Compensation (Requisites) petitioner to pay his debt for P500 when admittedly his creditor is indebted to him for
itioner to pay his debt for P500 when admittedly his creditor is indebted to him for more than
G.R. No. L-22490 May 21, 1969
GAN TION, petitioner,
vs.
HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as Judge of the Court of First
Instance of Manila, ONG WAN SIENG and THE SHERIFF OF MANILA, respondents.
Burgos and Sarte for petitioner.
Roxas, Roxas, Roxas and Associates for respondents.
MAKALINTAL, J.:
The sole issue here is whether or not there has been legal compensation between petitioner Gan Tion
and respondent Ong Wan Sieng.
Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an
ejectment case against the former, alleging non-payment of rents for August and September of that
year, at P180 a month, or P360 altogether. The defendant denied the allegation and said that the
agreed monthly rental was only P160, which he had offered to but was refused by the plaintiff. The
plaintiff obtained a favorable judgment in the municipal court (of Manila), but upon appeal the Court of
First Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the
plaintiff to pay the defendant the sum of P500 as attorney's fees. That judgment became final.
On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to
P180 a month, effective November 1st, and at the same time demanded the rents in arrears at the old
rate in the aggregate amount of P4,320.00, corresponding to a period from August 1961 to October
1963.lâwphi1.ñet
In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to obtain a writ of execution of
the judgment for attorney's fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where
he pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of
P4,320 for unpaid rents. The appellate court accepted the petition but eventually decided for the
respondent, holding that although "respondent Ong is indebted to the petitioner for unpaid rentals in an
amount of more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it
being a "trust fund for the benefit of the lawyer, which would have to be turned over by the client to his
counsel." In the opinion of said court, the requisites of legal compensation, namely, that the parties
must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each one
of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279),
are not present in the instant case, since the real creditor with respect to the sum of P500 was the
defendant's counsel.
This is not an accurate statement of the nature of an award for attorney's fee's. The award is made in
favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by
the former in the cases enumerated in Article 2208 of the Civil Code.1 It is the litigant, not his counsel,
who is the judgment creditor and who may enforce the judgment by execution. Such credit, therefore,
may properly be the subject of legal compensation. Quite obviously it would be unjust to compel
P4,000.
WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by
the Court of First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against respondent.
G. R. No. L-74027 December 7, 1989
SILAHIS MARKETING CORPORATION, petitioner
vs.
INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing business under the
name and style of "MARK INDUSTRIAL SALES", respondents.
Jaime V. Villanueva for petitioner.
Tinga, Fuentes, Tagle & Malate for private respondent.
FERNAN, C.J.
Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a reversal of the
decision of the then Intermediate Appellate Court (IAC) in AC-G.R. CV No. 67162 entitled "De Leon,
etc. v. Silahis Marketing Corporation", disallowing petitioner's counterclaim for commission to partially
offset the claim against it of private respondent Gregorio de Leon for the purchase price of certain
merchandise.
A review of the record shows that on various dates in October, November and December, 1975,
Gregorio de Leon (De Leon for short) doing business under the name and style of Mark Industrial
Sales sold and delivered to Silahis Marketing Corporation (Silahis for short) various items of
merchandise covered by several invoices in the aggregate amount of P 22,213.75 payable within thirty
(30) days from date of the covering invoices. Allegedly due to Silahis' failure to pay its account upon
maturity despite repeated demands, de Leon filed before the then Court of First Instance of Manila a
complaint for the collection of the said accounts including accrued interest thereon in the amount of P
661.03 and attorney's fees of P 5,000.00 plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices were concerned but
presented as affirmative defenses; [al a debit memo for P 22,200.00 as unrealized profit for a
supposed commission that Silahis should have received from de Leon for the sale of sprockets in the
amount of P 111,000.00 made directly to Dole Philippines, Incorporated by the latter sometime in
August 1975 without coursing the same through the former allegedly in violation of the usual practice
concerning sale of merchandise to Dole Philippines, Inc.; and [b] Silahis' claim that it is entitled to
return the stainless steel screen covered by Exhibits '6-A' and '6-B' which was found defective by its
client, Borden International, Davao City, and to have the corresponding amount cancelled from its
account with de Leon.
In a decision dated August 25, 1978, 1 the lower court confirmed the liability of Silahis for the claim of
de Leon but at the same time ordered that it be partially offset by Silahis' counterclaim as contained in
the debit memo for unrealized profit and commission. Judge Bienvenido C. Ejercito of said court held:
1
 There is no question that the defendant received from the plaintiff the items
contained in Exhs. 'A' to 'F'. The only question is whether or not the defendant is
entitled to set off against the claim of the plaintiff the amount contained in the debit
memo of the defendant, Exh. '1', and whether or not the defendant is entitled to
return the steel wire mesh which was returned to them by Borden Philippines, as
shown by Exhs. '6-A' and '6-B'. The Court believes that the defendant is properly
chargeable for the amounts of the unpaid invoices set forth in the complaint.
However, the Court also believes that the plaintiff is also properly chargeable for the
debit memo of P 22,200.00, Exh. '1'. This is because it was proven by the defendant
from the testimonies of Isaias Fernando, Jr. and Jose Joel Tamon that contrary to
the agreement between plaintiff and defendant that the latter was to serve the
account of Dole Philippines in Davao, the plaintiff made a direct sale of sprockets for
P 111,000.00 which therreby deprives the defendant of its corresponding
commission for P 22,200.00 which the defendant would have otherwise made if the
plaintiff had followed its previous arrangement with the defendant. However, as to
the counterclaim of the defendant for a cancellation of the amount of P 6,000.00 for
defective stainless screen wire purchased and intended for Borden International,
Davao City, the Court believes that it is much too late now to present said claim
because the purchase was made and delivered as early as December 22,1975 and
the proposed return to the defendant by Borden was made on April 1, 1976 only. The
Court is not ready to award damages to any of the parties. After deducting the
amount of P 22,200.00, which is the unpaid commission of the defendant from the
principal total amount of the unpaid invoices of the plaintiff of P 22,213.75, the
unpaid balance in favor of the plaintiff is P 13.75. The claim for interest and
attorney's fees of the plaintiff may be offset against the interest and attorney's fees of
the defendant.
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the defendant to pay to the plaintiff the amount of P 13.75, with
interest at 12% per annum from the date of the filing of the action on July 1, 1976
until fully paid, without pronouncement as to costs.
SO ORDERED.2
De Leon appealed from the said decision insofar as it directed partial compensation and its failure to
award interest on his principal claim as well as attomey's fees in his favor. In a decision dated March 1
7, 1986, 3 respondent Intermediate Appellate Court 4 set aside the decision of the lower court and
dismissed herein petitioner's (therein defendant- appellee's) counterclaim for lack of factual or legal
basis. The appellate court found that there was no agreement, verbal or otherwise, nor was there any
contractual obligation between De Leon and Silahis prohibiting any direct sales to Dole Philippines, Inc.
by de Leon; nor was there anything in the debit memo obligating de Leon to pay a commission to
Silahis for the sale of P 111,000.00 worth of sprockets to Dole Philippines although in the past, the
former did supply certain items to the latter for delivery to Dole Philippines, Incorporated.
Hence, in this petition for review on certiorari, the central issue is whether or not private respondent is
liable to the petitioner for the commission or margin for the direct sale which the former concluded and
consummated with Dole Philippines, Incorporated without coursing the same through herein petitioner.
We have carefully gone over the record of this case particularly the debit memo upon which petitioner's
counterclaim rests and found nothing contained therein to show that private respondent obligated
himself to set-off or compensate petitioner's outstanding accounts with the alleged unrealized
commission from the assailed sale of sprockets in the amount of P 111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons, in their own right, are
creditors and debtors to each other. Article 1279 of the Civil Code provides that: "In order that
compensation may be proper, it is necessary: [1] that each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the other; [2] that both debts consist in a sum of
money, or if the things due are consumable, they be of the same kind, and also of the same quality if
the latter has been stated; [3] that the two debts be due; [4] that they be liquidated and demandable; [5]
that over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect
by operation of law, even without the consent or knowledge of the creditors and debtors. 5 Article 1279
requires, among others, that in order that legal compensation shall take place, "the two debts be due"
and "they be liquidated and demandable." Compensation is not proper where the claim of the person
asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to
unliquidated, disputed claim existing from breach of contract. 6
Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in the
amount of P 22,213.75 as contained in its answer. But whether private respondent is liable to pay the
petitioner a 20% margin or commission on the subject sale to Dole Philippines, Inc. is vigorously
disputed. This circumstance prevents legal compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence on record from which it can
be inferred that there was any agreement between the petitioner and private respondent prohibiting the
latter from selling directly to Dole Philippines, Incorporated. Definitely, it cannot be asserted that the
debit memo was a contract binding between the parties considering that the same, as correctly found
by the appellate court, was not signed by private respondent nor was there any mention therein of any
commitment by the latter to pay any commission to the former involving the sale of sprockets to Dole
Philippines, Inc. in the amount of P 111,000.00. Indeed, such document can be taken as self-serving
with no probative value absent a showing or at the very least an inference, that the party sought to be
bound assented to its contents or showed conformity thereto.
In fact the letter written by private respondent's lawyer dated March 5,1975 7 in reply to petitioner's
letter dated February 19, 1976 transmitting its Debit Memo No. 1695 8 further strengthens private
respondent's stand that it never agreed to give petitioner any commission on the direct sale to Dole
Philippines, Inc. by its company because said letter denied any utilization of petitioners personnel and
facilities at its Davao Branch in the transaction with Dole Philippines, Inc. which would otherwise lend a
basis for petitioner's monetary claim.
WHEREFORE, in view of the foregoing, the questioned decision of respondent appellate court is
hereby AFFIRMED.
SO ORDERED.
G.R. No. 116792 March 29, 1996
2
BANK OF THE PHILIPPINES ISLAND and GRACE ROMERO, petitioners,
vs.
COURT OF APPEALS and EDVIN F. REYES, respondents.
PUNO, J.:p
Petitioners seek a review of the Decision1 of respondent Court of Appeals in CA-G.R. CV No. 41543
reversing the Decision2 of the Regional Trial Court of Quezon City, Branch 79, and ordering petitioners
to credit private respondent's Savings Account No. 3185-0172-56 with P10,556,00 plus interest.
The facts reveal that on September 25, 1985, private respondent Edvin F. Reyes opened Savings
Account No. 3185-0172-56 at petitioner Bank of the Philippine Islands (BPI) Cubao, Shopping Center
Branch. It is a joint "AND/OR" account with his wife, Sonia S. Reyes.
Private respondent also held a joint "AND/OR" Savings Account No. 3185-0128-82 with his
grandmother, Emeteria M. Fernandez, opened on February 11, 1986 at the same BPI branch. He
regularly deposited in this account the U.S. Treasury Warrants payable to the order of Emeteria M.
Fernandez as her monthly pension.
Emeteria M. Fernandez died on December 28, 1989 without the knowledge of the U.S. Treasury
Department. She was still sent U.S. Treasury Warrant No. 21667302 dated January 1, 1990 in the
amount of U.S. $377.003 or P10,556.00. On January 4, 1990, private respondent deposited the said
U.S. treasury check of Fernandez in Savings Account No. 3185-0128-82. The U.S. Veterans
Administration Office in Manila conditionally cleared the check.4 The check was then sent to the United
States for further clearing.5
Two months after or on March 8, 1990, private respondent closed Savings Account No. 3185-0128-82
and transferred its funds amounting to P13,112.91 to Savings Account No. 3185-0172-56, the joint
account with his wife.
On January 16, 1991, U.S. Treasury Warrant No. 21667302 was dishonored as it was discovered that
Fernandez died three (3) days prior to its issuance. The U.S. Department of Treasury requested
petitioner bank for a refund.6For the first time petitioner bank came to know of the death of Fernandez.
On February 19, 1991, private-respondent received a PT&T urgent telegram from petitioner bank
requesting him to contact Manager Grace S. Romero or Assistant Manager Carmen Bernardo. When
he called up the bank, he was informed that the treasury check was the subject of a claim by Citibank
NA, correspondent of petitioner bank. He assured petitioners that he would drop by the bank to look
into the matter. He also verbally authorized them to debit from his other joint account the amount
stated in the dishonored U.S. Treasury Warrant.7 On the same day, petitioner bank debited the amount
of P10,556.00 from private respondent's Savings Account No. 3185-0172-56.
On February 21, 1991, private respondent with his lawyer Humphrey Tumaneng visited the petitioner
bank and the refund documents were shown to them. Surprisingly, private respondent demanded from
petitioner bank restitution of the debited amount. He claimed that because of the debit, he failed to
withdraw his money when he needed them. He then filed a suit for Damages 8 against petitioners
before the Regional Trial Court of Quezon City, Branch 79.
Petitioners contested the complaint and counter claimed, for moral and exemplary damages. By way of
Special and Affirmative Defense, they averred that private respondent gave them his express verbal
authorization to debit the questioned amount. They claimed that private respondent later refused to
execute a written authority.9
In a Decision dated January 20, 1993, the trial court dismissed the complaint of private respondent for
lack of cause of action.10
Private respondent appealed to the respondent Court of Appeals. On August 16, 1994, the Sixteenth
Division of respondent court in AC-G.R. CV No. 41543 reversed the impugned decision, viz:
WHEREFORE, the judgement appealed from is set aside, and another one entered
ordering defendant (petitioner) to credit plaintiff's (private respondent's) S.A. No.
3185-0172-56 with P10,556.00 plus interest at the applicable rates for express teller
savings accounts from February 19, 1991, until compliance herewith. The claim and
counterclaim for damages are dismissed for lack of merit.
SO ORDERED.11
Petitioners now contend that respondent Court of Appeals erred:
I
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT
RESPONDENT REYES GAVE EXPRESS AUTHORITY TO PETITIONER BANK TO
DEBIT HIS JOINT ACCOUNT WITH HIS WIFE FOR THE VALUE OF THE
RETURNED U.S. TREASURY WARRANT.
II
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT
PETITIONER BANK HAS LEGAL RIGHT TO APPLY THE DEPOSIT OF
RESPONDENT REYES TO HIS OUTSTANDING OBLIGATION TO PETITIONER
BANK BROUGHT ABOUT BY THE RETURN OF THE U.S. TREASURY WARRANT
HE EARLIER DEPOSITED UNDER THE PRINCIPLE OF "LEGAL
COMPENSATION."
III
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING
CORRECTLY THE PRINCIPLES ENUNCIATED BY THE SUPREME COURT IN
THE CASE OF GULLAS V. PNB, 62 PHIL. 519.
IV.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPRECIATING
THE FACT THAT THE MONEY DEBITED BY PETITIONER BANK WAS THE SAME
MONEY TRANSFERRED BY RESPONDENT REYES FROM HIS JOINT "AND/OR"
3
 ACCOUNT WITH HIS GRANDMOTHER TO HIS JOINT "AND/OR" ACCOUNT Q What, any was the content of her conversation, if you know?
WITH HIS WIFE.12
A Mr. Reyes instructed Mrs. Bernardo to debit his account with the
We find merit in the petition. bank. His account was maintained jointly with his wife then he
promised to drop by to give us a written confirmation, sir.
The first issue for resolution is whether private respondent verbally authorized petitioner bank to debit
his joint account with his wife for the amount of the returned U.S. Treasury Warrant. We find that xxx xxx xxx
petitioners were able to prove this verbal authority by preponderance of evidence. The testimonies of
Bernardo and Romero deserve credence. Bernardo testified: Q You said that you authorized the debiting of the account on
February 19, 1991, is that correct?
xxx xxx xxx
A I did not authorize, we merely followed the instruction of
Q After that, what happened? Mr. Reyes, sir.14

A . . . Dr. Reyes Called me up and I informed him about the return We are not disposed to believe private respondent's allegation that he did not give any verbal
of the U.S. Treasury Warrant and we are requested to reimburse authorization. His testimony is uncorroborated. Nor does he inspire credence. His past and
for the amount. fraudulent conduct is an evidence against him.15 He concealed from petitioner bank the death
of Fernandez on December 28, 1989. 16As of that date, he knew that Fernandez was no
Q What was his response if any? longer entitled to receive any pension. Nonetheless, he-still received the U.S. Treasury
Warrant of Fernandez, and on January 4, 1990 deposited the same in Savings Account No.
3185-0128-82. To pre-empt a refund, private respondent closed his joint account with
A Don't you worry about it, there is no personal problem. Fernandez (Savings Account No. 31-85-0128-82) on March 8, 1990 and transferred its
balance to his joint account with his wife (Savings Account No. 3185-0172-56). Worse, private
xxx xxx xxx respondent declared under the penalties of perjury in the withdrawal slip 17 dated March 8,
1990 that his co-depositor, Fernandez, is still living. By his acts, private respondent has
Q And so what was his response? stripped himself of credibility.

A He said that don' t you worry about. More importantly, the respondent court erred when it failed to rule that legal compensation is
proper. Compensation shall take place when two persons, in their own right, are creditors and debtors
of each other.18 Article 1290 of the Civil Code provides that "when all the requisites mentioned
xxx xxx xxx in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts
to the concurrent amount, even though the creditors and debtors are not aware of the compensation."
Q You said that you asked him the advice and he did not answer, Legal compensation operates even against the will of the interested parties and even without the
what advice are you referring to? consent of them. 19 Since this compensation takes place ipso jure, its effects arise on the very day on
which all its requisites concur. 20 When used as a defense, it retroacts to the date when its requisites
are fulfilled.21
A In our conversation, he promised me that he will give me written
confirmation or authorization.13
Article 1279 states that in order that compensation may be proper, it is necessary:
The conversation was promptly relayed to Romero who testified:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
xxx xxx xxx

(2) That both debts consist in a sum of money, or if the things due are consumable,
Q . . . Was there any opportunity where in said Mrs. Bernardo was
they be of the same kind, and also of the same quality if the latter has been stated;
able to convey to you the contents of their conversation?

(3) That the two debts be due;

A This was immediately relayed to me as manager of the Bank of
the Philippine Islands, sir.
(4) That they be liquidated and demandable;

4
 (5) That over neither of them there be any retention or controversy, commenced by 1) In the main complaint, ordering the defendant
third persons and communicated in due time to the debtor. (herein petitioner PNB) to pay the plaintiff
(private respondent herein) the sum of
The elements of legal compensation are all present in the case at bar. The obligors bound US$2,627.11 or its equivalent in Philippine
principally are at the same time creditors of each other. Petitioner bank stands as a debtor of currency with interest at the legal rate from
the private respondent, a depositor. At the same time, said bank is the creditor of the private January 13, 1987, the date of judicial demand;
respondent with respect to the dishonored U.S. Treasury Warrant which the latter illegally
transferred to his joint account. The debts involved consist of a sum of money. They are due, 2) The plaintiff's supplemental complaint is
liquidated, and demandable. They are not claimed by a third person. hereby dismissed (sic);

It is true that the joint account of private respondent and his wife was debited in the case at bar. We 3) The defendant's counterclaims are likewise
hold that the presence of private respondent's wife does not negate the element of mutuality of dismissed.
parties, i.e., that they must be creditors and debtors of each other in their own right. The wife of private
respondent is not a party in the case at bar. She never asserted any right to the debited U.S. Treasury The Facts
Warrant. Indeed, the right of the petitioner bank to make the debit is clear and cannot be doubted. To
frustrate the application of legal compensation on the ground that the parties are not all mutually
obligated would result in unjust enrichment on the part of the private respondent and his wife who The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the
herself out of honesty has not objected to the debit. The rule as to mutuality is strictly applied at same being undisputed by the parties:4
law. But not in equity, where to allow the same would defeat a clear right or permit irremediable
injustice.22 The body of the decision reads:

In VIEW HEREOF, the Decision of respondent Court of Appeals in CA-G.R. CV No. 41543 dated After a close scrutiny and analysis of the pleadings as well as the
August 16, 1994 is ANNULLED and SET ASIDE and the Decision of the trial court in Civil Case No. Q- evidence of both parties, the Court makes the following
91-8451 dated January 20, 1993 is REINSTATED. Costs against private respondent. conclusions:

SO ORDERED. (a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38
from remittances of the plaintiff's principals (sic) abroad. These were admitted by the
G.R. No. 108052 July 24, 1996 defendant, subject to the affirmative defense of compensation for what is owing to it
on the principle of solution (sic) indebiti.
PHILIPPINE NATIONAL BANK, petitioner,
vs. (b) The first remittance was made by the NCB of Jeddah for the benefit of the
THE COURT OF APPEALS and RAMON LAPEZ,1 doing business under the name and plaintiff, to the credited to his account at Citibank, Greenhills Branch; the second was
style SAPPHIRE SHIPPING, respondents. from Libya, and was intended to be deposited at the plaintiff's account with the
defendant, No. 830-2410;

PANGANIBAN, J.:p
Does a local bank, while acting as local correspondent bank, have the right to intercept
funds being coursed through it by its foreign counterpart for transmittal and deposit to
the account of an individual with another local bank, and apply the said funds to
certain obligations owed to it by the said individual?
Assailed in this petition is the Decision of respondent Court of Appeals 2 in CA-G.R. CV
No. 27926 rendered on June 16, 1992 affirming the decision of the Regional Trial Court,
Branch 107 of Quezon City, the dispositive portion of which read:3
(c) The plaintiff made a written demand upon the defendant for remittance of the
equivalent of $2,627.11 by means of a letter dated December 4, 1986 (Exh. D). This
was answered by the defendant on December 22, 1986 (Exh. 13), inviting the
plaintiff to come for a conference;
(d) There were indeed two instances in the past, one in November 1980 and the
other in January 1981 when the plaintiff's account No. 830-2410 was doubly credited
with the equivalents of $5,679.23 and $5,885.38, respectively, which amounted to an
aggregate amount of P87,380.44. The defendant's evidence on this point (Exhs. 1
thru 11, 14 and 15; see also Annexes C and E to defendant's Answer), were never
refuted nor impugned by the plaintiff. He claims, however, that plaintiff's claim has
prescribed.

