G.R. No.

L-1405

July 31, 1948

BENJAMIN ABUBAKAR, petitioner, vs. THE AUDITOR GENERAL, respondent. Viray and Viola Viray for petitioner. First Assistant Solicitor General Roberto A. Gianzon and Solicitor Manuel Tomacruz for respondent. BENGZON, J.: We are asked to overrule the decision of the Auditor General refusing to authorize the payment of Treasury warrant No. A-2867376 for P1,000 which was issued in favor of Placido S. Urbanes on December 10, 1941, but is now in the hands of herein petitioner Benjamin Abubakar. For his refusal the respondent gave two reasons: first, because the money available for the redemption of treasury warrants issued before January 2, 1942, is appropriated by Republic Act No. 80 (Item F-IV-8) and this warrant does not come within the purview of said appropriation; and second, because on of the requirements of his office had not been complied with, namely, that it must be shown that the holders of warrants covering payment or replenishment of cash advances for official expenditures (as this warrant is) received them in payment of definite government obligations. Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon the second. There is no doubt as to the authenticity and date of the treasury warrant. There is no question that it was regularly indorsed by the payee and is now in the custody of the herein petitioner who is a private individual. On the other hand, it is admitted that the warrant was originally made payable to Placido S. Urbanes in his capacity as disbursing officer of the Food Administration for "additional cash advance for Food Production Campaign in La Union" (Annex A). It is thus apparent that this is a treasury warrant issued in favor of a public officer or employeeand held in possession by a private individual. Such being the case, the Auditor General can hardly be blamed for not authorizing its redemption out of an appropriation specifically for "treasury warrants issued ... in favor of and held in possession by private individuals." (Republic Act No. 80, Item F-IV-8.) This warrant was not issued in favor of a private individual. It was issued in favor of a government employee. The distinction is not without a difference. Outstanding treasury warrants issued prior to January 2, 1942, amount to more than four million pesos. The appropriation herein mentioned is only for P1,750,000. Obviously Congress wished to provide for redemption of one class of warrants those issued to private individuals as distinguished from those issued in favor of government officials. Basis for the discrimination is not lacking. Probably the Government is not so sure that those warrants to officials have all been properly used by the latter during the Japanese occupation or maybe it wants to conduct further inquiries as to the equities of the present holders thereof. The petitioner argues that he is a holder in good faith and for value of a negotiable instrument an dis entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of the negotiable instruments law. For one thing, the document bearing on its face the words "payable from the appropriation for food administration," is actually an order for payment out of "a particular fund," and is not unconditional, and does not fulfill one of the essential requirements of a negotiable instrument. (Section 3 last sentenced and section 1[b] of the Negotiable Instruments Law.) In the United States, government warrants for the payment of money are not negotiable instruments nor commercial proper1

Anyway the question here is not whether the Government should eventually pay this warrant, or is ultimately responsible for it, but whether the Auditor General erred in refusing to permit payment out of the particular appropriation in Item F-IV-8 of Republic Act No. 80. We think that he did not. Petition dismissed, with costs. Paras, Actg. C.J., Feria, Pablo, Perfecto, Briones, and Padilla, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-222 April 26, 1950

