G.R. No.

193796 July 2, 2014

LAND BANK OF THE PHILIPPINES, Petitioner, vs. ATLANTA INDUSTRIES, INC., Respondent.

PERLAS-BERNABE, J.:

This is a direct recourse1 to the Court from the Decision2 dated September 3, 2010 of the Regional Trial Court
of Manila, Branch 21 (Manila RTC) in Civil Case No. 09-122643 which declared null and void the results of the
re-bidding for the supply of water pipes conducted by the Bids and Awards Committee (BAC) of the City
Government of Iligan due to the use of bidding documents outside of the rules and procedures prescribed
under Republic Act No. (RA) 9184,3 otherwise known as the "Government Procurement Act."

The Facts

On October 3, 2006, Land Bank of the Philippines (Land Bank) and the International Bank for Reconstruction
and Development4 (IBRD) entered into Loan Agreement No. 4833-PH5 for the implementation. of the IBRD's
"Support for Strategic Local Development and Investment . Project" (S2LDIP). The loan facility in the amount
of JP¥11,710,000,000.00 was fully guaranteed by the Government of the Philippines and conditioned upon the
participation of at least two (2) local government units by way of a Subsidiary Loan Agreement (SLA) with Land
Bank.6

On February 22, 2007, Land Bank entered into an SLA7 with the City Government of Iligan to finance the
development and expansion of the city's water supply system, which had two (2) components, namely: (a) the
procurement of civil works; and ( b) the procurement of goods for the supply and delivery of various sizes of PE
100 HDPE pipes and fittings.8 The SLA expressly provided that the goods, works, and services to be financed
out of the proceeds of the loan with Land Bank were to be "procured in accordance with the provisions of
Section I of the 'Guidelines: Procurement under IBRD Loans and IDA Credits' x x x, and with the provisions of
[the] Schedule 4."9 Accordingly, the City Government of Iligan, through its BAC, conducted a public bidding for
the supply and delivery of various sizes of PE 100 HDPE pipes and fittings using the IBRD Procurement
Guidelines.10

Respondent Atlanta Industries, Inc. (Atlanta) participated in the said bidding and came up with the second to
the lowest bid in the amount of P193,959,354.34.11

However, in a letter12 dated July 27, 2009, the BAC informed Atlanta that the bidding was declared a failure
upon the recommendation of Land "Bank due to the IBRD 's non-concurrence with the Bid Evaluation Report.
Moreover, in a letter13 dated August 28, 2009, the BAC informed Atlanta of its disqualification from the bidding
because it lacked several documentary requirements.

In response, Atlanta, through a letter14 dated September 8, 2009, sought to correct the BAC's erroneous
assumption that it failed to submit the necessary documents and to have its disqualification reconsidered. It
expressed its objection against the BAC's declaration of a failure of bidding, asserting that had it not been
improperly disqualified there would have also been no need to declare the bidding a failure because its tender
would be the sole responsive bid necessary to save the bid process.15

However, in a Resolution16 dated September 25, 2009, the BAC deemed it futile to reconsider Atlanta's
disqualification in view of the fact that the bidding had already been declared a failure because of noted
violations of the IBRD Procurement Guidelines and that, unless the BAC conducts a new bidding on the
project, it would not be able to obtain a "no objection" from .the World Bank. Atlanta did not pursue the matter
further with the BAC and opted, instead, to participate in the re-bidding of the project, the notice of which was
published anew on October 30, 2009.17

This notwithstanding, Atlanta, in a letter18 dated November 16, 2009, called the BAC's attention to its use of
Bidding Documents19 which, as it purported, not only failed to conform with the Third Edition of the Philippine
Bidding Documents for the Procurement of Goods (PBDs)20 prescribed by the Government Procurement Policy
Board (GPPB) but also contained numerous provisions that were not in accordance with RA 9184 and its
Implementing Rules and Regulations (IRR). During the pre-bid conference, the BAC declared that the project
was not covered by RA 9184 or by any of the GPPB 's issuances. It further announced that the bid opening
would be conducted on December 14, 2009.21

Apprehensive of the BAC's use of bidding documents that appeared to be in contravention of RA 9184 and its
IRR, Atlanta filed on December 10, 2009 a Petition for Prohibition and Mandamus22 with an urgent prayer for
the issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction to enjoin the re-
bidding .of the project against the City Government of Iligan, the BAC, and Land Bank before the Manila RTC,
docketed as Civil Case No. 09-122643 (Petition for Prohibition).

In their separate comments on the said petition, Land Bank and the BAC asserted that the case was
dismissible for improper. venue, mootness, non-exhaustion of administrative remedies, failure to implead an
indispensable party, and the inapplicability of RA 918.4.23

In the meantime, with Atlanta's Urgent Ex Parte Motion for the Issuance of a 72-Hour TRO and Special
Raffle24having been denied,25 the re-bidding of the project was conducted (as scheduled on December 14,
2009), with four .C 4) bidders participating and submitting the following bids:

1. Atlanta Industries, Inc. P141,289,680.50

2. Moldex Products, Inc. P172,727,052.49
3. Dong Won Plastics, Inc. P189,184,599.74
4. Thai-Asia/Junnie Industries P191,900.020.0026

Thereupon, the case proceeded with the parties' submission of their respective memoranda27 and the denial of
Atlanta's prayer for the issuance of an injunctive writ.28

The Manila RTC Ruling

In a Decision29 dated September 3, 2010, the Manila RTC declared the subject bidding null and void on the
ground that it was done contrary to the rules and procedure prescribed in RA 9184 and its IRR. Consequently,
it enjoined the City Government of Iligan and. its BAC from entering into and/or implementing the contract for
the supply of water pipes with Moldex Products, Inc.30

The Manila RTC also ruled that the City Government of Iligan cannot claim exemption from the application of
RA 9184 and its IRR by virtue of Loan Agreement No. 48~3-PH with the IBRD because it was Land Bank, and
not the City Government of Iligan, which was the party to the same. Moreover, it .held that the IBRD could not
have passed on its status as an international institution exempt from RA 9184 simply because it loaned money
to Land Bank.31 It added that the SLA subsequently executed by Land Bank with the City Government of Iligan
cannot validly provide for the use of bidding procedures different from those provided under RA 9184 because
the said SLA is not in the nature of an international agreement similar to the Loan Agreement with the IBRD.32

The Manila RTC finally concluded that in view of GPPB Resolution No. 05-2009 (September 30, 2009) which
requires "all branches, agencies, departments, bureaus, offices and instrumentalities of the Government,
including x x x local government units x x x to use the Philippine Bidding Documents Third Edition for all their
procurement activities," the City Government of Iligan and its BAC exceeded their jurisdiction in conducting the
public bidding using the questioned bidding documents.33

Dissatisfied, Land Bank elevated the matter directly to the Court, vigorously asserting, among others, that: (a)
venue was improperly laid; and (b) the public bidding for the supply of water pipes to the City of Iligan's Water
Supply System Development and Expansion Project is exempt from the application of RA 9184 and its IRR by
virtue of the SLA being .a related and subordinate covenant to Loan Agreement No. 4833-PH.34
 The Issues Before the Court

The main issues presented for the Court's resolution are: (a) whether or not the Manila RTC has jurisdiction
over the instant prohibition case and eventually issue the writ prayed for; and (b) whether or not the SLA
between the Land Bank and the City Government of Iligan is an executive agreement similar to Loan
Agreement No. 4833-PH such that the procurement of water pipes by the BAC of the City Government of Iligan
should be deemed exempt from the application of RA 9184.

The Court's Ruling

The petition is meritorious.

The Court first resolves the procedural issues of this case, then proceeds to its substantive aspects.

A. PROCEDURAL ISSUES:

The Manila RTC's Lack of Jurisdiction to Issue the Writ of Prohibition Subject of this Case; and Atlanta's
Failure to Exhaust Administrative Remedies.

Preliminarily, Land Bank asserts that the Petition for Prohibition was improperly filed before the Manila RTC
considering that the acts sought to be enjoined, i.e., the public bidding for the supply of water pipes, are
beyond the said court's territorial jurisdiction.35 Atlanta, for its part, counter-argues that the acts of Land Bank
are as much to be enjoined for causing the City Government of Iligan and its BAC to continuously violate the
provisions of RA 9184, its IRR, and the PBDs in the conduct of the public bidding36 and that the filing of the
prohibition case in the City of Manila was in accordance with the rules on venue given that Land Bank's main
office is in the City of Manila.37

The Court finds for Land Bank.

A petition for prohibition is a special civil action that seeks for a judgment ordering the respondent to desist
from continuing with the commission of an act perceived to be illegal. Section 2, Rule 65 of the Rules of Court
(Rules) reads:

Sec. 2. Petition for Prohibition. - When the proceedings of any tribunal, corporation, board, officer or person,
whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal
or any other plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be
rendered commanding the respondent to desist from further proceedings in the action or matter specified
therein, or otherwise granting such incidental reliefs as law and justice may require.

x x x x (Emphasis supplied)

While the Court, Court of Appeals and Regional Trial Court have original concurrent jurisdiction to issue writs
of certiorari, prohibition and mandamus, if what is assailed relates to "acts or omissions of a lower court or of a
corporation, board, officer or person," the petition must be filed "in the Regional Trial Court exercising
jurisdiction over the territorial area as defined by the Court." Section 4 of the same Rules provides that:

Sec. 4. When and Where to file the petition. -The petition shall be filed not later than sixty (60) days from notice
of the judgment, order or resolution. In case a motion for reconsideration or new trial is timely filed, whether
such motion is required or not, the petition shall be filed not later than sixty (60) days counted from the notice
of the denial of the motion.

If the petition relates to an act or an omission of a municipal trial court or of a corporation, a board, an officer or
a person, it shall be filed with the Regional Trial Court exercising jurisdiction over the territorial area as defined
by the Supreme Court. H may also be filed with the Court of Appeals or with the Sandiganbayan, whether or
not the same is .in aid of the court's appellate jurisdiction. If the petition involves an act or an omission of a
quasi-judicial agency, unless otherwise provided by law or these rules, the petition shall be filed with and be
cognizable only by the Court of Appeals.

x x x x (Emphasis supplied)

The foregoing rule corresponds to Section 21 ( 1) of Batas Pambansa Blg. 129,38 otherwise known as "The
Judiciary Reorganization Act of 1980" (BP 129), which gives Regional Trial Courts original jurisdiction over
cases of certiorari, prohibition, mandamus, quo warranto, habeas corpus, and injunction but lays down the
limitation that the writs issued therein are enforceable only within their respective territorial jurisdictions. The
pertinent provision reads:

Sec. 21. Original jurisdiction in other cases. - Regional Trial Courts shall exercise original jurisdiction:

(1) In the issuance of writs of certiorari: prohibition, mandamus, quo warranto, habeas corpus and injunction,
which may be enforced in any part of their respective regions;

x x x x (Emphasis supplied)

The Court already ruled in numerous cases, beginning with the very early case of Costaño v. Lobingier, 39 that
the power to administer justice conferred upon judges of the Regional Trial Courts, formerly Courts of First
Instance (CFI), can only be exercised within the limits of their respective districts, outside of which they have
no jurisdiction whatsoever. Applying previous legislation similar to the present Section 21 of BP 129 and its
complementary provision, i.e., Section 4, Rule 65 of the Rules, the Court held in said case that the CFI of Leyte
had no power to issue writs of injunction and certiorari against the Justice of the Peace of Manila, as the same
was outside the territorial boundaries of the issuing court. Also, in Samar Mining Co., Inc. v. Arnado, 40 a
petition for certiorari and prohibition with preliminary injunction was filed in the CFI of Manila to question the
authority of the Regional Administrator and Labor Attorney of the Department of Labor in Cebu City to hear a
complaint for sickness compensation in Catbalogan, Samar and to enjoin said respondents from conducting
further proceedings thereat. The Court affirmed the dismissal . of the case on the ground of improper venue,
holding that the CFI of Manila had no authority to issue writs of injunction, certiorari, and prohibition affecting
persons outside its territorial boundaries. Further, in both Cudiamat v. Torres (Cudiamat)41 and National
Waterworks and Sewerage Authority v. Reyes42 (NAWASA), the losing bidders succeeded in securing an
injunctive writ from the CFI of Rizal in order to . restrain, in Cudiamat, the implementation of an award on a
public bidding for the supply of a police call and signal box system for the City of Manila, and, in NAWASA, the
conduct of the public bidding for the supply of steel pipes for its Manila and Suburbs Waterworks Project. The
Court held in both cases that the injunction issued by the CFI of Rizal purporting to restrain acts outside the
province of Rizal was null and void for want of jurisdiction.

Undoubtedly, applying the aforementioned precepts and pronouncements to the instant case, the writ of
prohibition issued by the Manila RTC in order to restrain acts beyond the bounds of the territorial limits of its
jurisdiction (i.e., in Iligan City) is null and void.

Also on a matter of procedure, the Court further discerns that the Manila RTC should have dismissed the case
outright for failure of Atlanta to exhaust administrative remedies. Under RA 9184, the decisions of the BAC in
all stages of procurement may be protested. to the head of the procuring entity through a verified position
paper and upon payment of a protest fee.43 The necessity for the complaining bid participant to complete the
protest process before resorting to court action cannot be overemphasized. It is a condition precedent to the
court's taking cognizance of an action that assails a bid process.44 When precipitately taken prior to the
completion of the protest process, such case shall be dismissed for lack of jurisdiction.45 While Atlanta may
have written the BAC a letter objecting to some of the terms and conditions contained in the bidding
documents to be used for the re-bidding, its action fell short of the required protest. It failed to follow through
with' its protest and opted instead to participate in the re-bidding with full knowledge that the IBRD
Procurement Guidelines were to be followed throughout the conduct of the bid. Having failed to observe the
protest procedure required by law, Atlanta's case should not have prospered with the RTC altogether.
With the procedural matters having been resolved, the Court now proceeds to discuss the substantive aspect
of this case concerning the SLA and Land Bank's claimed exemption from the provisions of RA 9184.

B. SUBSTANTIVE ISSUES:

The Applicability of the Bidding Procedure under RA 9184; and the Nature of Loan No. 4833-PH · and its
Relation to the SLA.

While mandating adherence to the general policy of the government that contracts for the procurement of civil
works or supply of goods and equipment shall be undertaken only after competitive public bidding, RA 9184
recognizes the country's commitment to abide by its obligations under any treaty or international or executive
agreement. This is pertinently provided in Section 4 of RA 9184 which reads as follows:

Sec. 4. Scope and Application. - This Act shall apply to the Procurement of Infrastructure Projects, Goods and
Consulting Services, regardless of source of funds, whether local or foreign, by all branches and
instrumentalities of the government, its department, offices and agencies, including government owned and/or
-controlled corporations and local government units, subject to the provisions of Commonwealth Act No.
138.1âwphi1 Any treaty or international or executive agreement affecting the subject matter of this Act to which
the Philippine government is a signatory shall be observed. (Emphasis supplied)

The IRR of RA 9184 further supplements the law's treatment of treaties and international or executive
agreements as follows:

Section 4. Scope and Application of the IRR

4.1 This IRR shall apply to all procurement of any branch, agency, department, bureau, office or
instrumentality of the GOP, including government-owned and/or -controlled corporations (GOCCs),
government financial institutions (GFis), state universities and colleges (SUCs) and local government
units (LGUs).

4.2 Any Treaty or International or Executive Agreement to which the GOP is a signatory affecting the
subject matter of the Act and this IRR shall be observed. In case of conflict between the terms of the
Treaty or International or Executive Agreement and this IRR, the former shall prevail.

4.3 Unless the Treaty or International or Executive Agreement expressly provides use of foreign
government/foreign or international financing institution procurement procedures and guidelines, this
IRR shall apply to Foreign-funded Procurement for goods, infrastructure projects, and consulting
services by the GOP.

Consistent with the policies and principles set forth in Sections 2 and 3 of this IRR, the GOP negotiating panels
shall adopt, as its default position, use of this IRR, or at the very least, selection through competitive bidding, in
all Foreign-funded Procurement. If the Treaty or International or Executive Agreement states otherwise, then
the negotiating panels shall explain in writing the reasons therefor. (Emphasis supplied)

While Atlanta admits that there are exceptions to the application of RA 9184, it posits that the City Government
of Iligan could not claim to be exempt under any of the enumerated instances because it is not a party to the
IBRD Loan Agreement.46 It further asserts that a provision in the SLA between Larid Bank and the City
Government of Iligan providing for procurement procedures different from that required under RA 9184 would
not be valid since it is not a treaty or an executive agreement in the way that Loan Agreement, No. 4833-PH is.

The argument lacks merit.

As the parties have correctly discerned, Loan Agreement No. 4833-PH is in the nature of an executive
agreement. In Bayan Muna v. Romulo47 (Bayan Muna) the Court defined an international agreement as one
concluded between states in written form and governed by international law, "whether embodied in a single
instrument or in two or more related instruments and whatever its particular designation," 48 and further
expounded that it may be in the form of either (a) treaties that require legislative concurrence after executive
ratification; or ( b) executive agreements that are similar to treaties, except that they do not require legislative
concurrence and are usually less formal and deal with a narrower range of subject matters than
treaties.49Examining its features, Loan Agreement No. 4833-PH between the IBRD and the Land Bank is an
integral component of the Guarantee Agreement executed by the Government of the Philippines as a subject
of international law possessed of a treaty-making capacity, and the IBRD, which, as an international lending
institution organized by world governments to provide loans conditioned upon the guarantee of repayment by
the borrowing sovereign state, is likewise regarded a subject of international law and possessed of the capacity
to enter into executive agreements with sovereign states. Being similar to a treaty but without requiring
legislative concurrence, Loan Agreement No. 4833-PH - following the definition given in the Bayan Muna case
- is an executive agreement and is, thus, governed by international law. Owing to this classification, the
Government of the Philippines is therefore obligated to observe its terms and conditions under the rule of pacta
sunt servanda, a fundamental maxim of international law that requires the parties to keep their agreement in
good faith.50 It bears pointing out that the pacta sunt servanda rule has become part of the law of the land
through the incorporation clause found under Section 2, Article II of the 1987 Philippine Constitution, which
states that the Philippines "adopts the generally accepted principles of international law as part of the law of
the land and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations."
Keeping in mind the foregoing attributions, the .Court now examines the SLA and its relation with Loan
Agreement No. 4833-PH.

As may be palpably observed, the terms and conditions of Loan Agreement No. 4833-PH, being a project-
based and government-guaranteed loan facility, were incorporated and made part of the SLA that was
subsequently entered into by Land Bank with the City Government of Iligan.51 Consequently, this means that
the SLA cannot be treated as an independent and unrelated contract but as a conjunct of, or having a joint and
simultaneous occurrence with, Loan Agreement No. 4833-PH. Its nature and consideration, being a mere
accessory contract of Loan Agreement No. 4833-PH, are thus the same as that of its principal contract from
which it receives life and without which it cannot exist as an independent contract.52 Indeed, the accessory
follows the principal;53 and, concomitantly, accessory contracts should not be read independently of the main
contract.54 Hence, as Land Bank correctly puts it, the SLA has attained indivisibility with the Loan Agreement
and the Guarantee Agreement through the incorporation of each other's terms and conditions such that the
character of one has likewise become the character of the other.

Considering that Loan Agreement No. 4833-PH expressly provides that the procurement of the goods to be
financed from the loan proceeds shall be in accordance with the IBRD Guidelines and the provisions of
Schedule 4, and that the accessory SLA contract merely follows its principal 's terms and conditions, the
procedure for competitive public bidding prescribed under RA 9184 therefore finds no application to the
procurement of goods for the Iligan City Water Supply System Development and Expansion Project. The
validity of similar stipulations in foreign loan agreements requiring the observance of IBRD Procurement
Guidelines in the procurement process has, in fact, been previously upheld by the Court in the case of
Department of Budget and Management Procurement Service (DBMPS) v. Kolonwel Trading, 55 viz.:

The question as to whether or not foreign loan agreements with international financial institutions, such as
Loan No. 7118-PH, partake of an executive or international agreement within the purview of Section 4 of R.A.
No. 9184, has been answered by the Court in the affirmative in [Abaya v. Sec. Ebdane, Jr., 544 Phil. 645
(2007)]. Significantly, Abaya declared that the RP-JBIC loan agreement was to be of governing application
over the CP I project and that the JBIC · Procurement Guidelines, as stipulated in the loan agreement, shall
primarily govern the procurement of goods necessary to implement the main project.

Under the fundamental international law principle of pacta sunt servanda, which is in fact embodied in the
afore-quoted Section 4 of R.A. No. 9184, the RP, as borrower, bound itself to perform in good faith its duties
and obligation under Loan No. 7118-PH. Applying this postulate in the concrete to this case, the IABAC was
legally obliged to comply with, or accord, primacy to, the WB Guidelines on the conduct and implementation of
the bidding/procurement process in question.56
With the nature and treatment of Loan Agreement No. 4833-PH as well as its accessory SLA herein explained,
the Court thus holds that the RTC committed reversible error in ruling that the provisions of RA 9184 were to
be applied in this case. Quite the contrary, it is the IBRD Guidelines and the provisions of Schedule 4 which
should govern. As such, the procurement of water pipes by the BAC of the City Government of Iligan -as Land
Bank meritoriously submits in its petition - is beyond the purview of RA 9184, yielding as it should to the
express stipulations found in the executive agreement, to which the latter's accessory merely follows.

In view of all these errors, both on procedural and substantive counts, the Court is hereby bound to reverse the
trial court's decision and accordingly grant the present petition.

WHEREFORE, the petition is GRANTED. The Decision dated September 3, 2010 of the Regional Trial Court
of Manila, Branch 21 (Manila RTC) in Civil Case No. 09-122643 is hereby REVERSED and SET ASIDE. The
Petition for Prohibition and Mandamus filed before the Manila RTC is DISMISSED.

SO ORDERED.
 POUSES LUIGI M. GUANIO and
ANNA HERNANDEZ-GUANIO,
Petitioners,
- versus -
MAKATI SHANGRI-LA HOTEL and RESORT, INC., also doing
business under the name of Promulgated:
SHANGRI-LA HOTEL MANILA,
Respondent. February 7, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CARPIO MORALES, J.

For their wedding reception on July 28, 2001, spouses Luigi M. Guanio and Anna Hernandez-Guanio (petitioners)
booked at the Shangri-la Hotel Makati (the hotel).

Prior to the event, Makati Shangri-La Hotel & Resort, Inc. (respondent) scheduled an initial food
tasting. Petitioners claim that they requested the hotel to prepare for seven persons ─ the two of them, their respective
parents, and the wedding coordinator. At the scheduled food tasting, however, respondent prepared for only six.

Petitioners initially chose a set menu which included black cod, king prawns and angel hair pasta with wild
mushroom sauce for the main course which cost P1,000.00 per person. They were, however, given an option in which
salmon, instead of king prawns, would be in the menu at P950.00 per person. They in fact partook of the salmon.

Three days before the event, a final food tasting took place. Petitioners aver that the salmon served was half the size
of what they were served during the initial food tasting; and when queried about it, the hotel quoted a much higher price
(P1,200.00) for the size that was initially served to them. The parties eventually agreed on a final price ─ P1,150 per
person.

A day before the event or on July 27, 2001, the parties finalized and forged their contract.[1]

Petitioners claim that during the reception, respondent’s representatives, Catering Director Bea Marquez and
Sales Manager Tessa Alvarez, did not show up despite their assurance that they would; their guests complained of the
delay in the service of the dinner; certain items listed in the published menu were unavailable; the hotel’s waiters were
rude and unapologetic when confronted about the delay; and despite Alvarez’s promise that there would be no charge for
the extension of the reception beyond 12:00 midnight, they were billed and paid P8,000 per hour for the three-hour
extension of the event up to 4:00 A.M. the next day.

Petitioners further claim that they brought wine and liquor in accordance with their open bar arrangement, but these
were not served to the guests who were forced to pay for their drinks.

Petitioners thus sent a letter-complaint to the Makati Shangri-la Hotel and Resort, Inc. (respondent) and received an
apologetic reply from Krister Svensson, the hotel’s Executive Assistant Manager in charge of Food and Beverage. They
nevertheless filed a complaint for breach of contract and damages before the Regional Trial Court (RTC) ofMakati City.

In its Answer, respondent claimed that petitioners requested a combination of king prawns and salmon, hence, the
price was increased to P1,200.00 per person, but discounted at P1,150.00; that contrary to petitioners’ claim, Marquez and
Alvarez were present during the event, albeit they were not permanently stationed thereat as there were three other hotel
functions; that while there was a delay in the service of the meals, the same was occasioned by the sudden increase of
guests to 470 from the guaranteed expected minimum number of guests of 350 to a maximum of 380, as stated in the
Banquet Event Order (BEO);[2] and that Isaac Albacea, Banquet Service Director, in fact relayed the delay in the service
of the meals to petitioner Luigi’s father, Gil Guanio.
 Respecting the belated service of meals to some guests, respondent attributed it to the insistence of petitioners’
wedding coordinator that certain guests be served first.

On Svensson’s letter, respondent, denying it as an admission of liability, claimed that it was meant to maintain
goodwill to its customers.

By Decision of August 17, 2006, Branch 148 of the Makati RTC rendered judgment in favor of petitioners,
disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and
against the defendant ordering the defendants to pay the plaintiff the following:

1) The amount of P350,000.00 by way of actual damages;

2) The amount of P250,000.00 for and as moral damages;
3) The amount of P100,000.00 as exemplary damages;
4) The amount of P100,000.00 for and as attorney’s fees.

With costs against the defendant.

SO ORDERED.[3]

In finding for petitioners, the trial court relied heavily on the letter of Svensson which is partly quoted
below:

Upon receiving your comments on our service rendered during your reception here with us, we are in fact,
very distressed. Right from minor issues pappadums served in the soup instead of the creutons, lack of
valet parkers, hard rolls being too hard till a major one – slow service, rude and arrogant waiters, we have
disappointed you in all means.

Indeed, we feel as strongly as you do that the services you received were unacceptable and definitely not
up to our standards. We understand that it is our job to provide excellent service and in this instance, we
have fallen short of your expectations. We ask you please to accept our profound apologies for causing
such discomfort and annoyance. [4] (underscoring supplied)

The trial court observed that from “the tenor of the letter . . . the defendant[-herein respondent]
admits that the services the plaintiff[-herein petitioners] received were unacceptable and definitely not up
to their standards.”[5]

On appeal, the Court of Appeals, by Decision of July 27, 2009,[6] reversed the trial court’s decision, it holding that
the proximate cause of petitioners’ injury was an unexpected increase in their guests:

x x x Hence, the alleged damage or injury brought about by the confusion, inconvenience and disarray
during the wedding reception may not be attributed to defendant-appellant Shangri-la.

We find that the said proximate cause, which is entirely attributable to plaintiffs-appellants, set the
chain of events which resulted in the alleged inconveniences, to the plaintiffs-appellants. Given the
circumstances that obtained, only the Sps. Guanio may bear whatever consequential damages that they
may have allegedly suffered.[7] (underscoring supplied)

Petitioners’ motion for reconsideration having been denied by Resolution of November 18, 2009, the present
petition for review was filed.

The Court finds that since petitioners’ complaint arose from a contract, the doctrine of proximate cause finds no
application to it:
The doctrine of proximate cause is applicable only in actions for quasi-delicts, not in actions
involving breach of contract. x x x The doctrine is a device for imputing liability to a person where there
 is no relation between him and another party. In such a case, the obligation is created by law itself. But,
where there is a pre-existing contractual relation between the parties, it is the parties themselves who
create the obligation, and the function of the law is merely to regulate the relation thus
created.[8] (emphasis and underscoring supplied)

What applies in the present case is Article 1170 of the Civil Code which reads:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.