WHEREFORE, judgment is hereby rendered: (e) Defendant PNB made a demand upon the plaintiff for refund of the double or
duplicated credits erroneously made on plaintiff's account, by means of a letter (Exh.
5
 12) dated October 23, 1986 or 5 years and 11 months from November 1980, and 5
years and 9 months from January 1981. Such letter was answered by the plaintiff on
December 2, 1986 (Annex C, Complaint). This plaintiff's letter was likewise replied to
by the defendant through Exh. 13;
(f) The deduction of P34,340.58 was made by the defendant not without the
knowledge and consent of the plaintiff, who was issued a receipt No. 857576 dated
February 18, 1987 (Exh. E) by the defendant.
There is no question that the two erroneous double payments made to plaintiff's
accounts in 1980 and 1981 created an extra-contractual obligation on the part of the
plaintiff in favor of the defendant, under the principle of solutio indebiti, as follows:
If something is received when there is no right to demand it, and it
was unduly delivered through (sic) mistake, the obligation to return
it arises. (Article 2154, Civil Code of the Phil.)
Two issues were raised before the trial court, namely, first, whether the herein petitioner was
legally justified in making the compensation or set-off against the two remittances coursed
through it in favor of private respondent to recover on the double credits it erroneously made
in 1980 and 1981, based on the principle solutio indebiti, and second, whether or not
petitioner's claim is barred by the statute of limitations. The trial court's ratiocination, as
quoted by the appellate Court, follows:5
Article 1279 of the Civil Code provides:
In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there by any retention or controversy, commenced by
third persons and communicated in due time to the debtor.
In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for
both debts consist in a sum of money, are both due, liquidated and demandable, and
over neither of them is there a retention or controversy commenced by third persons
and communicated in due time to the debtor. The question, however, is, where both
of the obligors bound principally, and was each one of them a debtor and creditor of
the other at the same time?
Analyzing now the relationship between the parties, it appears that:
(a) With respect to the plaintiff's being a depositor of the defendant bank, they are
creditor and debtor respectively (Guingona, et.al. vs. City Fiscal, et. al., 128 SCRA
577);
(b) As to the relationship created by the telexed fund transfers from abroad: A
contract between a foreign bank and local bank asking the latter to pay an amount to
a beneficiary is a stipulation pourautrui. (Bank of America NT & SA vs. IAC, 145
SCRA 419).
A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs.
Encarnacion, 79 SCRA 193; Bonifacio Brothers vs. Mora, 20 SCRA 261; Uy Tam vs.
Leonard, 30 Phils. 475).
Thus between the defendant bank (as the local correspondent of the National
Commercial Bank of Jeddah) and the plaintiff as beneficiary, there is created an
implied trust pursuant to Art. 1453 of the Civil Code, quoted as follows:
When the property is conveyed to a person in reliance upon his
declared intention to hold it for, or transfer it to another or the
grantor, there is an implied trust in favor of the person whose
benefit is contemplated (sic).
(c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly,
received something (sic) by mistake (i.e., the 2 double credits, although he had no
right to demand it), became obligated to the defendant to return what he unduly
received. Thus, there was created between them a relationship of obligor and
obligee, or of debtor and creditor under a quasi-contract.
In view of the foregoing, the Court is of the opinion that the parties are not both
principally bound with respect to the $2,627.11 from Jeddah; neither are they at the
same time principal creditor of the other. Therefore, as matters stand, the parties'
obligations are not subject to compensation or set off under Art. 1279 of the Civil
Code, for the reason that the defendant is not a principal debtor nor is the plaintiff a
principal creditor insofar as the amount of $2,627.11 is concerned. They are debtor
and creditor only with respect to the double payments; but are trustee-beneficiary as
to the fund transfer of $2,627.11.
Only the plaintiff is principally bound as a debtor of the defendant to the extent of the
double credits. On the other hand, the defendant was an implied trustee, who was
obliged to deliver to the Citibank for the benefit of the plaintiff the sum of $2,627.11.
Thus while it may be concluded that the plaintiff owes the defendant the equivalent
of the sums of $5,179.23 and $5,885.38 erroneously doubly credited to his account,
the defendant's actuation in intercepting the amount of $2,627.11 supposed to be
remitted to another bank is not only improper; it will also erode the trust and
confidence of the international banking community in the banking system of the
6
country, something we can ill afford at this time when we need to attract and invite
deposits of foreign currencies.
It would have been different has the telex advice from NCB of Jeddah been for
deposit of $2,627.11 to plaintiff's account No. 830-2410 with the defendant bank.
However, the defendant alleged this for the first time in its Memorandum (Pls. see
par. 16, p. 6 of defendant's Memorandum). There was neither any allegation thereof
in its pleadings, nor was there any evidence to prove such fact. On the contrary, the
defendant admitted that the telex advice was for credit of the amount of $2,627.11 to
plaintiff's account with Citibank, Greenhills, San Juan, Metro-Manila (Pls. see par. of
defendant's Answer with Compulsary Counterclaim, in relation to plaintiff's
Complaint). Hence, it is submitted that the set-off or compensation of $2,627.11
against the double payments to plaintiff's account is not in accordance with law.
On this point, the Court finds the plaintiff's theory of agency to be untenable. For one
thing, there was no express contract of agency. On the other hand, were we to infer
that there was an implied agency, the same would not be between the plaintiff and
defendant, but rather, between the National Commercial Bank of Jeddah as principal
on the one hand, and the defendant as agent on the other. Thus, in case of violation
of the agency, the cause of action would accrue to the NCB and not to the plaintiff.
The P34,340.38 subject of the supplemental complaint is quite another thing. The
plaintiff's Exh. "E", which is a receipt issued to the plaintiff by the defendant for the
amount of P34,340.00 in "full settlement of accounts receivables with RICB Fund
Transfer Department, PNB-Escolta base on Legal Department Memo dated
February 28, 1987" seems to uphold the defendant's theory that the said amount
was voluntarily delivered by the plaintiff to the defendant as alleged in the last
paragraph of defendant's memorandum. The same is in accordance with the
defendant's answer, as follows:
The retention and application of the amount of P34,340.58 was
done in a manner consonant with basic due process considering
that plaintiff was not only furnished documented proof of the cause
but was also given the opportunity to con(tro)vert such proof .
Moreover, plaintiff, through counsel, communicated his
unequivocal and unconditional consent to the retention and
application of the amount in question. (Pls. see paragraphs 8-9,
defendant's Answer with Compulsary Counterclaim to Plaintiff's
Supplemental Complaint).
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff,
indicating that such receipt was handed over to the plaintiff when he "paid" or
allowed the deduction from the amount of $28,392.38 from Libya.
At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer
from Brega Petroleum Marketing Company of Libya (from where the P34,340.38 was
deducted) was intended for credit and deposit in plaintiff's account at the defendant's
Bank CA No. 830-2410 (per par. 1, page 2, Memorandum for the plaintiff). Such
being the case, the Court believes that insofar as the amount of P34,340.38 is
concerned, all the requirements of Art. 1279 of the Civil Code are present, and the
said amount may properly be the subject of compensation or set-off. And since all
the requisites of Art. 1279 of the Civil Code are present (insofar as the amount of
P34,392.38 is concerned), compensation takes place by operation of law (Art.
1286, Ibid.), albeit only partial with respect to plaintiff's indebtedness of P7,380.44.
Now, on the question of prescription, the Court believes that Art. 1149 as cited by the
plaintiff is not applicable in this case. Rather, the applicable law is Art. 1145, which
fixes the prescriptive period for actions upon a quasi contract (such as solution
indebiti) at six years.
In the dispositive portion of its decision, the trial court ruled that the herein petitioner was
obligated to pay private respondent the amount of US$2,627.11 or its peso equivalent, with
interest at the legal rate. The court dismissed all other claims and counterclaims.
On appeal to the respondent Court, petitioner bank continued to insist that it validly retained
the US$2,627.11 in payment of the private respondent's indebtedness by way of
compensation or set-off, as provided under Art. 1279 of the Civil Code.
The respondent Court of Appeals rejected such argument, saying:
The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah,
Saudi Arabia, thru the National Commercial Bank of Jeddah, Saudi Arabia (NCB, for
short), for the credit/account of plaintiff with the Citibank, Greenhills Branch, San
Juan, Metro Manila, coursed thru the PNB's head office, the NCB's corresponden(t)
bank in the Philippines.
The credit account, or simply account means that the amount stated in the
telegraphic money transfer is to be credited in the account of plaintiff with the
Citibank, and, in that sense, presupposes a creditor-debtor relationship between the
plaintiff, as creditor and the Citibank, as debtor. Withal the telegraphic money
transfer, no such creditor-debtor relationship could have been created between the
plaintiff and defendant.
The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by
the IBN from the NCB in Saudi Arabia, and since the PNB is the NCB's
corresponden(t) bank in the Philippines, there is created between the two banks a
sort of communication exchange for the corresponden(t) bank to transmit and/or
remit and/or pay the value of the telegraphic transfer in accordance with the dictate
of the correspondence exchange. Some such responsibility of the corresponden(t)
bank is akin to section 7 of the Rules and Regulations Implementing E.O. 857, as
amended by E.O. 925, ". . . to take charge of the prompt payment" of the telegraphic
transfer, that is, by transmitting the telegraphic money transfer to the Citibank so that
the amount can be promptly credited to the account of the plaintiff with the said
bank. That is all that the PNB can do under the remittance arrangement that it has
with the NCB. With its responsibility as defined as well as by the nature of its banking
business and the responsibility attached to it, and through which the industry, trade
and commerce of all countries and communities are carried on, the PNB's liability as
corresponden(t) bank continues until it has completely (sic) performed and
discharged it(s) obligation thereunder." (emphasis ours)
7
Hence, the respondent Court affirmed the trial court's holding in toto.
Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed
Decision.
The Issue
Petitioner's arguments revolve around one single issue: 6
WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE
RESPONDENT LEGALLY BOUND (UNDER THE PRINCIPLE OF SOLUTIO
INDEBITI) TO RETURN TO PNB THE SUM OF US$2,627.11, IT ERRED IN NOT
RULING THAT LEGAL COMPENSATION HAS TAKEN PLACE WHEN PNB WAS
ORDERED BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT
THE SAME AMOUNT. SUCH COURSE OF ACTION IS IN CONSONANCE WITH
SPEEDY AND SUBSTANTIAL JUSTICE, AND WOULD PREVENT THE
UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE
COLLECTION OF THE SAME AMOUNT FROM PRIVATE RESPONDENT.
The Court's Ruling
We note that in framing the issue in the manner aforecited, the petitioner implicity admits the
correctness of the respondent Court's affirmance of the trial court's ruling finding herein
petitioner liable to private respondent for the sum of US$2,627.11 or its peso equivalent. And
it could not have done otherwise. After a careful scrutiny of both the decision of the trial court
and that of the appellate court, we find no reversible error whatsoever in either ruling, and see
no need to add to the extensive discussions already made regarding the non-existence of all
the requisites for legal compensation to take place.
But petitioner has adopted a novel theory, contending that since respondent Court found that
private respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor
of private respondent (resulting in legal compensation), the (h)onorable respondent court
should have ordered private respondent to pay PNB what the latter is bound by the trial
court's decision to return the former."7
By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the
trial court and the appellate Court, and have this Court validate its original misdeed, thereby
making a mockery of the entire judicial process of this country. What the petitioner bank is
effectively saying is that since the respondent Court of Appeals ruled that petitioner
bank could not do a shortcut and simply intercept funds being coursed through it, for
transmittal to another bank, and eventually to be deposited to the account of an individual who
happens to owe some amount of money to the petitioner, and because respondent Court
order petitioner bank to return intercepted amount to said individual, who in turn was found by
the appellate Court to be indebted to petitioner bank, THEREFORE, there must now be legal
compensation of the amounts each owes the other, and hence, there is no need for petitioner
bank to actually return the amount, and finally, that petitioner bank ends up in exactly the
same position as when it first took the improper and unwarranted shortcut by intercepting the
said money transfer, notwithstanding the assailed Decision saying that this could not be done!
We see in this petition a clever ploy to use this Court to validate or legalize an improper act of
the petitioner bank, with the not impossible intention of using this case as a precedent for
similar acts of interception in the future. This piratical attitude of the nation's premier bank
deserves a warning that it should not abuse the justice system in its collection efforts,
particularly since we are aware that if the petitioner bank had been in good faith, it could have
easily disposed of this controversy in ten minutes flat by means of an exchange of checks
with private respondent for the same amount. The litigation could have ended there, but it did
not. Instead, this plainly unmeritorious case had to clog our docket and take up the valuable
time of this Court.
WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and
the assailed Decision is AFFIRMED in toto. Costs against petitioner.
SO ORDERED.
G.R. No. 128448 February 1, 2001
SPOUSES ALEJANDRO MlRASOL and LILIA E. MIRASOL, petitioners,
vs.
THE COURT OF APPEALS, PHILIPPINE NATIONAL and PHILIPPINE EXCHANGE CO.,
INC., respondent.
QUISUMBING, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals dated July 22, 1996, in
CA-G.R. CY No. 38607, as well as of its resolution of January 23, 1997, denying petitioners' motion for
reconsideration. The challenged decision reversed the judgment of the Regional Trial Court of Bacolod
City, Branch 42 in Civil Case No. 14725.
The factual background of this case, as gleaned from the records, is as follows:
The Mirasols are sugarland owners and planters. In 1973-1974, they produced 70,501.08 piculs1 of
sugar, 25,662.36 of which were assigned for export. The following crop year, their acreage planted to
the same crop was lower, yielding 65,100 piculs of sugar, with 23,696.40 piculs marked for export.
Private respondent Philippine National Bank (PNB) financed the Mirasols' sugar production venture for
crop years, 1973-1974 and 1974-1975 under a crop loan financing scheme. Under said scheme, the
Mirasols signed Credit Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate
Mortgage in favor of PNB. The Chattel Mortgage empowered PNB as the petitioners' attorney-in-fact to
negotiate and to sell the latter's sugar in both domestic and export markets and to apply the proceeds
to the payment of their obligations to it.
Exercising his law-making powers under Martial Law, then President Ferdinand Marcos issued
Presidential Decree (P.D.) No. 5792 in November, 1974. The decree authorized private respondent
Philippine Exchange Co., Inc. (PHILEX) to purchase sugar allocated for export to the United States
and to other foreign markets. The price and quantity was determined by the Sugar Quota
Administration, PNB, the Department of Trade and Industry, and finally, by the Office of the President.
The decree further authorized PNB to finance PHILEX's purchases. Finally, the decree directed that
whatever profit PHILEX might realize from sales of sugar abroad was to be remitted to a special fund
8
of the national government, after commissions, overhead expenses and liabilities had been deducted.
The government offices and entities tasked by existing laws and administrative regulations to oversee
the sugar export pegged the purchase price of export sugar in crop years 1973-1974 and 1974-1975 at
P180.00 per picul.
PNB continued to finance the sugar production of the Mirasols for crop years 1975-1976 and 1976-
1977. These crop loans and similar obligations were secured by real estate mortgages over several
properties of the Mirasols and chattel mortgages over standing crops. Believing that the proceeds of
their sugar sales to PNB, if properly accounted for, were more than enough to pay their obligations,
petitioners asked PNB for an accounting of the proceeds of the sale of their export sugar. PNB ignored
the request. Meanwhile, petitioners continued to avail of other loans from PNB and to make unfunded
withdrawals from their current accounts with said bank. PNB then asked petitioners to settle their due
and demandable accounts. As a result of these demands for payment, petitioners on August 4, 1977,
conveyed to PNB real properties valued at P1,410,466.00 by way of dacion en pago, leaving an unpaid
overdrawn account of P1,513,347.78.
On August 10, 1982, the balance of outstanding sugar crop and other loans owed by petitioners to
PNB stood at P15,964,252.93. Despite demands, the Mirasols failed to settle said due anti
demandable accounts. PNB then proceeded to extrajudicially for close the mortgaged properties. After
applying the proceeds of the auction sale of the mortgaged realties, PNB still had a deficiency claim of
P12,551,252.93.
Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for crop
years 1973-1974 and 1974-1975, insisting that said proceeds, if properly liquidated, could offset their
outstanding obligations with the batik. PNB remained adamant in its stance that under P.D. No. 579,
there was nothing to account since under said law, all earnings from the export sales of sugar
pertained to the National Government and were subject to the disposition of the President of the
Philippines for public purposes.1âwphi1.nêt
On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and damages against
PNB with the Regional Trial Court of Bacolod City, docketed as Civil Case No. 14725.
On June 16, 1987, the complaint was amended to implead PHILEX as party-defendant.
The parties agreed at pre-trial to limit the issues to the following:
"1. The constitutionality and/or legality of Presidential Decrees numbered 338, 579, and 1192;
"2. The determination of the total amount allegedly due the plaintiffs from the defendants
corresponding to the allege(d) unliquidated cost price of export sugar during crop years 1973-
1974 and 1974-1975."3
After trial on the merits, the trial court decided as follows:
"WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of
the plaintiffs and against the defendants Philippine National Bank (PNB) and Philippine
Exchange Co., Inc. (PHILEX):
(1) Declaring Presidential Decree 579 enacted on November 12, 1974 and all circulars, as
well as policies, orders and other issuances issued in furtherance thereof, unconstitutional
and therefore, NULL and VOID being in gross violation of the Bill of Rights;
(2) Ordering defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the whole
amount corresponding to the residue of the unliquidated actual cost price of 25,662 piculs in
export sugar for crop year 1973-1974 at an average price of P300.00 per picul, deducting
therefrom however, the amount of P180.00 already paid in advance plus the allowable
deductions in service fees and other charges;
(3) And also, for the same defendants to pay, jointly and severally, same plaintiffs the whole
amount corresponding to the unpaid actual price of 14,596 piculs of export sugar for crop year
1974-1975 at an average rate of P214.14 per picul minus however, the sum of P180.00 per
picul already paid by the defendants in advance and the allowable deducting (sic) in service
fees and other charges.
"The unliquidated amount of money due the plaintiffs but withheld by the defendants, shall
earn the legal rate of interest at 12% per annum computed from the date this action was
instituted until fully paid; and, finally -
(4) Directing the defendants PNB and PHILEX to pay, jointly and severally, plaintiffs the sum
of P50,000.00 in moral damages and the amount of P50,000.00 as attorney's fees, plus the
costs of this litigation.
"SO ORDERED."4
The same was, however, modified by a Resolution of the trial court dated May 14, 1992, which added
the following paragraph:
"This however whatever benefits that may have accrued in favor of the plaintiffs with the
massage and approval of Republic Act. 7202 otherwise known as the 'Sugar Restitution Law,'
authorizing the restitution of losses suffered by the plaintiffs from Crop year 1974-1975 to
Crop year 1984-1985 occasioned by the actuations of government-owned and controlled
agencies. (Underscoring in the original).
"SO ORDERED."5
The Mirasols then filed an appeal with the respondent court, docketed as CA-G.R. CY No. 38607,
faulting the trial court for not nullifying the dacion en pago and the mortgage contracts, as well as the
foreclosure of their mortgaged properties. Also faulted was the trial court's failure to award them the full
money claims and damages sought from both PNB and PHILEX.
On July 22, 1996, the Court of Appeals reversed the trial court as follows:
"WHEREFORE, this Court renders judgment REVERSING the appealed Decision and entering the
following verdict:
"1. Declaring the dacion en pago and the foreclosure of the mortgaged properties valid;
9
 "2. Ordering the PNB to render an accounting of the sugar account of the Mirasol[s]
specifically stating the indebtedness of the latter to the former and the proceeds of Mirasols'
1973-1974 and 1974-1975 sugar production sold pursuant to and in accordance with P.D. 579
and the issuances therefrom;
"3. Ordering the PNB to recompute in accordance with RA 7202 Mirasols' indebtedness to it
crediting to the latter payments already made as well as the auction price of their foreclosed
real estate and stipulated value of their properties ceded to PNB in the dacon (sic) en pago;
"4. Whatever the result of the recomputation of Mirasols' account, the outstanding balance or
the excess payment shall be governed by the pertinent provisions of RA 7202.
"SO ORDERED."6
On August 28, 1996, petitioners moved for reconsideration, which the appellate court denied on
January 23, 1997.
Hence, the instant petition, with petitioners submitting the following issues for our resolution:
"1. Whether the Trial Court has jurisdiction to declare a statute unconstitutional without notice
to the Solicitor General where the parties have agreed to submit such issue for the resolution
of the Trial Court.
"2. Whether PD 579 and subsequent issuances7 thereof are unconstitutional.
"3. Whether the Honorable Court of Appeals committed manifest error in not applying the
doctrine of piercing the corporate veil between respondents PNB and PHILEX.
"4. Whether the Honorable Court of Appeals committed manifest error in upholding the validity
of the foreclosure on petitioners property and in upholding the validity of the dacion en pago in
this case.
"5. Whether the Honorable Court of Appeals committed manifest error in not awarding
damages to petitioners grounds relied upon the allowance of the petition. (Underscored in the
original)"8
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider
the constitutionality of a statute, presidential decree, or executive order.9 The Constitution vests the
power of judicial review or the power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation not. only in this Court, but in all
Regional Trial Courts.10 In J.M. Tuason and Co. v. Court of Appeals, 3 SCRA 696 (1961) we held:
"Plainly, the Constitution contemplates that the inferior courts should have jurisdiction in cases
involving constitutionality of any treaty or law, for it speaks of appellate review of final
judgments of inferior courts in cases where such constitutionality happens to be in issue." 11
Furthermore, B.P. BIg. 129 grants Regional Trial Courts the authority to rule on the conformity of laws
or treaties with the Constitution, thus:
"SECTION 19. Jurisdiction in civil cases. - Regional Trial Courts shall exercise exclusive
original jurisdiction:
(1) In all civil actions in which the subject of the litigations is incapable of pecuniary
estimation;"
The pivotal issue, which we must address, is whether it was proper for the trial court to have exercised
judicial review.
Petitioners argue that the Court of Appeals erred in finding that it was improper for the trial court to
have declared P.D. No. 57912 unconstitutional, since petitioners had not complied with Rule 64,
Section 3, of the Rules of Court. Petitioners contend that said Rule specifically refers only to actions for
declaratory relief and not to an ordinary action for accounting, specific performance, and damages.
Petitioners' contentions are bereft of merit. Rule 64, Section 3 of the Rules of Court provides:
"SEC. 3. Notice to Solicitor General. - In any action which involves the validity of a statute, or
executive order or regulation, the Solicitor General shall be notified by the party attacking the
statute, executive order, or regulation, and shall be entitled to be heard upon such question."
This should be read in relation to Section 1 [c] of P.D. No. 478,13 which states in part:
"SECTION 1. Functions and Organizations - (1) The Office of the Solicitor General
shall...have the following specific powers and functions:
xxx
"[c] Appear in any court in any action involving the validity of any treaty, law, executive order
or proclamation, rule or regulation when in his judgment his intervention is necessary or when
requested by the court."
It is basic legal construction that where words of command such as "shall," "must," or "ought" are
employed, they are generally and ordinarily regarded as mandatory.14 Thus, where, as in Rule 64,
Section 3 of the Rules of Court, the word "shall" is used, a mandatory duty is imposed, which the
courts ought to enforce.
The purpose of the mandatory Notice in Rule 64, Section 3 is to enable the Solicitor General to decide
whether or not his intervention in the action assailing the validity of a law or treaty is necessary. To
deny the Solicitor General such notice would be tantamount to depriving him of his day in court. We
must stress that, contrary to petitioners' stand, the mandatory notice requirement is not limited to
actions involving declaratory relief and similar remedies. The rule itself provides that such notice is
required in "any action" and not just actions involving declaratory relief. Where there is no ambiguity in
the words used in the true, there is no room for constnlction. 15 In all actions assailing the validity of a
statute, treaty, presidential decree, order, or proclamation, notice to the Solicitor General is mandatory.
In this case, the Solicitor General was never notified about Civil Case No. 14725. Nor did the trial court
ever require him to appear in person or by a representative or to file any pleading or memorandum on
the constitutionality of the assailed decree. Hence, the Court of Appeals did not err in holding that lack
10
of the required notice made it improper for the trial court to pass upon the constitutional validity of the
questioned presidential decrees.
As regards the second issue, petitioners contend that P.D. No. 579 and its implementing issuances are
void for violating the due process clause and the prohibition against the taking of private property
without just compensation. Petitioners now ask this Court to exercise its power of judicial review.
Jurisprudence has laid down the following requisites for the exercise of this power: First, there must be
before the Court an actual case calling for the exercise of judicial review. Second, the question before
the Court must be ripe for adjudication. Third, the person challenging the validity of the act must have
standing to challenge. Fourth, the question of constitutionality must have been raised at the earliest
opportunity, and lastly, the issue of constitutionality must be the very lis mota of the case.16
As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be settled on
other grounds.17 The policy of the courts is to avoid ruling on constitutional questions and to presume
that the acts of the political departments are valid, absent a clear and unmistakable showing to the
contrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powers.
This means that the measure had first been carefully studied by the legislative and executive
departments and found to be in accord with the Constitution before it was finally enacted and
approved.18
The present case was instituted primarily for accounting and specific performance. The Court of
Appeals correctly ruled that PNB's obligation to render an accounting is an issue, which can be
determined, without having to rule on the constitutionality of P.D. No. 579. In fact there is nothing in
P.D. No. 579, which is applicable to PNB's intransigence in refusing to give an accounting. The
governing law should be the law on agency, it being undisputed that PNB acted as petitioners' agent.
In other words, the requisite that the constitutionality of the law in question be the very lis mota of the
case is absent. Thus we cannot rule on the constitutionality of P.D. No. 579.
Petitioners further contend that the passage of R.A. No. 720219 rendered P.D. No. 579
unconstitutional, since R.A. No. 7202 affirms that under P.D. 579, the due process clause of the
Constitution and the right of the sugar planters not to be deprived of their property without just
compensation were violated.
A perusal of the text of R.A. No. 7202 shows that the repealing clause of said law merely reads:
"SEC. 10. All laws, acts, executive orders and circulars in conflict herewith are hereby
repealed or modified accordingly."
The settled rule of statutory construction is that repeals by implication are not favored. 20 R.A. No. 7202
cannot be deemed to have repealed P.D. No. 579. In addition, the power to declare a law
unconstitutional does not lie with the legislature, but with the courts.21 Assuming arguendo that R.A.
No. 7202 did indeed repeal P.D. No. 579, said repeal is not a legislative declaration finding the earlier
law unconstitutional.
To resolve the third issue, petitioners ask us to apply the doctrine of piercing the veil of corporate
fiction with respect to PNB and PHILEX. Petitioners submit that PHILEX was a wholly-owned
subsidiary of PNB prior to the latter's privatization.
We note, however, that the appellate court made the following finding of fact:
"1. PNB and PHILEX are separate juridical persons and there is no reason to pierce the veil
of corporate personality. Both existed by virtue of separate organic acts. They had separate
operations and different purposes and powers." 22
Findings of fact by the Court of Appeals are conclusive and binding upon this Court unless said
findings are not supported by the evidence.23 Our jurisdiction in a petition for review under Rule 45 of
the Rules of Court is limited only to reviewing questions of law and factual issues are not within its
province.24 In view of the aforequoted finding of fact, no manifest error is chargeable to the respondent
court for refusing to pierce the veil of corporate fiction.
On the fourth issue, the appellate court found that there were two sets of accounts between petitioners
and PNB, namely:
"1. The accounts relative to the loan financing scheme entered into by the Mirasols with PNB
(PNB's Brief, p. 16) On the question of haw much the PNB lent the Mirasols for crop years
1973-1974 and 1974-1975, the evidence recited by the lower court in its decision was
deficient. We are offered (sic) PNB the amount of FIFTEEN MILLION NINE HUNDRED
SIXTY FOUR THOUSAND TWO HUNDRED FIFTY TWO PESOS and NINETY THREE
Centavos (Ps15,964,252.93) but this is the alleged balance the Mirasols owe PNB covering
the years 1975 to 1982.
"2. The account relative to the Mirasol's current account Numbers 5186 and 5177 involving
the amount of THREE MILLION FOUR HUNDRED THOUSAND Pesos (P3,400,000.00). PNB
claims against the Mirasols. (PNB's Brief, p. 17)
"In regard to the first set of accounts, besides the proceeds from PNB's sale of sugar
(involving the defendant PHILEX in relation to the export portion of tile stock), the PNB
foreclosed the Mirasols' mortgaged properties realizing therefrom in 1981 THREE MILLION
FOUR HUNDRED THIRTEEN THOUSAND pesos (P3,413,000.00), the PNB itself having
acquired the properties as the highest bidder.
"As to the second set of accounts, PNB proposed, and the Mirasols accepted, a dacion en
pago scheme by which the Mirasols conveyed to PNB pieces of property valued at ONE
MILLION FOUR HUNDRED TEN THOUSAND FOUR HUNDRED SIXTY-SIX Pesos
(Ps1,410,466.00) (PNB's Brief, pp. 16-17)."25
Petitioners now claim that the dacion en pago and the foreclosure of their mortgaged properties were
void for want of consideration. Petitioners insist that the loans granted them by PNB from 1975 to 1982
had been fully paid by virtue of legal compensation. Hence, the foreclosure was invalid and of no
effect, since the mortgages were already fully discharged. It is also averred that they agreed to
the dacion only by virtue of a martial law Arrest, Search, and Seizure Order (ASSO).
We find petitioners' arguments unpersuasive. Both the lower court and the appellate court found that
the Mirasols admitted that they were indebted to PNB in the sum stated in the latter's
counterclaim.26 Petitioners nonetheless insist that the same can be offset by the unliquidated amounts
owed them by PNB for crop years 1973-74 and 1974-75. Petitioners' argument has no basis in law. For
11
legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil
Code must be present. Said articles read as follows:
"Art. 1278. Compensation shall take place when two persons, in their own right, are creditors
and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor."
In the present case, set-off or compensation cannot take place between the parties because: First,
neither of the parties are mutually creditors and debtors of each other. Under P.D. No. 579, neither
PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of sugar sold by the
two firms. P.D. No. 579 prescribed where the profits from the sales are to be paid, to wit:
"SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%) percent of
gross sales, the balance of the proceeds of sugar trading operations for every crop year shall
be set aside by the Philippine Exchange Company, Inc,. as profits which shall be paid to a
special fund of the National Government subject to the disposition of the President for public
purposes."
Thus, as correctly found by the Court of Appeals, "there was nothing with which PNB was supposed to
have off-set Mirasols' admitted indebtedness."27
Second, compensation cannot take place where one claim, as in the instant case, is still the subject of
litigation, as the same cannot be deemed liquidated.28
With respect to the duress allegedly employed by PNB, which impugned petitioners' consent to
the dacion en pago, both the trial court and the Court of Appeals found that there was no evidence to
support said claim. Factual findings of the trial court, affirmed by the appellate court, are conclusive
upon this Court.29
On the fifth issue, the trial court awarded petitioners P50,000.00 in moral damages and P50,000.00 in
attorney's fees. Petitioners now theorize that it was error for the Court of Appeals to have deleted these
awards, considering that the appellate court found PNB breached its duty as an agent to render an
accounting to petitioners.
An agent's failure to render an accounting to his principal is contrary to Article 1891 of the Civil
Code.30 The erring agent is liable for damages under Article 1170 of the Civil Code, which states:
"Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages."
Article 1170 of the Civil Code, however, must be construed in relation to Article 2217 of said Code
which reads:
"Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury
.Though incapable of pecuniary computation, moral damages may be recovered if they are
the proximate result of the defendant's wrongful act or omission."
Moral damages are explicitly authorized in breaches of contract where the defendant acted fraudulently
or in bad faith.31 Good faith, however, is always presumed and any person who seeks to be awarded
damages due to the acts of another has the burden of proving that the latter acted in bad faith, with
malice, or with ill motive. In the instant case, petitioners have failed to show malice or bad faith32 on the
part of PNB in failing to render an accounting. Absent such showing, moral damages cannot be
awarded.
Nor can we restore the award of attorney's fees and costs of suit in favor of petitioners. Under Article
2208 (5) of the Civil Code, attorney's fees are allowed in the absence of stipulation only if "the
defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff s plainly valid, just, and
demandable claim." As earlier stated, petitioners have not proven bad faith on the part of PNB and
PHILEX. 1âwphi1.nêt
WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent court in CA-
G.R. CY 38607 AFFIRMED. Costs against petitioners.
SO ORDERED.
G.R. No. 147477 June 27, 2006
HERMENEGILDO M. TRINIDAD, Petitioner,
vs.
ESTRELLA ACAPULCO, Respondent
DECISION
AUSTRIA-MARTINEZ, J.:
Before this Court is a Petition for Review under Rule 45 of the Rules of Court assailing the Decision 1 of
the Court of Appeals (CA) in CA-G.R. CV No. 42518 promulgated on February 16, 2001, which
affirmed the Decision2 of the Regional Trial Court (RTC) Cebu City, Branch 6 dated March 23, 1992.
The facts are as follows:
12
On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the
nullification of a sale she made in favor of petitioner Hermenegildo M. Trinidad. She alleged: Sometime
in February 1991, a certain Primitivo Cañete requested her to sell a Mercedes Benz for P580,000.00.
Cañete also said that if respondent herself will buy the car, Cañete was willing to sell it
for P500,000.00. Petitioner borrowed the car from respondent for two days but instead of returning the
car as promised, petitioner told respondent to buy the car from Cañete for P500,000.00 and that
petitioner would pay respondent after petitioner returns from Davao. Following petitioner’s instructions,
respondent requested Cañete to execute a deed of sale covering the car in respondent’s favor
for P500,000.00 for which respondent issued three checks in favor of Cañete. Respondent thereafter
executed a deed of sale in favor of petitioner even though petitioner did not pay her any consideration
for the sale. When petitioner returned from Davao, he refused to pay respondent the amount
of P500,000.00 saying that said amount would just be deducted from whatever outstanding obligation
respondent had with petitioner. Due to petitioner’s failure to pay respondent, the checks that
respondent issued in favor of Cañete bounced, thus criminal charges were filed against
her.3 Respondent then prayed that the deed of sale between her and petitioner be declared null and
void; that the car be returned to her; and that petitioner be ordered to pay damages.4
In his Answer petitioner contended that: it is not true that he borrowed the car and that any demand
was made to return it; he also did not give any instructions to respondent to buy the car from Cañete
because as early as September 28, 1990, Cañete has already sold the car to respondent
for P500,000.00; at the time respondent executed the deed of sale in his favor on March 4, 1991,
respondent was already in possession of the deed of sale from Cañete; the amount of P500,000.00
was fully paid by way of dation in payment to partially extinguish respondent’s obligation with petitioner;
the contract entered into was a true sale of a motor vehicle and the mode of payment was that of
dation in payment agreed upon at the time of the sale.5
The parties filed their respective pre-trial briefs. Petitioner raised as issue: whether or not there is valid
dation in payment;6 while respondent put forth the questions: whether or not she is indebted to
petitioner in the amount of P566,000.00, and whether the car was ceded by her to petitioner in order to
partially pay off her obligation of P566,000.00 to petitioner as dation in payment.7
On September 6, 1991, the trial court came out with its Pre-Trial Order limiting the issue to whether
there is dacion en pago between petitioner and respondent. 8
Trial ensued and on March 23, 1992, the RTC rendered its Decision finding that no dacion en pago is
present in this case as common consent was not proven.9 The fallo of said decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff (Acapulco) and against the
defendant (Trinidad), to wit:
1. Declaring the deed of sale executed by plaintiff in favor of defendant as null and void for
being fictitious and/or simulated;
2. The defendant is ordered to return the Mercedes Benz car in question to plaintiff in the
same condition when it was delivered to him by plaintiff;
3. Defendant is ordered to pay plaintiff the amount of P100,000.00 as moral
damages; P20,000.00 as exemplary damages and attorney’s fees of P20,000.00 as well as
litigation expenses in the amount of P5,000.00 and costs.
SO ORDERED.10
Petitioner filed a Motion for Reconsideration arguing that contrary to the findings of the trial court that
there was no common consent, the offer to deliver the car to him actually came from respondent after
petitioner told her that he was going to file estafa cases against her for her failure to pay her debt to
petitioner.11
Petitioner also filed a Supplemental Motion and for the first time averred that assuming that respondent
did not agree to having the purchase price charged against the P566,000.00 she owed petitioner,
nonetheless, with or without her consent and/or knowledge, the obligations parties owed to each other
were extinguished by operation of law or through legal compensation in the amount of P500,000.00.12
The RTC issued an Order dated October 18, 1992 denying the Motion for Reconsideration and
Supplemental Motion of petitioner stating that the claim of dacion en pago is inexistent in this case and
the defense of legal compensation was not alleged or pleaded in petitioner’s Answer. 13
Petitioner appealed to the CA which affirmed the Decision of the trial court, finding that the issue of
legal compensation was filed too late as it was brought up only in the supplemental motion for
reconsideration; that the parties agreed that the issue to be tried was whether or not there was dacion
en pago; that dacion en pago however is not present in this case as the parties did not give their
consent thereto; that there can also be no legal compensation as one of the obligations of this case did
not entail payment of a monetary debt but the delivery of a car; and that the admission of petitioner that
the sale price of the car was not paid entitled respondent to file the action for rescission of sale. 14
Petitioner now comes before this Court claiming that:
>1. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT THE ANSWER DID NOT
ALLEGE FACTS AMOUNTING TO EXTINGUISHMENT OF OBLIGATION BY LEGAL
COMPENSATION;
>2. THE HONORABLE APPELLATE COURT ERRED IN GIVING UNDUE RELIANCE TO
PETITIONER’S CONCLUSION IN HIS ANSWER THAT HIS OBLIGATION WAS DEEMED
EXTINGUISHED BECAUSE OF DATION IN PAYMENT INSTEAD OF DISREGARDING SAID
CONCLUSION AND SIMPLY APPRECIATING THE FACTS ALLEGED AND PROVED AND
DRAWING FOR ITSELF THE JURIDICAL IMPLICATION OF SAID FACTS;
>3. ASSUMING THAT LEGAL COMPENSATION HAD NOT BEEN ALLEGED IN THE ANSWER,
STILL THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT LEGAL
COMPENSATION AS A MANNER OF EFFECTING PAYMENT HAD TO BE SPECIFICALLY
ALLEGED, THE SAME BEING ONLY EVIDENTIARY;
>4. ASSUMING THAT LEGAL COMPENSATION HAD TO BE ALLEGED AND THAT THE ANSWER
FAILED TO DO SO, NEVERTHELESS THE HONORABLE APPELLATE COURT ERRED IN
IGNORING THE EVIDENCE PRESENTED WITHOUT OBJECTION FROM RESPONDENT
SHOWING THAT PARITES’(SIC) MUTUAL MONETARY OBLIGATIONS TO EACH OTHER HAD
BEEN EXTINGUISHED TO THE CONCURRENT AMOUNT OF P500,00.00;
>5. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT LEGAL COMPENSATION
COULD BE EFFECTED ONLY THROUGH THE CONSENT OF THE PARTIES;
13
>6. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT NON-PAYMENT OF THE
PURCHASE PRICE MADE THE CONTRACT OF SALE FICTITIOUS, HENCE NULL AND VOID;
>7. IN VIEW OF THE RESPONDENT’S ADMISSION THAT SHE OWED PETITIONER P566,000.00,
THE HONORABLE APPELLATE COURT ERRED IN NOT ORDERING RESPONDENT TO PAY THE
SAME WITH LEGAL INTEREST;
>8. THE HONORABLE APPELLATE COURT ERRED IN ASSESSING DAMAGES AGAINST THE
PETITIONER.15
Petitioner argues that: the purchase price of the car had been automatically offset by respondent’s own
monetary obligation of P566,000.00, even if he and respondent had not agreed to offsetting following
Article 129016 of the Civil Code; Bank of the Philippine Islands v. Court of Appeals 17 also held that
compensation shall take place when two persons, in their own right, are creditors and debtors of each
other; legal compensation takes place by operation of law and may be taken up even though it is not
raised in the pleadings or during trial; it is the duty of courts to grant the relief to which the parties are
entitled as shown by the allegations and the facts proven at the trial; here, while petitioner claimed
dation in payment, there was more than enough testimony and admissions to prove elements of legal
compensation; failure to pay the agreed purchase price does not make the contract of sale fictitious
and null and void; the CA erred in not ordering respondent to pay petitioner the balance of her partially
extinguished indebtedness and in assessing damages against him as there was no basis therefor. 18
In her Comment, respondent counters that: it was only in the Supplemental Motion for Reconsideration
of the decision of the trial court that petitioner changed his theory and started claiming legal
compensation as a defense; the CA did not commit any error in rejecting the belated new defense of
petitioner as it would be offensive to the basic rule of fair play, justice and due process; Article 1279 of
the Civil Code also states that for legal compensation to be proper both debts should consist of sum of
money; in this case, one of the obligations does not entail payment of money but delivery of a car.19
Petitioner merely reiterated his arguments in his Memorandum, 20 while respondent in hers, further
averred that: she is not the owner of the car, but was only in possession thereof in order to sell it at a
price of P580,000.00 with P80,000.00 going to her; both the trial court and the CA failed to make a
finding as to the exact amount respondent owed petitioners. 21
Stripped to its basics, what petitioner is contending is that legal compensation should be appreciated,
though not expressly stated in his Answer to the Complaint before the trial court, as his allegations
therein and the facts proven at the trial show the presence of legal compensation. He further argues
that, in any case, legal compensation takes place by operation of law even without the consent of the
interested parties.
The Court resolves to grant the petition.
Our rules recognize the broad discretionary power of an appellate court to waive the lack of proper
assignment of errors and to consider errors not assigned.22 The interest of justice dictates that the
Court consider and resolve issues even though not particularly raised if it is necessary for the complete
adjudication of the rights and obligations of the parties and it falls within the issues already found by
them.23 While it is true that petitioner failed to raise the issue of legal compensation at the earliest
opportunity, this should not preclude the courts from appreciating the same especially in this case,
where ignoring the same would only result to unnecessary and circuitous filing of cases.
Indeed, the doctrine that higher courts are precluded from entertaining matters neither alleged in the
pleadings nor raised during the proceedings below but ventilated for the first time only in a motion for
reconsideration or on appeal, is subject to exceptions, such as when:
(a) grounds not assigned as errors but affecting jurisdiction over the subject matter; (b) matters not
assigned as errors on appeal but are evidently plain or clerical errors within contemplation of law; (c)
matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just
decision and complete resolution of the case or to serve the interests of justice or to avoid dispensing
piecemeal justice; (d) matters not specifically assigned as errors on appeal but raised in the trial court
and are matters of record having some bearing on the issue submitted which the parties failed to raise
or which the lower court ignored; (e) matters not assigned as errors on appeal but closely related to an
error assigned; and (f) matters not assigned as errors on appeal but upon which the determination of a
question properly assigned, is dependent.24
In this case, petitioner raised the issue of dacion en pago in his Answer to respondent’s Complaint.
The trial court thus focused on ascertaining whether the elements of dacion en pago are present in the
case at bar, i.e.: whether there is consent, object certain and cause or consideration, with common
consent as an essential prerequisite to have the effect of totally extinguishing the debt or
obligation.25 As respondent’s consent was not adequately proven by petitioner, the trial court held that
there could be no dacion en pago. Petitioner thereafter filed a Motion for Reconsideration and a
Supplemental Motion for Reconsideration where, for the first time, he raised the issue of legal
compensation. In striking down petitioner’s claim of legal compensation, the trial court reasoned that it
was raised too late. This was affirmed by the CA.
This Court holds otherwise.
Compensation takes effect by operation of law even without the consent or knowledge of the parties
concerned when all the requisites mentioned in Article 1279 of the Civil Code are present. 26 This is in
consonance with Article 1290 of the Civil Code which provides that:
Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect
by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors
and debtors are not aware of the compensation.
Since it takes place ipso jure,27 when used as a defense, it retroacts to the date when all its requisites
are fulfilled.28
Article 1279 provides that in order that compensation may be proper, it is necessary:
(1) that each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) that both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) that the two debts be due;
(4) that they be liquidated and demandable;
14
 (5) that over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
Here, petitioner’s stance is that legal compensation has taken place and operates even against the will
of the parties because: (a) respondent and petitioner were personally both creditor and debtor of each
other; (b) the monetary obligation of respondent was P566,000.00 and that of the petitioner
was P500,000.00 showing that both indebtedness were monetary obligations the amount of which
were also both known and liquidated; (c) both monetary obligations had become due and
demandable—petitioner’s obligation as shown in the deed of sale and respondent’s indebtedness as
shown in the dishonored checks; and (d) neither of the debts or obligations are subject of a controversy
commenced by a third person.
While the proceedings in the RTC focused on ascertaining the presence of the elements of dacion en
pago, it was likewise proven that petitioner owed respondent the amount of P500,000.00 while
respondent owed petitioner P566,000.00; that both debts are due, liquidated and demandable, and;
that neither of the debts or obligations are subject of a controversy commenced by a third person.
Respondent in her cross-examination categorically admitted that she is indebted to petitioner as
follows:
Q But you will admit that you have borrowed several times from Mr. Trinidad some money?
A Yes.
Q And in fact the total amount of money that you have borrowed from Mr. Trinidad reaches
to P566,000.00, right?
A Yes.
Q And in fact you have issued checks to cover for this account?
A Yes.
Q There were several checks you have issued, right?
A Yes.
Q And all of these checks bounced?
A Yes.29
xxxx
Q x x x It is now very clear, Mrs. Acapulco, that at the time you executed a deed of absolute sale of the
car in favor of Hermenegildo Trinidad you have an outstanding account with him in the amount
of P566,000.00?
A Yes.30
Ignoring this admission would only result in added burden to petitioner as well as the courts as
petitioner will be forced to file a separate case for collection of sum of money just so he could enforce
his right to collect from respondent. This is precisely what compensation seeks to avoid as its aim is to
prevent unnecessary suits and payments through the mutual extinction of concurring debts by
operation of law.31
The claim of respondent that there could be no legal compensation in this case as one of the
obligations consists of delivery of a car and not a sum of money must also fail. Respondent sold the
car to petitioner on March 4, 1991 for P500,000.00 while she filed her complaint for nullification of the
sale only on May 6, 1991. As legal compensation takes place ipso jure, and retroacts to the date when
its requisites are fulfilled, legal compensation has already taken place at the time of the sale. At such
time, petitioner owed respondent the sum of P500,000.00 which is the price of the vehicle.
Consequently, by operation of law, the P500,000.00 which petitioner owed respondent is off-set
against the P566,000.00 owed by respondent to petitioner, leaving a balance of P66,000.00, which
respondent should pay with 12% interest per annum from date of judicial or extrajudicial deed.32 Since
there was no extrajudicial deed in this case, the interest shall be resolved from the date petitioner filed
its Supplemental Motion for Reconsideration invoking for the first time legal compensation, that is, May
20, 1992.33
Finally, the Court agrees with petitioner that the trial court erred in awarding damages in favor of
respondent.
In order that moral damages may be awarded, there must be pleading and proof of moral suffering,
mental anguish, fright and the like, and while no proof of pecuniary loss is necessary in order that
moral damages may be awarded, it is nevertheless essential that the claimant should satisfactorily
show the existence of the factual basis of damages and its causal connection to defendant’s
acts.34 Claims must be substantiated by clear and convincing proof35 and there must be clear
testimony on the anguish and other forms of mental sufferings as mere allegations will not
suffice.36 Allegations of besmirched reputation, embarrassment and sleepless nights are insufficient for
it must be shown that the proximate cause thereof was the unlawful act or omission of the opposing
party.37
Indeed, for a court to arrive upon a judicious approximation of emotional or moral injury, competent and
substantial proof of the suffering experienced must be laid before it. 38 There must be definite findings
as to what the supposed moral damages suffered consisted of.39 The award of moral damages must
be solidly anchored on a definite showing that the claiming party actually experienced emotional and
mental sufferings.40
In this case, respondent merely testified that after petitioner refused the payment of the car as well as
its return, she was very much worried, which if converted into monetary amount is equivalent
to P200,000.00.41 We deem such testimony insufficient to warrant the award of moral damages.
Similarly, in order that exemplary damages may be awarded, it must be shown that the wrongful act
was accompanied by bad faith or done in a wanton, fraudulent, reckless or malevolent
manner.42 Exemplary damages are also allowed only in addition to moral damages such that no
exemplary damage can be awarded unless the claimant first establishes his clear right to moral
15
damages.43 As moral damages are improper in the present case, so is the award of exemplary
damages.
The decision of the trial court also does not mention the reason for the award of attorney’s fees and the
award was simply contained in the dispositive portion of the decision. Again, the trial court erred on this
score as it must explicitly state in the body of its decision and not only in the dispositive portion thereof
the legal reason for the award of attorney’s fees.44
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated February 16,
2001 is REVERSED and SET ASIDE. The P500,000.00 which Hermenegildo M. Trinidad owed Estrella
Acapulco is offset against the P566,000.00 which Acapulco owed Trinidad. Acapulco is ordered to pay
Trinidad the amount of P66,000.00 plus interest at 12% per annum from May 20, 1992 until full
payment.
SO ORDERED.
G.R. No. 168251 July 27, 2011
JESUS M. MONTEMAYOR, Petitioner,
vs.
VICENTE D. MILLORA, Respondent.
DECISION
DEL CASTILLO, J.:
When the dispositive portion of a judgment is clear and unequivocal, it must be executed strictly
according to its tenor.
This Petition for Review on Certiorari1 assails the Decision2 dated May 19, 2005 of the Court of
Appeals (CA) in CA-G.R. SP No. 81075, which dismissed the petition for certiorari seeking to annul
and set aside the Orders dated September 6, 20023 and October 2, 20034 of the Regional Trial Court
(RTC) of Quezon City, Branch 98 in Civil Case No. Q-93-17255.
Factual Antecedents
On July 24, 1990, respondent Atty. Vicente D. Millora (Vicente) obtained a
loan of ₱400,000.00 from petitioner Dr. Jesus M. Montemayor (Jesus) as evidenced by a promissory
note5 executed by Vicente. On August 10, 1990, the parties executed a loan contract 6 wherein it was
provided that the loan has a stipulated monthly interest of 2% and that Vicente had already paid the
amount of ₱100,000.00 as well as the ₱8,000.00 representing the interest for the period July 24 to
August 23, 1990.
Subsequently and with Vicente’s consent, the interest rate was increased to 3.5% or ₱10,500.00 a
month. From March 24, 1991 to July 23, 1991, or for a period of four months, Vicente was supposed to
pay ₱42,000.00 as interest but was able to pay only ₱24,000.00. This was the last payment Vicente
made. Jesus made several demands7 for Vicente to settle his obligation but to no avail.
Thus, on August 17, 1993, Jesus filed before the RTC of Quezon City a Complaint8 for Sum of Money
against Vicente which was docketed as Civil Case No. Q-93-17255. On October 19, 1993, Vicente filed
his Answer9interposing a counterclaim for attorney’s fees of not less than ₱500,000.00. Vicente
claimed that he handled several cases for Jesus but he was summarily dismissed from handling them
when the instant complaint for sum of money was filed.
Ruling of the Regional Trial Court
In its Decision10 dated October 27, 1999, the RTC ordered Vicente to pay Jesus his monetary
obligation amounting to ₱300,000.00 plus interest of 12% from the time of the filing of the complaint on
August 17, 1993 until fully paid. At the same time, the trial court found merit in Vicente’s counterclaim
and thus ordered Jesus to pay Vicente his attorney’s fees which is equivalent to the amount of
Vicente’s monetary liability, and which shall be set-off with the amount Vicente is adjudged to pay
Jesus, viz:
WHEREFORE, premises above-considered [sic], JUDGMENT is hereby rendered ordering defendant
Vicente D. Millora to pay plaintiff Jesus M. Montemayor the sum of ₱300,000.00 with interest at the
rate of 12% per annum counted from the filing of the instant complaint on August 17, 1993 until fully
paid and whatever amount recoverable from defendant shall be set off by an equivalent amount
awarded by the court on the counterclaim representing attorney’s fees of defendant on the basis of
"quantum meruit" for legal services previously rendered to plaintiff.
No pronouncement as to attorney’s fees and costs of suit.
SO ORDERED.11
On December 8, 1999, Vicente filed a Motion for Reconsideration12 to which Jesus filed an
Opposition.13 On March 15, 2000, Vicente filed a Motion for the Issuance of a Writ of Execution 14 with
respect to the portion of the RTC Decision which awarded him attorney’s fees under his counterclaim.
Jesus filed his Urgent Opposition to Defendant’s Motion for the Issuance of a Writ of Execution 15 dated
May 31, 2000.
In an Order16 dated June 23, 2000, the RTC denied Vicente’s Motion for Reconsideration but granted
his Motion for Issuance of a Writ of Execution of the portion of the decision concerning the award of
attorney’s fees.
Intending to appeal the portion of the RTC Decision which declared him liable to Jesus for the sum of
₱300,000.00 with interest at the rate of 12% per annum counted from the filing of the complaint on
August 17, 1993 until fully paid, Vicente filed on July 6, 2000 a Notice of Appeal.17 This was however
denied by the RTC in an Order18 dated July 10, 2000 on the ground that the Decision has already
become final and executory on July 1, 2000.19
Meanwhile, Jesus filed on July 12, 2000 a Motion for Reconsideration and Clarification 20 of the June
23, 2000 Order granting Vicente’s Motion for the Issuance of a Writ of Execution. Thereafter, Jesus
filed on September 22, 2000 his Motion for the Issuance of a Writ of Execution. 21 After the hearing on
the said motions, the RTC issued an Order22dated September 6, 2002 denying both motions for lack of
merit. The Motion for Reconsideration and Clarification was denied for violating Section 5,23 Rule 15 of
the Rules of Court and likewise the Motion for the Issuance of a Writ of Execution, for violating Section
6,24 Rule 15 of the same Rules.
16
Jesus filed his Motion for Reconsideration25 thereto on October 10, 2002 but this was eventually
denied by the trial court through its Order26 dated October 2, 2003.
Ruling of the Court of Appeals
Jesus went to the CA via a Petition for Certiorari27 under Rule 65 of the Rules of Court.
On May 19, 2005, the CA issued its Decision the dispositive portion of which provides:
WHEREFORE, the foregoing considered, the petition for certiorari is DENIED and the assailed Orders
are AFFIRMED in toto. No costs.
SO ORDERED.28
Not satisfied, Jesus is now before this Court via a Petition for Review on Certiorari under Rule 45 of the
Rules of Court.
Issue
notwithstanding the finality of the trial court’s decision of October 27, 1999, as well as the orders of
September 6, 2002 and October 2, 2003, the legal issue to be resolved in this case is whether x x x
[DESPITE] the absence of a specific amount in the decision representing respondent’s counterclaim,
the same could be validly [offset] against the specific amount of award mentioned in the decision in
favor of the petitioner.29
Petitioner’s Arguments
Jesus contends that the trial court grievously erred in ordering the implementation of the RTC’s
October 27, 1999 Decision considering that same does fix the amount of attorney’s fees. According to
Jesus, such disposition leaves the matter of computation of the attorney’s fees uncertain and, hence,
the writ of execution cannot be implemented. In this regard, Jesus points out that not even the Sheriff
who will implement said Decision can compute the judgment awards. Besides, a sheriff is not clothed
with the authority to render judicial functions such as the computation of specific amounts of judgment
awards.
Respondent’s Arguments
Vicente counter-argues that the October 27, 1999 RTC Decision can no longer be made subject of
review, either by way of an appeal or by way of a special civil action for certiorari because it had
already attained finality when after its promulgation, Jesus did not even file a motion for
reconsideration thereof or interpose an appeal thereto. In fact, it was Vicente who actually filed a
motion for reconsideration and a notice of appeal, which was eventually denied and disapproved by the
trial court.
Our Ruling
The petition lacks merit.
The October 27, 1999 Decision of the RTC is already final and executory, hence, immutable.
At the outset, it should be stressed that the October 27, 1999 Decision of the RTC is already final and
executory. Hence, it can no longer be the subject of an appeal. Consequently, Jesus is bound by the
decision and can no longer impugn the same. Indeed, well-settled is the rule that a decision that has
attained finality can no longer be modified even if the modification is meant to correct erroneous
conclusions of fact or law. The doctrine of finality of judgment is explained in Gallardo-Corro v.
Gallardo:30
Nothing is more settled in law than that once a judgment attains finality it thereby becomes immutable
and unalterable. It may no longer be modified in any respect, even if the modification is meant to
correct what is perceived to be an erroneous conclusion of fact or law, and regardless of whether the
modification is attempted to be made by the court rendering it or by the highest court of the land. Just
as the losing party has the right to file an appeal within the prescribed period, the winning party also
has the correlative right to enjoy the finality of the resolution of his case. The doctrine of finality of
judgment is grounded on fundamental considerations of public policy and sound practice, and that, at
the risk of occasional errors, the judgments or orders of courts must become final at some definite time
fixed by law; otherwise, there would be no end to litigations, thus setting to naught the main role of
courts of justice which is to assist in the enforcement of the rule of law and the maintenance of peace
and order by settling justiciable controversies with finality.31
To stress, the October 27, 1999 Decision of the RTC has already attained finality. "Such definitive
judgment is no longer subject to change, revision, amendment or reversal. Upon finality of the
judgment, the Court loses its jurisdiction to amend, modify or alter the same. Except for correction of
clerical errors or the making of nunc pro tuncentries which cause no prejudice to any party, or where
the judgment is void, the judgment can neither be amended nor altered after it has become final and
executory. This is the principle of immutability of final judgment." 32
The amount of attorney’s fees is ascertainable from the RTC Decision. Thus, compensation is
possible.
Jesus contends that offsetting cannot be made because the October 27, 1999 judgment of the RTC
failed to specify the amount of attorney’s fees. He maintains that for offsetting to apply, the two debts
must be liquidated or ascertainable. However, the trial court merely awarded to Vicente attorney’s fees
based on quantum meruit without specifying the exact amount thereof.
We do not agree.
For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil
Code, quoted below, must be present.
ARTICLE 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.
ARTICLE 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
17
 (2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
"A debt is liquidated when its existence and amount are determined. It is not necessary that it be
admitted by the debtor. Nor is it necessary that the credit appear in a final judgment in order that it can
be considered as liquidated; it is enough that its exact amount is known. And a debt is considered
liquidated, not only when it is expressed already in definite figures which do not require verification, but
also when the determination of the exact amount depends only on a simple arithmetical operation x x
x."33
In Lao v. Special Plans, Inc.,34 we ruled that:
When the defendant, who has an unliquidated claim, sets it up by way of counterclaim, and a judgment
is rendered liquidating such claim, it can be compensated against the plaintiff’s claim from the moment
it is liquidated by judgment. We have restated this in Solinap v. Hon. Del Rosario 35 where we held that
compensation takes place only if both obligations are liquidated.
In the instant case, both obligations are liquidated. Vicente has the obligation to pay his debt due to
Jesus in the amount of ₱300,000.00 with interest at the rate of 12% per annum counted from the filing
of the instant complaint on August 17, 1993 until fully paid. Jesus, on the other hand, has the obligation
to pay attorney’s fees which the RTC had already determined to be equivalent to whatever amount
recoverable from Vicente. The said attorney’s fees were awarded by the RTC on the counterclaim of
Vicente on the basis of "quantum meruit" for the legal services he previously rendered to Jesus.
In its Decision, the trial court elucidated on how Vicente had established his entitlement for attorney’s
fees based on his counterclaim in this manner:
Defendant, on his counterclaim, has established the existence of a lawyer-client relationship between
him and plaintiff and this was admitted by the latter. Defendant had represented plaintiff in several
court cases which include the Laguna property case, the various cases filed by Atty. Romulo Reyes
against plaintiff such as the falsification and libel cases and the disbarment case filed by plaintiff
against Atty. Romulo Reyes before the Commission on Bar Integration. Aside from these cases,
plaintiff had made defendant his consultant on almost everything that involved legal opinions.
More particularly in the Calamba, Laguna land case alone, plaintiff had agreed to pay defendant a
contingent fee of 25% of the value of the property for the latter’s legal services as embodied in the
Amended Complaint signed and verified by plaintiff (Exh. 5). Aside from this contingent fee, defendant
had likewise told plaintiff that his usual acceptance fee for a case like the Laguna land case is
₱200,000.00 and his appearance fee at that time was x x x ₱2,000.00 per appearance but still plaintiff
paid nothing.
The lawyer-client relationship between the parties was severed because of the instant case. The court
is however fully aware of defendant’s stature in life – a UP law graduate, Bar topnotcher in 1957 bar
examination, former Senior Provincial Board Member, Vice-Governor and Governor of the province of
Pangasinan, later as Assemblyman of the Batasang Pambansa and is considered a prominent trial
lawyer since 1958. For all his legal services rendered to plaintiff, defendant deserves to be
compensated at least on a "quantum meruit" basis.36
The above discussion in the RTC Decision was then immediately followed by the dispositive portion,
viz:
WHEREFORE, premises above-considered, JUDGMENT is hereby rendered ordering defendant
Vicente D. Millora to pay plaintiff Jesus M. Montemayor the sum of ₱300.000.00 with interest at the
rate of 12% per annum counted from the filing of the instant complaint on August 17, 1993 until fully
paid and whatever amount recoverable from defendant shall be set off by an equivalent amount
awarded by the court on the counterclaim representing attorney’s fees of defendant on the basis
of "quantum meruit" for legal services previously rendered to plaintiff.
No pronouncement as to attorney’s fees and costs of suit.
SO ORDERED.37 (Emphasis supplied.)
It is therefore clear that in the execution of the RTC Decision, there are two parts to be executed. The
first part is the computation of the amount due to Jesus. This is achieved by doing a simple arithmetical
operation at the time of execution. The principal amount of ₱300,000.00 is to be multiplied by the
interest rate of 12%. The product is then multiplied by the number of years that had lapsed from the
filing of the complaint on August 17, 1993 up to the date when the judgment is to be executed. The
result thereof plus the principal of ₱300,000.00 is the total amount that Vicente must pay Jesus.
The second part is the payment of attorney’s fees to Vicente. This is achieved by following the clear
wordings of the above fallo of the RTC Decision which provides that Vicente is entitled to attorney’s
fees which is equivalent to whatever amount recoverable from him by Jesus. Therefore, whatever
amount due to Jesus as payment of Vicente’s debt is equivalent to the amount awarded to the latter as
his attorney’s fees. Legal compensation or set-off then takes place between Jesus and Vicente and
both parties are on even terms such that there is actually nothing left to execute and satisfy in favor of
either party.
In fact, the RTC, in addressing Jesus’ Motion for Reconsideration and Clarification dated July 12, 2000
had already succinctly explained this matter in its Order dated September 6, 2002, viz:
Notwithstanding the tenor of the said portion of the judgment, still, there is nothing to execute and
satisfy in favor of either of the herein protagonists because the said decision also states clearly that
"whatever amount recoverable from defendant shall be SET-OFF by an equivalent amount
awarded by the Court on the counterclaim representing attorney’s fees of defendant on the
basis of "quantum meruit" for legal services previously rendered to plaintiff" x x x.
Said dispositive portion of the decision is free from any ambiguity. It unequivocably ordered that any
amount due in favor of plaintiff and against defendant is set off by an equivalent amount awarded to
defendant in the form of counterclaims representing attorney’s fees for past legal services he rendered
to plaintiff.
18
It will be an exercise in futility and a waste of so precious time and unnecessary effort to enforce
satisfaction of the plaintiff’s claims against defendant, and vice versa because there is in fact a setting
off of each other’s claims and liabilities under the said judgment which has long become
final.38 (Emphasis in the original.)
A reading of the dispositive portion of the RTC Decision would clearly show that no ambiguity of any
kind exists. Furthermore, if indeed there is any ambiguity in the dispositive portion as claimed by
Jesus, the RTC had already clarified it through its Order dated September 6, 2002 by categorically
stating that the attorney’s fees awarded in the counterclaim of Vicente is of an amount equivalent to
whatever amount recoverable from him by Jesus. This clarification is not an amendment, modification,
correction or alteration to an already final decision as it is conceded that such cannot be done
anymore. What the RTC simply did was to state in categorical terms what it obviously meant in its
decision. Suffice it to say that the dispositive portion of the decision is clear and unequivocal such that
a reading of it can lead to no other conclusion, that is, any amount due in favor of Jesus and against
Vicente is set off by an equivalent amount in the form of Vicente’s attorney’s fees for past legal
services he rendered for Jesus.
WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The assailed Decision of the
Court of Appeals dated May 19, 2005 in CA-G.R. SP No. 81075 which dismissed the petition
for certiorari seeking to annul and set aside the Orders dated September 6, 2002 and October 2, 2003
of the Regional Trial Court of Quezon City, Branch 98 in Civil Case No. Q-93-17255, is
hereby AFFIRMED.
SO ORDERED.
G.R. No. 191555 January 20, 2014
UNION BANK OF THE PHILIPPINES, Petitioner,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review onCertiorari1
are the Decision2
dated November 3, 2009 and
Resolution3 dated February 26, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 93833 which
affirmed the Orders4 dated November 9, 2005 and January 30, 2006 of the Regional Trial Court of
Makati, Branch 585 (RTC) in Civil Case No. 7648 denying the motion to affirm legal compensation 6 filed
by petitioner Union Bank of the Philippines (Union Bank) against respondent Development Bank of the
Philippines (DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s predecessor-in-interest,
Bancom Development Corporation (Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In Payment
of Debt7(dacion en pago) whereby the former ceded in favor of the latter certain properties (including a
processing plant in Marilao, Bulacan [processing plant]) in consideration of the following: (a) the full
and complete satisfaction of FI’s loan obligations to DBP; and (b) the direct assumption by DBP of FI’s
obligations to Bancom in the amount of ₱17,000,000.00 (assumed obligations).8
On the same day, DBP, as the new owner of the processing plant, leased back9 for 20 years the said
property to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be shared by
DBP and Bancom.
DBP also entered into a separate agreement10 with Bancom (Assumption Agreement) whereby the
former: (a) confirmed its assumption of FI’s obligations to Bancom; and (b) undertook to remit up to
30% of any and all rentals due from FI to Bancom (subject rentals) which would serve as payment of
the assumed obligations, to be paid in monthly installments. The pertinent portions of the Assumption
Agreement reads as follows:
WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the above obligations to
Bancom which DBP has assumed shall be settled, paid and/or liquidated by DBP out of a portion of the
lease rentals or part of the proceeds of sale of those properties of the Assignors conveyed to DBP
pursuant to the [Deed of Cession of Property in Payment of Debt dated May 21, 1979] and which are
the subject of [the Lease Agreement] made and executed by and between DBP and [FI], the last
hereafter referred to as the "Lessee" to be effective as of July 31, 1978.
xxxx
4. DBP hereby covenants and undertakes that the amount up to 30% of any and all rentals due from
the Lessee pursuant to the Lease Agreement shall be remitted by DBP to Bancom at the latter’s offices
at Pasay Road, Makati, Metro Manila within five (5) days from due dates thereof, and applied in
payment of the Assumed Obligations. Likewise, the amount up to 30% of the proceeds from any sale
of the Leased Properties shall within the same period above, be remitted by DBP to Bancom and
applied in payment or prepayment of the Assumed Obligations. x x x.
Any balance of the Assumed Obligations after application of the entire rentals and or the entire sales
proceeds actually received by Bancom on the Leased Properties shall be paid by DBP to Bancom not
later than December 29, 1998. (Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to
Foodmasters Worldwide, Inc. (FW);11 while on May 9, 1984, Bancom conveyed all its receivables,
including, among others, DBP’s assumed obligations, to Union Bank. 12
Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union
Bank filed, on June 20, 1984, a collection case against DBP before the RTC, docketed as Civil Case
No. 7648.13 In opposition, DBP countered, among others, that the obligations it assumed were payable
only out of the rental payments made by FI. Thus, since FI had yet to pay the same, DBP’s obligation
to Union Bank had not arisen.14 In addition, DBP sought to implead FW as third party-defendant in its
capacity as FI’s assignee and, thus, should be held liable to Union Bank.15
In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it had ceased to be
a real-party-in-interest due to the supervening transfer of its rights, title and interests over the subject
matter to the Asset Privatization Trust (APT). Said motion was, however, denied by the RTC in an
Order dated May 27, 1988.16
19
 The RTC Ruling in Civil Case No. 7648
Finding the complaint to be meritorious, the RTC, in a Decision 17 dated May 8, 1990, ordered: (a) DBP
to pay Union Bank the sum of ₱4,019,033.59, representing the amount of the subject rentals (which,
again, constitutes 30% of FI’s [now FW’s] total rental debt), including interest until fully paid; and (b)
FW, as third-party defendant, to indemnify DBP, as third- party plaintiff, for its payments of the subject
rentals to Union Bank. It ruled that there lies no evidence which would show that DBP’s receipt of the
rental payments from FW is a condition precedent to the former’s obligation to remit the subject rentals
under the Lease Agreement. Thus, when DBP failed to remit the subject rentals to Union Bank, it
defaulted on its assumed obligations.18 DBP then elevated the case on appeal before the CA,
docketed as CA-G.R. CV No. 35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the RTC’s ruling, and
consequently ordered: (a) FW to pay DBP the amount of ₱32,441,401.85 representing the total rental
debt incurred under the Lease Agreement, including ₱10,000.00 as attorney’s fees; and (b) DBP, after
having been paid by FW its unpaid rentals, to remit 30% thereof (i.e., the subject rentals) to Union
Bank.20
It rejected Union Bank’s claim that DBP has the direct obligation to remit the subject rentals not only
from FW’s rental payments but also out of its own resources since said claim contravened the "plain
meaning" of the Assumption Agreement which specifies that the payment of the assumed obligations
shall be made "out of the portion of the lease rentals or part of the proceeds of the sale of those
properties of [FI] conveyed to DBP."21 It also construed the phrase under the Assumption Agreement
that DBP is obligated to "pay any balance of the Assumed Obligations after application of the entire
rentals and/or the entire sales proceeds actually received by [Union Bank] on the Leased Properties . .
. not later than December 29, 1998" to mean that the lease rentals must first be applied to the payment
of the assumed obligations in the amount of ₱17,000,000.00, and that DBP would have to pay out of its
own money only in case the lease rentals were insufficient, having only until December 29, 1998 to do
so. Nevertheless, the monthly installments in satisfaction of the assumed obligations would still have to
be first sourced from said lease rentals as stipulated in the assumption agreement. 22 In view of the
foregoing, the CA ruled that DBP did not default in its obligations to remit the subject rentals to Union
Bank precisely because it had yet to receive the rental payments of FW.23
Separately, the CA upheld the RTC’s denial of DBP’s motion to dismiss for the reason that the transfer
of its rights, title and interests over the subject matter to the APT occurred pendente lite, and, as such,
the substitution of parties is largely discretionary on the part of the court.
At odds with the CA’s ruling, Union Bank and DBP filed separate petitions for review on certiorari
before the Court, respectively docketed as G.R. Nos. 115963 and 119112, which were thereafter
consolidated.
The Court’s Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution24 dated December 13, 1995. First, it upheld the CA’s
finding that while DBP directly assumed FI’s obligations to Union Bank, DBP was only obliged to remit
to the latter 30% of the lease rentals collected from FW, from which any deficiency was to be settled by
DBP not later than December 29, 1998.25 Similarly, the Court agreed with the CA that the denial of
DBP’s motion to dismiss was proper since substitution of parties, in case of transfers pendente lite, is
merely discretionary on the part of the court, adding further that the proposed substitution of APT will
amount to a novation of debtor which cannot be done without the consent of the creditor. 26
On August 2, 2000, the Court’s resolution became final and executory.27
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for execution 28 before the RTC, praying that DBP be
directed to pay the amount of ₱9,732,420.555 which represents the amount of the subject rentals (i.e.,
30% of the FW’s total rental debt in the amount of ₱32,441,401.85). DBP opposed 29 Union Bank’s
motion, contending that it sought to effectively vary the dispositive portion of the CA’s May 27, 1994
Decision in CA-G.R. CV No. 35866. Also, on September 12, 2001, DBP filed its own motion for
execution against FW, citing the same CA decision as its basis.
In a Consolidated Order30 dated October 15, 2001 (Order of Execution), the RTC granted both motions
for execution. Anent Union Bank’s motion, the RTC opined that the CA’s ruling that DBP’s payment to
Union Bank shall be demandable only upon payment of FW must be viewed in light of the date when
the same was rendered. It noted that the CA decision was promulgated only on May 27, 1994, which
was before the December 29, 1998 due date within which DBP had to fully pay its obligation to Union
Bank under the Assumption Agreement. Since the latter period had already lapsed, "[i]t would, thus, be
too strained to argue that payment by DBP of its assumed obligation[s] shall be dependent on [FW’s]
ability, if not availability, to pay."31 In similar regard, the RTC granted DBP’s motion for execution
against FW since its liability to Union Bank and DBP remained undisputed.
As a result, a writ of execution32 dated October 15, 2001 (October 15, 2001 Writ of Execution) and,
thereafter, a notice of garnishment33 against DBP were issued. Records, however, do not show that the
same writ was implemented against FW.
DBP filed a motion for reconsideration34 from the Execution Order, averring that the latter issuance
varied the import of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866 in that it prematurely
ordered DBP to pay the assumed obligations to Union Bank before FW’s payment. The motion was,
however, denied on December 5, 2001.35 Thus, DBP’s deposits were eventually
garnished.36 Aggrieved, DBP filed a petition for certiorari37 before the CA, docketed as CA-G.R. SP No.
68300.
The CA Ruling in CA-G.R. SP No. 68300
In a Decision38 dated July 26, 2002, the CA dismissed DBP’s petition, finding that the RTC did not
abuse its discretion when it issued the October 15, 2001 Writ of Execution. It upheld the RTC’s
observation that there was "nothing wrong in the manner how [said writ] was implemented," as well as
"in the zealousness and promptitude exhibited by Union Bank" in moving for the same. DBP appealed
the CA’s ruling before the Court, which was docketed as G.R. No. 155838.
The Court’s Ruling in G.R. No. 155838
In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the Court granted DBP’s appeal,
and thereby reversed and set aside the CA’s ruling in CA-G.R. SP No. 68300. It found significant
points of variance between the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866, and the RTC’s
Order of Execution/October 15, 2001 Writ of Execution. It ruled that both the body and the dispositive
20
portion of the same decision acknowledged that DBP’s obligation to Union Bank for remittance of the
lease payments is contingent on FW’s prior payment to DBP, and that any deficiency DBP had to pay
by December 29, 1998 as per the Assumption Agreement cannot be determined until after the
satisfaction of FW’s own rental obligations to DBP. Accordingly, the Court: (a) nullified the October 15,
2001 Writ of Execution and all related issuances thereto; and (b) ordered Union Bank to return to DBP
the amounts it received pursuant to the said writ.40 Dissatisfied, Union Bank moved for reconsideration
which was, however, denied by the Court in a Resolution dated March 24, 2004 with finality. Thus, the
January 13, 2004 Decision attained finality on April 30, 2004. 41 Thereafter, DBP moved for the
execution of the said decision before the RTC. After numerous efforts on the part of Union Bank
proved futile, the RTC issued a writ of execution (September 6, 2005 Writ of Execution), ordering
Union Bank to return to DBP all funds it received pursuant to the October 15, 2001 Writ of Execution. 42
Union Bank’s Motion to Affirm Legal Compensation
On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal
Compensation,43 praying that the RTC apply legal compensation between itself and DBP in order to
offset the return of the funds it previously received from DBP. Union Bank anchored its motion on two
grounds which were allegedly not in existence prior to or during trial, namely: (a) on December 29,
1998, DBP’s assumed obligations became due and demandable;44 and (b) considering that FWI
became non-operational and non-existent, DBP became primarily liable to the balance of its assumed
obligation, which as of Union Bank’s computation after its claimed set-off, amounted to
₱1,849,391.87.45
On November 9, 2005, the RTC issued an Order46 denying the above-mentioned motion for lack of
merit, holding that Union Bank’s stated grounds were already addressed by the Court in the January
13, 2004 Decision in G.R. No. 155838. With Union Bank’s motion for reconsideration therefrom having
been denied, it filed a petition for certiorari47 with the CA, docketed as CA-G.R. SP No. 93833.
Pending resolution, Union Bank issued Manager’s Check48 No. 099-0003192363 dated April 21, 2006
amounting to ₱52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution dated September
6, 2005 Writ of Execution. DBP, however, averred that Union Bank still has a balance of ₱756,372.39
representing a portion of the garnished funds of DBP,49 which means that said obligation had not been
completely extinguished.
The CA Ruling in CA-G.R. SP No. 93833
In a Decision50 dated November 3, 2009, the CA dismissed Union Bank’s petition, finding no grave
abuse of discretion on the RTC’s part. It affirmed the denial of its motion to affirm legal compensation
considering that: (a) the RTC only implemented the Court’s January 13, 2004 Decision in G.R. No.
155838 which by then had already attained finality; (b) DBP is not a debtor of Union Bank; and (c)
there is neither a demandable nor liquidated debt from DBP to Union Bank. 51
Undaunted, Union Bank moved for reconsideration which was, however, denied in a
Resolution52 dated February 26, 2010; hence, the instant petition.
The Issue Before the Court
The sole issue for the Court’s resolution is whether or not the CA correctly upheld the denial of Union
Bank’s motion to affirm legal compensation.
The Court’s Ruling
The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby
two persons in their capacity as principals are mutual debtors and creditors of each other with respect
to equally liquidated and demandable obligations to which no retention or controversy has been timely
commenced and communicated by third parties.53 The requisites therefor are provided under Article
1279 of the Civil Code which reads as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.1awp++i1 (Emphases and underscoring
supplied)
The rule on legal54 compensation is stated in Article 1290 of the Civil Code which provides that "[w]hen
all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law,
and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not
aware of the compensation."
In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken place in
order to effectively offset (a) its own obligation to return the funds it previously received from DBP as
directed under the September 6, 2005 Writ of Execution with (b) DBP’s assumed obligations under the
Assumption Agreement. However, legal compensation could not have taken place between these
debts for the apparent reason that requisites 3 and 4 under Article 1279 of the Civil Code are not
present. Since DBP’s assumed obligations to Union Bank for remittance of the lease payments are – in
the Court’s words in its Decision dated January 13, 2004 in G.R. No. 155838 – " contingent on the prior
payment thereof by [FW] to DBP," it cannot be said that both debts are due (requisite 3 of Article 1279
of the Civil Code). Also, in the same ruling, the Court observed that any deficiency that DBP had to
make up (by December 29, 1998 as per the Assumption Agreement) for the full satisfaction of the
assumed obligations " cannot be determined until after the satisfaction of Foodmasters’ obligation to
DBP." In this regard, it cannot be concluded that the same debt had already been liquidated, and
thereby became demandable (requisite 4 of Article 1279 of the Civil Code).
The aforementioned Court decision had already attained finality on April 30, 2004 55 and, hence,
pursuant to the doctrine of conclusiveness of judgment, the facts and issues actually and directly
resolved therein may not be raised in any future case between the same parties, even if the latter suit
may involve a different cause of action.56 Its pertinent portions are hereunder quoted for ready
reference:57
21
Both the body and the dispositive portion of the [CA’s May 27, 1994 Decision in CA-G.R. CV No. until after the satisfaction of Foodmasters obligation to DBP, for remittance to Union Bank in the
35866] correctly construed the nature of DBP’s liability for the lease payments under the various proportion set out in the 1994 Decision. (Emphases and underscoring supplied; citations omitted)
contracts, to wit:
xxxx
x x x Construing these three contracts, especially the "Agreement" x x x between DBP and Bancom as
providing for the payment of DBP’s assumed obligation out of the rentals to be paid to it does not mean In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this case, no
negating DBP’s assumption "for its own account" of the ₱17.0 million debt x x x. It only means that they legal compensation could have taken place between the above-stated debts pursuant to Article 1290 of
provide a mechanism for discharging [DBP’s] liability. This liability subsists, since under the the Civil Code. Perforce, the petition must be denied, and the denial of Union Bank s motion to affirm
"Agreement" x x x, DBP is obligated to pay "any balance of the Assumed Obligations after application legal compensation sustained.
of the entire rentals and or the entire sales proceeds actually received by [Union Bank] on the Leased
Properties … not later than December 29, 1998." x x x It only means that the lease rentals must first be
applied to the payment of the ₱17 million debt and that [DBP] would have to pay out of its money only WHEREFORE, the petition is DENIED. The Decision dated November 3, 2009 and Resolution dated
in case of insufficiency of the lease rentals having until December 29, 1998 to do so. In this sense, it is February 26, 2010 of the Court of Appeals in CA-G.R. SP No. 93833 are hereby AFFIRMED.
correct to say that the means of repayment of the assumed obligation is not limited to the lease rentals.
The monthly installments, however, would still have to come from the lease rentals since this was SO ORDERED.
stipulated in the "Agreement."
Objective Novation
xxxx
G.R. No. L-29981 April 30, 1971
Since, as already stated, the monthly installments for the payment of the ₱17 million debt are to be
funded from the lease rentals, it follows that if the lease rentals are not paid, there is nothing for DBP to
EUSEBIO S. MILLAR, petitioner,
remit to [Union Bank], and thus [DBP] should not be considered in default. It is noteworthy that, as
vs.
stated in the appealed decision, "as regards plaintiff’s claim for damages against defendant for its
THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents.
alleged negligence in failing and refusing to enforce a lessor’s remedies against Foodmasters
Worldwide, Inc., the Court finds no competent and reliable evidence of such claim."
Fernandez Law Office and Millar and Esguerra for petitioner.
xxxx
Francisco de la Fuente for respondents.
WHEREFORE, the decision appealed from is SET ASIDE and another one is RENDERED,

(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc. to pay defendant and
third-party plaintiff-appellant Development Bank of the Philippines the sum of ₱32,441,401.85,
representing the unpaid rentals from August 1981 to June 30, 1987, as well as ₱10,000.00 for
attorney’s fees; and
(ii) Ordering defendant and third-party plaintiff-appellant Development Bank of the Philippines
after having been paid by third-party defendant-appellee the sum of ₱32,441,401.85, to remit
30% thereof to plaintiff-appellee Union Bank of the Philippines.
SO ORDERED.
In other words, both the body and the dispositive portion of the aforequoted decision acknowledged
that DBP’s obligation to Union Bank for remittance of the lease payments is contingent on the prior
payment thereof by Foodmasters to DBP.
CASTRO, J.:
On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner) obtained a favorable
judgment from the Court of First Instance of Manila, in civil case 27116, condemning Antonio P.
Gabriel (hereinafter referred to as the respondent) to pay him the sum of P1,746.98 with interest at
12% per annum from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the
costs of suit. From the said judgment, the respondent appealed to the Court of Appeals which,
however, dismissed the appeal on January 11, 1957.
Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case, the petitioner
moved ex parte in the court of origin for the issuance of the corresponding writ of execution to enforce
the judgment. Acting upon the motion, the lower court issued the writ of execution applied for, on the
basis of which the sheriff of Manila seized the respondent's Willy's Ford jeep (with motor no. B-192297
and plate no. 7225, Manila, 1956).

A careful reading of the decision shows that the Court of Appeals, which was affirmed by the Supreme
Court, found that only the balance or the deficiency of the ₱17 million principal obligation, if any, would The respondent, however, pleaded with the petitioner to release the jeep under an arrangement
whereby the respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle
be due and demandable as of December 29, 1998. Naturally, this deficiency cannot be determined

22
in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties, on February 22,
1957, executed a chattel mortgage on the jeep, stipulating, inter alia, that
This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR,
mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116
of the Court of First Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in
the amount of ONE THOUSAND SEVEN HUNDRED (P1,700.00) PESOS, Philippine
currency, which MORTGAGOR agrees to pay as follows:
March 31, 1957 — EIGHT HUNDRED FIFTY (P850) PESOS;
April 30, 1957 — EIGHT HUNDRED FIFTY (P850.00) PESOS.
Upon failure of the respondent to pay the first installment due on March 31, 1957, the petitioner
obtained an alias writ of execution. This writ which the sheriff served on the respondent only on May
30, 1957 — after the lapse of the entire period stipulated in the chattel mortgage for the respondent to
comply with his obligation — was returned unsatisfied.
So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of the petitioner,
issued several alias writs, which writs the sheriff also returned unsatisfied. On September 20, 1961, the
petitioner obtained a fifth alias writ of execution. Pursuant to this last writ, the sheriff levied on certain
personal properties belonging to the respondent, and then scheduled them for execution sale.
However, on November 10, 1961, the respondent filed an urgent motion for the suspension of the
execution sale on the ground of payment of the judgment obligation. The lower court, on November 11,
1961, ordered the suspension of the execution sole to afford the respondent the opportunity to prove
his allegation of payment of the judgment debt, and set the matter for hearing on November 25, 1961.
After hearing, the lower court, on January 25, 1962, issued an order the dispositive portion of which
reads:
IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs of execution.
The lower court ruled that novation had taken place, and that the parties had executed the chattel
mortgage only "to secure or get better security for the judgment.
The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the order of
execution in a decision rendered on October 17, 1968, holding that the subsequent agreement of the
parties impliedly novated the judgment obligation in civil case 27116.
The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility
between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a
conclusion of implied novation:
1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with
interest at 12% per annum from the filing of the complaint, plus the amount of P400 and the costs of
suit, the deed of chattel mortgage limits the principal obligation of the respondent to P1,700;
2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner,
the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments;
3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the
respondent to pay liquidated damages in the amount of P300 in case of default on his part; and
4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed
extrajudicially in case of default, secured the obligation.
On November 26, 1968, the petitioner moved for reconsideration of the appellate court's decision,
which motion the Court of Appeals denied in its resolution of December 7, 1968. Hence, the present
petition for certiorari to review the decision of the Court of Appeals, seeking reversal of the appellate
court's decision and affirmance of the order of the lower court.
Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether
or not the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly
novated the judgment obligation in civil case 27116. The Court of Appeals, in arriving at the conclusion
that implied novation has taken place, took into account the four circumstances heretofore already
adverted to as indicative of the incompatibility between the judgment debt and the principal obligation
under the deed of chattel mortgage.
1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in
implying novation of the judgment debt, stating that in the interim — from the time of the rendition of
the judgment in civil case 27116 to the time of the execution of the deed of chattel mortgage — the
respondent made partial payments, necessarily resulting in the lesser sum stated in the deed of chattel
mortgage. He adds that on record appears the admission by both parties of the partial payments made
before the execution of the deed of chattel mortgage. The erroneous conclusion arrived at by the Court
of Appeals, the petitioner argues, creates the wrong impression that the execution of the deed of
chattel mortgage provided the consideration or the reason for the reduced judgment indebtedness.
Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but
minor alterations or slight modifications with respect to the cause or object or conditions of he latter,
such changes do not effectuate any substantial incompatibility between the two obligations Only those
essential and principal changes introduced by the new obligation producing an alteration or
modification of the essence of the old obligation result in implied novation. In the case at bar, the mere
reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially
in the light of (a) the explanation by the petitioner that the reduced indebtedness was the result of the
partial payments made by the respondent before the execution of the chattel mortgage agreement and
(b) the latter's admissions bearing thereon.
At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the
petitioner by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid
any future confusion as to the amounts already paid and as to the sum still due, decoded to state with
specificity in the deed of chattel mortgage only the balance of the judgment debt properly collectible
from the respondent. All told, therefore, the first circumstance fails to satisfy the test of substantial and
complete incompatibility between the judgment debt an the pecuniary liability of the respondent under
the chattel mortgage agreement.
2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as
indicative of incompatibility, is directly contrary to the admissions of the respondent and is without any
23
factual basis. The appellate court pointed out that while the judgment made no mention of payment of
damages, the deed of chattel mortgage stipulated the payment of liquidated damages in the amount of
P300 in case of default on the part of the respondent.
However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals
admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of
attorney's fees and not as liquidated damages. Similarly, the judgment makes mention of the payment
of the sum of P400 as attorney's fees and omits any reference to liquidated damages.
The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the
judgment and the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial
payments made by the respondent before the execution of the chattel mortgage agreement were
applied in satisfaction of part of the judgment debt and of part of the attorney's fee fixed in the
judgment, thereby reducing both amounts.
At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the
payment of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an
obligation for the payment of liquidated damages in case of default on the part of the respondent, we
find it difficult to agree with the conclusion reached by the Court of Appeals.
3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the
montage obligation superseded, through implied novation, the judgment debt, the petitioner points out
that the appellate court considered said circumstances in a way not in accordance with law or accepted
jurisprudence. The appellate court stated that while the judgment specified no mode for the payment of
the judgment debt, the deed of chattel mortgage provided for the payment of the amount fixed therein
in two equal installments.
On this point, we see no substantial incompatibility between the mortgage obligation and the judgment
liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the
payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an
express and specific method for its extinguishment — payment in two equal installments. The chattel
mortgage simply gave the respondent a method and more time to enable him to fully satisfy the
judgment indebtedness.1 The chattel mortgage agreement in no manner introduced any substantial
modification or alteration of the judgment. Instead of extinguishing the obligation of the respondent
arising from the judgment, the deed of chattel mortgage expressly ratified and confirmed the existence
of the same, amplifying only the mode and period for compliance by the respondent.
The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the
judgment because the chattel mortgage secured the obligation under the deed, whereas the obligation
under the judgment was unsecured. The petitioner argues that the deed of chattel agreement clearly
shows that the parties agreed upon the chattel mortgage solely to secure, not the payment of the
reduced amount as fixed in the aforesaid deed, but the payment of the judgment obligation and other
incidental expenses in civil case 27116.
The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel
mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising
from the judgment against him in civil case 27116. As a security for the payment of the judgment
obligation, the chattel mortgage agreement effectuated no substantial alteration in the liability of the
respondent.
The defense of implied novation requires clear and convincing proof of complete incompatibility
between the two obligations.2 The law requires no specific form for an effective novation by implication.
The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and
the second obligation novates the first. If they can stand together, no incompatibility results and
novation does not take place.
We do not see any substantial incompatibility between the two obligations as to warrant a finding of an
implied novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended
the full discharge of the respondent's liability under the judgment by the obligation assumed under the
terms of the deed of chattel mortgage so as to justify a finding of express novation.
ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside, and the order
of the Court of First Instance of Manila of January 25, 1962 is affirmed, at respondent Antonio Gabriel's
cost.
Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando and Makasiar, JJ., concur.
Villamor, J., abstains.
Separate Opinions
BARREDO, J., concurring:
I concur. I would like to add the following considerations to the rationale of the main opinion:
As evidenced by the express terms of the chattel mortgage by repondent Gabriel in favor of petitioner
Millar, it was unmistakably the intent of the parties that the said mortgage be merely a "security for the
payment to the said Eusebio Millar, mortgagee, of the judgment and other incidental expenses in Civil
Case No. 27116 of the Court of First Instance of Manila against Antonio P. Gabriel, mortgagor," to be
paid in the amount and manner therein stated. If this can in any sense in which the parties must be
held to have newly bound themselves. In other words, by their explicit covenant, the parties
contemplated the chattel mortgage to be a security for the payment of the judgment and not the
payment itself thereof. Such being the case, and it appearing that respondent Gabriel has not paid the
judgment remains unimpaired in its full existence and vigor, and the resort to the execution thereof thru
the ordinary procedure of a writ of execution by the petitioner is an election to which every mortgage
creditor is entitled when he decides to abandon his security.
Teehankee, J., concurs.
G.R. No. L-25897 August 21, 1976
AGUSTIN DORMITORIO and LEONCIA D. DORMITORIO, petitioner
vs.
HONORABLE JOSE FERNANDEZ, Judge of the Court of First Instance of Negros Occidental,
Branch Bacolod City, and SERAFIN LAZALITA, respondents.
Graciano H. Arinday, Jr. for petitioners.
24
Antonio L. Balinas for respondent.
FERNANDO, Acting C.J.:
The filing of this suit for certiorari could have been avoided had there full awareness by petitioners of
the legal import and significance of a later decision involving the parties. If such were the case, they
would have realized that no grave abuse of discretion, no abuse of discretion for that matter, could be
imputed to respondent Judge for issuing the challenged order,1 setting aside a writ of execution
conformably to a petition for relief by private respondent Serafin Lazalita. 2 Insofar as pertinent, it is
worded thus: "That the above-mentioned order of Execution to be set aside is based on the decision of
the Honorable Court dated September 5, 1961 in the above-entitled case which is no longer
enforceable, and executory by virtue of the "Agreed Stipulation of Facts" entered into by the Plaintiffs
and Defendants in Civil Case No. 6553, and which said "Agreed Stipulation of Facts" was the basis for
the judgment of the Honorable Court dated February 12, 1965. That the parties and subject matter in
Civil Case No. 5111 and Civil Case No. 6553 are the same except that the plaintiffs in Civil Case No.
5111 were the defendants in Civil Case No. 6553, and vice-versa; ... That in the "Agreed Stipulation of
Facts" in Civil Case No. 6553 which was the basis of the Honorable Court judgment dated February
12, 1965, it was agreed by the defendant spouses Dormitorio, who are the plaintiffs in Civil Case No.
5111 that the defendant Serafin Lazalita should be reimbursed for his expenses in transferring his
house to another Lot to be assigned to him by the Municipality of Victorias, and that the Decision in
Civil Case No. 5111 shall not be enforced and executed anymore; That by means of fraud,
misrepresentation and concealment of the true facts of the case, the plaintiffs were able to mislead the
Honorable Court, thru an Ex-Parte Motion to issue by mistake an Order for the issuance of a Writ of
Execution by making this Honorable Court believe that the Decision of September 5, 1961 is still
enforceable and executory; ..."3 Respondent Judge granted the relief prayed for and set aside the writ
of execution, in view of the conclusion reached by him that such later decision, arrived at as the result
of a compromise between the same parties, evidenced by the agreed stipulation of facts, was clear
proof of an animus novandi and thus superseded the previous judgment which as a result of an ex
parte motion was mistakenly ordered executed. Such a conclusion is borne out by a study of the
records of the case. certiorari does not lie.
The decision in the aforecited Civil Case No. 6553, which as contended by private respondent, a
submission that earned the approval of respondent Judge, sufficed for the lifting of the writ of
execution, pursuant to the decision in Civil Case No. 5111 deemed superseded, started with a
stipulation of facts. Thus: "When this case was called for hearing the parties submitted an Agreed
Stipulation of Facts duly signed by the parties and their respective counsel, as follows: "[Agreed
Stipulation of Facts]," Come now the parties, in the above-entitled case, represented by their
respective counsel and before this Honorable Court, respectfully submit the following agreed
stipulation of facts: 1. That the defendant Municipality of Victorias, is the owner of several parcels of
lands in Victorias, Negros Occidental, known as Lots Nos. 102 and 120 and 138 and 102-New, which
[are] consolidated and subdivided into small lots for sale to the inhabitants thereof; the lots were sold
by the Municipality, either in cash or installment for ten (10) years at [one peso] (P1.00) per square
meter; 2. That on December 7, 1948, the plaintiff Serafin Lazalita, bought from the Municipality of
Victorias, Lot No. 1, Block 16 of the consolidated-subdivision plan PCs-118 having an area of Two
Hundred Thirty (230) Square Meters, payable in installment at [one peso] (P1.00) per square meter,
and in the year 1958, upon full payment by plaintiff Lazalita of the purchase price of the land, a deed of
definite sale was executed in his favor by the then Municipal Mayor Montinola of Victorias, Negros
Occidental, and thereafter a Certificate of Title No. T-23098 covering the property, was issued him by
the Register of Deeds of Bacolod, Negros Occidental; 3. That from February 7, 1948, until about eight
continuous years thereafter, plaintiff had been in full and peaceful possession of the said land, and he
introduced permanent and valuable improvements thereon, [namely] fruit trees, like coconuts,
avocados, pumelos and oranges, which have long been fruit bearing, and built a house of strong
materials, valued at P5,000.00; 4. That plaintiff Lazalita, was placed in possession of the said Lot No.
1, Block 16 of the subdivision plan of Victorias, by the persons designated by the Municipality to take
charge of the sale of said lots to the people, and from the time, he had occupied by same, up to the
present, there has not been a change in the location thereof, as described in the Certificate of Title
covering the property, now registered in plaintiff's name; 5. That about the year 1955, however, the
other co-defendants herein — the spouses Agustin Dormitorio and Leoncia D. Dormitorio, purchased
also, from the defendant Municipality of Victorias, their lot known as Lot 2, Block 16, of the same
consolidation-subdivision plan PCs-118, having an area of Three Hundred Forty-Three (343) Square
meters, in cash, at [one peso) (P1.00) per square meter. Immediately thereafter, the Dormitorios,
obtained a transfer Certificate of Title known as T-18189 for their property, from the Office of the
Register of Deeds, Bacolod, Negros Occidental. However, the spouses Dormitorio, have not taken
actual possession of the land, they have purchased from the defendant Municipality of Victorias, up to
the present; 6. That on December 12, 1958, the spouses Dormitorio, brought a suit against the plaintiff
Lazalita, for Ejectment and the conflict between them was made known to the office of the Municipal
Mayor and the Council of Victorias, who tried to settle the matter between the parties — Dormitorio and
Lazalita. Later, a private Land Surveyor, was hired by the Municipality of Victorias, and it was found
out, according to said Surveyor, Mr. Ceballos, that the Lot sold by the Municipality of Victorias, to the
plaintiff, was converted into the new Municipal. Road known as "Jover Street" and that the lot presently
occupied by him, is supposed to be the lot No. 2, bought by the spouses Dormitorio from the
Municipality of Victorias; and so, availing of the said discovery, the Court of First Instance of Negros
Occidental, Branch V, Presided over by Hon. Jose F. Fernandez, rendered judgment in that case No.
5111, in favor of Dormitorio, ordering the plaintiff herein Lazalita, to vacate the land and to pay a
monthly rental of P20.00, to said Dormitorio, besides his Attorney's fees; 7. That Lazalita, having failed
to appeal from said judgment in Civil Case No. 5111 of this Honorable Court, brought this present
action, against the Municipality of Victorias, and joined the Dormitorios, as formal parties, because of
the value of his permanent improvements and building introduced or constructed on Lot No. 2, Block
16, ascertained to be that, very lot purchased by Dormitorio from the defendant Municipality of
Victorias, which building and improvements, have far exceed then, the original purchase price of the
land; 8. That the present fair market value of residential lots in the Poblacion of Victorias, ranges
between P15.00 to P25.00 per square meter and the lots in controversy, are saleable at present, at
P20.00 per square meter; 9. That the Municipality of Victorias, under the present administration, is
willing to amicably settle the case, now before this Honorable Court, by giving the plaintiff another lot, if
they could open their newly proposed subdivision, or pay back Lazalita the amount necessary and just
for plaintiff to acquire another lot for his residence, and for the expenses of transferring his present
residential house thereto. ....:"4 Then, as noted in the decision, the parties did respectfully pray "that
judgment be rendered by this Honorable Court, on the basis of the foregoing agreed stipulation of
facts, and on such other basis just and equitable, without special pronouncement of costs." 5 So it was
granted in the dispositive portion of such decision: "[Wherefore], judgment is hereby rendered in
accordance with the above-mentioned Agreed Stipulation of Facts."6
grave abuse of discretion when he set aside the writ of execution is thus clearly apparent. He had no
choice on the matter. That was made even more evident in the answer to the petition filed by
respondents. It must have been the realization by petitioners that certiorari certainly did not lie that led
to their not only failing to make an attempt at a refutation of what was asserted in the answer but also
failing to appear at the hearing when this case was set for oral argument. As noted at the outset, this
petition must be dismissed.
1. What was done by respondent Judge in setting aside the writ of execution in Civil Case No. 5111
finds support in the applicable authorities. There is this relevant excerpt in Barretta v. Lopez,7 this
25
Court speaking through the then Chief Justice Paras: "Alleging that the respondent judge of the Roxas and Sarmiento for plaintiff-appelle.
municipal court had acted in excess of her jurisdiction and with grave abuse of discretion in issuing the Somero, Baclig and Savello for defendants-appellants.
writ of execution of December 15, 1947, the petitioner has filed the present petition for certiorari and
prohibition for the purpose of having said writ of execution annulled. Said petition is meritorious. The REGALA, J.:
agreement filed by the parties in the ejectment case created as between them new rights and
obligations which naturally superseded the judgment of the municipal court." 8 In Santos v. Acuña,9 it
was contended that a lower court decision was novated by subsequent agreement of the parties. Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants to
Implicit in this Court's ruling is that such a plea would merit approval if indeed that was what the parties pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon from
intended. Nonetheless, it was not granted, for as explained by the ponente, Justice J. B. L. Reyes: date of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.
"Appellants understood and expressly agreed to be bound by this condition, when they stipulated that
"they will voluntarily deliver and surrender possession of the premises to the plaintiff in such event" ... The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-
Hence, it is plain that in no case were the subsequent arrangements entered into with any unqualified 26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the
intention to discard or replace the judgment in favor of the plaintiff-appellee; and without such intent appellants executed on January 4, 1957, the following promissory note representing the said account:
or animus novandi, no substitution of obligations could possibly take place." 10 Can there be any doubt
that if it could be shown, as it was in this case, that there was such clear manifestation of will by the
parties, the original decision had lost force and effect? To ask the question is to answer it. The PROMISSORY NOTE
presence of the animus novandi is undeniable. Nor is there anything novel in such an approach. So it
was noted by then Chief Justice Concepcion in De los Santos v. Rodriguez: 11 "As early as Molina v. P5,000.00
De la Riva the principle has been laid down that, when, after judgment has become final, facts and
Manila, January 4, 1957
circumstances transpire which render its execution impossible or unjust, the interested party may ask
the court to modify or alter the judgment to harmonize the same with justice and the facts" 12 Molina v. We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally
de la Riva 13 was a 1907 decision. Again, the present case is far stronger, for there is a later decision promise to pay the Magdalena Estates, Inc., or order, at its offices in the City of Manila, without any
expressly superseding the earlier one relied upon on which the writ of execution thereafter set aside demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency, with interest at the
was based. rate of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957. The sum of
P5,000.00 represents the balance of the purchase price of the parcel of land known as Lot 7-K-2-G,
2. Nor can it be denied that as the later decision in Civil Case No. 6553 was the result of a Psd. 26193, containing an area of 2,191 square meters, Quezon City.
compromise, it had the effect of res judicata. This was made clear in Salazar v. Jarabe. 14 There are
later decisions to the same effect. 15The parties were, therefore, bound by it. There was thus an (Sgd.)
element of bad faith when petitioners did try to evade its terms. At first, they were quite successful. Antonio A.
Respondent Judge, however, upon being duly informed, set matters right. He set aside the writ of Rodriguez
execution. That was to act in accordance with law. He is to be commended, not condemned. (T)
ANTONIO
A.
3. There is no merit likewise to the point raised by petitioners that they were not informed by RODRIGUE
respondent Judge of the petition by private respondent to set aside the writ of execution. The order Z
granting such petition was the subject of a motion for reconsideration. 16 The motion for reconsideration
was thereafter denied.17 Under the circumstances, the failure to give notice to petitioners had been (Sgd.)
cured. That is a well-settled doctrine. 18 Their complaint was that they were not heard. They were given Herminia C.
the opportunity to file a motion for reconsideration. So they did. That was to free the order from the Rodriguez
alleged infirmity. Petitioners then cannot be heard to claim that they were denied procedural due (T)
process. HERMINIA
C.
WHEREFORE, the petition for certiorari is dismissed. Costs against petitioners. RODRIGUE
Z
G.R. No. L-18411 December 17, 1966
Signed in the Presence of:

MAGDALENA ESTATES, INC., plaintiff-appellee,

(Sgd.) ILLEGIBLE
vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.
(Sgd.) ILLEGIBLE

26
On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the
appellee, the undertaking thereof being embodied therein as follows:
. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the
purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191
square meters, Quezon City, covered by Transfer Certificate of Title No. 13 (6947), Quezon
City, within a period of sixty (60) days from January 7, 1957; That the Surety shall be notified
in writing within Ten (10) days from moment of default otherwise, this undertaking is
automatically null and void.
On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon
Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded from
the appellants the payment of P655.89 corresponding to the alleged accumulated interests on the
principal of P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee started
this suit in the Municipal Court of Manila to enforce the collection thereof. The said court, on February
5, 1959, rendered judgment in favor of the appellee and against the appellants, ordering the latter to
pay jointly and severally the appellee the sum of P655.89 with interest thereon at the legal rate from
November 10, 1958, the date of the filing of the complaint, until the whole amount is fully paid. Not
satisfied with that judgment, appellants appealed to the Court of First Instance of Manila, where the
case was submitted for decision on the pleadings. The Court of First Instance of Manila rendered the
judgment stated at the outset of this decision.
On appeal directly to this Court, the following errors are assigned:
I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee
demanded, and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of
P655.89, and in not finding and declaring that said plaintiff-appellee waived or condoned the
said interests.
II. The lower court erred in not finding and declaring that the obligation of the defendants-
appellants in favor of the plaintiff-appellee was totally extinguished by payment and/or
condonation.
III. The lower court erred in not finding and declaring that the promissory note executed by the
defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document
provided for the payment of interests, novated when the plaintiff-appellee unqualifiedly
accepted the surety bond which merely guaranteed payment of the principal in the sum of
P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the appellee for the
payment of accrued interest and what could be deduced therefrom was merely that the appellee
demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the
obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as
performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the
amount of the principal obligation and without exercising its (appellee's) right to apply a portion of
P655.89 thereof to the payment of the alleged interest due despite its presumed knowledge of its right
to do so, the appellee showed that it waived or condoned the interests due, because Articles 1235 and
1253 of the Civil Code provide:
ART. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.
ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been recovered.
We do not agree with the contention of the appellants. It is very clear in the promissory note that the
principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G,
Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc.
undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of
land known as Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it accepted
the payment of P5,000.00 because it knew that that was the complete amount undertaken by the
surety as appearing in the contract. The liability of a surety is not extended, by implication, beyond the
terms of his contract.1 It is for the same reason that the appellee cannot apply a part of the P5,000.00
as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the
rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the
same kind of a single creditor. They cannot be made applicable to a person whose obligation as a
mere surety is both contingent and singular; his liability is confined to such obligation, and he is entitled
to have all payments made applied exclusively to said application and to no other. 2 Besides, Article
1253 of the Civil Code is merely directory, and not mandatory. 3 Inasmuch as the appellee cannot
protest for non-payment of the interest when it accepted the amount of P5,000.00 from the Luzon
Surety Co., Inc., nor apply a part of that amount as payment for the interest, we cannot now say that
there was a waiver or condonation on the interest due.
It is claimed that there was a novation and/or modification of the obligation of the appellants in favor of
the appellee because the appellee accepted without reservation the subsequent agreement set forth in
the surety bond despite its failure to provide that it also guaranteed payment of accruing interest.
The rule is settled that novation by presumption has never been favored. To be sustained, it needs to
be established that the old and new contracts are incompatible in all points, or that the will to novate
appears by express agreement of the parties or in acts of similar import. 4
An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by
changing only the terms of payment and adding other obligations not incompatible with the old one, 5 or
wherein the old contract is merely supplemented by the new one.6 The mere fact that the creditor
receives a guaranty or accepts payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall be released from responsibility does
not constitute a novation, and the creditor can still enforce the obligation against the original debtor.
(Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v. Sotto, 34 Phil. 237; Estate of Mota v. Serra,
47 Phil. 464; Duñgo v. Lopena, supra ). In the instant case, the surety bond is not a new and separate
contract but an accessory of the promissory note.
WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs against the
appellants.
G.R. No. 120817 November 4, 1996
ELSA B. REYES, petitioner,
vs.
27
COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-MUTUAL BENEFIT ASSOCIATION, INC.,
and GRACIELA ELEAZAR, respondents.
TORRES, JR., J.:
Petitioner assails the respondent court's decision1 dated May 12, 1995 which sustained the two
resolutions of the respondent Secretary of Justice, namely: 1) the Resolution dated January 23, 1992
affirming the resolution of the Provincial Prosecutor of Rizal dismissing the complaints of petitioner
against private respondent Eleazar in I.S. Nos. 91-2853, 91-4328 to 29, 91-4585 to 91 and 91-4738 to
39 for violations of B.P. Blg. 22 and estafa under Article 315, par. 4, no. 2 (d) of the Revised Penal
Code, and 2) the Resolution dated January 12, 1993 affirming the resolution of the City Prosecutor of
Quezon City finding a prima facie case in I.S. No. 92-926 for violation of B.P. Blg. 22 and estafa filed
by respondent AFP-Mutual Benefit Association, Inc. (AFP-MBAI, for brevity) against petitioner Reyes.
The facts as summarized by the respondent court are as follows:
Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a
domestic corporation engaged in credit financing. Graciela Eleazar, private
respondent, is the president of B.E. Ritz Mansion International Corporation
(BERMIC), a domestic enterprise engaged in real estate development. The other
respondent, Armed Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI),
is a corporation duly organized primarily to perform welfare services for the Armed
Forces of the Philippines.
A. Re: Resolution dated January 23, 1992.
In her various affidavits-complaint with the Office of the Provincial Prosecutor of
Rizal, Elsa Reyes alleges that Eurotrust and Bermic entered into a loan agreement.
Pursuant to the said contract, Eurotrust extended to Bermic P216.053,126.80 to
finance the construction of the latter's Ritz Condominium and Gold Business Park.
The loan was without collateral but with higher interest rates than those allowed by
the banks. In turn, Bermic issued 21 postdated checks to cover payments of the loan
packages. However, when those checks were presented for payment, the same
were dishonored by the drawee bank, Rizal Commercial Banking Corporation
(RCBC), due to stop payment order made by Graciela Eleazar. Despite Eurotrust's
notices and repeated demands to pay, Eleazar failed to make good the dishonored
checks, prompting Reyes to file against her several criminal complaints for violation
of B.P. 22 and estafa under Article 315, 4th paragraph, No. 2 (d) of the Revised
Penal Code.
Graciela Eleazar, in her counter-affidavits, asserts that beginning December 1989,
Eurotrust extended to Bermic several loan packages amounting to P190,336,388.86.
For its part, Bermic issued several postdated checks to cover payments of the
principal and interest of every a loan packages involved.
Subsequently, Elsa Reyes was investigated by the Senate Blue Ribbon Committee.
She was involved in a large scale scam amounting to millions of pesos belonging to
Instructional Material Corporation (IMC), an agency under the Department of
Education, Culture and Sports.
Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying
from it government securities, conducted its own investigation and found that after
Eurotrust delivered to AFP-MBAI the securities it purchased, the former borrowed
the same securities but failed to return them to AFP-MBAI; and that the amounts
paid by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to
Bermic and others.
When Eleazar came to know that the funds originally loaned by Eurotrust to Bermic
belonged to AFP-MBAI, she, as President of Bermic, requested a meeting with
Eurotrust representatives. Thus, on February 15, 1991, the representatives of
Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the
real owners of the fund-AFP-MBAI and DECS-IMC. This agreement was formalized
in two letters dated March 19, 1991. Pursuant to this understanding, Bermic
negotiated with AFP-MBAI and DECS-IMC and made payments to the latter. In fact,
Bermic paid AFP-MBAI P31,711.11 and a check of P1-million.
However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the
postdated checks issued by her (Eleazar) contrary to their agreement. So, Bermic
wrote to Eurotrust to hold the amounts "in constructive trust" for the real owners. But
Reyes continued to collect on the other postdated checks dated April 17 to June 28,
1991. Upon her counsel's advise, Eleazar had the payment stopped. Hence, her
checks issued in favor of Eurotrust were dishonored.
After investigation, the Office of the Provincial Prosecutor of Rizal issued a resolution
dismissing the complaints filed by Elsa Reyes against Graciela Eleazar on the
ground that when the latter assumed the obligation of Reyes to AFP-MBAI, it
constituted novation, extinguishing any criminal liability on the part of Eleazar.
Reyes filed a petition for review of the said resolution with respondent Secretary of
Justice contending that novation did not take place.
The Secretary of Justice dismissed the petition holding that "the novation of the loan
agreement prevents the rise of any incipient criminal liability since the novation had
the effect of canceling the checks and rendering without effect the subsequent
dishonor of the already cancelled checks."
B. Re: Resolution dated January 12, 1993
At the time of the pendency of the cases filed by Elsa Reyes against Graciela
Eleazar, AFP-MBAI lodged a separate complaint for estafa and a violation of BP 22
against Elsa Reyes with the office of the city prosecutor of Quezon City docketed as
I.S. 92-926. The affidavit of Gudelia Dinapo a member of the investigating committee
formed by AFP-MBAI to investigate the anomalies committed by Eurotrust/Reyes,
shows that between August 1989 and September 1990, Eurotrust offered to sell to
AFP-MBAI various marketable securities, including government securities, such as
but not limited to treasury notes, treasury bills, Land Bank of the Philippines Bonds
and Asset Participation Certificates.
28
 Relying on a canvass conducted by one of its employees, Cristina Cornista, AFP-
MBAI decided to purchase several securities amounting to P120,000,000.00 from
Eurotrust. From February 1990 to September 1990, a total of 21 transactions were
entered into between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-MBAI
treasury notes amounting to P73 million. However, Eurotrust fraudulently borrowed
all those treasury notes from the AFP-MBAI for purposes of verification with the
Central Bank. Despite AFP-MBAI's repeated demands, Eurotrust failed to return the
said treasury notes. Instead it delivered 21 postdated checks in favor of AFP-MBAI
which were dishonored upon presentment for payment. Eurotrust nonetheless made
partial payment to AFP-MBAI amounting to P35,151,637.72. However, after
deducting this partial payment, the amounts of P73 million treasury notes with
interest and P35,151,637.72 have remained unpaid. Consequently, AFP-MBAI filed
with the Office of the City Prosecutor of Quezon City a complaint for violation of BP
22 and estafa against Elsa Reyes.
Reyes interposed the defense of novation and insisted that AFP-MBAI's claim of
unreturned P73 million worth of government securities has been satisfied upon her
payment of P30 million. With respect to the remaining P43 million, the same was
paid when Eurotrust assigned its Participation Certificates to AFP-MBAI.
Eventually, the Office of the City Prosecutor of Quezon City issued a resolution
recommending the filing of an information against Reyes for violation of BP 22 and
estafa.
Whereupon, Reyes filed a petition for review with respondent Secretary of Justice.
The latter dismissed the petition on the ground that only resolutions of the
prosecutors dismissing criminal complaints are cognizable for review by the
Department of Justice.2
On February 2, 1994, petitioner seeking the nullification of either of the two resolutions of the
respondent Secretary of Justice filed a petition for certiorari, prohibition and mandamus 3 with the
respondent court which, however, denied and dismissed her petition. Her motion for
reconsideration4 was likewise denied in a Resolution5 dated June 27, 1995. Hence, this present
petition.
The first Department of Justice Resolution dated January 23, 1992 which sustained the Provincial
Prosecutor's decision dismissing petitioner's complaints against respondent Eleazar for violation of
B.P. 22 and estafa ruled that the contract of loan between petitioner and respondent Eleazar had been
novated when they agreed that respondent Eleazar should settle her firm's (BERMIC) loan obligations
directly with AFP-MBAI and DECS-IMC instead of settling it with petitioner Reyes. This finding was
affirmed by the respondent court which pointed out that "the first contract was novated in the sense
that there was a substitution of creditor"6 when respondent Eleazar, with the agreement of Reyes,
directly paid her obligations to AFP-MBAI.
We cannot see how novation can take place considering the surrounding circumstances which negate
the same. The principle of novation by substitution of creditor was erroneously applied in the first
questioned resolution involving the contract of loan between petitioner and respondent Eleazar.
Admittedly, in order that a novation can take place, the concurrence of the following requisites 7 is
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.
Upon the facts shown in the record, there is no doubt that the last three essential requisites of novation
are wanting in the instant case. No new agreement for substitution of creditor war forged among the
parties concerned which would take the place of the preceding contract. The absence of a new
contract extinguishing the old one destroys any possibility of novation by conventional subrogation, In
concluding that a novation took place, the respondent court relied on the two letters dated March 19,
1991,8 which, according to it, formalized petitioner's and respondent Eleazar's agreement that BERMIC
would directly settle its obligation with the real owners of the funds - the AFP MBAI and DECS
IMC.9 Be that as it may, a cursory reading of these letters, however clearly and unmistakably shows
that there was nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the
petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that the two
letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-
MBAI and DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only.
There was no mention whatsoever of AFP-MBAI's consent to the new agreement between petitioner
and respondent Eleazar much less an indication of AFP-MBAI's intention to be the substitute creditor in
the loan contract. Well settled is the rule that novation by substitution of creditor requires an agreement
among the three parties concerned — the original creditor, the debtor and the new creditor.10 It is a
new contractual relation based on the mutual agreement among all the necessary parties, Hence,
there is no novation if no new contract was executed by the parties. Article 1301 of the Civil Code is
explicit, thus:
Conventional subrogation of a third person requires the consent of the original
parties and of the third person.
The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them does
not ipso factoresult in novation. There must be an express intention to novate — animus
novandi.11 Novation is never
presumed.12 Article 1300 of the Civil Code provides inter alia that conventional subrogation must be
clearly established in order that it may take effect.
Notwithstanding our disagreement with the decision of the respondent court and the ruling of the
Secretary of Justice that a novation by substitution of creditor has taken place, we opt not to disturb the
Resolution of the respondent Secretary of Justice dated January 23, 1992 finding a prima facie case
against the petitioner in as much as it had already become final. It appears that petitioner filed two
motions for reconsideration to the said resolution, the first one on February 6, 1992 and the second
one in June 2, 1992. These two motions were, however, denied by the respondent Secretary of
Justice, the last denial was contained in a Resolution dated June 25, 1992 which was received by
petitioner on July 9, 1992. Petitioner made no prompt attempt to question the said resolutions before
the proper forum. It took her almost seventeen months (from July 9, 1992 to February 2, 1994) to
challenge the January 23, 1992 Resolution when she filed the petition for certiorari with the respondent
court on February 3, 1994,13 which resolved to affirm the aforesaid resolution of the Secretary of
Justice.
29
Petitioner who chose her forum but unfortunately lost her claim is bound by such adverse judgment on
account of finality of judgment, otherwise, there would be no end to litigation. Litigation must end and
terminate sometime and somewhere, and it is essential to an effective administration of justice that
once a judgment has become final, the issue or cause therein should be laid at rest.14 While the
respondent Secretary of Justice was in error in applying the rule on novation in the January 23, 1992
Resolution, such irregularity, however, does not affect the validity of the proceedings in the Department
of Justice. Erroneous application of a legal principle cannot bring a judgment that has already attained
the status of finality to an absolute nullity under the well entrenched rule of finality of judgment. The
basic rule of finality of judgment is grounded on the fundamental principle of public policy and sound
practice that at the risk of occasional error, the judgment of court and award of quasi-judicial agencies
must become final at some definite date fixed by law.15
We find no plausible explanation nor justifiable reason offered by petitioner for the obvious delay or
omission to take a timely action against the questioned resolution. She is apparently guilty of laches
which bars her from seeking relief in a court of law after she intentionally and unreasonably fails to
guard of her rights. Laches is the failure or neglect for an unreasonable and unexplained length of time
to do that which by exerting due diligence could/should have been done earlier. 16 Petitioner's omission
to assert her right to avail of the remedies in law within a reasonable time warrants a presumption that
she abandoned it or declined to assert it. The law serves those who are vigilant and diligent and no
those who sleep when the law requires to act.17
Its bears emphasis that the above pronouncement we laid down applies only pro hac vice. This Court
in affirming the questioned resolution despite the erroneous application of a legal principle acted
according to what the peculiar circumstances of the instant case demand. Its factual setting led us to
consider that to sustain the resolution is but the proper action to take in this particular case.
Regarding the second Resolution of respondent Secretary of Justice dated January 12, 1993 which
affirms the City Prosecutor's finding of a prima facie case against petitioner for violation of B.P. Blg. 22
and estafa involving the contract of sale of securities, petitioner avers that she could not be held
criminally liable for the crime charged because the contract of sale of securities between her and
respondent AFP-MBAI was novated by substitution of debtor. According to petitioner, the obligation
assumed by respondent Eleazar pursuant to the authority given by her to respondent Eleazar in a letter
dated March 19, 1991 was precisely her (petitioner's) obligation to respondent AFP-MBAI under the
contract of sale of securities. She claims that private respondent Eleazar, instead of fulfilling her
obligation under the contract of loan to pay petitioner the amount of debts, assumed petitioner's
obligation under the contract of sale to make payments to respondent AFP-MBAI directly.18
This contention is bereft of any legal and factual basis. Just like in the first questioned resolution, no
novation took place in this case. A thorough examination of the records shows that no hard evidence
was presented which would expressly and unequivocably demonstrate the intention of respondent
AFP-MBAI to release petitioner from her obligation to pay under the contract of sale of securities. It is a
rule that novation by substitution of debtor must always be made with the consent of the
creditor.19 Article 1293 of the Civil Code is explicit, thus:
Novation which consists in substituting a new debtor in the place of the original one,
may be made even without or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in
Articles 1236 and 1237.
The consent of the creditor to a novation by change of debtor is as indispensable as the
creditor's consent in conventional subrogation in order that a novation shall legally take place.
The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who
acquiesced to assume the obligation of petitioner under the contract of sale of securities,
when there is clearly no agreement to release petitioner from her responsibility, does not
constitute novation, at most, it only creates a juridical relation of co-debtorship or suretyship
on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and
the latter can still enforce the obligation against the petitioner. In Ajax Marketing and
Development Corporation vs. Court of Appeals.20 which is relevant in the instant case, we
stated that—
In the same vein, to effect a subjective novation by a change in the person of the
debtor, it is necessary that the old debtor be released expressly from the obligation,
and the third person or new debtor assumes his place in the relation. There is no
novation without such release as the third person who has assumed the debtor's
obligation becomes merely a co-debtor or surety. . . Novation arising from a
purported change in the person of the debtor must be clear and express. . .
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle novatio non praesumitur — that novation is never presumed.
At bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito —
basically extinguishing the old obligation for the new one.
The foregoing elements are found wanting in the case at bar.
ACCORDINGLY, finding no reversible error in the decision appealed from dated May 12, 1995, the
same is hereby AFFIRMED in all respects.
SO ORDERED.
June 30, 1987
G.R. No. L-47369
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.
FELICIANO, J.:
This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one
involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of this
Court under Section 17, Republic Act 296, as amended.
30
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an
increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the
Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and
sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to secure
its faithful compliance with the terms and conditions under which its line of credit was increased. In
compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the
respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of
the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly
and severally to comply with the "terms and conditions of the advance line [of credit] established by the
[PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the
necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also
provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but
would also include "accrued interest" on the said amount "plus all expenses, charges or other legal
costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements
were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the
Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as
President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24
December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva
and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal and
individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal
capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B
Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and
conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED
and/or DISCHARGED." The Indemnity Agreements further provided:
(b) INDEMNITY: — TO indemnify the SURETY COMPANY for any damage, prejudice, loss,
costs, payments, advances and expenses of whatever kind and nature, including [of]
attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or
incur as consequence of having executed the above mentioned Bond, its renewals,
extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%] per
cent of the total amount claimed by the CORPORATION in each action, the same to be due,
demandable and payable, irrespective of whether the case is settled judicially or
extrajudicially and whether the amount has been actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: — The said
indemnities will be paid to the CORPORATION as soon as demand is received from the
Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of
any sum under the terms of the above-mentioned Bond, its renewals, extensions,
modifications or substitutions, whether the said sum or sums or part thereof, have been
actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from
any of us, payments on account of the pending obligations, and to grant extension to any of
us, to liquidate said obligations, without necessity of previous knowledge of [or] consent from
the other obligors.
xxx xxx xxx
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. — Any payment or
disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds,
its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was
obligate[d] to make such payment or in the belief that said payment was necessary in order to
avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue
of the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be
final and will not be disputed by the undersigned, who jointly and severally bind themselves to
indemnify the SURETY COMPANY of any and all such payments as stated in the preceding
clauses.
xxx xxx xxx
When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment
from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety
made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed
vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K.
Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability
to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought
suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance
of Manila, praying principally that judgment be rendered:
b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20
representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the
additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with
interest thereon at the rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of
P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest thereon
at the rate of 12% per annum on the amount of P70,000.00 which had been paid to the Phil.
National Bank already, the interest to begin from the month of September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed
in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that he had been
asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R &
B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed
so that R & B Surety could show that it was complying with the regulations of the Insurance
Commission concerning bonding companies; (iii) that R & B Surety had assured him that the execution
of the agreement was a mere formality and that he was to be considered a stranger to the transaction
between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the
Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement
in favor of R & B Surety only "for accommodation purposes" and that it did not express their true
31
intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had
already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM
represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the
PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation
arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint
was premature, considering that R & B Surety filed the case against him as indemnitor although the
PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses.
Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial
court was therefore constrained to decide the case on the basis alone of the terms of the Trust
Agreement and other documents submitted in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B
Surety, the dispositive portion of which reads as follows;
Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph
Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum
of 400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and
interest at the rate of 6% per annum on the following amounts:
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28, 1966;
On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff
the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest
thereon from the filing of plaintiff's complaint on August 1, 1968 until fully paid, and the further
sum of P4,000.00 as and for attorney's fees and expenses of litigation which this Court deems
just and equitable.
There being no showing the summons was duly served upon the defendant Liu Tua Ben who
has filed no answer in this case, plaintiff's complaint is hereby dismissed as against defendant
Liu Tua Ben without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals
which, as already noted, certified the case to us as one raising only questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to
the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the
Indemnity Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from
their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust
Agreement; and
3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit
against R & B Surety for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28
December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed)
between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the
Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB
official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as
follows:
WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by
the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers,
Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the
application of PAGRICO for an advance line of P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance
& Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the
BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the Pacific
Copra Export Co., Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their
respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R
& B and the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY
has demanded compliance by the R & B and the CONSOLACION of their respective
obligations under the aforesaid bonds;
32
 WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the
indemnity agreements aforementioned executed by him in favor of R & B and the
CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY
against said companies, he is willing as he hereby agrees to pay the obligations of said
companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest
from the net profits arising from the procurement of reparations consumer goods made thru
the allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the
purpose of paying to the BENEFICIARY Philippine National Bank in the manner stated
hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00
dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond No. G-
5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without interest
from the net profits arising from the procurement of reparations consumer goods under the
Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the
allocation of WARVETS;
xxx xxx xxx
6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R
& B and CONSOLACION, subject of the bond mentioned above. In the meantime that this
TRUST AGREEMENT is being implemented, the BENEFICIARY hereby agrees to forthwith
reinstate the R & B and the CONSOLACION as among the companies duly accredited to do
business with the BENEFICIARY and its branches, unless said companies have been
blacklisted for reasons other than those relating to the obligations subject of the herein
TRUST AGREEMENT;
xxx xxx xxx
9. This agreement shall not in any manner release the R & B and CONSOLACION from their
respective liabilities under the bonds mentioned above. (emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of
the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means,
it must still subsist. And so must the supporting Indemnity Agreements. 3
We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under
the Indemnity Agreements were extinguished by novation brought about by the subsequent execution
of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which terminates it, either by changing its object or principal conditions, or by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is
referred to as objective (or real) novation. Novation by the change of either the person of the debtor or
of the creditor is described as subjective (or personal) novation. Novation may also be both objective
and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is
achieved-an obligation is extinguished and a new one is created in lieu thereof. 5
If objective novation is to take place, it is imperative that the new obligation expressly declare that the
old obligation is thereby extinguished, or that the new obligation be on every point incompatible with
the old one. 6 Novation is never presumed: it must be established either by the discharge of the old
debt by the express terms of the new agreement, or by the acts of the parties whose intention to
dissolve the old obligation as a consideration of the emergence of the new one must be clearly
discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that
the juridical relation between the parties to the original contract is extended to a third person. It is
essential that the old debtor be released from the obligation, and the third person or new debtor take
his place in the new relation. If the old debtor is not released, no novation occurs and the third person
who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that the Trust Agreement does
not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the
Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that
"[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the
Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation (and nothing else) would sustain a finding of novation by
implication. 9 But where, as in this case, the parties to the new obligation expressly recognize the
continuing existence and validity of the old one, where, in other words, the parties expressly negated
the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached
at all.
What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-
to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not
unusual in business for a stranger to a contract to assume obligations thereunder; a contract of
suretyship or guarantee is the classical example. The precise legal effect is the increase of the number
of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus,
in Magdalena Estates vs. Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments from a third person
who has agreed to assume the obligation, when there is no agreement that the first debtor
shall be released from responsibility, does not constitute a novation, and the creditor can still
enforce the obligation against the original debtor.
In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already
previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the
Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the
Trust Agreement was that where there had been only two, there would now be three obligors directly
and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could
proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release,
and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust
Agreement, could not have intended to release any of its own indemnitors simply because one of those
indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB.
33
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the
24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in
the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety .
The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in
solidum) to the R & B Surety] — to become SURETY upon a SURETY BOND demanded by and in
favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set
forth in said SURETY BOND — ." This part of the Agreement suggests that the indemnitors (including
the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however,
is bereft of any indication that the petitioners-indemnitors ever in fact became co-sureties of R & B
Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors
bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of
the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-
which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty" could apply in the instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and
any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and
the trustors[s]) could not prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the
Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not
extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in
fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered
into. Petitioner's Obligation had in fact already matured, for those obligations were to amture "as soon
as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] —
whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was
that precisely envisaged in Article 2079:
[t]he mere failure on the part of the creditor to demand payment after the debt has become
due does not of itself constitute any extension of the referred to herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor
without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's
remedies against the principal debtor upon the original maturity date. The surety is said to be entitled
to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be
entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming
insolvent during the extended period. The underlying rationale is not present in the instant case. As this
Court has held,
merely delay or negligence in proceeding against the principal will not discharge a
surety unless there is between the creditor and the principal debtor a valid and binding
agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of
obtaining indemnity by presenting a legal objection for the time, to the prosecution of an
action on the original security.12
In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were
so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming
subrogated to such remedies as R & B Surety may have against PAGRICO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted
above) allow R & B Surety to recover from petitioners even before R & B Surety shall have paid the
PNB. We have previously held similar indemnity clauses to be enforceable and not violative of any
public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not
only against actual loss but against liability as well. 14 While in a contract of indemnity against loss as
indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a
contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the
liability of the person to be indemnified has arisen without regard to whether or not he has suffered
actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the
partial payments already made but for the full amount owed by PAGRICO to the PNB.
Summarizing, we hold that :
(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The
Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition
to PAGRICO and R & B Surety.
(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B
Surety did not amount to an "extension granted to the debtor" without petitioner's consent so as to
release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity
Agreements; and
(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to
the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted
any action against R & B Surety for the collection of its matured obligation under the Surety Bond.
WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court
is AFFIRMED in toto. Costs against the petitioners.
SO ORDERED.
G.R. No. 79642 July 5, 1993
BROADWAY CENTRUM CONDOMINIUM CORPORATION, petitioner,
vs.
TROPICAL HUT FOOD MARKET, INC. and THE HONORABLE COURT OF
APPEALS, respondents.
Gozon, Berenguer, Fernandez & Defensor Law Offices for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles Law Office for respondent.
FELICIANO, J.:
34
Petitioner Broadway Centrum Condominium Corporation ("Broadway") and private respondent Tropical
Hut Food Market. Inc. ("Tropical") executed an 28 November 1980 a contract of lease. Broadway, as
lessor, agreed to lease a 3,042.19 square meter portion of the Broadway Centrum Commercial
Complex for a period of ten (10) years, commencing from 1 February 1981 and expiring on 1 February
1991, "renewable for a like period upon the mutual agreement of both parties." The rental provision of
this contract reads as follows:
3. BASIC RENTAL ON LEASED PREMISES — LESSEE agrees to pay LESSOR a
basic monthly rental on the leased promises in the amount of ONE HUNDRED
TWENTY THOUSAND PESOS (P120,000.00) Philippine Currency, during the first
three (3) years of this lease contract from February 1, 1981 to February 1, 1984,
allowing two (2) months grace period on rental for renovation/improvements on the
leased promises from December 1, 1980 to January 31. 1961. The basic rental shall
be increased to ONE HUNDRED FORTY THOUSAND PESOS (P140,000.00) per
month during the next three (3) years from February 1, 1984 to February 1, 1987,
and ONE HUNDRED SIXTY FIVE THOUSAND PESOS (P165,000.00) per month
during the last four (4) years from February 1, 1967 to February 1, 1991.
The first basic monthly rental shall be paid in advance to the LESSOR on or before
December 1, 1980. Succeeding basic monthly rentals starting March, 1981 be paid
by LESSEE to LESSOR, without the necessity of a previous demand or the services
of a collector, within the first five (5) days of the month to which said rental shall
correspond, at the Office of the LESSOR at Broadway Centrum.
During the first year of the lessor-lessee relationship between Broadway and Tropical, no problems
were apparently experienced by either of them. On 5 February 1982, however, Tropical wrote to
Broadway stating that Tropical's rental payments to Broadway were equivalent to 7.31% of Tropical's
actual sales of P17,246,103.00 in 1981, while "[Tropical's] gross profit, rate [was] only 10%." Tropical
went on to say that the rental specified in that contract had been "based merely on [Tropical's)
projections that [Tropical] could reach an average sale of P120,000.00 a day;" however, Tropical's total
sales projection for 1982 was only P23,000,000.00. This would mean again a rental rate of 6.08% of
sales "which is too high for Tropical Hut-Broadway considering that the present rental rates of other
Tropical branches are even below the normal rate of 1.5% on sales." Accordingly. Tropical made the
following proposal to Broadway:
[Tropical] would therefore propose to reduce the present monthly rental to
P50,000.00 or 2.0% of their monthly sales whichever is higher, up to the end of the
third year after which it shall again be subject to renegotiations. (Emphasis supplied)
On 4 March 1962, Broadway responded to Tropical's latter by stating that it (Broadway) believed that
the problems of Tropical's supermarket in the Broadway Centrum were within the control of Tropical's
management. Broadway offered six (6) suggestions which, if implemented, should result in increased
sales for Tropical of at least 15% in the succeeding months. In the meantime, Broadway made the
following counter-proposal consisting of conditional reduction of the stipulated rental by P20,000.00 for
a limited period of four (4) months:
. . . Meantime, we are agreeable to a conditional reduction of your rental by
P20,000.00 per month for four months starting this month on a trial basis; that is, the
P20,000.00 per month reduction in rental will be paid back to us and spread over the
last six months of the years should the target of 15% increase in sales be achieved
by the fourth month. However, should your sales not increased by 5% in spite of the
improvements you have introduced, the reduction in rental of P20,000.00 per month
of P80,000.00 for four months will not have to be paid anymore. In other words, the
monthly reduction in rental is conditioned upon your not achieving the desired 15%
increased in sales volume by the fourth month assuming you implement all of the
above changes.
It is understood, however, that any reduction in rental extended is merely a
temporary suspension of the original rate of rental stipulated in our contract of lease
and not an amendment thereto.2 (Emphases supplied)
Officers of Tropical met with the President of Broadway and during this conference, Tropical's officers
recounted the "low sales volume" that the Tropical Supermarket in the Broadway Centrum was
experiencing, apparently as a result of the temporary closure of Doña Juana Rodriguez Avenue.3 This
Avenue is a major thoroughfare adjacent to the Broadway Centrum and was then closed to vehicular
traffic because of the road expansion project of the Government. Broadway's President, Mrs. Cita
Fernandez Orosa, was aware that the temporary closure of the Doña Juana Rodriguez Avenue had
affected the business of all the Broadway's tenants, including Tropical. She, therefore, agreed on 20
April 1982 to a "provisional and temporary agreement" which agreement needs to be quoted in full:
Further to our letter dated April 6, 1982, we hereby make formal our provisional and
temporary agreement to a reduction of your monthly rental on the basis of 2% of
gross receipts or P60,000.00 whichever is higher. Gross receipts should be
construed as the total sales and receipts from sublessees of your area and from
whatever source arising from the area leased by you. This Provisional arrangement
should not be interpreted as amendment to the lease contract entered into between
us.
We invite your attention to the fact that, as agreed upon, you have committed to
return by the end of April a certain portion of your leased premises totalling 466.56
square meters and presently occupied by your drug store and coffee shop outlets
and half of the hallway.
Finally we wish to remind you that the temporary alteration in rental is conditioned on
your good faith implementation an the suggestions we conveyed to you in our letter
of March 4, 1982 regarding the operations of the supermarket and shall not
commence until the area mentioned above to be surrendered is actually
surrendered.
Should you find the foregoing in accordance with our previous verbal agreement,
please signify your acceptance by signing above the word "conforme."
Thank you for your, continued patronage.
C o n f o r m e: Very, truly yours,
Tropical Hut Food Broadway Centrum
Market, Inc. Condominium Corp.
35
 By: (Signed) By: (Signed) 4
___________________
_____________________
(Emphasis supplied).
Months later, the road expansion project at the Doña Juana Rodriguez Avenue was completed. By a
letter dated 15 December 1982, addressed to Tropical, Broadway referred to the rental which "as of
last, April 20, 1982, wasprovisionally reduced" to P60,000.00 a month or 2% of gross receipts
whichever is higher "without waving any of [Broadway's] rights under our rental agreement." Broadway
then went on to say that:
After careful deliberation, we regret that this concession can no longer be extended
in its present form. We, therefore, advising that we shall increase the monthly rental
to P100,000.00.
This increase, however, shall be implemented gradually as follows: P80,000.00
effective January, 1983 and P100,000.00 effective April, 1993 until further notice.
Considering the fact that you collect a monthly gross rental of P24,600.00 from your
concessionaires (other forms of income not considered), the previous temporary
arrangement afforded you mare than sufficient respite from whatever business
constraints you may have had then. The consequent effect of said temporary
arrangement is your payment of a monthly rental of P35,400.00 or an effective rate
of P14.32 only per square mater. We are sure that you will agree with us that this
rate is very low and cannot therefore be sustained indefinitely. 5 (Emphases
supplied).
While the rental rate above fixed by Broadway was higher than that set out in the provisional and
temporary agreement of the parties of 20 April 1982, the rates so fixed were nonetheless lower than
that stipulated in their contract of 28 November 1980. Tropical, however, was not satisfied with the
adjusted rates fixed by Broadway. In a letter dated 4 January 1983, Mr. Luis Que of Tropical wrote to
Broadway's President appealing to Broadway "to fix our monthly rental at P60,000.00 or 2% of our
gross receipts whichever is higher." In this letter, Mr. Que expressly hoped that
[Broadway would] understand our position, and may we reiterate our appeal to
maintain our presentprovisional rates until such time that more sales are achieved.
(Emphasis supplied)
Mr. Luis Que's appeal was, however, found unsatisfactory by Broadway. In a letter dated 13 January
1983, Broadway said:
We are replying to your letter of January 4, 1983. While it may be admitted that you
are incurring losses in your operations, the same is not a monopoly experienced
solely by your corporation. Broadway Centrum itself has had its share of business
setbacks but we have nevertheless decided to absorb part of your losses last
year by agreeing to a temporary reduction of your monthly rental. However, as we
have stated in our December 15, 1982 letter, this concession can no longer be
extended in its present form which continues to be a considerable reduction on the
provisions of our existing long term contract. Consequently, we have to reiterate our
advise on you regarding your rental increased.6(Emphasis supplied).
Tropical continued its renegotiation efforts. In another letter dated 29 March 1983, Broadway's
President wrote to Mr. Luis Que turning down his request for reconsideration. Broadway, however, was
evidently desirous of keeping Tropical as a tenant if possible and so stated that the P100,000.00
monthly rental would begin, not on April 1983 as stated in its letter of 15 December 1982 but rather on
July 1983. By a letter, dated 9 April 1983, the Credit and Collection Officer of Broadway sent Mr. Luis
Que a bill for P81,320.00 representing the accrued differential of P20,000.00 per month between the
rental which Broadway was willing to grant to Tropical (P80,000.00 per month starting 1 January, 1983)
and up to 30 June 1983)and the P60,000.00 per month or 2% of gross receipts whichever is higher,
under the temporary and provisional letter-agreement of 20 April 1982.
Tropical responded to the statement of account sent by Broadway by pleading, once more, in a letter
dated 15 April 1983, that Tropical's present rentals of P60,000.00 monthly or 2% of gross receipts,
whichever is higher, "would at least stay until we have somehow recovered," to which Tropical
proposed, however, to add 20% of its income from concessionaires (i.e., concessionaires at Tropical-
Broadway Supermarket).7
Tropical's last counter-offer was not acceptable to Broadway. In a letter dated 22 April 1983,
Broadway's President wrote to Mr. Luis Que stating that "the matter was no longer negotiable":
We are responding to your letter of April 15, 1983 proposing a counter offer to the
payment of your rentals. You will remember that in our last meeting our position on
the matter has been unequivocably stated. The temporary arrangement of reducing
your monthly rentals was extended as an assistance. This had caused us to lose
P620,000.00 on rental income.
You will agree that this is a sizeable amount which had tremendous adverse effects
on our financial position. This can no longer be sustained.
We reiterate, therefore, that the matter is no longer negotiable and we strongly urge
you to settle your obligation to minimize the 2% penalty on delayed payments
provided for in our contract.
We trust that you will see the merits of the foregoing.8 (Emphasis supplied).
On 5 May 1983, Mr. Mariano Gue, adopting a new and much harder posture than Mr. Luis Que had,
wrote to Broadway as follows:
. . . I could only confirm what I told you in our conference that we cannot afford any
increase in rentals in the space occupied by us at Broadway Centrum. And I could
only repeat what is contained in the letter sent you by our Mr. Luis Que dated April
15, 1983. We cannot agree to an increase in rentals at this time. To do so would put
us in a financial situation worse then we were in before we agreed to reduce the
leased premises and adjust the rentals. Our position is that you cannot arbitrarily and
unilaterally increase the rentals. This is a matter which should be mutually agreed
upon by us and as stated, we are not in a financial position to agree to such an
increase.9 (Emphasis supplied).
On the same day, 5 May 1983, Mrs. Orosa wrote to Mr. Mariano Que expressing shock and dismay at
the posture suddenly adopted by the latter. Mrs. Orosa wrote:
36
 We are replying to your letter of May 5, 1983 categorically stating that your position
is that we cannot arbitrarily and unilaterally increase the rentals. We are appealed by
the apparent attempt to distort the very crystal clear arrangement we reached last
April 20, 1982 anent the temporary alteration of your rentals. We hereby attached a
xerox copy of said agreement with our underscores to refresh your memory.
We have exhaustively, repeatedly but patiently labored to explain to you the
temporary and provisional arrangement to reduce your monthly rentals is not
amendment to the lease contract and this was done merely as an assistance. There
is, therefore, absolutely no basis to your claim that we cannot arbitrarily and
unilaterally increase the rentals. We strongly feel that we should have instead been
the recipient an act of gratitude from you.
In view therefore of your obstinate decision to blur your view and continue refusing to
heed our demands, we are hereby formally serving you notice that if you still fail to
pay your back accounts amounting to P100,000.00 exclusive of penalty charges by
Monday, May 9, 1983, paragraph five (5) of our lease contract will be
implemented. 10 (Emphasis supplied).
A week later, on 12 May 1983, Tropical filed a Complaint before the Regional Trial Court, Quezon City,
seeking a restraining order or preliminary injunction to prevent Broadway from invoking and
implementing Section 5 of their Lease Contract and asking the court to decree that the, rental provided
for in the letter-agreement of 20 April 1982 "should subsist while the low volume of sales [of Tropical]
still continues." A restraining order was issued by the trial court ex parte the next day and a preliminary
injunction was granted on 2 June 1983, upon Tropical's filing of a bond in the amount of P100,000.00.
On 6 January 1984, while trial before the Regional Trial Court was pending, Broadway informed
Tropical that the basic rental would be increased to P140,000.00 per month during the next three (3)
years from 1 February 1984 to 1 February 1987 in accordance with paragraph (3) of the Lease
Contract dated 28 November 1980.
Tropical reacted by filing a supplemental complaint with the trial court raising for the first time the issue
of whether or not the letter-agreement dated 20 April 1982 had novated the Lease Contract of 28
November 1980. Tropical alleged that the original Contract. of Lease had been novated in its principal
conditions — i.e., the area subject to the lease and the lease rentals — by the letter-agreement dated
20 April 1982 and that the reduced lease rates set out in the letter-agreement are to subsist while
Tropical's sales volume "remains low."
Petitioner, upon the other hand, vehemently denied that the original Lease Contract had been novated
by the letter-agreement of 20 April 1982.
In time, the trial court rendered its decision dated 14 March 1985, the dispositive portion of which reads
as follows:
WHEREFORE, judgment, is hereby rendered in favor of the plaintiff and against the
defendant as follows:
1. The writ of preliminary injunction previously issued is made permanent;
2. The reduced rental provided for in the letter-agreement of April 20, 1982 (Exh. "G"
or "5") shall subsist or be effective during the period that a plaintiff cannot achieve its
Projected daily sales average as envisioned in its feasibility study;
3. The contract of leased dated November 28, 1980 (Exh. "A" or "1") is declared as
partially novated or modified by the letter-agreement;
4. The amount of monthly rentals payable by plaintiff for the reduced area of the
leased promises afterplaintiff has achieved its projected daily sales average is fixed
as follows:
February 1, 1981 to February 1, 1984 —
P39.45 per square meter or P101,609.00;
February 1, 1984 to February 1, 1987 —
P46.02 per square meter or P118.530.00;
February 1, 1987 to February 1, 1991 —
P54.24 per square mater or P139,702.00.
Correspondingly, defendant's counterclaim is dismissed.
Costs against the defendant.
So Ordered. 11 (Emphasis supplied).
On appeal, the Court of Appeals affirmed the decision of the trial court. The Court of Appeals held that
the letter-agreement dated 20 April 1982 had novated the principal conditions of the Lease Contract.
The Court of Appeals also hold that the reduction in the rentals was not entirely a gratuitous
accommodation on the part of Broadway since the reduction of the leased space by 466.56 square
meters, possession of which was returned by Tropical to Broadway, constituted valuable consideration
for the reduction of rentals while the "low sales volume" of Tropical continued. The Court of Appeals
corrected a microscopic arithmetical error committed by the trial court and in effect directed Tropical to
pay, when its "low sales volume" shall hove been overcome, the following rental rates:
From 1 February 1984 up to 1 February 1987 — P118.529.15 per month;
From 1 February 1987 up to 1 February 1991 — P139,695.07 per month.
Petitioner Broadway now asks us to review and set aside the Decision of the Court of Appeals.
The sole issue confronting us here is Whether or not the latter-agreement dated 20 April 1982 had
novated the Contract of Lease of 28 November 1980.
We start with the basic conception that novation is the extinguishment of an obligation by the
substitution of that obligation with a subsequent one, which terminates it, either by changing its object
or principal conditions or by substituting a now debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. 12Novation through a change of the object or principal conditions of
37
an existing obligation is referred to as objective (or real) novation. Novation by the change of either the
person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may
also be objective and subjective (mixed) at the same time. In both objective and subjective novation, a
dual purpose is achieved — an obligation in extinguished and a news one is created In lieu thereof. 13
If objective novation is to take place, it is essential that the new obligation expressly declare that the
old obligation to be extinguished, or that now obligation be on every point incompatible with the old
one. 14 Novation is never presumed; it must be established either by the discharge of use old debt by
the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the
old obligation as a consideration of the emergence of the new one must be clearly manifested. 15 It is
hardly necessary to add that the role that novation is never presumed, is not avoided by merely
referring to partial novation. The will to novate, whether totally or partially, must appear by express
agreement of the parties, by their acts which are too clear and unequivocal to be mistaken.
Applying the above principles to the case at bar, it is entirely clear to the court that the letter-agreement
of 20 April 1992 did not extinguish or alter the obligations of respondent Tropical and the rights of
petitioner Broadway under their lease contract dated 28 November 1980.
In the first place, the letter-agreement of 20 April 1982 was, by its own terms, a " provisional and
temporaryagreement to a reduction of [Tropical's] monthly rental —." The letter-agreement, as noted
earlier, also contained the following sentence:
This provisional agreement should not be interpreted as amendment to the contract
entered into by us.
The same letter also referred to the reduction of rental as a "temporary alteration in rental" which was
"conditioned" upon good faith implementation by Tropical of the six (6) principal suggestions Broadway
had conveyed to Tropical concerning improvement of the operations of Tropical's supermarket at the
Broadway Centrum. The non-specification by Broadway (who had prepared the letter-agreement an
which Tropical placed its conforme) of the period of time during which the reduced rentals would
remain in effect, only meant that Broadway retained for itself the discretionary right to return to the
original contractual rates of rental whenever Broadway felt it appropriate to do so. There is nothing in
the text of the 20 April 1982 letter-agreement to suggest that the reduced concessional rental rates
could not be terminated Broadway without the consent of Tropical.
In the second place, the formal notarized Lease Contract of 28 November 1980 made it clear that a
temporary and provisional concessional reduction of rentals which Broadway might grant to Tropical
was not to be construed as alteration or waiver of any; of the terms of the Lease Contract itself. That
Lease Contract provided, among other things, as follows:
32. NON-WAIVER OF CONDITIONS & COVENANTS — The failure of the LESSOR
to insist upon strict performance of any of the terms, conditions and stipulation
hereof shall not be deemed a relinquishment or waiver of any right or remedy that
said LESSOR may have, nor shall it be construed as a waiver of any subsequent
breach of, or default in the terms, conditions and covenants hereof, which terms,
conditions and covenants shall continue under this Contract and shall be deemed to
have been made unless express in writing and signed by the LESSOR. 16 (Emphasis
supplied).
In the third place, the course of negotiations between Broadway and Tropical before the execution of
their letter-agreement of 20 April 1982, quite clearly indicated that what they were negotiating was a
temporary and provisional reduction of rentals. Thus, Tropical itself, in its letter to Broadway dated 5
February 1982, quoted earlier, had proposed reduction of rentals from the stipulated contractual rates
to P50,000.00 per month or 2% of monthly sales, whichever is higher, "up to the end of the
third year after which it shall again subject, to renegotiation."
Any reduction in rental extended is merely a temporary suspension of the original
rate of rental stipulated in our contract of lease and not an amendment thereto.
In the fourth place, the course of discussions between Broadway and Tropical, as disclosed in their
correspondence, after execution of the 20 April 1982 letter-agreement, shows that the reduction of
rentals agreed upon in the letter-agreement was not to persist, for the rest of the life of the ten (10)-
year Contract of Lease. That correspondence is bereft of any, sign of mutual agreement or recognition
that the reduced rentals had so permanently replaced the contract stipulations on rentals as to have
become immune to change save by common consent of Tropical and Broadway. Quite the contrary. In
Broadway's letter to Tropical dated 15 December 1982, Mrs. Orosa referred to the letter-agreement of
20 April 1982 which "provisionally reduced to P60,000.00 a month or 2% of [Tropical's] gross receipts,
whichever is higher, without waiving any of our right under our rental agreement." This 15 December
1982 letter, quoted earlier, in an obvious effort to be conciliatory, did not try to go back immediately to
the contract stipulation of P120,000.00 monthly rental, from 1 February 1981 to 1 February 1984.
Instead, Broadway proposed P80,000.00 per month effective January 1983 and P100 000.00 per
month effective April 1983 "until further notice." In its reply letter of 4 January 1983, Tropical appealed
to Broadway to maintain "our present provisional rates until such time that more sales are achieved." In
its rejoinder of 13 January 1983, Broadway stressed that though it had its own share of business set
backs, it had "nevertheless decided to absorb part of [Tropical-Broadway Centrum's] losses last year
by agreeing to a temporary reduction of the monthly rental." At the same time, Broadway stressed that
"this concession" could no longer be extended "in its present form which continues to be a
considerable reduction on the provisions of our existing long-term contract." Finally, in his last letter of
15 April 1983, Mr. Luis Que of Tropical appealed once more to Broadway to continue the reduction in
rental under the 20 April 1982 letter-agreement "until we have somehow recovered" and then, at the
same time, offered to increase that reduced rental by adding to it 20% of Tropical's income from
concessionaires at its Broadway Centrum Supermarket. Turning down Mr. Que's last counter-officer,
Mrs. Orosa of Broadway on 22 April 1983 once again stressed that:
The temporary arrangement of reducing your monthly rentals was extended as an
assistance. This had caused us to lose P620,000.00 on rental income. (Emphasis
supplied).
It is thus clear to the Court that Tropical was attempting to modify its formal Lease Contract with
Broadway by implying or inserting terms into the 20 April 1982 letter-agreement which are not found in
that letter-agreement. Under both the Civil Code and our case law on novation and as well the express
terms of the 28 November 1980 Contract of Lease, only evidence of the clearest and most explicit kind
will suffice for that purpose. Tropical's theory that Broadway had agreed in the 20 April 1982 letter-
agreement to maintain the reduced rental so long as Tropical was suffering from a "low volume of
sales" appears to us as an afterthought, imaginative and original no doubt, but still an afterthought.
Tropical did not pretend to have reached agreement with Broadway on what level of sales would
constitute the critical "low volume of sales." And so, the trial court ended up with the truly extraordinary
recourse of referring to the feasibility study that Tropical had made on it's own, before Tropical and
Broadway executed their 28 November 1980 Contract of Lease. That feasibility study was no mare
than an expression of Tropical's own expectations when it entered into the 1980 Contract of Lease; yet
38
the trial court held that the reduced rentals were to remain in effect until Tropical achieved its own
expectations concerning its sales at the Broadway Centrum, which presumably were not "low."
Tropical, in its Memorandum, stressed that Broadway had supplied the number of customers which
Tropical had inputted in its feasibility study. Whatever number Broadway may have submitted to
Tropical in their pre-contract negotiations was no more than an estimate or speculation as to the
number of customers that might be coming into the then proposed Tropical Supermarket at the
Broadway Centrum. We do not understand Tropical to have suggested that that number constituted
a representation on the part of Broadway which turned out to be false and which vitiated Tropical's
consent to the original 1980 Contract, of Lease. Neither do we understand Tropical to be suggesting
that Broadway had warranted to Tropical that a certain number of customers would in fact be visiting
the then proposed Tropical Supermarket at Broadway Centrum. The 1980 Contract of Lease itself was
totally silent as to any such estimated or expected number of customers either as a representation or
as a warranty on the part, of Broadway. That silence rendered any estimate which Broadway may have
conveyed to Tropical, quite immaterial. 17
We turn to the holding of the Court of Appeals that the surrender of 466.56 square meters of leased
space by Tropical to Broadway constituted valuable consideration, acceptance of which disabled
Broadway from insisting on the original terms of their Contract of Lease. Under the view we have taken
above of the legal effects of the 20 April 1982 letter-agreement, this supposed valuable consideration
appears quite immaterial. We must, nonetheless, note that comparison of the lease rentals reduced
and the floor space surrendered yields a strong presumption that Broadway could not have agreed to
the supposed partial novation. The rentals were reduced by Broadway by 50% (from P120,000.00 to
P60,000.00 per month). The floor space was reduced by slightly over 15% only. No substantial
relationship existed between the amount of the reduction of rental and the area of the space returned
by Tropical. Hence, no reasonable presumption can be indulged that that, return of part of the leased
space constituted consideration for the reduction of rental rates. In that Contract of Lease, moreover,
the rentals were stipulated for a specified portion of the Broadway Centrum having a total floor area of
3,042.19 square meters; the rental rate was not specified on a per square meter basis.
We conclude that the Court, of Appeals fell into reversible error when it affirmed the decision of the trial
court. We believe and so hold that the letter-agreement of 20 April 1982 did not constitute a novation,
Whether partial or total, of the 28 November 1980 Contract of Lease between Broadway and Tropical.
WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is hereby GIVEN DUE
COURSE, and the Comment filed by private respondent Tropical is hereby TREATED as its ANSWER
and the Decision dated 30 January 1987 of the Court, of Appeals and the Decision dated 14 March
1985 of the trial court are hereby REVERSED and SET ASIDE. A new judgment is hereby entered
dismissing the complaint filed by private respondent Tropical, and requiring private respondent Tropical
to pay to petitioner Broadway the following rental rates:
1. P80,000.00 per month from 1 January 1983 up to 30 June 1983;
2. P100,000.00 per, month from 1 July 1983 up to 31 January 1984;
3. P140,000.00 per month from 1 February 1984 to 1 February 1987; and
4. P160,000.00 per month from 1 February 1987 to 31 January 1991.
The penalty of 2% per month on unpaid rentals specified in Section 5 of the 28 November 1980
Contract of Lease is, in the exercise of the Court's discretion, hereby equitably REDUCED to ten
percent (10%) per annum computed from accrual of such rentals as above specified until fully paid. In
addition, private respondent Tropical shall pay to petitioner Broadway attorney's fees in the amount of
ten percent (10%) (and not twenty percent [20%] as specified in Section 33 of the Contract of lease) of
the total amount due and payable to petitioner Broadway under this Decision. Costs against, private
respondent.
SO ORDERED.
G.R. No. 147950 December 11, 2003
CALIFORNIA BUS LINES, INC., petitioner,
vs.
STATE INVESTMENT HOUSE, INC., respondent.
DECISION
QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the decision, 1 dated April 17, 2001, of the
Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment2 , dated June 3, 1993, of the
Regional Trial Court of Manila, Branch 13, in Civil Case No. 84-28505 entitled State Investment House,
Inc. v. California Bus Lines, Inc., for collection of a sum of money. The Court of Appeals held petitioner
California Bus Lines, Inc., liable for the value of five promissory notes assigned to respondent State
Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors Corporation—M.A.N. Division (Delta) applied for financial assistance
from respondent State Investment House, Inc. (hereafter SIHI), a domestic corporation engaged in the
business of quasi-banking. SIHI agreed to extend a credit line to Delta for ₱25,000,000.00 in three
separate credit agreements dated May 11, June 19, and August 22, 1979. 3 On several occasions,
Delta availed of the credit line by discounting with SIHI some of its receivables, which evidence actual
sales of Delta’s vehicles. Delta eventually became indebted to SIHI to the tune of ₱24,010,269.32.4
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI),
purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N. Diesel
Conversion Engines from Delta. To secure the payment of the purchase price of the 35 buses, CBLI
and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes in favor of Delta on
January 23 and April 25, 1980.5 In each promissory note, CBLI promised to pay Delta or order,
₱2,314,000 payable in 60 monthly installments starting August 31, 1980, with interest at 14% per
annum. CBLI further promised to pay the holder of the said notes 25% of the amount due on the same
as attorney’s fees and expenses of collection, whether actually incurred or not, in case of judicial
proceedings to enforce collection. In addition to the notes, CBLI executed chattel mortgages over the
35 buses in Delta’s favor.
When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta on
October 7, 1981, to cover its overdue obligations under the promissory notes.6 The restructuring
39
agreement provided for a new schedule of payments of CBLI’s past due installments, extending the
period to pay, and stipulating daily remittance instead of the previously agreed monthly remittance of
payments. In case of default, Delta would have the authority to take over the management and
operations of CBLI until CBLI and/or its president, Mr. Dionisio Llamas, remitted and/or updated CBLI’s
past due account. CBLI and Delta also increased the interest rate to 16% p.a. and added a
documentation fee of 2% p.a. and a 4% p.a. restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables7 in favor of
SIHI as security for the payment of its obligations to SIHI per the credit agreements. In view of Delta’s
failure to pay, the loan agreements were restructured under a Memorandum of Agreement dated
March 31, 1982.8 Delta obligated itself to pay a fixed monthly amortization of ₱400,000 to SIHI and to
discount with SIHI ₱8,000,000 worth of receivables with the understanding that SIHI shall apply the
proceeds against Delta’s overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI
with the enforcement of the management takeover clause. To pre-empt the take-over, CBLI filed on
May 3, 1982, a complaint for injunction9 , docketed as Civil Case No. 0023-P, with the Court of First
Instance of Rizal, Pasay City, (now Regional Trial Court of Pasay City). In due time, Delta filed its
amended answer with applications for the issuance of a writ of preliminary mandatory injunction to
enforce the management takeover clause and a writ of preliminary attachment over the buses it sold to
CBLI.10 On December 27, 1982,11 the trial court granted Delta’s prayer for issuance of a writ of
preliminary mandatory injunction and preliminary attachment on account of the fraudulent disposition
by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of
Sale12 assigning to SIHI five (5) of the sixteen (16) promissory notes13 from California Bus Lines, Inc. At
the time of assignment, these five promissory notes, identified and numbered as 80-53, 80-54, 80-55,
80-56, and 80-57, had a total value of ₱16,152,819.80 inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983,14 to CBLI requiring CBLI to remit
the payments due on the five promissory notes directly to it. CBLI replied informing SIHI of Civil Case
No. 0023-P and of the fact that Delta had taken over its management and operations. 15
As regards Delta’s remaining obligation to SIHI, Delta offered its available bus units, valued at
₱27,067,162.22, as payment in kind.16 On December 29, 1983, SIHI accepted Delta’s offer, and Delta
transferred the ownership of its available buses to SIHI, which in turn acknowledged full payment of
Delta’s remaining obligation.17 When SIHI was unable to take possession of the buses, SIHI filed a
petition for recovery of possession with prayer for issuance of a writ of replevin before the RTC of
Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila RTC issued a writ of replevin and
SIHI was able to take possession of 17 bus units belonging to Delta. SIHI applied the proceeds from
the sale of the said 17 buses amounting to ₱12,870,526.98 to Delta’s outstanding obligation. Delta’s
obligation to SIHI was thus reduced to ₱20,061,898.97. On December 5, 1984, Branch 6 of the RTC of
Manila rendered judgment in Civil Case No. 84-23019 ordering Delta to pay SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984, 18 in Civil Case No.
0023-P, the injunction case before the RTC of Pasay. CBLI agreed that Delta would exercise its right to
extrajudicially foreclose on the chattel mortgages over the 35 bus units. The RTC of Pasay approved
this compromise agreement the following day, July 25, 1984.19 Following this, CBLI vehemently
refused to pay SIHI the value of the five promissory notes, contending that the compromise agreement
was in full settlement of all its obligations to Delta including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against CBLI in
the Regional Trial Court of Manila, Branch 34, to collect on the five (5) promissory notes with interest at
14% p.a. SIHI also prayed for the issuance of a writ of preliminary attachment against the properties of
CBLI.20
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages pursuant
to its compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC of Pasay a motion
for execution of the judgment based on the compromise agreement. 21 The RTC of Pasay granted this
motion the following day.22
In view of Delta’s petition and motion for execution per the judgment of compromise, the RTC of Manila
granted in Civil Case No. 84-28505 SIHI’s application for preliminary attachment on January 4,
1985.23 Consequently, SIHI was able to attach and physically take possession of thirty-two (32) buses
belonging to CBLI.24 However, acting on CBLI’s motion to quash the writ of preliminary attachment, the
same court resolved on January 15, 1986,25 to discharge the writ of preliminary attachment. SIHI
assailed the discharge of the writ before the Intermediate Appellate Court (now Court of Appeals) in a
petition for certiorari and prohibition, docketed as CA-G.R. SP No. 08378. On July 31, 1987, the Court
of Appeals granted SIHI’s petition in CA-GR SP No. 08378 and ruled that the writ of preliminary
attachment issued by Branch 34 of the RTC Manila in Civil Case No. 84-28505 should stay.26 The
decision of the Court of Appeals attained finality on August 22, 1987.27
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of Pasay City
conducted a public auction and issued a certificate of sheriff’s sale to Delta on April 2, 1987, attesting
to the fact that Delta bought 14 of the 35 buses for ₱3,920,000.28 On April 7, 1987, the sheriff of
Manila, by virtue of the writ of execution dated March 27, 1987, issued by Branch 6 of the RTC of
Manila in Civil Case No. 84-23019, sold the same 14 buses at public auction in partial satisfaction of
the judgment SIHI obtained against Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila in view
of the retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell the sixteen (16)
buses of CBLI which had previously been attached by the sheriff in Civil Case No. 84-28505 pursuant
to the January 4, 1985, Order of the RTC of Manila.29 SIHI’s motion was granted on December 16,
1987.30 On November 29, 1988, however, SIHI filed an urgent ex-parte motion to amend this order
claiming that through inadvertence and excusable negligence of its new counsel, it made a mistake in
the list of buses in the Motion to Sell Attached Properties it had earlier filed. 31 SIHI explained that 14 of
the buses listed had already been sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order
of the RTC of Pasay, and that two of the buses listed had been released to third party, claimant
Pilipinas Bank, by Order dated September 16, 198732 of Branch 13 of the RTC of Manila.
CBLI opposed SIHI’s motion to allow the sale of the 16 buses. On May 3, 1989, 33 Branch 13 of the
RTC of Manila denied SIHI’s urgent motion to allow the sale of the 16 buses listed in its motion to
amend. The trial court ruled that the best interest of the parties might be better served by denying
further sales of the buses and to go direct to the trial of the case on the merits. 34
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993, discharging CBLI from
liability on the five promissory notes. The trial court likewise favorably ruled on CBLI’s compulsory
counterclaim. The trial court directed SIHI to return the 16 buses or to pay CBLI ₱4,000,000
representing the value of the seized buses, with interest at 12% p.a. to begin from January 11, 1985,
the date SIHI seized the buses, until payment is made. In ruling against SIHI, the trial court held that
the restructuring agreement dated October 7, 1981, between Delta and CBLI novated the five
40
promissory notes; hence, at the time Delta assigned the five promissory notes to SIHI, the notes were
already merged in the restructuring agreement and cannot be enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No.
52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We find
defendant-appellee CBLI liable for the value of the five (5) promissory notes subject of the complaint a
quo less the proceeds from the attached sixteen (16) buses. The award of attorney’s fees and costs is
eliminated. The appealed decision is hereby REVERSED. No costs.
SO ORDERED.35
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING
AGREEMENT BETWEEN DELTA AND THE PETITIONER DID NOT SUBSTANTIALLY
NOVATE THE TERMS OF THE FIVE PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE
AGREEMENT BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID
NOT SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF
THE PRELIMINARY ATTACHMENT AND EXONERATING THE RESPONDENT OF
MALEFACTIONS IN PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER.36
Essentially, the issues are (1) whether the Restructuring Agreement dated October 7, 1981, between
petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp.
assigned to respondent SIHI, and (2) whether the compromise agreement in Civil Case No. 0023-P
superseded and/or discharged the subject five promissory notes. The issues being interrelated, they
shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not merely change the incidental elements of
the obligation under all sixteen (16) promissory notes, but it also increased the obligations of CBLI with
the addition of new obligations that were incompatible with the old obligations in the said notes. 37 CBLI
adds that even if the restructuring agreement did not totally extinguish the obligations under the sixteen
(16) promissory notes, the July 24, 1984, compromise agreement executed in Civil Case No. 0023-P
did.38 CBLI cites paragraph 5 of the compromise agreement which states that the agreement between
it and CBLI was in "full and final settlement, adjudication and termination of all their rights and
obligations as of the date of (the) agreement, and of the issues in (the) case." According to CBLI,
inasmuch as the five promissory notes were subject matters of the Civil Case No. 0023-P, the decision
approving the compromise agreement operated as res judicata in the present case. 39
Novation has been defined as the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates the first, either by changing the object or principal
conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the
creditor.40
Novation, in its broad concept, may either be extinctive or modificatory. 41 It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible with the
amendatory agreement.42 An extinctive novation results either by changing the object or principal
conditions (objective or real), or by substituting the person of the debtor or subrogating a third person
in the rights of the creditor (subjective or personal).43 Novation has two functions: one to extinguish an
existing obligation, the other to substitute a new one in its place. 44 For novation to take place, four
essential requisites have to be met, namely, (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation.45
Novation is never presumed,46 and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.47
The extinguishment of the old obligation by the new one is a necessary element of novation which may
be effected either expressly or impliedly.48 The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old
one.49 Upon the other hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts.50 While there is really no hard
and fast rule to determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and
the new obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. The first is when novation
has been explicitly stated and declared in unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of incompatibility is whether the two obligations
can stand together, each one having its independent existence. 51 If they cannot, they are incompatible
and the latter obligation novates the first.52 Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility must take place in any of the
essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise,
the change would be merely modificatory in nature and insufficient to extinguish the original
obligation.53
The necessity to prove the foregoing by clear and convincing evidence is accentuated where the
obligation of the debtor invoking the defense of novation has already matured.54
With respect to obligations to pay a sum of money, this Court has consistently applied the well-settled
rule that the obligation is not novated by an instrument that expressly recognizes the old, changes only
the terms of payment, and adds other obligations not incompatible with the old ones, or where the new
contract merely supplements the old one.55
In Inchausti & Co. v. Yulo56 this Court held that an obligation to pay a sum of money is not novated in a
new instrument wherein the old is ratified, by changing only the term of payment and adding other
obligations not incompatible with the old one. In Tible v. Aquino 57 and Pascual v. Lacsamana58 this
Court declared that it is well settled that a mere extension of payment and the addition of another
obligation not incompatible with the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The restructuring agreement
between Delta and CBLI executed on October 7, 1981, shows that the parties did not expressly
41
stipulate that the restructuring agreement novated the promissory notes. Absent an unequivocal
declaration of extinguishment of the pre-existing obligation, only a showing of complete incompatibility
between the old and the new obligation would sustain a finding of novation by implication.59 However,
our review of its terms yields no incompatibility between the promissory notes and the restructuring
agreement.
1. That the past due installment referred to above plus the current and/or falling due amortization as of
October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL and/or
LLAMAS in accordance with the following schedule of payments:
Daily payments of ₱11,000.00 from<>October 1 to December 31, 1981