SALVACION F. VDA. DE EDUQUE, ETC., plaintiff-appellee, vs. JOSE M. OCAMPO, defendant-appellant. Alfredo B. Cacnio and Padilla, Carlos and Fernando for appellant. Jose Feria for appellee. Delfin L. Gonzalez for plaintiff-intervenor. MORAN, C.J.: This is an action to compel acceptance of payment of a mortgage debt. On February 16, 1935, Dr. Jose Eduque secured two loans from Mariano Ocampo de Leon, Doa Escolastica de los Reyes and Don Jose M. Ocampo, the first in the amount of P40,000 and the second in the sum of P15,000, both payable within the period of twenty years, with interest at the rate of 5 per cent per annum. Payment of these two loans was guaranteed by mortgage on real property. In the mortgage contract it is stipulated that any of the mortgage creditors may receive payment and execute deeds of cancellation of the mortgage debts. On December 6, 1943, plaintiff and appellee, as administratrix of the estate of the deceased Dr. Jose Eduque, tendered payment, by means of cashier's check, of the total amount of the two loans, P55,000, to defendant-appellant Jose M. Ocampo, one of the creditors, who refused to accept payment. By reason of such refusal, an action was brought and a cashier's check for the total amount of P55,000 deposited in court. After trial, judgment was rendered against defendant compelling him to accept the P55,000 deposited in court, to issue deeds for cancellation of the mortgage debts, and to pay the expenses of consignation and costs. Defendant accepted the judgment with respect to the second loan of P15,000 upon the ground that, according to him, in the deed of mortgage corresponding to that loan it clearly appeared that the loan was payable "durante el termino de 20 aos," and that the only question remaining between the parties is the interpretation of the first deed of mortgage regarding the first loan of P40,000. and he asked the court to order "que de la cantidad de P55,000 consignada en este Juzgado, se entregue al demandado la suma de P15,000, despues de descontar proporcionalmente cualesquiera cantidades por deposito y otros conceptos segun los terminos de la decision promulgada." The order was issued accordingly and the sum of P15,000 out of the P55,000 deposited in court was delivered to the defendant.

The present appeal concerns the decision of the lower court regarding the first loan of P40,000, and the principal error assigned by the appellant is that tender of payment by means of a cashier's check representing Japanese war notes is not valid. We have already help that Japanese military notes were legal tender during the Japanese occupation. But appellant argues, further, that the consignation of a cashier's check, which is not legal tender, is not binding upon him. This question, however, has never been raised in the lower court. Upon the contrary, defendant accepted impliedly the consignation of the cashier's check when he himself asked the court that out of the money thus consigned he be paid the amount of the second loan of P15,000. It is a rule that " a cashier's check may constitute a sufficient tender where no objection is made on this ground." (62 C. J., p. 670; see also 40 Amer. Jur., p. 764.) For all the foregoing, judgment is affirmed with cost against appellant. Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-22405 June 30, 1971 PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, vs. MAURICIO A. SORIANO, ET AL., defendant-appellees. Marcial Esposo for plaintiff-appellant. Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney Concepcion Torrijos-Agapinan for defendants-appellees.

DIZON, J.: An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras. On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal teller had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with a private checks were not generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order Division, but instead of doing so, Montinola managed to leave building with his own check and the ten(10) money orders without the knowledge of the teller. On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an urgent message was sent to all postmasters, and the following day notice was likewise served

upon all banks, instructing them not to pay anyone of the money orders aforesaid if presented for payment. The Bank of America received a copy of said notice three days later. On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by appellant as part of its sales receipts. The following day it deposited the same with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its face value of P200.00. On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of America that money order No. 124688 attached to his letter had been found to have been irregularly issued and that, in view thereof, the amount it represented had been deducted from the bank's clearing account. For its part, on August 2 of the same year, the Bank of America debited appellant's account with the same amount and gave it advice thereof by means of a debit memo. On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his office deducting the sum of P200.00 from the clearing account of the Bank of America, but his request was denied. So was appellant's subsequent request that the matter be referred to the Secretary of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and Communications, but the latter sustained the actions taken by the postal officers. In connection with the events set forth above, Montinola was charged with theft in the Court of First Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable doubt. On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying for judgment as follows: WHEREFORE, plaintiff prays that after hearing defendants be ordered: (a) To countermand the notice given to the Bank of America on September 27, 1961, deducting from the said Bank's clearing account the sum of P200.00 represented by postal money order No. 124688, or in the alternative indemnify the plaintiff in the same amount with interest at 8-% per annum from September 27, 1961, which is the rate of interest being paid by plaintiff on its overdraft account; (b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral damages in the amount of P1,000.00 or in such amount as will be proved and/or determined by this Honorable Court: exemplary damages in the amount of P1,000.00, attorney's fees of P1,000.00, and the costs of action. Plaintiff also prays for such other and further relief as may be deemed just and equitable. On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to 15 of the Record on Appeal, the above-named court rendered judgment as follows: WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice given to the Bank of America on September 27, 1961, deducting from said Bank's clearing account the sum of P200.00 representing the amount of postal money order No. 124688, or in the alternative, to indemnify the

plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-% per annum from September 27, 1961 until fully paid; without any pronouncement as to cost and attorney's fees. The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted the same stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered. The first, second and fifth assignments of error discussed in appellant's brief are related to the other and will therefore be discussed jointly. They raise this main issue: that the postal money order in question is a negotiable instrument; that its nature as such is not in anyway affected by the letter dated October 26, 1948 signed by the Director of Posts and addressed to all banks with a clearing account with the Post Office, and that money orders, once issued, create a contractual relationship of debtor and creditor, respectively, between the government, on the one hand, and the remitters payees or endorses, on the other. It is not disputed that our postal statutes were patterned after statutes in force in the United States. For this reason, ours are generally construed in accordance with the construction given in the United States to their own postal statutes, in the absence of any special reason justifying a departure from this policy or practice. The weight of authority in the United States is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in establishing and operating a postal money order system, the government is not engaging in commercial transactions but merely exercises a governmental power for the public benefit. It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of circumstances (49 C.J. 1153). Of particular application to the postal money order in question are the conditions laid down in the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal money orders received by it from its depositors. Among others, the condition is imposed that "in cases of adverse claim, the money order or money orders involved will be returned to you (the bank) and the, corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you if such step is deemed necessary." The conditions thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is clearly referred from the fact that, upon receiving advice that the amount represented by the money order in question had been deducted from its clearing account with the Manila Post Office, it did not file any protest against such action. Moreover, not being a party to the understanding existing between the postal officers, on the one hand, and the Bank of America, on the other, appellant has no right to assail the terms and conditions thereof on the ground that the letter setting forth the terms and conditions aforesaid is void because it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said legal provision does not apply to the letter in question because it does not provide for a department regulation but merely sets down certain conditions upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented for payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments of error. WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs.
Sunday, April 15, 2012

Ponce vs. Court of Appeals, 90 SCRA 533, No. L-49494, May 31, 1979
Posted by Alchemy Business Center and Marketing Consultancy at 10:13 PM Labels: 1979, 90 SCRA 533, Civil Law Review, May 31, No. L-49494,Ponce vs. Court of Appeals