RCPI v. Verchez, et al. [9] enlightens:

In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force
of contracts, will not permit a party to be set free from liability for any kind of misperformance of the
contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon
the injured party a valid cause for recovering that which may have been lost or suffered. The remedy
serves to preserve the interests of the promissee that may include his “expectation interest,” which is his
interest in having the benefit of his bargain by being put in as good a position as he would have been in
had the contract been performed, or his“reliance interest,” which is his interest in being reimbursed for
loss caused by reliance on the contract by being put in as good a position as he would have been in had
the contract not been made; or his “restitution interest,” which is his interest in having restored to him
any benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for
their makers or for society, unless they are made the basis for action. The effect of every infraction is to
create a new duty, that is, to make RECOMPENSE to the one who has been injured by the failure of
another to observe his contractual obligation unless he can show extenuating circumstances, like proof of
his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him from his
ensuing liability. (emphasis and underscoring in the original; capitalization supplied)

The pertinent provisions of the Banquet and Meeting Services Contract between the parties read:

4.3 The ENGAGER shall be billed in accordance with the prescribed rate for the minimum
guaranteed number of persons contracted for, regardless of under attendance or non-appearance of the
expected number of guests, except where the ENGAGER cancels the Function in accordance with its
Letter of Confirmation with the HOTEL. Should the attendance exceed the minimum guaranteed
attendance, the ENGAGER shall also be billed at the actual rate per cover in excess of the minimum
guaranteed attendance.

xxxx

4.5. The ENGAGER must inform the HOTEL at least forty eight (48) hours before the scheduled
date and time of the Function of any change in the minimum guaranteed covers. In the absence of such
notice, paragraph 4.3 shall apply in the event of under attendance. In case the actual number of
attendees exceed the minimum guaranteed number by ten percent (10%), the HOTEL shall not in
any way be held liable for any damage or inconvenience which may be caused thereby. The
ENGAGER shall also undertake to advise the guests of the situation and take positive steps to
remedy the same.[10] (emphasis, italics and underscoring supplied)

Breach of contract is defined as the failure without legal reason to comply with the terms of a contract. It is also
defined as the [f]ailure, without legal excuse, to perform any promise which forms the whole or part of the contract.[11]

The appellate court, and even the trial court, observed that petitioners were remiss in their obligation to inform
respondent of the change in the expected number of guests. The observation is reflected in the records of the
case. Petitioners’ failure to discharge such obligation thus excused, as the above-quoted paragraph 4.5 of the parties’
contract provide, respondent from liability for “any damage or inconvenience” occasioned thereby.
 As for petitioners’ claim that respondent departed from its verbal agreement with petitioners, the same fails, given
that the written contract which the parties entered into the day before the event, being the law between them.

Respecting the letter of Svensson on which the trial court heavily relied as admission of respondent’s liability but
which the appellate court brushed aside, the Court finds the appellate court’s stance in order. It is not uncommon in the
hotel industry to receive comments, criticisms or feedback on the service it delivers. It is also customary for hotel
management to try to smooth ruffled feathers to preserve goodwill among its clientele.

Kalalo v. Luz holds:[12]

Statements which are not estoppels nor judicial admissions have no quality of conclusiveness, and
an opponent whose admissions have been offered against him may offer any evidence which serves as an
explanation for his former assertion of what he now denies as a fact.

Respondent’s Catering Director, Bea Marquez, explained the hotel’s procedure on receiving and
processing complaints, viz:

ATTY. CALMA:
Q You mentioned that the letter indicates an acknowledgement of the concern and that there was-the
first letter there was an acknowledgment of the concern and an apology, not necessarily
indicating that such or admitting fault?
A Yes.
Q Is this the letter that you are referring to?
If I may, Your Honor, that was the letter dated August 4, 2001, previously marked as plaintiff’s
exhibits, Your Honor. What is the procedure of the hotel with respect to customer concern?
A Upon receipt of the concern from the guest or client, we acknowledge receipt of such concern, and
as part of procedure in service industry particularly Makati Shangri-la we apologize for whatever
inconvenience but at the same time saying, that of course, we would go through certain
investigation and get back to them for the feedback with whatever concern they may have.
Q Your Honor, I just like at this point mark the exhibits, Your Honor, the letter dated August 4, 2001
identified by the witness, Your Honor, to be marked as Exhibit 14 and the signature of Mr.
Krister Svensson be marked as Exhibit 14-A.[13]
xxxx
Q In your opinion, you just mentioned that there is a procedure that the hotel follows with respect to
the complaint, in your opinion was this procedure followed in this particular concern?
A Yes, ma’am.
Q What makes you say that this procedure was followed?
A As I mentioned earlier, we proved that we did acknowledge the concern of the client in this case
and we did emphatize from the client and apologized, and at the same time got back to them in
whatever investigation we have.
Q You said that you apologized, what did you apologize for?
A Well, first of all it is a standard that we apologize, right? Being in the service industry, it is a
practice that we apologize if there is any inconvenience, so the purpose for apologizing is mainly
to show empathy and to ensure the client that we are hearing them out and that we will do a better
investigation and it is not in any way that we are admitting any fault.[14] (underscoring supplied)

To the Court, the foregoing explanation of the hotel’s Banquet Director overcomes any presumption of admission
of breach which Svensson’s letter might have conveyed.
 The exculpatory clause notwithstanding, the Court notes that respondent could have managed the “situation”
better, it being held in high esteem in the hotel and service industry. Given respondent’s vast experience, it is safe to
presume that this is not its first encounter with booked events exceeding the guaranteed cover. It is not audacious to
expect that certain measures have been placed in case this predicament crops up. That regardless of these measures,
respondent still received complaints as in the present case, does not amuse.

Respondent admitted that three hotel functions coincided with petitioners’ reception. To the Court, the delay in
service might have been avoided or minimized if respondent exercised prescience in scheduling events. No less than
quality service should be delivered especially in events which possibility of repetition is close to nil. Petitioners are not
expected to get married twice in their lifetimes.

In the present petition, under considerations of equity, the Court deems it just to award the amount of P50,000.00
by way of nominal damages to petitioners, for the discomfiture that they were subjected to during to the event. [15] The
Court recognizes that every person is entitled to respect of his dignity, personality, privacy and peace of
mind.[16] Respondent’s lack of prudence is an affront to this right.

WHEREFORE, the Court of Appeals Decision dated July 27, 2009 is PARTIALLY REVERSED. Respondent
is, in light of the foregoing discussion, ORDERED to pay the amount of P50,000.00 to petitioners by way of nominal
damages.

SO ORDERED.
G.R. No. 173155 March 21, 2012

R.S. TOMAS, INC., Petitioner,

vs.
RIZAL CEMENT COMPANY, INC., Respondent.

DECISION

PERALTA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by petitioner R.S. Tomas, Inc.
against respondent Rizal Cement Company, Inc. assailing the Court of Appeals (CA) Decision1 dated
December 19, 2005 and Resolution2 dated June 6, 2006 in CA-G.R. CV No. 61049. The assailed decision
reversed and set aside the Regional Trial Court3 (RTC) Decision4 dated June 5, 1998 in Civil Case No. 92-
1562.

The facts of the case, as culled from the records, are as follows:

On December 28, 1990, respondent and petitioner entered into a Contract5 for the supply of labor, materials,
and technical supervision of the following projects:

1. J.O. #P-90-212 – Wiring and installation of primary and secondary lines system.

2. J.O. #P-90-213 – Supply and installation of primary protection and disconnecting switch.

3. J.O. #P-90-214 – Rewinding and conversion of one (1) unit 3125 KVA, 34.5 KV/2.4 KV, 3ø
Transformer to 4000 KVA, 34.5 KV/480V, 3ø Delta Primary, Wye with neutral secondary. 6

Petitioner agreed to perform the above-mentioned job orders. Specifically, it undertook to supply the labor,
equipment, supervision, and materials as specified in the detailed scope of work.7 For its part, respondent
agreed to pay the total sum of P2,944,000.00 in consideration of the performance of the job orders. Petitioner
undertook to complete the projects within one hundred twenty (120) days from the effectivity of the contract.8 It
was agreed upon that petitioner would be liable to respondent for liquidated damages in the amount
of P29,440.00 per day of delay in the completion of the projects which shall be limited to 10% of the project
cost.9 To secure the full and faithful performance of all its obligations and responsibilities under the contract,
petitioner obtained from Times Surety & Insurance Co. Inc. (Times Insurance) a performance bond10 in an
amount equivalent to fifty percent (50%) of the contract price or P1,458,618.18. Pursuant to the terms of the
contract, respondent made an initial payment of P1,458,618.18 on January 8, 1991.11

In a letter12 dated March 9, 1991, petitioner requested for an extension of seventy-five (75) days within which to
complete the projects because of the need to import some of the materials needed. In the same letter, it also
asked for a price adjustment of P255,000.00 to cover the higher cost of materials.13 In another letter14 dated
March 27, 1991, petitioner requested for another 75 days extension for the completion of the transformer
portion of the projects for failure of its supplier to deliver the materials.

On June 14, 1991,15 petitioner manifested its desire to complete the project as soon as possible to prevent
further losses and maintain goodwill between the companies. Petitioner requested for respondent’s assistance
by facilitating the acquisition of materials and supplies needed to complete J.O. #P-90-212 and J.O. #P-90-213
by directly paying the suppliers. It further sought that it be allowed to back out from J.O. #P-90-214 covering
the rewinding and conversion of the damaged transformer.

In response16 to petitioner’s requests, respondent, through counsel, manifested its observation that petitioner’s
financial status showed that it could no longer complete the projects as agreed upon. Respondent also
informed petitioner that it was already in default having failed to complete the projects within 120 days from the
effectivity of the contract. Respondent further notified petitioner that the former was terminating the contract. It
also demanded for the refund of the amount already paid to petitioner, otherwise, the necessary action would
be instituted. Respondent sent another demand letter17 to Times Insurance for the payment of P1,472,000.00
pursuant to the performance bond it issued.

On November 14, 1991,18 respondent entered into two contracts with Geostar Philippines, Inc. (Geostar) for
the completion of the projects commenced but not completed by petitioner for a total consideration
of P3,435,000.00.

On December 14, 1991, petitioner reiterated its desire to complete J.O. #P-90-212 and J.O. #P-90-213 and to
exclude J.O. #P-90-214,19 but the same was denied by respondent in a letter20 dated January 14, 1992. In the
same letter, respondent pointed out that amicable settlement is impossible. Hence, the Complaint for Sum of
Money21 filed by respondent against petitioner and Times Surety & Insurance Co., Inc. praying for the payment
of the following: P493,695.00 representing the amount which they owed respondent from the downpayment
and advances made by the latter vis-à-vis the work accomplishment; P2,550,945.87 representing the amount
incurred in excess of the cost of the projects as agreed upon; P294,000.00 as liquidated damages; plus
interest and attorney’s fees.22

Times Insurance did not file any pleading nor appeared in court. For its part, petitioner denied23 liability and
claimed instead that it failed to complete the projects due to respondent’s fault. It explained that it relied in
good faith on respondent’s representation that the transformer subject of the contract could still be rewound
and converted but upon dismantling the core-coil assembly, it discovered that the coils were already badly
damaged and the primary bushing broken. This discovery allegedly entailed price adjustment. Petitioner thus
requested respondent for additional time within which to complete the project and additional amount to finance
the same. Petitioner also insisted that the proximate cause of the delay is the misrepresentation of the
respondent on the extent of the defect of the transformer.

After the presentation of the parties’ respective evidence, the RTC rendered a decision on June 5, 1998 in
favor of petitioner, the dispositive portion of which reads:

Wherefore, finding defendant-contractor’s evidence more preponderant than that of the plaintiff, judgment is
hereby rendered in favor of the defendant-contractor against the plaintiff and hereby orders:

(1) that the instant case be DISMISSED;

(2) that plaintiff pays defendant the amount of P4,000,000.00; for moral and exemplary & other
damages;

(3) P100,000.00 for attorney’s fees and cost of suit.

SO ORDERED.24

The RTC held that the failure of petitioner to complete the projects was not solely due to its fault but more on
respondent’s misrepresentation and bad faith.25 Therefore, the Court dismissed respondent’s complaint. Since
respondent was found to have committed deceit in its dealings with petitioner, the court awarded damages in
favor of the latter.26

Respondent, however, successfully obtained a favorable decision when its appeal was granted by the CA. The
appellate court reversed and set aside the RTC decision and awarded respondent P493,695.34 for the excess
payment made to petitioner, P508,510.00 for the amount spent in contracting Geostar and P294,400.00 as
liquidated damages.27 Contrary to the conclusion of the RTC, the CA found that petitioner failed to prove that
respondent made fraudulent misrepresentation to induce the former to enter into the contract. It further held
that petitioner was given the opportunity to inspect the transformer before offering its bid. 28 This being so, the
CA added that petitioner’s failure to avail of such opportunity is inexcusable, considering that it is a company
engaged in the electrical business and the contract involved a sizable amount of money.29 As to the condition
of the subject transformer unit, the appellate court found the testimony of petitioner’s president insufficient to
prove that the same could no longer be rewound or converted.30 Considering that advance payments had been
made to petitioner, the court deemed it necessary to require it to return to respondent the excess amounts, vis-
à-vis its actual accomplishment.31 In addition to the refund of the excess payment, the CA also ordered the
reimbursement of what respondent paid to Geostar for the unfinished projects of petitioner as well as the
payment of liquidated damages as stipulated in the contract.32

Aggrieved, petitioner comes before the Court in this petition for review on certiorari under Rule 45 of the Rules
of Court raising the following issues: (1) whether or not respondent was guilty of fraud or misrepresentation as
to the actual condition of the transformer subject of the contract;33 (2) whether or not the evidence presented
by petitioner adequately established the true nature and condition of the subject transformer; 34 (3) whether or
not petitioner is guilty of inexcusable delay in the completion of the projects;35 (4) whether or not petitioner is
liable for liquidated damages;36 and (5) whether or not petitioner is liable for the cost of the contract between
respondent and Geostar.37

The petition is without merit.

The case stemmed from an action for sum of money or damages arising from breach of contract. The contract
involved in this case refers to the rewinding and conversion of one unit of transformer to be installed and
energized to supply respondent’s power requirements.38 This project was embodied in three (3) job orders, all
of which were awarded to petitioner who represented itself to be capable, competent, and duly licensed to
handle the projects.39 Petitioner, however, failed to complete the projects within the agreed period allegedly
because of misrepresentation and fraud committed by respondent as to the true nature of the subject
transformer. The trial court found that respondent indeed failed to inform petitioner of the true condition of the
transformer which amounted to fraud thereby justifying the latter’s failure to complete the projects. The CA,
however, had a different conclusion and decided in favor of respondent. Ultimately, the issue before us is
whether or not there was breach of contract which essentially is a factual matter not usually reviewable in a
petition filed under Rule 45.40

In resolving the issues, the Court inquires into the probative value of the evidence presented before the trial
court.41 Petitioner, indeed, endeavors to convince us to determine once again the weight, credence, and
probative value of the evidence presented before the trial court.42 While in general, the findings of fact of the
CA are final and conclusive and cannot be reviewed on appeal to the Court because it is not a trier of
facts,43 there are recognized exceptions44 as when the findings of fact are conflicting, which is obtaining in this
case. The conflicting conclusions of the trial and appellate courts impel us to re-examine the evidence
presented.

After a thorough review of the records of the case, we find no reason to depart from the conclusions of the CA.

It is undisputed that petitioner and respondent entered into a contract for the supply of labor, materials, and
technical supervision primarily for the rewinding and conversion of one (1) unit of transformer and related
works aimed at providing the power needs of respondent. As agreed upon by the parties, the projects were to
be completed within 120 days from the effectivity of the contract. Admittedly, however, respondent failed, not
only to perform its part of the contract on time but, in fact, to complete the projects. Petitioner tried to exempt
itself from the consequences of said breach by passing the fault to respondent. It explained that its failure to
complete the project was due to the misrepresentation of the respondent. It claimed that more time and money
were needed, because the condition of the subject transformer was worse than the representations of
respondent. Is this defense tenable?

We answer in the negative.

Records show that petitioner indeed asked for price adjustment and extension of time within which to complete
the projects. In its letter45 dated March 9, 1991, petitioner anchored its request for extension on the following
grounds:
 1. To maximize the existing 3125 KVA to 4000 KVA capacity using the same core, we will replace the
secondary windings from rectangular type to copper sheet which is more accurate in winding to the
required number of turns than using parallel rectangular or circular type of copper magnet wires.
However, these copper sheets are not readily available locally in volume quantities, and therefore, we
will be importing this material and it will take 60 days minimum time for its delivery.

2. We also find it difficult to source locally the replacement for the damaged high voltage bushing.

3. The delivery of power cable no. 2/0 will also be delayed. This will take 90 days to deliver from
January 1991.46

Also in its letter47 dated March 27, 1991, petitioner informed respondent that the projects would be completed
within the contract time table but explained that the delivery of the transformer would only be delayed. The
reasons advanced by petitioner to justify the delay are as follows:

1. Our supplier for copper sheets cannot complete the delivery until April 30, 1991.

2. Importation of HV Bushing will take approximately 45 days delivery per advice of our supplier. x x x48

Clearly, in the above letters, petitioner justified its inability to complete the projects within the stipulated period
on the alleged unavailability of the materials to be used to perform the projects as stated in the job orders.
Nowhere in said letters did petitioner claim that it could not finish the projects, particularly the conversion of the
transformer unit because the defects were worse than the representation of respondent. In other words, there
was no allegation of fraud, bad faith, concealment or misrepresentation on the part of respondent as to the true
condition of the subject transformer. Even in its letter49 dated May 25, 1991, petitioner only requested
respondent that payment to the first progress billing be released as soon as possible and without deduction. It
further proposed that respondent make a direct payment to petitioner’s suppliers.

It was only in its June 14, 1991 letter50 when petitioner raised its observations that the subject transformer
needed more repairs than what it knew during the bidding. 51 In the same letter, however, petitioner repeated
its request that direct payment be made by respondent to petitioner’s suppliers.52 More importantly, petitioner
admitted that it made a judgment error when it quoted for only P440,770.00 for the contract relating to J.O. #P-
90-214 based on limited information.

It can be inferred from the foregoing facts that there was not only a delay but a failure to complete the projects
as stated in the contract; that petitioner could not complete the projects because it did not have the materials
needed; and that it is in need of financial assistance.

As the Court sees it, the bid submitted by petitioner may have been sufficient to be declared the winner but it
failed to anticipate all expenses necessary to complete the projects. 53 When it incurred expenses it failed to
foresee, it began requesting for price adjustment to cover the cost of high voltage bushing and difference in
cost of copper sheet and rectangular wire.54 However, the scope of work presented by respondent specifically
stated that the wires to be used shall be pure copper and that there was a need to supply new bushings for the
complete rewinding and conversion of 3125 KVA to 4 MVA Transformer.55 In other words, petitioner was aware
that there was a need for complete replacement of windings to copper and of secondary bushings. 56 It is,
therefore, improper for petitioner to ask for additional amount to answer for the expenses that were already
part and parcel of the undertaking it was bound to perform. For petitioner, the contract entered into may have
turned out to be an unwise investment, but there is no one to blame but petitioner for plunging into an
undertaking without fully studying it in its entirety.57

The Court likewise notes that petitioner repeatedly asked for extension allegedly because it needed to import
the materials and that the same could not be delivered on time. Petitioner also repeatedly requested that
respondent make a direct payment to the suppliers notwithstanding the fact that it contracted with respondent
for the supply of labor, materials, and technical supervision. It is, therefore, expected that petitioner would be
responsible in paying its suppliers because respondent is not privy to their (petitioner and its suppliers)
contract. This is especially true in this case since respondent had already made advance payments to
petitioner. It appears, therefore, that in offering its bid, the source and cost of materials were not seriously
taken into consideration. It appears, further, that petitioner had a hard time in fulfilling its obligations under the
contract that is why it asked for financial assistance from respondent. This is contrary to petitioner’s
representation that it was capable, competent, and duly licensed to handle the projects.

As to the alleged damaged condition of the subject transformer, we quote with approval the CA conclusion in
this wise:

In the same vein, We cannot readily accept the testimony of Tomas that the transformer unit was severely
damaged and was beyond repair as it was not substantiated with any other evidence. R.S. Tomas could have
presented an independent expert witness whose opinion may corroborate its stance that the transformer unit
was indeed incapable of being restored. To our mind, the testimony of Tomas is self-serving as it is easy to
concoct, yet difficult to verify.58

This lack of evidence, coupled with petitioner’s failure to raise the same at the earliest opportunity, belies
petitioner’s claim that it could not complete the projects because the subject transformer could no longer be
repaired.

Assuming for the sake of argument that the subject transformer was indeed in a damaged condition even
before the bidding which makes it impossible for petitioner to perform its obligations under the contract, we
also agree with the CA that petitioner failed to prove that respondent was guilty of bad faith, fraud, deceit or
misrepresentation.

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 a known duty through some motive or interest or ill will
that partakes of the nature of fraud.59 Fraud has been defined to include an inducement through insidious
machination. Insidious machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit
exists where the party, with intent to deceive, conceals or omits to state material facts and, by reason of such
omission or concealment, the other party was induced to give consent that would not otherwise have been
given.60 These are allegations of fact that demand clear and convincing proof. They are serious accusations
that can be so conveniently and casually invoked, and that is why they are never presumed.61 In this case, the
evidence presented is insufficient to prove that respondent acted in bad faith or fraudulently in dealing with
petitioner.1âwphi1

Petitioner in fact admitted that its representatives were given the opportunity to inspect the subject transformer
before it offered its bid. If indeed the transformer was completely sealed, it should have demanded that the
same be opened if it found it necessary before it offered its bid. As contractor, petitioner had been remiss in its
obligation to obtain as much information as possible on the actual condition of the subject transformer or at
least it should have provided a qualification in its bid so as to make clear its right to claim contract price and
time adjustment.62 As aptly held by the CA, considering that petitioner is a company engaged in the electrical
business and the contract it had entered into involved a sizable amount of money, its failure to conduct an
inspection of the subject transformer is inexcusable.63

In sum, the evidence presented by the parties lead to the following conclusions: (1) that the projects were not
completed by petitioner; (2) that petitioner was given the opportunity to inspect the subject transformer; (3) that
petitioner failed to thoroughly study the entirety of the projects before it offered its bid; (4) that petitioner failed
to complete the projects because of the unavailability of the required materials and that petitioner needed
financial assistance; (5) that the evidence presented by petitioner were inadequate to prove that the subject
transformer could no longer be repaired; and (6) that there was no evidence to show that respondent was in
bad faith, acted fraudulently, or guilty of deceit and misrepresentation in dealing with petitioner.

In view of the foregoing disquisitions, we find that there was not only delay but non-completion of the projects
undertaken by petitioner without justifiable ground. Undoubtedly, petitioner is guilty of breach of contract.
Breach of contract is defined as the failure without legal reason to comply with the terms of a contract. It is also
defined as the failure, without legal excuse, to perform any promise which forms the whole or part of the
contract.64 In the present case, petitioner did not complete the projects. This gives respondent the right to
terminate the contract by serving petitioner a written notice. The contract specifically stated that it may be
terminated for any of the following causes:

1. Violation by Contractor of the terms and conditions of this Contract;

2. Non-completion of the Work within the time agreed upon, or upon the expiration of extension agreed
upon;

3. Institution of insolvency or receivership proceedings involving Contractor; and

4. Other causes provided by law applicable to this contract.65

Consequently, and pursuant to the agreement of the parties,66 petitioner is liable for liquidated damages in the
amount of P29,440.00 per day of delay, which shall be limited to a maximum of 10% of the project cost
orP294,400.00. In this case, petitioner bound itself to complete the projects within 120 days from December
29, 1990. However, petitioner failed to fulfill the same prompting respondent to engage the services of another
contractor on November 14, 1991. Thus, despite the lapse of eleven months from the time of the effectivity of
the contract entered into between respondent and petitioner, the latter had not completed the projects.
Undoubtedly, petitioner may be held to answer for liquidated damages in its maximum amount which is 10% of
the contract price. While we have reduced the amount of liquidated damages in some cases,67 because of
partial fulfillment of the contract and/or the amount is unconscionable, we do not find the same to be applicable
in this case. It must be recalled that the contract entered into by petitioner consists of three projects, all of
which were not completed by petitioner. Moreover, the percentage of work accomplishment was not
adequately shown by petitioner. Hence, we apply the general rule not to ignore the freedom of the parties to
agree on such terms and conditions as they see fit as long as they are not contrary to law, morals, good
customs, public order or public policy.68 Thus, as agreed upon by the parties, we apply the 10% liquidated
damages.

Considering that petitioner was already in delay and in breach of contract, it is liable for damages that are the
natural and probable consequences of its breach of obligation.69 Since advanced payments had been made by
respondent, petitioner is bound to return the excess vis-à-vis its work accomplishments. In order to finish the
projects, respondent had to contract the services of another contractor. We, therefore, find no reason to depart
from the CA conclusion requiring the return of the excess payments as well as the payment of the cost of
contracting Geostar, in addition to liquidated damages.70

WHEREFORE, premises considered, the petition is hereby DENIED. The Court of Appeals Decision dated
December 19, 2005 and Resolution dated June 6, 2006 in CA-G.R. CV No. 61049 are AFFIRMED.

SO ORDERED.
G.R. No. 178008 October 9, 2013

SAN FERNANDO REGALA TRADING, INC., Petitioner,

vs.
CARGILL PHILIPPINES, INC., Respondent.

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

G.R. No. 178042

CARGILL PHILIPPINES, INC., Petitioner,

vs.
SAN FERNANDO REGALA TRADING, INC., Respondent.

DECISION

ABAD, J.:

These cases pertain to the reciprocal obligations of the parties in a contract of sale to deliver the goods,
receive them, and pay the price as stipulated and the consequent effects of breach of such obligations.

The facts and the Case

Cargill Philippines, Inc. (Cargill) and San Fernando Regala Trading, Inc. (San Fernando) were cane molasses
traders that did business with each other for sometime. The present controversy arose when San Fernando
claimed that Cargill reneged on its contractual obligations to deliver certain quantities of molasses. Cargill
denied this, insisting that San Fernando actually refused to accept the delivery of the goods. This enmity
resulted in Cargill’s filing on March 2, 1998 a complaint for sum of money and damages against San Fernando
before the Regional Trial Court (RTC) of Makati City in Civil Case 98-493.

Cargill alleged that on July 15, 1996 it entered into Contract 50261 covering its sale to San Fernando of 4,000
metric tons (mt) of molasses at the price of P3,950.00 per mt. Cargill agreed to deliver the molasses within the
months of "April to May 1997" at the wharf of Union Ajinomoto, Inc.(Ajinomoto) along the Pasig River, Metro
Manila. This was a risk-taking forward sale in that its execution was to take place about 10 months later when
the parties did not yet know what the trading price of molasses would be.

Shortly after, Cargill also entered into Contract 50472 covering another sale to San Fernando of 5,000 mt of
molasses at P2,750.00 per mt. The delivery period under this contract was within "October-November-
December 1996," sooner than the delivery period under Contract 5026. Apparently, San Fernando had a deal
with Ajinomoto for the supply of these molasses.

Cargill further alleged that it offered to deliver the 4,000 mt of molasses as required by Contract 5026 within the
months of April and May1997 but San Fernando accepted only 951 mt, refusing to accept the rest. On April 2,
1997 Dolman V, the barge carrying Cargill’s 1,174 mt of molasses, arrived at the Ajinomoto wharf but San
Fernando refused to accept the same. The barge stayed at the wharf for 71 days, waiting for San Fernando’s
unloading order. Because of the delay, the owner of the barges lapped Cargill with demurrage amounting
toP920,000.00. Cargill also suffered P3,480,000.00 in damages by way of unrealized profits because it had to
sell the cargo to another buyer at a loss.

Cargill further alleged that it earlier sought to deliver the molasses covered by Contract 5047 at the Ajinomoto
wharf in the months of October, November, and December 1996, but San Fernando failed or refused for
unjustified reasons to accept the delivery. Consequently, Cargill suffered damages by way of unrealized profits
ofP360,000.00 from this contract. Apart from asking the RTC for awards of unrealized profits, Cargill also
asked for a return of the demurrage it paid, attorney’s fees, and cost of litigation.
To substantiate its claim, Cargill presented David Mozo of Dolman Transport Corp. who testified that Cargill
chartered its Dolman V barge to carry molasses from Pasacao to the Ajinomoto wharf in Pasig. But the barge
was unable to unload its cargo and was placed on stand-by for around 70days, awaiting orders to unload its
molasses. Consequently, Dolman Transport charged Cargill for demurrage.

Cargill also presented Arthur Gunlao, an employee, who testified that his company was unable to unload the
molasses covered by Contracts 5026and 5047 because San Fernando’s President, Quirino Kehyeng, advised
them to wait because Ajinomoto’s storage tanks were still full and could not receive the molasses. Because of
the prolonged delay in the unloading of the goods, Cargill had no choice but to sell the molasses to another
buyer. At the prodding of Kehyeng, Cargill wrote San Fernando on May 14, 1997 proposing changes in the
delivery periods of Contract 5026 and 5047,respectively from "April to May 1997" to "May to June 1997" and
from" October-November-December 1996" to "May-June-July 1997."3 The amendments were needed to keep
the contracts valid and maintain the good business relations between the two companies.