The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the Daily payments of ₱12,000.00 from<>January 1, 1982 to March 31, 1982
following common stipulations:
Daily payments of ₱13,000.00 from<>April 1, 1982 to June 30, 1982
1. They were payable in 60 monthly installments up to July 31, 1985;
Daily payments of ₱14,000.00 from<>July 1, 1982 to September 30, 1982
2. Interest: 14% per annum;
Daily payments of ₱15,000.00 from<>October 1, 1982 to December 31, 1982
3. Failure to pay any of the installments would render the entire remaining balance due and
payable at the option of the holder of the notes;
Daily payments of ₱16,000.00 from<>January 1, 1983 to June 30, 1983
4. In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president, Mr.
Dionisio O. Llamas, Jr) were solidarily liable of attorney’s fees and expenses of 25% of the Daily payments of ₱17,000.00 from<>July 1, 1983
amount due in addition to the costs of suit.
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash payments due
The restructuring agreement, for its part, had the following provisions: to DMC in accordance with the schedule in paragraph 1. DMC may send a collector to receive the
amount due at CBL’s premises. All delayed remittances shall be charged additional 2% penalty interest
per month.
WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory notes:
3. All payments shall be applied to amortizations and penalties due in accordance with paragraph of
a. PN Nos. 16 to 26 (11 units) the restructured past due installments above mentioned and PN Nos. 16 to 26 and 52 to 57.
Past Due as of September 30, 1981 – ₱1,411,434.00
4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL
b. PN Nos. 52 to 57 (24 units) pertaining to the financial and field operations and service and maintenance matters of M.A.N. units.
Past Due as of September 30, 1981 – ₱1,105,353.00 Records needed by the DMC representatives in monitoring said operations shall be made available by
CBL and LLAMAS.
WHEREAS, the parties agreed to restructure the above-mentioned past due installments under the
following terms and conditions: 5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or
LLAMAS shall remit in lump sum whatever balance is left after deducting all payments made from what
a. PN Nos. 16 to 26 (11 units) – 37 months is due and payable to DMC in accordance with paragraph 1 of this agreement and PN Nos. 16 to 26
PN Nos. 52 to 57 (24 units) – 46 months and 52 to 57.

b. Interest Rate: 16% per annum 6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total
accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC and Silverio
c. Documentation Fee: 2% per annum shall exercise any or all of the following options:

d. Penalty previously incurred and Restructuring fee: 4% p.a. (a) The whole sum remaining then unpaid plus 2% penalty per month and 16% interest per
annum on total past due installments will immediately become due and payable. In the event
of judicial proceedings to enforce collection, CBL and LLAMAS will pay to DMC an additional
e. Mode of Payment: Daily Remittance sum equivalent to 25% of the amount due for attorney’s fees and expenses of collection,
whether actually incurred or not, in addition to the cost of suit;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby agree and
covenant as follows: (b) To enforce in accordance with law, their rights under the Chattel Mortgage over various
M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or
42
 (c) To take over management and operations of CBL until such time that CBL and/or LLAMAS
have remitted and/or updated their past due account with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N. Diesel
Buses and shall make available to CBL at the price prevailing at the time of purchase, an inventory of
spare parts consisting of at least ninety (90%) percent of the needs of CBL based on a moving 6-
month requirement to be prepared and submitted by CBL, and acceptable to DMC, within the first week
of each month.
8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. 16
to 26 and 52 to 57 shall continue to govern the relationship between the parties and that the Chattel
Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-
44 and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall continue to secure
the obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public Alberto G.
Doller and to instruct him not to proceed with the public auction sale of the shares of stock of CBL
subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand, undertakes to move for
the immediate dismissal of Civil Case No. 9460-P entitled "Dionisio O. Llamas vs. Alberto G. Doller, et
al.", Court of First Instance of Pasay, Branch XXIX.60
It is clear from the foregoing that the restructuring agreement, instead of containing provisions
"absolutely incompatible" with the obligations of the judgment, expressly ratifies such obligations in
paragraph 8 and contains provisions for satisfying them. There was no change in the object of the prior
obligations. The restructuring agreement merely provided for a new schedule of payments and
additional security in paragraph 6 (c) giving Delta authority to take over the management and
operations of CBLI in case CBLI fails to pay installments equivalent to 60 days. Where the parties to
the new obligation expressly recognize the continuing existence and validity of the old one, there can
be no novation.61 Moreover, this Court has ruled that an agreement subsequently executed between a
seller and a buyer that provided for a different schedule and manner of payment, to restructure the
mode of payments by the buyer so that it could settle its outstanding obligation in spite of its
delinquency in payment, is not tantamount to novation. 62
The addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA 63 ,
this Court ruled that a change in the incidental elements of, or an addition of such element to, an
obligation, unless otherwise expressed by the parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory notes.
Neither is there merit in CBLI’s argument that the compromise agreement dated July 24, 1984, in Civil
Case No. 0023-P superseded and/or discharged the five promissory notes. Both Delta and CBLI
cannot deny that the five promissory notes were no longer subject of Civil Case No. 0023-P when they
entered into the compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more right to compromise
the same. Delta’s limited authority to collect for SIHI stipulated in the September 13, 1985, Deed of
Sale cannot be construed to include the power to compromise CBLI’s obligations in the said
promissory notes. An authority to compromise, by express provision of Article 1878 64 of the Civil Code,
requires a special power of attorney, which is not present in this case. Incidentally, Delta’s authority to
collect in behalf of SIHI was, by express provision of the Continuing Deed of
Assignment,65 automatically revoked when SIHI opted to collect directly from CBLI.
As regards CBLI, SIHI’s demand letter dated December 13, 1983, requiring CBLI to remit the
payments directly to SIHI effectively revoked Delta’s limited right to collect in behalf of SIHI. This
should have dispelled CBLI’s erroneous notion that Delta was acting in behalf of SIHI, with authority to
compromise the five promissory notes.
But more importantly, the compromise agreement itself provided that it covered the rights and
obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the new
creditor of CBLI in the subject promissory notes. CBLI and Delta stipulated in paragraph 5 of the
agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the
plaintiffs and the defendants as well as their lawyers, and operates as full and final settlement,
adjudication and termination of all their rights and obligations as of the date of this agreement, and of
the issues in this case.66
Even in the absence of such a provision, the compromise agreement still cannot bind SIHI under the
settled rule that a compromise agreement determines the rights and obligations of only the parties to
it.67 Therefore, we hold that the compromise agreement covered the rights and obligations only of Delta
and CBLI and only with respect to the eleven (11) other promissory notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise agreement because SIHI
failed to intervene in Civil Case No. 0023-P after CBLI informed it of the takeover by Delta of CBLI’s
management and operations and the resultant impossibility for CBLI to comply with its obligations in
the subject promissory notes. CBLI also adds that SIHI’s failure to intervene in Civil Case No. 0023-P
is proof that Delta continued to act in SIHI’s behalf in effecting collection under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the
subject promissory notes in favor of SIHI. This had the effect of separating the five promissory notes
from the 16 promissory notes subject of Civil Case No. 0023-P. From that time, CBLI’s obligations to
SIHI embodied in the five promissory notes became separate and distinct from CBLI’s obligations in
eleven (11) other promissory notes that remained with Delta. Thus, any breach of these independent
obligations gives rise to a separate cause of action in favor of SIHI against CBLI. Considering that
Delta’s assignment to SIHI of these five promissory notes had the effect of removing the said notes
from Civil Case No. 0023-P, there was no reason for SIHI to intervene in the said case. SIHI did not
have any interest to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and permissive.68 Notably, Section 2,69 Rule
12 of the then 1988 Revised Rules of Procedure uses the word ‘may’ in defining the right to intervene.
The present rules maintain the permissive nature of intervention in Section 1, Rule 19 of the 1997
Rules of Civil Procedure, which provides as follows:
SEC. 1. Who may intervene.—A person who has a legal interest in the matter in litigation, or in the
success of either of the parties, or an interest against both, or is so situated as to be adversely affected
by a distribution or other disposition of property in the custody of the court or of an officer thereof may,
with leave of court, be allowed to intervene in the action. The court shall consider whether or not the
intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and
whether or not the intervenor's rights may be fully protected in a separate proceeding. 70
43
Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983 while Civil
Case No. 0023-P was pending. Then as now, the rule in case of transfer of interest pendente lite is that
the action may be continued by or against the original party unless the court, upon motion, directs the
person to whom the interest is transferred to be substituted in the action or joined with the original
party.71 The non-inclusion of a necessary party does not prevent the court from proceeding in the
action, and the judgment rendered therein shall be without prejudice to the rights of such necessary
party.72
In light of the foregoing, SIHI’s refusal to intervene in Civil Case No. 0023-P in another court does not
amount to an estoppel that may prevent SIHI from instituting a separate and independent action of its
own.73 This is especially so since it does not appear that a separate proceeding would be inadequate
to protect fully SIHI’s rights.74 Indeed, SIHI’s refusal to intervene is precisely because it considered that
its rights would be better protected in a separate and independent suit.
The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to prevent SIHI
from prosecuting its claims in the present case. As previously discussed, the compromise agreement
and the judgment on compromise in Civil Case No. 0023-P covered only Delta and CBLI and their
respective rights under the 11 promissory notes not assigned to SIHI. In contrast, the instant case
involves SIHI and CBLI and the five promissory notes. There being no identity of parties and subject
matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject promissory notes is no longer
allowed by Article 1484(3)75 of the Civil Code, which prohibits a creditor from suing for the deficiency
after it has foreclosed on the chattel mortgages. SIHI, being the successor-in-interest of Delta, is no
longer allowed to recover on the promissory notes given as security for the purchase price of the 35
buses because Delta had already extrajudicially foreclosed on the chattel mortgages over the said
buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the chattel
mortgages Delta effected cannot prejudice SIHI’s rights. As stated earlier, the assignment of the five
notes operated to create a separate and independent obligation on the part of CBLI to SIHI, distinct
and separate from CBLI’s obligations to Delta. And since there was a previous revocation of Delta’s
authority to collect for SIHI, Delta was no longer SIHI’s collecting agent. CBLI, in turn, knew of the
assignment and Delta’s lack of authority to compromise the subject notes, yet it readily agreed to the
foreclosure. To sanction CBLI’s argument and to apply Article 1484 (3) to this case would work
injustice to SIHI by depriving it of its right to collect against CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No. 84-
23019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No. 0023-P, did
not operate to render the compromise agreement and the foreclosure binding on SIHI. At the time SIHI
effected the levy on execution to satisfy its judgment credit against Delta in Civil Case No. 84-23019,
the said buses already pertained to Delta by virtue of the April 2, 1987 auction sale. CBLI no longer
had any interest in the said buses.1âwphi1 Under the circumstances, we cannot see how SIHI’s
belated acquisition of the foreclosed buses operates to hold the compromise agreement—and
consequently Article 1484(3)—applicable to SIHI as CBLI contends. CBLI’s last contention must,
therefore, fail. We hold that the writ of execution to enforce the judgment of compromise in Civil Case
No. 0023-P and the foreclosure sale of April 2, 1987, done pursuant to the said writ of execution
affected only the eleven (11) other promissory notes covered by the compromise agreement and the
judgment on compromise in Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no basis for SIHI’s application
for a writ of preliminary attachment.76 According to CBLI, it committed no fraud in contracting its
obligation under the five promissory notes because it was financially sound when it issued the said
notes on April 25, 1980.77 CBLI also asserts that at no time did it falsely represent to SIHI that it would
be able to pay its obligations under the five promissory notes. 78 According to CBLI, it was not guilty of
fraudulent concealment, removal, or disposal, or of fraudulent intent to conceal, remove, or dispose of
its properties to defraud its creditors;79 and that SIHI’s bare allegations on this matter were insufficient
for the preliminary attachment of CBLI’s properties.80
The question whether the attachment of the sixteen (16) buses was valid and in accordance with law,
however, has already been resolved with finality by the Court of Appeals in CA-G.R. SP No. 08376. In
its July 31, 1987, decision, the Court of Appeals upheld the legality of the writ of preliminary attachment
SIHI obtained and ruled that the trial court judge acted with grave abuse of discretion in discharging the
writ of attachment despite the clear presence of a determined scheme on the part of CBLI to dispose of
its property. Considering that the said Court of Appeals decision has already attained finality on August
22, 1987, there exists no reason to resolve this question anew. Reasons of public policy, judicial
orderliness, economy and judicial time and the interests of litigants as well as the peace and order of
society, all require that stability be accorded the solemn and final judgments of courts or tribunals of
competent jurisdiction.81
Finally, in the light of the justness of SIHI’s claim against CBLI, we cannot sustain CBLI’s contention
that the Court of Appeals erred in dismissing its counterclaim for lost income and the value of the 16
buses over which SIHI obtained a writ of preliminary attachment. Where the party who requested the
attachment acted in good faith and without malice, the claim for damages resulting from the attachment
of property cannot be sustained.82
WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667 is
AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay respondent State Investment
House, Inc., the value of the five (5) promissory notes subject of the complaint in Civil Case No. 84-
28505 less the proceeds from the sale of the attached sixteen (16) buses. No pronouncement as to
costs.
SO ORDERED.
G.R. No. 167519 January 14, 2015
THE WELLEX GROUP, INC., Petitioner,
vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:
44
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court. The Wellex Group, Inc.
(Wellex) prays that the Decision2 dated July 30, 2004 of the Court of Appeals in CA-GR. CV No. 74850
be reversed and set aside.3
The Court of Appeals affirmed the Decision4 of the Regional Trial Court, Branch 62 of Makati City in
Civil Case No. 99-1407. The Regional Trial Court rendered judgment in favor of U-Land Airlines, Co.,
Ltd. (ULand) and ordered the rescission of the Memorandum of Agreement 5 between Wellex and U-
Land.6
Wellex is a corporation established under Philippine law and it maintains airline operations in the
Philippines.7 It owns shares of stock in several corporations including Air Philippines International
Corporation (APIC), Philippine Estates Corporation (PEC), and Express Savings Bank (ESB).8 Wellex
alleges that it owns all shares of stock of Air Philippines Corporation (APC). 9
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and existing under the laws of
Taiwan, registered to do business . . . in the Philippines." 10 It is engaged in the business of air
transportation in Taiwan and in other Asian countries.11
On May 16, 1998, Wellex and U-Land entered into a Memorandum of Agreement12 (First Memorandum
of Agreement) to expand their respective airline operations in Asia.13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation in Taiwan, Philippines and/or
in other countries in the Asian region, and desires to expand its operation and increase its market
share by, among others, pursuing a long-term involvement in the growing Philippine airline industry;
WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets, a Memorandum of Agreement on ______, a certified copy of which is attached hereto as
Annex "A" and is hereby made an integral part hereof, which sets forth, among others, the basis for
WELLEX’s present ownership of shares in Air Philippines International Corporation. WHEREAS, the
parties recognize the opportunity to develop a long-term profitable relationship by combining such of
their respective resources in an expanded airline operation as well as in property development and in
other allied business activities in the Philippines, and desire to set forth herein the basic premises and
their understanding with respect to their joint cooperation and undertakings.14
In the First Memorandum of Agreement, Wellex and U-Land agreed to develop a long-term business
relationship through the creation of joint interest in airline operations and property development
projects in the Philippines.15 This long-term business relationship would be implemented through the
following transactions, stated in Section 1 of the First Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES
INTERNATIONAL CORPORATION ("APIC") equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less than 1,050,000,000 shares . . . [;]
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES
CORPORATION ("PEC") equivalent to at least 35% of the outstanding capital stock of PEC,
but in any case, not less than 490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement with PEC . . . [; and]
(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS
SAVINGS BANK ("ESB") up to 40% of the outstanding capital stock of ESB . . . under terms
to be mutually agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from its execution date, Wellex and U-
Land would execute a share purchase agreement covering U-Land’s acquisition of the shares of stock
of both APIC (APIC shares) and PEC (PEC shares).17 In this share purchase agreement, U-Land
would purchase from Wellex its APIC shares and PEC shares.18
Wellex and U-Land agreed to an initial purchase price of P0.30 per share of APIC and 0.65 per share
of PEC. However, they likewise agreed that the final price of the shares of stock would be reflected in
the actual share purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC shares would be paid upon the
execution of the share purchase agreement and Wellex’s delivery of the stock certificates covering the
shares of stock. The transfer of APIC shares and PEC shares to U-Land was conditioned on the full
remittance of the final purchase price as reflected in the share purchase agreement. Further, the
transfer was conditioned on the approval of the Securities and Exchange Commission of the issuance
of the shares of stock and the approval by the Taiwanese government of U-Land’s acquisition of these
shares of stock.20
Thus, Section 2 of the First Memorandum of Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by
mutual agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement ("SHPA")
covering the acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the parties, the purchase price for
the APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that
for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution
of the SHPA against delivery of the Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price
reflected in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC)
shall have approved the issuance of the Subject Shares; and (iii) any required approval by the
Taiwanese government of the acquisition by U-LAND of the Subject Shares shall likewise have been
obtained.21
II. Operation and management of APIC/PEC/APC
45
U-Land was "entitled to a proportionate representation in the Board of Directors of APIC and PEC in
accordance with Philippine law."22 Operational control of APIC and APC would be exercised jointly by
Wellex and U-Land "on the basis of mutual agreement and consultations." 23 The parties intended that
U-Land would gain primary control and responsibility for the international operations of APC.24 Wellex
manifested that APC is a subsidiary of APIC in the second preambular clause of the First
Memorandum of Agreement.25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a proportionate representation
in the Board of Directors of APIC and PEC in accordance with Philippine law. For this purpose,
WELLEX shall cause the resignation of its nominated Directors in APIC and PEC to accommodate U-
LAND’s pro rata number of Directors. Subject to applicable Philippine law and regulations, operational
control of APIC and Air Philippines Corporation ("APC") shall be lodged jointly to WELLEX and U-
LAND on the basis of mutual agreement and consultations. Further, U-LAND may second technical
and other consultants into APIC and/or APC with the view to increasing service, productivity and
efficiency, identifying and implementing profit-service opportunities, developing technical capability and
resources, and installing adequate safety systems and procedures. In addition, U-LAND shall arrange
for the lease by APC of at least three (3) aircrafts owned by ULAND under such terms as the parties
shall mutually agree upon. It is the intent of the parties that U-LAND shall have primary control and
responsibility for APC’s international operations.26
III. Entering into and funding a joint development agreement
Wellex and U-Land also agreed to enter into a joint development agreement simultaneous with the
execution of the share purchase agreement. The joint development agreement shall cover housing and
other real estate development projects.27
U-Land agreed to remit the sum ofUS$3 million not later than May 22, 1998. This sum was to serve as
initial funding for the development projects that Wellex and U-Land were to undertake pursuant to the
joint development agreement. In exchange for the US$3 million, Wellex would deliver stock certificates
covering 57,000,000 PEC shares to U-Land.28
The execution of a joint development agreement was also conditioned on the execution of a share
purchase agreement.29
Section 4 of the First Memorandum of Agreement reads:
4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA, U-LAND
and PEC shall execute a joint development agreement ("JDA") to pursue property development
projects in the Philippines. The JDA shall cover specific housing and other real estate development
projects as the parties shall agree. All profits derived from the projects covered by the JDA shall be
shared equally between ULAND and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of
US$3.0 million as initial funding for the aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance with Section 9 below. 30
In case of conflict between the provisions of the First Memorandum of Agreement and the provisions of
the share purchase agreement or its implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated otherwise or the context of any
agreement between the parties would reveal a different intent. 31 Thus, in Section 6 of the First
Memorandum of Agreement:
6. Primacy of Agreement. – It is agreed that in case of conflict between the provisions of this
Agreement and those of the SHPA and the implementing agreements of the SHPA, the provisions of
this Agreement shall prevail, unless the parties specifically state otherwise, or the context clearly reveal
a contrary intent.32
Finally, Wellex and U-Land agreed that if they were unable to agree on the terms of the share
purchase agreement and the joint development agreement within 40 days from signing, then the First
Memorandum of Agreement would cease to be effective. 33
In case no agreements were executed, the parties would be released from their respective
undertakings, except that Wellex would be required to refund within three (3) days the US$3 million
given as initial funding by U-Land for the development projects. If Wellex was unable to refund the
US$3 million to U-Land, U-Land would have the right to recover on the 57,000,000 PEC shares that
would be delivered to it.34 Section 9 of the First Memorandum of Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA
within forty (40) days from date hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million provided under Section 4
within three (3) days therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000
PEC shares delivered to U-LAND under Section 4.35
The First Memorandum of Agreement was signed by Wellex Chairman and President William T.
Gatchalian (Mr. Gatchalian) and U-Land Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998.36
Annex "A" or the Second Memorandum of Agreement
Attached and made an integral part of the First Memorandum of Agreement was Annex "A," as stated
in the second preambular clause. It is a document denoted as a "Memorandum of Agreement" entered
into by Wellex, APIC, and APC.37
The Second Memorandum of Agreement states:
This Memorandum of Agreement, made and executed this ___th day of ______ at Makati City, by and
between:
THE WELLEX GROUP, INC., a corporation duly organized and existing under the laws of the
Philippines, with offices at 22F Citibank Tower, 8741 Paseo de Roxas, Makati City (hereinafter referred
to as "TWGI"),
AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM PACIFIC, INC.), likewise a
corporation duly organized and existing under the laws of the Philippines, with offices at 8F Rufino
Towers, Ayala Avenue, Makati City (hereinafter referred to as "APIC"),
- and –
46
AIR PHILIPPINES CORPORATION, corporation duly organized and existing under the laws of the billion to ₱3.5 _____ (illegible in rollo) shall have been approved by the Securities
Philippines, with offices at Multinational Building, Ayala Avenue, Makati City (hereinafter referred to as and Exchange Commission.
"APC").
IN WITNESS WHEREOF, the parties have caused these presents to be signed on
W I T N E S S E T H: That - the date _____ (illegible in rollo) first above written. 38 (Emphasis supplied)

WHEREAS, TWGI is the registered and beneficial owner, or has otherwise acquired _____ (illegible in
rollo) rights to the entire issued and outstanding capital stock (the "APC SHARES") of AIR
PHILIPPINES CORPORATION ("APC") and has made stockholder advances to APC for the _____
(illegible in rollo) of aircraft, equipment and for working capital used in the latter’s operations (the
"_____ (illegible in rollo) ADVANCES").
This Second Memorandum of Agreement was allegedly incorporated into the First Memorandum of
Agreement as a "disclosure to [U-Land] [that] . . . [Wellex] was still in the process of acquiring and
consolidating its title to shares of stock of APIC."39 It "included the terms of a share swap whereby
[Wellex] agreed to transfer to APIC its shareholdings and advances to APC in exchange for the
issuance by APIC of shares of stock to [Wellex]."40

WHEREAS, APIC desires to obtain full ownership and control of APC, including all of _____ (illegible in
rollo) assets, franchise, goodwill and operations, and for this purpose has offered to acquire the _____
(illegible in rollo) 302SHARES of TWGI in APC, including the APC ADVANCES due to TWGI from
APC, with _____ (illegible in rollo) of acquiring all the assets, franchise, goodwill and operations of
APC; and TWGI has _____ (illegible in rollo) to the same in consideration of the conveyance by APIC
to TWGI of certain investments, _____ (illegible in rollo) issuance of TWGI of shares of stock of APIC
in exchange for said APC SHARES and the _____ (illegible in rollo) ADVANCES, as more particularly
described hereunder.
NOW, THEREFORE, the parties agree as follows:
The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC President Salud,41 and
APC President Augustus C. Paiso.42 It was not dated, and no place was indicated as the place of
signing.43 It was not notarized either, and no other witnesses signed the document.44
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not able to enter into any
share purchase agreement although drafts were exchanged between the two.
Despite the absence of a share purchase agreement, U-Land remitted to Wellex a total of
US$7,499,945.00.46These were made in varying amounts and through the issuance of post-dated
checks.47 The dates of remittances were the following:

1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange for the _____
(illegible in rollo) by APIC to TWGI of investment shares of APIC in Express Bank, Date Amount (in US$)
Petro Chemical _____ (illegible in rollo) of Asia Pacific, Republic Resources & June 30, 1998 990,000.00
Development Corporation and Philippine _____ (illegible in rollo) Corporation (the
"APIC INVESTMENTS"). July 2, 1998 990,000.00
20,000.00
2. TWGI likewise agrees to transfer the APC SHARES to APIC in exchange solely
_____ (illegible in rollo) the issuance by APIC of One Billion Seven Hundred Ninety- July 30, 1998 990,000.00
Seven Million Eight Hundred Fifty Seven Thousand Three Hundred Sixty Four 490,000.00
(1,797,857,364) shares of its capital stock of a _____ (illegible in rollo) value of
₱1.00 per share (the "APIC SHARES"), taken from the currently authorized but 490,000.00
_____ (illegible in rollo) shares of the capital stock of APIC, as well as from the August 1, 1998 990,000.00
increase in the authorized capital _____ (illegible in rollo) of APIC from ₱2.0 billion to
₱3.5 billion. 490,000.00
490,000.00
3. It is the basic understanding of the parties hereto that the transfer of the APC
_____ (illegible in rollo) as well as the APC ADVANCES to APIC shall be intended to August 3, 1998 990,000.00
enable APIC to obtain _____ (illegible in rollo) and control of APC, including all of 70,000.00
APC’s assets, franchise, goodwill and _____ (illegible in rollo).
September 25, 1998 399,972.50
4. Unless the parties agree otherwise, the effectivity of this Agreement and transfers 99, 972.50
_____ (illegible in rollo) APC ADVANCES in exchange for the APIC INVESTMENTS,
and the transfer of the _____ (illegible in rollo) SHARES in exchange for the Total US$7,499,945.0048
issuance of new APIC SHARES, shall be subject to _____ (illegible in rollo) due
diligence as the parties shall see fit, and the condition subsequent that the _____ Wellex acknowledged the receipt of these remittances in a confirmation letter addressed to U-Land
(illegible in rollo) for increase in the authorized capital stock of the APIC from ₱2.0 dated September 30, 1998.49

