Case Digest in OBLIGATIONS AND CONTRACTS

Floriano vs Delgado, 11 Phil 154, August 27, 1908 Facts: On February 17, 1907, Floriano filed a complaint against Delgado and Bertumen, alleging that the latter were indebted to the plaintiff in the sum of P1,352.80, who engaged to pay it together with interest at the rate of ten percent per annum, as appears in their promissory note on January 20, 1907. The said amount was not paid, not withstanding demand. Thus constitute this case. Issue: Whether or not the obligation contracted by both parties are pure obligation. Held: Yes. In accordance with the old laws in force in the Islands prior to the enactment of the present Civil Code, when an obligation is pure, simple and unconditional and no particular day has been fixed for its fulfillment payment payment of the same may be demanded ten days after it is contracted. LIGUTAN VS. COURT OF APPEALS G.R. No. 147465, February 12, 2002 Facts: Ligutan and dela Llana obtained a loan from Security Bank and Trust Co. They executed a promissory note binding themselves jointly and severally to pay the sum borrowed with an interest of 15.89% per annum upon maturity and to pay a penalty of 5% every month on the outstanding principal and interest in case of default. In addition, they agreed to pay 10% of the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for collection or if a suit were instituted to enforce payment. Ligutan and dela Llana failed to settle the debt. A complaint for recovery of the amount due was filed with the RTC. The court held, among others, the borrowers were liable for a 3% per month penalty (instead of 5%) and 10% of the total amount of the indebtedness for attorneys fee, in addition to the principal loan. Issue: Whether the court is correct in holding the borrowers liable for the penalty. Held: A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the obligation and to provide for what could be the stipulated indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. Although the court may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit, a stipulated penalty, nevertheless may be equitably reduced by the courts if iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with. The reduction is justified by the facts that the borrowers were able to partly comply with their obligations.

FIRST DIVISION [G.R. No. 141968. February 12, 2001]

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE PHILIPPINES), petitioner, vs. SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents. DECISION KAPUNAN, J.: The respondents Gueco Spouses obtained a loan from petitioner International Corporate Bank (now Union Bank of the Philippines) to purchase a car a Nissan Sentra 1600 4DR, 1989 Model. In consideration thereof, the Spouses executed promissory notes which were payable in monthly installments and chattel mortgage over the car to serve as security for the notes. The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995 a civil action docketed as Civil Case No. 658-95 for Sum of Money with Prayer for a Writ of Replevin before the Metropolitan Trial Court of Pasay City, Branch 45. On August 25, 1995, Dr. Francis Gueco was served summons and was fetched by the sheriff and representative of the bank for a meeting in the bank premises. Desi Tomas, the Banks Assistant Vice President demanded payment of the amount of P184,000.00 which represents the unpaid balance for the car loan. After some negotiations and computation, the amount was lowered to P154,000.00, However, as a result of the non-payment of the reduced amount on that date, the car was detained inside the banks compound. On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the further reduction of the outstanding loan to P150,000.00. On August 29, 1995, Dr. Gueco delivered a managers check in the amount of P150,000.00 but the car was not released because of his refusal to sign the Joint Motion to Dismiss. It is the contention of the Gueco spouses and their counsel that Dr. Gueco need not sign the motion for joint dismissal considering that they had not yet filed their Answer. Petitioner, however, insisted that the joint motion to dismiss is standard operating procedure in their bank to effect a compromise and to preclude future filing of claims, counterclaims or suits for damages. After several demand letters and meetings with bank representatives, the respondents Gueco spouses initiated a civil action for damages before the Metropolitan Trial Court of Quezon City, Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of merit. On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan Trial Court was reversed. In its decision, the RTC held that there was a meeting of the minds between the parties as to the reduction of the amount of indebtedness and the release of the car but said agreement did not include the signing of the joint motion to dismiss as a condition sine qua non for the effectivity of the compromise. The court further ordered the bank: 1. to return immediately the subject car to the appellants in good working condition; Appellee may deposit the Managers check the proceeds of which have