In its Answer with counterclaim, San Fernando pointed out that, except for the 951 mt of molasses that Cargill
delivered in March 1997, the latter made no further deliveries for Contract 5026. Indeed, Cargill sent San
Fernando a letter dated May 14, 1997 proposing a change in the delivery period for that contract from "April to
May 1997" to "May to June 1997."But San Fernando rejected the change since it had a contract to sell the
molasses to Ajinomoto for P5,300.00 per mt.4 San Fernando expected to earn a P5,400,000.00 profit out of
Contract 5026.

As for Contract 5047, San Fernando maintained that Cargill delivered no amount of molasses in connection
with the same. Cargill admitted its inability to deliver the goods when it wrote San Fernando a letter on May
14,1997, proposing to move the delivery period from "October-November-December 1996" to "May-June-July
1997." But San Fernando also rejected the change since it had already contracted to sell the subject molasses
to Ajinomoto for P4,950.00 per mt.5 San Fernando expected a profit of P11,000,000.00 under this contract.

To prove its claims, San Fernando presented its President, Kehyeng, who testified that apart from the March
1997 delivery of 951 mt of molasses under Contract 5026, Cargill made no further deliveries. He called Dennis
Seah of Cargill several times demanding delivery but nothing came of it. Subsequently, Cargill wrote San
Fernando, proposing the extension of the delivery periods provided in their two contracts. But Kehyeng
rejected the proposal and refused to sign his conformity at the appropriate spaces on Cargill’s letter.

Kehyeng denied that San Fernando had refused to receive deliveries because it bought molasses from Cargill
at prices higher than what Ajinomoto was willing to pay. Kehyeng insisted that San Fernando had always
received Cargill’s deliveries even on occasions when the prices fluctuated resulting in losses to his company.
He claimed that, as a result of Cargill’s violation of Contracts 5026 and 5047, San Fernando was entitled to
rescission and awards for unrealized profits of P4,115,329.20 and P11,000,000.00, respectively, moral and
exemplary damages each in the amount of P500,000.00, attorney’s fees of P1,000,000.00, and litigation
expenses.

On December 23, 2003 the RTC dismissed Cargill’s complaint for lack of merit and granted San Fernando’s
counterclaims. The RTC did not give credence to Cargill’s claim that San Fernando refused to accept the
deliveries of molasses because Ajinomoto’s tanks were full. San Fernando sufficiently proved that Ajinomoto
continued receiving molasses from other suppliers during the entire time that Cargill’s chartered barge was put
on stand-by at the wharf, supposedly waiting for San Fernando’s unloading orders.

It was incomprehensible, said the RTC, for San Fernando to refuse Cargill’s deliveries, considering that
Ajinomoto had already agreed to buy the molasses from it. Cargill’s failure to make the required deliveries
resulted in San Fernando’s default on its obligations to Ajinomoto, prompting the latter to cancel its orders. As
a result, San Fernando lost expected profits of P4,115,329.20 representing the remaining undelivered
molasses under Contract 5026 and P11,000,000.00 under Contract 5047.The RTC awarded San Fernando its
claims for unrealized profits,P500,000.00 in moral damages, another P500,000.00 in exemplary damages,
attorney’s fees ofP1,000,000.00, and P500,000.00 as cost of litigation.
The Court of Appeals (CA) ruled on appeal, however, that Cargill was not entirely in breach of Contract 5026.
Cargill made an advance delivery of 951 mt in March 1997. It then actually sent a barge containing 1,174 mt of
molasses on April 2, 1997 for delivery at Ajinomoto’s wharf but San Fernando refused to have the cargo
unloaded. Consequently, the trial court erred in awarding San Fernando unrealized profits of P4,115,329.20
under Contract 5026. The CA also ruled that since San Fernando unjustifiably refused to accept the April 2,
1997 delivery, it should reimburse Cargill theP892,732.50 demurrage that it paid the owner of the barge.

The CA, however, found Cargill guilty of breach of Contract 5047which called for delivery of the molasses in
"October-November-December 1996." Since San Fernando did not accede to Cargill’s request to move the
delivery period back, Cargill violated the contract when it did not deliver the goods during the previously agreed
period. Cargill was liable to San Fernando for unrealized profits of P11,000,000.00 that it would have made if it
had sold them to Ajinomoto. The CA deleted the award of moral and exemplary damages in favor of San
Fernando for its failure to sufficiently establish Cargill’s bad faith in complying with its obligations. The CA also
deleted the awards of attorney’s fees and cost of litigation.

The CA thus ordered: 1) San Fernando to reimburse Cargill the demurrage of P892,732.50 that it paid, subject
to 6% interest per annum computed from the date of the filing of the complaint until the finality of the decision;
and 2) Cargill to pay San Fernando P11,000,000.00 in unrealized profits under Contract 5047. The CA deleted
the award of moral and exemplary damages, attorney’s fees, and cost of litigation. This prompted both Cargill
and San Fernando to appeal to this Court.

Issues for Resolution

These cases present the following issues:

1. Whether or not the CA erred in ruling that Cargill was not guilty of breach of obligation to deliver the
4,000 mt of molasses covered by Contract 5026 during the period April and May 1997;

2. Whether or not the CA erred in ruling that Cargill was guilty of breach of obligation to deliver the
5,000 mt of molasses covered by Contract5047 during the period October, November, and December
1996; and

3. Whether or not the CA erred in deleting the award of moral and exemplary damages, attorney’s fees,
and cost of suit in favor of San Fernando.

The Rulings of the Court

One. The CA held that Cargill committed no breach of Contract 5026 because it had earlier delivered 951 mt of
molasses in March 19976 and sent a barge containing 1,174 mt of the goods on April 2, 1997 at the
Ajinomoto’s wharf. It was actually San Fernando that refused to accept this delivery on April 2.

But Contract 5026 required Cargill to deliver 4,000 mt of molasses during the period "April to May 1997." Thus,
anything less than that quantity constitutes breach of the agreement. And since Cargill only delivered a total of
2,125 mt of molasses during the agreed period, Cargill should be regarded as having violated Contract 5026
with respect to the undelivered balance of 1,875 mt of molasses.

Notably, Chargill’s chartered barge showed up with 1,174 mt of molasses at the Ajinomoto wharf on April 27,
1997. The barge stayed therefor around 70 days, awaiting orders to unload the cargo. David Mozo of Dolman
Transport Corp. attested to this. Dolman V was put on stand-by at the wharf while other barges queued to
unload their molasses into Ajinomoto’s storage tanks.7

In failing to accept delivery of Cargill’s 1,174molasses, San Fernando should reimburse Cargill
the P892,732.50 demurrage that it paid.
Ultimately, what are the liabilities of the parties under Contract 5026?Had San Fernando accepted the delivery
of 1,174 mt of molasses on April27, 1997 Cargill would have been entitled to payment of their price
ofP4,637,300.00 at P3,950.00 per mt. But, since Cargill succeeded in selling that 1,174 mt of molasses to
Schuurmans & Van Ginneken for P1,861.92 per mt.8 Cargill’s unrealized profit then amounted to
onlyP2,451,405.59. Thus:

P3,950 per mt – P1,861.92 per mt = P2,088.09 x 1,174

mt = P2,451,405.59

Since Cargill failed, however, to deliver the balance of 1,875 mt of molasses under Contract 5026, it must pay
San Fernando the P2,531,250.00, representing the latter’s unrealized profits had it been able to sell that
1,875mt of molasses to Ajinomoto. Thus:

P5,300 per mt selling price at Ajinomoto – P3,950acquisition cost = P1,350 profit per mt P1,350.00 profit
margin per mt x 1,875 mt = P2,531,250.00

Cargill, of course, claimed that it had sufficient inventories of molasses to complete its deliveries, implying that
had San Fernando accepted its initial delivery of 1,174 mt it would have continued delivering the rest. But it is
not enough for a seller to show that he is capable of delivering the goods on the date he agreed to make the
delivery. He has to bring his goods and deliver them at the place their agreement called for, i.e., at the
Ajinomoto Pasig River wharf.

A stipulation designating the place and manner of delivery is controlling on the contracting parties. 9 The thing
sold can only be understood as delivered to the buyer when it is placed in the buyer’s control and possession
at the agreed place of delivery.10 Cargill presented no evidence that it attempted to make other deliveries to
complete the balance of Contract 5026.

Two. The CA correctly ruled that Cargill was in breach of Contract 5047 which provided for delivery of the
molasses within the months of October, November, and December 1996. Thus, when Cargill wrote San
Fernando on May 14, 1997 proposing to move the delivery dates of this contract to May, June, and July, 1997,
it was already in default. San Fernando’s refusal to signify its conformity at the proper space on Cargill’s letter-
proposal regarding Contract 5047 signifies that it was not amenable to the change.

San Fernando had good reason for this: it had already agreed to supply Ajinomoto the molasses covered by
Contract 5047 at the rate of P4,950.00 per mt.11 Consequently, Cargill’s failure to deliver the 5,000 mt of
molasses on "October-November-December 1996" makes it liable to San Fernando for P11,000,000.00 in
unrealized profits. Thus:

P4,950 per mt selling price to Ajinomoto – P2,750acquisition cost = P2,200 profit per mt

P2,200 per mt x 5,000 mt = P11,000,000.00

In failing to make any delivery under Contract 5047, Cargill should pay San Fernando the profit that it lost
because of such breach. Cargill of course points out that San Fernando never wrote a demand letter
respecting its failure to make any delivery under that contract. But demand was not necessary since Cargill’s
obligation under the contract specified the date and place of delivery, i.e., "October-November-December
1996," at the Ajinomoto wharf in Pasig.12

Three. The Court concurs with the CA’s deletion of the RTC’s award of moral damages to San
Fernando.1âwphi1 As a rule, moral damages are not awarded to a corporation unless it enjoyed good
reputation that the offender debased and besmirched by his actuations.13 San Fernando failed to prove by
sufficient evidence that it fell within this exception. Besides, moral damages are, as a rule, also not recoverable
in culpa contractual except when bad faith had been proved.14
San Fernando failed to show that Cargill was motivated by bad faith or ill will when it failed to deliver the
molasses as agreed.

The Court rules that the CA correctly deleted the award of exemplary damages to San Fernando. In breach of
contract, the court may only award exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.15 The evidence has not sufficiently established that Cargill’s
failure to deliver the molasses on time was attended by such wickedness.

Lastly, the CA correctly deleted the award of attorney’s fees and cost of litigation to San Fernando. Attorney’s
fees and expenses of litigation under Article 2208 of the Civil Code are proper only when exemplary damages
are awarded. Here, the Court has ruled that San Fernando is not entitled to an award of exemplary damages.
Both parties actually committed shortcomings in complying with their contractual obligations. San Fernando
failed in Contract 5026 to accept Cargill’s delivery of 1,174 mt of molasses; Cargill only complied partially with
its undertakings under Contract 5026and altogether breached its obligations under Contract 5047. For these,
they must bear their own expenses of litigation.

WHEREFORE, the Court PARTIALLY GRANTS the petitions and MODIFIES the Court of Appeals Decision on
January 19, 2007 in CA-G.R.CV 81993 as follows:

1. San Fernando Regala Trading, Inc. is ORDERED to pay Cargill Philippines, Inc. (a) P892,732.50
representing the demurrage that the latter incurred and (b) P2,451,405.59 representing its unrealized
profit on the rejected delivery of 1,174 mt of molasses, both under Contract 5026, for a total
of P3,344,138.09, with interest at 6% per annum computed from the date of the filing of the complaint
until the same is fully paid; and

2. Cargill Philippines, Inc. is ORDERED to pay San Fernando Regala Trading, Inc. the latter’s
unrealized profits of P2,531,250.00 for the breach of Contract 5026 and P11,000,000.00 for the breach
of Contract 5047, for a total of P 13,531,250.00, with interest at 6% per annum computed from the date
of the tiling of the answer with counterclaim until the same is fully paid.

The Court of Appeals' deletion of the awards of moral and exemplary damages, attorney's fees, and costs of
litigation stands.

SO ORDERED.
 SPOUSES JESSE CACHOPERO AND G.R. No. 146754
BEMA CACHOPERO,
Petitioners, Present:

CORONA, C.J.,
Chairperson,
LEONARDO-DE CASTRO,
- versus - BERSAMIN,
VILLARAMA, JR., and
PERLAS-BERNABE,* JJ.

Promulgated:
RACHEL CELESTIAL,
Respondent. March 21, 2012

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

DECISION

LEONARDO-DE CASTRO, J.:

This is a petition for review on certiorari[1] seeking to vacate and set aside the September 4, 2000 Decision[2] and
January 19, 2001 Resolution[3] of the Court of Appeals in CA-G.R. SP No. 52655.

Petitioner Jesse Cachopero, married to co-petitioner Bema Cachopero (spouses Cachopero), is the younger
brother of respondent Rachel Celestial (Celestial). Celestial owned an old residential house (old house) situated on Lot
No. 2586-G-28 (LRC) Psd-105462 (hereinafter, “Celestial’s lot”) at Poblacion 8, Midsayap, Cotabato, Philippines.[4] A
major portion of this house stood on the eastern part of the 344-square meter-lot (subject land) immediately adjoining
Celestial’s lot. The subject land was formerly part of the Salunayan Creek that became dry as a result of the construction
of an irrigation canal by the National Irrigation Administration.[5]

On July 21, 1989, Celestial filed an Ejectment case, which was docketed as Civil Case No. 711, against the
spouses Cachopero before the Municipal Trial Court (MTC) of Midsayap.

In her Complaint,[6] Celestial alleged that the spouses Cachopero had been living in her house for free and out of
tolerance since 1973. Celestial claimed that when the condition of the old house had become uninhabitable, she decided
to have it demolished. However, the spouses Cachopero refused to vacate the premises.

In the meantime, on August 10, 1989, Celestial and the spouses Cachopero entered into a Compromise
Agreement,[7] the terms and conditions of which are quoted as follows:

That Spouses Jesse Cachopero and Bema Cachopero, defendants in this case, are going to vacate
the premises in question and transfer the old house subject of this ejectment case [to] the back of Lot No.
2586-G-28 (LRC) Psd-105462, located at 8, Midsayap, Cotabato, within eight (8) months from today, but
not later than April 30, 1990;

That in transferring the old house subject of this suit to the back of Lot No. 2586-G-28 (LRC) Psd-
105462 of plaintiff, plaintiff shall shoulder all expenses in dismantling said house and in the
reconstruction of said house, plaintiff binds herself to pay fifty (50%) percent of the costs of labor and
expenses in transferring the said house;
 That plaintiff is willing to give a two (2) meter wide exit alley on the eastern portion of Lot No.
2586-G-28 (LRC) Psd-105462 and on the southern portion of said lot as roadright-of-way up to the point
of the NIA road on the west of Lot No. 2586-G-28 (LRC) Psd-105462;

That defendants hereby promise to remove all their improvements introduced fronting the
residence of the plaintiff before August 31, 1989; and the plaintiff shall likewise remove all her existing
improvements on the same area;

That the parties are waiving their respective claims for moral damages, as well as attorney’s fees
as appearing in the Complaint and Counter-Claim appearing in their Answer in order to totally have this
case amicably settled.

WHEREFORE, premises considered, it is most respectfully prayed that Judgment be rendered by

this Honorable Court base[d] on the terms and conditions of this Compromise Agreement.

Midsayap, Cotabato, August 10, 1989.

On August 10, 1989, the MTC rendered a judgment, approving the Compromise Agreement, to wit:

WHEREFORE, finding the Compromise Agreement to be in accordance with law and equity, the
same is hereby approved and judgment is rendered pursuant to, and in accordance with the terms and
conditions therein stipulated.[8]

On July 17, 1990, then Deputy Sheriff Benedicto F. Flauta issued the Sheriff’s Return in the above Ejectment
case, viz:

Respectfully returned to the Honorable Court, Municipal Trial Court, Midsayap, Cotabato the
herein attached original copy of the writ of Execution issued in the above-entitled case with the
information that:

1. Defendants Jesse and Bema is (sic) found to be out of the real estate property of the
plaintiff;

2. The boundary of the defendants and the plaintiff is distinct; and

3. The improvements introduced by the defendants fronting the residence of the plaintiff is
already outside the lot of the plaintiff.

WHEREFORE, the undersigned had nothing to do except to return the said Writ of Execution for
whatever the Honorable Court may deem necessary and appropriate for both parties.[9]

However, as the portion of the house beyond Celestial’s lot was not demolished, Celestial filed a Motion for the
Issuance of an Alias Writ of Execution, with a prayer to cite the Deputy Sheriff in Contempt for not executing the Writ of
Execution issued on May 17, 1990.[10]

Since the MTC had not yet received the Sheriff’s Return, it ordered the Deputy Provincial Sheriff to comment on
the Motion and on August 16, 1990, the latter complied. The pertinent portions of said Comment are quoted as follows:

That on May 30, 1990, the undersigned met one of the defendants at the premises of the subject
area and three days after, the same met the plaintiff in the same area; the same informations were obtained
which are top confidential except that their boundary is distinct;

That the defendants are no longer within the metes and bounds of the plaintiff’s property;
 That Lot No. 25[8]6-[G]-28 is the only base (sic) of this case and no other lots more; and,

That the defendants had complied [with] the Compromise Agreement which was the basis of the
Court.

WHEREFORE, in view of the foregoing, the undersigned respectfully submit, that he has fully
complied with the Writ of Execution issued by the Honorable Court in this case.[11]

Based on the above, the MTC denied the Motion for the Issuance of an Alias Writ of Execution on August 30,
1990. The MTC likewise denied Celestial’s Motion for Reconsideration on November 20, 1990, and highlighted the fact
that the agreement was for the spouses Cachopero to vacate Celestial’s lot, which was the land subject of the Ejectment
case. The MTC further said that it had no jurisdiction or power to decide a question not in issue.[12]

Celestial filed a petition for mandamus before the Regional Trial Court (RTC), Branch 18, of Midsayap, Cotabato,
praying that the MTC be ordered to issue an Alias Writ of Execution in the Ejectment case and that the Sheriff be directed
to enforce such Alias Writ of Execution. Celestial furthermore prayed for the RTC to order the spouses Cachopero to pay
her damages, attorney’s fees, litigation expenses, and costs of suit. This was docketed as Special Civil Case No. 051.[13]

In response, MTC Judge Nestor Flauta said that the old house constructed on Celestial’s lot had already been
demolished. Whatever remained undemolished were owned by the spouses Cachopero, and were not put in issue in the
Ejectment case. Thus, Judge Flauta averred, “to order the demolition of the undemolished improvements outside of the
property of [Celestial] would be tantamount to lack of jurisdiction and/or grave abuse of discretion on the part of the
[MTC].”[14]

On July 27, 1992, the RTC conducted an ocular inspection to determine whether or not the Compromise
Agreement was executed in accordance with its terms.[15]

On March 20, 1997, the RTC issued an Order[16] dismissing the petition for mandamus for lack of merit. The
RTC ratiocinated in this wise:

Mandamus does not lie where there was no right of petitioner which was excluded from exercising
and there is no duty on the part of respondent Judge to perform (Villa Rey Transit, Inc. vs. Bello, 10
SCRA 238).

The law concedes to judges and courts the right to decide questions according to their judgment
and their understanding of the law and if their decision in that regard is not correct or contrary to law,
appeal, not Mandamus, is the remedy. (Santiago Labor Union vs. Tabique, 17 SCRA 286.)[17]

Acting on Celestial’s Motion for Reconsideration, the RTC on September 1, 1997, rendered an Order granting
such motion, and setting aside its earlier Order of March 20, 1997.[18]

Meanwhile Jesse Cachopero had already instituted a petition, docketed as Special Civil Case No. 070,
for certiorari, prohibition, and mandamus with preliminary injunction and temporary restraining order, assailing the
orders of the Department of Environment and Natural resources (DENR), which denied his Miscellaneous Sales
Application (MSA) over a portion of the subject land. This petition and Jesse Cachopero’s subsequent Motion for
Reconsideration, were denied by the RTC for lack of merit and non-exhaustion of administrative remedies. Undaunted,
Jesse Cachopero assailed the above orders in a petition for certiorari, prohibition, and mandamus, filed before the Court
of Appeals. This was docketed as CA-G.R. No. 45927.[19]

On February 3, 1999, the RTC rendered a Resolution,[20] again dismissing Celestial’s petition for mandamus, but
on the ground that the issuance of an Alias Writ of Execution in Civil Case No. 711 depended on the outcome of Special
Civil Case No. 070, which involved the subject land that Jesse Cachopero had applied for. [21] The RTC said that the
foregoing “circumstance is a supervening cause necessitating refusal to issue an alias writ of execution.”[22]
 Celestial brought this matter to the Court of Appeals and claimed that the RTC itself found that part of the old
house, subject of the compromise agreement, was still standing or undemolished. Thus, she posited the following issues
for the Court of Appeals’ resolution:

1. Can the Honorable Regional Trial Court set a condition – other than that provided in the
Judgment itself –for the implementation and execution of the said judgment in Civil Case No. 711?

2. Was it legal, lawful and proper and did the Honorable Regional Trial Court act without or in
excess and/or grave abuse of discretion when it ordered and directed the execution of the Judgment in
Civil Case No. 711, subject to the outcome of Special Civil Case No. 070, which is never a condition in
the said judgment sought to be executed in full? or

3. Did the Honorable Regional Trial Court, act without and in excess or abuse of discretion
and against the law and jurisprudence, in dismissing the petition for Mandamus and making the issuance
of a Writ of Execution subjected to the outcome of Special Civil Case No. 070, which is never a condition
made in said Judgment sought to be executed?[23]

On September 4, 2000, the Court of Appeals came out with its Decision in favor of Celestial. The fallo reads:

IN VIEW WHEREOF, the resolution in Special Civil Case No. 051 dated February 3, 1999 is
hereby set aside. As prayed for by petitioner, respondent Judge is hereby directed to issue an alias Writ of
Execution in Ejectment Case No. 711 ordering the full and complete implementation of the judicially
approved compromise judgment.[24]

In finding merit in Celestial’s appeal, the Court of Appeals said that a compromise judgment is immediately
executory and once judicially approved, has the force of res judicata between the parties, which should not be disturbed
except for the vices of consent or perjury. More importantly, the Court of Appeals held:

What is involved in Ejectment Case No. 711 is only the material possession of the lot litigated
therein. In Special Civil Case No. 070, what is involved is the issue of who between the parties therein
has a better right to purchase the lot of the public domain the pendency of which may not abate the
execution of the compromise judgment in Ejectment Case No. 711.[25]

Resolving the spouses Cachopero’s Motion for Reconsideration, the Court of Appeals reiterated its position in its
Resolution of January 19, 2001 and said:

Movants may not be allowed to renege from their express undertaking “to vacate the premises and
transfer the old house at the back of lot 2586-[G]-28” and/or “to remove all of their improvements” from
the premises in dispute embodied in the judicially approved compromise in Ejectment Case No.
111. Reiterated here, for emphasis, is the Court’s previous holding that the pendency of Civil Case No.
070 (on appeal in the Supreme Court) which calls for the determination of who between the litigants
possesses as superior right to purchase the land of the public domain will not bar the execution of the
executory compromise judgment.[26]

The spouses Cachopero then elevated their case to this Court, praying that the Court of Appeals’ Decision and
Resolution be vacated and set aside, and to declare that the RTC was correct in dismissing the case for mandamus.

On May 30, 2002, Celestial filed a Motion for the Issuance of a Status Quo Order and/or a Writ of Preliminary
Injunction,[27] alleging that while the case was pending in this Court, the spouses Cachopero had been making
constructions and had been planting trees and plants on the subject land. Celestial claims that the spouses Cachopero’s
actions will cause her great and grave injustice.
 In the meantime, CA-G.R. No. 45927, which was originally Special Civil Case No. 070, had already reached this
Court upon Celestial’s pleading, after the Court of Appeals granted Jesse Cachopero’s petition, reversed and set aside the
assailed orders of the RTC, and ordered the DENR to process Jesse Cachopero’s MSA.[28] Celestial’s petition, docketed
as G.R. No. 142595, was denied for lack of merit by this Court on October 15, 2003.[29]

Issues

The following are the issues presented by the spouses Cachopero for this Court’s resolution:

1. Will Mandamus lie to compel the Regional Trial Court to issue an alias Writ of
Execution to execute a compromise agreement which the Provincial Sheriff, the Municipal Trial
Court, and the Regional Trial Court ruled to have been properly executed?

2. Will Mandamus lie to compel the Regional Trial Court to eject Petitioners from the land
they occupy and applied for under MSA XII-6-1669 after demolition of the contested house by
virtue of a compromise agreement in an ejectment case?[30]

Discussion

The spouses Cachopero are insisting that the Writ of Execution had been properly implemented as they had
already vacated Celestial’s lot, which according to them, was the subject matter of the Ejectment case against them. They
argue that to eject them also from the subject land, which they applied for in the DENR, and which was put in issue in
Special Civil Case No. 070, and then G.R. No. 142595 before this Court, would be going beyond what was agreed upon
by the parties.

Celestial on the other hand, claims that G.R. No. 142595 has no bearing on this case. She asseverates that it was
clear not only from the Sheriff’s own return, but also from the ocular inspection conducted by the RTC, that the old house,
which was the subject matter of the compromise agreement, was only partially demolished.

We affirm the Court of Appeals.

A petition for mandamus, under Rule 65 of the 1997 Rules of Civil Procedure, provides:

SEC. 3. Petition for mandamus. – When any tribunal, corporation, board, officer or person
unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting from
an office, trust, or station, or unlawfully excludes another from the use and enjoyment of a right or office
to which such other is entitled, and there is no other plain, speedy and adequate remedy in the ordinary
course of law, the person aggrieved thereby may file a verified petition in the proper court, alleging the
facts with certainty and praying that judgment be rendered commanding the respondent, immediately or at
some other time to be specified by the court, to do the act required to be done to protect the rights of the
petitioner, and to pay the damages sustained by the petitioner by reason of the wrongful acts of the
respondent.

The writ of mandamus is aimed to compel a respondent, who failed to execute his/her legal duty, or unlawfully
excluded another from the enjoyment of an entitled right or office, to perform the act needed to be done in order to protect
the rights of the petitioner.[31] Simply put, “mandamus is employed to compel the performance, when refused, of a
ministerial, as opposed to a discretionary, duty.”[32]

In Tay v. Court of Appeals,[33] this Court elucidated on when a writ of mandamus may issue, to wit:

In order that a writ of mandamus may issue, it is essential that the person petitioning for the same
has a clear legal right to the thing demanded and that it is the imperative duty of the respondent to
perform the act required. It neither confers powers nor imposes duties and is never issued in doubtful
 cases. It is simply a command to exercise a power already possessed and to perform a duty already
imposed.[34]

In addition, mandamus applies as a remedy when the petitioner’s right is founded clearly in law and is not
doubtful.[35]

In the case at bar, Celestial’s petition for mandamus is anchored on her rights emanating from the Compromise
Agreement she executed with the spouses Cachopero.

Article 2028 of the Civil Code defines a compromise as follows:

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or
put an end to one already commenced.

Article 2037 of the Civil Code provides for the effects of a compromise agreement, to wit:

A compromise has upon the parties the effect and authority of res judicata; but there shall be no execution
except in compliance with a judicial compromise.