47
According to Wellex, the parties agreed to enter into a security arrangement. If the sale of the shares of
stock failed to push through, the partial payments or remittances U-Land made were to be secured by
these shares of stock and parcels of land.50 This meant that U-Land could recover the amount it paid to
Wellex by selling these shares of stock and land titles or using them to generate income.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock certificates representing
60,770,000 PEC shares and 72,601,000 APIC shares.51 These were delivered to U-Land on July 1,
1998, September 1, 1998, and October 1, 1998.52
In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT) Nos. T-216769, T-216771,
T-228231, T-228227, T-211250, and T-216775 covering properties owned by Westland Pacific
Properties Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910, T-120250, T-
1114398, and T-120772 covering properties owned by Rexlon Realty Group, Inc. 53 On October 1,
1998,54 U-Land received a letter from Wellex, indicating a list of stock certificates that the latter was
giving to the former by way of "security."55
Despite these transactions, Wellex and U-Land still failed to enter into the share purchase agreement
and the joint development agreement.
In the letter56 dated July 22, 1999, 10 months57 after the last formal communication between the two
parties, U-Land, through counsel, demanded the return of the US$7,499,945.00. 58 This letter was sent
14 months after the signing of the First Memorandum of Agreement.
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to enter into the. . . Share
Purchase Agreement."59 As far as U-Land was concerned, the First Memorandum of Agreement was
no longer in effect, pursuant to Section 9.60 As such, U-Land offered to return all the stock certificates
covering APIC shares and PEC shares as well as the titles to real property given by Wellex as security
for the amount remitted by U-Land.61
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-Land’s claims. Counsel for Wellex
stated that the two parties carried out several negotiations that included finalizing the terms of the
share purchase agreement and the terms of the joint development agreement. Wellex asserted that
under the joint development agreement, U-Land agreed to remit the sum of US$3 million by May
22,1998 as initial funding for the development projects.63
Wellex further asserted that it conducted extended discussions with U-Land in the hope of arriving at
the final terms of the agreement despite the failure of the remittance of the US$3 million on May 22,
1998.64 That remittance pursuant to the joint development agreement "would have demonstrated [U-
Land’s] good faith in finalizing the agreements."65
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually agreed on the terms of both
[the share purchase agreement and the joint development agreement.]" 66 Wellex believed that the
parties had already "gone beyond the ‘intent’ stage of the [First Memorandum of Agreement] and [had
already] effected partial implementation of an over-all agreement."67 U-Land even delivered a total of
12 post-dated checks to Wellex as payment for the APIC shares and PEC shares.68 "[Wellex] on the
other hand, had [already] delivered to[U-Land] certificates of stock of APEC [sic] and PEC as well as
various land titles to cover actual remittances." 69 Wellex alleged that the agreements were not finalized
because U-Land was "forced to suspend operations because of financial problems spawned by the
regional economic turmoil."70
Thus, Wellex maintained that "the inability of the parties to execute the [share purchase agreement]
and the [joint development agreement] principally arose from problems at [U-Land’s] side, and not due
to [Wellex’s] ‘unjustified refusal to enter into [the] [share purchase agreement][.]’" 71
On July 30, 1999, U-Land filed a Complaint72 praying for rescission of the First Memorandum of
Agreement and damages against Wellex and for the issuance of a Writ of Preliminary
Attachment.73 From U-Land’s point of view, its primary reason for purchasing APIC shares from Wellex
was APIC’s majority ownership of shares of stock in APC (APC shares).74 After verification with the
Securities and Exchange Commission, U-Land discovered that "APIC did not own a single share of
stock in APC."75 U-Land alleged that it repeatedly requested that the parties enter into the share
purchase agreement.76 U-Land attached the demand letter dated July 22, 1999 to the
Complaint.77 However, the 40-day period lapsed, and no share purchase agreement was finalized.78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still refused to return the amount
of US$7,499,945.00 while refusing to enter into the share purchase agreement. 79 U-Land stated that it
was induced by Wellex to enter into and execute the First Memorandum of Agreement, as well as
release the amount of US$7,499,945.00.80
In its Answer with Compulsory Counterclaim,81 Wellex countered that U-Land had no cause of
action.82 Wellex maintained that under the First Memorandum of Agreement, the parties agreed to
enter into a share purchase agreement and a joint development agreement. 83 Wellex alleged that to
bring the share purchase agreement to fruition, it would have to acquire the corresponding shares in
APIC.84 It claimed that U-Land was fully aware that the former "still ha[d] to consolidate its title over
these shares."85 This was the reason for Wellex’s attachment of the Second Memorandum of
Agreement to the First Memorandum of Agreement. Wellex attached the Second Memorandum of
Agreement as evidence to refute U-Land’s claim of misrepresentation.86
Wellex further alleged that U-Land breached the First Memorandum of Agreement since the payment
for the shares was to begin during the 40-day period, which began on May 16, 1998.87 In addition, U-
Land failed to remit the US$3 million by May 22, 1998 that would serve as initial funding for the
development projects.88 Wellex claimed that the remittance of the US$3 million on May 22, 1998 was a
mandatory obligation on the part of U-Land.89 Wellex averred that it presented draft versions of the
share purchase agreement, which were never finalized.90 Thus, it believed that there was an implied
extension of the 40-day period within which to enter into the share purchase agreement and the joint
development agreement since U-Land began remitting sums of money in partial payment for the
purchase of the shares of stock.91
In its counterclaim against U-Land, Wellex alleged that it had already set in motion building and
development of real estate projects on four (4) major sites in Cavite, Iloilo, and Davao. It started initial
construction on the basis of its agreement with U-Land to pursue real estate development projects.92
Wellex claims that, had the development projects pushed through, the parties would have shared
equally in the profits of these projects.93 These projects would have yielded an income of
₱2,404,948,000.00, as per the study Wellex conducted, which was duly recognized by U-Land.94 Half
of that amount, ₱1,202,474,000.00, would have redounded to Wellex.95 Wellex, thus, prayed for the
rescission of the First Memorandum of Agreement and the payment of ₱1,202,474,000 in damages for
loss of profit.96 It prayed for the payment of moral damages, exemplary damages, attorney’s fees, and
costs of suit.97
48
In its Reply,98 U-Land denied that there was an extension of the 40-day period within which to enter
into the share purchase agreement and the joint development agreement. It also denied requesting for
an extension of the 40-day period. It further raised that there was no provision in the First
Memorandum of Agreement that required it to remit payments for Wellex’s shares of stock in APIC and
PEC within the 40-day period. Rather, the remittances were supposed to begin upon the execution of
the share purchase agreement.99
As for the remittance of the US$3 million, U-Land stated that the issuance of this amount on May 22,
1998 was supposed to be simultaneously made with Wellex’s delivery of the stock certificates for
57,000,000 PEC shares. These stock certificates were not delivered on that date.100
With regard to the drafting of the share purchase agreement, U-Land denied that it was Wellex that
presented versions of the agreement. U-Land averred that it was its own counsel who drafted versions
of the share purchase agreement and the joint development agreement, which Wellex refused to
sign.101
U-Land specifically denied that it had any knowledge prior to or during the execution of the First
Memorandum of Agreement that Wellex still had to "consolidate its title over" its shares in APIC. U-
Land averred that it relied on Wellex’s representation that it was a majority owner of APIC shares and
that APIC owned a majority of APC shares.102
Moreover, U-Land denied any knowledge of the initial steps that Wellex undertook to pursue the
development projects and denied any awareness of a study conducted by Wellex regarding the
potential profit of these projects.103
The case proceeded to trial.
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Executive Officer, as its sole
witness.104 Mr. Tseng testified that "[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan
invited [U-Land] to join in the operation of his airline company[.]" 105 U-Land did not accept the offer at
that time.106 During the first quarter of 1998, Mr. Gatchalian "went to Taiwan and invited [U-Land] to
invest in Air Philippines[.]"107 This time, U-Land alleged that subsequent meetings were held where Mr.
Gatchalian, representing Wellex, "claimed ownership of a majority of the shares of APIC and
ownership by APIC of a majority of the shares of [APC,] a domestic carrier in the
Philippines."108Wellex, through Mr. Gatchalian, offered to sell to U-Land PEC shares as well.109
According to Mr. Tseng, the parties agreed to enter into the First Memorandum of Agreement after
their second meeting.110 Mr. Tseng testified that under this memorandum of agreement, the parties
would enter into a share purchase agreement "within forty (40) days from its execution which [would]
put into effect the sale of the shares [of stock] of APIC and PEC[.]" 111 However, the "[s]hare [p]urchase
[a]greement was not executed within the forty-day period despite the draft . . . given [by U-Land to
Wellex]."112
Mr. Tseng further testified that it was only after the lapse of the 40-day period that U-Land discovered
that Wellex needed money for the transfer of APC shares to APIC. This allegedly shocked U-Land
since under the First Memorandum of Agreement, APIC was supposed to own a majority of APC
shares. Thus, U-Land remitted to Wellex a total of US$7,499,945.00 because of its intent to become
involved in the aviation business in the Philippines. These remittances were confirmed by Wellex
through a confirmation letter. Despite the remittance of this amount, no share purchase agreement was
entered into by the parties.113
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President of Wellex. She admitted
her knowledge of the First Memorandum of Agreement as she was involved in its drafting. She testified
that the First Memorandum of Agreement made reference, under its second preambular clause, to the
Second Memorandum of Agreement entered into by Wellex, APIC, and APC. She testified that under
the First Memorandum of Agreement, U-Land’s purchase of APIC shares and PEC shares from Wellex
would take place within 40 days, with the execution of a share purchase agreement.114
According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr. Wang requested
sometime in June of 1998 for an extension for the execution of the share purchase agreement and the
remittance of the US$3 million. As proof that Mr. Wang made this request, Ms. Ting testified that Mr.
Wang sent several post-dated checks to cover the payment of the APIC shares and PEC shares and
the initial funding of US$3 million for the joint development agreement. She testified that Mr. Wang
presented a draft of the share purchase agreement, which Wellex rejected. Wellex drafted a new
version of the share purchase agreement.115 However, the share purchase agreement was not
executed because during the period of negotiation, Wellex learned from other sources that U-Land
"encountered difficulties starting October of 1998."116 Ms. Ting admitted that U-Land made the
remittances to Wellex in the amount of US$7,499,945.00. 117
Ms. Ting testified that U-Land was supposed to make an initial payment of US$19 million under the
First Memorandum of Agreement. However, U-Land only paid US$7,499,945.00. The total payments
should have amounted to US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a meeting to thresh out the
problems of the First Memorandum of Agreement, but U-Land did not reply. Instead, Wellex only
received communication from U-Land regarding their subsequent negotiations through the latter’s
demand letter dated July 22, 1999. In response, Wellex wrote to U-Land requesting another meeting to
discuss the demands. However, U-Land already filed the Complaint for rescission and caused the
attachment against the properties of Wellex, causing embarrassment to Wellex. 119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati City held that rescission of the
First Memorandum of Agreement was proper:
The first issue must be resolved in the negative. Preponderance of evidence leans in favor of plaintiff
that it is entitled to the issuance of the writ of preliminary attachment. Plaintiff’s evidence establishes
the facts that it is engaged in the airline business in Taiwan, was approached by defendant, through its
Chairman William Gatchalian, and was invited by the latter to invest in an airline business in the
Philippines, Air Philippines Corporation (APC); that plaintiff became interested in the invitation of
defendant; that during the negotiations between plaintiff and defendant, defendant induced plaintiff to
buy shares in Air Philippines International Corporation (APIC) since it owns majority of the shares of
APC; that defendant also induced plaintiff to buy shares of APIC in Philippine Estates Corporation
(PEC); that the negotiations between plaintiff and defendant culminated into the parties executing a
MOA (Exhs. "C" to "C-3", also Exh. "1"); that in the second "Whereas" clause of the MOA, defendant
represented that it has a current airline operation through its majority-owned subsidiary APIC, that
under the MOA, the parties were supposed to enter into a Share Purchase Agreement (SPA) within
forty (40) days from May 16, 1998, the date the MOA in order to effect the transfer of APIC and PEC
shares of defendant to plaintiff; that plaintiff learned from defendant that APIC does not actually own a
single share in APC; that plaintiff verified with the Securities and Exchange Commission (SEC), by
obtaining a General Information Sheet therefrom (Exh. "C-Attachment"); that APIC does not in fact own
APC; that defendant induced plaintiff to still remit its investment to defendant, which plaintiff did as
admitted by defendant per its Confirmation Letter (Exh. "D") in order that APC shares could be
transferred to APIC; that plaintiff remitted a total of US$7,499,945.00 to defendant; and that during the
49
forty-day period stipulated in the MOA and even after the lapse of the said period, defendant has not
entered into the SPA, nor has defendant caused the transfer of APC shares to APIC.
In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s misrepresentation that APIC owns
APC is made clear, as follows:
"WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation (Exh. "C") and the latter’s
subsidiary, Air Philippines Corporation, and in like manner also desires to expand its operation in the
Asian regional markets; x x x" (Second Whereas of Exh. "C")
On the other hand, defendant’s evidence failed to disprove plaintiff’s evidence. The testimony of
defendant’s sole witness Elvira Ting, that plaintiff knew at the time of the signing of the MOA that APIC
does not own a majority of the shares of APC because another Memorandum of Agreement was
attached to the MOA (Exh "1") pertaining to the purchase of APC shares by APIC is unavailing. The
second "Whereas" clause of the MOA leaves no room for interpretation. . . . The second MOA
purportedly attached as Annex "A" of this MOA merely enlightens the parties on the manner by which
APIC acquired the shares of APC. Besides, . . . the second MOA was not a certified copy and did not
contain a marking that it is an Annex "A" when it was supposed to be an Annex "A" and a certified copy
per the MOA between plaintiff and defendant. As can be also gathered from her testimony, Ms. Ting
does not have personal knowledge that plaintiff was not informed that APIC did not own shares of APC
during the negotiations as she was not present during the negotiations between plaintiff and
defendant’s William Gatchalian. Her participation in the agreement between the parties [was] merely
limited to the preparation of the documents to be signed. Ms. Ting testified, as follows:
"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.
Q And you are just making your statement that U-Land knew about the intended transfer of shares
from APC to APIC because of this WHEREAS CLAUSE and the Annex to this Memorandum of
Agreement?
A Yes, it was part of the contract."
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendant’s fraud in the performance of its obligation under the MOA is further revealed when Ms. Ting
testified on cross-examination that notwithstanding the remittances made by plaintiff in the total
amountn [sic] of US$7,499, 945.00 to partially defray the cost of transferring APC shares to APIC even
as of the year 2000, as follows:
"Q Ms. Ting, can you please tell the Court if you know who owns shares of Air Philippines Corporation
at this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and certain individual.
Q How much shares of Air Philippines Corporation is owned by Wellex Group?
A Around twenty...at this moment around twenty five percent (25%).
Q Can you tell us if you know who are the other owners of the shares of Air Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the owners?
A As of this moment, no sir."
(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances of plaintiff, even if no SPA was
executed yet between the parties, to effect the transfer of APC shares to APIC is admitted by its same
witness also in this wise:
"Q You said that remittances were made to the Wellex Group, Incorporated by plaintiff for the period
from June 1998 to September 1998[,] is that correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total amount of more than seven million
dollars, did you ever know if plaintiff asked for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of AIR PHILIPPINES
CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.
Q Even up to the time that plaintiff U-Land stopped the remittances sometime in September 1998 you
have not effected the transfer of shares of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
INTERNATIONCAL [sic] CORPORATION[,] am I correct?
A APC to APIC, well at that time it’s still in the process.
Q In fact, Madam Witness, is it not correct for me to say that one of the reasons why U-Land
Incorporated was convinced to remit the amounts of money totalling seven million dollars plus,
was that your company said that it needed funds to effect these transfers, is that correct?
A Yes, sir."
(lbid, pp. 25-29)
50
As the evidence adduced by the parties stand, plaintiff has established the fact that it had made
remittances in the total amount of US$7,499,945.00 to defendant in order that defendant will make
good its representation that APC is a subsidiary of APIC. The said remittances are admitted by
defendant.
Notwithstanding the said remittances, APIC does not own a single share of APC. On the other hand,
defendant could not even satisfactorily substantiate its claim that at least it had the intention to cause
the transfer of APC shares to APIC. [D]efendant obviously did not enter into the stipulated SPA
because it did not have the shares of APC transferred to APIC despite its representations. Under the
circumstances, it is clear that defendant fraudulently violated the provisions of the MOA. 120 (Emphasis
supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court.121 In its July 30, 2004
Decision, the Court of Appeals held that the Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter itself asked for the rescission
of the MOA. Thus, in effect, it prays for the return of what has been given or paid under the MOA, as
the law creates said obligation to return the things which were the object of the contract, and the same
could be carried out only when he who demands rescission can return whatever he may be obliged to
restore. The law says:
"Rescission creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore."
Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to return what has been paid
to it. Further, appellant’s claim that the lower court erred in ruling for the rescission of the MOA is
absurd and ridiculous because rescission thereof is prayed for by the former. . . . This Court agrees
with the lower court that appellee is the injured party in this case, and therefore is entitled to rescission,
because the rescission referred to here is predicated on the breach of faith by the appellant which
breach is violative of the reciprocity between the parties. It is noted that appellee has partly complied
with its own obligation, while the appellant has not. It is, therefore, the right of the injured party to ask
for rescission because the guilty party cannot ask for rescission.
The lower court . . . correctly ruled that:
". . . This Court agrees with plaintiff that defendant’s misrepresentations regarding APIC’s not owning
shares in APC vitiates its consent to the MOA. Defendant’s continued misrepresentation that it will
cause the transfer of APC shares in APIC inducing plaintiff to remit money despite the lapse of the
stipulated forty day period, further establishes plaintiff’s right to have the MOA rescinded.
Section 9 of the MOA itself provides that in the event of the non-execution of an SPA within the 40 day
period, or within the extensions thereof, the payments made by plaintiff shall be returned to it, to wit:
"9 Validity.- In the event that the parties are unable to agree on the terms of the SHPA and/or JDA
within forty (40) days from the date hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million under Section 4 within three
(3) days therefrom, otherwise U-LAND shall have the right to recover the 57,000,000 PEC shares
delivered to ULAND under Section 4."
Clearly, the parties were not able to agree on the terms of the SPA within and even after the lapse of
the stipulated 40 day period. There being no SPA entered into by and between the plaintiff and
defendant, defendant’s return of the remittances [of] plaintiff in the total amount of US$7,499,945 is
only proper, in the same vein, plaintiff should return to defendant the titles and certificates of stock
given to it by defendant.122 (Citations omitted)
Hence, this Petition was filed.
Petitioner’s Arguments
Petitioner Wellex argues that contrary to the finding of the Court of Appeals, respondent U-Land was
not entitled to rescission because the latter itself violated the First Memorandum of Agreement.
Petitioner Wellex states that respondent U-Land was actually bound to pay US$17.5 million for all of
APIC shares and PEC shares under the First Memorandum of Agreement and the US$3 million to
pursue the development projects under the joint development agreement. In sum, respondent U-Land
was liable to petitioner Wellex for the total amount of US$20.5 million. Neither the Court of Appeals nor
the Regional Trial Court made any mention of the legal effect of respondent U-Land’s failure to pay the
full purchase price.123
On the share purchase agreement, petitioner Wellex asserts that its obligation to deliver the totality of
the shares of stock would become demandable only upon remittance of the full purchase price of
US$17.5 million.124 The full remittance of the purchase price of the shares of stock was a suspensive
condition for the execution of the share purchase agreement and delivery of the shares of stock.
Petitioner Wellex argues that the use of the term "upon" in Section 2 of the First Memorandum of
Agreement clearly provides that the full payment of the purchase price must be given "simultaneously"
or "concurrent" with the execution of the share purchase agreement.125
Petitioner Wellex raises that the Court of Appeals erred in saying that the rescission of the First
Memorandum of Agreement was proper because petitioner Wellex itself asked for this in its Answer
before the trial court.126 It asserts that "there can be no rescission of a non-existent obligation, such as
[one] whose suspensive condition has not yet happened[,]"127 as held in Padilla v. Spouses
Paredes.128 Citing Villaflor v. Court of Appeals129 and Spouses Agustin v. Court of Appeals,130 it argues
that "the vendor. . . has no obligation to deliver the thing sold. . . if the buyer. . . fails to fully pay the
price as required by the contract."131 In this case, petitioner Wellex maintains that respondent U-Land’s
remittance of US$7,499,945.00 constituted mere partial performance of a reciprocal
obligation.132 Thus, respondent U-Land was not entitled to rescission. The nature of this reciprocal
obligation requires both parties’ simultaneous fulfillment of the totality of their reciprocal obligations and
not only partial performance on the part of the allegedly injured party.
As to the finding of misrepresentations, petitioner Wellex raises that a seller may sell a thing not yet
belonging to him at the time of the transaction, provided that he will become the owner at the time of
delivery so that he can transfer ownership to the buyer. Contrary to the finding of the lower courts,
petitioner Wellex was obliged to be the owner of the shares only when the time came to deliver these
to respondent U-Land and not during the perfection of the contract itself.133
Finally, petitioner Wellex argues that respondent U-Land could have recovered through the securities
given to the latter.134 Petitioner Wellex invokes Suria v. Intermediate Appellate Court,135 which held that
51
an "action for rescission is not a principal action that is retaliatory in character [under Article 1191 of
the Civil Code, but] a subsidiary one which. . . is available only in the absence of any other legal
remedy [under Article 1384 of the Civil Code]."136Respondent’s Arguments
Respondent U-Land argues that it was the execution of the share purchase agreement that would
result in its purchase of the APIC shares and PEC shares. 137 It was not the full remittance of the
purchase price of the shares of stock as indicated in the First Memorandum of Agreement, as alleged
by petitioner Wellex.138 Respondent U-Land asserts that the First Memorandum of Agreement provides
that the exact number of APIC shares and PEC shares to be purchased under the share purchase
agreement and the final price of these shares were not yet determined by the parties. 139
Respondent U-Land reiterates that it was petitioner Wellex that requested for the remittances
amounting to US$7,499,945.00 to facilitate APIC’s purchase of APC shares. 140 Thus, it was petitioner
Wellex’s refusal to enter into the share purchase agreement that led to respondent U-Land demanding
rescission of the First Memorandum of Agreement and the return of the
US$7,499,945.00.141 Respondent U-Land further argues before this court that petitioner Wellex failed
to present evidence as to how the money was spent, stating that Ms. Ting admitted that the Second
Memorandum of Agreement "was not consummated at any time." 142 Respondent U-Land raises that
petitioner Wellex was guilty of fraud by making it appear that APC was a subsidiary of APIC.143 It
reiterates that, as an airline company, its primary reason for entering into the First Memorandum of
Agreement was to acquire management of APC, another airline company. 144 Under Article 1191 of the
Civil Code, respondent U-Land, as the injured party, was entitled to rescission due to the fatal
misrepresentations committed by petitioner Wellex.145
Respondent U-Land further asserts that the "shareholdings in APIC and APC were never in
question."146 Rather, it was petitioner Wellex’s misrepresentation that APIC was a majority shareholder
of APC that compelled it to enter into the agreement.147
As for Suria, respondent U-land avers that this case was inapplicable because the pertinent provision
in Suria was not Article 1191 but rescission under Article 1383 of the Civil Code. 148 The "rescission"
referred to in Article 1191 referred to "resolution" of a contract due to a breach of a mutual obligation,
while Article 1384 spoke of "rescission" because of lesion and damage. 149 Thus, the rescission that is
relevant to the present case is that of Article 1191, which involves breach in a reciprocal obligation. It
is, in fact, resolution, and not rescission as a result of fraud or lesion, as found in Articles 1381, 1383,
and 1384 of the Civil Code.150
The Issue
The question presented in this case is whether the Court of Appeals erred in affirming the Decision of
the Regional Trial Court that granted the rescission of the First Memorandum of Agreement prayed for
by U-Land.
The Petition must be denied.
I Section 1 of the First Memorandum of Agreement reads:
The requirement of a share
purchase agreement
The Civil Code provisions on the interpretation of contracts are controlling to this case, particularly
Article 1370, which reads:
ART. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.
In Norton Resources and Development Corporation v. All Asia Bank Corporation: 151
The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of
the Civil Code: "[i]f the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control." This provision is akin to the
"plain meaning rule" applied by Pennsylvania courts, which assumes that the intent of the parties to an
instrument is "embodied in the writing itself, and when the words are clear and unambiguous the intent
is to be discovered only from the express language of the agreement." It also resembles the "four
corners" rule, a principle which allows courts in some cases to search beneath the semantic surface for
clues to meaning. A court's purpose in examining a contract is to interpret the intent of the contracting
parties, as objectively manifested by them. The process of interpreting a contract requires the court to
make a preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written terms of
the contract are not ambiguous and can only be read one way, the court will interpret the contract as a
matter of law. If the contract is determined to be ambiguous, then the interpretation of the contract is
left to the court, to resolve the ambiguity in the light of the intrinsic evidence. 152 (Emphasis supplied)
As held in Norton, this court must first determine whether a provision or stipulation contained in a
contract is ambiguous. Absent any ambiguity, the provision on its face will be read as it is written and
treated as the binding law of the parties to the contract.
The parties have differing interpretations of the terms of the First Memorandum of Agreement.
Petitioner Wellex even admits that "the facts of the case are fairly undisputed [and that] [i]t is only the
parties’ respective [understanding] of these facts that are not in harmony."153
The second preambular clause of the First Memorandum of Agreement reads:
WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets; a Memorandum of Agreement on ______, a certified copy of which is attached hereto as
Annex "A" and is hereby made an integral part hereof, which sets forth, among others, the basis for
WELLEX’s present ownership of shares in Air Philippines International Corporation. 154 (Emphasis
supplied)
I. Basic Agreement. - The parties agree to develop a long-term business relationship initially through
the creation of joint interest in airline operations as well as in property development projects in the
Philippines to be implemented as follows:
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 (a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES
INTERNATIONAL CORPORATION ("APIC") equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less than 1,050,000,000 shares (the "APIC
Shares").
(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES
CORPORATION ("PEC") equivalent to at least 35% of the outstanding capital stock of PEC,
but in any case, not less than 490,000,000 shares (the "PEC Shares").
(c) U-LAND shall enter into a joint development agreement with PEC to jointly pursue property
development projects in the Philippines.
(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS
SAVINGS BANK ("ESB") up to 40% of the outstanding capital stock of ESB (the "ESB
Shares") under terms to be mutually agreed.155
The First Memorandum of Agreement contained the following stipulations regarding the share
purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by
mutual agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement ("SHPA")
covering the acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject
Shares"). Without prejudice to any subsequent agreement between the parties, the purchase price for
the APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that
for the PEC Shares at SIXTY FIVE CENTAVOS (P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution
of the SHPA against delivery of the Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price
reflected in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC)
shall have approved the issuance of the Subject Shares; and (iii) any required approval by the
Taiwanese government of the acquisition by U-LAND of the Subject Shares shall likewise have been
obtained.156 (Emphasis supplied)
As for the joint development agreement, the First Memorandum of Agreement contained the following
stipulation:
4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA, U-LAND
and PEC shall execute a joint development agreement ("JDA") to pursue property development
projects in the Philippines. The JDA shall cover specific housing and other real estate development
projects as the parties shall agree. All profits derived from the projects covered by the JDA shall be
shared equally between ULAND and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of
US$3.0 million as initial funding for the aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance with Section 9
below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure to agree on the terms of the
share purchase agreement or the joint development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA
within forty (40) days from date hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million provided under Section 4
within three (3) days therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000
PEC shares delivered to U-LAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that the execution of a share
purchase agreement containing mutually agreeable terms and conditions must first be accomplished
by the parties before respondent U-Land purchases any of the shares owned by petitioner Wellex. A
perusal of the stipulation on its face allows for no other interpretation.
The need for a share purchase agreement to be entered into before payment of the full purchase price
can further be discerned from the other stipulations of the First Memorandum of Agreement.
In Section 1, the parties agreed to enter into a joint business venture, through entering into two (2)
agreements: a share purchase agreement and a joint development agreement. However, Section 1
provides that in the share purchase agreement, "U-LAND shall acquire from WELLEX, shares of stock
of AIR PHILIPPINES INTERNATIONAL CORPORATION (‘APIC’) equivalent to at least 35% of the
outstanding capital stock of APIC, but in any case, not less than 1,050,000,000 shares (the ‘APIC
Shares’)."159
As for the PEC shares, Section 1 provides that respondent U-Land shall purchase from petitioner
Wellex "shares of stock of PHILIPPINE ESTATES CORPORATION (‘PEC’) equivalent to at least 35%
of the outstanding capital stock of PEC, but in any case, not less than 490,000,000 shares(the ‘PEC
Shares’)."160
The use of the terms "at least 35% of the outstanding capital stock of APIC, but in any case, not less
than 1,050,000,000 shares" and "at least 35% of the outstanding capital stock of PEC, but in any case,
not less than 490,000,000 shares" means that the parties had yet to agree on the number of shares of
stock to be purchased.
The need to execute a share purchase agreement before payment of the purchase price of the shares
is further shown by the clause, "[w]ithout prejudice to any subsequent agreement between the parties,
the purchase price for the APIC Shares to be reflected in the [share purchase agreement] shall be...
P0.30 per share and that for the PEC Shares at... P0.65 per share." 161 This phrase clearly shows that
the final price of the shares of stock was to be reflected in the share purchase agreement. There being
no share purchase agreement executed, respondent U-Land was under no obligation to begin payment
or remittance of the purchase price of the shares of stock.
Petitioner Wellex argues that the use of "upon" in Section 2 162 of the First Memorandum of Agreement
means that respondent U-Land must pay the purchase price of the shares of stock in its entirety when
they are transferred. This argument has no merit.
Article 1373 of the Civil Code provides:
53
ART. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood
as bearing that import which is most adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price and the number of shares of
stock to be purchased before respondent U-Land is obligated to pay or remit the entirety of the
purchase price. Thus, petitioner Wellex’s argument cannot be sustained since the parties to the First
Memorandum of Agreement were clearly unable to agree on all the terms concerning the share
purchase agreement. It would be absurd for petitioner Wellex to expect payment when respondent U-
Land did not yet agree to the final amount to be paid for the totality of an indeterminate number of
shares of stock.
The third paragraph of Section 2163 provides that the "transfer of the Subject Shares" shall take place
upon the fulfillment of certain conditions, such as full payment of the purchase price "as reflected in the
[share purchase agreement]." The transfer of the shares of stock is different from the execution of the
share purchase agreement. The transfer of the shares of stock requires full payment of the final
purchase price. However, that final purchase price must be reflected in the share purchase agreement.
The execution of the share purchase agreement will require the existence of a final agreement.
In its Answer with counterclaim before the trial court, petitioner Wellex argued that the payment of the
shares of stock was to begin within the 40-day period. Petitioner Wellex’s claim is not in any of the
stipulations of the contract. Its subsequent claim that respondent U-Land was actually required to remit
a total of US$20.5 million is likewise bereft of basis since there was no final purchase price of the
shares of stock that was agreed upon, due to the failure of the parties to execute a share purchase
agreement. In addition, the parties had yet to agree on the final number of APIC shares and PEC
shares that respondent U-Land would acquire from petitioner Wellex.
Therefore, the understanding of the parties captured in the First Memorandum of Agreement was to
continue their negotiation to determine the price and number of the shares to be purchased. Had it
been otherwise, the specific number or percentage of shares and its price should already have been
provided clearly and unambiguously. Thus, they agreed to a 40-day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides that:
In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within forty
(40)days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings
herein . . .164
The First Memorandum of Agreement was, thus, an agreement to enter into a share purchase
agreement. The share purchase agreement should have been executed by the parties within 40 days
from May 16, 1998, the date of the signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9 lapsed, the efficacy of the First Memorandum of
Agreement ceased. The parties were "released from their respective undertakings." Thus, from June
25, 1998, the date when the 40-day period lapsed, the parties were no longer obliged to negotiate with
each other in order to enter into a share purchase agreement.
However, Section 9 provides for another period within which the parties could still be required to
negotiate. The clause "or such period as the parties shall mutually agree" means that the parties
should agree on a period within which to continue negotiations for the execution of an agreement. This
means that after the 40-day period, the parties were still allowed to negotiate, provided that they could
mutually agree on a new period of negotiation.
Based on the records and the findings of the lower courts, the parties were never able to arrive at a
specific period within which they would bind themselves to enter into an agreement. There being no
other period specified, the parties were no longer under any obligation to negotiate and enter into a
share purchase agreement. Section 9 clearly freed them from this undertaking.
II
There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were, therefore, independent of the First
Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex mentioned that there was an
"implied partial objective or real novation"165 of the First Memorandum of Agreement. Petititoner did not
raise this argument of novation before this court. In Gayos v. Gayos, 166 this court held that "it is a
cherished rule of procedure that a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future litigation[.]" 167
Articles 1291 and 1292 of the Civil Code provides how obligations may be modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of novation:
Novation extinguishes an obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so
"in unequivocal terms" or that "the old and the new obligations be on every point incompatible with
each other."
....
54
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. The test of incompatibility is whether the two obligations
can stand together, each one with its own independent existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatiois literally construed as to make new. So it is deeply rooted in the Roman
Law jurisprudence, the principle — novatio non praesumitur— that novation is never presumed. At
bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito—
basically extinguishing the old obligation for the new one. 169 (Emphasis from the original omitted,
citations omitted)
Applying Arco, it is clear that there was no novation of the original obligation.
After the 40-day period, the parties did not enter into any subsequent written agreement that was
couched in unequivocal terms. The transaction of the First Memorandum of Agreement involved large
amounts of money from both parties. The parties sought to participate in the air travel industry, which
has always been highly regulated and subject to the strictest commercial scrutiny. Both parties
admitted that their counsels participated in the crafting and execution of the First Memorandum of
Agreement as well as in the efforts to enter into the share purchase agreement. Any subsequent
agreement would be expected to be clearly agreed upon with their counsels’ assistance and in writing,
as well.
Given these circumstances, there was no express novation.
There was also no implied novation of the original obligation. In Quinto v. People: 170
[N]o specific form is required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to determine what
might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new obligations.
....
. . . The test of incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter obligation novates
the first. Corollarily, changes that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential elements of the obligation, such
as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory
in nature and insufficient to extinguish the original obligation. 171(Citations omitted)
There was no incompatibility between the original terms of the First Memorandum of Agreement and
the remittances made by respondent U-Land for the shares of stock. These remittances were actually
made with the view that both parties would subsequently enter into a share purchase agreement. It is
clear that there was no subsequent agreement inconsistent with the provisions of the First
Memorandum of Agreement.
Thus, no implied novation took place. In previous cases,172 this court has consistently ruled that
presumed novation or implied novation is not deemed favorable. In United Pulp and Paper Co., Inc. v.
Acropolis Central Guaranty Corporation:173
Neither can novation be presumed in this case. As explained in Duñgo v. Lopena:
"Novation by presumption has never been favored. To be sustained, it need be established that the old
and new contracts are incompatible in all points, or that the will to novate appears by express
agreement of the parties or in acts of similar import." 174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement, respondent U-Land is entitled to the
return of the amount it remitted to petitioner Wellex. Petitioner Wellex is likewise entitled to the return of
the certificates of shares of stock and titles of land it delivered to respondent U-Land. This is simply an
enforcement of Section 9 of the First Memorandum of Agreement. Pursuant to Section 9, only the
execution of a final share purchase agreement within either of the periods contemplated by this
stipulation will justify the parties’ retention of what they received or would receive from each other.
III
Applying Article 1185 of the Civil
Code, the parties are obligated to
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a determinate time shall render the
obligation effective from the moment the time indicated has elapsed, or if it has become evident that
the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably
been contemplated, bearing in mind the nature of the obligation.
Article 1185 provides that if an obligation is conditioned on the nonoccurrence of a particular event at a
determinate time, that obligation arises (a) at the lapse of the indicated time, or(b) if it has become
evident that the event cannot occur.
55
Petitioner Wellex and respondent U-Land bound themselves to negotiate with each other within a 40-
day period to enter into a share purchase agreement. If no share purchase agreement was entered
into, both parties would be freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase agreement that would give rise to the
obligation to both parties to free each other from their respective undertakings. This includes returning
to each other all that they received in pursuit of entering into the share purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a share purchase agreement. This
lapse is the first circumstance provided for in Article 1185 that gives rise to the obligation. Applying
Article 1185, the parties were then obligated to return to each other all that they had received in order
to be freed from their respective undertakings.
However, the parties continued their negotiations after the lapse of the 40-day period. They made
subsequent transactions with the intention to enter into the share purchase agreement. Despite that,
they still failed to enter into a share purchase agreement. Communication between the parties ceased,
and no further transactions took place.
It became evident that, once again, the parties would not enter into the share purchase agreement.
This is the second circumstance provided for in Article 1185. Thus, the obligation to free each other
from their respective undertakings remained.
As such, petitioner Wellex is obligated to return the remittances made by respondent U-Land, in the
same way that respondent U-Land is obligated to return the certificates of shares of stock and the land
titles to petitioner Wellex.
IV
Respondent U-Land is praying for
rescission or resolution under
Article 1191, and not rescission
under Article 1381
The arguments of the parties generally rest on the propriety of the rescission of the First Memorandum
of Agreement. This requires a clarification of rescission under Article 1191, and rescission under Article
1381 of the Civil Code.
Article 1191 of the Civil Code provides:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment,
if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of rescissible contracts: ART.
1380. Contracts validly agreed upon may be rescinded in the cases established by law. ART. 1381.
The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect
the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Article 1383 expressly provides for the subsidiary nature of rescission:
ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same.
Rescission itself, however, is defined by Article 1385:
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to restore. Neither shall rescission
take place when the things which are the object of the contract are legally in the possession of third
persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss. Gotesco
Properties v. Fajardo175 categorically stated that Article 1385 is applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract and
release the parties from further obligations to each other, but abrogates the contract from its inception
and restores the parties to their original positions as if no contract has been made. Consequently,
mutual restitution, which entails the return of the benefits that each party may have received as a result
of the contract, is thus required. To be sure, it has been settled that the effects of rescission as
provided for in Article 1385 of the Code are equally applicable to cases under Article 1191, to wit:
xxxx
56
Mutual restitution is required in cases involving rescission under Article 1191. This means bringing the
parties back to their original status prior to the inception of the contract. Article 1385 of the Civil Code
provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obligated to restore. Neither shall rescission
take place when the things which are the object of the contract are legally in the possession of third
persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
This Court has consistently ruled that this provision applies to rescission under Article 1191: [S]ince
Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the price with its
interest," the Court finds no justification to sustain petitioners’ position that said Article 1385 does not
apply to rescission under Article 1191. x x x176 (Emphasis from the original, citations omitted)
Rescission, as defined by Article 1385, mandates that the parties must return to each other everything
that they may have received as a result of the contract. This pertains to rescission or resolution under
Article 1191, as well as the provisions governing all forms of rescissible contracts.
For Article 1191 to be applicable, however, there must be reciprocal prestations as distinguished from
mutual obligations between or among the parties. A prestation is the object of an obligation, and it is
the conduct required by the parties to do or not to do, or to give. 177 Parties may be mutually obligated
to each other, but the prestations of these obligations are not necessarily reciprocal. The reciprocal
prestations must necessarily emanate from the same cause that gave rise to the existence of the
contract. This distinction is best illustrated by an established authority in civil law, the late Arturo
Tolentino:
This article applies only to reciprocal obligations. It has no application to every case where two persons
are mutually debtor and creditor of each other. There must be reciprocity between them. Both relations
must arise from the same cause, such that one obligation is correlative to the other. Thus, a person
may be the debtor of another by reason of an agency, and his creditor by reason of a loan. They are
mutually obligated, but the obligations are not reciprocal. Reciprocity arises from identity of cause, and
necessarily the two obligations are created at the same time.178(Citation omitted)
Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the cause in perfecting the
existence of an obligation:
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is
constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or
juridical tie which is the efficient cause established by the various sources of obligations (law,
contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is the prestation or conduct,
required to be observed (to give, to do or not to do); and (c) the subject-persons who, viewed from the
demandability of the obligation, are the active (obligee) and the passive (obligor) subjects.180
The cause is the vinculum juris or juridical tie that essentially binds the parties to the obligation. This
linkage between the parties is a binding relation that is the result of their bilateral actions, which gave
rise to the existence of the contract.
The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to
seek the remedy of Article 1191. The wronged party is entitled to rescission or resolution under Article
1191, and even the payment of damages. It is a principal action precisely because it is a violation of
the original reciprocal prestation.
Article 1381 and Article 1383, on the other hand, pertain to rescission where creditors or even third
persons not privy to the contract can file an action due to lesion or damage as a result of the contract.
In Ong v. Court of Appeals,181 this court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by
law to the contracting parties and even to third persons, to secure the reparation of damages caused to
them by a contract, even if this should be valid, by restoration of things to their condition at the moment
prior to the celebration of the contract. It implies a contract, which even if initially valid, produces a
lesion or a pecuniary damage to someone.182(Citations omitted)
Ong elaborated on the confusion between "rescission" or resolution under Article 1191 and rescission
under Article 1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each party
is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation
of the other. They are to be performed simultaneously such that the performance of one is conditioned
upon the simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of
the New Civil Code should be distinguished from rescission of contracts under Article 1383. Although
both presuppose contracts validly entered into and subsisting and both require mutual restitution when
proper, they are not entirely identical.
While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code,
from which the article was based, was "resolution." Resolution is a principal action which is based on
breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of
rescissionfor lesion under Article 1381 of the New Civil Code, which expressly enumerates the
following rescissible contracts:
1. Those which are entered into by guardians whenever the wards whom they represent
suffer lesion by more than one fourth of the value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number;
3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the
claims due them;
4. Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority; [and]
57
 5. All other contracts specially declared by law to be subject to rescission. 183 (Citations
omitted)
When a party seeks the relief of rescission as provided in Article 1381, there is no need for reciprocal
prestations to exist between or among the parties. All that is required is that the contract should be
among those enumerated in Article 1381 for the contract to be considered rescissible. Unlike Article
1191, rescission under Article 1381 must be a subsidiary action because of Article 1383.
Contrary to petitioner Wellex’s argument, this is not rescission under Article 1381 of the Civil Code.
This case does not involve prejudicial transactions affecting guardians, absentees, or fraud of
creditors. Article 1381(3) pertains in particular to a series of fraudulent actions on the part of the debtor
who is in the process of transferring or alienating property that can be used to satisfy the obligation of
the debtor to the creditor. There is no allegation of fraud for purposes of evading obligations to other
creditors. The actions of the parties involving the terms of the First Memorandum of Agreement do not
fall under any of the enumerated contracts that may be subject of rescission.
Further, respondent U-Land is pursuing rescission or resolution under Article 1191, which is a principal
action. Justice J.B.L. Reyes’ concurring opinion in the landmark case of Universal Food Corporation v.
Court of Appeals184gave a definitive explanation on the principal character of resolution under Article
1191 and the subsidiary nature of actions under Article 1381:
The rescission on account of breach of stipulations is not predicated on injury to economic interests of
the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is a principal action retaliatory in character, it being unjust
that a party be held bound to fulfill his promises when the other violates his. As expressed in the old
Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure of
the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot
be maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of
these two articles is limited to the cases of rescission for lesión enumerated in Article 1381 of the Civil
Code of the Philippines, and does not apply to cases under Article 1191.185
Rescission or resolution under Article 1191, therefore, is a principal action that is immediately available
to the party at the time that the reciprocal prestation was breached. Article 1383 mandating that
rescission be deemed a subsidiary action cannot be applicable to rescission or resolution under Article
1191. Thus, respondent U-Land correctly sought the principal relief of rescission or resolution under
Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which arose from the same cause: the
desire of both parties to enter into a share purchase agreement that would allow both parties to expand
their respective airline operations in the Philippines and other neighboring countries.
V obligation to convey title from acquiring binding force.189 (Citations omitted) This court’s statement in
The jurisprudence relied upon by
petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance its arguments against respondent U-Land’s right to
rescission are not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this court specifically stated that
the parties entered into a contract of sale, and their reciprocal obligations had already been fulfilled: 186
There is no dispute that the parties entered into a contract of sale as distinguished from a contract to
sell.
By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a
determinate thing to the buyer, who in turn, is obligated to pay a price certain in money or its equivalent
(Art. 1458, Civil Code). From the respondents’ own arguments, we note that they have fully complied
with their part of the reciprocal obligation. As a matter of fact, they have already parted with the title as
evidenced by the transfer certificate of title in the petitioners’ name as of June 27, 1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage. The
payments on an installment basis secured by the execution of a mortgage took the place of a cash
payment. In other words, the relationship between the parties is no longer one of buyer and seller
because the contract of sale has been perfected and consummated. It is already one of a mortgagor
and a mortgagee. In consideration of the petitioners’ promise to pay on installment basis the sum they
owe the respondents, the latter have accepted the mortgage as security for the obligation.
The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice
J.B.L. Reyes. The petitioners’ breach of obligations is not with respect to the perfected contract of sale
but in the obligations created by the mortgage contract. The remedy of rescission is not a principal
action retaliatory in character but becomes a subsidiary one which by law is available only in the
absence of any other legal remedy. (Art. 1384, Civil Code). Foreclosure here is not only a remedy
accorded by law but, as earlier stated, is a specific provision found in the contract between the
parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not rescission or resolution under
Article 1191. In addition, the First Memorandum of Agreement is not a contract to sell shares of stock.
It is an agreement to negotiate with the view of entering into a share purchase agreement.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this court held that non-payment of
consideration of contracts only gave rise to the right to sue for collection, but this non-payment cannot
serve as proof of a simulated contract.188 The case did not rule that the vendor has no obligation to
deliver the thing sold if the buyer fails to fully pay the price required by the contract. In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts proves their simulation. We
disagree. Nonpayment, at most, gives him only the right to sue for collection. Generally, in a contract of
sale, payment of the price is a resolutory condition and the remedy of the seller is to exact fulfillment
or, in case of a substantial breach, to rescind the contract under Article 1191 of the Civil Code.
However, failure to pay is not even a breach, but merely an event which prevents the vendor’s
58
Villaflor regarding rescission under Article 1191 was a mere obiter dictum. In Land Bank of the
Philippines v. Suntay,190 this court discussed the nature of an obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court upon some question of law that
is not necessary in the determination of the case before the court. It is a remark made, or opinion
expressed, by a judge, in his decision upon a cause by the way, that is, incidentally or collaterally, and
not directly upon the question before him, or upon a point not necessarily involved in the determination
of the cause, or introduced by way of illustration, or analogy or argument. It does not embody the
resolution or determination of the court, and is made without argument, or full consideration of the
point. It lacks the force of an adjudication, being a mere expression of an opinion with no binding force
for purposes of res judicata.191 (Citations omitted)
Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses Agustin v. Court of Appeals is
also misplaced. In these cases, this court held that there can be no rescission for an obligation that is
nonexistent, considering that the suspensive condition that will give rise to the obligation has not yet
happened. This is based on an allegation that the contract involved is a contract to sell. In a contract to
sell, the failure of the buyer to pay renders the contract without effect. A suspensive condition is one
whose non-fulfillment prevents the existence of the obligation.192 Payment of the purchase price,
therefore, constitutes a suspensive condition in a contract to sell. Thus, this court held that non-
remittance of the full price allowed the seller to withhold the transfer of the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to sell. Entering into the share
purchase agreement or the joint development agreement remained a stipulation that the parties
themselves agreed to pursue in the First Memorandum of Agreement.
Based on the First Memorandum of Agreement, the execution of the share purchase agreement was
necessary to put into effect respondent U-Land’s purchase of the shares of stock. This is the stipulation
indicated in this memorandum of agreement. There was no suspensive condition of full payment of the
purchase price needed to execute either the share purchase agreement or the joint development
agreement. Upon the execution of the share purchase, the obligation of petitioner Wellex to transfer
the shares of stock and of respondent U-Land to pay the price of these shares would have arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has the same effect as rescission or
resolution under Article 1191 of the Civil Code. The parties are obligated to return to each other all that
they may have received as a result of the breach by petitioner Wellex of the reciprocal obligation.
Therefore, the Court of Appeals did not err in affirming the rescission granted by the trial court.
VI
Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court found that petitioner Wellex
committed fraud by inducing respondent U-Land to purchase APIC shares and PEC shares and by
leading the latter to believe that APC was a subsidiary of APIC.
Determining the existence of fraud is not necessary in an action for rescission or resolution under
Article 1191. The existence of fraud must be established if the rescission prayed for is the rescission
under Article 1381.
However, the existence of fraud is a question that the parties have raised before this court. To settle
this question with finality, this court will examine the established facts and determine whether petitioner
Wellex indeed defrauded respondent U-Land.
In Tankeh v. Development Bank of the Philippines,193 this court enumerated the relevant provisions of
the Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and illustrations of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts,
are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the
other party has relied on the former’s special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation
has created substantial mistake and the same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n) The
distinction between fraud as a ground for rendering a contract voidable or as basis for an award of
damages is provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270) 194
Tankeh further discussed the degree of evidence needed to prove the existence of fraud:
[T]he standard of proof required is clear and convincing evidence. This standard of proof is derived
from American common law. It is less than proof beyond reasonable doubt (for criminal cases) but
greater than preponderance of evidence (for civil cases). The degree of believability is higher than that
of an ordinary civil case. Civil cases only require a preponderance of evidence to meet the required
burden of proof. However, when fraud is alleged in an ordinary civil case involving contractual
relations, an entirely different standard of proof needs to be satisfied. The imputation of fraud in a civil
case requires the presentation of clear and convincing evidence. Mere allegations will not suffice to
59
sustain the existence of fraud. The burden of evidence rests on the part of the plaintiff or the party
alleging fraud. The quantum of evidence is such that fraud must be clearly and convincingly shown. 195
To support its allegation of fraud, Mr. Tseng, respondent U-Land’s witness before the trial court,
testified that Mr. Gatchalian approached respondent U-Land on two (2) separate meetings to propose
entering into an agreement for joint airline operations in the Philippines. Thus, the parties entered into
the First Memorandum of Agreement. Respondent U-Land primarily anchors its allegation of fraud
against petitioner Wellex on the existence of the second preambular clause of the First Memorandum
of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex admitted that "[t]he amount of
US$7,499,945.00 was remitted for the purchase of APIC and PEC shares." 196 In that brief, it argued
that the parties were already in the process of partially executing the First Memorandum of Agreement.
As held in Tankeh, there must be clear and convincing evidence of fraud. Based on the established
facts, respondent U-Land was unable to clearly convince this court of the existence of fraud.
Respondent U-Land had every reasonable opportunity to ascertain whether APC was indeed a
subsidiary of APIC. This is a multimillion dollar transaction, and both parties admitted that the share
purchase agreement underwent several draft creations. Both parties admitted the participation of their
respective counsels in the drafting of the First Memorandum of Agreement. Respondent U-Land had
every opportunity to ascertain the ownership of the shares of stock. Respondent U-Land itself admitted
that it was not contesting petitioner Wellex’s ownership of the APIC shares or APC shares; hence, it
was not contesting the existence of the Second Memorandum of Agreement. Upon becoming aware of
petitioner Wellex’s representations concerning APIC’s ownership or control of APC as a subsidiary,
respondent U-Land continued to make remittances totalling the amount sought to be rescinded. It had
the option to opt out of negotiations after the lapse of the 40-day period. However, it proceeded to
make the remittances to petitioner Wellex and proceed with negotiations.
Respondent U-Land was not defrauded by petitioner Wellex to agree to the First Memorandum of
Agreement.1awp++i1 To constitute fraud under Article 1338, the words and machinations must have
been so insidious or deceptive that the party induced to enter into the contract would not have agreed
to be bound by its terms if that party had an opportunity to be aware of the truth. 197 Respondent U-
Land was already aware that APC was not a subsidiary of APIC after the 40-day period. Still, it agreed
to be bound by the First Memorandum of Agreement by making the remittances from June 30 to
September 25, 1998.198 Thus, petitioner Wellex’s failure to inform respondent U-Land that APC was
not a subsidiary of APIC when the First Memorandum of Agreement was being executed did not
constitute fraud.
However, the absence of fraud does not mean that petitioner Wellex is free of culpability. By failing to
inform respondent U-Land that APC was not yet a subsidiary of APIC at the time of the execution of
the First Memorandum of Agreement, petitioner Wellex violated Article 1159 of the Civil Code. Article
1159 reads:
ART. 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.
In Ochoa v. Apeta,199 this court defined good faith:
Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it
encompasses, among other things, an honest belief, the absence of malice and the absence of design
to defraud or to seek an unconscionable advantage. It implies honesty of intention, and freedom from
knowledge of circumstances which ought to put the holder upon inquiry. The essence of good faith lies
in an honest belief in the validity of one’s right, ignorance of a superior claim and absence of intention
to overreach another.200 (Citations omitted)
It was incumbent upon petitioner Wellex to negotiate the terms of the pending share purchase
agreement in good faith. This duty included providing a full disclosure of the nature of the ownership of
APIC in APC. Unilaterally compelling respondent U-Land to remit money to finalize the transactions
indicated in the Second Memorandum of Agreement cannot constitute good faith.
The absence of fraud in a transaction does not mean that rescission under Article 1191 is not proper.
This case is not an action to declare the First Memorandum of Agreement null and void due to fraud at
the inception of the contract or dolo causante. This case is not an action for fraud based on Article
1381 of the Civil Code. Rescission or resolution under Article 1191 is predicated on the failure of one of
the parties in a reciprocal obligation to fulfill the prestation as required by that obligation. It is not based
on vitiation of consent through fraudulent misrepresentations.
VII
Respondent U-Land was not bound
to pay the US$3 million under the
joint development agreement
The alleged failure of respondent U-Land to pay the amount of US$3 million to petitioner Wellex does
not justify the actions of the latter in refusing to return the US$7,499,945.00.
Article 1374 of the Civil Code provides that:
ART. 1374. The various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly.
The execution of the joint development agreement was contingent on the execution of the share
purchase agreement.1âwphi1 This is provided for in Section 4 of the First Memorandum of Agreement,
which stated that the execution of the two agreements is "[s]imultaneous." 201 Thus, the failure of the
share purchase agreement’s execution would necessarily mean the failure of the joint development
agreement’s execution.
Section 9 of the First Memorandum of Agreement provides that should the parties fail to execute the
agreement, they would be released from their mutual obligations. Had respondent U-Land paid the
US$3 million and petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of the joint
development agreement, they would have been obligated to return these to each other.
Section 4 and Section 9 of the First Memorandum of Agreement must be interpreted together. Since
the parties were unable to agree on a final share purchase agreement and there was no exchange of
money or shares of stock due to the continuing negotiations, respondent U-Land was no longer obliged
to provide the money for the real estate development projects. The payment of the US$3 million was
for pursuing the real estate development projects under the joint development agreement. There being
60
no joint development agreement, the obligation to deliver the US$3 million and the delivery of the PEC
shares for that purpose were no longer incumbent upon the parties.
VIII
Respondent U-Land was not
obligated to exhaust the "securities"
given by petitioner Wellex
Contrary to petitioner Wellex’s assertion, there is no obligation on the part of respondent U-Land to
exhaust the "securities" given by petitioner Wellex. No such meeting of the minds to create a
guarantee or surety or any other form of security exists. The principal obligation is not a loan or an
obligation subject to the conditions of sureties or guarantors under the Civil Code. Thus, there is no
need to exhaust the securities given to respondent U-Land, and there is no need for a legal condition
where respondent U-Land should pursue other remedies.
Neither petitioner Wellex nor respondent U-Land stated that there was already a transfer of ownership
of the shares of stock or the land titles. Respondent U-Land itself maintained that the delivery of the
shares of stock and the land titles were not in the nature of a pledge or mortgage. 202 It received the
certificates of shares of stock and the land titles with an understanding that the parties would
subsequently enter a share purchase agreement. There being no share purchase agreement,
respondent U-Land is obligated to return the certificates of shares of stock and the land titles to
petitioner Wellex.
The parties are bound by the 40-day period provided for in the First Memorandum of Agreement.
Adherence by the parties to Section 9 of the First Memorandum of Agreement has the same effect as
the rescission or resolution prayed for and granted by the trial court.
Informal acts are prone to ambiguous legal interpretation. This will be based on the say-so of each
party and is a fragile setting for good business transactions. It will contribute to the unpredictability of
the market as it would provide courts with extraordinary expectations to determine the business actor's
intentions. The parties appear to be responsible businessmen who know that their expectations and
obligations should be clearly articulated between them. They have the resources to engage legal
representation. Indeed, they have reduced their agreement in writing.
Petitioner Wellex now wants this court to define obligations that do not appear in these instruments.
We cannot do so. This court cannot interfere in the bargains, good or bad, entered into by the parties.
Our duty is to affirm legal expectations, not to guarantee good business judgments.
WHEREFORE, the petition is DENIED. The Decision of the Regional Trial Court in Civil Case No. 99-
1407 and the Decision of the Court of Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs
against petitioner The Wellex Group, Inc.
SO ORDERED.
G.R. No. 156162 June 22, 2015
CCC INSURANCE CORPORATION, Petitioner,
vs.
KAWASAKI STEEL CORPORATION, F.F. MAÑACOP CONSTRUCTION CO., INC., and FLORANTE
F. MAÑACOP, Respondents.
DECISION
LEONARDO-DE CASTRO, J.:
Assailed in this Petition for Review on Certiorari are: (1) the Decision1 dated May 30, 2002 of the Court
of Appeals in CA-G.R. CV No. 54066, which reversed and set aside the Decision 2 dated May 2, 1996
of the Regional Trial Court (RTC), Makati City, Branch 66, and held petitioner CCC Insurance
Corporation (CCCIC) liable under its Surety and Performance Bonds to respondent Kawasaki Steel
Corporation (Kawasaki); and (2) the Resolution3 dated November 14, 2002 of the appellate court in the
same case which denied the Motion for Reconsideration of CCCIC.
The antecedents of this case are as follows:
On August 16, 1988, Kawasaki, represented by its Manager, Yoshimitsu Hosoya, and F .F. Mañacop
Construction Company, Inc. (FFMCCI), represented by its President, Florante F. Mañacop (Mañacop ),
executed a Consortium Agreement for Pangasinan Fishing Port Network Project (Consortium
Agreement).4 Kawasaki and FFMCCI formed a consortium (Kawasaki-FFMCCI Consortium) for the
purpose of contracting with the Philippine Government for the construction of a fishing port network in
Pangasinan (Project). According to their Consortium Agreement, Kawasaki and FFMCIA undertook to
perform and accomplish their respective and specific portions of work in the intended contract with the
Philippine Government.5
The Project was awarded to the Kawasaki-FFMCCI Consortium for the contract price of
₱62,000,441.00, 33 .3 7% of which or ₱20,692,026.00 was the price of work of FFMCCI. On October
4, 1988, the Republic of the Philippines (Republic), through the Department of Public Works and
Highways (DPWH), represented by former Secretary Romulo M. del Rosario, as owner, and the
Kawasaki-FFMCCI Consortium, represented by Shigeru Kohda, as contractor, entered into a Contract
Agreement entitled Stage I-A Construction of Pangasinan Fishing Port Network (Construction
Contract).6
In accordance with Article 10 of the Consortium Agreement,7 "Consortium Leader" Kawasaki, on behalf
of the Consortium, secured from the Philippine Commercial International Bank (PCIB) Letter of Credit
No. 38-001-1836178in the amount of ₱6,200,044.10 in favor of DPWH, available from September 9,
1988 to November 19, 1990. Said Letter of Credit guaranteed the faithful performance by Kawasaki-
FFMCCI Consortium of its obligation under the Construction Contract.
The Republic made an advance payment for the Project to the Kawasaki-FFMCCI Consortium in the
amount of ₱9,300,066.15, representing 15% of the contract price of: ₱62,000,441.00.
For the release of its share in the advance payment made by the Republic, and also pursuant to Article
10 of the Consortium Agreement, FFMCCI secured from CCCIC the following bonds in favor of
Kawasaki: (a) Surety Bond No. B-88/111919 in the amount of ₱3,103,803.90 (equivalent to 15% of the
price of work of FFMCCI), effective from October 26, 1988 to October 26, 1989, to counter guarantee
the amount of advance payment FFMCCI would receive from Kawasaki; and (b) Performance Bond B-
88/1119310 in the amount of ₱2,069,202.60 (equivalent to 10% of the price of work of FFMCCI),
effective from October 27, 1988 to October 27, 1989, to guarantee completion by FFMCCI of its scope
61
of work in the Project. In turn, FFMCCI and Mañacop executed two Indemnity Agreements 11promising
to compensate CCCIC for any damages the insurance company might incur from issuing the Surety
and Performance Bonds.
In two letters dated October 27, 1998,12 FFMCCI submitted the Surety and Performance Bonds to
Kawasaki and requested Kawasaki to release the advance payment in the amount of ₱3,103,803.90.
FFMCCI eventually received the amount of advance payment it requested on a staggered basis.13
The Project commenced in November 1988.14 Sometime in April 1989, FFMCCI ceased performing its
work in the Project after suffering financial problems and/or business reverses. After discussions,
Kawasaki and FFMCCI then executed a new Agreement15 on August 24, 1989 wherein Kawasaki
recognized the "Completed Portion of Work" of FFMCCI as of April 25, 1989, and agreed to take over
the unfinished portion of work of FFMCCI, referred to as "Transferred Portion of Work." Kawasaki and
FFMCCI further agreed that "[a]ny profit or benefit arising from the performance by [Kawasaki] of the
Transferred Portion of Work shall accrue to [Kawasaki]."
In a letter dated September 14, 1989,16 Kawasaki informed CCCIC about the cessation of operations
of FFMCCI, and the failure of FFMCCI to perform its obligations in the Project and repay the advance
payment made by Kawasaki. Consequently, Kawasaki formally demanded that CCCIC, as surety, pay
Kawasaki the amounts covered by the Surety and Performance Bonds. Because CCCIC did not act
upon its demand, Kawasaki filed on November 6, 1989 before the RTC a Complaint17 against CCCIC
to collect on Surety Bond No. B-88/11191 and Performance Bond No. B-88/11193.
In its Answer with Counterclaims,18 CCCIC denied any liability on its Surety and Performance Bonds
on the following grounds: (a) the rights of Kawasaki under the Surety and Performance Bonds had not
yet accrued since the said Bonds were mere counter-guarantees, for which CCCIC could only be held
liable upon the filing of a claim by the Republic against the Kawasaki-FFMCCI Consortium; (b)
Kawasaki and FFMCCI, without the consent of CCCIC, executed a new Agreement dated August 24,
1989 novating the terms of the Consortium Agreement, which prevented CCCIC from being
subrogated to the right of Kawasaki against FFMCCI; (c) Kawasaki, in completing the Transferred
Portion of Work was correspondingly compensated, which negated any allegation of loss on the part of
Kawasaki; and (d) the obligation of CCCIC was extinguished when the Republic granted the Kawasaki-
FFMCCI Consortium an extension of time to complete the Project, without the consent of CCCIC.
CCCIC subsequently filed on August 19, 1991 before the RTC a Third-Party Complaint19 against
FFMCCI and its President Mañacop based on the two Indemnity Agreements which FFMCCI and
Mañacop executed in favor of CCCIC. The RTC issued summonses but FFMCCI and Mañacop failed
to file any responsive pleading to the Third-Party Complaint of CCCIC. Upon motion of CCCIC, the
RTC issued an Order20 dated December 2, 1991 declaring FFMCCI and Mañacop in default.
After trial, the RTC rendered a Decision on May 2, 1996 dismissing the Complaint of Kawasaki and the
counterclaim of CCCIC. The RTC agreed with CCCIC that the Surety and Performance Bonds issued
by the insurance company were mere counter-guarantees and the cause of action of Kawasaki based
on said Bonds had not yet accrued. Since the Republic did not exercise its right to claim against the
PCIB Letter of Credit No. 38-001-183617, nor compelled Kawasaki to perform the unfinished work of
FFMCCI, Kawasaki could not claim indemnification from CCCIC. Moreover, the RTC, citing Article
2079 of the Civil Code, ruled that the obligations of CCCIC under the Surety and Performance Bonds
were extinguished when the Republic granted the Kawasaki-FFMCCI Consortium a 43-day extension
to finish the Project, absent the consent of CCCIC. The RTC found no deliberate intent on the part of
Kawasaki to cause prejudice to CCCIC, so it did not grant the counterclaims for moral and exemplary
damages and attorney's fees of CCCIC against Kawasaki.
Kawasaki appealed before the Court of Appeals assigning the following errors on the part of the RTC:
I. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT [CCCIC] CAN BE HELD
LIABLE TO [Kawasaki] UNDER THE SUBJECT BONDS ONLY "IF THE GOVERNMENT
EXERCISES ITS RIGHTS AGAINST THE GUARANTEE-BONDS ISSUED TO IT BY
[Kawasaki]" ON THE THEORY ADVANCED BY [CCCIC], WHICH THE COURT A QUO
FULLY EMBRACED AND ADOPTED, THAT THE BONDS ARE MERE "COUNTER-
GUARANTEES."
II. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT THE EXTENSION
GRANTED BY THE GOVERNMENT TO THE CONSORTIUM FOR THE CONSTRUCTION
OF THE PANGASINAN FISHING PORT NETWORK PROJECT EXTINGUISHED THE
LIABILITY OF [CCCIC].
III. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT ARTICLE 2079 OF THE
CIVIL CODE OF THE PHILIPPINES APPLIES TO THE CASE AT BAR. IN A LONG LINE OF
DECISIONS, THE SUPREME COURT HAS HELD THAT THE RULE OF "STRICTISSIMI
JURIS" DOES NOT APPLY TO SURETY COMPANIES SUCH AS [CCCIC] HEREIN.
IV. THE SUBJECT BONDS ARE FIXED UNTIL OCTOBER 26 AND 27, 1989
RESPECTIVELY WHILE THE ORIGINAL PERIOD OF THE CONTRACT WITH THE
GOVERNMENT, THE PERFORMANCE OF WHICH BY [CCCIC] ARE PRECISELY
GUARANTEED BY THESE BONDS, IS UNTIL DECEMBER 30, 1989. ON THE OTHER
HAND, THE DEF AULT BY [FFMCCI] WHICH THE BONDS GUARANTEED AGAINST
OCCURRED ON [OR] ABOUT AUGUST 24, 1989. THEREFORE, IRRESPECTIVE OF
WHETHER THERE WAS AN EXTENSION OR NOT AT THE END OF THE ORIGINAL
CONTRACT PERIOD AND IRRESPECTIVE OF WHETHER THIS EXTENSION IS KNOWN
OR UNKNOWN TO [CCCIC], THE LIABILITY THAT IT BOUND ITSELF UNTO UNDER THE
BONDS IS VERY CLEARLY AND UNEQUIVOCALLY FIXED UNTIL OCTOBER 26 AND 27,
1989 RESPECTIVELY. THEREFORE, ARTICLE 2079 WILL NOT APPLY. HENCE, THE
COURT A QUO GROSSLY ERRED IN HOLDING OTHERWISE.21
The Court of Appeals, in its Decision dated May 30, 2002, reversed the appealed RTC Decision,
reasoning as follows:21
From the language of the aforesaid bonds, it is clear that, in the case of the surety bond, the same was
posted, jointly and severally, by [FFMCCI] and CCCIC "to fully and faithfully guarantee the repayment
of the downpayment made by the principal ([FFMCCI]) to the obligee (KAWASAKI) in connection with
the construction of the Pangasinan Fishing Port Network Project at Pangasin.an" subject only to the
condition that "the liability of the [herein] surety shall in no case exceed the amount of Pesos: THREE
MILLION ONE HUNDRED THREE THOUSAND EIGHT HUNDRED THREE & 90/100 (₱3,103,803.90)
Philippine currency; and in the case of the performance bond, the same was posted, jointly and
severally by [FFMCCI] and CCCIC "to guarantee the full and faithful performance of the principal
([FFMCCI]) of its obligation in connection with the project for the construction of the Pangasinan
Fishing Port Network located at Pangasinan in accordance with the plans and specifications of the
contract" subject only to the condition that "the liability of the [herein] surety shall in no case exceed the
62
amount of Pesos: TWO MILLION SIXTY-NINE THOUSAND TWO HUNDRED TWO & 60/100
(₱2,069,202.60) Philippine currency."
The right of KAW AS AKI as the obligee/creditor of the said bonds was not made subject to any other
condition expressly so provided in the Consortium Agreement, which was the reason for the bonds
posted by [FFMCCI] and CCCIC, or in the subject bonds themselves.
Hence, this Court finds that the court a quo did err in ruling that "[u]nder the Consortium Agreement,
the bonds are counter-guarantees which only guarantee the plaintiff KAWASAKI for reimbursement to
the extent of the value of the bonds in case the employer (government) successfully exercised its rights
under the bonds issued to it by plaintiff KAW AS AKI;" and that "[ c]onsidering that the government did
not exercise its rights against the bond issued to it by the Consortium Leader, it follows that the
Consortium Leader cannot collect from the counter-guarantees furnished by [FFMCCI]."
Time and again, the Supreme Court has stressed the rule that a contract is the law between the
parties, and courts have no choice but to enforce such contract so long as they are not contrary to law,
morals, good customs or public policy.
With respect to the second, third and fourth issues raised, suffice it to say that this Court finds Article
2079 of the Civil Code of the Philippines not applicable. [Kawasaki] claims that since the issue in this
case is the liability of CCCIC to KAWASAKI, the extension of forty-three (43) days within which to
complete the Pangasinan Fishing Port Network Project granted by the Philippine government, who is
not a party to the two (2) bonds posted by [FFMCCI] and CCCIC, to the consortium, does not absolve
CCCI C's liabilities to KAWASAKI under the subject bonds.
We agree.
As stated earlier, the parties insofar as the surety bond and performance bond are concerned are:
KAWASAKI, as obligee, [FFMCCI], as principal; and CCCIC, as surety. Considering therefore that the
extension of time within which to complete the construction of the Pangasinan Fishing Port Network
Project was granted by the Philippine government, who is not the creditor of the bonds, this Court finds
that Article 2079 of the Civil Code of the Philippines does not apply and the extension of time granted
by the Philippine government, contrary to the ruling of the trial court, does not absolve the surety of its
liabilities to KAWASAKI under the subject bonds.
The principle of relativity of contracts provides that contracts can only bind the parties who entered into
it.
Finally, this Court finds the award of attorney's fees in favor of the appellant warranted under the
circumstance, pursuant to paragraph (2) of Article 2208 of the Civil Code of the Philippines. 22
In the end, the Court of Appeals decreed:
WHEREFORE, the instant appeal is hereby GRANTED. Accordingly, the assailed decision of the
Regional Trial Court of Makati City, Branch 66, is hereby REVERSED and SET ASIDE. CCC Insurance
Corporation is hereby ordered to pay KAWASAKI the following:
1. The amount of ₱3,103,803.90 representing its liability to Kawasaki Steel Corporation under
Surety Bond No. B-88/11191, plus legal interest at the rate of 12% per annum computed from
15 September 1989, until fully paid;
2. The amount of ₱2,069,202.80 representing its liability to Kawasaki Steel Corporation under
Performance Bond No. B-88/11193, plus legal interest at the rate of 12% per annum
computed from 15 September 1989, until fully paid; and
3. 15% of the total amount due as and for attorney's fees.23 In its Resolution dated November
14, 2002, the Court of Appeals denied the Motion for Reconsideration of CCCIC. However, in
the same Resolution, the appellate court partially granted the Third-Party Complaint of CCCIC
by holding Mañacop liable under the Indemnity Agreements he executed in favor of the
insurance company, while declaring the RTC was without jurisdiction over FFMCCI due to
invalid service of summons. The Court of Appeals ultimately resolved:
WHEREFORE, judgment is hereby rendered in favor of third-party plaintiff CCC Insurance Corporation
and against third-party defendant Florante F. Mañacop, ordering the latter to indemnify the former the
total amount paid by the former to Kawasaki Steel Corporation representing CCC Insurance
Corporation's liabilities under Surety Bond No. B-88/11191 and Performance Bond No. B88/11193 and
to pay CCC Insurance Corporation 25% of the total amount due, as and for attorney's fees.24
In the instant Petition for Review on Certiorari, CCCIC assails the aforementioned Decision and
Resolution of the Court of Appeals on six grounds, viz.:
A.
THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO CONSIDER THE TRUE NATURE OF
THE TRANSACTION BETWEEN THE PARTIES AND THE TRUE NATURE OF A COUNTER-
GUARANTEE.
B.
THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO APPRECIATE THE APPLICABILITY
OF ARTICLE 2079 OF THE CIVIL CODE, WHICH PROVIDES THAT AN EXTENSION GRANTED TO
THE DEBTOR BY THE CREDITOR WITHOUT THE CONSENT OF THE GUARANTOR
EXTINGUISHES THE GUARANTY.
C.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY FAILED TO CONSIDER THE
FACT THAT KAWASAKI AND FFMCCI HAVE NOVATED THEIR ORIGINAL AGREEMENT
WITHOUT THE KNOWLEDGE AND CONSENT OF CCCIC, THEREBY RELEASING THE LATTER
FROM ANY OBLIGATION UNDER THE BONDS IT ISSUED.
D.
63
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY RENDERED CCCIC LIABLE TO
PAY THE FULL AMOUNT OF THE SURETY AND PERFORMANCE BONDS DESPITE THE FACT
THAT FFMCCI WAS ABLE TO PARTIALLY EXECUTE ITS PORTION OF THE WORK AND THAT
KAWASAKI HAD BEEN FULLY COMPENSATED FOR TAKING OVER THE UNFINISHED PORTION.
E.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY AWARDED ATTORNEY'S
FEES TO KAWASAKI UNDER PARAGRAPH 2 OF ARTICLE 2208 OF THE CIVIL CODE.
F.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY RULED THAT THER WAS NO
VALID SERVICE OF SUMMONS UPON FFMCCI.25
CCCIC avers that its liabilities under the Surety and Performance Bonds are directly linked with the
obligation of the Kawasaki-FFMCCI Consortium to finish the Project for the Republic, so that its liability
as surety of FFMCCI will only arise if the Republic made a claim on the PCIB Letter of Credit furnished
by Kawasaki, on behalf of the Consortium. Since the Republic has not exercised its right against said
Letter of Credit, Kawasaki does not have a cause of action against CCCIC.
CCCIC also maintains that its obligations under the Surety and Performance Bonds had been
extinguished when (a) the Republic extended the completion period for the Project upon the request of
Kawasaki but without the knowledge or consent of CCCIC, based on Article 2079 of the Civil Code;
and (b) when Kawasaki and FFMCCI executed the Agreement dated August 24, 1989, without the
consent of CCCIC, there being a novation of the Consortium Agreement.
CCCIC further argues that when Kawasaki, under the Agreement dated August 24, 1989, voluntarily
took over the Transferred Portion of Work from FFMCCI, it resulted in the reduction of revenue of
FFMCCI on which CCCIC relied upon as a source of indemnification. CCCIC additionally posits that
Kawasaki already received compensation for doing the Transferred Portion of Work, so the Court of
Appeals had no basis for still ordering Kawasaki to pay the full value of the Surety and Performance
Bonds, plus interest.
Moreover, CCCIC contends that the Court of Appeals erred in awarding attorney's fees in favor of
Kawasaki based on paragraph 2 of Article 2208 of the Civil Code as it is not a sound policy to place a
penalty on the right to litigate.
Lastly, CCCIC insists that there was proper service of summons upon FFMCCI, through one of its
directors, as authorized by the Rules of Court.
The Petition is partly meritorious.
The liability of CCCIC under the
Surety and Performance Bonds is
dependent on the fulfillment and/or
non-fulfillment of the obligation of
FFMCCI to KAWASAKI under the
Consortium Agreement.
The statutory definition of suretyship is found in Article 204 7 of the Civil Code, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract is called a suretyship. (Emphasis supplied.)
Jurisprudence also defines a contract of suretyship as "an agreement where a party called the surety
guarantees the performance by another party called the principal or obligor of an obligation or
undertaking in favor of a third person called the obligee. Specifically, suretyship is a contractual relation
resulting from an agreement whereby one person, the surety, engages to be answerable for the debt,
default or miscarriage of another, known as the principal." 26 The Court expounds that "a surety's
liability is joint and several, limited to the amount of the bond, and determined strictly by the terms of
contract of suretyship in relation to the principal contract between the obligor and the obligee. It bears
stressing, however, that although the contract of suretyship is secondary to the principal contract, the
surety's liability to the obligee is nevertheless direct, primary, and absolute."27
At the outset, the Court ascertains that there are two principal contracts in this case: (1) the
Consortium Agreement wherein Kawasaki and FFMCCI agreed to jointly enter into a contract with the
Republic for the Project, each assuming the performance of specific scopes of work in said Project;
and (2) the Construction Contract whereby the Republic awards the Project to the Kawasaki-FFMCCI
Consortium. While there is a connection between these two contracts, they are each distinguishable
from and enforceable independently of one another: the first governs the rights and obligations
between Kawasaki and FFMCCI, while the second covers contractual relations between the Republic
and the Kawasaki-FFMCCI Consortium. The Surety and Performance Bonds from CCCIC guaranteed
the performance by FFMCCI of its obligations under the Consortium Agreement; whereas the Letter of
Credit from PCIB warranted the completion of the Project by the Kawasaki FFMCCI Consortium. At the
crux of the instant controversy are the Surety and Performance Bonds issued by CCCIC in relation to
the Consortium Agreement.
FFMCCI secured the Surety and Performance Bonds from CCCIC in compliance with Article 10 of the
Consortium Agreement which provided:
ARTICLE 10 - BONDS
10.1 The CONSORTIUM LEADER [Kawasaki] shall arrange, at [its] own cost, all necessary bonds or
guarantees as required under the CONTRACT on behalf of the CONSORTIUM. [FFMCCI] shall, at its
own cost, furnish the CONSORTIUM LEADER [Kawasaki] with a suitable counter guarantees of its
advance payment under the CONTRACT and the performance of its PORTION OF WORK in the
amount of fifteen (15%) percent (in the case of the repayment guarantee for the advance) and ten
(10%) percent (in the case of the performance guarantee) of the price of its PORTION OF THE WORK.
10.2 If the EMPLOYER [Republic] exercises its right on the bonds or guarantees furnished by the
CONSORTIUM LEADER, the PARTIES shall decide the respective responsibilities according to the
provisions of this AGREEMENT and the necessary reimbursement or compensation shall be made
also according to the provisions of this AGREEMENT. Pertinent portions of Surety Bond No. B-
88/11191 read:
64
 SURETY BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MANACOP CONSTRUCTION CO., INC., x xx, as principal, and CCC Insurance
Corporation, x x x, as SURETY, are held and firmly bound unto KAWASAKI STEEL CORPORATION,
hereinafter referred to as the OBLIGEE: in the sum of PESOS: THREE MILLION ONE HUNDRED
THREE THOUSAND EIGHT HUNDRED THREE & 90/100 ONLY (₱3,103,803.90), Philippine currency,
for the payment of which, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly bound from notice of acceptance,
by these presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
TO FULLY AND FAITHFULLY GUARANTEE THE REPAYMENT OF THE DOWNPAYMENT MADE
BY THE PRINCIPAL TO THE OBLIGEE IN CONNECTION WITH THE CONSTRUCTION OF THE
PANGASINAN FISHING PORT NETWORK PROJECT AT PANGASINAN; AND PROVIDED
HOWEVER, THAT THE LIABILITY OF THE HEREIN SURETY SHALL IN NO CASE EXCEED THE
AMOUNT OF PESOS: THREE MILLION ONE HUNDRED THREE THOUSAND EIGHT HUNDRED
THREE & 90/100 ONLY (₱3,103,803.90) PHILIPPINE CURRENCY.
xxxx
WHEREAS, the said OBLIGEE requires said Principal to give a good and sufficient bond in the above-
stated sum to secure the full and faithful performance on his part of said UNDERTAKING. NOW,
THEREFORE, if the above bounden principal shall in all respects duly and fully observe and perform
all and singular the aforesaid covenants, conditions and agreements to the true intent and meaning
thereof, then this obligation shall be null and void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on October 26, 1989 and the Surety does not
assume responsibility for any liability incurred or created after said date. Any claims against this bond
must be presented to the Surety in writing not later than ten (10) days after said expiry date; otherwise,
failure to do so shall forthwith release the Surety from all liabilities under this bond and shall be a bar to
any court action against it and which right to sue is hereby waived by the Obligee after the lapse of
said period often (10) days above cited.29
(Emphases supplied.)
Performance Bond No. B-88111193 contains the following terms and conditions:
PERFORMANCE BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MANACOP CONSTRUCTION CO., INC., xx x, as principal, and CCC Insurance
Corporation, x x x, as SURETY, are held and firmly bound unto KAWASAKI STEEL CORPORATION,
hereinafter referred to as the OBLIGEE: in the sum of PESOS: TWO MILLION SIXTY-NINE
THOUSAND TWO HUNDRED TWO & 60/100 ONLY (₱2,069,202.60), Philippine currency, for the
payment of which, well and truly to be made, we bind ourselves, our heirs, executors, administrators,
successors and assigns, jointly and severally, firmly bound from notice of acceptance, by these
presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
TO GUARANTEE THE FULL AND FAITHFUL PERFORMANCE OF THE PRINCIPAL OF ITS
OBLIGATION IN CONNECTION WITH THE PROJECT FOR THE CONSTRUCTION OF
PANGASINAN FISHING PORT NETWORK LOCATED AT PANGASINAN IN ACCORDANCE WITH
THE PLANS AND SPECIFICATION OF THE CONTRACT, AND; PROVIDED HOWEVER, THAT THE
LIABILITY OF THE HEREIN SURETY SHALL IN NO CASE EXCEED THE AMOUNT OF PESOS:
TWO MILLION SIXTY-NINE THOUSAND TWO HUNDRED TWO & 60/100 ONLY (₱2,069,202.60)
PHILIPPINE CURRENCY.
xxxx
WHEREAS, the said OBLIGEE requires said Principal to give a good and sufficient bond in the above-
stated sum to secure the full and faithful performance on his part of said UNDERTAKING.
NOW, THEREFORE, if the above bounden principal shall in all respects duly and fully observe and
perform all and singular the aforesaid covenants, conditions and agreements to the true intent and
meaning thereof, then this obligation shall be null and void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on October 27, 1989 and the Surety does not
assume responsibility for any liability incurred or created after said date. Any claims against this bond
must be presented to the Surety in writing not later than ten (10) days after said expiry date; otherwise,
failure to do so shall forthwith release the Surety from all liabilities under this bond and shall be a bar to
any court action against it and which right to sue is hereby waived by the Obligee after the lapse of
said period of ten ( 10) days above cited. 30
(Emphasis supplied.)
The Court reiterates that a surety's liability is determined strictly by the terms of contract of suretyship,
in relation to the principal contract between the obligor and the obligee. Hence, the Court looks at the
Surety and Performance Bonds, in relation to the Consortium Agreement.
According to the principle of relativity of contracts in Article 1311 of the Civil Code, 31 a contract takes
effect only between the parties, their assigns, and heirs; except when the contract contains a
stipulation in favor of a third person, which gives said person the right to demand fulfillment of said
stipulation. In this case, the Surety and Performance Bonds are enforceable by and against the parties
FFMCCI (the obligor) and CCCIC (the surety), as well as the third person Kawasaki (the obligee) in
whose favor said bonds had been explicitly constituted; while the related Consortium Agreement binds
the parties Kawasaki and FFMCCI. Since the Republic is neither a party to the Surety and
Performance Bonds nor the Consortium Agreement, any action or omission on its part has no effect on
the liability of CCCIC under said bonds.
The Surety and Performance Bonds state that their purpose was "to secure the full and faithful
performance on [FFMCCI' s] part of said undertaking," particularly, the repayment by FFMCCI of the
downpayment advanced to it by Kawasaki (in the case of the Surety Bond) and the full and faithful
65
performance by FFMCCI of its portion of work in the Project (in the case of the Performance
Bond).These are the only undertakings expressly guaranteed by the bonds, the fulfillment of which by
FFMCCI would release CCCIC from its obligations as surety; or conversely, the non-performance of
which would give rise to the liabilities of CCCIC as a surety.
The Surety and Performance Bonds do not contain any condition that CCCIC would be liable only if, in
addition to the default on its undertakings by FFMCCI, the Republic also made a claim against the
PCIB Letter of Credit furnished by Kawasaki, on behalf of the Kawasaki-FFMCCI Consortium. The
Court agrees with the observation of the Court of Appeals that "it is not provided, neither in the
Consortium Agreement nor in the subject bonds themselves that before KAWASAKI may proceed
against the bonds posted by [FFMCCI] and CCCIC, the Philippine government as employer must first
exercise its rights against the bond issued in its favor by the consortium."32
The Court cannot give any additional meaning to the plain language of the undertakings in the Surety
and Performance Bonds. The extent of a surety's liability is determined by the language of the
suretyship contract or bond itself. Article 1370 of the Civil Code provides that "[i]f the terms of a
contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning
of its stipulations shall control. "33
There is no basis for the interpretation by CCCIC of the word "counter-guarantee" in Article 10 of the
Consortium Agreement. The first paragraph of Article 10 of the Consortium Agreement provides that
Kawasaki, as the Consortium Leader, shall arrange, at its own cost but on behalf of the Kawasaki-
FFMCCI Consortium, for all necessary bonds and guarantees under the Construction Contract with the
Republic. The same paragraph requires, in turn, that FFMCCI, at its own cost, to furnish Kawasaki with
suitable counter-guarantees for the repayment by FFMCCI for the advance payment from Kawasaki
and performance by FFMCCI of its portion of work in the Project. Clearly, the "guarantees" and
"counter-guarantees" were securities for the fulfillment of the obligations of the Kawasaki-FFMCCI
Consortium to the Republic under the Construction Contract and of FFMCCI to the Consortium Leader
Kawasaki under the Consortium Agreement, respectively. The CCCIC Surety and Performance Bonds
were not counter-guarantees to the PCIB Letter of Credit. In fact, in the event that the Republic did
make a claim on the PCIB Letter of Credit, the second paragraph of Article 10 of the Consortium
Agreement stipulates
that Kawasaki and FFMCCI would still have to determine their respective
responsibilities, reimbursements, and/or compensations according to the provisions of the Consortium
Agreement, instead of simply allowing Kawasaki to recover on the "counter-guarantees" of FFMCCI.
It is not disputed that FFMCCI, due to financial difficulties, was unable to repay the advance payment it
received from Kawasaki and to finish its scope of work in the Project, thus, FFMCCI defaulted on its
obligations to Kawasaki. Given the default of FFMCCI, CCCIC as surety
became directly, primarily, and absolutely liable to Kawasaki as the obligee under the Surety and
Performance Bonds. The following pronouncements of the Court in Asset Builders Corporation v.
Stronghold Insurance Company, Inc.34 are relevant herein:
Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it executed in its
favor surety and performance bonds. The contents of the said contracts clearly establish that the
parties entered into a surety agreement as defined under Article 2047 of the New Civil Code. x x x.
xxxx
As provided in Article 204 7, the surety undertakes to be bound solidarily with the principal obligor.
That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a
principal contract. Although the contract of a surety is in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or
personal interest over the obligations nor does it receive any benefit therefrom. Let it be stressed that
notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety
assumes liability as a regular party to the undertaking.
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation, reiterating the ruling in
Garcia v. Court of Appeals, expounds on the nature of the surety's liability:
x x x. The surety's obligation is not an original and direct one for the performance of his own act, but
merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal obligation,
his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the principal.
Suretyship, in essence, contains two types of relationship - the principal relationship between the
obligee (petitioner) and the obligor (Lucky Star), and the accessory surety relationship between the
principal (Lucky Star) and the surety (respondent). In this arrangement, the obligee accepts the
surety's solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not
change in any material way the obligee's relationship with the principal obligor. Neither does it make
the surety an active party to the principal obligee-obligor relationship. Thus, the acceptance does not
give the surety the right to intervene in the principal contract. The surety's role arises only upon the
obligor's default, at which time, it can be directly held liable by the obligee for payment as a solidary
obligor.
In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time frame
despite petitioner's demand for completion, it was already in delay. Due to this default, Lucky Star's
liability attached and, as a necessary consequence, respondent's liability under the surety agreement
arose. Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to
return the ₱575,000.00 downpayment that was already advanced to it, respondent, as surety, became