long been under the control of the issuing bank in favor of the appellee since its issuance, whereas the funds have long been paid by appellants to secure said Managers Check, over which appellants have no control; 2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary damages, and P25,000.00 as attorneys fees, and 3. to pay the cost of suit. In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby AFFIRMED. The case was elevated to the Court of Appeals, which on February 17, 2000, issued the assailed decision, the decretal portion of which reads: WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED and the Decision of the Regional Trial Court of Quezon City, Branch 227, in Civil Case No. Q-97-31176, for lack of any reversible error, is AFFIRMED in toto. Costs against petitioner. SO ORDERED.[5] The Court of Appeals essentially relied on the respect accorded to the finality of the findings of facts by the lower court and on the latter's finding of the existence of fraud which constitutes the basis for the award of damages. The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of the Rules of Court, raising the following assigned errors: I THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A CONDITION FOR THE COMPROMISE AGREEMENT. II THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES AND ATTORNEYS FEES IN FAVOR OF THE RESPONDENTS.

III THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR THE ISSUANCE OF THE NEW MANAGERS/CASHIERS CHECK BY THE RESPONDENTS IN FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL CASHIERS CHECK THAT ALREADY BECAME STALE.

As to the first issue, we find for the respondents. The issue as to what constitutes the terms of the oral compromise or any subsequent novation is a question of fact that was resolved by the Regional Trial Court and the Court of Appeals in favor of respondents. It is well settled that the findings of fact of the lower court, especially when affirmed by the Court of Appeals, are binding upon this Court. While there are exceptions to this rule,[8] the present case does not fall under any one of them, the petitioners claim to the contrary, notwithstanding. Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that the oral compromise entered into by the parties on August 28, 1995 included the stipulation that the parties would jointly file a motion to dismiss. This petitioner failed to do. Notably, even the Metropolitan Trial Court, while ruling in favor of the petitioner and thereby dismissing the complaint, did not make a factual finding that the compromise agreement included the condition of the signing of a joint motion to dismiss. The Court of Appeals made the factual findings in this wise: In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related that respondent Dr. Gueco was aware that the signing of the draft of the Joint Motion to Dismiss was one of the conditions set by the bank for the acceptance of the reduced amount of indebtedness and the release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18, 5). Respondents, however, maintained that no such condition was ever discussed during their meeting of August 28, 1995 (Rollo, p. 32). The trial court, whose factual findings are entitled to respect since it has the opportunity to directly observe the witnesses and to determine by their demeanor on the stand the probative value of their testimonies (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed to make a categorical finding on the issue. In dismissing the claim of damages of the respondents, it merely observed that respondents are not entitled to indemnity since it was their unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the release of the car. The trial court opined, thus: As regards the third issue, plaintiffs claim for damages is unavailing. First, the plaintiffs could have avoided the renting of another car and could have avoided this litigation had he signed the Joint Motion to Dismiss. While it is true that herein defendant can unilaterally dismiss the case for collection of sum of money with replevin, it is equally true that there is nothing wrong for the plaintiff to affix his signature in the Joint Motion to Dismiss, for after all, the dismissal of the case against him is for his own good and benefit. In fact, the signing of the Joint Motion to Dismiss gives the plaintiff three (3) advantages. First, he will recover his car. Second, he will pay his obligation to the bank on its reduced amount of P150,000.00 instead of its original claim of P184,985.09. And third, the case against him will be dismissed. Plaintiffs, likewise, are not entitled to the award of moral damages and exemplary damages as there is no showing that the defendant bank acted fraudulently or in bad faith. (Rollo, p. 15)