Expounding on the concept of compromise agreements, this Court, in Air Transportation Office v. Gopuco,
Jr.,[36] said:

[W]e have time and again ruled that a compromise agreement, when not contrary to law, public order,
public policy, morals, or good customs, is a valid contract which is the law between the parties. It is a
contract perfected by mere consent, whereby the parties, making reciprocal concessions, avoid litigation
or put an end to one already commenced. It has the force of law and is conclusive between the parties,
and courts will not relieve parties from obligations voluntarily assumed, simply because their contracts
turned out to be unwise. x x x.[37]

Likewise, in Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) v. Abella,[38] this
Court pronounced:

Prevailing case law provides that “a compromise once approved by final orders of the court has
the force of res judicata between the parties and should not be disturbed except for vices of consent or
forgery. Hence, ‘a decision on a compromise agreement is final and executory.’ Such agreement has the
force of law and is conclusive on the parties. It transcends its identity as a mere contract binding only
upon the parties thereto, as it becomes a judgment that is subject to execution in accordance with the
Rules. Judges therefore have the ministerial and mandatory duty to implement and enforce it.” Hence,
compromise agreements duly approved by the courts are considered the decisions in the particular cases
they involve.[39]

The terms of the compromise agreement involved herein are clear and unequivocal. The spouses Cachopero
agreed to vacate Celestial’s lot and transfer the old house to the land at the back of Celestial’s lot. While it has been
shown that the spouses Cachopero had already removed part of the old house, Jesse Cachopero himself admitted, during
the ocular inspection done by the RTC, that part of the old house beyond Celestial’s lot were not demolished nor removed,
to wit:

COURT:
Q This house here which is now remain standing in the lot enclosed with bamboo fence, was it
existing at the time of the filing of the complaint between you and defendants at the time the
decision was rendered?

JESSE CACHOPERO:

A Yes, your Honor.

xxxx

ATTY. AGDEPPA:

That the roofing is a part of the old house that was brought down when the second story was
destroyed, your Honor.

xxxx

COURT:

There is a structure which has been destroyed and above the remaining structure of which a shade
of galvanized iron was made. Yes…

JESSE CACHOPERO:

A part of the second floor which was lowered down.

COURT:

Another questions – This structure here was already existing during the time of the filing of the
complaint in the Municipal Court?

JESSE CACHOPERO:

Yes, your Honor.

ATTY. AMPARO:

When the two story building was demolished, how did the remaining portion looks like?

JESSE CACHOPERO:

It looks like a bahay kubo, sir.

ATTY. AMPARO:

When the building was demolished, what improvement did you introduce?

JESSE CACHOPERO:

The walling made of rough wood, sir.

ATTY. AMPARO:

How about this wall on the other side of the remaining structure?
 JESSE CACHOPERO:

It is part of the old building, sir.

xxxx

COURT:

In other words it has already been paid for the expenses of the demolition.

Why was the other parts of the building not included in the demolition which was made at the
instance of the plaintiff?

RACHEL CELESTIAL:

Because he objected and according to him (Jesse Cachopero) it is beyond my property, your
Honor.[40]

It is clear from the records and the facts of this case that the real reason Celestial wanted to eject the spouses
Cachopero from the subject land is to reclaim the use of such land for herself. This can be gleaned from the fact that in
their compromise agreement, she was willing to shoulder the expenses of transferring the old house to the area at the back
of her own lot. This fact runs counter to her claim that she was ejecting her brother and his wife from the old house due to
its dilapidated and uninhabitable condition. However, Celestial’s intention has nothing to do with the validity of the
compromise agreement, which the spouses Cachopero freely signed, and on which the MTC based its judgment.

This Court agrees with the Court of Appeals that Special Civil Case No. 070, which became G.R. No. 142595
when it was elevated to this Court, has nothing to do with the case before us. The spouses Cachopero anchor their right
on the MSA that they filed with the DENR over the subject land, whereas this case concerns the compromise agreement
they executed with Celestial.

Although Celestial’s petition in G.R. No. 142595 was denied, and the Court of Appeals’ ruling ordering the
DENR to process the spouses Cachopero’s MSA over the subject lot was affirmed, what is involved herein is the
transfer of the old house from the subject land, and not the subject land itself. However, the spouses Cachopero have
not shown this Court that their MSA had indeed been approved.

Unless the spouses Cachopero can show this Court that there is a supervening event, which occurred after the
judgment of the MTC, and which brought about a material change in their situation vis-à-vis that of Celestial, the latter
has the right to have the compromise agreement executed, according to its terms.[41]

This Court’s pronouncements in Silverio, Jr. v. Filipino Business Consultants, Inc.,[42] are instructive, and we quote
as follows:

To justify the stay of immediate execution, the supervening events must have a direct effect on the matter
already litigated and settled. Or, the supervening events must create a substantial change in the rights or
relations of the parties which would render execution of a final judgment unjust, impossible or inequitable
making it imperative to stay immediate execution in the interest of justice.[43]

We find that no such supervening events exist in this case so as to justify the stay of the execution of Civil Case No.
711.

WHEREFORE, the petition is hereby DENIED and the September 4, 2000 Decision and January 19, 2001
Resolution of the Court of Appeals in CA-G.R. SP No. 52655are AFFIRMED.
SO ORDERED.
G.R. No. 175123 July 4, 2012
MOLDEX REALTY, INC. and ANSELMO AGERO, Petitioners,
vs.
SPOUSES RICARDO J. VILLABONA and GILDA G. VILLABONA and EDUARDO J.
VILLABONA, Respondents.
DECISION
SERENO, J.:
Before us is a Petition for Review under Rule 45 of the Rules of Court, Petitioners assail the Decision 1 dated 6
October 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 74435, affirming the Decision2 dated 28
January 2002 in Civil Case No. 3276-AF of Branch 25 of the Regional Trial Court (RTC), Third Judicial Region
of Cabanatuan City. The undisputed facts follow.
The case arose when respondents filed on 4 August 1998 a Complaint3 against herein petitioners and Levi P.
Sayo (Sayo) for the annulment of Transfer Certificate of Title (TCT) Nos. NT-250333 and NT-250334
registered under the name of Moldex Realty, Inc. (Moldex), and formerly covered by Original Certificate of Title
(OCT) Nos. 3322 and 3323, respectively. Respondents likewise prayed for the award of damages.
Respondent Eduardo J. Villabona (Eduardo) alleged that he was the true owner of Lot No. 2346, covered by
OCT No. 3322; and respondent spouses Ricardo Villabona (Ricardo) and Gilda Villabona (Gilda), of Lot No.
2527, covered by OCT No. 3323. They acquired these properties by virtue of a Deed of Sale dated 1 June
1977 executed by their parents, Rafael Villabona (Rafael) and Ursula Jose Villabona (Ursula).
Respondents claimed that sometime in January 1996, petitioner Moldex, through its alleged representative
Sayo, negotiated for the purchase of the subject properties, whereby Lot No. 2346 would be sold for
P1,132,080 and Lot No. 2527 for P511,320. Sayo then was able to successfully obtain from respondent
Ricardo the original copy of OCT Nos. 3322 and 3323. According to respondents, Sayo encashed the check
payment of petitioner Moldex for Lot No. 2346, while petitioner Anselmo Agero (Agero) encashed that for Lot
No. 2527.
Respondents further alleged that petitioners caused the cancellation and transfer of OCT Nos. 3322 and 3323
through allegedly falsified Deeds of Absolute Sale4 executed on 21 May 1996. They maintained that the deeds
were falsified, because these were executed after the deaths of Rafael and Ursula on 3 June 1993 and 17
October 1990, respectively.
In support of their claims, respondents attached to their Complaint photocopies of the Deed of Sale executed
by them and their parents, Rafael and Ursula; TCT Nos. NT-250333 and NT-250334; Certificates of Death of
Rafael and Ursula; and Deeds of Absolute Sale allegedly executed between spouses Rafael and Ursula and
petitioner Moldex.
In his Answer,5 petitioner Agero denied being an agent of respondent Moldex in the purchase of the subject
properties. He further denied having received money representing the purchase price of these lots.
Petitioner Moldex, meanwhile, alleged that Sayo and Agero were respondents? real estate brokers and offered
the subject properties for sale. It contended that respondents had executed Deeds of Absolute Sale on 21 May
1996, whereby Lot No. 2527 was sold for P 383,490 and Lot No. 2346 for P849,060. In consideration of the
sale of the two parcels of land, it issued on 13 May 1996 United Coconut Planters Bank (UCPB) Check No.
0000344050 in the sum of P1,132,080, which was endorsed by respondent Ricardo. The check was
subsequently deposited and the amount therein stated withdrawn. Petitioner Moldex further alleged that
respondent Ricardo voluntarily handed the titles over to Sayo, so that the latter could cause the transfer
thereof. Finally, it denied having any knowledge of or participation in the alleged falsified Deeds of Absolute
Sale. Petitioner Moldex attached to its Answer6 photocopies of the deeds7 it executed with respondent Ricardo,
as well as the UCPB check including the dorsal part thereof.8
On 31 May 2000, respondents filed an Amended Complaint impleading Atty. Elias Estrella, the Deputy
Register of Deeds of Cabanatuan City; Atty. Alfredo G. Ortaleza, the lawyer who notarized the alleged falsified
Deeds of Absolute Sale; and Jacinto Uy, the chairperson of the Board of Directors of petitioner Moldex.
Trial ensued. After the presentation of Ricardo as the first witness on 5 October 2000, Atty. Cecilio Suarez,
counsel for respondents, prayed for a resetting of the hearing for the presentation of another witness. The 14
December 2000 hearing was likewise reset for 18 January 2001 upon agreement of the parties. At the 18
January 2001 hearing, Judge Johnson L. Ballutay, the RTC executive judge, issued an Order, to wit:
When this case was called for the second time this morning, it was only defendant Levi P. Sayo and Atty.
Samuel Acorda for the Moldex Realty, Inc. and Atty. Lamberto Magbitang for the defendant Anselmo S. Agero
were in Court. There was no representation on the part of the plaintiffs [sic] neither for [sic] the plaintiffs
themselves were in Court.
In view of this, the presentation of the evidence for the plaintiffs is hereby considered closed and terminated
specially so that there was a promise on the part of the plaintiffs, through counsel, that a settlement will be
arrived at and a compromise agreement will be presented today, yet nothing was heard over [sic] on the part of
the plaintiffs as well as counsel.
WHEREFORE, premises considered, the defendants are hereby allowed to present evidence on February 9,
2001 at 8:30 o?clock in the morning.9
The 9 February 2001 hearing was likewise reset, because Atty. Suarez was again absent.10 He was again
absent at the 9 March 2001 hearing, prompting the court to reiterate its Order of 18 January 2001.11
On 13 March 2001, respondents filed a Motion for Reconsideration of the RTC Order dated 18 January 2001,
insisting that they were still to present two more witnesses.12
However, at the hearing scheduled on 16 March 2001, respondents and Atty. Suarez were absent yet again.13
The 5 April 2001 hearing was reset once more, upon agreement of the parties, in anticipation of an amicable
settlement.14
On 23 May 2001, Atty. Suarez moved for the cancellation of the hearing scheduled for 25 May 2001 because
of a previously scheduled one in another court. He further manifested that a compromise agreement had been
approved by respondents and may be submitted for the approval of the trial court once the agreement was
signed by the parties.15
During the 28 May 2001 hearing, Atty. Suarez and respondents were likewise absent. Petitioners objected to
the resetting of the hearing on account of the numerous postponements attributable to the nonappearance of
respondents and their counsel.16 On 26 June 2001, upon agreement of the parties, the hearing was reset for
31 July 2001,17 and had to be reset two times more for possible amicable settlement of the case.
Finally, with Atty. Suarez still failing to appear at the 12 November 2001 hearing, the RTC issued an Order
submitting the case for decision based on whatever evidence had been adduced.18
On 28 November 2001, the trial court issued another Order, this time stating that there being no formal offer of
evidence from petitioners, it thus resolved to set aside the previous Order. The court gave 15 days for
petitioners to submit their written formal offer of evidence from receipt of the Order, after which the case was to
be deemed submitted for resolution.19
On 28 January 2002, without waiting for the submission of the written formal offer of evidence, the RTC
rendered its assailed Decision, the dispositive portion of which states:
WHEREFORE, premises considered:
1. Declaring Transfer Certificate of Title Nos. NT-250333 and NT-250334 both of the Registry of Deeds
of Cabanatuan City in the name of Moldex Realty Inc. is hereby declared null and void;
2. Ordering jointly and severally the defendants to pay the plaintiffs the amount of P100,000.00
Philippine Currency, as actual, moral and exemplary damages; and,
3. To pay the plaintiffs the sum of P10,000.00 as attorney[?]s fees.
SO ORDERED.20
On the same day that petitioner Moldex received a copy of the Decision, 5 February 2002, it filed a
Manifestation asking for a clarification of the trial court?s Order dated 28 November 2001, which it received on
29 January 2002. It alleged that it was in a quandary over whether to file its formal offer of evidence,
considering that it had not yet presented any, and that the court had already ordered respondents?
presentation of evidence as closed and terminated without any formal offer. Moreover, petitioners stated:
5. That defendant Moldex Realty, Inc. is more than willing to present its evidence but the court asked
defendants [sic] counsel during the last hearing on November 12, 2001, if they wish to submit the case
for decision and they agreed, considering that plaintiffs had been delaying the proceedings by their
continuous absence and that they (plaintiffs) had not formally offered their evidence and rested their
case;
6. That for all intents and purposes of the law and pursuant to the Rules of Court, plaintiffs had not
presented evidence at all.21
After it received a copy of the RTC?s Decision, however, petitioner Moldex filed a Motion for
Reconsideration22 on 11 February 2002. It alleged that Judge Ballutay gravely erred and abused his discretion
when he rendered the assailed Decision before respondents had completed their evidence and rested their
case, and before defendants had the opportunity to adduce evidence; that the Decision was rendered without
the 15-day period given to petitioners to formally submit their evidence pursuant to the 28 November 2001
Order, which was received only on 29 January 2002; that the Decision was tantamount to a judgment on the
pleadings and/or summary judgement; and that the Decision was contrary to the law and the facts.
On 27 February 2002, the RTC issued an Order23 denying the Motion for Reconsideration for the following
reasons: counsel for petitioner Moldex, Atty. Samuel Acorda, was absent on several hearing dates; he
manifested in open court during the 31 May 2000 hearing that petitioner Moldex had nothing to do with the
case; the parties failed to submit a compromise agreement despite manifesting that they would; and the case
had already dragged on for a number of years.
On appeal, the CA affirmed the ruling of the trial court. It held that petitioners had been given ample time to
present their evidence, but failed to do so and in fact agreed to submit the case for resolution. It further ruled
that the trial court based its findings on the documents attached to the Complaint, pointing out that these
documents had been properly identified and marked during the testimony of Ricardo. Neither did the CA find
the RTC?s resolution of the case reprehensible despite the fact that the 15 days given to petitioners to submit
their formal offer of evidence had not yet lapsed.
Moreover, delving into the merits of the case, the CA held that petitioner Moldex failed to prove that it had
actually paid respondents the value of the subject properties. Furthermore, the appellate court held that the
Deeds of Absolute Sale, which were purportedly signed by Ursula and Rafael Villabona, were null and void.
Thus, the dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the assailed Decision, dated January 28, 2002, of the Regional Trial
Court (Branch 25, Cabanatuan City), is hereby AFFIRMED in toto.
SO ORDERED.24
Hence, this Petition.
To recapitulate, upon failure of respondents and their counsel, Atty. Suarez, to appear during the 18 January
2001 hearing, the RTC decreed that their presentation of evidence was considered closed and terminated. On
the same day, petitioners were ordered to present their evidence on 9 February 2001. However, the hearing
scheduled for that day was also cancelled and reset due to the absence of Atty. Suarez. Again, on 9 March
2001, he was absent; thus, the trial was rescheduled for 5 April 2001. Thereafter, the parties exerted efforts to
reach a compromise agreement, prompting the trial court to postpone the scheduled hearings. Neither did the
court resolve respondents? 13 March 2001 Motion for Reconsideration questioning the 18 January 2001
Order, which considered respondents? presentation of evidence closed and terminated.
It is clear from the records that since 18 January 2001, petitioners did not have the opportunity to present their
evidence through no fault of their own. Most of the time, counsel for respondents did not attend the scheduled
hearings. While it is true that some of the postponements were attributable to petitioners, these were agreed
upon by the parties in order to reach an amicable settlement. It must be emphasized that, in this jurisdiction, a
compromise agreement is highly encouraged as provided under the Civil Code. Articles 2029 and 2030 thereof
reads:
Art. 2029. The court shall endeavour to persuade the litigants in a civil case to agree upon some fair
compromise.
Art. 2030. Every civil action or proceeding shall be suspended:
(1) If willingness to discuss a possible compromise is expressed by one or both parties; or
(2) If it appears that one of the parties, before the commencement of the action or proceeding, offered
to discuss a possible compromise but the other party refused the offer.
The duration and terms of the suspension of the civil action or proceeding and similar matters shall be
governed by such provisions of the rules of court as the Supreme Court shall promulgate. Said rules of court
shall likewise provide for the appointment and duties of amicable compounders.
Furthermore, upon failure of the parties to present an amicable settlement, what the trial court should have
done was to continue the trial by resolving respondents? Motion for Reconsideration and allowing petitioners to
present their evidence in chief. Rather, the RTC immediately considered the case submitted for decision on 12
November 2001. After realizing that no formal offer of evidence had been submitted by petitioners, it recalled
the 12 November 2001 Order, through another Order dated 28 November 2001, and required petitioners to
submit their formal offer of evidence.
Clearly, the procedure adopted by the RTC was contrary to that provided in Rule 30, Section 5 of the Rules of
Court, which states:
SECTION 5. Order of trial. ? Subject to the provisions of Section 2 of Rule 31, and unless the court for special
reasons otherwise directs, the trial shall be limited to the issues stated in the pre-trial order and shall proceed
as follows:
(a) The plaintiff shall adduce evidence in support of his complaint;
(b) The defendant shall then adduce evidence in support of his defense, counterclaim, cross-claim and
third-party complaint;
(c) The third-party defendant, if any, shall adduce evidence of his defense, counterclaim, cross-claim
and fourth-party complaint;
(d) The fourth-party, and so forth, if any, shall adduce evidence of the material facts pleaded by them;
(e) The parties against whom any counterclaim or cross-claim has been pleaded, shall adduce
evidence in support of their defense, in the order to be prescribed by the court;
(f) The parties may then respectively adduce rebutting evidence only, unless the court, for good
reasons and in the furtherance of justice, permits them to adduce evidence upon their original case;
and
(g) Upon admission of the evidence, the case shall be deemed submitted for decision, unless the court
directs the parties to argue or to submit their respective memoranda or any further pleadings. If several
defendants or third-party defendants, and so forth, having separate defenses appear by different
counsel, the court shall determine the relative order of presentation of their evidence.
Moreover, without verifying the date of receipt by petitioners of the 28 November 2001 Order, and without
waiting for the submission of their formal offer of evidence, the RTC rendered its Decision. Not only the parties,
but even the court itself is bound by its own Order. The RTC further brushed aside petitioner Moldex?s
Manifestation filed on 5 February 2002 that it still had to present evidence to prove its case, as well as its
explanation that it only received the 28 November 2001 Order on 29 January 2002.
It is equally important to note that the trial court relied merely on the Annexes of photocopied documents
attached to the Complaint, without giving the same weight to those attached to petitioner Moldex?s Answer. On
the one hand, respondents claim that the titles to the subject properties were transferred by virtue of falsified
Deeds of Absolute Sale executed by their deceased parents in favor of petitioner Moldex. On the other hand,
petitioner Moldex alleges that the titles were transferred to its name by virtue of the Deeds of Absolute Sale
executed by respondents themselves. It further claims that payment had been made upon Ricardo?s
endorsement of the check, extinguishing its obligation to him. Clearly, there were still substantial issues that
needed to be threshed out that necessitated the presentation of evidence.
In Borje v. Court of First Instance of Misamis Occidental, Branch II,25 we said:
Verily, the above discussion shows the need of presentation of proof for the respective allegations of
the parties.1avvphi1 For the respondent Court to make a summary finding of lack of malice or bad faith on the
part of private respondents from those controverted facts and then decree the dismissal of the case is,
therefore, violative of due process. In view of the doubtful question of facts presented herein, respondent
court, in the exercise of sound discretion, should have refused to consider and decide in a summary
manner and should have allowed the parties to present proof in support of their respective stand. This
is because the right to a hearing, which is the right of the parties interested or affected to present their
respective cases and submit evidence in support thereof, is one of the primary cardinal rights of
litigants.
The importance of this right has been underscored in several cases of this nature decided by this Court. In one
of such cases, De Leon vs. Henson, his Court ruled that the dismissal of an action upon a motion to dismiss
constitutes a denial of due process, if, from a consideration of the pleadings, it appears that there are issues of
fact which cannot be decided without a trial of the case on the merits. Similarly, in Constantino vs. Estenzo,
citing Garanciang, et al. vs. Garanciang, et al. and Boñaga vs. Soler, this Court held as follows:
"x x x Summary or outright dismissals of actions are not proper where there are factual matters in
dispute which need presentation and appreciation of evidence. The demands of a fair, impartial and
wise administration of justice call for faithful adherence to legal precepts on procedure which ensure
to litigants the opportunity to present their evidence and secure a ruling on all the issues presented in
their respective pleadings. ?Short cuts? in judicial processes are to be avoided where they impede
rather than promote a judicious dispensation of justice."26 (Emphasis supplied)
It was therefore incumbent on the RTC to allow the presentation of petitioner?s evidence for the proper
disposal of the case.
In all, we find that the trial court violated the parties? due process when it proceeded with the trial contrary to
the procedure provided by the Rules of Court. It failed to resolve respondents? Motion for Reconsideration
questioning the 18 January 2001 Order and prevented petitioners from presenting their evidence in chief.
WHEREFORE, in view of the foregoing, the 6 October 2006 Decision of the Court of Appeals in CA-G.R. CV
No. 74435 and the 28 January 2002 Decision and 27 February 2002 Order of Branch 25 of the Regional Trial
Court of Cabanatuan City in Civil Case No. 3276-AF are hereby REVERSED and SET ASIDE.
Let this case be remanded to Branch 25 of the Regional Trial Court of Cabanatuan City, which is hereby
ORDERED to resolve respondents? Motion for Reconsideration dated 6 March 2001 and to proceed with the
trial thereafter, as provided under the Rules of Court.
SO ORDERED.
SOLEDAD DALTON, G.R. No. 172577

Petitioner,

Present:

CARPIO, J., Chairperson,

NACHURA,

- versus - PERALTA,

ABAD, and

MENDOZA, JJ.

FGR REALTY AND DEVELOPMENT

CORPORATION, FELIX NG,

NENITA NG, and FLORA R. DAYRIT Promulgated:

or FLORA REGNER,

Respondents. January 19, 2011

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

RESOLUTION

CARPIO, J.:

The Case

This is a petition1 for review on certiorari under Rule 45 of the Rules of Court. The petition challenges the 9 November
2005 Decision2 and 10 April 2006 Resolution3 of the Court of Appeals in CA-G.R. CV No. 76536. The Court of Appeals
affirmed the 26 February 2002 Decision4 of the Regional Trial Court (RTC), Judicial Region 7, Branch 13, Cebu City, in
Civil Case No. CEB 4218.
 The Facts

Flora R. Dayrit (Dayrit) owned a 1,811-square meter parcel of land located at the corner of Rama Avenue and Velez
Street in Cebu City. Petitioner Soledad Dalton (Dalton), ClementeSasam,
Romulo Villalonga, Miguela Villarente, Aniceta Fuentes, Perla Pormento, Bonifacio Cabajar, Carmencita Yuson, Angel
Ponce, Pedro Regudo, Pedro Quebedo, Mary Cabanlit,Marciana Encabo and Dolores Lim (Sasam, et al.) leased portions
of the property.

In June 1985, Dayrit sold the property to respondent FGR Realty and Development Corporation (FGR). In August
1985, Dayrit and FGR stopped accepting rental payments because they wanted to terminate the lease agreements with
Dalton and Sasam, et al.

In a complaint5 dated 11 September 1985, Dalton and Sasam, et al. consigned the rental payments with the RTC. They
failed to notify Dayrit and FGR about the consignation. In motions dated 27 March 1987,6 10 November 1987,7 8 July
1988,8 and 28 November 1994,9 Dayrit and FGR withdrew the rental payments. In their motions, Dayrit and FGR reserved
the right to question the validity of the consignation.

Dayrit, FGR and Sasam, et al. entered into compromise agreements dated 25 March 199710 and 20 June 1997.11 In the
compromise agreements, they agreed to abandon all claims against each other. Dalton did not enter into a compromise
agreement with Dayrit and FGR.

The RTC’s Ruling

In its 26 February 2002 Decision, the RTC dismissed the 11 September 1985 complaint and ordered Dalton to vacate the
property. The RTC held that:

Soledad Dalton built a house which she initially used as a dwelling and store space. She vacated the premises
when her children got married. She transferred her residence near F. Ramos Public Market, Cebu City.

She constructed the 20 feet by 20 feet floor area house sometime in 1973. The last monthly rental was P69.00.
When defendants refused to accept rental and demanded vacation of the premises, sheconsignated [sic] her
monthly rentals in court.

xxxx
 It is very clear from the facts that there was no valid consignation made.

The requisites of consignation are as follows:

1. The existence of a valid debt.

2. Valid prior tender, unless tender is excuse [sic];

3. Prior notice of consignation (before deposit)

4. Actual consignation (deposit);

5. Subsequent notice of consignation;

Requisite Nos. 3 and 5 are absent or were not complied with. It is very clear that there were no prior notices of
consignation (before deposit) and subsequent notices of consignation (after deposit)

Besides, the last deposit was made on December 21, 1988. At the time Dalton testified on December 22, 1999,
she did not present evidence of payment in 1999. She had not, therefore, religiously paid her monthly obligation.

By clear preponderance of evidence, defendants have established that plaintiff was no longer residing
at Eskina Banawa at the time she testified in court. She vacated her house and converted it into a store or business
establishment. This is buttressed by the testimony of Rogelio Capacio, the court’s appointed commissioner, who
submitted a report, the full text of which reads as follows:

REPORT AND/OR OBSERVATION

“The store and/or dwelling subject to ocular inspection is stuated [sic] on the left portion of the road which is
about fifty-five (55) meters from the corner of Banawa-Guadalupe Streets, when turning right heading towards
the direction of Guadalupe Church, if travelling from the Capitol Building.
 I observed that when we arrived at the ocular inspection site, Mrs. Soledad Dalton with the use of a key opened
the lock of a closed door. She claimed that it was a part of the dwelling which she occupies and was utilized as a
store. There were few saleable items inside said space.”

Soledad Dalton did not take exception to the said report.

Two witnesses who were former sub-lessees testified and clearly established that Mrs. Dalton use the house for
business purposes and not for dwelling.12

Dalton appealed to the Court of Appeals.

The Court of Appeals’ Ruling

In its 9 November 2005 Decision, the Court of Appeals affirmed the RTC’s 26 February 2002 Decision. The Court of
Appeals held that:

After a careful review of the facts and evidence in this case, we find no basis for overturning the decision of the
lower court dismissing plaintiffs-appellants’ complaint, as we find that no valid consignation was made by the
plaintiff-appellant.

Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor
cannot accept or refuses to accept payment and generally requires a prior tender of payment. In order that
consignation may be effective, the debtor must show that: (1) there was a debt due; (2) the consignation of the
obligation had been made because the creditor to whom tender of payment was made refused to accept it, or
because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount
due or because the title to the obligation has been lost; (3) previous notice of the consignation had been given to
the person interested in the performance of the obligation; (4) the amount due was placed at the disposal of the
court; and (5) after the consignation had been made the person interested was notified thereof. Failure in any of
these requirements is enough ground to render a consignation ineffective.

Consignation is made by depositing the proper amount to the judicial authority, before whom the tender of
payment and the announcement of the consignation shall be proved. All interested parties are to be notified of the
consignation. It had been consistently held that compliance with these requisites is mandatory.

No error, therefore, can be attributed to the lower court when it held that the consignation made by the plaintiff-
appellant was invalid for failure to meet requisites 3 and 5 of a valid consignation (i.e., previous notice of the
consignation given to the person interested in the performance of the obligation and, after the consignation had
been made, the person interested was notified thereof).
Plaintiff-appellant failed to notify defendants-appellees of her intention to consign the amount due to them as
rentals. She, however, justifies such failure by claiming that there had been substantial compliance with the said
requirement of notice upon the service of the complaint on the defendants-appellees together with the summons.

We do not agree with such contention.