Ponce vs. Court of Appeals, 90 SCRA 533, No. L-49494, May 31, 1979 G.R. No. L-49494 May 31, 1979 NELIA G. PONCE and VICENTE C. PONCE, petitioners, vs. THE HONORABLE COURT OF APPEALS, and JESUSA B. AFABLE, respondents. Romeo L. Mendoza & Gallardo S. Tongohan for petitioners. Ramon M. Velayo for private respondent. MELENCIO-HERRERA, J.: This is a Petition for Certiorari seeking to set aside the Resolution of the Court of Appeals, dated June 8, 1978, reconsidering its Decision dated December 17, 1977 and reversing the judgment of the Court of First Instance of Manila in favor of petitioners as well as the Resolutions, dated July 6, 1978 and November 27, 1978, denying petitioners' Motion for Reconsideration. The factual background of the case is as follows: On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza and Ma. Aurora C. Dio executed a promissory note in favor of petitioner Nelia G. Ponce in the sum of P814,868.42, Philippine Currency, payable, without interest, on or before July 31, 1969. It was further provided therein that should the indebtedness be not paid at maturity, it shall draw interest at 12% per annum, without demand; that should it be necessary to bring suit to enforce pay ment of the note, the debtors shall pay a sum equivalent to 10% of the total amount due for attorney's fees; and, in the event of failure to pay the indebtedness plus interest in accordance with its terms, the debtors shall execute a first mortgage in favor of the creditor over their properties or of the Carmen Planas Memorial, Inc. Upon the failure of the debtors to comply with the terms of the promissory note, petitioners (Nelia G. Ponce and her husband) filed, on July 27, 1970, a Complaint against them with the Court of First Instance of Manila for the recovery of the principal sum of P814,868.42, plus interest and damages. Defendant Ma. Aurora C. Dio's Answer consisted more of a general denial and the contention that she did not borrow any amount from plaintiffs and that her signature on the promissory note was obtained by plaintiffs on their assurance that the same was for " formality only." Defendant Jesusa B. Afable, for her part, asserted in her Answer that the promissory note failed to express the true intent and agreement of the parties, the true agreement being that the obligation therein mentioned would be assumed and paid entirely by defendant Felisa L. Mendoza; that she had signed said document only as President of the Carmen Planas Memorial, Inc., and that she was not to incur any personal obligation as to the payment thereof because the same would be repaid by defendant Mendoza and/or Carmen Planas Memorial, Inc. In her Amended Answer, defendant Felisa L. Mendoza admitted the authenticity and due execution of the promissory note, but averred that it was a recapitulation of a series of transactions between her and the plaintiffs, "with defendant Ma. Aurora C. Dio and Jesusa B. Afable coming only as accomodation parties." As affirmative defense, defendant Mendoza contended that the promissory note was the result of usurious transactions, and, as counterclaim, she prayed that plaintiffs be ordered to account for all the interests paid. Plaintiffs filed their Answer to defendant Mendoza's counterclaim denying under oath the allegations of usury. After petitioners had rested, the case was deemed submitted for decision since respondent Afable and her co-debtors had repeatedly failed to appear before the trial Court for the presentation of their evidence. On March 9, 1972, the trial Court rendered judgment ordering respondent Afable and her co-debtors, Felisa L. Mendoza and Ma. Aurora C. Dio , to pay petitioners, jointly and severally, the sum of P814,868.42, plus 12% interest per annum from July 31, 1969 until full payment, and a sum equivalent to 10% of the total amount due as attorney's fees and costs.