The Court has noted, however, that the trial court, in its findings of facts, clearly indicated that the agreement of the parties on August 28, 1995 was merely for the lowering of the price, hence xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered into an oral compromise agreement, whereby the original claim of the bank of P184,985.09 was reduced to P150,000.00 and that upon payment of which, plaintiff was informed that the subject motor vehicle would be released to him. (Rollo, p. 12) The lower court, on the other hand, expressly made a finding that petitioner failed to include the aforesaid signing of the Joint Motion to Dismiss as part of the agreement. In dismissing petitioners claim, the lower court declared, thus: If it is true, as the appellees allege, that the signing of the joint motion was a condition sine qua non for the reduction of the appellants obligation, it is only reasonable and logical to assume that the joint motion should have been shown to Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco was not given a copy of the joint motion that day of August 28, 1995, for his family or legal counsel to see to be brought signed, together with the P150,000.00 in managers check form to be submitted on the following day on August 29, 1995? (sic) [I]s a question whereby the answer up to now eludes this Courts comprehension. The appellees would like this Court to believe that Dr. Gueco was informed by Mr. Rivera of the bank requirement of signing the joint motion on August 28, 1995 but he did not bother to show a copy thereof to his family or legal counsel that day August 28, 1995. This part of the theory of appellee is too complicated for any simple oral agreement. The idea of a Joint Motion to Dismiss being signed as a condition to the pushing through a deal surfaced only on August 29, 1995. This Court is not convinced by the appellees posturing. Such claim rests on too slender a frame, being inconsistent with human experience. Considering the effect of the signing of the Joint Motion to Dismiss on the appellants substantive right, it is more in accord with human experience to expect Dr. Gueco, upon being shown the Joint Motion to Dismiss, to refuse to pay the Managers Check and for the bank to refuse to accept the manager's check. The only logical explanation for this inaction is that Dr. Gueco was not shown the Joint Motion to Dismiss in the meeting of August 28, 1995, bolstering his claim that its signing was never put into consideration in reaching a compromise. We see no reason to reverse. Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding the petitioner liable for damages, both the Regional Trial Court and the Court of Appeals ruled that there was fraud on the part of the petitioner. The CA thus declared: The lower court's finding of fraud which became the basis of the award of damages was likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines, as amended is the deliberate and intentional evasion of the normal fulfillment of obligation When petitioner refused to release the car despite

respondent's tender of payment in the form of a manager's check, the former intentionally evaded its obligation and thereby became liable for moral and exemplary damages, as well as attorneys fees. We disagree. Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects which naturally and necessarily arise from such act or omission; the fraud referred to in Article 1170 of the Civil Code is the deliberate and intentional evasion of the normal fulfillment of obligation. We fail to see how the act of the petitioner bank in requiring the respondent to sign the joint motion to dismiss could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco that the signing of a joint motion to dismiss is a standard operating procedure of petitioner bank. However, this can not in anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court would be dismissed with prejudice. The whole point of the parties entering into the compromise agreement was in order that Dr. Gueco would pay his outstanding account and in return petitioner would return the car and drop the case for money and replevin before the Metropolitan Trial Court. The joint motion to dismiss was but a natural consequence of the compromise agreement and simply stated that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case. Petitioner's act of requiring Dr. Gueco to sign the joint motion to dismiss can not be said to be a deliberate attempt on the part of petitioner to renege on the compromise agreement of the parties. It should, likewise, be noted that in cases of breach of contract, moral damages may only be awarded when the breach was attended by fraud or bad faith. The law presumes good faith. Dr. Gueco failed to present an iota of evidence to overcome this presumption. In fact, the act of petitioner bank in lowering the debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and sincere desire to settle the case. If respondent did suffer any damage, as a result of the withholding of his car by petitioner, he has only himself to blame. Necessarily, the claim for exemplary damages must fail. In no way, may the conduct of petitioner be characterized as wanton, fraudulent, reckless, oppressive or malevolent. We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of August 29, 1995, respondent Dr. Gueco delivered a managers check representing the reduced amount of P150,000.00. Said check was given to Mr. Rivera, a representative of respondent bank. However, since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to the effect that he was withholding the payment of the check.[14]Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the bank, dated September 4, 1995, Dr. Gueco instructed the bank to disregard the hold order letter and demanded the immediate release of his car, to which the former replied that the condition of signing the joint motion to dismiss must be satisfied and that they had kept the check which could be claimed by Dr. Gueco anytime.[16] While there is controversy as to whether the document evidencing the order to hold payment of the check was formally offered as evidence by petitioners, it appears from the pleadings that said check has not been encashed.