The prevailing rule is that substantial compliance with the requisites of a valid consignation is not enough.
In Licuanan vs. Diaz, reiterating the ruling in Soco vs. Militante, the Supreme Court had the occasion to rule thus:

“In addition, it must be stated that in the case of Soco v. Militante (123 SCRA 160, 166-167 [1983]), this Court
ruled that the codal provisions of the Civil Code dealing with consignation (Articles 1252-1261) should be
accorded mandatory construction —

We do not agree with the questioned decision. We hold that the essential requisites of a valid consignation must
be complied with fully and strictly in accordance with the law. Articles 1256-1261, New Civil Code. That these
Articles must be accorded a mandatory construction is clearly evident and plain from the very language of
the codal provisions themselves which require absolute compliance with the essential requisites therein provided.
Substantial compliance is not enough for that would render only directory construction of the law. The use of the
words “shall” and “must [sic] which are imperative, operating to impose a duty which may be enforced, positively
indicated that all the essential requisites of a valid consignation must be complied with. The Civil Code Articles
expressly and explicitly direct what must be essentially done in order that consignation shall be valid and
effectual...”

Clearly then, no valid consignation was made by the plaintiff-appellant for she did not give notice to the
defendants-appellees of her intention to so consign her rental payments. Without any announcement of the
intention to resort to consignation first having been made to persons interested in the fulfillment of the obligation,
the consignation as a means of payment is void.

As to the other issues raised by the plaintiff-appellant in her second and third assigned errors, we hold that the
ruling of the lower court on such issues is supported by the evidence adduced in this case.

That plaintiff-appellant is not residing at the leased premises in Eskina Banawa and that she is using the same for
business purposes, not as dwelling place, is amply supported by the testimony of two of plaintiff-appellant’s sub-
lessees. The Commissioner’s Report submitted by Rogelio Capacio, who was commissioned by the lower court to
conduct an ocular inspection of the leased premises, further lends support to the lower court’s findings. On the
other hand, plaintiff-appellant only has her self-serving claims that she is residing at the leased premises
in Eskina Banawa to prove her continued use of the leased premises as dwelling place.
 There is thus no merit to plaintiff-appellant’s fourth assigned error. The lower court acted within its authority in
ordering the plaintiff-appellant to vacate the leased premises. The evidence shows that plaintiff-appellant had
failed to continuously pay the rentals due to the defendants-appellees. It was therefore within the powers of the
lower court to grant such other relief and remedies equitable under the circumstances.

In sum, there having been no valid consignation and with the plaintiff-appellant having failed to pay the rentals
due to the defendants-appellees, no error can be attributed to the lower court in rendering its assailed decision.13

Hence, the present petition. Dalton raises as issues that the Court of Appeals erred in ruling that (1) the consignation was
void, and (2) Dalton failed to pay rent.

The Court’s Ruling

The petition is unmeritorious.

Dalton claims that, “the issue as to whether the consignation made by the petitioner is valid or not for lack of notice has
already been rendered moot and academic with the withdrawal by the private respondents of the amounts consigned and
deposited by the petitioner as rental of the subject premises.”14

The Court is not impressed. First, in withdrawing the amounts consigned, Dayrit and FGR expressly reserved the right to
question the validity of the consignation. In Riesenbeck v. Court of Appeals,15 the Court held that:

A sensu contrario, when the creditor’s acceptance of the money consigned is conditional and with
reservations, he is not deemed to have waived the claims he reserved against his debtor. Thus, when the
amount consigned does not cover the entire obligation, the creditor may accept it, reserving his right to the
balance (Tolentino, Civil Code of the Phil., Vol. IV, 1973 Ed., p. 317, citing 3 Llerena 263). The same factual
milieu obtains here because the respondent creditor accepted with reservation the amount consigned in court
by the petitioner-debtor. Therefore, the creditor is not barred from raising his other claims, as he did in his
answer with special defenses and counterclaim against petitioner-debtor.

As respondent-creditor’s acceptance of the amount consigned was with reservations, it did not completely
extinguish the entire indebtedness of the petitioner-debtor. It is apposite to note here thatconsignation is
completed at the time the creditor accepts the same without objections, or, if he objects, at the time the
court declares that it has been validly made in accordance with law.16(Emphasis supplied)

Second, compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of the
requisites will render the consignation void. Substantial compliance is not enough.
In Insular Life Assurance Company, Ltd. v. Toyota Bel-Air, Inc.,17 the Court enumerated the requisites of a valid
consignation: (1) a debt due; (2) the creditor to whom tender of payment was made refused without just cause to accept
the payment, or the creditor was absent, unknown or incapacitated, or several persons claimed the same right to collect, or
the title of the obligation was lost; (3) the person interested in the performance of the obligation was given notice
before consignation was made; (4) the amount was placed at the disposal of the court; and (5) the person interested in
the performance of the obligation was given notice after the consignation was made.

Articles 1257 and 1258 of the Civil Code state, respectively:

Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be
announced to the persons interested in the fulfillment of the obligation.

The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which
regulate payment.

Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority,
before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation
in other cases.

The consignation having been made, the interested parties shall also be notified thereof. (Emphasis supplied)

The giving of notice to the persons interested in the performance of the obligation is mandatory. Failure to notify the
persons interested in the performance of the obligation will render the consignation void. In Ramos v. Sarao,18 the Court
held that, “All interested parties are to be notified of the consignation. Compliance with [this requisite] is
mandatory.”19 InValdellon v. Tengco,20 the Court held that:

Under Art. 1257 of our Civil Code, in order that consignation of the thing due may release the obligor, it
must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall
be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. In said
Article 1258, it is further stated that the consignation having been made, the interested party shall also be
notified thereof.21 (Emphasis supplied)

In Soco v. Militante, et al.,22 the Court held that:

 We hold that the essential requisites of a valid consignation must be complied with fully and strictly in
accordance with the law, Articles 1256 to 1261, New Civil Code. That these Articles must be accorded a
mandatory construction is clearly evident and plain from the very language of the codal provisions themselves
which require absolute compliance with the essential requisites therein provided. Substantial compliance is not
enough for that would render only a directory construction to the law. The use of the words “shall” and
“must” which are imperative, operating to impose a duty which may be enforced, positively indicate that all the
essential requisites of a valid consignation must be complied with. The Civil Code Articles expressly and
explicitly direct what must be essentially done in order that consignation shall be valid and
effectual.23 (Emphasis supplied)

Dalton claims that the Court of Appeals erred in ruling that she failed to pay rent. The Court is not impressed. Section 1,
Rule 45 of the Rules of Court states that petitions for review on certiorari “shall raise only questions of law which must be
distinctly set forth.” In Pagsibigan v. People,24 the Court held that:

A petition for review under Rule 45 of the Rules of Court should cover only questions of law. Questions of fact
are not reviewable. A question of law exists when the doubt centers on what the law is on a certain set of facts. A
question of fact exists when the doubt centers on the truth or falsity of the alleged facts.

There is a question of law if the issue raised is capable of being resolved without need of reviewing the probative
value of the evidence. The issue to be resolved must be limited to determining what the law is on a certain set of
facts. Once the issue invites a review of the evidence, the question posed is one of fact.25

Whether Dalton failed to pay rent is a question of fact. It is not reviewable.

The factual findings of the lower courts are binding on the Court. The exceptions to this rule are (1) when there is grave
abuse of discretion; (2) when the findings are grounded on speculation; (3) when the inference made is manifestly
mistaken; (4) when the judgment of the Court of Appeals is based on a misapprehension of facts; (5) when the factual
findings are conflicting; (6) when the Court of Appeals went beyond the issues of the case and its findings are contrary to
the admissions of the parties; (7) when the Court of Appeals overlooked undisputed facts which, if properly considered,
would justify a different conclusion; (8) when the facts set forth by the petitioner are not disputed by the respondent; and
(9) when the findings of the Court of Appeals are premised on the absence of evidence and are contradicted by the
evidence on record.26 Dalton did not show that any of these circumstances is present.

WHEREFORE, the Court DENIES the petition. The Court AFFIRMS the 9 November 2005 Decision and 10 April
2006 Resolution of the Court of Appeals in CA-G.R. CV No. 76536.

SO ORDERED.
RICARDO B. BANGAYAN, G.R. No. 149193
Petitioner,
Present:

CARPIO,*
CARPIO MORALES, J.,
- versus – Chairperson,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

RIZAL COMMERCIAL BANKING Promulgated:

CORPORATION AND PHILIP SARIA,
April 4, 2011
Respondents,

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

DECISION
SERENO, J.:

Before this Court is a Rule 45 Petition[1] questioning the Court of Appeals’ affirmance of a trial court’s dismissal of
a complaint for damages filed by a depositor against a bank for the dishonor of seven checks and for the wrongful
disclosure of information regarding the depositor’s account contrary to the Bank Secrecy Act (Republic Act No. 1405).[2]

The Facts

Petitioner Ricardo Bangayan had a savings account and a current account with one of the branches of respondent
Rizal Commercial Banking Corporation (RCBC).[3]These two accounts had an “automatic transfer” condition wherein
checks issued by the depositor may be funded by any of the two accounts.[4]

On 26 June 1992, petitioner Bangayan purportedly signed a Comprehensive Surety Agreement (the Surety
Agreement)[5] with respondent RCBC in favor of nine corporations.[6] Under the Surety Agreement, the funds in petitioner
Bangayan’s accounts with respondent RCBC would be used as security to guarantee any existing and future loan
obligations, advances, credits/increases and other obligations, including any and all expenses that these corporations may
incur with respondent bank.

Petitioner Bangayan contests the veracity and due authenticity of the Surety Agreement on the ground that his
signature thereon was not genuine, and that the agreement was not notarized. [7] Respondent RCBC refutes this claim,
although it admitted that it was exceptional for a perfected Surety Agreement of the bank to be without a signature of the
witness and to remain unnotarized. Mr. Eli Lao, respondent bank’s Group Head of Account Management, however,
explained that the bank was still in the process of “completing” the Surety Agreement at that time. [8]

The following are the transactions of respondent RCBC in relation to the Surety Agreement vis-à-vis the petitioner
Bangayan.

On 26 June 1992 (the same day that the Surety Agreement was allegedly signed), two of the corporations whose
performance were guaranteed therein – LBZ Commercial and Peaks Marketing – were issued separate commercial letters
of credit[9] by respondent RCBC for the importation of PVC resin from Korea. Three days later or on 29 June 1992,
respondent RCBC issued a third letter of credit[10] in favor of another corporation, Final Sales Enterprise, whose
obligations to respondent bank were likewise secured by petitioner Bangayan under the Surety Agreement. Mr. Lao
claimed that respondent bank would not have extended the letters of credit in favor of the three corporations without
petitioner Bangayan acting as surety.[11]
 On 26 August 1992, a fourth letter of credit[12] was issued by respondent RCBC for the importation of materials
from Korea, this time by Lotec Marketing, another corporation enumerated in the Surety Agreement. The Korea
Exchange Bank was designated as the advising bank for Lotec Marketing’s letter of credit.[13]

On 15 September 1992, after the arrival of the shipments of the first three corporations from Korea, the Bureau of
Customs (BOC) demanded – via letter of the same date – from respondent RCBC, which facilitated the three letters of
credit, the remittance of import duties in the amount of thirteen million two hundred sixty-five thousand two hundred
twenty-five pesos (PhP13,265,225).[14]

Mr. Lao of respondent RCBC allegedly called petitioner Bangayan and informed him of the BOC’s demand for
payment of import duties.[15] According to Mr. Lao, petitioner allegedly replied that he understood the situation and
assured Mr. Lao that he was doing everything he could to solve the problem.[16]

Considering the BOC’s demand, respondent RCBC decided to put on hold the funds in petitioner Bangayan’s
accounts by virtue of the authority given to it by petitioner under the Surety Agreement. [17] Respondent RCBC reasoned
that as the collecting agent, it had to earmark sufficient funds in the account of petitioner Bangayan (the surety) to satisfy
the tax obligations of the three corporations, in the event that they would fail to pay the same. [18] Thus, respondent bank
refused payments drawn from petitioner Bangayan’s deposits, unless there was an order from the BOC. [19] Petitioner
Bangayan, however, contests this action since respondent bank did not present any writ of garnishment that would
authorize the freezing of his funds.[20]

On 18 September 1992, two of the seven checks that were drawn against petitioner Bangayan’s Current Account
No. 0109-8232-5 were presented for payment to respondent RCBC, namely:

RCBC Check No. Date of Paid To Amount

Presentment
98799[21] 18 Sept 1992 United Pacific Enterprises PhP3,650,000
938000[22] 18 Sept 1992 United Pacific Enterprises PhP4,500,000
TOTAL PhP8,150,000

On the same day, the amounts of three million six hundred fifty thousand pesos (PhP3,650,000) and four million
five hundred thousand pesos (PhP4,500,000)[23] were successively debited from the said current account, as shown in
petitioner Bangayan’s passbook for the current account.[24] Alongside these two debit entries in the passbook was the
transaction reference code “DFT,” which apparently stands for “debit fund transfer.”[25]

On 21 September 1992, the same amounts in the two checks were credited to petitioner Bangayan’s current
account, under the transaction reference code “CM,” that stands for “credit memo.”[26] Moreover, petitioner Bangayan’s
Checks Nos. 93799 and 93800 issued in favor of United Pacific Enterprises were also returned by respondent RCBC with
the notation “REFER TO DRAWER.”[27]

On the same day that the checks were referred to petitioner Bangayan by respondent RCBC, United Pacific
Enterprises, through Mr. Manuel Dente, demanded from petitioner Bangayan the payment of eight million one hundred
fifty thousand pesos (PhP8,150,000), which corresponded to the amounts of the two dishonored checks that were issued to
it.[28] Nothing more has been alleged by petitioner on this particular matter.

On 24 September 1992, the Korea Exchange Bank (the advising bank) informed respondent RCBC through a telex
that it had already negotiated the fourth letter of credit for Lotec Marketing’s shipment, which amounted to seven hundred
twelve thousand eight hundred U.S. dollars (US$712,800) and, thereafter, claimed reimbursement from respondent
RCBC.[29]

This particular shipment by Lotec Marketing became the subject matter of an investigation conducted by the
Customs Intelligence & Investigation Service of the BOC, according to respondent bank. [30] Both parties agreed that the
BOC likewise conducted an investigation covering the importation of the three corporations – LBZ Commercial, Peaks
Marketing and Final Sales Enterprise - that were opened through the letters of credit issued by respondent RCBC.[31]
 On 09 October 1992, respondent Philip Saria, who was an Account Officer of respondent bank’s Binondo Branch,
signed and executed a Statement before the BOC, with the assistance of Atty. Arnel Z. Dolendo of respondent RCBC, on
the bank’s letters of credit issued in favor of the three corporations.[32] Petitioner Bangayan cited this incident as the basis
for the allegation in the Complaint he subsequently filed that respondent RCBC had disclosed to a third party (the BOC)
information concerning the identity, nature, transaction and deposits including details of transaction related to and
pertaining to his deposits with the said bank, in violation of the Bank Secrecy Act.[33] It must be pointed out that the trial
court found that “no evidence was introduced by (petitioner Bangayan) to substantiate his claim that (respondent RCBC)
gave any classified information” in violation of the Bank Secrecy Law. [34] Thus, the trial court considered the alleged
disclosure of confidential bank information by respondent RCBC as a non-issue.[35]

On the same date, when Lotec Marketing’s loan obligation under the fourth letter of credit became due and
demandable,[36] respondent RCBC issued an advice that it would debit the amount of twelve million seven hundred sixty-
two thousand six hundred pesos (PhP12,762,600) from petitioner Bangayan’s current account to partially satisfy the
guaranteed corporation’s loan.[37] At that time, petitioner Bangayan’s passbook for his current account showed that it had
funds of twelve million seven hundred sixty-two thousand six hundred forty-five and 64/100 pesos
(PhP12,762,645.64).[38]

On 12 October 1992, the amount of twelve million seven hundred sixty-two thousand and six hundred pesos
(PhP12,762,600) was debited from petitioner Bangayan’s current account, consequently reducing the funds to forty-five
and 64/100 pesos (PhP45.64).[39] Respondent RCBC claimed that the former amount was debited from petitioner’s
account to partially pay Lotec Marketing’s outstanding obligation which stood at eighteen million forty-seven thousand
thirty-three and 60/100 pesos (PhP18,047,033.60).[40]Lotec Marketing, thereafter, paid the balance of its obligation to
respondent RCBC in the amount of five million three hundred thirty-eight thousand eight hundred nineteen and 20/100
pesos (PhP5,338,819.20)[41] under the fourth letter of credit.

On 13 October 2010, the three corporations earlier adverted to paid the corresponding customs duties demanded by
the BOC.[42] Receipts were subsequently issued by the BOC for the corporations’ payments, copies of which were
received by Atty. Nelson Loyola, counsel of petitioner Bangayan in this case.[43] The trial court considered this as payment
by petitioner of the three corporations’ obligations for custom duties. [44] Thereafter, respondent RCBC released to the
corporations the necessary papers for their PVC resin shipments which were imported through the bank’s letters of
credit.[45]

On 15 October 2010, five other checks of petitioner Bangayan were presented for payment to respondent RCBC,
namely:

RCBC Check No. Date of Paid To Amount

Presentment
938011[46] 15 Oct 1992 Simplex Merchandising PhP1,200,000
938012[47] 15 Oct 1992 Simplex Merchandising PhP1,260,000
938013[48] 15 Oct 1992 Simplex Merchandising PhP1,180,000
938014[49] 15 Oct 1992 Hinomoto Trading Company PhP1,052,000
938015[50] 15 Oct 1992 Hinomoto Trading Company PhP982,000
TOTAL AMOUNT PhP5,674,000

On 16 October 1992, these five checks were also dishonored by respondent RCBC on the ground that they had
been drawn against insufficient funds (“DAIF”) and were subsequently returned.[51]

On 20 October 1992, Hinomoto Trading Company, one of the payees for two of the dishonored
checks,[52] demanded that petitioner Bangayan make good on his payments.[53] On 21 October 1992, the other payee of the
three other dishonored checks,[54] Simplex Merchandising, likewise made a final demand on petitioner to replace the
dishonored instruments.[55]

On 23 October 1992, petitioner Bangayan, through counsel, demanded that respondent bank restore all the funds
to his account and indemnify him for damages.[56]
 On 30 October 1992, nineteen thousand four hundred twenty-seven and 15/100 pesos (PhP19,427.15) was
credited in petitioner Bangayan’s current account, with the transaction reference code “INT” referring to
interest.[57] Petitioner explains that even if the outstanding balance at that time was reduced, this interest was earned based
on the average daily balance of the account for the quarter and not just on the balance at that time, which was forty-five
and 64/100 pesos (PhP45.64).[58]

The Case in the Trial Court

On 09 November 1992, petitioner Bangayan filed a complaint for damages against respondent
RCBC.[59] Subsequently, respondent RCBC filed an Answer dated 02 December 1992 with compulsory counter-
claims.[60] On 12 January 1993, respondent RCBC filed a Motion for Leave to File Attached Amended Answer and
Amended Answer.[61]

Petitioner Bangayan argues that at the time the dishonored checks were issued, there were sufficient funds in his
accounts to cover them;[62] that he was informed by personnel of respondent RCBC that his accounts were garnished, but
no notice or writ of garnishment was ever shown to him;[63] and that his name and reputation were tarnished because of the
dishonor of checks that were issued in relation to his automotive business.[64]

In its defense, respondent RCBC claims that petitioner Bangayan signed a Surety Agreement in favor of several
companies that defaulted in their payment of customs duties that resulted in the imposition of a lien over the accounts,
particularly for the payment of customs duties assessed by the Bureau of Customs. [65] Respondent bank further claimed
that it had funded the letter of credit[66] availed of by Lotec Marketing to finance the latter’s importation with the account
of petitioner Bangayan, who agreed to guarantee Lotec Marketing’s obligations under the Surety Agreement; and, that
respondent bank applied petitioner Bangayan’s deposits to satisfy part of Lotec Marketing’s obligation in the amount of
twelve million seven hundred sixty-two thousand and six hundred pesos (PhP12,762,600), which resulted in the depletion
of the bank accounts.[67]

Petitioner Bangayan also alleged that respondent RCBC disclosed to a third party (the BOC) classified information
about the identity and nature of the transactions and deposits, in violation of the Bank Secrecy Act. Respondent RCBC
counters that no confidential information on petitioner’s bank accounts was disclosed.

Availing himself of discovery proceedings in the lower court, petitioner Bangayan filed a Request for
Admission[68] and Request for Answer to Written Interrogatories,[69] to which respondent RCBC filed the corresponding
Answers and Objections to Interrogatories[70] and Response to Request for Admission.[71]

During the presentation of complainant’s evidence, petitioner Bangayan, Atty. Randy Rutaquio, respondent Saria
and Manuel Dantes testified in open court. Petitioner Bangayan thereafter filed a Formal Offer of Evidence. [72]

On the other hand, respondent RCBC presented Mr. Lao as its lone defense witness. Before the termination of Mr.
Lao’s direct examination, respondent RCBC filed a Motion to Inhibit Presiding Judge Pedro Santiago, [73] who
subsequently denied the motion.[74] The Order denying the Motion to Inhibit was the subject matter of petitions filed by
respondent RCBC in the Court of Appeals[75] and subsequently in this Court, which were all dismissed.

In the meantime, when respondent RCBC’s witness (Mr. Lao) failed to appear at the hearing, Judge Santiago
ordered that Mr. Lao’s testimony be stricken off the record despite respondent bank’s motion to have the case
reset.[76] After the appellate proceedings for respondent RCBC’s Petition as regards the Motion to Inhibit, however, Judge
Santiago set aside his earlier Order and reinstated the testimony of Mr. Lao, subject to cross-examination.[77] Petitioner
Bangayan took exception to the Order reinstating Mr. Lao’s testimony, but continued to conduct his cross examination
with a reservation to raise the Order in the appellate courts.[78]

Respondent RCBC thereafter filed its Formal Offer of Exhibits.[79]

On 17 October 1994, the trial court rendered a Decision, the dispositive portion of which reads:

“WHEREFORE, premises above considered, plaintiff not having proved that defendant
RCBC acted wrongly, maliciously and negligently in dishonoring his 7 checks, nor has the bank given
any confidential informations against the plaintiff in violation of R.A. 1405 and the defendant bank
 having established on the contrary that plaintiff has no sufficient funds for his said checks, the instant
complaint is hereby DISMISSED.”[80] (Emphasis supplied)

When his omnibus motion[81] to have the Decision reconsidered was denied,[82] petitioner Bangayan filed a notice
of appeal.[83]

The Ruling of the Court of Appeals

After petitioner Bangayan[84] and respondent RCBC[85] filed their respective appeal briefs, the Court of Appeals
affirmed the trial court’s decision in toto.[86] The appellate court found that the dishonor of the checks by respondent
RCBC was not without good reason, considering that petitioner Bangayan’s account had been debited owing to his
obligations as a surety in favor of several corporations. Thus, the Court Appeals found “there was no ‘dishonest purpose,’
or ‘some moral obliquity,’ or ‘conscious doing of wrong,’ or ‘breach of a known duty,’ or ‘some motive or interest,’ or ‘ill
will’ that ‘partakes (sic) nature of fraud’ that can be attributed” to respondent RCBC. [87] It likewise ruled that petitioner
Bangayan cannot raise the question as to the genuineness, authenticity and due execution of the Surety Agreement for the
first time on appeal.[88]

This Decision of the appellate court is the subject of the instant Petition for Review on Certiorari filed by
petitioner Bangayan under Rule 45 of the Rules of Court.[89]

Assignment of Errors

Petitioner Bangayan makes the following assignment of errors:

A. THE COURT OF APPEALS ACTED WITH GROSS

ARBITRARINESS AND IN BLATANT VIOLATION OF

THE CONSTITUTIONAL RIGHTS OF THE PETITITONER TO DUE PROCESS, AND A FAIR

TRIAL:

(1) WHEN IT REINSTATED THE TESTIMONY OF ELI LAO ALREADY

STRICKEN OFF THE RECORDS UPON PRIOR ORDER OF THE RTC AFFIRMED
BY THE COURT OFAPPEALS AND CONFIRMED BY THE SUPREME COURT;

(2) WHEN IT SANCTIONED THE CAVALIER ACT OF RESPONDENTS IN

DEMEANING THE RULES ON DISCOVERY PROCEDURE;

(3) WHEN IT RENDERED A DECISION WHICH IS CONTRARY TO THE

FACTS AND THE EVIDENCE PRESENTED AT THE TRIAL; and

(4) WHEN IT REFUSED TO APPLY THE LAWS SQUARELY IN POINT ON

THE MATTER IN CONTROVERSY.

B. THE HONORABLE COURT OF APPEALS DECIDED THIS CASE IN A WAY NOT IN

ACCORD WITH THE APPLICABLE DECISIONS OF THE HONORABLE SUPREME COURT;

C. THERE ARE SPECIAL AND IMPORTANT REASONS THAT REQUIRE A REVIEW OF THE
CA DECISION;

D. THE DECISION OF THE COURT OF APPEALS … IS NEITHER JUST NOR IN ACCORD

WITH THE RULES OF LAW AND JURISPRUDENCE NOR IS IT EQUITABLE AND IT IGNORES
THE PREVIOUS RULINGS OF THE SUPREME COURT IN EARLIER PRECEDENT CASES.[90]

The Issues
 A. Whether respondent RCBC was justified in dishonoring the checks, and, consequently, whether petitioner
Bangayan is entitled to damages arising from the dishonor.

B. Whether there was reversible error on the part of the lower court in allowing the testimony of Mr. Lao,
despite its earlier Order to strike off the testimony.

C. Whether respondent RCBC violated the Bank Secrecy Act.

 The Ruling of the Court

Preliminarily, petitioner Bangayan raises questions of fact[91] regarding the authenticity of the Surety Agreement
and the events leading up to the dishonor of the seven checks. However, petitions for review on certiorari under Rule 45
are limited only to pure questions of law[92] and, generally, questions of fact are not reviewable[93] since this Court is not a
trier of facts.[94] Although respondent RCBC briefly treated this procedural matter,[95] the Court finds that the instant
Petition is indeed subject to dismissal because the determination of questions of fact is improper in a Rule 45
proceeding.[96] In any case, even if procedural rules were to be relaxed at this instance, the substantial merits of petitioner
Bangayan’s cause is nonetheless insufficient to reverse the decisions of the trial and appellate courts, as will be discussed
in detail below.

A. There was no malice or bad faith on the part of respondent RCBC in the
dishonor of the checks, since its actions were justified by petitioner
Bangayan’s obligations under the Surety Agreement.

The Court is unconvinced by petitioner Bangayan’s arguments that respondent RCBC acted with malice or bad faith
in dishonoring the seven checks, which would entitle him to an award of damages.

At the heart of the controversy is the Surety Agreement that secured the obligations of the nine corporations in favor
of respondent RCBC.

Petitioner Bangayan denies the genuineness, authenticity and due execution of the alleged agreement on the
following grounds: (a) his signature on the document is not genuine; (b) the Surety Agreement was never notarized; and
(c) the alleged accounts, being guaranteed, appear in a separate piece of paper that does not bear his signature or
conformity.[97]

Both the trial and the appellate courts gave credence to the Surety Agreement, which categorically guaranteed the
four corporations’ obligations to respondent RCBC under the letters of credit. Petitioner Bangayan did not provide
sufficient reason for the Court to reverse these findings. The evidence on record supports the conclusion arrived at by the
lower court and the Court of Appeals.

First, aside from his bare allegations, petitioner Bangayan failed to establish how his signature in the Surety
Agreement was forged and therefore, not genuine.

Before a private document is offered as authentic, its due execution and authenticity must be proved: (a) either by
anyone who has seen the document executed or written; or (b) by evidence of the genuineness of the signature or
handwriting of the maker.[98] As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing
evidence.[99] The burden of proof rests on the party alleging forgery.[100] Mere allegation of forgery is not evidence.[101]

Mr. Lao, witness for respondent RCBC, identified the Surety Agreement[102] as well as the genuineness of
petitioner Bangayan’s signature therein using petitioner’s signature cards in his bank accounts.[103] The trial and the
appellate courts gave due credence to the identification and authentication of the Surety Agreement made by Mr. Lao. [104]

In Deheza-Inamarga v. Alano,[105] the Court ruled that:

The question of forgery is one of fact. It is well-settled that when supported by substantial
evidence or borne out by the records, the findings of fact of the Court of Appeals are conclusive and
binding on the parties and are not reviewable by this Court.