From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that the contract under consideration involved the payment of US dollars and was, therefore, illegal; and that under the in pari delicto rule, since both parties are guilty of violating the law, neither one can recover. It is to be noted that said defense was not raised in her Answer. On December 13, 1977, the Court of Appeals* rendered judgment affirming the decision of the trial Court. In a Resolution dated February 27, 1978, the Court of Appeals,** denied respondent's Motion for Reconsideration. However, in a Resolution dated June 8, 1978, the Court of Appeals acting on the Second Motion for Reconsideration filed by private respondent, set aside the Decision of December 13, 1977, reversed the judgment of the trial Court and dismissed the Complaint. The Court of Appeals opined that the intent of the parties was that the promissory note was payable in US dollars, and, therefore, the transaction was illegal with neither party entitled to recover under the in pari delicto rule. Their Motions for Reconsideration having been denied in the Resolutions dated July 6, 1978 and November 27, 1978, petitioners filed the instant Petition raising the following Assignments of Error. I THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE PROMISSORY NOTE EVIDENCING THE TRANSACTION OF THE PARTIES IS PAYABLE IN U.S. DOLLARS THEREBY DETERMINING THE INTENT OF THE PARTIES OUTSIDE OF THEIR PROMISSORY NOTE DESPITE LACK OF SHOWING THAT IT FAILED TO EXPRESS THE TRUE INTENT OR AGREEMENT OF THE PARTIES AND ITS PAYABILITY IN PHILIPPINE PESOS WHICH IS EXPRESSED, AMONG OTHERS, BY ITS CLEAR AND PRECISE TERMS. II THE RESPONDENT COURT, OF APPEALS ERRED IN HOLDING THAT REPUBLIC ACT 529, OTHERWISE KNOWN ASIAN ACT TO ASSURE UNIFORM VALUE TO PHILIPPINE COINS AND CURRENCY,' COVERS THE TRANSACTION OF THE PARTIES HEREIN. III THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT PRIVATE RESPONDENT JESUSA B. AFABLE COULD NOT FAVORABLY AVAIL HERSELF OF THE DEFENSE OF ALLEGED APPLICABILITY OF REPUBLIC ACT 529 AND THE DOCTRINE OF IN PARI DELICTO AS THESE WERE NOT PLEADED NOR ADOPTED BY HER IN THE TRIAL. IV THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING ASSUMING ARGUENDO THAT REPUBLIC ACT 529 COVERS THE PARTIES TRANSACTION, THAT THE Doctrine OF IN PARI DELICTO DOES NOT APPLY AND THE PARTIES AGREEMENT WAS NOT NULL AND VOID PURSUANT TO THE RULING IN OCTAVIO A. KALALO VS. ALFREDO J. LUZ, NO.-27782, JULY 31, 1970. In the Resolution dated June 8, 1978, the Court of Appeals made the following observations: We are convinced from the evidence that the amount awarded by the lower Court was indeed owed by the defendants to the plaintiffs. However, the sole issue raised in this second motion for reconconsideration is not the existence of the obligation itself but the legality of the subject matter of the contract. If the subject matter is illegal and against public policy, the doctrine of pari delicto applies. xxx xxx xxx We are constrained to reverse our December 13, 1977 decision. While it is true that the promissory note does not mention any obligation to pay in dollars, plaintiff-appellee Ponce himself admitted that there was an agreement that he would be paid in dollars by the defendants. The promissory note is payable in U.S. donors. The in. tent of the parties prevails over the bare words of the written contracts. xxx xxx xxx The agreement is null and void and of no effect under Republic Act No. 529. Under the doctrine of pari delicto, no recovery can 1 be made in favor of the plaintiffs for being themselves guilty of violating the law. We are constrained to disagree. Reproduced hereunder is Section 1 of Republic Act No. 529, which was enacted on June 16, 1950: Section 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null voice and of no effect and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) transactions were the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long as the funds are Identifiable, as having emanated from the sources enumerated above; (b) transactions affecting high priority economic projects for agricultural industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward exchange transactions entered into between banks or between banks and individuals or juridical persons; (d) import-export and other international banking financial investment and industrial transactions. With the exception of the cases enumerated in items (a) (b), (c) and (d) in the foregoing provision, in, which cases the terms of the parties' agreement shag apply, every other domestic obligation heretofore or hereafter incurred whether or not any such provision as to payment is contained therein or made with- respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency,