The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals, orders the petitioner: 1. to return immediately the subject car to the appellants in good working condition. Appellee may deposit the Managers Check the proceeds of which have long been under the control of the issuing bank in favor of the appellee since its issuance, whereas the funds have long been paid by appellants to secure said Managers Check over which appellants have no control.[18] Respondents would make us hold that petitioner should return the car or its value and that the latter, because of its own negligence, should suffer the loss occasioned by the fact that the check had become stale. It is their position that delivery of the managers check produced the effect of payment and, thus, petitioner was negligent in opting not to deposit or use said check. Rudimentary sense of justice and fair play would not countenance respondents position. A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, an instrument not payable on demand must be presented for payment on the day it falls due. When the instrument is payable on demand, presentment must be made within a reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if made within a reasonable time after the last negotiation thereof. A check must be presented for payment within a reasonable time after its issue, and in determining what is a reasonable time, regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. The test is whether the payee employed such diligence as a prudent man exercises in his own affairs. This is because the nature and theory behind the use of a check points to its immediate use and payability. In a case, a check payable on demand which was long overdue by about two and a half (2-1/2) years was considered a stale check. Failure of a payee to encash a check for more than ten (10) years undoubtedly resulted in the check becoming stale. Thus, even a delay of one (1) week or two (2) days, under the specific circumstances of the cited cases constituted unreasonable time as a matter of law. In the case at bar, however, the check involved is not an ordinary bill of exchange but a managers check. A managers check is one drawn by the banks manager upon the bank itself. It is similar to a cashiers check both as to effect and use. A cashiers check is a check of the banks cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance. It is really the banks own check and may be treated as a promissory note with the bank as a maker. The check becomes the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. If treated as promissory note, the drawer would be the maker and in which case the holder need not prove presentment for payment or present the bill to the drawee for acceptance.

Even assuming that presentment is needed, failure to present for payment within a reasonable time will result to the discharge of the drawer only to the extent of the loss caused by the delay. Failure to present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses have not alleged, much less shown that they or the bank which issued the managers check has suffered damage or loss caused by the delay or non-presentment. Definitely, the original obligation to pay certainly has not been erased. It has been held that, if the check had become stale, it becomes imperative that the circumstances that caused its non-presentment be determined. In the case at bar, there is no doubt that the petitioner bank held on the check and refused to encash the same because of the controversy surrounding the signing of the joint motion to dismiss. We see no bad faith or negligence in this position taken by the Bank. WHEREFORE, premises considered, the petition for review is given due course. The decision of the Court of Appeals affirming the decision of the Regional Trial Court is SET ASIDE. Respondents are further ordered to pay the original obligation amounting to P150,000.00 to the petitioner upon surrender or cancellation of the managers check in the latters possession, afterwhich, petitioner is to return the subject motor vehicle in good working condition. SO ORDERED. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 4410 August 27, 1908 URBANO FLORIANO, plaintiffs-appellee, vs. ESTEBAN DELGADO, ET AL., defendants-appellants. A. E. Somersille for appellants. R. Fernandez for appellee. TORRES, J.: On the 17th of February, 1907, the attorneys for Urbano Floriano filed a complaint against the married couple Esteban Delgado and Regina Bertumen, residents of Ligao, Albay, alleging that the latter were indebted to the plaintiff in the sum, of P1,352.80, duly admitted by the debtors, who engaged to pay it together with interest thereon at the rate of 10 per cent per annum, as appears by a promissory note made out on the 20th of January, 1907, and which reads: We promise to pay to Sr. Urbano Floriano the sum of one thousand three hundred and fifty-two pesos and eighty centavos (P1, 352.80), Conant, for balance standing against us on this date. Until said amount is paid to Sr. Floriano we engaged to pay interest thereon at the rate of 10 per cent per annum, as agreed. Ligao, January 20, 1907. (Signed) Esteban Delgado. (Signed) Regina Bertumen. That the aforesaid amount has not been paid either in whole part, notwithstanding demand thereof, for which reason the plaintiff asked the court to enter judgment against the defendants, sentencing them to pay the said sum in Philippine currency, with interest thereon at the rate of 10 per cent per annum, from