It is a hornbook doctrine that the findings of fact of trial courts are entitled to great weight on
appeal and should not be disturbed except for strong and valid reasons. It is not a function of this Court to
analyze and weigh evidence by the parties all over again. Our jurisdiction is limited to reviewing errors of
law that might have been committed by the Court of Appeals. Where the factual findings of the trial
court are affirmed in toto by the Court of Appeals as in this case, there is great reason for not
 disturbing such findings and for regarding them as not reviewable by this Court. (Emphasis
supplied)

Furthermore, petitioner Bangayan did not adduce any evidence to support his claim of forgery, despite the
opportunity to do so. Considering that there was evidence on record of his genuine signature and handwriting (the
signature card and the dishonored checks themselves), nothing should have prevented petitioner Bangayan from
submitting the Surety Agreement for examination or comparison by a handwriting expert.

Even respondent RCBC did not interpose any objection when the possibility of forwarding the signature card and
Surety Agreement forwarded to the National Bureau of Investigation for examination was raised during the testimony of
Mr. Lao:

ATTY. LOYOLA

Considering the delicate nature or the significance of the signatures in the signature cards and the
risk of my admitting the authenticity of a mere xerox copies [sic] and considering further that it is
our position that the surety agreement as well as specimen signatures on the signature cards
must be submitted to the Court and later forwarded to the NBI, Question Document
Section, for examination, I am in no position to admit now that the machine copies in the
signature cards are faithful reproduction. Accordingly, I am hoping at this stage that the surety
agreement and the signature cards be forwarded to the NBI later on for examination and in
the mean time, the questioned documents be entrusted to the custody of the Honorable Court.

ATTY. POBLADOR

With respect to the manifestation of counsel that the documents with the signatures should
be submitted to the NBI, we have no objection, but at this juncture, we are only asking, Your
Honor, if the xerox copies are faithful reproduction of the original.[106] (Emphasis supplied)

Despite his intention to have the signatures in the Surety Agreement compared with those in the signature cards,
petitioner Bangayan did not have the questioned document examined by a handwriting expert in rebuttal and simply relied
on his bare allegations. There is no clear, positive and convincing evidence to show that his signature in the Surety
Agreement was indeed forged. As petitioner failed to discharge his burden of demonstrating that his signature was forged,
there is no reason to overturn the factual findings of the lower courts with respect to the genuineness and due execution of
the Surety Agreement.

Second, the mere absence of notarization does not necessarily render the Surety Agreement invalid.

Notarization of a private document converts the document into a public one, renders it admissible in court without
further proof of its authenticity, and is entitled to full faith and credit upon its face. [107] However, the irregular notarization
— or, for that matter, the lack of notarization — does not necessarily affect the validity of the contract reflected in the
document.[108]

On its face, the Surety Agreement is not notarized, even if respondent RCBC’s standard form for that agreement
makes provisions for it. The non-completion of the notarization form, however, does not detract from the validity of the
agreement, especially in this case where the genuineness and due authenticity of petitioner Bangayan’s signature in the
contract was not successfully assailed.

The failure to notarize the Surety Agreement does not invalidate petitioner Bangayan’s consent to act as surety for
the nine corporations’ obligations to respondent RCBC. Contracts are obligatory in whatever form they may have been
entered into, provided all essential requisites are present [109] and the notarization is not an essential requisite for the
validity of a Surety Agreement.[110]

Third, that the annex of the Surety Agreement does not bear petitioner Bangayan’s signature is not a sufficient
ground to invalidate the main agreement altogether. As the records will bear out, the Surety Agreement enumerated the
names of the corporation whose obligations petitioner Bangayan are securing. The annex to the Surety Agreement
enumerated not only the names of the corporations but their respective addresses as well.[111] The corporations enumerated
in the annex correspond to the nine corporations enumerated in the main body of the Surety Agreement. Ordinarily, the
name and address of the principal borrower whose obligation is sought to be assured by the surety is placed in the body of
the agreement, but in this case the addresses could not all fit in the body of the document, thus, requiring that the address
be written in an annex. The Surety Agreement itself noted that the principal places of business and postal addresses of the
nine corporations were to be found in an “attached” document.

Fourth, petitioner Bangayan never contested the existence of the Surety Agreement prior to the filing of the
Complaint. When Mr. Lao informed him of the letter from the BOC regarding the failure of the three corporations to pay
the customs duties under the letters of credit, the petitioner assured respondent bank that “he is doing everything he can to
solve the problem.”[112] If petitioner Bangayan purportedly never signed the Surety Agreement, he would have been
surprised or at least perplexed that respondent RCBC would contact him regarding the three corporations’ letters of credit,
when, as he claims, he never agreed to act as their surety. Instead, he acknowledged the situation and even offered to solve
the predicament of these borrower corporations. In fact, Atty. Loyola, petitioner’s counsel in this case, even obtained
copies of the BOC receipts after the three corporations paid the customs duties for their importation under the letters of
credit giving a possible interpretation that petitioner was himself answering the obligations of the three corporations for
the unpaid customs duties.

It must be emphasized that petitioner Bangayan did not complain against the four corporations which had benefitted
from his bank account. He claims to have no reasonable connection to these borrower corporations and denies having
signed the Surety Agreement. If true, nothing should have stopped him from taking these corporations to court and
demanding compensation as well as damages for their unauthorized use of his bank account. Yet, these bank accounts
were put on hold and/or depleted by the letters of credit issued to the four entities. That petitioner did not include them in
the present suit strengthens the finding that he had indeed consented to act as surety for those entities, and that there seems
to be no arm’s length relationship between petitioner and the three entities.

Whatever damage to petitioner Bangayan’s interest or reputation from the dishonor of the seven checks was a
consequence of his agreement to act as surety for the corporations and their failure to pay their loan obligations, advances
and other expenses.

With respect to the first two dishonored checks, respondent RCBC had already put on hold petitioner Bangayan’s
account to answer for the customs duties being demanded from the bank by the BOC. In fact, the trial court considered the
referral of these checks to petitioner Bangayan as an effort by respondent RCBC to allow its depositor an opportunity to
“arrange his accounts and provide funds for his checks.”[113] It likewise appeared to the appellate court that the funds in
petitioner’s account served as the lien of the custom duties assessed; thus, the funds cannot be considered as sufficient to
cover future transactions.[114]

On the other hand, the five other checks were subsequently dishonored because petitioner Bangayan’s account was
by that time already depleted due to the partial payment of Lotec Marketing’s loan obligation.[115] Although the lien earlier
imposed on petitioner’s account was lifted when the three corporations paid the customs duties,[116] the account was
almost completely depleted when the funds were subsequently used to partially pay Lotec Marketing’s outstanding
obligation under the fourth letter of credit.[117]Respondent RCBC was compelled to fully debit the funds to satisfy the
main loan obligation of Lotec Marketing, which petitioner had guaranteed in joint and several capacity.

What must be underscored in respondent RCBC’s immediate action of applying petitioner Bangayan’s account to
the Lotec Marketing is the nature of the loan instrument used in this case – a letter of credit. In a letter of credit, the
engagement of the issuing bank (respondent RCBC in this instance) is to pay the seller or beneficiary of the credit (or the
advising bank, Korean Exchange Bank, in this instance) once the draft and the required documents are presented to
it.[118] This “independence principle” in letters of credit assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the issuing bank from determining whether the
main contract is actually accomplished or not.[119]

In this case, respondent RCBC, as the issuing bank for Lotec Marketing’s letter of credit had to make prompt
payment to Korea Exchange Bank (the advising bank) when the obligation became due and demandable. Precisely
because of the independence principle in letters of credit and the need for prompt payment,[120] respondent RCBC required
a Surety Agreement from petitioner Bangayan before issuing the letters of credit in favor of the four corporations,
including Lotec Marketing.

Under Articles 2199[121] and 2200[122] of the Civil Code, actual or compensatory damages are those awarded in
satisfaction of or in recompense for loss or injury sustained. [123] They proceed from a sense of natural justice and are
designed to repair the wrong that has been done.[124]

In all seven dishonored checks, respondent RCBC properly exercised its right as a creditor under the Surety
Agreement to apply the petitioner Bangayan’s funds in his accounts as security for the obligations of the four corporations
under the letters of credit. Thus, petitioner Bangayan cannot attribute any wrong or misconduct to respondent RCBC since
there was no malice or bad faith on the part of respondent in dishonoring the checks. Any damage to petitioner arising
from the dishonor of those checks was brought about, not by the bank’s actions, but by the corporations that defaulted on
their obligations that petitioner had guaranteed to pay. The trial and the appellate courts, therefore, committed no
reversible error in disallowing the award of damages to petitioner.

B. The trial court did not commit reversible error when it reinstated the
testimony of Mr. Lao and allowed petitioner Bangayan to cross-examine
him.

Petitioner Bangayan also assails the lower court’s order that reinstated the direct testimony of Mr. Lao, respondent
RCBC’s lone witness. Petitioner claims that Judge Santiago acted with partiality by reinstating Mr. Lao’s testimony,
because this Court in another case had already sustained the lower court’s earlier Order striking out the testimony. Hence,
petitioner says that the judge’s reinstatement of Mr. Lao’s testimony was in violation of petitioner’s right to due process.

Petitioner Bangayan’s arguments are unmeritorious.

Discretionary power is generally exercised by trial judges in furtherance of the convenience of the courts and the
litigants, the expedition of business, and in the decision of interlocutory matters on conflicting facts where one tribunal
could not easily prescribe to another the appropriate rule of procedure.[125] Thus, the Court ruled:

In its very nature, the discretionary control conferred upon the trial judge over the proceedings
had before him implies the absence of any hard-and-fast rule by which it is to be exercised, and in
accordance with which it may be reviewed. But the discretion conferred upon the courts is not a
willful, arbitrary, capricious and uncontrolled discretion. It is a sound, judicial discretion which
should always be exercised with due regard to the rights of the parties and the demands of equity
and justice. As was said in the case of The Styria vs. Morgan(186 U.S., 1, 9): “The establishment of a
clearly defined rule of action would be the end of discretion, and yet discretion should not be a word
for arbitrary will or inconsiderate action.” So in the case of Goodwin vs. Prime (92 Me., 355), it was
said that “discretion implies that in the absence of positive law or fixed rule the judge is to decide by
his view of expediency or by the demands of equity and justice.”

There being no “positive law or fixed rule” to guide the judge in the court below in such cases,
there is no “positive law or fixed rule” to guide a court of appeals in reviewing his action in the premises,
and such courts will not therefore attempt to control the exercise of discretion by the court below
unless it plainly appears that there was “inconsiderate action” or the exercise of mere “arbitrary
will”, or in other words that his action in the premises amounted to “an abuse of discretion.” But the
right of an appellate court to review judicial acts which lie in the discretion of inferior courts may
properly be invoked upon a showing of a strong and clear case of abuse of power to the prejudice of the
appellant, or that the ruling objected to rested on an erroneous principle of law not vested in
discretion.[126] (Emphasis supplied)

Prior to a final judgment, trial courts have plenary control over the proceedings including the judgment, and in the
exercise of a sound judicial discretion, may take such proper action in this regard as truth and justice may require. [127]

In the instant case, the trial court was within the exercise of its discretionary and plenary control of the proceedings
when it reconsidered motu propio its earlier order striking out the testimony of Mr. Lao[128] and ordered it
reinstated.[129] The order of the judge cannot be considered as “willful, arbitrary, capricious and uncontrolled discretion,”
since his action allowed respondent bank to present its case fully, especially considering that Mr. Lao was the sole witness
for the defense.

Petitioner Bangayan’s reliance[130] on the Decisions of the Court of Appeals (CA-G.R. SP No. 31865) and this Court
(G.R. No. 115922) with respect to respondent RCBC’s Petition is misplaced. Contrary to his claim, what respondent
RCBC questioned in those cases was the denial by Judge Santiago of its Motion for Inhibition. [131] As respondent pointed
out, its Petitions to the Court of Appeals and the Court simply prayed for the reversal of the denial of the Motion for
Inhibition and did not include the Order striking out the testimony of Mr. Lao. Even the appellate court (CA-G.R. CV No.
48479) noted that “what was resolved by the High Court was the issue of Inhibition of the Judge and not the striking out
of the testimony of Mr. Eli Lao.”[132]

Neither can petitioner Bangayan claim any deprivation of due process when the trial court ordered the reinstatement
of Mr. Lao’s testimony without any motion or prayer from respondent RCBC. The right of a party to confront and cross-
examine opposing witnesses in a judicial litigation, be it criminal or civil in nature, or in proceedings before
administrative tribunals with quasi-judicial powers, is a fundamental right which is part of due process. [133] This right,
however, has always been understood as requiring not necessarily an actual cross-examination but merely an opportunity
to exercise the right to cross-examine if desired.[134] What is proscribed by statutory norm and jurisprudential precept is
the absence of the opportunity to cross-examine.[135]

In this case, petitioner Bangayan’s right to due process was not violated, as he was given the freedom and
opportunity to cross-examine and confront Mr. Lao on the latter’s testimony. Even if respondent RCBC had not filed any
motion, it was well within the court’s discretion to have Mr. Lao’s testimony reinstated in the “interest of substantial
justice.” The proceedings in the trial court in this civil case were adversarial in nature insofar as the parties, in the process
of attaining justice, were made to advocate their respective positions in order to ascertain the truth. [136] The truth-seeking
function of the judicial system is best served by giving an opportunity to all parties to fully present their case, subject to
procedural and evidentiary rules. Absent any blatant neglect or willful delay, both parties should be afforded equal latitude
in presenting the evidence and the testimonies of their witnesses in favor of their respective positions, as well as in testing
the credibility and the veracity of the opposing party’s claims through cross-examination.

The Court finds no reversible error on the part of the trial court in allowing the full presentation of the reinstated
testimony of respondent RCBC’s lone witness, especially since the other party was afforded the occasion to cross-
examine the witness and in fact availed himself of the opportunity. Although he expressly reserved his right to question
the court’s reinstatement of the testimony of the witness, petitioner Bangayan did not satisfactorily offer convincing
arguments to overturn the trial court’s order. That the court gave petitioner the opportunity to cross-examine Mr. Lao – a
remedy that petitioner even fully availed himself of – negates the allegation of bias against the Judge.

The timing of petitioner Bangayan’s allegations of prejudice on the part of Judge Santiago is suspect, since the latter
had already rendered a Decision unfavorable to petitioner’s cause.

A motion to inhibit shall be denied if filed after a member of the court has already given an opinion on the merits
of the case, the rationale being that “a litigant cannot be permitted to speculate on the action of the court . . . (only to) raise
an objection of this sort after the decision has been rendered.”[137]

When respondent RCBC moved for Judge Santiago’s inhibition, petitioner even interposed an objection and
characterized as unfounded respondent bank’s charge of partiality.[138] It is now too late in the day to suddenly accuse
Judge Santiago of prejudice in the proceedings below, after he has already rendered an unfavorable judgment against
petitioner. If at all, the latter’s claim that Judge Santiago was biased in favoring respondent RCBC is a mere afterthought
that fails to support a reversal by the Court.

C. Respondent RCBC did not violate the Bank Secrecy Act.

The Court affirms the trial court’s findings which were likewise concurred with by the Court of Appeals that the
alleged violation of the Bank Secrecy Act was not substantiated:

The Customs’s investigation with a subpoena/duces tecum sent to witness Mr. Lao on the three
companies, Final Sales Enterprises, Peak Marketing and LBZ Commercial, guaranteed by plaintiff
 naturally raised an alarm. Mr. Lao was asked to bring documents on the questioned importations. The
witness denied having given any statement in connection therewith. No evidence was introduced by
plaintiff to substantiate his claim that defendant bank gave any classified information in violation of
Republic Act No. 1405. On this score, plaintiff has no cause of action for damages against said defendant
RCBC.[139]

In his Memorandum, petitioner Bangayan argues that there was a wrongful disclosure by respondents RCBC and
Philip Saria of confidential information regarding his bank accounts in violation of the Bank Secrecy Act.[140] However,
petitioner failed to identify which confidential information respondents divulged before the BOC that would make them
liable under the said law.

Section 2 of the Bank Secrecy Act provides:

All deposits of whatever nature with banks or banking institutions in the Philippines including
investments in bonds issued by the Government of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official, bureau or office, except upon written
permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the
subject matter of the litigation.

Petitioner Bangayan claims that respondent Saria divulged confidential information through the Affidavit he
submitted to the BOC.[141] However, nothing in respondent Saria’s Affidavit before the BOC showed that details of
petitioner Bangayan’s bank accounts with respondent bank was disclosed. If at all, respondent Saria merely discussed his
functions as an account officer in respondent bank and identified petitioner as the one who had guaranteed the payment or
obligations of the importers under the Surety Agreement.

According to petitioner Bangayan, the responses of respondent RCBC’s officers in relation to the BOC’s actions led
to unsavory news reports that “disparaged petitioner’s good character and reputation” and exposed him to “public ridicule
and contempt.”[142] However, as the appellate court correctly found, the humiliation and embarrassment that petitioner
Bangayan suffered in the business community was not brought about by the alleged violation of the Bank Secrecy Act; it
was due to the smuggling charges filed by the Bureau of Customs which found their way in the headlines of
newspapers.[143]

Both the trial and appellate courts correctly found that petitioner Bangayan did not satisfactorily introduce
evidence “to substantiate his claim that defendant bank gave any classified information” in violation of the Bank Secrecy
Act. Failing to adduce further evidence in the instant Petition with respect to the bank’s purported disclosure of
confidential information as regards his accounts, petitioner cannot be awarded any damages arising from an
unsubstantiated and unproved violation of the Bank Secrecy Act.

Rules of Discovery

The Court finds that petitioner Bangayan’s argument as regards the bank’s purported failure to comply with the
rules of discovery is not substantive enough to warrant further discussion by this Court. Petitioner has not alleged any
different outcome that would be generated if we were to agree with him on this point. If petitioner is unsatisfied with
respondent RCBC’s responses, then his remedy is to expose the falsity (if any) of the bank’s responses in the various
modes of discovery during the trial proper. He could have confronted respondent with contradictory statements,
testimonies or other countervailing evidence. The Court affirms the findings of the appellate court that the rules of
discovery were not treated lightly by respondent RCBC.[144]

In summary, petitioner Bangayan failed to establish that the dishonor of the seven checks by respondent RCBC
entitled him to damages, since the dishonor arose from his own voluntary agreement to act as surety for the four
corporations’ letters of credit. There was no bad faith or malice on the part of respondent bank, as it merely acted within
its rights as a creditor under the Surety Agreement.
 IN VIEW OF THE FOREGOING, the instant Petition for Review on Certiorari filed by Ricardo B. Bangayan
is DENIED. The Decisions of the trial court and appellate court dismissing the Complaint for damages filed by
Bangayan against respondents Rizal Commercial Banking Corporation and Philip Saria are hereby AFFIRMED.

SO ORDERED.
NEW WORLD INTERNATIONAL G.R. No. 171468

DEVELOPMENT (PHILS.), INC.,

Petitioner, Present:

VELASCO, JR., J., Chairperson,

- versus - LEONARDO-DE CASTRO,*

PERALTA,

ABAD, and

MENDOZA, JJ.

NYK-FILJAPAN SHIPPING CORP.,

LEP PROFIT INTERNATIONAL,

INC. (ORD), LEP INTERNATIONAL

PHILIPPINES, INC., DMT CORP.,

ADVATECH INDUSTRIES, INC.,

MARINA PORT SERVICES, INC.,

SERBROS CARRIER CORPORATION,

and SEABOARD-EASTERN

INSURANCE CO., INC.,

Respondents.

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

NEW WORLD INTERNATIONAL G.R. No. 174241

DEVELOPMENT (PHILS.), INC.,

Petitioner,

- versus -

SEABOARD-EASTERN Promulgated:

INSURANCE CO., INC.,

Respondent. August 24, 2011

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

ABAD, J.:

These consolidated petitions involve a cargo owner’s right to recover damages from the loss of insured goods under
the Carriage of Goods by Sea Act and the Insurance Code.

The Facts and the Case

Petitioner New World International Development (Phils.), Inc. (New World) bought from DMT Corporation (DMT)
through its agent, Advatech Industries, Inc. (Advatech) three emergency generator sets worth US$721,500.00.

DMT shipped the generator sets by truck from Wisconsin, United States, to LEP Profit International, Inc. (LEP
Profit) in Chicago, Illinois. From there, the shipment went by train to Oakland, California, where it was loaded on S/S
California Luna V59, owned and operated by NYK Fil-Japan Shipping Corporation (NYK) for delivery to petitioner New
World in Manila. NYK issued a bill of lading, declaring that it received the goods in good condition.

NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX Ruby V/72 that it also owned and
operated. On its journey to Manila, however, ACX Ruby encountered typhoon Kadiang whose captain filed a sea protest
on arrival at the Manila South Harbor on October 5, 1993 respecting the loss and damage that the goods on board his
vessel suffered.

Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or cargo-handling operator, received the
shipment on October 7, 1993. Upon inspection of the three container vans separately carrying the generator sets, two vans
bore signs of external damage while the third van appeared unscathed. The shipment remained at Pier 3’s Container Yard
under Marina’s care pending clearance from the Bureau of Customs. Eventually, on October 20, 1993 customs authorities
allowed petitioner’s customs broker, Serbros Carrier Corporation (Serbros), to withdraw the shipment and deliver the
same to petitioner New World’s job site in Makati City.

An examination of the three generator sets in the presence of petitioner New World’s representatives, Federal
Builders (the project contractor) and surveyors of petitionerNew World’s insurer, Seaboard–Eastern Insurance Company
(Seaboard), revealed that all three sets suffered extensive damage and could no longer be repaired. For these reasons,
New World demanded recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit, LEP International
Philippines, Inc. (LEP), Marina, and Serbros. While LEP and NYK acknowledged receipt of the demand, both denied
liability for the loss.

Since Seaboard covered the goods with a marine insurance policy, petitioner New World sent it a formal claim
dated November 16, 1993. Replying on February 14, 1994, Seaboard required petitioner New World to submit to it an
itemized list of the damaged units, parts, and accessories, with corresponding values, for the processing of the claim. But
petitioner New World did not submit what was required of it, insisting that the insurance policy did not include the
submission of such a list in connection with an insurance claim. Reacting to this, Seaboard refused to process the claim.

On October 11, 1994 petitioner New World filed an action for specific performance and damages against all the
respondents before the Regional Trial Court (RTC) ofMakati City, Branch 62, in Civil Case 94-2770.

On August 16, 2001 the RTC rendered a decision absolving the various respondents from liability with the
exception of NYK. The RTC found that the generator sets were damaged during transit while in the care of NYK’s
vessel, ACX Ruby. The latter failed, according to the RTC, to exercise the degree of diligence required of it in the face of
a foretold raging typhoon in its path.

The RTC ruled, however, that petitioner New World filed its claim against the vessel owner NYK beyond the one
year provided under the Carriage of Goods by Sea Act (COGSA). New World filed its complaint on October 11, 1994
when the deadline for filing the action (on or before October 7, 1994) had already lapsed. The RTC held that the one-year
period should be counted from the date the goods were delivered to the arrastre operator and not from the date they were
delivered to petitioner’s job site.[1]
 As regards petitioner New World’s claim against Seaboard, its insurer, the RTC held that the latter cannot be
faulted for denying the claim against it since New Worldrefused to submit the itemized list that Seaboard needed for
assessing the damage to the shipment. Likewise, the belated filing of the complaint prejudiced Seaboard’s right to pursue
a claim against NYK in the event of subrogation.

On appeal, the Court of Appeals (CA) rendered judgment on January 31, 2006,[2] affirming the RTC’s rulings
except with respect to Seaboard’s liability. The CA held that petitioner New World can still recoup its loss from
Seaboard’s marine insurance policy, considering a) that the submission of the itemized listing is an unreasonable
imposition and b) that the one-year prescriptive period under the COGSA did not affect New World’s right under the
insurance policy since it was the Insurance Code that governed the relation between the insurer and the insured.

Although petitioner New World promptly filed a petition for review of the CA decision before the Court in G.R.
171468, Seaboard chose to file a motion for reconsideration of that decision. On August 17, 2006 the CA rendered an
amended decision, reversing itself as regards the claim against Seaboard. The CA held that the submission of the itemized
listing was a reasonable requirement that Seaboard asked of New World. Further, the CA held that the one-year
prescriptive period for maritime claims applied to Seaboard, as insurer and subrogee of New World’s right against the
vessel owner. New World’s failure to comply promptly with what was required of it prejudiced such right.

Instead of filing a motion for reconsideration, petitioner instituted a second petition for review before the Court in
G.R. 174241, assailing the CA’s amended decision.

The Issues Presented

The issues presented in this case are as follows:

a) In G.R. 171468, whether or not the CA erred in affirming the RTC’s release from liability of respondents
DMT, Advatech, LEP, LEP Profit, Marina, and Serbros who were at one time or another involved in handling the
shipment; and

b) In G.R. 174241, 1) whether or not the CA erred in ruling that Seaboard’s request from petitioner New World
for an itemized list is a reasonable imposition and did not violate the insurance contract between them; and 2) whether or
not the CA erred in failing to rule that the one-year COGSA prescriptive period for marine claims does not apply to
petitioner New World’s prosecution of its claim against Seaboard, its insurer.

The Court’s Rulings

In G.R. 171468 --

Petitioner New World asserts that the roles of respondents DMT, Advatech, LEP, LEP Profit, Marina and Serbros
in handling and transporting its shipment fromWisconsin to Manila collectively resulted in the damage to the same,
rendering such respondents solidarily liable with NYK, the vessel owner.

But the issue regarding which of the parties to a dispute incurred negligence is factual and is not a proper subject
of a petition for review on certiorari. And petitioner New World has been unable to make out an exception to this
rule.[3] Consequently, the Court will not disturb the finding of the RTC, affirmed by the CA, that the generator sets were
totally damaged during the typhoon which beset the vessel’s voyage from Hong Kong to Manila and that it was her
negligence in continuing with that journey despite the adverse condition which caused petitioner New World’s loss.

That the loss was occasioned by a typhoon, an exempting cause under Article 1734 of the Civil Code, does not
automatically relieve the common carrier of liability. The latter had the burden of proving that the typhoon was the
proximate and only cause of loss and that it exercised due diligence to prevent or minimize such loss before, during, and
after the disastrous typhoon.[4] As found by the RTC and the CA, NYK failed to discharge this burden.

In G.R. 174241 --
 One. The Court does not regard as substantial the question of reasonableness of Seaboard’s additional
requirement of an itemized listing of the damage that the generator sets suffered. The record shows that petitioner New
World complied with the documentary requirements evidencing damage to its generator sets.

The marine open policy that Seaboard issued to New World was an all-risk policy. Such a policy insured against
all causes of conceivable loss or damage except when otherwise excluded or when the loss or damage was due to fraud or
intentional misconduct committed by the insured. The policy covered all losses during the voyage whether or not arising
from a marine peril.[5]

Here, the policy enumerated certain exceptions like unsuitable packaging, inherent vice, delay in voyage, or
vessels unseaworthiness, among others.[6] But Seaboard had been unable to show that petitioner New World’s loss or
damage fell within some or one of the enumerated exceptions.

What is more, Seaboard had been unable to explain how it could not verify the damage that New World’s goods
suffered going by the documents that it already submitted, namely, (1) copy of the Supplier’s Invoice KL2504; (2) copy of
the Packing List; (3) copy of the Bill of Lading 01130E93004458; (4) the Delivery of Waybill Receipts 1135, 1222, and
1224; (5) original copy of Marine Insurance Policy MA-HO-000266; (6) copies of Damage Report from Supplier and
Insurance Adjusters; (7) Consumption Report from the Customs Examiner; and (8) Copies of Received Formal Claim
from the following: a) LEP International Philippines, Inc.; b) Marina Port Services, Inc.; and c) Serbros Carrier
Corporation.[7] Notably, Seaboard’s own marine surveyor attended the inspection of the generator sets.

Seaboard cannot pretend that the above documents are inadequate since they were precisely the documents listed
in its insurance policy.[8] Being a contract of adhesion, an insurance policy is construed strongly against the insurer who
prepared it. The Court cannot read a requirement in the policy that was not there.

Further, it appears from the exchanges of communications between Seaboard and Advatech that submission of the
requested itemized listing was incumbent on the latter as the seller DMT’s local agent. Petitioner New World should not
be made to suffer for Advatech’s shortcomings.

Two. Regarding prescription of claims, Section 3(6) of the COGSA provides that the carrier and the ship shall be
discharged from all liability in case of loss or damage unless the suit is brought within one year after delivery of the goods
or the date when the goods should have been delivered.