solidarily bound with Lucky Star for the repayment of the said amount to petitioner. The clause, "this
bond is callable on demand," strongly speaks of respondent's primary and direct responsibility to the
petitioner.
Accordingly, after liability has attached to the principal, the obligee or, in this case, the petitioner, can
exercise the right to proceed against Lucky Star or respondent or both. x x x. (Emphases supplied,
citations omitted.)
Article 2079 of the New Civil Code is not applicable to the instant case.
To free itself from its liabilities under the Surety and Performance Bonds, CCCIC cites Article 2079 of
the Civil Code, which reads: Art. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to
66
demand payment after the debt has become due does not of itself constitute any extension of time
referred to herein.
The aforequoted provision clearly speaks of an extension for the payment of a debt granted by the
creditor to a debtor without the consent of the surety. The theory behind Article 2079 was further
explained by the Court in Trade and Investment Development Corporation of the Philippines (Formerly
Philippine Export and Foreign Loan Guarantee Corporation) v. Asia Paces Corporation,35 thus:
Comparing a surety's obligations with that of a guarantor, the Court, in the case of Palmares v. CA,
illumined that a surety is responsible for the debt's payment at once if the principal debtor makes
default, whereas a guarantor pays only if the principal debtor is unable to pay, viz.:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A
suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor
shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay,
while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against
the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does
not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the
principal will pay, but simply that he is able to do so. In other words, a surety undertakes directly for the
payment and is so responsible at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.
xxx.
Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc., and later
in the case of Security Bank, held that Article 2079 of the Civil Code, which pertinently provides that
"[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes
the guaranty," equally applies to both contracts of guaranty and suretyship. The rationale therefore was
explained by the Court as follows:
The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor
without the surety's consent would deprive the surety of his right to pay the creditor and to be
immediately subrogated to the creditor's remedies against the principal debtor upon the maturity date.
The surety is said to be entitled to protect himself against the contingency of the principal debtor or the
indemnitors becoming insolvent during the extended period.
Applying these principles, the Court finds that the payment extensions granted by Banque Indosuez
and PCI Capital to TIDCORP under the Restructuring Agreement did riot have the effect of
extinguishing the bonding companies' obligations to TIDCORP under the Surety Bonds,
notwithstanding the fact that said extensions were made without their consent. This is because Article
2079 of the Civil Code refers to a payment extension granted by the creditor to the principal
debtor without the consent of the guarantor or surety. In this case, the Surety Bonds are suretyship
contracts which secure the debt of ASP AC, the principal debtor, under the Deeds of Undertaking to
pay TIDCORP, the creditor, the damages and liabilities it may incur under the Letters of Guarantee,
within the bounds of the bonds' respective coverage periods and amounts. No payment extension was,
however, granted by TIDCORP in favor of ASP AC in this regard; hence, Article 2079 of the Civil Code
should not be applied with respect to the bonding companies' liabilities to TIDCORP under the Surety
Bonds.
The payment extensions granted by Banque Indosuez and PCI Capital pertain to TIDCORP's own debt
under the Letters of Guarantee wherein it (TIDCORP) irrevocably and unconditionally guaranteed full
payment of ASPAC's loan obligations to the banks in the event of its (ASP AC) default. In other words,
the Letters of Guarantee secured ASPAC's loan agreements to the banks. Under this arrangement,
TIDCORP therefore acted as a guarantor, with ASP AC as the principal debtor, and the banks as
creditors.
Proceeding from the foregoing discussion, it is quite clear that there are two sets of transactions that
should be treated separately and distinctly from one another following the civil law principle of relativity
of contracts "which provides that contracts can only bind the parties who entered into it, and it cannot
favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge
thereof." Verily, as the Surety Bonds concern ASPAC's debt to TIDCORP and not TIDCORP's debt to
the banks, the payments extensions (which conversely concern TIDCORP's debt to the banks and not
ASP A C's debt to TIDCORP) would not deprive the bonding companies of their right to pay their
creditor (TIDCORP) and to be immediately subrogated to the latter's remedies against the principal
debtor (ASP AC) upon the maturity date. It must be stressed that these payment extensions did not
modify the terms of the Letters of Guarantee but only provided for a new payment scheme covering
TIDCORP's liability to the banks. In fine, considering the inoperability of Article 2079 of the Civil Code
in this case, the bonding companies' liabilities to TIDCORP under the Surety Bonds - except those
issued by Paramount and covered by its Compromise Agreement with TIDCORP - have not been
extinguished. Since these obligations arose and have been duly demanded within the coverage
periods of all the Surety Bonds, TIDCORP's claim is hereby granted.
Similarly, there are two sets of transactions in the present case covered by two different contracts: the
Consortium Agreement between Kawasaki and FFMCCI and the Construction Contract between the
Republic and the Kawasaki-FFMCCI Consortium. The Surety and Performance Bonds guaranteed the
performance of the obligations of FFMCCI to Kawasaki under the Consortium Agreement. The
Republic was not a party in either the Surety and Performance Bonds or the Consortium Agreement.
Under these circumstances, there was no creditor-debtor relationship between the Republic and
FFMCCI and Article 2079 of the Civil Code did not apply. The extension granted by the Republic to
Kawasaki modified the deadline for the completion of the Project under the Construction Contract, but
had no effect on the obligations of FFMCCI to Kawasaki under the Consortium Agreement, much less,
on the liabilities of CCCIC under the
Surety and Performance Bonds.
CCCIC failed to discharge the
burden of proving the novation of
the Consortium Agreement which
would have extinguished its
obligations under the Surety and
Performance Bonds.
CCCIC argues that it was released from its obligations as surety under the Surety and Performance
Bonds because of the novation of the Consortium Agreement by the subsequent Agreement dated
August 24, 1989 executed between Kawasaki and FFMCCI, without the consent of CCCIC.
The Court first notes that the default of FFMCCI preceded the execution of the Agreement on August
24, 1989 which purportedly novated the Consortium Agreement and, in effect, extinguished the Surety
and Performance Bonds. As early as his letter dated July 20, 1989, Mañacop, FFMCCI President,
already admitted the inability of FFMCCI to continue with its portion of work in the Project and
authorized Kawasaki to continue the same. It was precisely because FFMCCI defaulted on its
67
obligations under the Consortium Agreement that necessitated the execution of the Agreement dated
August 24, 1989 between Kawasaki and FFMCCI, and this is evident from one of the "whereas"
clauses in the said Agreement which says that "due to some financial reverses[, FFMCCI] can no
longer do its portion of the work under the Contract." The liabilities of CCCIC as surety to Kawasaki
under the Surety and Performance Bonds had already attached upon the default of FFMCCI while the
said bonds were still in effect and prior to the alleged novation of the Consortium Agreement by the
Agreement dated August 24, 1989 which resulted in the extinguishment of the bonds.
The Court expounded on the concept of novation in Reyes v. BPI Family Savings Bank, Inc.36
Novation is defined as the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates the first, either by changing the object or principal
conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the
creditor.
Article 1292 of the Civil Code on novation further provides:
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other.
The cancellation of the old obligation by the new one is a necessary element of novation which may be
effected either expressly or impliedly. While there is really no hard and fast rule to determine what
might constitute sufficient change resulting in novation, the touchstone, however, is irreconcilable
incompatibility between the old and the new obligations.
In Garcia, Jr. v. Court of Appeals, we held that:
In every novation there are four essential requisites: (1) a previous valid obligation; (2) the agreement
of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the
new one. There must be consent of all the parties to the substitution, resulting in the extinction of the
old obligation and the creation of a valid new one .xx x. (Citations omitted.)
It is well-settled that novation is never presumed - novatio non praesumitur. As the party alleging
novation, the onus of showing clearly and unequivocally that novation had indeed taken place rests on
CCCIC.The Court laid down guidelines in establishing novation, viz.:
Novation is never presumed, and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is a necessary element of novation which may
be effected either expressly or impliedly. The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one.
Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by
law would be an incompatibility between the two contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation, the touchstone
for contrariety,
however, would be an irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. The first is when novation
has been explicitly stated and declared in unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes that breed incompatibility
must be essential in nature and not merely accidental. The incompatibility must take place in any of the
essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise,
the change would be merely modificatory in nature and insufficient to extinguish the original
obligation.38(Citations omitted.)
CCCIC failed to discharge the burden of proving novation of the Consortium Agreement by the
Agreement dated August 24, 1989. The Court failed to see the presence of the essential requisites for
a novation of contract, specifically, the irreconcilable incompatibility between the old and new
contracts. Indeed, Kawasaki and FFMCCI executed the Agreement dated August 24, 1989 pursuant to
Article 8.3 of the Consortium Agreement:
8.3 If, for any reason, any PARTY should fail in the performance of its PORTION OF WORK or
contractual obligations and if such defaulting PAR TY refuses to cure or makes no remedial action,
without presenting any valid cause, within fifteen (15) days following demand of rectification by
registered letter sent by the other PARTY, the defaulting PARTY's PORTION OF WORK may be
performed at the account and responsibility of the defaulting PARTY, by the non-defaulting PARTY or
by any other contractor selected by the non-defaulting PARTY and approved by the EMPLOYER. In
such event, the defaulting PARTY or its representative shall, in no way, interfere with the performance
of the CONTRACT or impede the progress thereof, on any ground, and shall allow such performing
PARTY or the said contractor to use the materials and equipment of such defaulting PARTY, for the
purpose of remedial action.
FFMCCI was unable to finish its portion of work in the Project because of business reverses, and by
the Agreement dated August 24, 1989, Kawasaki assumed the Transferred Portion of Work from
FFMCCI and was accorded the right to receive the profits and benefits corresponding to said portion.
Although the Agreement dated August 24, 1989 resulted in the reallocation of the respective portions
of work of Kawasaki and FFMCCI, as well as their corresponding shares in the profits and benefits
under the Consortium Agreement, such changes were not incompatible with the object, cause, and
principal conditions of the Consortium Agreement. Consequently, the changes under the Agreement
dated August 24, 1989 were only modificatory and did not extinguish the original obligations under the
Consortium Agreement.
Even granting that there is novation, the Court in Stronghold Insurance Company, Incorporated v.
Tokyu Construction Company, Ltd.,39 held that to release the surety, the material change in the
principal contract must make the obligation of the surety more onerous. The Court ratiocinated in
Stronghold as follows:
Petitioner's liability was not affected by the revision of the contract price, scope of work, and contract
schedule. Neither was it extinguished because of the issuance of new bonds procured from Tico.
As early as February 10, 1997, respondent already sent a letter to Gabriel informing the latter of the
delay incurred in the performance of the work, and of the former's intention to terminate the
subcontract agreement to prevent further losses. Apparently, Gabriel had already been in default even
prior to the aforesaid letter; and demands had been previously made but to no avail. By reason of said
68
default, Gabriel's liability had arisen; as a consequence, so also did the liability of petitioner as a surety
arise.
xxxx
By the language of the bonds issued by petitioner, it guaranteed the full and faithful compliance by
Gabriel of its obligations in the construction of the SDS and STP specifically set forth in the subcontract
agreement, and the repayment of the 15% advance payment given by respondent. These guarantees
made by petitioner gave respondent the right to proceed against the former following Gabriel's non-
compliance with her obligation.
Confusion, however, transpired when Gabriel and respondent agreed, on February 26, 1997, to reduce
the scope of work and, consequently, the contract price. Petitioner viewed such revision as novation of
the original subcontract agreement; and since no notice was given to it as a surety, it resulted in the
extinguishment of its obligation.
We wish to stress herein the nature of suretyship, which actually involves two types of relationship --
the underlying principal relationship between the creditor (respondent) and the debtor (Gabriel), and
the accessory surety relationship between the principal (Gabriel) and the surety (petitioner). The
creditor accepts the surety's solidary undertaking to pay if the debtor does not pay. Such acceptance,
however, does not change in any material way the creditor's relationship with the principal debtor nor
does it make the surety an active party to the principal creditor-debtor relationship. In other words, the
acceptance does not give the surety the right to intervene in the principal contract. The surety's role
arises only upon the debtor's default, at which time, it can be directly held liable by the creditor for
payment as a solidary obliger.
The surety is considered in law as possessed of the identity of the debtor in relation to whatever is
adjudged touching upon the obligation of the latter. Their liabilities are so interwoven as to be
inseparable. Although the contract of a surety is, in essence, secondary only to a valid principal
obligation, the surety's liability to the creditor is direct, primary, and absolute; he becomes liable for the
debt and duty of another although he possesses no direct or personal interest over the obligations nor
does he receive any benefit therefrom.
Indeed, a surety is released from its obligation when there is a material alteration of the principal
contract in connection with which the bond is given, such as a change which imposes a new obligation
on the promising party, or which takes away some obligation already imposed, or one which changes
the legal effect of the original contract and not merely its form. However, a surety is not released by a
change in the contract, which does not have the effect of making its obligation more onerous.
In the instant case, the revision of the subcontract agreement did not in any way make the obligations
of both the principal and the surety more onerous. To be sure, petitioner never assumed added
obligations, nor were there any additional obligations imposed, due to the modification of the terms of
the contract. Failure to receive any notice of such change did
not, therefore, exonerate petitioner from its liabilities as surety. (Emphasis supplied, citations omitted.)
There is no showing herein that the obligations of CCCIC as surety had become more onerous with the
execution of the Agreement dated August 24, 1989 between Kawasaki and FFMCCI. The Agreement
dated August 24, 1989 did not alter in any way the original coverage and the terms and conditions of
the Surety and Performance Bonds of CCCIC. If truth be told, the Agreement dated August 24, 1989
made it more onerous for Kawasaki which had to take over the Transferred Portion of Work from
FFMCCI.
That Kawasaki was to receive the profits and benefits corresponding to the Transferred Portion of
Work would not extinguish the liabilities of CCCIC under the Surety and Performance Bonds. The right
of Kawasaki to the profits and benefits corresponding to the Transferred Portion of Work was granted
under the Agreement dated August 24, 1989 because Kawasaki was the one that would actually
perform the remaining portion of work and complete the Project and should be duly compensated for
the same. It is separate and distinct from the right of Kawasaki to demand payment of the amounts
guaranteed by CCCIC as surety upon the default of FFMCCI on its undertakings under the Surety and
Performance Bonds. CCCIC cannot standby passively and be benefitted by payments made by the
Republic, as owner of the Project, to Kawasaki, as contractor, for the Transferred Portion of Work. The
only way CCCIC can extinguish its liabilities as surety, which
already attached upon the default of FFMCCI, is to make its own payments to Kawasaki of the
amounts guaranteed under the Surety and Performance Bonds.
Equally without merit is the averment of CCCIC that by executing the Agreement dated August 24,
1989, which gave Kawasaki the right to the profits and benefits corresponding to the Transferred
Portion of Work, Kawasaki and FFMCCI colluded or connived to deprive CCCIC of its source of
indemnification. Other than its allegation, CCCIC failed to present any evidence of collusion or
connivance between Kawasaki and FFMCCI to intentionally prejudice CCCIC. The Court reiterates that
the execution of the Agreement dated August 24, 1989 was actually authorized under Article 8.3 of the
Consortium Agreement. Kawasaki was given the right to the profits and benefits corresponding to the
Transferred Portion of Work because it would be the one to perform the same. It would be the height of
inequity to allow FFMCCI to continue collecting payments for work it was not able to do. Besides, there
is utter lack of basis for the claim of CCCIC that without the compensation for the Transferred Portion
of Work, FFMCCI would have no means to indemnify CCCIC for any payments the latter would have to
make to Kawasaki under the Surety and Performance Bonds. As the succeeding discussion will show,
it is premature for CCCIC to question the capacity of FFMCCI to indemnify it.
CCCIC must first pay its liabilities to
Kawasaki under the Surety and
Performance Bonds before it could
be indemnified and subrogated to the
rights of Kawasaki against FFMCCI.
The rights of a guarantor who pays for the debt of the debtor are governed by the following provisions
of the Civil Code:
Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
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 (2) The legal interests thereon from the time the payment was made known to the debtor,
even though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that payment had
been demanded of him;
(4) Damages, if they are due. Art. 2067. The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he
has really paid.
Although the foregoing provisions only speak of a guarantor, they also apply to a surety, as the Court
held in Escano v. Ortigas, Jr. 40
What is the source of this right to full reimbursement by the surety? We find the right under Article 2066
of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must be indemnified by the
latter," such indemnity comprising of, among others, "the total amount of the debt." Further, Article
2067 of the Civil Code likewise establishes that "[t]he guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor."
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should
not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and
several obligations should apply to sureties. We reject that argument, and instead adopt Dr. Tolentino's
observation that "[t]he reference in the second paragraph of [Article 2047] to the provisions of Section
4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that
suretyship is withdrawn from the applicable provisions governing guaranty." For if that were not the
implication, there would be no material difference between the surety as defined under Article 204 7
and the joint and several debtors, for both classes of obligors would be
governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor
by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. x x x. (Citations
omitted.)
Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to indemnification and subrogation
will arise only after it has paid its obligations to Kawasaki as the debtor-obligee. In Autocorp Group v.
Intra Strata Assurance Corporation,41 the Court ruled that:
The benefit of subrogation, an extinctive subjective novation by a change of creditor, which "transfers
to the person subrogated, the credit and all the rights thereto appertaining, either against the debtor or
against third persons," is granted by the Article 2067 of the Civil Code only to the "guarantor (or surety)
who pays." (Emphases supplied, citations omitted.)
In the present case, CCCIC has yet to pay Kawasaki.
While summons was validly served
upon FFMCCI, the Third-Party
Complaint of CCCJC against
FFMCCI is dismissed on the ground
of lack of cause of action.
The Court disagrees with the ruling of the Court of Appeals that there was no proper service of
summons upon FFMCCI. The appellate court overlooked the fact that the service of summons on
FFMCCI at its principal address at #86 West A venue, Quezon City failed because FFMCCI had
already vacated said premises without notifying anyone as to where it transferred. For this reason, the
RTC, upon the motion of CCCIC, issued an Order42 dated September 4, 1991, directing the issuance
and service of Alias Summons to the individual directors of FFMCCI. Eventually, the Alias Summons
was personally served upon FFMCCI director Vicente Concepcion on September 25, 1991.43
Rule 14, Section 13 of the 1964 Rules of Court, which was then in force, allowed the service of
summons upon a director of a private domestic corporation:
Sec. 13. Service upon private domestic corporation or partnership. - If the defendant is a corporation
organized under the laws of the Philippines or a partnership duly registered, service may be made on
the president, manager, secretary, cashier, agent, or any of its directors.
The aforementioned rule does not require that service on the private domestic corporation be served at
its principal office in order for the court to acquire jurisdiction over the same. The Court, in Talsan
Enterprises, Inc. vs. Baliwag Transit, lnc.,44 citing Baltazar v. Court of Appeals,45 affirmed that:
[S]ervice on respondent's bus terminal at the address stated in the summons and not in its main office
in Baliwag do not render the service of summons invalid.1âwphi1 In Artemio Baltazar v. Court of
Appeals, we held:
"The regular mode, in other words, of serving summons upon a private Philippine Corporation is by
personal service upon one of the officers of such corporation identified in Section 13. Ordinarily, such
personal service may be expected to be made at the principal office of the corporation. Section 13,
does not, however, impose such requirement, and so personal service upon the corporation may be
effected through service upon, for instance, the president of the corporation at his office or residential
address." xx x.
In fine, the service of summons upon respondent Baliwag Transit is proper. Consequently, the trial
court validly acquired jurisdiction over respondent Baliwag. (Citation omitted.)
Hence, the personal service of the Alias Summons on an FFMCCI director was sufficient for the RTC
to acquire jurisdiction over FFMCCI itself.
Nevertheless, the Third-Party Complaint filed by CCCIC against FFMCCI and Mañacop must be
dismissed on the ground of lack of cause of action.
A cause of action is defined as the act or omission by which a party violates a right of another. The
essential elements of a cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b)
a correlative legal duty of the defendant to respect such right; and ( c) an act or omission by such
70
defendant in violation of the right of the plaintiff with a resulting injury or damage to the plaintiff for
which the latter may maintain an action for the recovery of relief from the defendant.46
As discussed earlier, the rights to indemnification and subrogation of a surety only arise upon its
payment of the obligation to the obligee. In the case at bar, since CCCIC up to this point refuses to
acknowledge and pay its obligation to Kawasaki under the Surety and Performance Bonds, it has not
yet acquired the rights to seek indemnification from FFMCCI and subrogation to Kawasaki as against
FFMCCI. In the same vein, the corresponding obligation of FFMCCI to indemnify CCCIC under the
Indemnity Agreements has yet to accrue. Thus far, there is no act or omission on the part of FFMCCI
which violated the right of CCCIC and for which CCCIC may seek relief from the courts. In the absence
of these elements, CCCIC has no cause of action against FFMCCI and/or FFMCCI President
Mañacop. Resultantly, the Third-Party Complaint of CCCIC should be dismissed.
There is no basis for awarding
attorney's fees in favor of Kawasaki.
In addition, the rate of legal interest
imposed shall conform with latest
jurisprudence.
Article 2208(2) of the Civil Code allows the award of attorney's fees "[w]hen the defendant's act or
omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his
interest[.]" In Servicewide Specialists, Incorporated v. Court of Appeals, 47 the Court declared that:
Article 2208 of the Civil Code allows attorney's fees to be awarded by a court when its claimant is
compelled to litigate with third persons or to incur expenses to protect his interest by reason of an
unjustified act or omission on the part of the party from whom it is sought. To be sure, private
respondents were forced to litigate to protect their rights but as we have previously held: "where no
sufficient showing of bad faith would be reflected in a party's persistence in a case other than an
erroneous conviction of the righteousness of his cause, attorney's fee shall not be recovered as cost."
(Citation omitted.)
Bad faith has been defined as "a breach of a known duty through some motive of interest or ill will. It
must, however, be substantiated by evidence. Bad faith under the law cannot be presumed, it must be
established by clear and convincing evidence." 48 There is no evidence in this case to show bad faith on
the part of CCCIC. CCCIC, in refusing the claim of Kawasaki, was merely acting based on its belief in
the righteousness of its defense. Hence, even though Kawasaki was compelled to litigate to enforce its
claim against CCCIC, the award of attorney's fees is not proper.
Finally, the Court, in Nacar v. Gallery Frames,49 modified the guidelines in imposing interests, taking
into account Bangko Sentral ng Pilipinas-Monetary Board Resolution No. 796 dated May 16, 2013 and
Circular No. 799, series of 2013, which fixed the legal rate at 6% per annum effective July 1, 2013. In
the absence of stipulated interest in the present case, the Court imposes upon the amounts covered by
the Surety and Performance Bonds the legal rate of 12% per annum from September 15, 1989, the
date of demand, until June 30, 2013; and then the legal rate of6% per annum from July 1, 2013 until
full payment of the same.
WHEREFORE, premises considered, the instant Petition for Review on Certiorari is PARTLY
GRANTED. The Decision dated May 30, 2002 and Resolution dated November 14, 2002 of the Court
of Appeals are AFFIRMED with the following MODIFICATIONS:
1) The Third-Party Complaint filed by CCC Insurance Corporation against F.F. Mañacop
Construction Company, Inc. and Mr. Florante F. Mañacop is DISMISSED on the ground of
lack of cause of action;
2) The award of attorney's fees in favor of Kawasaki Steel Corporation is DELETED; and
3) In addition to the amounts CCC Insurance Corporation is ordered to pay Kawasaki Steel
Corporation under Surety Bond No. B-88/11191 and Performance Bond No. B-88/11193,
CCC Insurance Corporation is further ORDERED to pay Kawasaki Steel Corporation legal
interest on said amounts at the rates of 12% per annum from September 15, 1989 to June 30,
2013 and 6% per annum from July 1, 2013 until full payment thereof.
SO ORDERED.
Subjective Novation
G.R. No. 154127 December 8, 2003
ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or
by the complete incompatibility between the old and the new agreements. Petitioner herein fails to
show either requirement convincingly; hence, the summary judgment holding him liable as a joint and
solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the November
26, 2001 Decision2 and the June 26, 2002 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
60521. The appellate court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it
pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification
that the award for attorney’s fees and cost of suit is DELETED. The portion of the judgment that
pertains to x x x Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the case against x x x
Eduardo de Jesus is REMANDED to the court of origin for purposes of receiving ex parte [Respondent]
Dionisio Llamas’ evidence against x x x Eduardo de Jesus."4
The challenged Resolution, on the other hand, denied petitioner’s Motion for Reconsideration.
The Antecedents
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The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio
Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No.
Q97-32-873, the complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed
₱400,000.00 from [respondent]; that, on the same day, [they] executed a promissory note wherein they
bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest
per month; that the loan has long been overdue and, despite repeated demands, [petitioner and de
Jesus] have failed and refused to pay it; and that, by reason of the[ir] unjustified refusal, [respondent]
was compelled to engage the services of counsel to whom he agreed to pay 25% of the sum to be
recovered from [petitioner and de Jesus], plus ₱2,000.00 for every appearance in court. Annexed to
the complaint were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under
the promissory note because he signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the note inasmuch as the loan had been
paid by x x x de Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance
of the check and [respondent’s] acceptance thereof novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder asserting that the loan
remained unpaid for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner]
Garcia’s answer was not even accompanied by a certificate of non-forum shopping. Annexed to the
reply were the face of the check and the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed
₱400,000.00 loan, he received only ₱360,000.00, the P40,000.00 having been advance interest
thereon for two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum of
₱120,000.00 by way of interests; that this was made when [respondent’s] daughter, one Nits Llamas-
Quijencio, received from the Central Police District Command at Bicutan, Taguig, Metro Manila (where
x x x de Jesus worked), the sum of ₱40,000.00, representing the peso equivalent of his accumulated
leave credits, another ₱40,000.00 as advance interest, and still another ₱40,000.00 as interest for the
months of March and April 1997; that he had difficulty in paying the loan and had asked [respondent]
for an extension of time; that [respondent] acted in bad faith in instituting the case, [respondent] having
agreed to accept the benefits he (de Jesus) would receive for his retirement, but [respondent]
nonetheless filed the instant case while his retirement was being processed; and that, in defense of his
rights, he agreed to pay his counsel ₱20,000.00 [as] attorney’s fees, plus ₱1,000.00 for every court
appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-
trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he
would no [longer] present evidence. Given this development, the trial court gave [respondent]
permission to present his evidence ex parte against x x x de Jesus; and, as regards [Petitioner] Garcia,
the trial court directed [respondent] to file a motion for judgment on the pleadings, and for [Petitioner]
Garcia to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to
present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his
defense to a judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to
submit the case for judgement on the pleadings, withdrawing in the process his previous motion.
Thereunder, he asserted that [petitioner’s and de Jesus’] solidary liability under the promissory note
cannot be any clearer, and that the check issued by de Jesus did not discharge the loan since the
check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as
follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of
[respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and
severally, the [respondent] the following sums, to wit:
‘1) ₱400,000.00 representing the principal amount plus 5% interest thereon per month from
January 23, 1997 until the same shall have been fully paid, less the amount of ₱120,000.00
representing interests already paid by x x x de Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for each day of [c]ourt
appearance, and;
‘3) Cost of this suit.’"6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De
Jesus. According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he
was still required to present his evidence ex parte. Thus, respondent was not ipso facto entitled to the
RTC judgment, even though De Jesus had been declared in default. The case against the latter was
therefore remanded by the CA to the trial court for the ex parte reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to
raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place when respondent
accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the
loan that was covered by the promissory note jointly and severally undertaken by petitioner and De
Jesus. Respondent’s acceptance of the check did not serve to make De Jesus the sole debtor
because, first, the obligation incurred by him and petitioner was joint and several; and, second, the
check -- which had been intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"I
72
Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in the
instant case as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loan
obligation he obtained from x x x Respondent Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of
₱400,000.00 in favor of Respondent Llamas, although the check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution
by x x x de Jesus or [the superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount of ₱120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to
financial difficulties, he be given an extension of time to pay his loan obligation and that his
retirement benefits from the Philippine National Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of
petitioner that he was merely an accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given weight and credence considering that
subsequent events showed that the principal obligor was in truth and in fact x x x de Jesus, as
evidenced by the foregoing circumstances showing his assumption of sole liability over the loan
obligation.
"III
Whether or not judgment on the pleadings or summary judgment was properly availed of by
Respondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable Court
of Appeals itself admitted in its Decision, which call for the presentation of evidence in a full-blown
trial."8
Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the
defense that petitioner was only an accommodation party had any basis; and 3) whether the judgment
against him -- be it a judgment on the pleadings or a summary judgment -- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that
novation took place, either through the substitution of De Jesus as sole debtor or the replacement of
the promissory note by the check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law,9 the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.10 Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from -- and may even be made
without the knowledge of -- the debtor, since it consists of a third person’s assumption of the obligation.
As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. 11Both modes of substitution by the
debtor require the consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by
the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement.13 Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a
third person to the rights of the creditor, an act known as subjective or personal novation. 14 For
novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point.16 The test of incompatibility is whether the two obligations
can stand together, each one with its own independent existence. 17
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the issuance
and the acceptance of the check, or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check. As the CA correctly observed, the check
73
had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan
obligation; and on the other, the check answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view, also constitutes novation 18 --
change the terms and conditions of the obligation. Such payment was already provided for in the
promissory note and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old one must be expressly released from the
obligation, and the third person or new debtor must assume the former’s place in the relation. 19 Well-
settled is the rule that novation is never presumed.20 Consequently, that which arises from a purported
change in the person of the debtor must be clear and express. 21 It is thus incumbent on petitioner to
show clearly and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from the obligation, that a
third person was substituted in his place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly held:
"x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de Jesus either, the
nature of the obligation being solidary due to the fact that the promissory note expressly declared that
the liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may
demand payment or performance from one of the solidary debtors or some or all of them
simultaneously, and payment made by one of them extinguishes the obligation. It therefore follows that
in case the creditor fails to collect from one of the solidary debtors, he may still proceed against the
other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor
expressly consent to the substitution of a new debtor.23 Since novation implies a waiver of the right the
creditor had before the novation, such waiver must be express.24 It cannot be supposed, without clear
proof, that the present respondent has done away with his right to exact fulfillment from either of the
solidary debtors.25
More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint
and solidary obligor of the ₱400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondent’s acceptance of his check did not change the person of the debtor,
because a joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the
whole obligation from any or all of the debtors.26 It is up to the former to determine against whom to
enforce collection.27Having made himself jointly and severally liable with De Jesus, petitioner is
therefore liable28 for the entire obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as
such, he was released as obligor when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:
"PROMISSORY NOTE
"₱400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS,
Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City,
with interest at the rate of 5% per month or fraction thereof.
"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996." 30
By its terms, the note was made payable to a specific person rather than to bearer or to order 31 -- a
requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner
cannot avail himself of the NIL’s provisions on the liabilities and defenses of an accommodation party.
Besides, a non-negotiable note is merely a simple contract in writing and is evidence of such intangible
rights as may have been created by the assent of the parties. 32 The promissory note is thus covered by
the general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory
note. Under Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for
value even if, at the time of its taking, the latter knew the former to be only an accommodation party.
The relation between an accommodation party and the party accommodated is, in effect, one of
principal and surety -- the accommodation party being the surety.33 It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an original promissor and debtor from
the beginning. The liability is immediate and direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings and a summary
judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered
after a summary hearing if the pleadings, supporting affidavits, depositions and admissions on file
show that (1) except as to the amount of damages, there is no genuine issue regarding any material
fact; and (2) the moving party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of actions in which the
pleadings raise only a legal, not a genuine, issue regarding any material fact. 35 Consequently, facts are
asserted in the complaint regarding which there is yet no admission, disavowal or qualification; or
specific denials or affirmative defenses are set forth in the answer, but the issues are fictitious as
shown by the pleadings, depositions or admissions.36 A summary judgment may be applied for by
either a claimant or a defending party.37
74
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is
proper when an answer fails to render an issue or otherwise admits the material allegations of the
adverse party’s pleading. The essential question is whether there are issues generated by the
pleadings.38 A judgment on the pleadings may be sought only by a claimant, who is the party seeking
to recover upon a claim, counterclaim or cross-claim; or to obtain a declaratory relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment against petitioner was correctly
treated by the appellate court as a summary judgment, rather than as a judgment on the pleadings. His
Answer40 apparently raised several issues -- that he signed the promissory note allegedly as a mere
accommodation party, and that the obligation was extinguished by either payment or novation.
However, these are not factual issues requiring trial. We quote with approval the CA’s observations:
"Although Garcia’s [A]nswer tendered some issues, by way of affirmative defenses, the documents
submitted by [respondent] nevertheless clearly showed that the issues so tendered were not valid
issues. Firstly, Garcia’s claim that he was merely an accommodation party is belied by the promissory
note that he signed. Nothing in the note indicates that he was only an accommodation party as he
claimed to be. Quite the contrary, the promissory note bears the statement: ‘It is understood that our
liability under this loan is jointly and severally [sic].’ Secondly, his claim that his co-defendant de Jesus
already paid the loan by means of a check collapses in view of the dishonor thereof as shown at the
dorsal side of said check."41
From the records, it also appears that petitioner himself moved to submit the case for judgment on the
basis of the pleadings and documents.1âwphi1 In a written Manifestation,42 he stated that "judgment on
the pleadings may now be rendered without further evidence, considering the allegations and
admissions of the parties."43
In view of the foregoing, the CA correctly considered as a summary judgment that which the trial court
had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
G.R. No. 126712 April 14, 1999
LEONIDA C. QUINTO, petitioner,
vs.
PEOPLE OF THE PHILIPPINES, respondent.
VITUG, J
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the decision of
the Court of Appeals, promulgated on 27 September 1996, in People of the Philippines vs. Leonida
Quinto y Calayan, docketed CA-G.R. CR No. 16567, which has affirmed the decision of Branch 157 of
the Regional Trial Court (RTC), National Capital Judicial Region, Branch 157, Pasig City, finding
Leonida Quinto y Calayan guilty beyond reasonable doubt of the crime of Estafa.
Leonida Quinto y Calayan, herein petitioner, was indicted for the crime of estafa under Article 315,
paragraph 1(b), of the Revised Penal Code, in an information which read:
That on or about the 23rd day of March 1977, in the Municipality of Makati, Metro
Manila, Philippines and within the jurisdiction of this Honorable Court, the above-
named accused, received in trust from one Aurelia Cariaga the following pieces of
jewelry, to wit:
One (1) set of marques with briliantitos
valued at P17,500.00
One (1) solo ring (2 karats & 30 points)
valued at P16,000.00
One (1) diamond ring (rosetas)
valued at P 2,500.00
with a total value of P36,000.00 for the purpose of selling the same on commission
basis and with the express obligation on the part of the accused to turn over the
proceeds of sale thereof, or to return the said jewelries (sic), if not sold, five (5) days
after receipt thereof, but the accused once in possession of the jewelries (sic), far
from complying with her obligation, with intent of gain, grave abuse of confidence
and to defraud said Aurelia Cariaga, did then and there wilfully, unlawfully and
feloniously misappropriate, misapply and convert to her own personal use and
benefit the said jewelries (sic) and/or the proceeds of sale or to recturn the pieces of
jewelry, to the damage and prejudice of the said Aurelia Cariaga in the
aforementioned amount of P36,000.00.
Contrary to law. 1
Upon her arraignment on 28 March 1978, petitioner Quinto pleaded not guilty; trial on the merits
thereupon ensued.
According to the prosecution, on or about 23 March 1977, Leonida went to see Aurelia Cariaga (private
complainant) at the latter's residence in Makati. Leonida asked Aurelia to allow her have some pieces
of jewelry that she could show to prospective buyers. Aurelia acceded and handed over to Leonida one
(1) set of marques with briliantitos worth P17,500.00, one (1) solo ring of 2.30 karats worth P16,000.00
and one (1) rosetas ring worth P2,500.00. Leonida signed a receipt (Exhibit "A") therefor, thus:
RECEIPT
Pinatutunayan ko na tinanggap ko kay Gng. Aurelia B. Cariaga (ang) mga alahas na
nakatala sa ibaba, upang aking ipagbili sa pamamagitan ng BIGAY PALA o
Commission at Kaliwaan lamang. Ako'y hindi pinahihintulutan (na) ipagbili ang mga
ito ng Pautang. Pinananagutan ko na ang mga alahas na ito ay hindi ko
75
 ipagkakaloob o ipagkakatiwala sa kanino pa man upang ilagak o maipagbili nila, at
ang mga ito ay ako ang magbibili sa ilalim ng aking pangangasiwa at pananagutan
sa halagang nakatala sa ibaba. At aking isasauli ang mga hindi na maipagbili sa loob
ng 5 days (sic) araw mula sa petsa nito o sa kahilingan, na nasa mabuti at malinis na
kalagayan katulad ng tanggapin ko sa petsang ito.
MGA URI NG ALAHAS
1 set marques with titos 17,500.
1 solo 2 karats & 30 points 16,000.
1 ring Rosetas brill 2,500.
Makati, March 23, 1977
(Sgd.) 2
When the 5-day period given to her had lapsed, Leonida requested for and was granted
additional time within which to vend the items. Leonida failed to conclude any sale and, about
six (6) months later, Aurelia asked that the pieces of jewelry be returned. She sent to Leonida
a demand letter which the latter ignored. The inexplicable delay of Leonida in returning the
items spurred the filing of the case for estafa against her.
The defense proffered differently. In its version, the defense sought to prove that Leonida was engaged
in the purchase and sale of jewelry. She was used to buying pieces of jewelry from a certain Mrs.
Antonia Ilagan who later introduced her (Leonida) to Aurelia. Sometime in 1975, the two, Aurelia and
Leonida, started to transact business in pieces of jewelry among which included a solo ring worth
P40,000.00 which was sold to Mrs. Camacho who paid P20,000.00 in check and the balance of
P20,000.00 in installments later paid directly to Aurelia. The last transaction Leonida had with Mrs.
Camacho involved a "marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs. Camacho was
not able to pay the due amount in full and left a balance of P13,000.00. Leonida brought Mrs.
Camacho to Aurelia who agreed to allow Mrs. Camacho to pay the balance in installments. Leonida
was also able to sell for Aurelia a 2-karat diamond ring worth P17,000.00 to Mrs. Concordia Ramos
who, unfortunately, was unable to pay the whole amount. Leonida brought Mrs. Ramos to Aurelia and
they talked about the terms of payment. As first payment, Mrs. Ramos gave Leonida a ring valued at
P3,000.00. The next payment made by her was P5,000.00. Leonida herself then paid P2,000.00.
The RTC, in its 25th January 1993 decision, found Leonida guilty beyond reasonable doubt of the
crime of estafa and sentenced her to suffer the penalty of imprisonment of seven (7) years and one (1)
day of prision mayor as minimum to nine (9) years of prision mayor as maximum and to indemnify
private complainant in the amount of P36,000.00.
Leonida interposed an appeal to the Court of Appeals which affirmed, in its 27th September 1996
decision, the RTC's assailed judgment.
The instant petition before this Court would have it that the agreement between petitioner and private
complainant was effectively novated when the latter consented to receive payment on installments
directly from Mrs. Camacho and Mrs. Ramos.
The petition is bereft of merit.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible with the
amendatory agreement. An extinctive novation results either by changing the object or principal
conditions (objective or real), or by substituting the person of the debtor or subrogating a third person
in the rights of the creditor (subjective or personal). 3 Under this mode, novation would have dual
functions — one to extinguish an existing obligation, the other to substitute a new one in its place 4—
requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation. 5
Novation is never presumed, 6 and the animus novandi, whether totally or partially, must appear by
7
express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is a necessary element of novation which may
be effected either expressly or impliedly. 8 The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old
one. 9 Upon the other hand, no specific form is required for an implied novation, 10 and all that is
prescribed by law would be an incompatibility between the two contracts. While there is really no hard
and fast rule to determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and
the new obligations. 11
There are two ways which could indicate, in fine, the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. The first is when novation
has been explicitly stated and declared in unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. 12 Corollarily, changes that breed incompatibility
must be essential in nature and not merely accidental. The incompatibility must take place in any of the
essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise,
the change would be merely modificatory in nature and insufficient to extinguish the original obligation.
The changes alluded to by petitioner consists only in the manner of payment. There was really no
substitution of debtors since private complainant merely acquiesced to the payment but did not give
her consent 13 to enter into a new contract. The appellate court observed:
Appellant, however, insists that their agreement was novated when complainant
agreed to be paid directly by the buyers and on installment basis. She adds that her
liability is merely civil in nature.
We are unimpressed.
It is to remembered that one of the buyers, Concordia Ramos, was not presented to
testify on the alleged aforesaid manner of payment.
76
 The acceptance by complainant of partial payment tendered by the buyer, Leonor
Camacho, does not evince the intention of the complainant to have their agreement
novated. It was simply necessitated by the fact that, at that time, Camacho had
substantial accounts payable to complainant, and because of the fact that appellant
made herself scarce to complainant. (TSN, April 15, 1981, 31-32) Thus, to obviate
the situation where complainant would end up with nothing, she was forced to
receive the tender of Camacho. Moreover, it is to be noted that the aforesaid
payment was for the purchase, not of the jewelry subject of this case, but of some
other jewelry subject of a previous transaction. (Ibid. June 8, 1981, 10-11) 14
There are two forms of novation by substituting the person of the debtor, depending on whose initiative
it comes from, to wit: expromision and delegacion. In the former, the initiative for the change does not
come from the debtor and may even be made without his knowledge. Since a third person would
substitute for the original debtor and assume the obligation, his consent and that of the creditor would
be required. In the latter, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation, thereby releasing the original debtor from the obligation; here,
the intervention and the consent of all parties thereto would perforce be
necessary. 15 In either of these two modes of substitution, the consent of the creditor, such as can be
seen, is an indispensable requirement. 16
It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's payment on installment
basis cannot be construed as a case of either expromision or delegacion sufficient to justify the
attendance of extinctive novation. Not too uncommon is when a stranger to a contract agrees to
assume an obligation; and while this may have the effect of adding to the number of persons liable, it
does not necessarily imply the extinguishment of the liability of the first debtor. 17 Neither would the fact
alone that the creditor receives guaranty or accepts payments from a third person who has agreed to
assume the obligation, constitute an extinctive novation absent an agreement that the first debtor shall
be released from responsibility. 18
Petitioner's reliance on Candida Mariano vs. People 19 is misplaced. The factual milieu in Mariano
would indicate a clear intention on the part of the parties to release the accused from her responsibility
as an agent and for her to instead assume the obligation of a guarantor. Unfortunately for petitioner in
the case at bar, the factual findings of both the trial court and the appellate court prove just the
opposite which is that there has never been any animus novandi between or among the parties.
Art. 315 of the Revised Penal Code defines estafa and penalizes any person who shall defraud
another by "misappropriating or converting, to the prejudice of another, money, goods, or any other
personal property received by the offender in trust or on commission, or for administration, or under
any other obligation involving the duty to make delivery of or to return the same, even though such
obligation be totally or partially guaranteed by a bond; or by denying having received such money,
goods, or other property. It is axiomatic that the gravemen of the offense is the appropriation or
conversion of money or property received to the prejudice of the owner. The terms "convert" and
"misappropriate" have been held to connote "an act of using or disposing of another's property as if it
were one's own or devoting it to a purpose or use different from that agreed upon." The phrase, "to
misappropriate to one's own use" has been said to include "not only conversion to one's personal
advantage, but also every attempt to dispose of the property of another without right." 20 Verily, the sale
of the pieces of jewelry on installments in contravention of the explicit terms of the authority granted to
her in Exhibit "A" (supra) is deemed to be one of conversion. Thus, neither the theory of "delay in the
fulfillment of commission" nor that of novation posed by petitioner, can avoid the incipient criminal
liability. In People vs. Nery, 21 this Court held:
It may be observed in this regard that novation is not one of the means recognized
by the Penal Code whereby criminal liability can be extinguished; hence, the role of
novation may only be either to prevent the rise of criminal liability or to cast doubt on
the true nature of the original basic transaction, whether or not it was such that its
breach would not give rise to penal responsibility . . .
The criminal liability for estafa already committed is then not affected by the subsequent
novation of contract, for it is a public offense which must be prosecuted and punished by the
State in its own conation. 22
Finally, this Court fails to see any reversible error, let alone any grave abuse of discretion, in the
appreciation of the evidence by the Court of Appeals which, in fact, hews with those of the trial court.
Indeed, under the circumstances, this Court must be deemed bound by the factual findings of those
courts.
Art. 315, 1st paragraph, of the Revised Penal Code, as amended by Presidential Decree No. 818,
provides that the penalty of "prison correccional in its maximum period to prison mayor in its minimum
period, if the amount of the fraud is over 12,000 but does not exceed 22,000 pesos, and if such amount
exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period,
adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall
not exceed twenty years. In such case, and in connection with the accessory penalties which may be
imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be."
In the leading case of People vs. Gabres 23 this Court ruled:
Under the Indeterminate Sentence Law, the maximum term of the penalty shall be
"that which, in view of the attending circumstances, could be properly imposed"
under the Revised Penal Code, and the minimum shall be "within the range of the
penalty next lower to that prescribed" for the offense. The penalty next lower should
be based on the penalty prescribed by the Code for the offense, without first
considering any modifying circumstance attendant to the commission of the crime.
The determination of the minimum penalty is left by law to the sound discretion of the
court and it can be anywhere within the range of the penalty next lower without any
reference to the periods into which it might be subdivided. The modifying
circumstances are considered only in the imposition of the maximum term of the
indeterminate sentence.
The fact that the amounts involved in the instant case exceed P22,000.00 should not
be considered in the initial determination of the indeterminate penalty; instead, the
matter should be so taken as analogous to modifying circumstances in the imposition
of the maximum term of the full indeterminate sentence. This interpretation of the law
accords with the rule that penal laws should be construed in favor of the accused.
Since the penalty prescribed by law for the estafa charge against accused-appellant
is prision correccional maximum to prision mayor minimum, the penalty next lower
would then be prision correccional minimum to medium. Thus, the minimum term of
the indeterminate sentence should be anywhere within six (6) months and one (1)
day to four (4) years and two (2) months while the maximum term of the
indeterminate sentence should at least be six (6) years and one (1) day because the
77
 amounts involved exceeded P22,000.00, plus an additional one (1) year for each
additional P10,000.00. 24
The penalty imposed by the trial court, affirmed by the appellate court, should accordingly be modified.
WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED except that the
imprisonment term is MODIFIED by now sentencing petitioner to an indeterminate penalty of from two
(2) years, eight (8) months and one (1) day of prison correccional to seven (7) years and one (1) day
of prision mayor. The civil liability of appellant for P36,000.00 in favor of private complainant is
maintained. Costs against petitioner.1âwphi1.nêt
SO ORDERED.
G.R. No. 183804 September 11, 2013
S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT CORPORATION, Petitioner,
vs.
ENGR. LUIS U. PARADA, represented by ENGR. LEONARDO A. PARADA of GENLITE
INDUSTRIES,Respondent.
DECISION
REYES, J.:
Before us on appeal by certiorari1 is the Decision2 dated April 30, 2008 of the Court of Appeals (CA) in
CA-G.R. CV No. 83811 which upheld the Decision3 dated May 8, 2004 of the Regional Trial Court
(RTC) of Quezon City, Branch 100, in Civil Case No. Q-01-45212.
Factual Antecedents
S.C. Megaworld Construction and Development Corporation (petitioner) bought electrical lighting
materials from Gentile Industries, a sole proprietorship owned by Engineer Luis U. Parada
(respondent), for its Read-Rite project in Canlubang, Laguna. The petitioner was unable to pay for the
above purchase on due date, but blamed it on its failure to collect under its sub-contract with the Enviro
KleenTechnologies, Inc. (Enviro Kleen). It was however able to persuade Enviro Kleen to agree to
settle its above purchase, but after paying the respondent ₱250,000.00 on June 2, 1999, 4 Enviro Kleen
stopped making further payments, leaving an outstanding balance of ₱816,627.00. It also ignored the
various demands of the respondent, who then filed a suit in the RTC, docketed as Civil Case No.Q-01-
45212, to collect from the petitioner the said balance, plus damages, costs and expenses, as
summarized in the RTC’s decision, as follows:
The petitioner in its answer denied liability, claiming that it was released from its indebtedness to the
respondent by reason of the novation of their contract, which, it reasoned, took place when the latter
accepted the partial payment of Enviro Kleen in its behalf, and thereby acquiesced to the substitution
of Enviro Kleen as the new debtor in the petitioner’s place. After trial, the RTC rendered judgment 6 on
May 28, 2004 in favor of the respondent, the fallo of which reads, as follows:
WHEREFORE, judgment is hereby rendered for the respondent. The petitioner is hereby ordered to
pay the respondent the following:
A. the sum of ₱816,627.00 representing the principal obligation due;
B. the sum equivalent to twenty percent (20%)per month of the principal obligation due from
date of judicial demand until fully paid as and for interest; and
C. the sum equivalent to twenty-five percent (25%) of the principal sum due as and for
attorney’s fees and other costs of suits. The compulsory counterclaim interposed by the
petitioner is hereby ordered dismissed for lack of merit.
SO ORDERED.7 (Emphasis supplied)
On appeal to the CA, the petitioner maintained that the trial court erred in ruling that no novation of the
contract took place through the substitution of Enviro Kleen as the new debtor. But for the first time, it
further argued that the trial court should have dismissed the complaint for failure of the respondent to
implead Genlite Industries as "a proper party in interest", as provided in Section 2 of Rule 3 of the 1997
Rules of Civil Procedure. The said section provides:
SEC. 2. Parties in interest. — A real party in interest is the party who stands to be benefited or injured
by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by
law or these Rules, every action must be prosecuted or defended in the name of the real party in
interest.
In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that the defendant may move to
dismiss the suit on the ground that it was not brought in the name of or against the real party in
interest, with the effect that the complaint is then deemed to state no cause of action.
In dismissing the appeal, the CA noted that the petitioner in its answer below raised only the defense of
novation, and that at no stage in the proceedings did it raise the question of whether the suit was
brought in the name of the real party in interest. Moreover, the appellate court found from the sales
invoices and receipts that the respondent is the sole proprietor of Genlite Industries, and therefore the
real party-plaintiff. Said the CA:
Settled is the rule that litigants cannot raise an issue for the first time on appeal as this would
contravene the basic rules of fair play and justice.
In any event, there is no question that respondent Engr.Luis U. Parada is the proprietor of Genlite
Industries, as shown on the sales invoice and delivery receipts. There is also no question that a special
power of attorney was executed by respondent Engr.Luis U. Parada in favor of Engr. Leonardo A.
Parada authorizingthe latter to file a complaint against the petitioner. 8 (Citations omitted)
The petitioner also contended that a binding novation of the purchase contract between the parties
took place when the respondent accepted the partial payment of Enviro Kleen of ₱250,000.00 in its
behalf, and thus acquiesced to the substitution by Enviro Kleen of the petitioner as the new debtor. But
the CA noted that there is nothing in the two (2) letters of the respondent to Enviro Kleen, dated April
14, 1999 and June 16, 1999, which would imply that he consented to the alleged novation, and,
particularly, that he intended to release the petitioner from its primary obligation to pay him for its
78
purchase of lighting materials. The appellate court cited the RTC’s finding 9 that the respondent
informed Enviro Kleen in his first letter that he had served notice to the petitioner that he would take
legal action against it for its overdue account, and that he retained his option to pull out the lighting
materials and charge the petitioner for any damage they might sustain during the pull-out:
Respondent x x x has served notice to the petitioner that unless the overdue account is paid, the
matter will be referred to its lawyers and there may be a pull-out of the delivered lighting fixtures. It was
likewise stated therein that incidental damages that may result to the structure in the course of the pull-
out will be to the account of the petitioner.10
The CA concurred with the RTC that by retaining his option to seek satisfaction from the petitioner, any
acquiescence which the respondent had made was limited to merely accepting Enviro Kleen as an
additional debtor from whom he could demand payment, but without releasing the petitioner as the
principal debtor from its debt to him.
On motion for reconsideration,11 the petitioner raised for the first time the issue of the validity of the
verification and certification of non-forum shopping attached to the complaint. On July 18, 2008, the CA
denied the said motion for lack of merit.12
Petition for Review in the Supreme Court
In this petition, the petitioner insists, firstly, that the complaint should have been dismissed outright by
the trial court for an invalid non-forum shopping certification; and, secondly, that the appellate court
erred in not declaring that there was a novation of the contract between the parties through substitution
of the debtor, which resulted in the release of the petitioner from its obligation to pay the respondent
the amount of its purchase.13
Our Ruling
The petition is devoid of merit.
The verification and certification of
non-forum shopping in the
complaint is not a jurisdictional but
a formal requirement, and any
objection as to non-compliance
therewith should be raised in the
proceedings below and not for the
first time on appeal.
"It is well-settled that no question will be entertained on appeal unless it has been raised in the
proceedings below. Points of law, theories, issues and arguments not brought to the attention of the
lower court, administrative agency or quasi-judicial body, need not be considered by are viewing court,
as they cannot be raised for the first time at that late stage. Basic considerations of fairness and due
process impel this rule. Any issue raised for the first time on appeal is barred by estoppel." 14
Through a Special Power of Attorney (SPA), the respondent authorized Engr. Leonardo A. Parada
(Leonardo), the eldest of his three children, to perform the following acts in his behalf: a) to file a
complaint against the petitioner for sum of money with damages; and b) to testify in the trial thereof
and sign all papers and documents related thereto, with full powers to enter into stipulation and
compromise.15 Incidentally, the respondent, a widower, died of cardio-pulmonary arrest on January
21,2009,16 survived by his legitimate children, namely, Leonardo, Luis, Jr., and Lalaine, all surnamed
Parada. They have since substituted him in this petition, per the Resolution of the Supreme Court
dated September 2, 2009.17 Also, on July 23, 2009, Luis, Jr. and Lalaine Parada executed an SPA
authorizing their brother Leonardo to represent them in the instant petition. 18
In the verification and certification of non-forum shopping attached to the complaint in Civil Case No.
Q01-45212, Leonardo as attorney-in-fact of his father acknowledged as follows:
xxxx
That I/we am/are the Plaintiff in the above-captioned case;
That I/we have caused the preparation of this Complaint;
That I/we have read the same and that all the allegations therein are true and correct to the best of
my/our knowledge;
x x x x.19
In this petition, the petitioner reiterates its argument before the CA that the above verification is invalid,
since the SPA executed by the respondent did not specifically include an authority for Leonardo to sign
the verification and certification of non-forum shopping, thus rendering the complaint defective for
violation of Sections 4 and 5 of Rule 7. The said sections provide, as follows:
Sec. 4. Verification. — A pleading is verified by an affidavit that the affiant has read the pleading and
that the allegations therein are true and correct of his personal knowledge or based on authentic
records.
Sec. 5. Certification against forum shopping. –– The plaintiff or principal party shall certify under oath in
the complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification annexed
thereto and simultaneously filed therewith: (a) that he has not thereto fore commenced any action or
filed any claim involving the same issues in any court, or tribunal x x x and, to the best of his
knowledge, no such other action or claim is pending therein; (b) if there is such other pending action or
claim, a complete statement of the present status thereof; and (c) if he should thereafter learn that the
same or similar action or claim has been filed or is pending, he shall report that fact x x x to the court
wherein his aforesaid complaint or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere amendment of the
complaint or other initiatory pleading but shall be cause for the dismissal of the case without prejudice,
unless otherwise provided, upon motion and after hearing.
The petitioner’s argument is untenable. The petitioner failed to reckon that any objection as to
compliance with the requirement of verification in the complaint should have been raised in the
proceedings below, and not in the appellate court for the first time.20 In KILUSAN-OLALIA v. CA,21 it
was held that verification is a formal, not a jurisdictional requisite:
79
We have emphasized, time and again, that verification is a formal, not a jurisdictional requisite, as it is
mainly intended to secure an assurance that the allegations therein made are done in good faith or are
true and correct and not mere speculation. The Court may order the correction of the pleading, if not
verified, or act on the unverified pleading if the attending circumstances are such that a strict
compliance with the rule may be dispensed with in order that the ends of justice may be served.
Further, in rendering justice, courts have always been, as they ought to be, conscientiously guided by
the norm that on the balance, technicalities take a backseat vis-à-vis substantive rights, and not the
other way around. x x x.22(Citations omitted)
In Young v. John Keng Seng,23 it was also held that the question of forum shopping cannot be raised in
the CA and in the Supreme Court, since such an issue must be raised at the earliest opportunity in a
motion to dismiss or a similar pleading. The high court even warned that "invoking it in the later stages
of the proceedings or on appeal may result in the dismissal of the action x x x." 24
Moreover, granting that Leonardo has no personal knowledge of the transaction subject of the
complaint below, Section 4 of Rule 7 provides that the verification need not be based on the verifier’s
personal knowledge but even only on authentic records. Sales invoices, statements of accounts,
receipts and collection letters for the balance of the amount still due to the respondent from the
petitioner are such records. There is clearly substantial compliance by the respondent’s attorney-in-fact
with the requirement of verification.
Lastly, it is well-settled that a strict compliance with the rules may be dispensed with in order that the
ends of substantial justice may be served.25 It is clear that the present controversy must be resolved on
its merits, lest for a technical oversight the respondent should be deprived of what is justly due him.
A sole proprietorship has no
juridical personality separate and
distinct from that of its owner, and
need not be impleaded as a party-
plaintiff in a civil case.
On the question of whether Genlite Industries should have been impleaded as a party-plaintiff, Section
1 of Rule 3 of the Rules of Court provides that only natural or juridical persons or entities authorized by
law may be parties in a civil case. Article 44 of the New Civil Code enumerates who are juridical
persons:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose, created by law;
their personality begins as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations for private interest or purpose to which the
law grants a juridical personality, separate and distinct from that of each shareholder, partner
or member.
Genlite Industries is merely the DTI-registered trade name or style of the respondent by which he
conducted his business. As such, it does not exist as a separate entity apart from its owner, and
therefore it has no separate juridical personality to sue or be sued.26 As the sole proprietor of Genlite
Industries, there is no question that the respondent is the real party in interest who stood to be directly
benefited or injured by the judgment in the complaint below. There is then no necessity for Genlite
Industries to be impleaded as a party-plaintiff, since the complaint was already filed in the name of its
proprietor, Engr. Luis U. Parada. To heed the petitioner’s sophistic reasoning is to permit a dubious
technicality to frustrate the ends of substantial justice.
Novation is never presumed but
must be clearly and unequivocally
shown.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.27 It is "the substitution of a new contract, debt, or obligation for an existing one between the
same or different parties."28 Article 1293 of the Civil Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in Articles 1236and 1237.
Thus, in order to change the person of the debtor, the former debtor must be expressly released from
the obligation, and the third person or new debtor must assume the former’s place in the contractual
relation.29 Article 1293 speaks of substitution of the debtor, which may either be in the form of
expromision or delegacion, as seems to be the case here. In both cases, the old debtor must be
released from the obligation, otherwise, there is no valid novation. As explained in Garcia 30:
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from—and may even be made
without the knowledge of—the debtor, since it consists of a third person’s assumption of the obligation.
As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the
debtor require the consent of the creditor.31 (Citations omitted)
From the circumstances obtaining below, we can infer no clear and unequivocal consent by the
respondent to the release of the petitioner from the obligation to pay the cost of the lighting materials.
In fact, from the letters of the respondent to Enviro Kleen, it can be said that he retained his option to
go after the petitioner if Enviro Kleen failed to settle the petitioner’s debt. As the trial court held:
The fact that Enviro Kleen Technologies, Inc. made payments to the respondent and the latter
accepted it does not ipso facto result innovation. Novation to be given its legal effect requires that the
creditor should consent to the substitution of a new debtor and the old debtor be released from its
obligation (Art. 1293, New Civil Code). A reading of the letters dated 14 April 1999 (Exh. 1) and dated
16 June 1999 (Exhs. 4 &4-a) sent by the respondent to Enviro Kleen Technologies, Inc. clearly shows
that there was nothing therein that would evince that the[respondent] has consented to the exchange
of the person of the debtor from the petitioner to Enviro Kleen Technologies, Inc.
xxxx
80
Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc., the respondent expressly
stated that it has served notice to the petitioner that unless the overdue account is paid, the matter will
be referred to its lawyers and there may be a pull-out of the delivered lighting fixtures. It was likewise
stated therein that incident damages that may result to the structure in the course of the pull-out will be
to the account of the petitioner.
It is evident from the two (2) aforesaid letters that there is no indication of the respondent’s intention to
release the petitioner from its obligation to pay and to transfer it to Enviro Kleen Technologies, Inc. The
acquiescence of Enviro Kleen Technologies, Inc. to assume the obligation of the petitioner to pay the
unpaid balance of [P]816,627.00 to the respondent when there is clearly no agreement to release the
petitioner will result merely to the addition of debtors and not novation. Hence, the creditor can still
enforce the obligation against the original debtor x x x. A fact which points strongly to the conclusion
that the respondent did not assent to the substitution of Enviro Kleen Technologies, Inc. as the new
debtor is the present action instituted by the respondent against the petitioner for the fulfillment of its
obligation. A mere recital that the respondent has agreed or consented to the substitution of the debtor
is not sufficient to establish the fact that there was a novation. x x x. 32
The settled rule is that novation is never presumed,33 but must be clearly and unequivocally
shown.34 In order for a new agreement to supersede the old one, the parties to a contract must
expressly agree that they are abrogating their old contract in favor of a new one.35 Thus, the mere
substitution of debtors will not result innovation,36 and the fact that the creditor accepts payments from
a third person, who has assumed the obligation, will result merely in the addition of debtors and not
novation, and the creditor may enforce the obligation against both debtors.37 If there is no agreement
as to solidarity, the first and new debtors are considered obligated jointly. 38 As explained in Reyes v.
CA39:
The consent of the creditor to a novation by change of debtor is as indispensable as the creditor’s
consent in conventional subrogation in order that a novation shall legally take place. The mere
circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to assume
the obligation of petitioner under the contract of sale of securities, when there is clearly no agreement
to release petitioner from her responsibility, does not constitute novation. At most, it only creates a
juridical relation of co-debtorship or surety ship on the part of respondent Eleazar to the contractual
obligation of petitioner to AFP-MBAI and the latter can still enforce the obligation against the petitioner.
In Ajax Marketing and Development Corporation vs. Court of Appeals which is relevant in the instant
case, we stated that —
"In the same vein, to effect a subjective novation by a change in the person of the debtor, it is
necessary that the old debtor be released expressly from the obligation, and the third person or new
debtor assumes his place in the relation. There is no novation without such release as the third person
who has assumed the debtor’s obligation becomes merely a co-debtor or surety. xxx. Novation arising
from a purported change in the person of the debtor must be clear and express xxx."
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle – novatio non praesumitur — that novation is never presumed.
At bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito —
basically extinguishing the old obligation for the new one. 40 (Citation omitted)
The trial court found that the respondent never agreed to release the petitioner from its obligation, and
this conclusion was upheld by the CA. We generally accord utmost respect and great weight to factual
findings of the trial court and the CA, unless there appears in the record some fact or circumstance of
weight and influence which has been overlooked, or the significance of which has been misinterpreted,
that if considered would have affected the result of the case.41 We find no such oversight in the
appreciation of the facts below, nor such a misinterpretation thereof, as would otherwise provide a
clear and unequivocal showing that a novation has occurred in the contract between the parties
resulting in the release of the petitioner.
Pursuant to Article 2209 of the
Civil Code, except as provided
under Central Bank Circular
No. 905, and now under Bangko
Sentral ng Pilipinas Circular
No. 799, which took effect on
July 1, 2013, the respondent may
be awarded interest of six percent
(6%) of the judgment amount by
way of actual and compensatory
damages.
It appears from the recital of facts in the trial court’s decision that the respondent demanded interest of
two percent (2%) per month upon the balance of the purchase price of ₱816,627.00, from judicial
demand until full payment. There is then an obvious clerical error committed in the fallo of the trial
court’s decision, for it incorrectly ordered the defendant there into pay "the sum equivalent to twenty
percent (20%) per month of the principal obligation due from date of judicial demand until fully paid as
and for interest."42
A clerical mistake is one which is visible to the eyes or obvious to the understanding; an error made by
a clerk or a transcriber; a mistake in copying or writing. 43 The Latin maxims Error placitandi aequitatem
non tollit ("A clerical error does not take away equity"), and Error scribentis nocere non debit ("An error
made by a clerk ought not to injure; a clerical error may be corrected") are apt in this case. 44 Viewed
against the landmark case of Medel v. CA45, an award of interest of 20% per month on the amount due
is clearly excessive and iniquitous. It could not have been the intention of the trial court, not to mention
that it is way beyond what the plaintiff had prayed for below.
It is settled that other than in the case of judgments which are void ab initio for lack of jurisdiction, or
which are null and void per se, and thus may be questioned at any time, when a decision is final, even
the court which issued it can no longer alter or modify it, except to correct clerical errors or mistakes.46
The foregoing notwithstanding, of more important consideration in the case before us is the fact that it
is nowhere stated in the trial court’s decision that the parties had in fact stipulated an interest on the
amount due to the respondent. Even granting that there was such an agreement, there is no finding by
the trial court that the parties stipulated that the outstanding debt of the petitioner would be subject to
two percent (2%) monthly interest. The most that the decision discloses is that the respondent
demanded a monthly interest of 2% on the amount outstanding.
Article 2209 of the Civil Code provides that "if the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six percent per annum." Pursuant to the said provision, then, since there is no finding
of a stipulation by the parties as to the imposition of interest, only the amount of 12% per annum 47 may
81
be awarded by the court by way of damages in its discretion, not two percent(2%) per month, following
the guidelines laid down in the landmark case of Eastern Shipping Lines v. Court of Appeals, 48 to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably
ascertained).The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 49 (Citations omitted)
As further clarified in the case of Sunga-Chan v. CA,50 a loan or forbearance of money, goods or credit
describes a contractual obligation whereby a lender or creditor has refrained during a given period from
requiring the borrower or debtor to repay the loan or debt then due and payable. 51 Thus:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank
(CB) Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And
for transactions involving payment of indemnities in the concept of damages arising from default in the
performance of obligations in general and/or for money judgment not involving a loan or forbearance of
money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6%
interest. Art. 2209 pertinently provides:
"Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum."
The term "forbearance," within the context of usury law, has been described as a contractual obligation
of a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to
repay the loan or debt then due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The12% per annum rate under CB Circular No. 416 shall apply only to
loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code
applies "when the transaction involves the payment of indemnities in the concept of damage arising
from the breach or a delay in the performance of obligations in general," with the application of both
rates reckoned "from the time the complaint was filed until the adjudged amount is fully paid." In either
instance, the reckoning period for the commencement of the running of the legal interest shall be
subject to the condition "that the courts are vested with discretion, depending on the equities of each
case, on the award of interest."52 (Citations omitted and emphasis ours)
Pursuant, then, to Central Bank Circular No. 416, issued on July 29,1974,53 in the absence of a written
stipulation, the interest rate to be imposed in judgments involving a forbearance of credit shall be 12%
per annum, up from 6% under Article 2209 of the Civil Code. This was reiterated in Central Bank
Circular No. 905, which suspended the effectivity of the Usury Law from January 1, 1983. 54 But if the
judgment refers to payment of interest as damages arising from a breach or delay in general, the
applicable interest rate is 6% per annum, following Article 2209 of the Civil Code. 55 Both interest rates
apply from judicial or extrajudicial demand until finality of the judgment. But from the finality of the
judgment awarding a sum of money until it is satisfied, the award shall be considered a forbearance of
credit, regardless of whether the award in fact pertained to one, and therefore during this period, the
interest rate of 12% per annum for forbearance of money shall apply. 56
But notice must be taken that in Resolution No. 796 dated May 16,2013, the Monetary Board of the
Bangko Sentral ng Pilipinas approved the revision of the interest rate to be imposed for the loan or
forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest. Thus, under BSP Circular No.799, issued on June 21,
2013 and effective on July 1, 2013, the said rate of interest is now back at six percent (6%), viz:
BANGKO SENTRAL NG PILIPINAS
OFFICE OF THE GOVERNOR
CIRCULAR NO. 799
Series of 2013
Subject: Rate of interest in the absence of stipulation
The monetary Board, in its Resolution No. 796 dated 16 May 2013,approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section
2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks
and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
82
FOR THE MONETARY BOARD:
DIWA C. GUINIGUNDO
Officer-In-Charge
The award of attorney’s fees is not proper.
Other than to say that the petitioner "unjustifiably failed and refused to pay the respondent," the trial
court did not state in the body of its decision the factual or legal basis for its award of attorney’s fees to
the respondent, as required under Article 2208 of the New Civil Code, for which reason we have
resolved to delete the same. The rule is settled that the trial court must state the factual, legal or
equitable justification for its award of attorney’s fees.57Indeed, the matter of attorney’s fees cannot be
stated only in the dispositive portion, but the reasons must be stated in the body of the court’s
decision.58 This failure or oversight of the trial court cannot even be supplied by the CA. As concisely
explained in Frias v. San Diego-Sison59:
Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all
cases, it must be reasonable, just and equitable if the same were to be granted. Attorney’s fees as part
of damages are not meant to enrich the winning party at the expense of the losing litigant. They are not
awarded every time a party prevails in a suit because of the policy that no premium should be placed
on the right to litigate. The award of attorney’s fees is the exception rather than the general rule. As
such, it is necessary for the trial court to make findings of facts and law that would bring the case within
the exception and justify the grant of such award. The matter of attorney’s fees cannot be mentioned
only in the dispositive portion of the decision. They must be clearly explained and justified by the trial
court in the body of its decision. On appeal, the CA is precluded from supplementing the bases for
awarding attorney’s fees when the trial court failed to discuss in its Decision the reasons for awarding
the same.1âwphi1Consequently, the award of attorney’s fees should be deleted. 60 (Citations omitted)
WHEREFORE, premises considered, the Decision dated April 30, 2008 of the Court of Appeals in CA-
G.R. CV No. 83811 is AFFIRMED with MODIFICATION. Petitioner S.C. Megaworld Construction and
Development Corporation is ordered to pay respondent Engr. Luis A. Parada, represented by Engr.
Leonardo A. Parada, the principal amount due of ₱816,627.00, plus interest at twelve percent (12%)
per annum, reckoned from judicial demand until June 30, 2013, and six percent (6%) per an own from
July 1, 2013 until finality hereof, by way of actual and compensatory damages. Thereafter, the principal
amount due as adjusted by interest shall likewise earn interest at six percent (6%) per annum until fully
paid. The award of attorney's fees is DELETED.
SO ORDERED.
G.R. No. 180144 September 24, 2014
LEONARDO BOGNOT, Petitioner,
vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J.
BERNARDEZ, Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari1 filed by Leonardo Bognot (petitioner) assailing
the March 28, 2007 decision2 and the October 15, 2007 resolution3 of the Court of Appeals (CA) in CA-
G.R. CV No. 66915.
Background Facts
RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its
borrowers within Metro Manila. It is duly represented by its General Manager, Mr. Dario J. Bernardez
(Bernardez).
Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot (collectively
referred to as the "Bognot siblings"), applied for and obtained a loan of Five Hundred Thousand Pesos
(₱500,000.00) from the respondent, payable on November 30, 1996. 4 The loan was evidenced by a
promissory note and was secured by a post dated check 5 dated November 30, 1996.
Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He
paid a renewal fee of ₱54,600.00 for each renewal, issued a new post-dated checkas security, and
executed and/or renewed the promissory note previouslyissued. The respondent on the other hand,
cancelled and returned to the petitioner the post-dated checks issued prior to their renewal.
Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as
principal and signed Promissory Note No. 97-0356 payable on April 1, 1997; his co-maker was again
Rolando. As security for the loan, the petitioner also issued BPI Check No. 0595236,7 post dated to
April 1, 1997.8
Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by the
Official Receipt No. 7979 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly
signed by Bernardez. The petitioner purportedly paid the renewal fees and issued a post-dated check
dated June 30, 1997 as security. As had been done in the past, the respondent superimposed the date
"June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it appear that it
would mature on the said date.
Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the
respondent’s office and applied for another renewal of the loan. She issued in favor of the respondent
Promissory Note No. 97-051, and International Bank Exchange (IBE) Check No. 00012522, dated July
30, 1997, in the amount of ₱54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan documents for the Bognot siblings’ signatures
and replacement, Mrs. Bognot asked the respondent’s clerk to release to her the promissory note, the
disclosure statement, and the check dated July 30, 1997. Mrs. Bognot, however, never returned these
documents nor issued a new post-dated check. Consequently, the respondent sent the petitioner
follow-up letters demanding payment of the loan, plus interest and penalty charges. These demands
went unheeded.
On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money before
the Regional Trial Court (RTC) against the Bognot siblings. The respondent mainly alleged that the
loan renewal payable on June 30, 1997 which the Bognot siblings applied for remained unpaid; that
before June30, 1997, Mrs. Bognot applied for another loan extension and issued IBE Check No.
00012522 as payment for the renewal fee; that Mrs. Bognot convinced the respondent’s clerk to
83
release to her the promissory note and the other loan documents; that since Mrs. Bognot never issued
any replacement check, no loanextension took place and the loan, originally payable on June 30, 1997,
became due on this date; and despite repeated demands, the Bognot siblings failed to pay their joint
and solidary obligation.
Summons were served on the Bognotsiblings. However, only the petitioner filed his answer.
In his Answer,10 the petitioner claimed that the complaint states no cause of action because the
respondent’s claim had been paid, waived, abandoned or otherwise extinguished. He denied being a
party to any loan application and/or renewal in May 1997. He also denied having issued the BPI check
post-dated to June 30, 1997, as well as the promissory note dated June 30, 1997, claiming that this
note had been tampered. He claimed that the one (1) month loan contracted by Rolando and his wife
in November 1996 which was lastly renewed in March 1997 had already been fully paid and
extinguished in April 1997.11
Trial on the merits thereafter ensued.
The Regional Trial Court Ruling
In adecision12 dated January 17, 2000,the RTC ruled in the respondent’s favor and ordered the
Bognot siblings to pay the amount of the loan, plus interest and penalty charges. It considered the
wordings of the promissory note and found that the loan they contracted was joint and solidary. It also
noted that the petitioner signed the promissory note as a principal (and not merely as a guarantor),
while Rolando was the co-maker. It brushed the petitioner’s defense of full payment aside, ruling that
the respondent had successfully proven, by preponderance of evidence, the nonpayment of the loan.
The trial court said:
Records likewise reveal that while he claims that the obligation had been fully paid in his Answer, he
did not, in order to protect his right filed (sic) a cross-claim against his co-defendant Rolando Bognot
despite the fact that the latter did not file any responsive pleading.
In fine, defendants are liable solidarily to plaintiff and must pay the loan of ₱500,000.00 plus 5%
interest monthly as well as 10% monthly penalty charges from the filing of the complaint on December
3, 1997 until fully paid. As plaintiff was constrained to engage the services of counsel in order to
protect his right,defendants are directed to pay the former jointly and severally the amount of
₱50,000.00 as and by way of attorney’s fee.
The petitioner appealed the decision to the Court of Appeals.
The Court of Appeals Ruling
In its decision dated March 28, 2007, the CA affirmed the RTC’s findings. It found the petitioner’s
defense of payment untenable and unsupported by clear and convincing evidence. It observed that the
petitioner did not present any evidence showing that the check dated June 30, 1997 had, in fact, been
encashed by the respondent and the proceeds applied to the loan, or any official receipt evidencing the
payment of the loan. It further stated that the only document relied uponby the petitioner to substantiate
his defense was the April 1, 1997 checkhe issued which was cancelled and returned to him by the
respondent.
The CA, however, noted the respondent’s established policy of cancelling and returning the post-dated
checks previously issued, as well as the subsequent loan renewals applied for by the petitioner, as
manifested by the official receipts under his name. The CA thus ruled that the petitioner failed to
discharge the burden of proving payment.
The petitioner moved for the reconsideration of the decision, but the CA denied his motion in its
resolution of October 15, 2007, hence, the present recourse to us pursuant toRule 45 of the Rules of
Court.
The Petition
The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his wife.
Heclaimed that based on the legal presumption provided by Article 1271 of the Civil Code, 13 his
obligation had been discharged by virtue of his possession of the post-dated check (stamped
"CANCELLED") that evidenced his indebtedness. He argued that it was Mrs. Bognot who subsequently
assumed the obligation by renewing the loan, paying the fees and charges, and issuing a check. Thus,
there is an entirely new obligation whose payment is her sole responsibility.
The petitioner also argued that as a result of the alteration of the promissory note without his consent
(e.g., the superimposition of the date "June 30, 1997" on the upper right portion of Promissory Note
No. 97-035 to make it appear that it would mature on this date), the respondent can no longer collect
on the tampered note, let alone, hold him solidarily liable with Rolando for the payment of the loan. He
maintained that even without the proof of payment, the material alteration of the promissory note is
sufficient to extinguish his liability.
Lastly, he claimed that he had been released from his indebtedness by novation when Mrs. Bognot
renewed the loan and assumed the indebtedness.
The Case for the Respondents
The respondent submits that the issues the petitioner raised hinge on the appreciation of the adduced
evidence and of the factual lower courts’ findings that, as a rule, are notreviewable by this Court.
The Issues
The case presents to us the following issues:
1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with
Rolando;
2. Whether the petitioner is relieved from liability by reason of the material alteration in the
promissory note; and
3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii) novation by
substitution of debtors.
Our Ruling
84
We find the petition partly meritorious.
As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of
law.14 Appreciation of evidence and inquiry on the correctness of the appellate court's factual findings
are not the functions of this Court; we are not a trier of facts. 15
A question of law exists when the doubt or dispute relates to the application of the law on given facts.
On the other hand, a question of fact exists when the doubt or dispute relates to the truth or falsity of
the parties’ factual allegations.16
As the respondent correctly pointedout, the petitioner’s allegations are factual issuesthat are not proper
for the petition he filed. In the absence of compelling reasons, the Court cannot re-examine, review or
re-evaluate the evidence and the lower courts’ factual conclusions. This is especially true when the CA
affirmed the lower court’s findings, as in this case. Since the CA’s findings of facts affirmed those of the
trial court, they are binding on this Court, rendering any further factual review unnecessary.
If only to lay the issues raised - both factual and legal – to rest, we shall proceed to discuss their merits
and demerits.
No Evidence Was Presented to Establish the Fact of Payment
Jurisprudence tells us that one who pleads payment has the burden of proving it; 17 the burden rests on
the defendant to prove payment, rather than on the plaintiff to prove non-payment.18 Indeed, once the
existence of an indebtedness is duly established by evidence, the burden of showing with legal
certainty that the obligation has been discharged by payment rests on the debtor. 19
In the present case, the petitioner failed to satisfactorily prove that his obligation had already been
extinguished by payment. As the CA correctly noted, the petitioner failed to present any evidence that
the respondent had in fact encashed his check and applied the proceeds to the payment of the loan.
Neither did he present official receipts evidencing payment, nor any proof that the check had been
dishonored.
We note that the petitioner merely relied on the respondent’s cancellation and return to him of the
check dated April 1, 1997. The evidence shows that this check was issued to secure the indebtedness.
The acts imputed on the respondent, standing alone, do not constitute sufficient evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides:
xxxx
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v. Spouses Royeca: 20
Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself, operate as
payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation
is not extinguished and remains suspended until the payment by commercial document is actually
realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in
cases where a private document evidencing a credit was voluntarily returned by the creditor to the
debtor), this presumption is merely prima facieand is not conclusive; the presumption loses efficacy
when faced with evidence to the contrary.
Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation of
the credit where more convincing evidence would be required than what normally would be called for to
prove payment.21Thus, reliance by the petitioner on the legal presumption to prove payment is
misplaced.
To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check
dated April 1, 1997, simply established his renewal of the loan – not the fact of payment. Furthermore,
it has been established during trial, through repeated acts, that the respondent cancelled and
surrendered the post-dated check previously issued whenever the loan is renewed. We trace
whatwould amount to a practice under the facts of this case, to the following testimonial exchanges:
Civil Case No. 97-0572
TSN December 14, 1998, Page 13.
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the debtor which
he or she must pay before a renewal is allowed. I show you Exhibit "3" official receipt of plaintiff dated
July 3, 1997, would this be your official receipt which you issued to your client which they make
renewal of the loan?
A: Yes, sir.
xxx xxx xxx
Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal has
already been cancelled, is that correct?
A: Yes, sir.
Q: It is also true to say that all promissory notes and all postdated checks covered by the old loan
which have been the subject of the renewal are deemed cancelled and replaced is that correct?
A: Yes, sir. xxx22
Civil Case No. 97-0572
85
TSN November 27, 1998, Page 27.
Q: What happened to the check that Mr. Bognot issued?
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a new check, sir.
Q: Do you have a copy of the checks?
A: We returned the check upon renewing the loan.23
In light of these exchanges, wefind that the petitioner failed to discharge his burden ofproving payment.
The Alteration of the Promissory Note
Did Not Relieve the Petitioner From Liability
We now come to the issue of material alteration. The petitioner raised as defense the alleged material
alteration of Promissory Note No. 97-035 as basis to claim release from his loan. He alleged that the
respondent’s superimposition of the due date "June 30, 1997" on the promissory note without his
consent effectively relieved him of liability.
We find this defense untenable.
Although the respondent did not dispute the fact of alteration, he nevertheless denied that the
alteration was done without the petitioner’s consent. The parties’ Pre-Trial Order dated November 3,
199824 states that:
xxx There being no possibility of a possible compromise agreement, stipulations, admissions, and
denials were made, to wit:
FOR DEFENDANT LEONARDO BOGNOT
13. That the promissory note subject of this case marked as Annex "A" of the complaint was originally
dated April 1, 1997 with a superimposed rubber stamp mark "June 30, 1997" to which the plaintiff
admitted the superimposition.
14. The superimposition was done without the knowledge, consent or prior consultation with Leonardo
Bognot which was denied by plaintiff."25 (Emphasis supplied)
Significantly, the respondent also admitted in the Pre-Trial Order that part of its company practice is to
rubber stamp, or make a superimposition through a rubber stamp, the old promissory note which has
been renewed to make it appear that there is a new loan obligation. The petitioner did not rebut this
statement. To our mind, the failure to rebut is tantamount to an admission of the respondent’s
allegations:
"22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a rubber
stamp on old promissory note which has been renewed to make it appear that there is a new loan
obligation to which the plaintiff admitted." (Emphasis Supplied).26
Even assuming that the note had indeed been tampered without the petitioner’s consent, the latter
cannot totally avoid payment of his obligation to the respondent based on the contract of loan.
Based on the records, the Bognot Siblings had applied for and were granted a loan of ₱500,000.00 by
the respondent. The loan was evidenced by a promissory note and secured by a post-dated
check27 dated November 30, 1996. In fact, the petitioner himself admitted his loan application was
evidenced by the Promissory Note dated April 1, 1997. 28 This loan was renewed several times by the
petitioner, after paying the renewal fees, as shown by the Official Receipt Nos. 797 29 and 58730 dated
May 5 and July 3, 1997, respectively. These official receipts were issued in the name of the petitioner.
Although the petitioner had insisted that the loan had been extinguished, no other evidence was
presented to prove payment other than the cancelled and returnedpost-dated check.
Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability to the
respondent solely on the ground that the Promissory Note in question was tampered. Notably, the
existence of the obligation, as well as its subsequent renewals, have been duly established by: first,
the petitioner’s application for the loan; second, his admission that the loan had been obtained from the
respondent; third, the post-dated checks issued by the petitioner to secure the loan; fourth, the
testimony of Mr. Bernardez on the grant, renewal and non-payment of the loan; fifth, proof of non-
payment of the loan; sixth, the loan renewals; and seventh, the approval and receipt of the loan
renewals.
In Guinsatao v. Court of Appeals,31 this Court pointed out that while a promissory note is evidence of
an indebtedness, it is not the only evidence, for the existence of the obligation can be proven by other
documentary evidence such as a written memorandum signed by the parties. In Pacheco v. Court of