the 20th of January, 1907, until the date of payment, with costs, as well as any further remedy that the court might consider just and equitable. The defendants appeared within the time prescribed by the law, but they did not answer the complaint, notwithstanding the fact that the time for answering had elapsed, nor did they present any answer, for which reason the court below, on the 22d of March, 1907, held the said defendants, Delgado and Bertumen, to be in default and ordered the plaintiff to proceed with his evidence; this aforesaid month and year, entered judgment ordering the defendants to pay the amount claimed together with interest thereon from the 20th of January, 1907, until such time as payment was made, with costs. On April 9, following, the defendant Delgado, in his own name and on behalf of his wife, Bertumen, appealed from said judgment. This appeal was admitted by the court below on the 13th of said month. A bill of exception was submitted, and, after hearing the adverse party, it was brought to this court. The subject in litigation is the fulfillment of an obligation contracted by the defendant spouses to pay a certain sum stated in a document of indebtedness which is set out in the complaint, with the particularly that no date was fixed therein for the payment of the debt. Before proceed in further let us set forth the following facts; the defendant appellants did not ask for the annulment of the judgment appealed from, nor for the holding of a new trial, but limited themselves simply to excepting to said judgment, appealing to this court. hence, we are not called upon to review the findings of the court below, and this decision will only dwell on the questions of law set up by the appellants in the bill of errors which accompanies their brief. Commencing with the second error in reference to the nature and character of the obligation continued in the document of indebtedness, it is sufficient for the purposes of the decisions to say that, in accordance with the old laws enforce in this country prior to the enactment of the present Civil Code, when an obligation is pure, simple, and unconditional, and no particular day had been fixed for its fulfillment of the same may be demanded ten days after it is contracted. From the liquidation of accounts that took place between the plaintiff and the defendants, there resulted a balance of P1,352.80 which the debtors bound themselves to pay, without fixing a day therefor, with interest at the rate of 10 per cent per annum until paid, just as if they had received said sum on loan at the time of the liquidation whereby they became indebted. Not having paid it at the time, they executed a document by which they bound themselves to pay the creditor without fixing a date for payment, or any other condition. Although in accordance with the old laws and the doctrine or precept of article 62 of the Code of Commerce, the parties bound should have met their obligation at the expiration of ten days after the 20th of January, 1907, nevertheless, under the provisions of Civil Code, the payment of the obligation may be demanded at once, unless from nature and circumstances of the creditor to grant the debtors some extension of time, in which case the duration thereof should be fixed by the courts. (Art. 128, Civil Code.) It can not be inferred from the language of the said document that it was the intention of Urbano Floriano to grant the defendants any extension of time in the payment, the duration of should be fixed by judicial authority; and inasmuch as a complaint was filed in court twenty-seven days after the obligation was executed, after payment had been demanded from the debtors, the latter have no right at all to claim an extension for the fulfillment of the obligation, the existence and legality of which they have expressly recognized.

Article 113 of the Civil Code provides: Every obligation, the fulfillment of which should not depend upon a future or uncertain event or upon a past event, unknown to the parties in interest, shall be immediately demandable. The document of indebtedness contains no term or condition whatever upon which depends the fulfillment of obligation contracted by the debtors; therefore, there exists no motive or reason that would exempt them from compliance therewith. The judgment entered by the court below, sentencing the defendants to pay the plaintiff the sum that they owe him together with interest thereon, must of course be understood as having been imposed upon them jointly in accordance with the mutual character of the obligation contracted by the debtors, therefore the decision of the court below is in accordance with the provisions of article 1137 and 1138 of the Civil Code, and it can not be contended that each of them has been severally sentenced to pay the whole amount stated in the document of indebtedness, and for said reason the fourth error attributed to the judgment appealed from is not true. As to the first and second errors imputed by the appellants to the said judgment, it is unquestionable that the plaintiff has made a material error in his writing of the 21st of March, 1907, by charging only the husband, one of the defendants, with default; such error is explicable however in that the husband is the natural representative of his wife, but it was no importance in view of the fact that the complaint was filed against both of them, and that they were both summoned. The judge below having discovered the mistake held both defendants to be in default, thus amending, to a certain extent, the erroneous charge of the plaintiff. The order of default of March 22 was complied with, and upon the necessary evidence being offered by the plaintiff, the judge below, without further formalities, since section 128 of the Code of Civil Procedure does not require any other than those observed into these proceedings, rendered judgment on the 30th of the same month, after proceedings is due form of law. For the foregoing reasons, and as the judgment appealed from is an accordance with the law, it is our opinion that it should be affirmed, with the costs against the appellants. So ordered. Arellano, C.J., Mapa, Carson, Willard and Tracey, JJ., concur. THIRD DIVISION BIENVENIDO M. CASIO, JR., Petitioner, - versus THE COURT OF APPEALS and OCTAGON REALTY DEVELOPMENT CORPORATION, Respondents. G.R. No. 133803, September 16, 2005 Present: PANGANIBAN, J., Chairman SANDOVAL-GUTIERREZ, CORONA,