But whose fault was it that the suit against NYK, the common carrier, was not brought to court on time? The last
day for filing such a suit fell on October 7, 1994. The record shows that petitioner New World filed its formal claim for
its loss with Seaboard, its insurer, a remedy it had the right to take, as early as November 16, 1993 or about 11 months
before the suit against NYK would have fallen due.

In the ordinary course, if Seaboard had processed that claim and paid the same, Seaboard would have been
subrogated to petitioner New World’s right to recover from NYK. And it could have then filed the suit as a
subrogee. But, as discussed above, Seaboard made an unreasonable demand on February 14, 1994 for an itemized list of
the damaged units, parts, and accessories, with corresponding values when it appeared settled that New World’s loss was
total and when the insurance policy did not require the production of such a list in the event of a claim.

Besides, when petitioner New World declined to comply with the demand for the list, Seaboard against whom a
formal claim was pending should not have remained obstinate in refusing to process that claim. It should have examined
the same, found it unsubstantiated by documents if that were the case, and formally rejected it. That would have at least
given petitioner New World a clear signal that it needed to promptly file its suit directly against NYK and the
others. Ultimately, the fault for the delayed court suit could be brought to Seaboard’s doorstep.

Section 241 of the Insurance Code provides that no insurance company doing business in the Philippines shall
refuse without just cause to pay or settle claims arising under coverages provided by its policies. And, under Section 243,
the insurer has 30 days after proof of loss is received and ascertainment of the loss or damage within which to pay the
claim. If such ascertainment is not had within 60 days from receipt of evidence of loss, the insurer has 90 days to pay or
settle the claim. And, in case the insurer refuses or fails to pay within the prescribed time, the insured shall be entitled to
interest on the proceeds of the policy for the duration of delay at the rate of twice the ceiling prescribed by the Monetary
Board.
 Notably, Seaboard already incurred delay when it failed to settle petitioner New World’s claim as Section 243
required. Under Section 244, a prima facie evidence of unreasonable delay in payment of the claim is created by the
failure of the insurer to pay the claim within the time fixed in Section 243.

Consequently, Seaboard should pay interest on the proceeds of the policy for the duration of the delay until the
claim is fully satisfied at the rate of twice the ceiling prescribed by the Monetary Board. The term “ceiling prescribed by
the Monetary Board” means the legal rate of interest of 12% per annum provided in Central Bank Circular 416, pursuant
to Presidential Decree 116.[9] Section 244 of the Insurance Code also provides for an award of attorney’s fees and other
expenses incurred by the assured due to the unreasonable withholding of payment of his claim.

In Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.,[10] the Court regarded as proper
an award of 10% of the insurance proceeds as attorney’s fees. Such amount is fair considering the length of time that has
passed in prosecuting the claim.[11] Pursuant to the Court’s ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[12] a
12% interest per annum from the finality of judgment until full satisfaction of the claim should likewise be imposed, the
interim period equivalent to a forbearance of credit.

Petitioner New World is entitled to the value stated in the policy which is commensurate to the value of the three
emergency generator sets or US$721,500.00 with double interest plus attorney’s fees as discussed above.

WHEREFORE, the Court DENIES the petition in G.R. 171468 and AFFIRMS the Court of Appeals decision of
January 31, 2006 insofar as petitioner New World International Development (Phils.), Inc. is not allowed to recover
against respondents DMT Corporation, Advatech Industries, Inc., LEP International Philippines, Inc., LEP Profit
International, Inc., Marina Port Services, Inc. and Serbros Carrier Corporation.

With respect to G.R. 174241, the Court GRANTS the petition and REVERSES and SETS ASIDE the Court of
Appeals Amended Decision of August 17, 2006. The Court DIRECTS Seaboard-Eastern Insurance Company, Inc. to pay
petitioner New World International Development (Phils.), Inc. US$721,500.00 under Policy MA-HO-000266, with 24%
interest per annum for the duration of delay in accordance with Sections 243 and 244 of the Insurance Code and
attorney’s fees equivalent to 10% of the insurance proceeds. Seaboard shall also pay, from finality of judgment, a 12%
interest per annum on the total amount due to petitioner until its full satisfaction.

SO ORDERED.
G.R. Nos. 173090-91 September 7, 2011

UNION BANK OF THE PHILIPPINES, Petitioner,

vs.
SPOUSES RODOLFO T. TIU AND VICTORIA N. TIU, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari seeking to reverse the Joint Decision1 of the Court of Appeals dated
February 21, 2006 in CA-G.R. CV No. 00190 and CA-G.R. SP No. 00253, as well as the Resolution2 dated June 1,
2006 denying the Motion for Reconsideration.

The factual and procedural antecedents of this case are as follows:

On November 21, 1995, petitioner Union Bank of the Philippines (Union Bank) and respondent spouses Rodolfo T.
Tiu and Victoria N. Tiu (the spouses Tiu) entered into a Credit Line Agreement (CLA) whereby Union Bank agreed
to make available to the spouses Tiu credit facilities in such amounts as may be approved.3 From September 22,
1997 to March 26, 1998, the spouses Tiu took out various loans pursuant to this CLA in the total amount of three
million six hundred thirty-two thousand dollars (US$3,632,000.00), as evidenced by promissory notes:

PN No. Amount in US$ Date Granted

87/98/111 72,000.00 02/16/98

87/98/108 84,000.00 02/13/98

87/98/152 320,000.00 03/02/98

87/98/075 150,000.00 01/30/98

87/98/211 32,000.00 03/26/98

87/98/071 110,000.00 01/29/98

87/98/107 135,000.00 02/13//98

87/98/100 75,000.00 02/12/98

87/98/197 195,000.00 03/19/98

87/97/761 60,000.00 09/26/97

87/97/768 30,000.00 09/29/97

87/97/767 180,000.00 09/29/97

87/97/970 110,000.00 12/29/97

 87/97/747 50,000.00 09/22/97

87/96/944 605,000.00 12/19/97

87/98/191 470,000.00 03/16/98

87/98/198 505,000.00 03/19/98

87/98/090 449,000.00 02/09/98

US$3,632,000.004

On June 23, 1998, Union Bank advised the spouses Tiu through a letter5 that, in view of the existing currency risks,
the loans shall be redenominated to their equivalent Philippine peso amount on July 15, 1998. On July 3, 1998, the
spouses Tiu wrote to Union Bank authorizing the latter to redenominate the loans at the rate of US$1=P41.406 with
interest of 19% for one year.7

On December 21, 1999, Union Bank and the spouses Tiu entered into a Restructuring Agreement.8 The
Restructuring Agreement contains a clause wherein the spouses Tiu confirmed their debt and waived any action on
account thereof. To quote said clause:

1. Confirmation of Debt – The BORROWER hereby confirms and accepts that as of December 8, 1999, its
outstanding principal indebtedness to the BANK under the Agreement and the Notes amount to ONE HUNDRED
FIFTY[-]FIVE MILLION THREE HUNDRED SIXTY[-]FOUR THOUSAND EIGHT HUNDRED PESOS (PHP
155,364,800.00) exclusive of interests, service and penalty charges (the "Indebtedness") and further confirms the
correctness, legality, collectability and enforceability of the Indebtedness. The BORROWER unconditionally waives
any action, demand or claim that they may otherwise have to dispute the amount of the Indebtedness as of the date
specified in this Section, or the collectability and enforceability thereof. It is the understanding of the parties that the
BORROWER’s acknowledgment, affirmation, and waiver herein are material considerations for the BANK’s
agreeing to restructure the Indebtedness which would have already become due and payable as of the above date
under the terms of the Agreement and the Notes.9

The restructured amount (P155,364,800.00) is the sum of the following figures: (1) P150,364,800.00, which is the
value of the US$3,632,000.00 loan as redenominated under the above-mentioned exchange rate of US$1=P41.40;
and (2) P5,000,000.00, an additional loan given to the spouses Tiu to update their interest payments.10

Under the same Restructuring Agreement, the parties declared that the loan obligation to be restructured (after
deducting the dacion price of properties ceded by the Tiu spouses and adding: [1] the taxes, registration fees and
other expenses advanced by Union Bank in registering the Deeds of Dation in Payment; and [2] other fees and
charges incurred by the Indebtedness) is one hundred four million six hundred sixty-eight thousand seven hundred
forty-one pesos (P104,668,741.00) (total restructured amount).11 The Deeds of Dation in Payment referred to are
the following:

1. Dation of the Labangon properties – Deed executed by Juanita Tiu, the mother of respondent Rodolfo Tiu,
involving ten parcels of land with improvements located in Labangon, Cebu City and with a total land area of
3,344 square meters, for the amount of P25,130,000.00. The Deed states that these properties shall be
leased to the Tiu spouses at a monthly rate of P98,000.00 for a period of two years.12

2. Dation of the Mandaue property – Deed executed by the spouses Tiu involving one parcel of land with
improvements located in A.S. Fortuna St., Mandaue City, covered by TCT No. T-31604 and with a land area
of 2,960 square meters, for the amount of P36,080,000.00. The Deed states that said property shall be
leased to the Tiu spouses at a monthly rate of P150,000.00 for a period of two years.13
As likewise provided in the Restructuring Agreement, the spouses Tiu executed a Real Estate Mortgage in favor of
Union Bank over their "residential property inclusive of lot and improvements" located at P. Burgos St., Mandaue
City, covered by TCT No. T-11951 with an area of 3,096 square meters.14

The spouses Tiu undertook to pay the total restructured amount (P104,668,741.00) via three loan facilities (payment
schemes).

The spouses Tiu claim to have made the following payments: (1) P15,000,000.00 on August 3, 1999; and (2)
another P13,197,546.79 as of May 8, 2001. Adding the amounts paid under the Deeds of Dation in Payment, the
spouses Tiu postulate that their payments added up to P89,407,546.79.15

Asserting that the spouses Tiu failed to comply with the payment schemes set up in the Restructuring Agreement,
Union Bank initiated extrajudicial foreclosure proceedings on the residential property of the spouses Tiu, covered by
TCT No. T-11951. The property was to be sold at public auction on July 18, 2002.

The spouses Tiu, together with Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T.
Tiu, filed with the Regional Trial Court (RTC) of Mandaue City a Complaint seeking to have the Extrajudicial
Foreclosure declared null and void. The case was docketed as Civil Case No. MAN-4363.16 Named as defendants
were Union Bank and Sheriff IV Veronico C. Ouano (Sheriff Oano) of Branch 55, RTC, Mandaue City. Complainants
therein prayed for the following: (1) that the spouses Tiu be declared to have fully paid their obligation to Union
Bank; (2) that defendants be permanently enjoined from proceeding with the auction sale; (3) that Union Bank be
ordered to return to the spouses Tiu their properties as listed in the Complaint; (4) that Union Bank be ordered to
pay the plaintiffs the sum of P10,000,000.00 as moral damages, P2,000,000.00 as exemplary
damages, P3,000,000.00 as attorney’s fees and P500,000.00 as expenses of litigation; and (5) a writ of preliminary
injunction or temporary restraining order be issued enjoining the public auction sale to be held on July 18, 2002.17

The spouses Tiu claim that from the beginning the loans were in pesos, not in dollars. Their office clerk, Lilia
Gutierrez, testified that the spouses Tiu merely received the peso equivalent of their US$3,632,000.00 loan at the
rate of US$1=P26.00. The spouses Tiu further claim that they were merely forced to sign the Restructuring
Agreement and take up an additional loan of P5,000,000.00, the proceeds of which they never saw because this
amount was immediately applied by Union Bank to interest payments.18

The spouses Tiu allege that the foreclosure sale of the mortgaged properties was invalid, as the loans have already
been fully paid. They also allege that they are not the owners of the improvements constructed on the lot because
the real owners thereof are their co-petitioners, Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young
and Rosenda T. Tiu.19

The spouses Tiu further claim that prior to the signing of the Restructuring Agreement, they entered into a
Memorandum of Agreement with Union Bank whereby the former deposited with the latter several certificates of
shares of stock of various companies and four certificates of title of various parcels of land located in Cebu. The
spouses Tiu claim that these properties have not been subjected to any lien in favor of Union Bank, yet the latter
continues to hold on to these properties and has not returned the same to the former.20

On the other hand, Union Bank claims that the Restructuring Agreement was voluntarily and validly entered into by
both parties. Presenting as evidence the Warranties embodied in the Real Estate Mortgage, Union Bank contends
that the foreclosure of the mortgage on the residential property of the spouses Tiu was valid and that the
improvements thereon were absolutely owned by them. Union Bank denies receiving certificates of shares of stock
of various companies or the four certificates of title of various parcels of land from the spouses Tiu. However, Union
Bank also alleges that even if said certificates were in its possession it is authorized under the Restructuring
Agreement to retain any and all properties of the debtor as security for the loan.21

The RTC issued a Temporary Restraining Order22 and, eventually, a Writ of Preliminary Injunction23 preventing the
sale of the residential property of the spouses Tiu. 24

On December 16, 2004, the RTC rendered its Decision25 in Civil Case No. MAN-4363 in favor of Union Bank. The
dispositive portion of the Decision read:
WHEREFORE, premises considered, judgment is hereby rendered dismissing the Complaint and lifting and setting
aside the Writ of Preliminary Injunction. No pronouncement as to damages, attorney’s fees and costs of suit.26

In upholding the validity of the Restructuring Agreement, the RTC held that the spouses Tiu failed to present any
evidence to prove either fraud or intimidation or any other act vitiating their consent to the same. The exact
obligation of the spouses Tiu to Union Bank is therefore P104,668,741.00, as agreed upon by the parties in the
Restructuring Agreement. As regards the contention of the spouses Tiu that they have fully paid their indebtedness,
the RTC noted that they could not present any detailed accounting as to the total amount they have paid after the
execution of the Restructuring Agreement.27

On January 4, 2005, Union Bank filed a Motion for Partial Reconsideration,28 protesting the finding in the body of the
December 16, 2004 Decision that the residential house on Lot No. 639 is not owned by the spouses Tiu and
therefore should be excluded from the real properties covered by the real estate mortgage. On January 6, 2005, the
spouses Tiu filed their own Motion for Partial Reconsideration and/or New Trial.29 They alleged that the trial court
failed to rule on their fourth cause of action wherein they mentioned that they turned over the following titles to Union
Bank: TCT Nos. 30271, 116287 and 116288 and OCT No. 0-3538. They also prayed for a partial new trial and for a
declaration that they have fully paid their obligation to Union Bank.30

On January 11, 2005, the spouses Tiu received from Sheriff Oano a Second Notice of Extra-judicial Foreclosure
Sale of Lot No. 639 to be held on February 3, 2005. To prevent the same, the Tiu spouses filed with the Court of
Appeals a Petition for Prohibition and Injunction with Application for TRO/Writ of Preliminary Injunction. 31 The
petition was docketed as CA-G.R. SP No. 00253. The Court of Appeals issued a Temporary Restraining Order on
January 27, 2005.32

On January 19, 2005, the RTC issued an Order denying Union Bank’s Motion for Partial Reconsideration and the
Tiu spouses’ Motion for Partial Reconsideration and/or New Trial.33

Both the spouses Tiu and Union Bank appealed the case to the Court of Appeals.34 The two appeals were given a
single docket number, CA-G.R. CEB-CV No. 00190. Acting on a motion filed by the spouses Tiu, the Court of
Appeals consolidated CA-G.R. SP No. 00253 with CA-G.R. CEB-CV No. 00190.35

On April 19, 2005, the Court of Appeals issued a Resolution finding that there was no need for the issuance of a
Writ of Preliminary Injunction as the judgment of the lower court has been stayed by the perfection of the appeal
therefrom.36

On May 9, 2005, Sheriff Oano proceeded to conduct the extrajudicial sale. Union Bank submitted the lone bid
ofP18,576,000.00.37 On June 14, 2005, Union Bank filed a motion with the Court of Appeals praying that Sheriff
Oano be ordered to issue a definite and regular Certificate of Sale.38 On July 21, 2005, the Court of Appeals issued
a Resolution denying the Motion and suspending the auction sale at whatever stage, pending resolution of the
appeal and conditioned upon the filing of a bond in the amount of P18,000,000.00 by the Tiu spouses.39 The Tiu
spouses failed to file said bond.40

On February 21, 2006, the Court of Appeals rendered the assailed Joint Decision in CA-G.R. CV No. 00190 and
CA-G.R. SP No. 00253. The Court of Appeals dismissed the Petition for Prohibition, CA-G.R. SP No. 00253, on the
ground that the proper venue for the same is with the RTC.41

On the other hand, the Court of Appeals ruled in favor of the spouses Tiu in CA-G.R. CV No. 00190. The Court of
Appeals held that the loan transactions were in pesos, since there was supposedly no stipulation the loans will be
paid in dollars and since no dollars ever exchanged hands. Considering that the loans were in pesos from the
beginning, the Court of Appeals reasoned that there is no need to convert the same. By making it appear that the
loans were originally in dollars, Union Bank overstepped its rights as creditor, and made unwarranted interpretations
of the original loan agreement. According to the Court of Appeals, the Restructuring Agreement, which purportedly
attempts to create a novation of the original loan, was not clearly authorized by the debtors and was not supported
by any cause or consideration. Since the Restructuring Agreement is void, the original loan ofP94,432,000.00
(representing the amount received by the spouses Tiu of US$3,632,000.00 using the US$1=P26.00 exchange rate)
should subsist. The Court of Appeals likewise invalidated (1) the P5,000,000.00 charge for interest in the
Restructuring Agreement, for having been unilaterally imposed by Union Bank; and (2) the lease of the properties
conveyed in dacion en pago, for being against public policy. 42
In sum, the Court of Appeals found Union Bank liable to the spouses Tiu in the amount of P927,546.79. For
convenient reference, we quote relevant portion of the Court of Appeal’s Decision here:

To summarize the obligation of the Tiu spouses, they owe Union Bank P94,432,000.00. The Tiu spouses had
already paid Union Bank the amount of P89,407,546.79. On the other hand, Union Bank must return to the Tiu
spouses the illegally collected rentals in the amount of P5,952,000.00. Given these findings, the obligation of the Tiu
spouses has already been fully paid. In fact, it is the Union Bank that must return to the Tiu spouses the amount of
NINE HUNDRED TWENTY[-]SEVEN THOUSAND FIVE HUNDRED FORTY[-]SIX PESOS AND SEVENTY[-]NINE
CENTAVOS (P927,546.79).43

With regard to the ownership of the improvements on the subject mortgaged property, the Court of Appeals ruled
that it belonged to respondent Rodolfo Tiu’s father, Jose Tiu, since 1981. According to the Court of Appeals, Union
Bank should not have relied on warranties made by debtors that they are the owners of the property. The appellate
court went on to permanently enjoin Union Bank from foreclosing the mortgage not only of the property covered by
TCT No. T-11951, but also any other mortgage over any other property of the spouses Tiu.44

The Court of Appeals likewise found Union Bank liable to return the certificates of stocks and titles to real properties
of the spouses Tiu in its possession. The appellate court held that Union Bank made judicial admissions of such
possession in its Reply to Plaintiff’s Request for Admission.45 In the event that Union Bank can no longer return
these certificates and titles, it was mandated to shoulder the cost for their replacement.46

Finally, the Court of Appeals took judicial notice that before or during the financial crisis, banks actively convinced
debtors to make dollar loans in the guise of benevolence, saddling borrowers with loans that ballooned twice or
thrice their original loans. The Court of Appeals, noting "the cavalier way with which banks exploited and
manipulated the situation,"47 held Union Bank liable to the spouses Tiu for P100,000.00 in moral
damages,P100,000.00 in exemplary damages, and P50,000.00 in attorney’s fees.48

The Court of Appeals disposed of the case as follows:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us permanently enjoining Union
Bank from foreclosing the mortgage of the residential property of the Tiu spouses which is covered by Transfer
Certificate of Title No. 11951 and from pursuing other foreclosure of mortgages over any other properties of the Tiu
spouses for the above-litigated debt that has already been fully paid. If a foreclosure sale has already been made
over such properties, this Court orders the cancellation of such foreclosure sale and the Certificate of Sale thereof if
any has been issued. This Court orders Union Bank to return to the Tiu spouses the amount of NINE HUNDRED
TWENTY[-]SEVEN THOUSAND FIVE HUNDRED FORTY[-]SIX PESOS AND SEVENTY[-]NINE CENTAVOS
(P927,546.79) representing illegally collected rentals. This Court also orders Union Bank to return to the Tiu
spouses all the certificates of shares of stocks and titles to real properties of the Tiu spouses that were deposited to
it or, in lieu thereof, to pay the cost for the replacement and issuance of new certificates and new titles over the said
properties. This Court finally orders Union Bank to pay the Tiu spouses ONE HUNDRED THOUSAND PESOS
(P100,000.00) in moral damages, ONE HUNDRED THOUSAND PESOS (P100,000.00) in exemplary damages,
FIFTY THOUSAND PESOS (P50,000.00) in attorney’s fees and cost, both in the lower court and in this Court.49

On June 1, 2006, the Court of Appeals rendered the assailed Resolution denying Union Bank’s Motion for
Reconsideration.

Hence, this Petition for Review on Certiorari, wherein Union Bank submits the following issues for the consideration
of this Court:

1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN IT CONCLUDED THAT THERE WERE NO DOLLAR LOANS OBTAINED BY [THE] TIU SPOUSES
FROM UNION BANK DESPITE [THE] CLEAR ADMISSION OF INDEBTEDNESS BY THE BORROWER-
MORTGAGOR TIU SPOUSES.

2. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN IT NULLIFIED THE RESTRUCTURING AGREEMENT BETWEEN TIU SPOUSES AND UNION
BANK FOR LACK OF CAUSE OR CONSIDERATION DESPITE THE ADMISSION OF THE BORROWER-
 MORTGAGOR TIU SPOUSES OF THE DUE AND VOLUNTARY EXECUTION OF SAID
RESTRUCTURING AGREEMENT.

3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN IT PERMANENTLY ENJOINED UNION BANK FROM FORECLOSING THE MORTGAGE ON THE
RESIDENTIAL PROPERTY OF THE TIU SPOUSES DESPITE THE ADMISSION OF NON-PAYMENT OF
THEIR OUTSTANDING LOAN TO THE BANK BY THE BORROWER-MORTGAGOR TIU SPOUSES;

4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN IT FIXED THE AMOUNT OF THE OBLIGATION OF RESPONDENT SPOUSES CONTRARY TO
THE PROVISIONS OF THE PROMISSORY NOTES, RESTRUCTURING AGREEMENT AND [THE]
VOLUNTARY ADMISSIONS BY BORROWER-MORTGAGOR TIU SPOUSES;

5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN IT RULED ON THE ALLEGED RENTALS PAID BY RESPONDENT SPOUSES WITHOUT ANY
FACTUAL BASIS;

6. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN IT HELD WITHOUT ANY FACTUAL BASIS THAT THE LOAN OBLIGATION OF TIU SPOUSES
HAS BEEN FULLY PAID;

7. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN IT HELD WITHOUT ANY FACTUAL BASIS THAT THE HOUSE INCLUDED IN THE REAL ESTATE
MORTGAGE DID NOT BELONG TO THE TIU SPOUSES.

8. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR IN
ORDERING UNION BANK TO RETURN THE CERTIFICATES OF SHARES OF STOCK AND TITLES TO
REAL PROPERTIES OF TIU SPOUSES ALLEGEDLY IN THE POSSESSION OF UNION BANK.

9. WHETHER OR NOT THE COURT OF APPEALS VIOLATED THE DOCTRINES AND PRINCIPLES ON
APPELLATE JURISDICTION.

10. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERROR IN
AWARDING DAMAGES AGAINST UNION BANK.50

Validity of the Restructuring Agreement

As previously discussed, the Court of Appeals declared that the Restructuring Agreement is void on account of its
being a failed novation of the original loan agreements. The Court of Appeals explained that since there was no
stipulation that the loans will be paid in dollars, and since no dollars ever exchanged hands, the original loan
transactions were in pesos.51 Proceeding from this premise, the Court of Appeals held that the Restructuring
Agreement, which was meant to convert the loans into pesos, was unwarranted. Thus, the Court of Appeals
reasoned that:

Be that as it may, however, since the loans of the Tiu spouses from Union Bank were peso loans from the very
beginning, there is no need for conversion thereof. A Restructuring Agreement should merely confirm the loans, not
add thereto. By making it appear in the Restructuring Agreement that the loans were originally dollar loans, Union
Bank overstepped its rights as a creditor and made unwarranted interpretations of the original loan agreement. This
Court is not bound by such interpretations made by Union Bank. When one party makes an interpretation of a
contract, he makes it at his own risk, subject to a subsequent challenge by the other party and a modification by the
courts. In this case, that party making the interpretation is not just any party, but a well entrenched and highly
respected bank. The matter that was being interpreted was also a financial matter that is within the profound
expertise of the bank. A normal person who does not possess the same financial proficiency or acumen as that of a
bank will most likely defer to the latter’s esteemed opinion, representations and interpretations. It has been often
stated in our jurisprudence that banks have a fiduciary duty to their depositors. According to the case of Bank of the
Philippine Islands vs. IAC (G.R. No. 69162, February 21, 1992), "as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship." Such fiduciary relationship should
also extend to the bank’s borrowers who, more often than not, are also depositors of the bank. Banks are in the
business of lending while most borrowers hardly know the basics of such business. When transacting with a bank,
most borrowers concede to the expertise of the bank and consider their procedures, pronouncements and
representations as unassailable, whether such be true or not. Therefore, when there is a doubtful banking
transaction, this Court will tip the scales in favor of the borrower.

Given the above ruling, the Restructuring Agreement, therefore, between the Tiu spouses and Union Bank does not
operate to supersede all previous loan documents, as claimed by Union Bank. But the said Restructuring
Agreement, as it was crafted by Union Bank, does not merely confirm the original loan of the Tiu spouses but
attempts to create a novation of the said original loan that is not clearly authorized by the debtors and that is not
supported by any cause or consideration. According to Article 1292 of the New Civil Code, in order that an obligation
may by extinguished by another which substitutes 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. Such is not the case
in this instance. No valid novation of the original obligation took place. Even granting arguendo that there was a
novation, the sudden change in the original amount of the loan to the new amount declared in the Restructuring
Agreement is not supported by any cause or consideration. Under Article 1352 of the Civil Code, contracts without
cause, or with unlawful cause, produce no effect whatever. A contract whose cause did not exist at the time of the
transaction is void. Accordingly, Article 1297 of the New Civil Code mandates that, if the new obligation is void, the
original one shall subsist, unless the parties intended that the former relation should be extinguished at any event.
Since the Restructuring Agreement is void and since there was no intention to extinguish the original loan, the
original loan shall subsist.52

Union Bank does not dispute that the spouses Tiu received the loaned amount of US$3,632,000.00 in Philippine
pesos, not dollars, at the prevailing exchange rate of US$1=P26.53 However, Union Bank claims that this does not
change the true nature of the loan as a foreign currency loan,54 and proceeded to illustrate in its Memorandum that
the spouses Tiu obtained favorable interest rates by opting to borrow in dollars (but receiving the equivalent peso
amount) as opposed to borrowing in pesos.55

We agree with Union Bank on this point. Although indeed, the spouses Tiu received peso equivalents of the
borrowed amounts, the loan documents presented as evidence, i.e., the promissory notes,56 expressed the amount
of the loans in US dollars and not in any other currency. This clearly indicates that the spouses Tiu were bound to
pay Union Bank in dollars, the amount stipulated in said loan documents. Thus, before the Restructuring
Agreement, the spouses Tiu were bound to pay Union Bank the amount of US$3,632,000.00 plus the interest
stipulated in the promissory notes, without converting the same to pesos. The spouses Tiu, who are in the
construction business and appear to be dealing primarily in Philippine currency, should therefore purchase the
necessary amount of dollars to pay Union Bank, who could have justly refused payment in any currency other than
that which was stipulated in the promissory notes.

We disagree with the finding of the Court of Appeals that the testimony of Lila Gutierrez, which merely attests to the
fact that the spouses Tiu received the peso equivalent of their dollar loan, proves the intention of the parties that
such loans should be paid in pesos. If such had been the intention of the parties, the promissory notes could have
easily indicated the same.

Such stipulation of payment in dollars is not prohibited by any prevailing law or jurisprudence at the time the loans
were taken. In this regard, Article 1249 of the Civil Code provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.