it shall be discharge in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in foreign currency stipulated to be payable in the currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail All coin and currency, including Central Bank notes, heretofore and hereafter issued and d by the Government of the Philippines shall be legal tender for all debts, public and private. (As amended by RA 4100, Section 1, approved June 19, 1964) (Empahsis supplied). It is to be noted that while an agreement to pay in dollars is declared as null and void and of no effect, what the law specifically prohibits is payment in currency other than legal tender. It does not defeat a creditor's claim for payment, as it specifically provides that "every other domestic obligation ... whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts." A contrary rule would allow a person to profit or enrich himself inequitably at another's expense. As the Court of Appeals itself found, the promissory note in question provided on its face for payment of the obligation in Philippine currency, i.e., P814,868.42. So that, while the agreement between the parties originally involved a dollar transaction and that petitioners expected to be paid in the amount of US$194,016.29, petitioners are not now insisting on their agreement with respondent Afable for the payment of the obligation in dollars. On the contrary, they are suing on the basis of the promissory note whereby the parties have already agreed to convert the dollar loan into Philippine currency at the rate of 2 P4.20 to $1.00. It may likewise be pointed out that the Promissory Note contains no provision "giving the obligee the right to require payment in a particular kind of currency other than Philippine currency, " which is what is specifically prohibited by RA No. 529. At any rate, even if we were to disregard the promissory note providing for the payment of the obligation in Philippine currency and consider that the intention of the parties was really to provide for payment of the obligation would be made in dollars, petitioners can still recover the amount of US$194,016.29, which respondent Afable and her co-debtors do not deny having received, in its peso equivalent. As held in Eastboard Navigation, Ltd. vs. Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta 3 vs. National Rice & Corn Corp., if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is nun and void as contrary to public policy, pursuant to Republic Act No. 529, and the most that could be demanded is to pay said obligation in Philippine currency. In other words, what is prohibited by RA No. 529 is the payment of an obligation in dollars, meaning that a creditor cannot oblige the debtor to pay him in dollars, even if the loan were given in said currency. In such a case, the indemnity to be allowed should be expressed in Philippine currency on the basis of the current rate of 4 exchange at the time of payment. The foregoing premises considered, we deem it unnecessary to discuss the other errors assigned by petitioners. WHEREFORE, the Resolutions of the Court of Appeals dated June 8, 1978, July 6, 1978 and November 27, 1978 are hereby set aside, and judgment is hereby rendered reinstating the Decision of the Court of First Instance of Manila. No pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Fernandez, Guerrero and De Castro, JJ., concur. Makasiar, J., took no part.

SECOND DIVISION [G.R. No. 117660. December 18, 2000] AGRO CONGLOMERATES, INC. and MARIO SORIANO, Petitioners, v. THE HON. COURT OF APPEALS and REGENT SAVINGS and LOAN BANK, INC., Respondents. DECISION QUISUMBING, J.:
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This is a petition for review challenging the decision1 dated October 17, 1994 of the Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-37388, 86-37543.
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This petition springs from three complaints for sums of money filed by respondent bank against herein petitioners. In the decision of the Court of Appeals, petitioners were ordered to pay respondent bank, as follows:
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Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants, as follows:
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1) In Civil Case No. 86-37374, defendants [petitioners, herein] are orderedintly and severally, to pay to plaintiff the amount of P78,212.29, together with interest and service charge thereon, at the rates of 14% and 3% per annum, respectively, computed from November 10, 1982, until fully paid, plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed from November 10, 1982, plus 15% as liquidated damage plus 10% of the total amount due, as attorneys fees, plus costs;
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2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of P632,911.39, together with interest and service charge thereon at the rate of 14% and 3% per annum, respectively, computed from January 15, 1983, until fully paid, plus stipulated penalty on unpaid principal at the rate of 6% per annum, computed from January 15, 1983, plus liquidated damages equivalent to 15% of the total amount due, plus attorneys fees equivalent to 10% of the total amount due, plus costs; and
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3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of action, the amount of P510,000.00, together with interest and service charge thereon, at the rates of 14% and 2% per annum, respectively, computed from March 13, 1983, until fully paid, plus a penalty of 6% per annum, based on the outstanding principal of the loan, computed from March 13, 1983, until fully paid; and on the second cause of action, the amount of P494,936.71, together with interest and service charge thereon at the rates of 14% and 2%, per annum, respectively, computed from March 30, 1983, until fully paid, plus a penalty charge of 6% per annum, based on the unpaid principal, computed from March 30, 1983, until fully paid, plus (on both causes of action) an amount equal to 15% of the total amounts due, as liquidated damages, plus attorneys fees equal to 10% of the total amounts due, plus costs.[2
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Based on the records, the following are the factual antecedents.