Appeals,32 this Court likewise expressly recognized that a check constitutes anevidence of
indebtedness and is a veritable proof of an obligation. It canbe used in lieu of and for the same
purpose as a promissory note and can therefore be presented to establish the existence of
indebtedness.33
In the present petition, we find that the totality of the evidence on record sufficiently established the
existence of the petitioner’s indebtedness (and liability) based on the contract ofloan. Even with the
tampered promissory note, we hold that the petitioner can still be held liable for the unpaid loan.
The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be Entertained
It has not escaped the Court’s attention that the petitioner raised the argument that the obligation had
been extinguished by novation. The petitioner never raised this issue before the lower courts.
It is a settled principle of law thatno issue may be raised on appeal unless it has been brought before
the lower tribunal for its consideration.34 Matters neither alleged in the pleadingsnor raised during the
proceedings below cannot be ventilated for the first time on appeal before the Supreme Court. 35
86
In any event, we find no merit in the defense of novation as we discuss at length below. Novation
cannot be presumed and must be clearly and unequivocably proven.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.36
Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists insubstituting a new debtor in the place of the originalone, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in Articles 1236 and 1237."
To give novation legal effect, the original debtor must be expressly released from the obligation, and
the new debtor must assume the original debtor’s place in the contractual relationship. Depending on
who took the initiative, novation by substitution of debtor has two forms – substitution by expromision
and substitution by delegacion. The difference between these two was explained in Garcia v. Llamas:37
"In expromision, the initiative for the change does not come from -- and may even be made without the
knowledge of -- the debtor, since it consists of a third person’s assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus,
the consent of these three persons are necessary."
In both cases, the original debtor must be released from the obligation; otherwise, there can be no
valid novation.38Furthermore, novation by substitution of debtor must alwaysbe made with the consent
of the creditor.39
The petitioner contends thatnovation took place through a substitution of debtors when Mrs. Bognot
renewed the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by
paying the renewal fees and charges, and by executing a new promissory note. He further claimed that
she issued her own check40 to cover the renewal fees, which fact, according to the petitioner, was done
with the respondent’s consent.
Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She
merely attempted to renew the original loan by executing a new promissory note 41 and check. The
purported one month renewal of the loan, however, did not push through, as Mrs. Bognot did not return
the documents or issue a new post dated check. Since the loan was not renewed for another month,
the originaldue date, June 30,1997, continued to stand.
More importantly, the respondent never agreed to release the petitioner from his obligation. That the
respondent initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement and
the petitioner’s previous check dated June 30, 1997, does not ipso factoresult in novation. Neither will
this acquiescence constitute an implied acceptance of the substitution of the debtor.
In order to give novation legal effect, the creditor should consent to the substitution of a new debtor.
Novation must be clearly and unequivocally shown, and cannot be presumed.
Since the petitioner failed to show thatthe respondent assented to the substitution, no valid novation
took place with the effect of releasing the petitioner from his obligation to the respondent.
Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the
petitioner, the respondent can still enforce the payment of the obligation against the original debtor.
Mere acquiescence to the renewal of the loan, when there is clearly no agreement to release the
petitioner from his responsibility, does not constitute novation.
The Nature of the Petitioner’s Liability
On the nature of the petitioner’s liability, we rule however, that the CA erred in holding the petitioner
solidarily liable with Rolando.
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of
the creditors is entitled to demand the satisfaction of the whole obligation from any or all of the
debtors.42 There is solidary liability when the obligation expressly so states, when the law so provides,
or when the nature of the obligation so requires.43 Thus, when the obligor undertakes to be "jointly and
severally" liable, the obligation is solidary,
In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on
Promissory Note No. 97-035 dated June 30, 1997. Under the promissory note, the Bognot Siblings
defined the parameters of their obligation as follows:
"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY RESOURCES
INVESTORS RRI LENDING CORPO. or Order, its office at Paranaque, M.M. the principal sum of Five
Hundred Thousand PESOS (₱500,000.00), PhilippineCurrency, with interest thereon at the rate of Five
percent (5%) per month/annum, payable in One Installment (01) equal daily/weekly/semi-
monthly/monthly of PESOS Five Hundred Thousand Pesos (₱500,000.00), first installment to become
due on June 30, 1997. xxx"44 (Emphasis Ours).
Although the phrase "jointly and severally" in the promissory note clearly and unmistakably provided for
the solidary liability of the parties, we note and stress that the promissory note is merely a photocopyof
the original, which was never produced.
Under the best evidence rule, whenthe subject of inquiry is the contents of a document, no evidence
isadmissible other than the original document itself except in the instances mentioned in Section 3,
Rule 130 of the Revised Rules of Court.45
The records show that the respondenthad the custody of the original promissory note dated April 1,
1997, with a superimposed rubber stamp mark "June 30, 1997", and that it had been given every
opportunity to present it. The respondent even admitted during pre-trial that it could not present the
original promissory note because it is in the custody of its cashier who is stranded in Bicol.46 Since the
respondent never produced the original of the promissory note, much less offered to produce it, the
photocopy of the promissory note cannot be admitted as evidence. Other than the promissory note in
question, the respondent has not presented any other evidence to support a finding of solidary liability.
As we earlier noted, both lower courts completely relied on the note when they found the Bognot
siblingssolidarily liable.
87
The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be positively and
clearly expressed and cannot be presumed.47
In view of the inadmissibility of the promissory note, and in the absence of evidence showing that the
petitioner had bound himself solidarily with Rolando for the payment of the loan, we cannot but
conclude that the obligation to pay is only joint.48
The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be Equitably
Reduced
Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the
respondentfor the unpaid loan, we find the imposition of the 5% monthly interest to be excessive,
iniquitous, unconscionable and exorbitant, and hence, contrary to morals and jurisprudence. Although
parties to a loan agreement have wide latitude to stipulate on the applicable interest rate under Central
Bank Circular No. 905 s. 1982 (which suspended the Usury Law ceiling on interest effective January 1,
1983), we stress that unconscionable interest rates may still be declared illegal.49
In several cases, we haveruled that stipulations authorizing iniquitous or unconscionable interests are
contrary to morals and are illegal. In Medel v. Court of Appeals,50 we annulled a stipulated 5.5% per
month or 66% per annum interest on a ₱500,000.00 loan, and a 6% per month or 72% per annum
interest on a ₱60,000.00 loan, respectively, for being excessive, iniquitous, unconscionableand
exorbitant.1âwphi1
We reiterated this ruling in Chua v. Timan,51 where we held that the stipulated interest rates of 3% per
month and higher are excessive, iniquitous, unconscionable and exorbitant, and must therefore be
reduced to 12% per annum.
Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5% per month,
(or 60% per annum) in the promissory note is excessive, unconscionable, contrary to morals and is
thus illegal. It is void ab initiofor violating Article 130652 of the Civil Code.1âwphi1 We accordingly find it
equitable to reduce the interest rate from 5% per month to 1% per month or 12% per annum in line with
the prevailing jurisprudence.
WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of Appeals in
CA-G.R. CV No. 66915 is hereby AFFIRMED with MODIFICATION, as follows:
1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot are JOINTLY
LIABLE to pay the sum of ₱500,000.00 plus 12% interest per annum from December 3, 1997
until fully paid.
2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.
Costs against petitioner Leonardo A. Bognot.
SO ORDERED.
G.R. No. 206806 June 25, 2014
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R. CV
No. 95709, which stemmed from a complaint3 filed in the Regional Trial Court of Valenzuela City,
Branch 171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under
the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill
business.4 From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to Arco
Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and
President, Candida A. Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either
pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent
value.6
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated
check dated April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the assurance that
the check would not bounce.8 When he deposited the check on April 18, 2007, it was dishonored for
being drawn against a closed account.9
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum,
the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic
Products. The memorandum of agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches
at the price of ₱18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of deliveries
are as follows:
....
It has been agreed further that the Local OCC materials to be used for the production of the above
Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at ₱6.50
per kg. (price subject to change per advance notice). Quantity of Local OCC delivery will be based on
the quantity of Test Liner delivered to Megapack Container Corp. based on the above production
schedule.11
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On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount
of 7,220,968.31, but no payment was made to him.13
Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the
Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer15 but failed to have its representatives attend the pre-trial hearing. Hence, the trial court
allowed Dan T. Lim to present his evidence ex parte.16
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation
to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not take
place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an
exclusive and private agreement between them. He argued that if his name was mentioned in the
contract, it was only for supplying the parties their required scrap papers, where his conformity through
a separate contract was indispensable.19
On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the
judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay
Dan T. Lim the amount of ₱7,220,968.31 with interest at 12% per annum from the time of demand;
₱50,000.00 moral damages; ₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s fees. 22
The appellate court ruled that the facts and circumstances in this case clearly showed the existence of
an alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorney’s fees
due to the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking. 24
Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief
Executive Officer, Candida A. Santos, bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the memorandum of agreement constituted a
novation of the original obligation since Eric Sy became the new debtor of respondent. They also argue
that there is no legal basis to hold petitioner Candida A. Santos personally liable for the transaction that
petitioner corporation entered into with respondent. The Court of Appeals, they allege, also erred in
awarding moral and exemplary damages and attorney’s fees to respondent who did not show proof
that he was entitled to damages.27
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was
no proper novation in this case. He argues that the Court of Appeals was correct in ordering the
payment of 7,220,968.31 with damages since the debt of petitioners remains unpaid. 28 He also argues
that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner Candida A.
Santos was "the prime mover for such outstanding corporate liability."29 In their reply, petitioners
reiterate that novation took place since there was nothing in the memorandum of agreement showing
that the obligation was alternative. They also argue that when respondent allowed them to deliver the
finished products to Eric Sy, the original obligation was novated. 30
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-
SC dated November 21, 2000.31
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by different prestations shall completely perform one of
them.
The creditor cannot be compelled to receive part of one and part of the other undertaking.
"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election." 32 The right of election is
extinguished when the party who may exercise that option categorically and unequivocally makes his
or her choice known.33
The choice of the debtor must also be communicated to the creditor who must receive notice of it
since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to
impugn the election made by the debtor, and only after said notice shall the election take legal effect
when consented by the creditor, or if impugned by the latter, when declared proper by a competent
court.34
According to the factual findings of the trial court and the appellate court, the original contract between
the parties was for respondent to deliver scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp and
Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s obligation. By
agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price
or(2) deliver the finished products of equivalent value to respondent. 35
The appellate court, therefore, correctly identified the obligation between the parties as an alternative
obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from respondent,
would either pay him the price of the raw materials or, in the alternative, deliver to him the finished
products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap
papers, they exercised their option to pay the price. Respondent’s receipt of the check and his
subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to pay.
89
This choice was also shown by the terms of the memorandum of agreement, which was executed on
the same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and
Paper’s finished products would be to a third person, thereby extinguishing the option to deliver the
finished products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement constituted a
novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to
deliver the finished products to a third person, it did not novate the original obligation between the
parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so
"in unequivocal terms" or that "the old and the new obligations be on every point incompatible with
each other."36
Novation was extensively discussed by this court in Garcia v. Llamas: 37
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from — and may even be made
without the knowledge of — the debtor, since it consists of a third person’s assumption of the
obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion,
the debtor offers, and the creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are necessary. Both modes of
substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by
the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a
third person to the rights of the creditor, an act known as subjective or personal novation. For novation
to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. The test of incompatibility is whether the two obligations
can stand together, each one with its own independent existence. 38 (Emphasis supplied)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle — novatio non praesumitur —that novation is never
presumed.At bottom, for novation tobe a jural reality, its animus must be ever present, debitum pro
debito — basically extinguishing the old obligation for the new one. 39 (Emphasis supplied) There is
nothing in the memorandum of agreement that states that with its execution, the obligation of petitioner
Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy somehow
substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that petitioner Arco
Pulp and Paper opted to deliver the finished products to a third person instead.
The consent of the creditor must also be secured for the novation to be valid:
Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with which to deduce a clear and
unequivocal intent by the parties to novate the old agreement. 40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first line of the memorandum, which states:
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Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy. . . .41
If the memorandum of agreement was intended to novate the original agreement between the parties,
respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum
of agreement must also state in clear and unequivocal terms that it has replaced the original obligation
of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their
alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to
petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor
consented to the latter as his new debtor. These acts, when taken together, clearly show that novation
did not take place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to
respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay
respondent the full amount of ₱7,220,968.31.
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract
where the breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the party claiming it proved that the
breach was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton
disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad faith,
and oppressive or abusive.42
Further, the following requisites must be proven for the recovery of moral damages:
An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be
an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second,
there must be culpable act or omission factually established; (3) third, the wrongful act or omission of
the defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the award
of damages is predicated on any of the cases stated in Article 2219 of the Civil Code. 43
Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from his business. This has
remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Paper’s
act of refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a third person in an effort to evade its liability.
This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded
in the following instances:
Article 2219. Moral damages may be recovered in the following and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a
party breaches a contract, he or she goes against Article 19 of the Civil Code, which states: Article 19.
Every person must, in the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith.
Persons who have the right to enter into contractual relations must exercise that right with honesty and
good faith. Failure to do so results in an abuse of that right, which may become the basis of an action
for damages. Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis
of an actionable tort. Article 19 describes the degree of care required so that an actionable tort may
arise when it is alleged together with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
91
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts
that are contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act
have been willful or negligent. Willful may refer to the intention to do the act and the desire to achieve
the outcome which is considered by the plaintiff in tort action as injurious. Negligence may refer to a
situation where the act was consciously done but without intending the result which the plaintiff
considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily
proscribed by law. This article requires that the act be willful, that is, that there was an intention to do
the act and a desire to achieve the outcome. In cases under Article 21, the legal issues revolve around
whether such outcome should be considered a legal injury on the part of the plaintiff or whether the
commission of the act was done in violation of the standards of care required in Article 19. 45
When parties act in bad faith and do not faithfully comply with their obligations under contract, they run
the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be
recovered since it only specifies, among others, Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the act is not only contrary to morals, good customs, and
public policy; it is also a violation of Article 1159. Breaches of contract become the basis of moral
damages, not only under Article 2220, but also under Articles 19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220
requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala: 46
To recover moral damages in an action for breach of contract, the breach must be palpably wanton,
reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith must
prove its existence by clear and convincing evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or
interest or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which can
be inferred from one’s conduct and/or contemporaneous statements. 47 (Emphasis supplied)
Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of
the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent,
it was presumably with the knowledge that it was being drawn against a closed account. Worse, it
attempted to shift their obligations to a third person without the consent of respondent.
Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that
partakes of the nature of fraud."48 Moral damages may, therefore, be awarded.
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the
following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide
whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show
that he is entitled to moral, temperate or compensatory damages before the court may consider the
question of whether or not exemplary damages should be awarded.
In Tankeh v. Development Bank of the Philippines,49 we stated that:
The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from
the commission of a similar offense. The case of People v. Ranteciting People v. Dalisay held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to
serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These terms
are generally, but not always, used interchangeably. In common law, there is preference in the use of
exemplary damages when the award is to account for injury to feelings and for the sense of indignity
and humiliation suffered by a person as a result of an injury that has been maliciously and wantonly
inflicted, the theory being that there should be compensation for the hurt caused by the highly
reprehensible conduct of the defendant—associated with such circumstances as willfulness,
wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud—that
intensifies the injury. The terms punitive or vindictive damages are often used to refer to those species
of damages that may be awarded against a person to punish him for his outrageous conduct. In either
case, these damages are intended in good measure to deter the wrongdoer and others like him from
similar conduct in the future.50 (Emphasis supplied; citations omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to compensatory damages, and only
after the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending upon the
amount of compensatory damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner.51
Business owners must always be forthright in their dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were freely entered into by them. Exemplary damages
may also be awarded in this case to serve as a deterrent to those who use fraudulent means to evade
their liabilities.
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Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be
recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to
prove that the transaction was also a personal undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that:
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation
is generally not held personally liable for obligations incurred by the corporation. Nevertheless, this
legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate
issues.
....
Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances that would warrant
the piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition
for review on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of
the lower court are not supported by the evidence on record or are based on a misapprehension of
facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for
obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and
(2) such negligence or bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the President and
Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of
petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is
clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc." 54 Any
obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking for
which she would be solidarily liable with petitioner Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines: 55
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. Under the
doctrine, the corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical.56 (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and
Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to
honor their undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68
issued by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner]
corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of the
remedies provided by law in order to protect his rights.57
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate
veil.1âwphi1 When petitioner Arco Pulp and Paper’s obligation to respondent became due and
demandable, she not only issued an unfunded check but also contracted with a third party in an effort
to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner
corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the
corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco
Pulp and Paper.
The rate of interest due on
the obligation must be
reduced in view of Nacar v.
Gallery Frames58
In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v.
Gallery Frames,59 the rate of interest due on the obligation must be modified from 12% per annum to
6% per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals, 60 and we
have laid down the following guidelines with regard to the rate of legal interest:
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Linesare accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.
93
II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum
to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code),
but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.61 (Emphasis supplied; citations omitted.)
According to these guidelines, the interest due on the obligation of ₱7,220,968.31 should now be at 6%
per annum, computed from May 5, 2007, when respondent sent his letter of demand to petitioners.
This interest shall continue to be due from the finality of this decision until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay
respondent Dan T. Lim the amount of ₱7,220,968.31 with interest of 6% per annum at the time of
demand until finality of judgment and its full satisfaction, with moral damages in the amount of
₱50,000.00, exemplary damages in the amount of ₱50,000.00, and attorney's fees in the amount of
₱50,000.00.
SO ORDERED.
Legal Subrogation
[G.R. No. 136729. September 23 ,2003]
ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioner, vs. PHILIPPINE EXPORT AND
FOREIGN LOAN GUARANTEE CORPORATION, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision
of the Court of Appeals in CA-G.R. CV No. 41274,[1]affirming the decision of the Regional Trial Court
(Branch 147) of Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics
Corp. (Astro for brevity) were ordered to pay respondent Philippine Export and Foreign Loan
Guarantee Corporation (Philguarantee), jointly and severally, the amount of P3,621,187.52 with
interests and costs.
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to
P3,000,000.00 with interest and secured by three promissory notes: PN NO. PFX-254 dated December
14, 1981 for P600,000.00, PN No. PFX-258 also dated December 14, 1981 for P400,000.00 and PN
No. 15477 dated August 27, 1981 for P2,000,000.00. In each of these promissory notes, it appears
that petitioner Roxas signed twice, as President of Astro and in his personal capacity. [2] Roxas also
signed a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro and as
surety.[3]
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment
of 70% of Astros loan,[4] subject to the condition that upon payment by Philguanrantee of said amount,
it shall be proportionally subrogated to the rights of Philtrust against Astro.[5]
As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee paid 70%
of the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a
complaint for sum of money with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely
signed the same in blank and the phrases in his personal capacity and in his official capacity were
fraudulently inserted without his knowledge.[6]
After trial, the RTC rendered its decision in favor of Philguarantee with the following dispositive
portion:
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or (sic) the
plaintiff and against the defendants Astro Electronics Corporation and Peter T. Roxas, ordering the
then (sic) to pay, jointly and severally, the plaintiff the sum of P3,621.187.52 representing the total
obligation of defendants in favor of plaintiff Philguarantee as of December 31, 1984 with interest at the
stipulated rate of 16% per annum and stipulated penalty charges of 16% per annum computed from
January 1, 1985 until the amount is fully paid. With costs.
SO ORDERED.[7]
94
 The trial court observed that if Roxas really intended to sign the instruments merely in his
capacity as President of Astro, then he should have signed only once in the promissory note. [8]
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that
Roxas failed to explain satisfactorily why he had to sign twice in the contract and therefore the
presumption that private transactions have been fair and regular must be sustained. [9]
In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly
and severally liable (solidary) with Astro for the sum awarded by the RTC.
The answer is in the affirmative.
Astros loan with Philtrust Bank is secured by three promissory notes. These promissory notes are
valid and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as
president of Astro and second, in his personal capacity. In signing his name aside from being the
President of Asro, Roxas became a co-maker of the promissory notes and cannot escape any liability
arising from it. Under the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers,[10] promising that they will pay to the order of the payee or any holder
according to its tenor.[11] Thus, even without the phrase personal capacity, Roxas will still be primarily
liable as a joint and several debtor under the notes considering that his intention to be liable as such is
manifested by the fact that he affixed his signature on each of the promissory notes twice which
necessarily would imply that he is undertaking the obligation in two different capacities, official and
personal.
Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures
affixed by Roxas on the promissory notes, Exhibits A-4 and 3-A and B-4 and 4-A readily reveals that
portions of his signatures covered portions of the typewritten words personal capacity indicating with
certainty that the typewritten words were already existing at the time Roxas affixed his signatures thus
demolishing his claim that the typewritten words were just inserted after he signed the promissory
notes. If what he claims is true, then portions of the typewritten words would have covered portions of
his signatures, and not vice versa.
As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is not clear so that this
Court could not discern the same observations on the notes, Exhibits A-4 and 3-A and B-4 and 4-A.
Nevertheless, the following discussions equally apply to all three promissory notes.
The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly, severally
and solidarily, promise to pay to PHILTRUST BANK or order... [12] An instrument which begins with I,
We, or Either of us promise to pay, when signed by two or more persons, makes them solidarily
liable.[13] Also, the phrase joint and several binds the makers jointly and individually to the payee so
that all may be sued together for its enforcement, or the creditor may select one or more as the object
of the suit.[14] Having signed under such terms, Roxas assumed the solidary liability of a debtor and
Philtrust Bank may choose to enforce the notes against him alone or jointly with Astro.
Roxas claim that the phrases in his personal capacity and in his official capacity were inserted on
the notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is
not disputed that Roxas does not deny that he signed the notes twice. As aptly found by both the trial
and appellate court, Roxas did not offer any explanation why he did so. It devolves upon him to
overcome the presumptions that private transactions are presumed to be fair and regular [15] and that a
person takes ordinary care of his concerns.[16] Aside from his self-serving allegations, Roxas failed to
prove the truth of such allegations. Thus, said presumptions prevail over his claims. Bare allegations,
when unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof under our
Rules of Court.[17]
Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary
care of his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign
document without first informing himself of its contents and consequences. Clearly, he knew the nature
of the transactions and documents involved as he not only executed these notes on two different dates
but he also executed, and again, signed twice, a continuing Surety ship Agreement notarized on July
31, 1981, wherein he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due
to Philtrust. Such continuing suretyship agreement even re-enforced his solidary liability Philtrust
because as a surety, he bound himself jointly and severally with Astros obligation. [18] Roxas cannot
now avoid liability by hiding under the convenient excuse that he merely signed the notes in blank and
the phrases in personal capacity and in his official capacity were fraudulently inserted without his
knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights
of Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the
value of 70% of roxas and Astro Electronics Corp.s loan obligation. In compliance with its contract of
Guarantee in favor of Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in
all his rights.[19] It may either be legal or conventional.Legal subrogation is that which takes place
without agreement but by operation of law because of certain acts. [20] Instances of legal subrogation
are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is
that which takes place by agreement of the parties.[21]
Roxas acquiescence is not necessary for subrogation to take place because the instant case is
one of the legal subrogation that occurs by operation of law, and without need of the debtors
knowledge.[22] Further, Philguarantee, as guarantor, became the transferee of all the rights of Philtrust
as against Roxas and Astro because the guarantor who pays is subrogated by virtue thereof to all the
rights which the creditor had against the debtor.[23]
WHEREFORE, finding no error with the decision of the Court of Appeals dated December 10,
1998, the same is hereby AFFIRMED in toto.
SO ORDERED.
G.R. No. 159097 July 5, 2010
METROPOLITAN BANK AND TRUST COMPANY, Petitioner,
vs.
RURAL BANK OF GERONA, INC. Respondent.
DECISION
BRION, J.:
Petitioner Metropolitan Bank and Trust Company (Metrobank) filed this Petition for Review on
Certiorari1 under Rule 45 of the Rules of Court to challenge the Court of Appeals (CA) decision dated
December 17, 20022 and the resolution dated July 14, 20033 in CA-G.R. CV No. 46777. The CA
decision set aside the July 7, 1994 decision4 of the Regional Trial Court (RTC) of Tarlac, Branch 65, in
Civil Case No. 6028 (a collection case filed by Metrobank against respondent Rural Bank of Gerona,
Inc. [RBG]), and ordered the remand of the case to include the Central Bank of the
Philippines5 (Central Bank) as a necessary party.
95
 THE FACTUAL ANTECEDENTS
RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In
the 1970s, the Central Bank and the RBG entered into an agreement providing that RBG shall facilitate
the loan applications of farmers-borrowers under the Central Bank-International Bank for
Reconstruction and Development’s (IBRD’s) 4th Rural Credit Project. The agreement required RBG to
open a separate bank account where the IBRD loan proceeds shall be deposited. The RBG
accordingly opened a special savings account with Metrobank’s Tarlac Branch. As the depository bank
of RBG, Metrobank was designated to receive the credit advice released by the Central Bank
representing the proceeds of the IBRD loan of the farmers-borrowers; Metrobank, in turn, credited the
proceeds to RBG’s special savings account for the latter’s release to the farmers-borrowers.
On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and
accordingly credited Metrobank’s demand deposit account in the amount of ₱178,652.00, for the
account of RBG. The amount, which was credited to RBG’s special savings account represented the
approved loan application of farmer-borrower Dominador de Jesus. RBG withdrew the ₱178,652.00
from its account.
On the same date, the Central Bank approved the loan application of another farmer-borrower, Basilio
Panopio, for ₱189,052.00, and credited the amount to Metrobank’s demand deposit account.
Metrobank, in turn, credited RBG’s special savings account. Metrobank claims that the RBG also
withdrew the entire credited amount from its account.
On October 3, 1978, the Central Bank approved Ponciano Lagman’s loan application for ₱220,000.00.
As with the two other IBRD loans, the amount was credited to Metrobank’s demand deposit account,
which amount Metrobank later credited in favor of RBG’s special savings account. Of the ₱220,000.00,
RBG only withdrew ₱75,375.00.
On November 3, 1978, more than a month after RBG had made the above withdrawals from its
account with Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD
loans.6 The Central Bank implemented the reversal by debiting from Metrobank’s demand deposit
account the amount corresponding to all three IBRD loans.
Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following amounts
from RBG’s special savings account: ₱189,052.00, ₱115,000.00, and ₱8,000.41. Metrobank, however,
claimed that these amounts were insufficient to cover all the credit advices that were reversed by the
Central Bank. It demanded payment from RBG which could make partial payments. As of October 17,
1979, Metrobank claimed that RBG had an outstanding balance of ₱334,220.00. To collect this
amount, it filed a complaint for collection of sum of money against RBG before the RTC, docketed as
Civil Case No. 6028.7
In its July 7, 1994 decision,8 the RTC ruled for Metrobank, finding that legal subrogation had ensued:
[Metrobank] had allowed releases of the amounts in the credit advices it credited in favor of [RBG’s
special savings account] which credit advices and deposits were under its supervision. Being faulted in
these acts or omissions, the Central Bank [sic] debited these amounts against [Metrobank’s] demand
[deposit] reserve; thus[, Metrobank’s] demand deposit reserves diminished correspondingly,
[Metrobank as of this time,] suffers prejudice in which case legal subrogation has ensued. 9
It thus ordered RBG to pay Metrobank the sum of ₱334,200.00, plus interest at 14% per annum until
the amount is fully paid.
On appeal, the CA noted that this was not a case of legal subrogation under Article 1302 of the Civil
Code. Nevertheless, the CA recognized that Metrobank had a right to be reimbursed of the amount it
had paid and failed to recover, as it suffered loss in an agreement that involved only the Central Bank
and the RBG. It clarified, however, that a determination still had to be made on who should reimburse
Metrobank. Noting that no evidence exists why the Central Bank reversed the credit advices it had
previously confirmed, the CA declared that the Central Bank should be impleaded as a necessary party
so it could shed light on the IBRD loan reversals. Thus, the CA set aside the RTC decision, and
remanded the case to the trial court for further proceedings after the Central Bank is impleaded as a
necessary party.10 After the CA denied its motion for reconsideration, Metrobank filed the present
petition for review on certiorari.
THE PETITION FOR REVIEW ON CERTIORARI
Metrobank disagrees with the CA’s ruling to implead the Central Bank as a necessary party and to
remand the case to the RTC for further proceedings. It argues that the inclusion of the Central Bank as
party to the case is unnecessary since RBG has already admitted its liability for the amount Metrobank
failed to recover. In two letters,11RBG’s President/Manager made proposals to Metrobank for the
repayment of the amounts involved. Even assuming that no legal subrogation took place, Metrobank
claims that RBG’s letters more than sufficiently proved its liability.
Metrobank additionally contends that a remand of the case would unduly delay the proceedings. The
transactions involved in this case took place in 1978, and the case was commenced before the RTC
more than 20 years ago. The RTC resolved the complaint for collection in 1994, while the CA decided
the appeal in 2002. To implead Central Bank, as a necessary party in the case, means a return to
square one and the restart of the entire proceedings.
THE COURT’S RULING
The petition is impressed with merit.
A basic first step in resolving this case is to determine who the liable parties are on the IBRD loans that
the Central Bank extended. The Terms and Conditions of the IBRD 4th Rural Credit Project12 (Project
Terms and Conditions) executed by the Central Bank and the RBG shows that the farmers-borrowers
to whom credits have been extended, are primarily liable for the payment of the borrowed amounts.
The loans were extended through the RBG which also took care of the collection and of the remittance
of the collection to the Central Bank. RBG, however, was not a mere conduit and
collector.1avvphil While the farmers-borrowers were the principal debtors, RBG assumed liability under
the Project Terms and Conditions by solidarily binding itself with the principal debtors to fulfill the
obligation.1awphi1
How RBG profited from the transaction is not clear from the records and is not part of the issues before
us, but if it delays in remitting the amounts due, the Central Bank imposed a 14% per annum penalty
rate on RBG until the amount is actually remitted. The Central Bank was further authorized to deduct
the amount due from RBG’s demand deposit reserve should the latter become delinquent in payment.
On these points, paragraphs 5 and 6 of the Project Terms and Conditions read:
96
5. Collection received representing repayments of borrowers shall be immediately remitted to the
Central Bank, otherwise[,] the Rural Bank/SLA shall be charged a penalty of fourteen [percent] (14%)
p.a. until date of remittance.
6. In case the rural bank becomes delinquent in the payment of amortizations due[,] the Central Bank
is authorized to deduct the corresponding amount from the rural bank’s demand deposit reserve 13 at
any time to cover any delinquency. [Emphasis supplied.]
Based on these arrangements, the Central Bank’s immediate recourse, therefore should have been
against the farmers-borrowers and the RBG; thus, it erred when it deducted the amounts covered by
the debit advices from Metrobank’s demand deposit account. Under the Project Terms and Conditions,
Metrobank had no responsibility over the proceeds of the IBRD loans other than serving as a conduit
for their transfer from the Central Bank to the RBG once credit advice has been issued. Thus, we
agree with the CA’s conclusion that the agreement governed only the parties involved – the Central
Bank and the RBG. Metrobank was simply an outsider to the agreement. Our disagreement with the
appellate court is in its conclusion that no legal subrogation took place; the present case, in fact,
exemplifies the circumstance contemplated under paragraph 2, of Article 1302 of the Civil Code which
provides:
Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor’s
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of
the obligation pays, without prejudice to the effects of confusion as to the latter’s share.
[Emphasis supplied.]
As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest except
as a conduit, and was not legally answerable for the IBRD loans. Despite this, it was Metrobank’s
demand deposit account, instead of RBG’s, which the Central Bank proceeded against, on the
assumption perhaps that this was the most convenient means of recovering the cancelled loans. That
Metrobank’s payment was involuntarily made does not change the reality that it was Metrobank which
effectively answered for RBG’s obligations.
Was there express or tacit approval by RBG of the payment enforced against Metrobank? After
Metrobank received the Central Bank’s debit advices in November 1978, it (Metrobank) accordingly
debited the amounts it could from RBG’s special savings account without any objection from
RBG.14 RBG’s President and Manager, Dr. Aquiles Abellar, even wrote Metrobank, on August 14,
1979, with proposals regarding possible means of settling the amounts debited by Central Bank from
Metrobank’s demand deposit account.15 These instances are all indicative of RBG’s approval of
Metrobank’s payment of the IBRD loans. That RBG’s tacit approval came after payment had been
made does not completely negate the legal subrogation that had taken place.
Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with
all the rights thereto appertaining, either against the debtor or against third persons. As the entity
against which the collection was enforced, Metrobank was subrogated to the rights of Central Bank
and has a cause of action to recover from RBG the amounts it paid to the Central Bank, plus 14% per
annum interest.
Under this situation, impleading the Central Bank as a party is completely unnecessary. We note that
the CA erroneously believed that the Central Bank’s presence is necessary "in order x x x to shed light
on the matter of reversals made by it concerning the loan applications of the end users and to have a
complete determination or settlement of the claim."16 In so far as Metrobank is concerned, however,
the Central Bank’s presence and the reasons for its reversals of the IBRD loans are immaterial after
subrogation has taken place; Metrobank’s interest is simply to collect the amounts it paid the Central
Bank. Whatever cause of action RBG may have against the Central Bank for the unexplained reversals
and any undue deductions is for RBG to ventilate as a third-party claim; if it has not done so at this
point, then the matter should be dealt with in a separate case that should not in any way further delay
the disposition of the present case that had been pending before the courts since 1980.
While we would like to fully and finally resolve this case, certain factual matters prevent us from doing
so. Metrobank contends in its petition that it credited RBG’s special savings account with three
amounts corresponding to the three credit advices issued by the Central Bank: the ₱178,652.00 for
Dominador de Jesus; the ₱189,052.00 for Basilio Panopio; and the ₱220,000.00 for Ponciano Lagman.
Metrobank claims that all of the three credit advices were subsequently reversed by the Central Bank,
evidenced by three debit advices. The records, however, contained only the credit and debit advices
for the amounts set aside for de Jesus and Lagman;17 nothing in the findings of fact by the RTC and
the CA referred to the amount set aside for Panopio.
Thus, what were sufficiently proven as credited and later on debited from Metrobank’s demand deposit
account were only the amounts of ₱178,652.00 and ₱189,052.00. With these amounts combined,
RBG’s liability would amount to ₱398,652.00 – the same amount RBG acknowledged as due to
Metrobank in its August 14, 1979 letter.18Significantly, Metrobank likewise quoted this amount in its
July 11, 197919 and July 26, 197920 demand letters to RBG and its Statement of Account dated
December 23, 1982.21
RBG asserts that it made partial payments amounting to ₱145,197.40,22 but neither the RTC nor the
CA made a conclusive finding as to the accuracy of this claim. Although Metrobank admitted that RBG
indeed made partial payments, it never mentioned the actual amount paid; neither did it state that the
₱145,197.40 was part of the ₱312,052.41 that, it admitted, it debited from RBG’s special savings
account.
Deducting ₱312,052.41 (representing the amounts debited from RBG’s special savings account, as
admitted by Metrobank) from ₱398,652.00 amount due to Metrobank from RBG, the difference would
only be ₱86,599.59. We are, therefore, at a loss on how Metrobank computed the amount of
₱334,220.00 it claims as the balance of RBG’s loan. As this Court is not a trier of facts, we deem it
proper to remand this factual issue to the RTC for determination and computation of the actual amount
RBG owes to Metrobank, plus the corresponding interest and penalties.
WHEREFORE, we GRANT the petition for review on certiorari, and REVERSE the decision and the
resolution of the Court of Appeals, in CA-G.R. CV No. 46777, promulgated on December 17, 2002 and
July 14, 2003, respectively. We AFFIRM the decision of the Regional Trial Court, Branch 65, Tarlac,
promulgated on July 7, 1994, insofar as it found respondent liable to the petitioner Metropolitan Bank
and Trust Company, but order the REMAND of the case to the trial court to determine the actual
amounts due to the petitioner. Costs against respondent Rural Bank of Gerona, Inc.
97
SO ORDERED.
Conventional subrogation
G.R. No. 142838 August 9, 2001
ABELARDO B. LICAROS, petitioner,
vs.
ANTONIO P. GATMAITAN, respondent.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court. The petition seeks to
reverse and set aside the Decision1 dated February 10, 2000 of the Court of Appeals and its
Resolution2 dated April 7, 2000 denying petitioner's Motion for Reconsideration thereto. The appellate
court decision reversed the Decision3 dated November 11, 1997 of the Regional Trial Court of Makati,
Branch 145 in Civil Case No. 96-1211.
The facts of the case, as stated in the Decision of the Court o Appeals dated February 10, 2000, are as
follows:
"The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for brevity), is a private bank
registered and organized to do business under the laws of the Republic of Vanuatu but not in
the Philippines. Its business consists primarily in receiving fund placements by way of
deposits from institutions and individuals investors from different parts of the world and
thereafter investing such deposits in money market placements and potentially profitable
capital ventures in Hongkong, Europe and the United States for the purpose of maximizing
the returns on those investments.
Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo Licaros, a
Filipino businessman, decided to make a fund placement with said bank sometime in the
1980's. As it turned out, the grim outcome of Licaros' foray in overseas fund investment was
not exactly what he envisioned it to be. More particularly, Licaros, after having invested in
Anglo-Asean, encountered tremendous and unexplained difficulties in retrieving, not only the
interest or profits, but even the very investments he had put in Anglo-Asean.1âwphi1.nêt
Confronted with the dire prospect of not getting back any of his investments, Licaros then
decide to seek the counsel of Antonio P. Gatmaitan, a reputable banker and investment
manager who had been extending managerial, financial and investment consultancy services
to various firms and corporations both here and abroad. To Licaros' relief, Gatmaitan was only
too willing enough to help. Gatmaitan voluntarily offered to assume the payment of Anglo-
Asean's indebtedness to Licaros subject to certain terms and conditions. In order to effectuate
and formalize the parties' respective commitments, the two executed a notarized
MEMORANDUM OF AGREEMENT on July 29, 1988 (Exh. "B"); also Exhibit "1"), the full text
of which reads:
Memorandum of Agreement
KNOW ALL MEN BY THESE PRESENTS:
This MEMORANDUM OF AGREEMENT made and executed this 29th day of July 1988, at Makati by
and between:
ABELARDO B. LICAROS, Filipino, of legal age and holding office at Concepcion Building, Intramuros,
Manila hereinafter referred to as THE PARTY OF THE FIRST PART,
and
ANTONIO P. GATMAITAN, Filipino, of legal age and residing at 7 Mangyan St., La vista, hereinafter
referred to as the PARTY OF THE SECOND PART,
WITNESSETH THAT:
WHEREAS, ANGLO-ASEAN BANK & TRUST, a company incorporated by the Republic of Vanuatu,
hereinafter referred to as the OFFSHORE BANK, is indebted to the PARTY OF THE FIRST PART in
the amount of US dollars; ONE HUNDRED FIFTY THOUSAND ONLY (US$150,000) which debt is
now due and demandable.
WHEREAS, the PARTY OF THE FIRST PART has encountered difficulties in securing full settlement
of the said indebtedness from the OFFSHORE BANK and has sought a business arrangement with the
PARTY OF THE SECOND PART regarding his claims;
WHEREAS, the PARTY OF THE SECOND PART, with his own resources and due to his association
with the OFFSHORE BANK, has offered to the PARTY OF THE FIRST PART to assume the payment
of the aforesaid indebtedness, upon certain terms and conditions, which offer, the PARTY OF THE
FIRST PART has accepted;
WHREAS, the parties herein have come to an agreement on the nature, form and extent of their
mutual prestations which they now record herein with the express conformity of the third parties
concerned;
NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants stipulated
herein, the PARTY OF THE FIRST PART and the PARTY OF THE SECOND PART have agreed, as
they do hereby agree, as follows:
1. The PARTY OF THE SECOND PART hereby undertakes to pay the PARTY OF THE
FIRST PART the amount of US DOLLARS ONE HOUNDRED FIFTY
THOUSAND (US$150,000) payable in Philippine Currency at the fixed exchange rate of
Philippine Pesos 21 to US$1 without interest on or before July 15, 1993.
For this purpose, the PARTY OF THE SECOND PART shall execute and deliver a non
negotiable promissory note, bearing the aforesaid material consideration in favor of the
PARTY OF THE FIRST PART upon execution of this MEMORANDUM OF AGREEMENT,
which promissory note shall form part as ANNEX A hereof.
2. For and in consideration of the obligation of the PARTY OF THE SECOND PART, the
PARTY OF THE FIRST does hereby;
98
 a. Sell, assign, transfer and set over unto the PARTY OF THE SECOND PART that
certain debt now due and owing to the PARTY OF THE FIRST PART by the
OFFSHORE BANK, to the amount of US Dollars One Hundred Fifty Thousand plus
interest due and accruing thereon;
b. Grant the PART OF THE SECOND PART the full power and authority, for his own
use and benefit, but at his own cost and expense, to demand, collect, receive,
compound, compromise and give acquittance for the same or any part thereof, and
in the name of the PARTY OF THE FIRST PART, to prosecute, and withdraw any
suit or proceedings therefor;
c. Agree and stipulate that the debt assigned herein is justly owing and due to the
PARTY OF THE FIRST PART from the said OFFSHORE BANK, and that the
PARTY OF THE FIRST PART has not done and will not cause anything to be done
to diminish or discharge said debt, or to delay or prevent the PARTY OF THE
SECOND PART from collecting the same; and;
d. At the request of the PARTY OF SECOND PART and the latter's own cost and
expense, to execute and do all such further acts and deeds as shall be reasonably
necessary for proving said debt and to more effectually enable the PARTY OF THE
SECOND PART to recover the same in accordance with the true intent and meaning
of the arrangements herein.
IN WITNESS WHEREOF, the parties have caused this MEMORANDUM OF AGREEMENT to be
signed on the date and place first written above.
Sgd. Sgd.
ABELARDO B. LICAROS ANTONIO P. GATMAITAN
PARTY OF THE FIRST PART PARTY OF THE FIRST ART
WITH OUR CONFORME:
ANGLO-ASEAN BANK &amp; TRUST
BY: (Unsigned)
SIGNED IN THE PRESENCE OF:
Sgd. (Illegible)
________________________________ ________________________________
Conformably with his undertaking under paragraph 1 of the aforequoted agreement, Gatmaitan
executed in favor of Licaros a NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF
CASH DIVIDENDS (Exhs. "A"; Also Exh. "2"), which promissory note, appended as Annex "A" to the
same Memorandum of Agreement, states in full, thus
"NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS
This promissory note is Annex A of the Memorandum of Agreement executed between
Abelardo B. Licaros and Antonio P. Gatmaitan, on ______ 1988 at Makati, Philippines and is
an integral part of said Memorandum of Agreement.
P3,150.00.
On or before July 15, 1993, I promise to pay to Abelardo B. Licaros the sum of Philippine
Pesos 3,150,000 (P3,150,000) without interest as material consideration for the full settlement
of his money claims from ANGLO-ASEAN BANK, referred to in the Memorandum of
Agreement as the 'OFFSHORE BANK".
As security for the payment of this of Promissory Note. I hereby ASSIGN, CEDE and
TRANSFER, Seventy Percent (70%) of ALL CASH DIVIDENDS, that may be due or owing to
me as the registered owner of __________________ (______________) shares of stock in
the Prudential Life Realty, Inc.
This assignment shall likewise include SEVENTY PERCENT (70%) of cash dividends that
may be declared by Prudential Life Realty, Inc. and due or owing to Prudential Life Plan, Inc.,
of which I am a stockholder, to the extent of or in proportion to my aforesaid shareholding in
Prudential Life Plan, Inc, the latter being the holding company of Prudential Life Realty, Inc.
In the event that I decide to sell or transfer my aforesaid shares in either or both the
Prudential Life Plan, Inc. or Prudential Life Realty, Inc. and the Promissory Note remains
unpaid or outstanding, I hereby give Mr. Abelardo B. Licaros the first option to buy the said
shares.
Manila, Philippines
July ______, 1988
(SGD.)
ANTONIO P. GATMAITAN
7 Mangyan St., La Vista QC
SIGNED IN THE PRESENCE OF:
(SGD.)
99
 ______________________________ ______________________________
Francisco A. Alba
President, Prudential Life Plan, Inc."
Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement earlier executed by
him and Licaros for the purpose of collecting the latter's placement thereat of U.S. $150,000.00. Albeit
the officers of Anglo-Asean allegedly committed themselves to "look into [this matter]", no formal
response was ever made by said bank to either Licaros or Gatmaitan. To date, Anglo-Asean has not
acted on Gatmaitan's monetary claims.
Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not bother anymore to
make good his promise to pay Licaros the amount stated in his promissory note (Exh. "A"; also Exh.
2"). Licaros, however, thought differently. He felt that he had a right to collect on the basis of the
promissory note regardless of the outcome of Gatmaitan's recovery efforts. Thus, in July, 1996,
Licaros, thru counsel, addressed successive demand letters to Gatmaitan (Exhs. "C" and "D"),
demanding payment of the later's obligations under the promissory note. Gatmaitan, however, did not
accede to these demands.
Hence, on August 1, 1996, in the Regional Trial Court at Makati, Licaros filed the complaint in this
case. In his complaint, docketed in the court below as Civil case No. 96-1211, Licaros prayed for a
judgment ordering Gatmaitan to pay him the following:
'a) Principal Obligation in the amount of Three Million Five Hundred Thousand Pesos
(P3,500,000.00);
b) Legal interest thereon at the rate of six (6%) percent per annum from July 16, 1993 when
the amount became due until the obligation is fully paid;
b) Twenty percent (20%) of the amount due as reasonable attorney's fees;
d) Costs of the suit.'"4
After trial on the merits, the court a quo rendered judgment in favor of petitioner Licaros and found
respondent Gatmaitan liable under the Memorandum of Agreement and Promissory Note for
P3,150,000.00 plus 12% interest per annum from July 16, 1993 until the amount is fully paid.
Respondent was likewise ordered to pay attorney's fees of P200,000.00. 5
Respondent Gatmaitan appealed the trial court's decision to the Court of Appeals. In a decision
promulgated on February 10, 2000, the appellate court reversed the decision of the trial court and held
that respondent Gatmaitan did not at any point become obligated to pay to petitioner Licaros the
amount stated in the promissory note. In a Resolution dated April 7, 2000 the Court of Appeals denied
petitioner's Motion for Reconsideration of its February 10, 2000 Decision.
Hence this petition for review on certiorari where petitioner prays for the reversal of the February 10,
2000 Decision of the Court of Appeals and the reinstatement of the November 11, 1997 decision of the
Regional Trial Court.
The threshold issue for the determination of this Court is whether the Memorandum of Agreement
between petitioner and respondent is one of assignment of credit or one of conventional subrogation.
This matter is determinative of whether or not respondent became liable to petitioner under the
promissory note considering that its efficacy is dependent on the Memorandum of Agreement, the note
being merely an annex to the said memorandum.6
An assignment of credit has been defined as the process of transferring the right of the assignor to the
assignee who would then have the right to proceed against the debtor. The assignment may be done
gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale. 7
On the other hand, subrogation has been defined as the transfer of all the rights of the creditor to a
third person, who substitutes him in all his rights. It may either be legal or convention. Legal
subrogation is that which takes place without agreement but by operation of law because of certain
acts. Conventional subrogation is that which takes place by agreement of parties.8
The general tenor of the foregoing definitions of the terms "subrogation" and "assignment of credit"
may make it seem that they are one and the same which they are not. A noted expert in civil law notes
their distinctions thus:
"Under our Code, however, conventional subrogation is not identical to assignment of credit.
In the former, the debtor's consent is necessary; in the latter it is not required. Subrogation
extinguishes the obligation and gives rise to a new one; assignment refers to the same right
which passes from one person to another. The nullity of an old obligation may be cured by
subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is
not remedied by the assignment of the creditor's right to another." 9
For our purposes, the crucial distinction deals with the necessity of the consent of the debtor in the
original transaction. In an assignment of credit, the consent of the debtor is not necessary in order that
the assignment may fully produce legal effects.10 What the law requires in an assignment of credit is
not the consent of the debtor but merely notice to him as the assignments takes effect only from the
time he has knowledge thereof.11 A creditor may, therefore, validly assign his credit and its accessories
without the debtor's consent.12 On the other hand, conventional subrogation requires an agreement
among the three parties concerned – the original creditor, the debtor, and the new creditor. It is a new
contractual relation based on the mutual agreement among all the necessary parties. Thus, Article
1301 of the Civil Code explicitly states that "(C)onventional subrogation of a third person requires the
consent of the original parties and of the third person."
The trial court, in finding for the petitioner, ruled that the Memorandum of Agreement was in the nature
of an assignment of credit. As such, the court a quo held respondent liable for the amount stated in the
said agreement even if the parties thereto failed to obtain the consent of Anglo-Asean Bank. On the
other hand, the appellate court held that the agreement was one of conventional subrogation which
necessarily requires the agreement of all the parties concerned. The Court of Appeals thus ruled that
the Memorandum of Agreement never came into effect due to the failure of the parties to get the
consent of Anglo-Asean Bank to the agreement and, as such, respondent never became liable for the
amount stipulated.
We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated July 29,
1988 was in the nature of a conventional subrogation which requires the consent of the debtor, Anglo-
Asean Bank, for its validity. We note with approval the following pronouncement of the Court of
Appeals:
100
 "Immediately discernible from above is the common feature of contracts involving
conventional subrogation, namely, the approval of the debtor to the subrogation of a third
person in place of the creditor. That Gatmaitan and Licaros had intended to treat their
agreement as one of conventional subrogation is plainly borne by a stipulation in their
Memorandum of Agreement, to wit:
"WHEREAS, the parties herein have come to an agreement on the nature, form and extent of
their mutual prestations which hey now record herein with the express conformity of the third
parties concerned" (emphasis supplied), which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a mere "assignee" of
appellee's credit, there is simply no sense for them to have stipulated in their agreement that
the same is conditioned on the "express conformity" thereto of Anglo-Asean Bank. That they
did so only accentuates their intention to treat the agreement as one of conventional
subrogation. And it is basic in the interpretation of contracts that the intention of the parties
must be the one pursued (Rule 130, Section 12, Rules of Court).
Given our finding that the Memorandum of Agreement (Exh. "B"; also Exh. "1"), is not one of
"assignment of credit" but is actually a "conventional subrogation", the next question that
comes to mind is whether such agreement was ever perfected at all. Needless to state, the
perfection – or non-perfection – of the subject agreement is of utmost relevance at this point.
For, if the same Memorandum of Agreement was actually perfected, then it cannot be denied
that Gatmaitan still has a subsisting commitment to pay Licaros on the basis of his promissory
note. If not, Licaros' suit for collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of Agreement expressly requires the
consent of Anglo-Asean to the subrogation. Upon whom the task of securing such consent
devolves, be it on Licaros or Gatmaitan, is of no significance. What counts most is the hard
reality that there has been an abject failure to get Anglo-Asean's nod of approval over
Gatmaitan's being subrogated in the place of Licaros. Doubtless, the absence of such
conformity on the part of Anglo-Asean, which is thereby made a party to the same
Memorandum of Agreement, prevented the agreement from becoming effective, much less
from being a source of any cause of action for the signatories thereto" 13
Aside for the "whereas clause" cited by the appellate court in its decision, we likewise note that on the
signature page, right under the place reserve for the signatures of petitioner and respondent, there is,
typewritten, the words "WITH OUR CONFORME." Under this notation, the words "ANGLO-ASEAN
BANK AND TRUST" were written by hand.14 To our mind, this provision which contemplates the signed
conformity of Anglo-Asean Bank, taken together with the aforementioned preambulatory clause leads
to the conclusion that both parties intended that Anglo-Asean Bank should signify its agreement and
conformity to the contractual arrangement between petitioner and respondent. The fact that Anglo-
Asean Bank did not give such consent rendered the agreement inoperative considering that, as
previously discussed, the consent of the debtor is needed in the subrogation of a third person to the
rights of a creditor.
In this petition, petitioner assails the ruling of the Court of Appeals that what was entered into by the
parties was a conventional subrogation of petitioner's rights as creditor of the Anglo-Asean Bank which
necessary requires the consent of the latter. In support, petitioner alleges that: (1) the Memorandum of
Agreement did not create a new obligation and, as such, the same cannot be a conventional
subrogation; (2) the consent of Anglo-Asean Bank was not necessary for the validity of the
Memorandum of Agreement; (3) assuming that such consent was necessary, respondent failed to
secure the same as was incumbent upon him; and (4) respondent himself admitted that the transaction
was one of assignment of credit.
Petitioner argues that the parties to the Memorandum of Agreement could not have intended the same
to be a conventional subrogation considering that no new obligation was created. According to
petitioner, the obligation of Anglo-Asean Bank to pay under Contract No. 00193 was not extinguished
and in fact, it was the basic intention of the parties to the Memorandum of Agreement to enforce the
same obligation of Anglo-Asean Bank under its contract with petitioner. Considering that the old
obligation of Anglo-Asean Bank under Contract No. 00193 was never extinguished under the
Memorandum of Agreement, it is contended that the same could not be considered as a conventional
subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of extinguishing the old obligation and giving rise
to a new one. However, the extinguishment of the old obligation is the effect of the establishment of a
contract for conventional subrogation. It is not a requisite without which a contract for conventional
subrogation may not be created. As such, it is not determinative of whether or not a contract of
conventional subrogation was constituted.
Moreover, it is of no moment that the subject of the Memorandum of Agreement was the collection of
the obligation of Anglo-Asean Bank to petitioner Licaros under Contract No. 00193. Precisely, if
conventional subrogation had taken place with the consent of Anglo-Asian Bank to effect a change in
the person of its creditor, there is necessarily created a new obligation whereby Anglo-Asean Bank
must now give payment to its new creditor, herein respondent.
Petitioner next argues that the consent or conformity of Anglo-Asean Bank is not necessary to the
validity of the Memorandum of Agreement as the evidence on record allegedly shows that it was never
the intention of the parties thereto to treat the same as one of conventional subrogation. He claims that
the preambulatory clause requiring the express conformity of third parties, which admittedly was Anglo-
Asean Bank, is a mere surplusage which is not necessary to the validity of the agreement.
As previously discussed, the intention of the parties to treat the Memorandum of Agreement as
embodying a conventional subrogation is shown not only by the "whereas clause" but also by the
signature space captioned "WITH OUR CONFORME" reserved for the signature of a representative of
Anglo-Asean Bank. These provisions in the aforementioned Memorandum of Agreement may not
simply be disregarded or dismissed as superfluous.
It is a basic rule in the interpretation of contracts that "(t)he various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them taken
jointly."15 Moreover, under our Rules of Court, it is mandated that "(I)n the construction of an instrument
where there are several provisions or particulars, such a construction is, if possible, to be adopted as
will give effect to all."16 Further, jurisprudence has laid down the rule that contracts should be so
construed as to harmonize and give effect to the different provisions thereof. 17
In the case at bench, the Memorandum of Agreement embodies certain provisions that are consistent
with either a conventional subrogation or assignment of credit. It has not been shown that any clause
or provision in the Memorandum of Agreement is inconsistent or incompatible with a conventional
subrogation. On the other hand, the two cited provisions requiring consent of the debtor to the
101
memorandum is inconsistent with a contract of assignment of credit. Thus, if we were to interpret the
same as one of assignment of credit, then the aforementioned stipulations regarding the consent of
Anglo-Asean Bank would be rendered inutile and useless considering that, as previously discussed,
the consent of the debtor is not necessary in an assignment of credit.
Petitioner next argues that assuming that the conformity of Anglo-Asean was necessary to the validity
of the Memorandum of Agreement, respondently only had himself to blame for the failure to secure
such conformity as was, allegedly, incumbent upon him under the memorandum.
As to this argument regarding the party responsible for securing the conformity of Anglo-Asean Bank,
we fail to see how this question would have any relevance on the outcome of this case. Having ruled
that the consent of Anglo-Asean was necessary for the validity of the Memorandum of Agreement, the
determinative fact is that such consent was not secured by either petitioner or respondent which
consequently resulted in the invalidity of the said memorandum.
With respect to the argument of petitioner that respondent himself allegedly admitted in open court that
an assignment of credit was intended, it is enough to say that respondent apparently used the word
"assignment" in his testimony in the general sense. Respondent is not a lawyer and as such, he is no
so well versed in law that he would be able to distinguish between the concepts of conventional
subrogation and of assignment of credit. Moreover, even assuming that there was an admission on his
part, such admission is not conclusive on this court as the nature and interpretation of the
Memorandum of Agreement is a question of law which may not be the subject of stipulations and
admission.18
Considering the foregoing, it cannot then be said that the consent of the debtor Anglo-Asean Bank is
not necessary to the validity of the Memorandum of Agreement. As above stated, the Memorandum of
Agreement embodies a contract for conventional subrogation and in such a case, the consent of the
original parties and the third person is required.19 The absence of such conformity by Anglo-Asean
Bank prevented the Memorandum of Agreement from becoming valid and effective. Accordingly, the
Court of Appeals did not err when it ruled that the Memorandum of Agreement was never perfected.
Having arrived at the above conclusion, the Court finds no need to discuss the other issues raised by
petitioner.
WHEREFORE, the instant petition is DENIED and the Decision of the Court of Appeals dated February
10, 2000 and its Resolution dated April 7, 2000 are hereby AFFIRMED.1âwphi1.nêt
G.R. No. 149040 July 4, 2007
EDGAR LEDONIO, petitioner,
vs.
CAPITOL DEVELOPMENT CORPORATION, respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Revised Rules of Court
praying that (1) the Decision,2 dated 20 March 2001, of the Court of Appeals in CA-G.R. CV No.
43604, affirming in toto the Decision,3 dated 6 August 1993, of the Quezon City Regional Trial Court
(RTC), Branch 91, in Civil Case No. Q-90-5247, be set aside; and (2) the Complaint4 in Civil Case No.
Q-90-5247 be dismissed.
Herein respondent Capitol Development Corporation instituted Civil Case No. Q-90-5247 by filing a
Complaint for the collection of a sum of money against herein petitioner Edgar Ledonio.
In its Complaint, respondent alleged that petitioner obtained from a Ms. Patrocinio S. Picache two
loans, with the aggregate principal amount of P60,000.00, and covered by promissory notes duly
signed by petitioner. In the first promissory note,5 dated 9 November 1988, petitioner promised to pay
to the order of Ms. Picache the principal amount of P30,000.00, in monthly installments of P3,000.00,
with the first monthly installment due on 9 January 1989. In the second promissory note, 6 dated 10
November 1988, petitioner again promised to pay to the order of Ms. Picache the principal amount
of P30,000.00, with 36% interest per annum, on 1 December 1988. In case of default in payment, both
promissory notes provide that (a) petitioner shall be liable for a penalty equivalent to 20% of the total
outstanding balance; (b) unpaid interest shall be compounded or added to the balance of the principal
amount and shall bear the same rate of interest as the latter; and (c) in case the creditor, Ms. Picache,
shall engage the services of counsel to enforce her rights and powers under the promissory notes,
petitioner shall pay as attorney's fees and liquidated damages the sum equivalent to 20% of the total
amount sought to be recovered, but in no case shall the said sum be less that P10,000.00, exclusive of
costs of suit.
On 1 April 1989, Ms. Picache executed an Assignment of Credit 7 in favor of respondent, which reads –
KNOW ALL MEN BY THESE PRESENTS:
That I, PAT S. PICACHE of legal age and with postal address at 373 Quezon Avenue,
Quezon City for and in consideration of SIXTY THOUSAND PESOS (P60,000.00) Philippine
Currency, to me paid by [herein respondent] CAPITOL DEVELOPMENT CORPORATION, a
corporation organized and existing under the laws of the Republic of the Philippines with
principal office at 373 Quezon Avenue, Quezon City receipt whereof is hereby acknowledged
have sold, transferred, assigned and conveyed and (sic) by me these presents do hereby sell,
assign, transfer and convey unto the said [respondent] CAPITOL DEVELOPMENT
CORPORATION, a certain debt due me from [herein petitioner] EDGAR A. LEDONIO in the
principal sum of SIXTY THOUSAND PESOS (P60,000.00) Philippine Currency, under two (2)
Promissory Notes dated November 9, 1988 and November 10, 1988, respectively,
photocopies of which are attached to as annexes A & B to form integral parts hereof with full
power to sue for, collect and discharge, or sell and assign the same.
That I hereby declare that the principal sum of SIXTY THOUSAND PESOS (P60,000.00) with
interest thereon at THIRTY SIX (36%) PER CENT per annum is justly due and owing to me
as aforesaid.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of April, 1989 at Quezon
City.
(SGD)PAT S. PICACHE
102
The foregoing document was signed by two witnesses and duly acknowledged by Ms. Picache before
a Notary Public also on 1 April 1989.
Since petitioner did not pay any of the loans covered by the promissory notes when they became due,
respondent -- through its Vice President Nina P. King and its counsel King, Capuchino, Banico &
Associates -- sent petitioner several demand letters.8 Despite receiving the said demand letters,
petitioner still failed and refused to settle his indebtedness, thus, prompting respondent to file the
Complaint with the RTC, docketed as Civil Case No. Q-90-5247.
In his Answer filed with the RTC, petitioner sought the dismissal of the Complaint averring that
respondent had no cause of action against him. He denied obtaining any loan from Ms. Picache and
questioned the genuineness and due execution of the promissory notes, for they were the result of
intimidation and fraud; hence, void. He asserted that there had been no transaction or privity of
contract between him, on one hand, and Ms. Picache and respondent, on the other. The assignment
by Ms. Picache of the promissory notes to respondent was a mere ploy and simulation to effect the
unjust enforcement of the invalid promissory notes and to insulate Ms. Picache from any direct
counterclaims, and he never consented or agreed to the said assignment.
Petitioner then presented his own narration of events leading to the filing of Civil Case No. Q-90-5247.
According to him, on 24 February 1988, he entered into a Contract of Lease 9 of real property located in
Quezon City with Mission Realty & Management Corporation (MRMC), of which Ms. Picache is an
incorporator and member of the Board of Directors.10 Petitioner relocated the plant and machines used
in his garments business to the leased property. After a month or two, a foreign investor was interested
in doing business with him and sent a representative to conduct an ocular inspection of petitioner's
plant at the leased property. During the inspection, a group of Meralco employees entered the leased
property to cut off the electric power connections of the plant. The event gave an unfavorable
impression to the foreign investor who desisted from further transacting with petitioner. Upon
verification with Meralco, petitioner discovered that there were unpaid electric bills on the leased
property amounting to hundreds of thousands of pesos. These electric bills were supposedly due to the
surreptitious electrical connections to the leased property. Petitioner claimed that he was never
informed or advised by MRMC of the existence of said unpaid electric bills. It took Meralco
considerable time to restore electric power to the leased property and only after petitioner pleaded that
he was not responsible for the illegal electrical connections and/or the unpaid electric bills, for he was
only a recent lessee of the leased property. Because of the work stoppage and loss of business
opportunities resulting from the foregoing incident, petitioner purportedly suffered damages amounting
to United States $60,000.00, for which petitioner verbally attempted to recover compensation from
MRMC.
Having failed to obtain compensation from MRMC, petitioner decided to vacate and pull out his
machines from the leased property but he can only do so, unhampered and uninterrupted by MRMC
security personnel, if he signed, as he did, blank promissory note forms. Petitioner alleged that when
he signed the promissory note forms, the allotted spaces for the principal amount of the loans, interest
rates, and names of the promisee/s were in blank; and that Ms. Picache took advantage of petitioner's
signatures on the blank promissory note forms by filling up the blanks.
To raise even more suspicions of fraud and spuriousness of the promissory notes and their
subsequent assignment to respondent, petitioner called attention to the fact that Ms. Picache is an
incorporator and member of the Board of Directors of both MRMC and respondent. 11
After the pre-trial conference and the trial proper, the RTC rendered a Decision12 on 6 August 1993,
ruling in favor of respondent. The RTC gave more credence to respondent's version of the facts,
finding that –
[Herein petitioner]'s disclaimer of the promissory note[s] does not inspire belief. He is a holder
of a degree in Bachelor of Science in Chemical Engineering and has been a manufacturer of
garments since 1979. As a matter of fact, [petitioner]'s testimony that he was made to sign
blank sheets of paper is contrary to his admission in paragraphs 12 and 13 of his Answer that
as a condition to his removal of his machines [from] the leased premises, he was made to
sign blank promissory note forms with respect to the amount, interest and promisee. It thus
appears incredulous that a businessman like [petitioner] would simply sign blank sheets of
paper or blank promissory notes just [to] be able to vacate the leased premises.
Moreover, the credibility of [petitioner]'s testimony leaves much to be desired. He contradicted
his earlier testimony that he only met Patrocinio Picache once, which took place in the office
of Mission Realty and Management Corporation, by stating that he saw Patrocinio Picache a
second time when she went to his house. Likewise, his claim that the electric power in the
leased premises was cut off only two months after he occupied the same is belied by his own
evidence. The contract of lease submitted by [petitioner] is dated February 24, 1988 and took
effect on March 1, 1988. His letter to Mission Realty and Management Corporation dated
September 21, 1988, complained of the electric power disconnection that took place on
September 6, 1988, that is, six (6) months after he had occupied the leased premises, and did
not even give a hint of his intention to vacate the premises because of said incident. It
appears that [petitioner] was already advised to pay his rental arrearages in a letter dated
August 9, 1988 (Exh. "2") and was notified of the termination of the lease contract in a letter
dated September 19, 1988 (Exh. "4"). However, in a letter dated September 26, 1988,
[petitioner] requested for time to look for a place to transfer.
The RTC also sustained the validity and enforceability of the Assignment of Credit executed by Ms.
Picache in favor of respondent, even in the absence of petitioner's consent to the said assignment,
based on the following reasoning –
The promissory notes (Exhs. "A" and "B") were assigned by Ms. Patrocinio Picache to [herein
respondent] by virtue of a notarized Assignment of Credit dated April 1, 1989 for a
consideration of P60,000.00 (Exh. "C"). The fact that the assignment of credit does not bear
the conformity of [herein petitioner] is of no moment. In C & C Commercial Corporation vs.
Philippine National Bank, 175 SCRA 1, 11, the Supreme Court held thus:
"x x x Article 1624 of the Civil Code provides that 'an assignment of credits and other
incorporeal rights shall be perfected in accordance with the provisions of Article
1475' which in turn states that 'the contract of sale is perfected at the moment there
is a meeting of the minds upon the thing which is the object of the contract and upon
the price.' The meeting of the minds contemplated here is that between the assignor
of the credit and his assignee, there being no necessity for the consent of the debtor,
contrary to petitioner's claim. It is sufficient that the assignment be brought to his
knowledge in order to be binding upon him. This may be inferred from Article 1626 of
the Civil Code which declares that 'the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation.'"
103
 [Petitioner] does not deny having been notified of the assignment of credit by Patrocinio
Picache to the [respondent]. Thus, [respondent] sent several demand letters to the [petitioner]
in connection with the loan[s] (Exhs. "D", "E", "F" and "G"). [Petitioner] acknowledged receipt
of [respondent]'s letter of demand dated June 13, 1989 (Exh. "F") and assured [respondent]
that he would settle his account, as per their telephone conversation (Exhs. "H" and "9").
Such communications between [respondent] and [petitioner] show that the latter had been
duly notified of the said assignment of credit. x x x.
Given its aforequoted findings, the RTC proceeded to a determination of petitioner's liabilities to
respondent, taking into account the provisions of the promissory notes, thus –
x x x Consequently, [herein respondent] is entitled to recover from [herein petitioner] the
principal amount of P30,000.00 for the promissory note dated November 9, 1988. As said
note did not provide for any interest, [respondent] may only recover interest at the legal rate of
12% per annum from April 18, 1990, the date of the filing of the complaint. With respect to the
promissory note dated November 10, 1988, the same provided for interest at 36% per annum
and that interest not paid when due shall be added to and shall become part of the principal
and shall bear the same rate of interest as the principal. Likewise, both promissory notes
provided for a penalty of 20% of the total outstanding balance thereon and attorney's fees
equivalent to 20% of the sum sought to be recovered in case of litigation.
In Garcia vs. Court of Appeals, 167 SCRA 815, it was held that penalty interests are in the
nature of liquidated damages and may be equitably reduced by the courts if they are
iniquitous or unconscionable, pursuant to Articles 1229 and 2227 of the Civil Code.
Considering that the promissory note dated November 10, 1988 already provided for interest
at 36% per annum on the principal obligation, as well as for the capitalization of the unpaid
interest, the penalty charge of 20% of the total outstanding balance of the obligation thus
appears to be excessive and unconscionable. The interest charges are enough punishment
for [petitioner]'s failure to comply with his obligation under the promissory note dated
November 10, 1988.
With respect to the attorney's fees, the court is likewise empowered to reduce the same if they
are unreasonable or unconscionable, notwithstanding the express contract therefor. (Insular
Bank of Asia and America vs. Spouses Salazar, 159 SCRA 133, 139). Thus, an award
of P10,000.00 as and for attorney's fees appears to be enough.
Consequently, the fallo of the RTC Decision reads –
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the [herein
respondent] and against [herein petitioner] ordering the latter as follows:
1. To pay [respondent], on the promissory note dated November 9, 1988, the amount
of P30,000.00 with interest thereon at the legal rate of 12% per annum from April 18,
1990 until fully paid and a penalty of 20% on the total amount;
2. To pay [respondent], on the promissory note dated November 10, 1988, the
amount of P30,000.00 with interest thereon at 36% per annum compounded at the
same rate until fully paid;
3. To pay [respondent] the amount of P10,000.00, as and for attorney's fees; and
4. To pay the costs of the suit.13
Aggrieved by the RTC Decision, dated 6 August 1993, petitioner filed an appeal with the Court of
Appeals, which was docketed as CA-G.R. CV No. 43604. The appellate court, in a Decision,14 dated
20 March 2001, found no cogent reason to depart from the conclusions arrived at by the RTC in its
appealed Decision, dated 6 August 1993, and affirmed the latter Decision in toto. The Court of Appeals
likewise denied petitioner's Motion for Reconsideration in a Resolution, 15 dated 16 July 2001, stating
that the grounds relied upon by petitioner in his Motion were mere reiterations of the issues and
matters already considered, weighed and passed upon; and that no new matter or substantial
argument was adduced by petitioner to warrant a modification, much less a reversal, of the Court of
Appeals Decision, dated 20 March 2001.
Comes now petitioner to this Court, via a Petition for Review on Certiorari under Rule 45 of the
Revised Rules of Court, raising the sole issue16 of whether or not the Court of Appeals committed
grave abuse of discretion in affirming in toto the RTC Decision, dated 6 August 1993. Petitioner's main
argument is that the Court of Appeals erred when it ruled that there was an assignment of credit and
that there was no novation/subrogation in the case at bar. Petitioner asserts the position that consent
of the debtor to the assignment of credit is a basic/essential element in order for the assignee to have a
cause of action against the debtor. Without the debtor's consent, the recourse of the assignee in case
of non-payment of the assigned credit, is to recover from the assignor. Petitioner further argues that
even if there was indeed an assignment of credit, as alleged by the respondent, then there had been a
novation of the original loan contracts when the respondent was subrogated in the rights of Ms.
Picache, the original creditor. In support of said argument, petitioner invokes the following provisions of
the Civil Code –
ART. 1300. Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in this Code;
the latter must be clearly established in order that it may take effect.
ART. 1301. Conventional subrogation of a third person requires the consent of the original
parties and the third person.
According to petitioner, the assignment of credit constitutes conventional subrogation which requires
the consent of the original parties to the loan contract, namely, Ms. Picache (the creditor) and petitioner
(the debtor); and the third person, the respondent (the assignee). Since petitioner never gave his
consent to the assignment of credit, then the subrogation of respondent in the rights of Ms. Picache as
creditor by virtue of said assignment is without force and effect.
This Court finds no merit in the present Petition.
Before proceeding to a discussion of the points raised by petitioner, this Court deems it appropriate to
emphasize that the findings of fact of the Court of Appeals and the RTC in this case shall no longer be
disturbed. It is axiomatic that this Court will not review, much less reverse, the factual findings of the
Court of Appeals, especially where, as in this case, such findings coincide with those of the trial court,
since this Court is not a trier of facts.17
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The jurisdiction of this Court in a Petition for Review on Certiorari under Rule 45 of the Revised Rules
of Court is limited to reviewing only errors of law, not of fact, unless it is shown, inter alia, that: (a) the
conclusion is grounded entirely on speculations, surmises and conjectures; (b) the inference is
manifestly mistaken, absurd and impossible; (c) there is grave abuse of discretion; (d) the judgment is
based on a misapplication of facts; (e) the findings of fact of the trial court and the appellate court are
contradicted by the evidence on record and (f) the Court of Appeals went beyond the issues of the
case and its findings are contrary to the admissions of both parties. 18 None of these circumstances are
present in the case at bar. After a perusal of the records, this Court can only conclude that the factual
findings of the Court of Appeals, affirming those of the RTC, are amply supported by evidence and are,
resultantly, conclusive on this Court.19
Therefore, the following facts are already beyond cavil: (1) petitioner obtained two loans
totaling P60,000.00 from Ms. Picache, for which he executed promissory notes, dated 9 November
1988 and 10 November 1988; (2) he failed to pay any of the said loans; (3) Ms. Picache executed on 1
April 1989 an Assignment of Credit covering petitioner's loans in favor of respondent for the
consideration of P60,000.00; (4) petitioner had knowledge of the assignment of credit; and (5)
petitioner still failed to pay his indebtedness despite repeated demands by respondent and its counsel.
Petitioner's persistent assertions that he never acquired any loan from Ms. Picache, or that he signed
the promissory notes in blank and under duress, deserve scant consideration. They were already
found by both the Court of Appeals and the RTC to be implausible and inconsistent with petitioner's
own evidence.
Now this Court turns to the questions of law raised by petitioner, all of which hinges on the contention
that a conventional subrogation occurred when Ms. Picache assigned the debt, due her from the
petitioner, to the respondent; and without petitioner's consent as debtor, the said conventional
subrogation should be deemed to be without force and effect.
This Court cannot sustain petitioner's contention and hereby declares that the transaction between Ms.
Picache and respondent was an assignment of credit, not conventional subrogation, and does not
require petitioner's consent as debtor for its validity and enforceability.
An assignment of credit has been defined as an agreement by virtue of which the owner of a credit
(known as the assignor), by a legal cause - such as sale, dation in payment or exchange or donation -
and without need of the debtor's consent, transfers that credit and its accessory rights to another
(known as the assignee), who acquires the power to enforce it, to the same extent as the assignor
could have enforced it against the debtor.20
On the other hand, subrogation, by definition, is the transfer of all the rights of the creditor to a third
person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is
that which takes place without agreement but by operation of law because of certain acts.
Conventional subrogation is that which takes place by agreement of parties. 21
Although it may be said that the effect of the assignment of credit is to subrogate the assignee in the
rights of the original creditor, this Court still cannot definitively rule that assignment of credit and
conventional subrogation are one and the same.
A noted authority on civil law provided a discourse22 on the difference between these two transactions,
to wit –
Conventional Subrogation and Assignment of Credits. – In the Argentine Civil Code,
there is essentially no difference between conventional subrogation and assignment of credit.
The subrogation is merely the effect of the assignment. In fact it is expressly provided (article
769) that conventional redemption shall be governed by the provisions on assignment of
credit.
Under our Code, however, conventional subrogation is not identical to assignment of
credit. In the former, the debtor's consent is necessary; in the latter, it is not required.
Subrogation extinguishes an obligation and gives rise to a new one; assignment refers to the
same right which passes from one person to another. The nullity of an old obligation may be
cured by subrogation, such that the new obligation will be perfectly valid; but the nullity of an
obligation is not remedied by the assignment of the creditor's right to another. (Emphasis
supplied.)
This Court has consistently adhered to the foregoing distinction between an assignment of credit and a
conventional subrogation.23 Such distinction is crucial because it would determine the necessity of the
debtor's consent. In an assignment of credit, the consent of the debtor is not necessary in order that
the assignment may fully produce the legal effects. What the law requires in an assignment of credit is
not the consent of the debtor, but merely notice to him as the assignment takes effect only from the
time he has knowledge thereof. A creditor may, therefore, validly assign his credit and its accessories
without the debtor's consent. On the other hand, conventional subrogation requires an agreement
among the parties concerned – the original creditor, the debtor, and the new creditor. It is a new
contractual relation based on the mutual agreement among all the necessary parties. 24
Article 1300 of the Civil Code provides that conventional subrogation must be clearly established in
order that it may take effect. Since it is petitioner who claims that there is conventional subrogation in
this case, the burden of proof rests upon him to establish the same25 by a preponderance of
evidence.26
In Licaros v. Gatmaitan,27 this Court ruled that there was conventional subrogation, not just an
assignment of credit; thus, consent of the debtor is required for the effectivity of the subrogation. This
Court arrived at such a conclusion in said case based on its following findings –
We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated
July 29, 1988 was in the nature of a conventional subrogation which requires the consent of
the debtor, Anglo-Asean Bank, for its validity. We note with approval the following
pronouncement of the Court of Appeals:
"Immediately discernible from above is the common feature of contracts involving
conventional subrogation, namely, the approval of the debtor to the subrogation of a
third person in place of the creditor. That Gatmaitan and Licaros had intended to
treat their agreement as one of conventional subrogation is plainly borne by a
stipulation in their Memorandum of Agreement, to wit:
"WHEREAS, the parties herein have come to an agreement on the nature,
form and extent of their mutual prestations which they now record
herein with the express conformity of the third parties concerned"
(emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
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 Had the intention been merely to confer on appellant the status of a mere "assignee" of
appellee's credit, there is simply no sense for them to have stipulated in their agreement that
the same is conditioned on the "express conformity" thereto of Anglo-Asean Bank. That they
did so only accentuates their intention to treat the agreement as one of conventional
subrogation. And it is basic in the interpretation of contracts that the intention of the parties
must be the one pursued (Rule 130, Section 12, Rules of Court).
xxxx
Aside for the 'whereas clause" cited by the appellate court in its decision, we likewise note
that on the signature page, right under the place reserved for the signatures of petitioner and
respondent, there is, typewritten, the words "WITH OUR CONFORME." Under this notation,
the words "ANGLO-ASEAN BANK AND TRUST" were written by hand. To our mind, this
provision which contemplates the signed conformity of Anglo-Asean Bank, taken together with
the aforementioned preambulatory clause leads to the conclusion that both parties intended
that Anglo-Asean Bank should signify its agreement and conformity to the contractual
arrangement between petitioner and respondent. The fact that Anglo-Asean Bank did not give
such consent rendered the agreement inoperative considering that, as previously discussed,
the consent of the debtor is needed in the subrogation of a third person to the rights of a
creditor.
None of the foregoing circumstances are attendant in the present case. The Assignment of Credit,
dated 1 April 1989, executed by Ms. Picache in favor of respondent, was a simple deed of assignment.
There is nothing in the said Assignment of Credit which imparts to this Court, whether literally or
deductively, that a conventional subrogation was intended by the parties thereto. The terms of the
Assignment of Credit only convey the straightforward intention of Ms. Picache to "sell, assign, transfer,
and convey" to respondent the debt due her from petitioner, as evidenced by the two promissory notes
of the latter, dated 9 November 1988 and 10 November 1988, for the consideration of P60,000.00. By
virtue of the same document, Ms. Picache gave respondent full power "to sue for, collect and
discharge, or sell and assign" the very same debt. The Assignment of Credit was signed solely by Ms.
Picache, witnessed by two other persons. No reference was made to securing the conforme of
petitioner to the transaction, nor any space provided for his signature on the said document.
Perhaps more in point to the case at bar is Rodriguez v. Court of Appeals, 28 in which this Court found
that –
The basis of the complaint is not a deed of subrogation but an assignment of credit whereby
the private respondent became the owner, not the subrogee of the credit since the
assignment was supported by HK $1.00 and other valuable considerations.
xxxx
The petitioner further contends that the consent of the debtor is essential to the subrogation.
Since there was no consent on his part, then he allegedly is not bound.
Again, we find for the respondent. The questioned deed of assignment is neither one of
subrogation nor a power of attorney as the petitioner alleges. The deed of assignment clearly
states that the private respondent became an assignee and, therefore, he became the only
party entitled to collect the indebtedness. As a result of the Deed of Assignment, the plaintiff
acquired all rights of the assignor including the right to sue in his own name as the legal
assignee. Moreover, in assignment, the debtor's consent is not essential for the validity of the
assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting
only the validity of the payment he might make (Article 1626, Civil Code).
Since the Assignment of Credit, dated 1 April 1989, is just as its title suggests, then petitioner's
consent as debtor is not necessary in order that the assignment may fully produce legal effects. The
duty to pay does not depend on the consent of the debtor; otherwise, all creditors would be prevented
from assigning their credits because of the possibility of the debtors' refusal to give
consent.29 Moreover, this Court had already noted previously that there does not appear to be anything
in Philippine statutes or jurisprudence which prohibits a creditor, without the consent of the debtor, from
making an assignment of his credit and the rights accessory thereto; and, certainly, an assignment of
credit and its accessory rights does not at all obliterate the obligation of the debtor to pay, but merely
puts the assignee in the place of the assignor.30 Hence, the obligation of petitioner to pay his debt
subsists despite the assignment thereof; only, his obligation after he came to know of the said
assignment would be to pay the debt to the respondent (the assignee), instead of Ms. Picache (the
original creditor).
It bears to emphasize that even if the consent of petitioner as debtor is unnecessary for the validity and
enforceability of the assignment of credit, nonetheless, the petitioner must have knowledge, acquired
either by formal notice or some other means, of the assignment so that he may pay the debt to the
proper party, which shall now be the assignee. This much can be gathered from a reading of Article
1626 of the Civil Code providing that, "The debtor who, before having knowledge of the assignment,
pays his creditor shall be released from the obligation."
This Court, in Sison v. Yap Tico,31 presented and adopted Manresa's analysis of Article 1626 of the
Civil Code (then Article 1527 of the old Civil Code) –
Manresa, in commenting upon the provisions of article 1527 of the Civil Code, after discussing
the articles of the Mortgage Law, says:
"We have said that article 1527 deals with the individual phase or aspect which presupposes
the existence of a relationship with third parties, that is, with the person of the debtor. Let us
see in what way.
"The above-mentioned article states that a debtor who, before having knowledge of the
assignment, should pay the creditor shall be released from the obligation.
"In the first place, the necessity for the notice to the debtor in order that the assignment may
fully produce its legal effects may be inferred from the above. It refers to a notice and not to a
petition for the consent which is not necessary. We say that the notice is not necessary in
order that the legal effects may be fully produced, because if it should be omitted, such
omission will not imply that the assignment will not exist legally, but that its effects will be
limited to the parties thereto; at least, they will not reach the debtor.
"* * * * * * * *
"Let us go to the legal effects produced by the failure to give the notice. In the beginning, we
have said that the contract does not lose its efficacy with respect to the parties who made it;
but article 1527 determines specifically one of the consequences arising from the failure to
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 give notice, for it evidently takes for granted that the debtor who, before having knowledge of WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED, and the
the assignment, should pay the creditor shall be released from the obligation. So that if the Decision, dated 20 March 2001, of the Court of Appeals in CA-G.R. CV No. 43604, affirming in toto the
creditor assigned his credit, acting in bad faith and taking advantage of the fact that the debtor Decision, dated 6 August 1993, of the Quezon City Regional Trial Court, Branch 91, in Civil Case No.
does not know anything about the assignment because the latter has not been notified, and Q-90-5247, is hereby AFFIRMED. Costs against the petitioner.
collects its amount, the debtor shall be free from the obligation, inasmuch as it has been
legally extinguished by a payment which fully redounds to his benefit. The assignee can take SO ORDERED.
advantage of all civil and criminal actions against the assignor, but he can ask nothing from
the debtor, because the latter did not know of the assignment, nor was he bound to know it;
the assignor should blame himself for his failure to have the notice made.