Although the Civil Code took effect on August 30, 1950, jurisprudence had upheld57 the continued effectivity of
Republic Act No. 529, which took effect earlier on June 16, 1950. Pursuant to Section 158 of Republic Act No. 529,
any agreement to pay an obligation in a currency other than the Philippine currency is void; the most that could be
demanded is to pay said obligation in Philippine currency to be measured in the prevailing rate of exchange at the
time the obligation was incurred.59 On June 19, 1964, Republic Act No. 4100 took effect, modifying Republic Act No.
529 by providing for several exceptions to the nullity of agreements to pay in foreign currency.60
On April 13, 1993, Central Bank Circular No. 138961 was issued, lifting foreign exchange restrictions and liberalizing
trade in foreign currency. In cases of foreign borrowings and foreign currency loans, however, prior Bangko Sentral
approval was required. On July 5, 1996, Republic Act No. 8183 took effect,62 expressly repealing Republic Act No.
529 in Section 263 thereof. The same statute also explicitly provided that parties may agree that the obligation or
transaction shall be settled in a currency other than Philippine currency at the time of payment.64

Although the Credit Line Agreement between the spouses Tiu and Union Bank was entered into on November 21,
1995,65 when the agreement to pay in foreign currency was still considered void under Republic Act No. 529, the
actual loans,66 as shown in the promissory notes, were taken out from September 22, 1997 to March 26, 1998,
during which time Republic Act No. 8183 was already in effect. In United Coconut Planters Bank v. Beluso,67 we
held that:

[O]pening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a
preparatory contract to the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the
considerations specified therefor, to lend to the other party amounts not exceeding the limit provided. The credit
transaction thus occurred not when the credit line was opened, but rather when the credit line was availed of. x x x.68

Having established that Union Bank and the spouses Tiu validly entered into dollar loans, the conclusion of the
Court of Appeals that there were no dollar loans to novate into peso loans must necessarily fail.

Similarly, the Court of Appeals’ pronouncement that the novation was not supported by any cause or consideration
is likewise incorrect. This conclusion suggests that when the parties signed the Restructuring Agreement, Union
Bank got something out of nothing or that the spouses Tiu received no benefit from the restructuring of their existing
loan and was merely taken advantage of by the bank. It is important to note at this point that in the determination of
the nullity of a contract based on the lack of consideration, the debtor has the burden to prove the same. Article
1354 of the Civil Code provides that "[a]though the cause is not stated in the contract, it is presumed that it exists
and is lawful, unless the debtor proves the contrary."

In the case at bar, the Restructuring Agreement was signed at the height of the financial crisis when the Philippine
peso was rapidly depreciating. Since the spouses Tiu were bound to pay their debt in dollars, the cost of purchasing
the required currency was likewise swiftly increasing. If the parties did not enter into the Restructuring Agreement in
December 1999 and the peso continued to deteriorate, the ability of the spouses Tiu to pay and the ability of Union
Bank to collect would both have immensely suffered. As shown by the evidence presented by Union Bank, the peso
indeed continued to deteriorate, climbing to US$1=P50.01 on December 2000.69 Hence, in order to ensure the
stability of the loan agreement, Union Bank and the spouses Tiu agreed in the Restructuring Agreement to peg the
principal loan at P150,364,800.00 and the unpaid interest at P5,000,000.00.

Before this Court, the spouses Tiu belatedly argue that their consent to the Restructuring Agreement was vitiated by
fraud and mistake, alleging that (1) the Restructuring Agreement did not take into consideration their substantial
payment in the amount of P40,447,185.60 before its execution; and (2) the dollar loans had already been
redenominated in 1997 at the rate of US$1=P26.34.70

We have painstakingly perused over the records of this case, but failed to find any documentary evidence of the
alleged payment of P40,447,185.60 before the execution of the Restructuring Agreement. In paragraph 16 of their
Amended Complaint, the spouses Tiu alleged payment of P40,447,185.60 for interests before the conversion of the
dollar loan.71 This was specifically denied by Union Bank in paragraph 5 of its Answer with
Counterclaim.72 Respondent Rodolfo Tiu testified that they made "50 million plus" in cash payment plus "other
monthly interest payments,"73 and identified a computation of payments dated July 17, 2002 signed by
himself.74Such computation, however, was never formally offered in evidence and was in any event, wholly self-
serving.

As regards the alleged redenomination of the same dollar loans in 1997 at the rate of US$1=P26.34, the spouses
Tiu merely relied on the following direct testimony of Herbert Hojas, one of the witnesses of Union Bank:

Q: Could you please describe what kind of loan was the loan of the spouses Rodolfo Tiu, the plaintiffs in this
case?

A: It was originally an FCDU, meaning a dollar loan.

 Q: What happened to this FCDU loan or dollar loan?

A: The dollar loan was re-denominated in view of the very unstable exchange of the dollar and the peso at
that time,

Q: Could you still remember what year this account was re-denominated from dollar to peso?

A: I think it was on the year 1997.

Q: Could [you] still remember what was then the prevailing exchange rate between the dollar and the peso
at that year 1997?

A: Yes. I have here the list of the dollar exchange rate from January 1987 (sic). It was P26.34 per dollar.75

Neither party presented any documentary evidence of the alleged redenomination in 1997. Respondent Rodolfo Tiu
did not even mention it in his testimony. Furthermore, Hojas was obviously uncertain in his statement that said
redenomination was made in 1997.

As pointed out by the trial court, the Restructuring Agreement, being notarized, is a public document enjoying a
prima facie presumption of authenticity and due execution. Clear and convincing evidence must be presented to
overcome such legal presumption.76 The spouses Tiu, who attested before the notary public that the Restructuring
Agreement "is their own free and voluntary act and deed,"77 failed to present sufficient evidence to prove otherwise.
It is difficult to believe that the spouses Tiu, veteran businessmen who operate a multi-million peso company, would
sign a very important document without fully understanding its contents and consequences.

This Court therefore rules that the Restructuring Agreement is valid and, as such, a valid and binding novation of
loans of the spouses Tiu entered into from September 22, 1997 to March 26, 1998 which had a total amount of
US$3,632,000.00.

Validity of the Foreclosure of Mortgage

The spouses Tiu challenge the validity of the foreclosure of the mortgage on two grounds, claiming that: (1) the debt
had already been fully paid; and (2) they are not the owners of the improvements on the mortgaged property.

(1) Allegation of full payment of the mortgage debt

In the preceding discussion, we have ruled that the Restructuring Agreement is a valid and binding novation of loans
of the spouses Tiu entered into from September 22, 1997 to March 26, 1998 in the total amount of
US$3,632,000.00. Thus, in order that the spouses Tiu can be held to have fully paid their loan obligation, they
should present evidence showing their payment of the total restructured amount under the Restructuring Agreement
which was P104,668,741.00. As we have discussed above, however, while respondent Rodolfo Tiu appeared to
have identified during his testimony a computation dated July 17, 2002 of the alleged payments made to Union
Bank,78 the same was not formally offered in evidence. Applying Section 34, Rule 13279 of the Rules of Court, such
computation cannot be considered by this Court. We have held that a formal offer is necessary because judges are
mandated to rest their findings of facts and their judgment only and strictly upon the evidence offered by the parties
at the trial. It has several functions: (1) to enable the trial judge to know the purpose or purposes for which the
proponent is presenting the evidence; (2) to allow opposing parties to examine the evidence and object to its
admissibility; and (3) to facilitate review by the appellate court, which will not be required to review documents not
previously scrutinized by the trial court.80 Moreover, even if such computation were admitted in evidence, the same
is self-serving and cannot be given probative weight. In the case at bar, the records do not contain even a single
receipt evidencing payment to Union Bank.

The Court of Appeals, however, held that several payments made by the spouses Tiu had been admitted by Union
Bank. Indeed, Section 11, Rule 8 of the Rules of Court provides that an allegation not specifically denied is deemed
admitted. In such a case, no further evidence would be required to prove the antecedent facts. We should therefore
examine which of the payments specified by the spouses Tiu in their Amended Complaint81were not specifically
denied by Union Bank.
The allegations of payment are made in paragraphs 16 to 21 of the Amended Complaint:

16. Before conversion of the dollar loan into a peso loan[,] the spouses Tiu had already paid the defendant
bank the amount of P40,447,185.60 for interests;

17. On August 3, 1999 and August 12, 1999, plaintiffs made payments in the amount of P15,000,000.00;

18. In order to lessen the obligation of plaintiffs, the mother of plaintiff Rodolfo T. Tiu, plaintiff Juanita T. Tiu,
executed a deed of dacion in payment in favor of defendant involving her 10 parcels of land located in
Labangon, Cebu City for the amount of P25,130,000.00. Copy of the deed was attached to the original
complaint as Annex "C";

19. For the same purpose, plaintiffs spouses Tiu also executed a deed of dacion in payment of their property
located at A.S. Fortuna St., Mandaue City for the amount of P36,080,000.00. Copy of the deed was attached
to the original complaint as Annex "D";

20. The total amount of the two dacions in payment made by the plaintiffs was P61,210,000.00;

21. Plaintiffs spouses Tiu also made other payment of the amount of P13,197,546.79 as of May 8, 2001;82

In paragraphs 4 and 5 of their Answer with Counterclaim,83 Union Bank specifically denied the allegation in
paragraph 9 of the Complaint, but admitted the allegations in paragraphs 17, 18, 19, 20 and 21 thereof. Paragraphs
18, 19 and 20 allege the two deeds of dacion. However, these instruments were already incorporated in the
computation of the outstanding debt (i.e., subtracted from the confirmed debt of P155,364,800.00), as can be
gleaned from the following provisions in the Restructuring Agreement:

a.) The loan obligation to the BANK to be restructured herein after deducting from the Indebtedness of the
BORROWER the dacion price of the properties subject of the Deeds of Dacion and adding to the Indebtedness all
the taxes, registration fees and other expenses advanced by the bank in registering the Deeds of Dacion, and also
adding to the Indebtedness the interest, and other fees and charges incurred by the Indebtedness, amounts to ONE
HUNDRED FOUR MILLION SIX HUNDRED SIXTY-EIGHT THOUSAND SEVEN HUNDRED FORTY-ONE PESOS
(PHP104,668,741.00) (the "TOTAL RESTRUCTURED AMOUNT").84

As regards the allegations of cash payments in paragraphs 17 and 21 of the Amended Complaint, the date of the
alleged payment is critical as to whether they were included in the Restructuring Agreement. The payment
ofP15,000,000.00 alleged in paragraph 17 of the Amended Complaint was supposedly made on August 3 and 12,
1999. This payment was before the date of execution of the Restructuring Agreement on December 21, 1999, and is
therefore already factored into the restructured obligation of the spouses.85 On the other hand, the payment
of P13,197,546.79 alleged in paragraph 21 of the Amended Complaint was dated May, 8, 2001. Said payment
cannot be deemed included in the computation of the spouses Tiu’s debt in the Restructuring Agreement, which was
assented to more than a year earlier. This amount (P13,197,546.79) is even absent86 in the computation of Union
Bank of the outstanding debt, in contrast with the P15,000,000.00 payment which is included87 therein. Union Bank
did not explain this discrepancy and merely relied on the spouses Tiu’s failure to formally offer supporting evidence.
Since this payment of P13,197,546.79 on May 8, 2001 was admitted by Union Bank in their Answer with
Counterclaim, there was no need on the part of the spouses Tiu to present evidence on the same. Nonetheless, if
we subtract this figure from the total restructured amount (P104,668,741.00) in the Restructuring Agreement, the
result is that the spouses Tiu still owe Union Bank P91,471,194.21.

(2) Allegation of third party ownership of the improvements on the mortgaged lot

The Court of Appeals, taking into consideration its earlier ruling that the loan was already fully paid, permanently
enjoined Union Bank from foreclosing the mortgage on the property covered by Transfer Certificate of Title No.
11951 (Lot No. 639) and from pursuing other foreclosure of mortgages over any other properties of the spouses Tiu.
The Court of Appeals ruled:

The prayer, therefore, of the Tiu spouses to enjoin the foreclosure of the real estate mortgage over their residential
property has merit. The loan has already been fully paid. It should also be noted that the house constructed on the
residential property of the Tiu spouses is not registered in the name of the Tiu spouses, but in the name of Jose Tiu
(Records, pp. 127-132), the father of appellant and petitioner Rodolfo Tiu, since 1981. It had been alleged by the Tiu
spouses that Jose Tiu died on December 18, 1983, and, that consequently upon his death, Juanita T. Tiu, Rosalinda
T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu became owners of the house (Records, p. 116). This
allegation has not been substantially denied by Union Bank. All that the Union Bank presented to refute this
allegation are a Transfer Certificate of Title and a couple of Tax Declarations which do not indicate that a residential
house is titled in the name of the Tiu spouses. In fact, in one of the Tax Declarations, the market value of the
improvements is worth only P3,630.00. Certainly, Union Bank should have been aware that this Tax Declaration did
not cover the residential house. Union Bank should also not rely on warranties made by debtors that they are the
owners of the property. They should investigate such representations. The courts have made consistent rulings that
a bank, being in the business of lending, is obligated to verify the true ownership of the properties mortgaged to
them. Consequently, this Court permanently enjoins Union Bank from foreclosing the mortgage of the residential
property of the Tiu spouses which is covered by Transfer Certificate of Title No. 11951 and from pursuing other
foreclosure of mortgages over any other properties of the Tiu spouses. If a foreclosure sale has already been made
over such properties, this Court orders the cancellation of such foreclosure sale and the Certificate of Sale thereof if
any has been issued, and the return of the title to the Tiu spouses.88

We disagree. Contrary to the ruling of the Court of Appeals, the burden to prove the spouses Tiu’s allegation – that
they do not own the improvements on Lot No. 639, despite having such improvements included in the mortgage – is
on the spouses Tiu themselves. The fundamental rule is that he who alleges must prove.89 The allegations of the
spouses Tiu on this matter, which are found in paragraphs 35 to 3990 of their Amended Complaint, were specifically
denied in paragraph 9 of Union Bank’s Answer with Counterclaim.91

Upon careful examination of the evidence, we find that the spouses Tiu failed to prove that the improvements on Lot
No. 639 were owned by third persons. In fact, the evidence presented by the spouses Tiu merely attempt to prove
that the improvements on Lot No. 639 were declared for taxes in the name of respondent Rodolfo Tiu’s father, Jose
Tiu, who allegedly died on December 18, 1983. There was no effort to show how their co-plaintiffs in the original
complaint, namely Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu, became
co-owners of the house. The spouses Tiu did not present evidence as to (1) who the heirs of Jose Tiu are; (2) if
Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu are indeed included as heirs;
and (3) why petitioner Rodolfo Tiu is not included as an heir despite being the son of Jose Tiu. No birth certificate of
the alleged heirs, will of the deceased, or any other piece of evidence showing judicial or extrajudicial settlement of
the estate of Jose Tiu was presented.

In light of the foregoing, this Court therefore sets aside the ruling of the Court of Appeals permanently enjoining
Union Bank from foreclosing the mortgage on Lot No. 639, including the improvements thereon.

Validity of Alleged Rental Payments on the Properties Conveyed to the Bank via Dacion en Pago

The Court of Appeals found the lease contracts over the properties conveyed to Union Bank via dacion en pago to
be void for being against public policy. The appellate court held that since the General Banking Law of
200092mandates banks to immediately dispose of real estate properties that are not necessary for its own use in the
conduct of its business, banks should not enter into two-year contracts of lease over properties paid to them through
dacion.93 The Court of Appeals thus ordered Union Bank to return the rentals it collected. To determine the amount
of rentals paid by the spouses Tiu to Union Bank, the Court of Appeals simply multiplied the monthly rental
stipulated in the Restructuring Agreement by the stipulated period of the lease agreement:

For the Labangon property, the Tiu spouses paid rentals in the amount of P98,000.00 per month for two years, or a
total amount of P2,352,000.00. For the A.S. Fortuna property, the Tiu spouses paid rentals in the amount
ofP150,000.00 per month for two years, or a total amount of P3,600,000.00. The total amount in rentals paid by the
Tiu spouses to Union Bank is FIVE MILLION NINE HUNDRED FIFTY- TWO THOUSAND PESOS (P5,952,000.00).
This Court finds that the return of this amount to the Tiu spouses is called for since it will better serve public policy.
These properties that were given by the Tiu spouses to Union Bank as payment should not be used by the latter to
extract more money from the former. This situation is analogous to having a debtor pay interest for a debt already
paid. Instead of leasing the properties, Union Bank should have instructed the Tiu spouses to vacate the said
properties so that it could dispose of them.94
The Court of Appeals committed a serious error in this regard. As pointed out by petitioner Union Bank, the spouses
Tiu did not present any proof of the alleged rental payments. Not a single receipt was formally offered in evidence.
The mere stipulation in a contract of the monthly rent to be paid by the lessee is certainly not evidence that the
same has been paid. Since the spouses Tiu failed to prove their payment to Union Bank of the amount
ofP5,952,000.00, we are constrained to reverse the ruling of the Court of Appeals ordering its return.

Even assuming arguendo that the spouses Tiu had duly proven that it had paid rent to Union Bank, we nevertheless
disagree with the finding of the Court of Appeals that it is against public policy for banks to enter into two-year
contracts of lease of properties ceded to them through dacion en pago. The provisions of law cited by the Court of
Appeals, namely Sections 51 and 52 of the General Banking Law of 2000, merely provide:

SECTION 51. Ceiling on Investments in Certain Assets. — Any bank may acquire real estate as shall be necessary
for its own use in the conduct of its business: Provided, however, That the total investment in such real estate and
improvements thereof, including bank equipment, shall not exceed fifty percent (50%) of combined capital accounts:
Provided, further, That the equity investment of a bank in another corporation engaged primarily in real estate shall
be considered as part of the bank's total investment in real estate, unless otherwise provided by the Monetary
Board.

SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. — Notwithstanding the limitations of the
preceding Section, a bank may acquire, hold or convey real property under the following circumstances:

52.1. Such as shall be mortgaged to it in good faith by way of security for debts;

52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or

52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as
it shall purchase to secure debts due it.

Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed
of by the bank within a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however,
That the bank may, after said period, continue to hold the property for its own use, subject to the limitations of the
preceding Section.

Section 52.2 contemplates a dacion en pago. Thus, Section 52 undeniably gives banks five years to dispose of
properties conveyed to them in satisfaction of debts previously contracted in the course of its dealings, unless
another period is prescribed by the Monetary Board. Furthermore, there appears to be no legal impediment for a
bank to lease the real properties it has received in satisfaction of debts, within the five-year period that such bank is
allowed to hold the acquired realty.

We do not dispute the interpretation of the Court of Appeals that the purpose of the law is to prevent the
concentration of land holdings in a few hands, and that banks should not be allowed to hold on to the properties
contemplated in Section 52 beyond the five-year period unless such bank has exerted its best efforts to dispose of
the property in good faith but failed. However, inquiries as to whether the banks exerted best efforts to dispose of
the property can only be done if said banks fail to dispose of the same within the period provided. Such inquiry is
furthermore irrelevant to the issues in the case at bar.

Order to Return Certificates Allegedly in Union Bank’s Possession

In the Amended Complaint, the spouses Tiu alleged95 that they delivered several certificates and titles to Union
Bank pursuant to a Memorandum of Agreement. These certificates and titles were not subjected to any lien in favor
of Union Bank, but the latter allegedly continued to hold on to said properties.

The RTC failed to rule on this issue. The Court of Appeals, tackling this issue for the first time, ruled in favor of the
Tiu spouses and ordered the return of these certificates and titles. The appellate court added that if Union Bank can
no longer return these certificates or titles, it should shoulder the cost for their replacement.96
Union Bank, asserting that the Memorandum of Agreement did not, in fact, push through, denies having received
the subject certificates and titles. Union Bank added that even assuming arguendo that it is in possession of said
documents, the Restructuring Agreement itself allows such possession.97

The evidence on hand lends credibility to the allegation of Union Bank that the Memorandum of Agreement did not
push through. The copy of the Memorandum of Agreement attached by the spouses Tiu themselves to their original
complaint did not bear the signature of any representative from Union Bank and was not notarized.98

We, however, agree with the finding of the Court of Appeals that despite the failure of the Memorandum of
Agreement to push through, the certificates and titles mentioned therein do appear to be in the possession of Union
Bank. As held by the Court of Appeals:

Lastly, this Court will order, as it hereby orders, Union Bank to return to the Tiu spouses all the certificates of shares
of stocks and titles to real properties of the Tiu spouses in its possession. Union Bank cannot deny possession of
these items since it had made judicial admissions of such possession in their document entitled "Reply to Plaintiffs’
request for Admission" (records, pp. 216-217). While in that document, Union Bank only admitted to the possession
of four real estate titles, this Court is convinced that all the certificates and titles mentioned in the unconsummated
Memorandum of Agreement (Records, pp. 211-213) were given by the Tiu spouses to Union Bank for appraisal.
This finding is further bolstered by the admission of the Union Bank that it kept the titles for safekeeping after it
rejected the Memorandum of Agreement. Since Union Bank rejected these certificates and titles of property, it
should return the said items to the Tiu spouses. If Union Bank can no longer return these certificates and titles or if it
has misplaced them, it shall shoulder the cost for the replacement and issuance of new certificates and new titles
over the said properties.99

As regards Union Bank’s argument that it has the right to retain said documents pursuant to the Restructuring
Agreement, it is referring to paragraph 11(b), which provides that:

11. Effects of Default – When the BORROWER is in default, such default shall have the following effects,
alternative, concurrent and cumulative with each other:

xxxx

(b) The BANK shall be entitled to all the remedies provided for and further shall have the right to effect or apply
against the partial or full payment of any and all obligations of the BORROWER under this Restructuring Agreement
any and all moneys or other properties of the BORROWER which, for any reason, are or may hereafter come into
the possession of the Bank or the Bank’s agent. All such moneys or properties shall be deemed in the BANK’s
possession as soon as put in transit to the BANK by mail or carrier.100

In the first place, notwithstanding the foregoing provision, there is no clear intention on the part of the spouses Tiu to
deliver the certificates over certain shares of stock and real properties as security for their debt. From the terms of
the Memorandum of Agreement, these certificates were surrendered to Union Bank in order that the said properties
described therein be given their corresponding loan values required for the restructuring of the spouses Tiu’s
outstanding obligations. However, in the event the parties fail to agree on the valuation of the subject properties,
Union Bank agrees to release the same.101 As Union Bank itself vehemently alleges, the Memorandum of
Agreement was not consummated. Moreover, despite the fact that the Bank was aware, or in possession, of these
certificates,102 at the time of execution of the Restructuring Agreement, only the mortgage over the real property
covered by TCT No. T-11951 was expressly mentioned as a security in the Restructuring Agreement. In fact, in its
Reply to Request for Admission,103 Union Bank admitted that (1) the titles to the real properties were submitted to it
for appraisal but were subsequently rejected, and (2) no real estate mortgages were executed over the said
properties. There being no agreement that these properties shall secure respondents’ obligation, Union Bank has no
right to retain said certificates.
1av vphi1

Assuming arguendo that paragraph 11(b) of the Restructuring Agreement indeed allows the retention of the
certificates (submitted to the Bank ostensibly for safekeeping and appraisal) as security for spouses Tiu’s debt,
Union Bank’s position still cannot be upheld. Insofar as said provision permits Union Bank to apply properties of the
spouses Tiu in its possession to the full or partial payment of the latter’s obligations, the same appears to impliedly
allow Union Bank to appropriate these properties for such purpose. However, said provision cannot be validly
applied to the subject certificates and titles without violating the prohibition against pactum commissorium contained
in Article 2088 of the Civil Code, to the effect that "[t]he creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them[;] [a]ny stipulation to the contrary is null and void." Applicable by analogy to
the present case is our ruling in Nakpil v. Intermediate Appellate Court,104 wherein property held in trust was ceded
to the trustee upon failure of the beneficiary to answer for the amounts owed to the former, to wit:

For, there was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to pay the
value of the advances. Thus, contrary to respondent's manifestations, all the elements of a pactum commissorium
were present: there was a creditor-debtor relationship between the parties; the property was used as security for the
loan; and, there was automatic appropriation by respondent of Pulong Maulap in case of default of
petitioner.105 (Emphases supplied.)

This Court therefore affirms the order of the Court of Appeals for Union Bank to return to the spouses Tiu all the
certificates of shares of stock and titles to real properties that were submitted to it or, in lieu thereof, to pay the cost
for the replacement and issuance of new certificates and new titles over the said properties.

Validity of the Award of Damages

The Court of Appeals awarded damages in favor of the spouses Tiu based on its taking judicial notice of the alleged
exploitation by many banks of the Asian financial crisis, as well as the foreclosure of the mortgage of the home of
the spouses Tiu despite the alleged full payment by the latter. As regards the alleged manipulation of the financial
crisis, the Court of Appeals held:

As a final note, this Court observes the irregularity in the circumstances [surrounding] dollar loans granted by banks
right before or during the Asian financial crisis. It is of common knowledge that many banks, around that time,
actively pursued and convinced debtors to make dollar loans or to convert their peso loans to dollar loans allegedly
because of the lower interest rate of dollar loans. This is a highly suspect behavior on the part of the banks because
it is irrational for the banks to voluntarily and actively proffer a conversion that would give them substantially less
income. In the guise of benevolence, many banks were able to convince borrowers to make dollar loans or to
convert their peso loans to dollar loans. Soon thereafter, the Asian financial crisis hit, and many borrowers were
saddled with loans that ballooned to twice or thrice the amount of their original loans. This court takes judicial notice
of these events or matters which are of public knowledge. It is inconceivable that the banks were unaware of the
looming Asian financial crisis. Being in the forefront of the financial world and having access to financial data that
were not available to the average borrower, the banks were in such a position that they had a higher vantage point
with respect to the financial landscape over their average clients. The cavalier way with which banks exploited and
manipulated the situation is almost too palpable that they openly and unabashedly struck heavy blows on the
Philippine economy, industries and businesses. The banks have a fiduciary duty to their clients and to the Filipino
people to be transparent in their dealings and to make sure that the latter’s interest are not prejudiced by the
former’s interest. Article 1339 of the New Civil Code provides that the failure to disclose facts, when there is a duty
to reveal them, as when the parties are bound by confidential relations, constitutes fraud. Undoubtedly, the banks
and their clients are bound by confidential relations. The almost perfect timing of the banks in convincing their clients
to shift to dollar loans just when the Asian financial crisis struck indicates that the banks not only failed to disclose
facts to their clients of the looming crisis, but also suggests of the insidious design to take advantage of these
undisclosed facts.106

We have already held that the foreclosure of the mortgage was warranted under the circumstances. As regards the
alleged exploitation by many banks of the Asian financial crisis, this Court rules that the generalization made by the
appellate court is unfounded and cannot be the subject of judicial notice. "It is axiomatic that good faith is always
presumed unless convincing evidence to the contrary is adduced. It is incumbent upon the party alleging bad faith to
sufficiently prove such allegation. Absent enough proof thereof, the presumption of good faith prevails."107 The
alleged insidious design of many banks to betray their clients during the Asian financial crisis is certainly not of
public knowledge. The deletion of the award of moral and exemplary damages in favor of the spouses Tiu is
therefore in order.

WHEREFORE, the Petition is PARTIALLY GRANTED. The Joint Decision of the Court of Appeals in CA-G.R. CV
No. 00190 and CA-G.R. SP No. 00253 dated February 21, 2006 is hereby AFFIRMED insofar as it ordered
petitioner Union Bank of the Philippines to return to the respondent spouses Rodolfo T. Tiu and Victoria N. Tiu all
the certificates of shares of stock and titles to real properties that were submitted to it or, in lieu thereof, to pay the
cost for the replacement and issuance of new certificates and new titles over the said properties. The foregoing Joint
Decision is hereby SET ASIDE: (1) insofar as it permanently enjoined Union Bank of the Philippines from foreclosing
the mortgage of the residential property of respondent spouses Rodolfo T. Tiu and Victoria N. Tiu which is covered
by Transfer Certificate of Title No. 11951; (2) insofar as it ordered Union Bank of the Philippines to return to the
respondent spouses Rodolfo T. Tiu and Victoria N. Tiu the amount of P927,546.79 representing illegally collected
rentals; and (3) insofar as it ordered Union Bank of the Philippines to pay the respondent spouses Rodolfo T. Tiu
and Victoria N. Tiu P100,000.00 in moral damages, P100,000.00 in exemplary damages,P50,000.00 in attorney’s
fees and cost, both in the lower court and in this Court.

No further pronouncement as to costs.

SO ORDERED.