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On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land to Wonderland Food Industries, Inc. In their Memorandum of Agreement, 3 the parties covenanted that the purchase price of Five Million (P5,000,000.00) Pesos would be settled by the vendee, under the following terms and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid in four equal installments, the first installment falling due, 180 days after the signing of the agreement and every six months thereafter, with an interest rate of 18% per annum, to be advanced by the vendee upon the signing of the agreement.
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On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings & Loan Bank (formerly Summa Savings & Loan Association), executed an Addendum[4to the previous Memorandum of Agreement. The new arrangement pertained to the revision of settlement of the initial payments of P1,000,000.00 and prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows:
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Whereas, the parties have agreed to qualify the stipulated terms for the payment of the said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.
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WHEREFORE, in consideration of the mutual covenant and agreement of the parties, they do further covenant and agree as follows:
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1. That the VENDEE instead of paying the amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes the VENDOR to obtain a loan

from Summa Savings and Loan Association with office address at Valenzuela, Metro Manila, being represented herein by its President, Mr. Jaime Cario and referred to hereafter as Financier; in the amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest thereon at such rate as the VENDEE and the Financier may agree, which amount shall cover the ONE MILLION (P1,000,000.00) PESOS cash which was agreed to be paid upon signing of the Memorandum of Agreement, plus 18% interest on the balance of two million pesos stipulated upon in Item No. 1(c) of the said agreement; provided however, that said loan shall be made for and in the name of the VENDOR.
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2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR; however, the VENDEE hereby undertakes to pay the full amount of the said loan to the Financier on such terms and conditions agreed upon by the Financier and the VENDOR, it being understood that while the loan will be secured from and in the name of the VENDOR, the VENDEE will be the one liable to pay the entire proceeds thereof including interest and other charges. [5
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This addendum was not notarized.

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Consequently, petitioner Mario Soriano signed as maker several promissory notes,[6 payable to the respondent bank. Thereafter, the bank released the proceeds of the loan to petitioners. However, petitioners failed to meet their obligations as they fell due. During that time, the bank was experiencing financial turmoil and was under the supervision of the Central Bank. Central Bank examiner and liquidator Cordula de Jesus, endorsed the subject promissory notes to the banks counsel for collection. The bank gave petitioners opportunity to settle their account by extending payment due dates. Mario Soriano manifested his intention to re-structure the loan, yet did not show up nor submit his formal written request.
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Respondent bank filed three separate complaints before the Regional Trial Court of Manila for Collection of Sums of money. The corresponding case histories are illustrated in the table below:

Date of Loan

Amount

Payment Payment Due Extension Date Dates

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Civil Case 86- P78,212.29 Nov. 10, 1982 37374 August 12, 1982
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Feb. 8, 1983 May 9, 1983 Aug. 7, 1983

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Civil Case 86- P632,911.39 Jan. 15, 1983 37388 July 19, 1982
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May 16, 1983 Aug. 14, 1983

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Civil Case 86- P510,000.00 March 13, 37543

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June 11, 1983

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September 1983 P494,936.71 14, 1982

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Sept. 9, 1983
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October 1, 1982

March June 28, 30, 1983 1983 Sept. 26, 1983

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In their answer, petitioners interposed the defense of novation and insisted there was a valid substitution of debtor. They alleged that the addendum specifically states that although the promissory notes were in their names, Wonderland shall be responsible for the payment thereof.
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The trial court held that petitioners are liable, to wit:

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The evidences, however, disclose that Wonderland did not comply with its obligation under said Addendum (Exh. S) as the agreement to turn over the farmland to it, did not materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not answerable. And since the loans obtained under the four promissory notes (Exhs. A, C, G, and E) have not been paid, despite opportunities given by plaintiff to defendants to make payments, it stands to reason that defendants are liable to pay their obligations thereunder to plaintiff. In fact, defendants failed to file a third-party complaint against Wonderland, which shows the weakness of its stand that Wonderland is answerable to make said payments.7
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Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed by the appellate court.
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Hence, this recourse, wherein petitioners raise the sole issue of:

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WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.
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Revealed by the facts on record, the conflict among the parties started from a contract of sale of a farmland between petitioners and Wonderland Food Industries, Inc. As found by the trial court, no such sale materialized.
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A contract of sale is a reciprocal transaction. The obligation or promise of each party is the cause or consideration for the obligation or promise by the other. The vendee is obliged to pay the price, while the vendor must deliver actual possession of the land. In the instant case the original plan was that the initial payments would be paid in cash. Subsequently, the parties (with the participation of respondent bank) executed an addendum providing instead, that the petitioners would secure a loan in the name of Agro Conglomerates Inc. for the total amount of the initial payments, while the settlement of said loan would be assumed by Wonderland. Thereafter, petitioner Soriano signed several promissory notes and received the proceeds in behalf of petitioner-company.
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By this time, we note a subsidiary contract of suretyship had taken effect since petitioners signed the promissory notes as maker and accommodation party for the benefit of Wonderland. Petitioners became liable as accommodation party. An accommodation party is a person who has signed the instrument as maker, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person and is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew (the signatory) to be an accommodation party.8 He has the right, after

paying the holder, to obtain reimbursement from the party accommodated, since the relation between them has in effect become one of principal and surety, the accommodation party being the surety.9 Suretyship is defined as the relation which exists where one person has undertaken an obligation and another person is also under the obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, one rather than the other should perform.10 The suretys liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal.[11 And the creditor may proceed against any one of the solidary debtors.12
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We do not give credence to petitioners assertion that, as provided by the addendum, their obligation to pay the promissory notes was novated by substitution of a new debtor, Wonderland. Contrary to petitioners contention, the attendant facts herein do not make a case of novation.
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Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor.13 In order that a novation can take place, the concurrence of the following requisites[14 are indispensable:
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1) There must be a previous valid obligation;

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2) There must be an agreement of the parties concerned to a new contract; 3) There must be the extinguishment of the old contract; and 4) There must be the validity of the new contract.
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In the instant case, the first requisite for a valid novation is lacking. There was no novation by substitution of debtor because there was no prior obligation which was substituted by a new contract. It will be noted that the promissory notes, which bound the petitioners to pay, were executed after the addendum. The addendum modified the contract of sale, not the stipulations in the promissory notes which pertain to the surety contract. At this instance, Wonderland apparently assured the payment of future debts to be incurred by the petitioners. Consequently, only a contract of surety arose. It was wrong for petitioners to presume a novation had taken place. The well-settled rule is that novation is never presumed,15 it must be clearly and unequivocally shown.16
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As it turned out, the contract of surety between Wonderland and the petitioners was extinguished by the rescission of the contract of sale of the farmland. With the rescission, there was confusion or merger in the persons of the principal obligor and the surety, namely the petitioners herein. The addendum which was dependent thereon likewise lost its efficacy.
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It is true that the basic and fundamental rule in the interpretation of contract is that, if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning shall control. However, in order to judge the intention of the parties, their contemporaneous and subsequent acts should be considered.[17
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The contract of sale between Wonderland and petitioners did not materialize. But it was admitted that petitioners received the proceeds of the promissory notes obtained from respondent bank.
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Sec. 22 of the Civil Code provides:

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Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.
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Petitioners had no legal or just ground to retain the proceeds of the loan at the expense of private respondent. Neither could petitioners excuse themselves and hold Wonderland still liable to pay the loan upon the rescission of their sales contract. If petitioners sustained damages as a result of the rescission, they should have impleaded Wonderland and asked damages. The non-inclusion of a necessary party does not prevent the court from proceeding in the action, and the judgment rendered therein shall be without prejudice to the rights of such necessary party.[18 But respondent appellate court did not err in holding that petitioners are duty-bound under the law to pay the claims of respondent bank from whom they had obtained the loan proceeds.
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WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of the Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
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SO ORDERED.

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