"* * * * * * * *

"Hence, there not having been any notice to the debtor, the existence of his knowledge of the
assignment should be proved by him who is interested therein; and the debtor is not bound to
prove his ignorance."

In a more recent case, Aquintey v. Spouses Tibong,32 this Court stated: "The law does not require any
formal notice to bind the debtor to the assignee, all that the law requires is knowledge of the
assignment. Even if the debtor had not been notified, but came to know of the assignment by whatever
means, the debtor is bound by it."

Since his consent is immaterial, the only other matter which this Court must determine is whether
petitioner had knowledge of the Assignment of Credit, dated 1 April 1989, between Ms. Picache and
respondent. Both the Court of Appeals and the RTC ruled in the affirmative, and so must this Court.
Petitioner does not deny having knowledge of the assignment of credit by Ms. Picache to the
respondent. In 1989, when petitioner's loans became overdue, it was respondent and its counsel who
sent several demand letters to him. It can be reasonably presumed that petitioner received said letters
for they were sent by registered mail, and the return cards were signed by petitioner's agent. Petitioner
expressly acknowledged receipt of respondent's demand letter, dated 13 June 1989, to which he
replied with another letter, dated 21 June 1989, stating that he would settle his account with
respondent but also requesting consideration of the losses he suffered from the electric power
disconnection at the property he leased from MRMC. It further appears that petitioner had never
questioned why it was respondent seeking payment of the loans and not the original creditor, Ms.
Picache. All these circumstances tend to establish that respondent already knew of the assignment of
credit made by Ms. Picache in favor of respondent and explains his acceptance of all the demands for
payment of the loans made upon him by the respondent.

Finally, assuming arguendo that this Court considers petitioner a third person to the Assignment of
Credit, dated 1 April 1989, the fact that the said document was duly notarized makes it legally
enforceable even as to him. According to Article 1625 of the Civil Code –

ART. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the Registry
of Property in case the assignment involves real property.

Notarization converted the Assignment of Credit, dated 1 April 1989, a private document, into a public
document,33thus, complying with the mandate of the afore-quoted provision and making it enforceable
even as against third persons.

107