CARPIO-MORALES and GARCIA, JJ. Promulgated: September 16, 2005 x--------------------------------------------------------------------x DECISION GARCIA, J.: Via this petition for review on certiorari under Rule 45 of the 1997 Rules of Court, petitioner Bienvenido M. Casio, Jr. seeks the annulment and setting aside of the following issuances of the Court of Appeals (CA) in C.A. - G.R. CV No. 47702, to wit: 1. Decision dated January 21, 1997, affirming an earlier decision of the Regional Trial Court at Pasig which upheld private respondents rescission of its contract with petitioner; and 2. Resolution dated May 20, 1998, denying petitioners motion for reconsideration. On October 2, 1991 in the Regional Trial Court at Pasig City, respondent Octagon Realty Development Corporation, a corporation duly organized and existing under Philippine laws, filed a complaint for rescission of contract with damages against petitioner Bienvenido M. Casio, Jr., owner and proprietor of the Casio Wood Parquet and Sanding Services, relative to the parties agreement for the supply and installation by petitioner of narra wood parquet ordered by respondent. As recited by the Court of Appeals in the decision under review, the parties principal pleadings in the Regional Trial Court disclose the following: In its complaint, [respondent] alleges that on December 22, 1989, it entered into a contract with [petitioner] for the supply and installation by the latter of narra wood parquet (kiln dried) to the Manila Luxury Condominium Project, of which [respondent] is the developer, covering a total area of 60,973 sq. ft. for a total price of P1,158,487.00; that the contract stipulated that full delivery by [petitioner] of labor and materials was in May 1990; that in accordance with the terms of payment in the contract, [respondent] paid to [petitioner] the amount P463,394.50, representing 40% of the total contract price; that after delivering only 26,727.02 sq. ft. of wood parquet materials, [petitioner] incurred in delay in the delivery of the remainder of 34,245.98 sq. ft.; that [petitioner] misrepresented to [respondent] that he is qualified to do the work contracted when in truth and in fact he was not and, furthermore, he lacked the necessary funds to execute the work as he was totally dependent on the funds advanced to him by [respondent]; that due to [petitioners] unlawful and malicious refusal to comply with its obligations, [respondent] incurred actual damages in the amount of P912,452.39 representing estimated loss on the new price, unliquidated damages and cost of money; that in order to minimize losses, the [respondent] contracted the services of Hilvano Quality Parquet and Sanding Services to complete the [petitioners] unfinished work, [respondent] thereby agreeing to pay the latter P1,198,609.30.

The [respondent] in its complaint prays for rescission of contract, actual damages of P912,452.39, reimbursement in the amount of P1,198,609.30, moral damages of P200,000.00, and attorneys fees of P50,000.00 plus a fee of P1,000.00 per appearance and other expenses of the suit. In his answer to the complaint, the [petitioner] admits the execution of the December 22, 1989 contract with the [respondent], the terms thereof relating to total price and scope of work, as well as the payment by the [respondent] of the 40% downpayment. He, however, avers that the manner of payment, period of delivery and completion of work and/or full delivery of labor and materials were modified; that the delivery and completion of the work could not be done upon the request and/or representations by the [respondent] because he failed to make available and/or to prepare the area in a suitable manner for the work contracted, preventing the [petitioner] from complying with the delivery schedule under the contract; that [petitioner] delivered the required materials and performed the work despite these constraints; that the [petitioner] delivered a total of 29,209.82 sq. ft. of wood parquet; that the [respondent] failed to provide for a safe and secure area for the materials and work in process or worked performed, thus exposing them to the elements and destroying the materials and/or work; that the [respondent] failed to pay the [petitioners] second and third billings for deliveries and work performed in the sum of P105,425.68, which amount the [petitioner] demanded from the [respondent] with the warning of suspension of deliveries or rescission for contract for non-payment; that the [petitioner] was fully qualified and had the experience of at least nine years to perform the work; and that it was the [respondent], after failing to prepare the area suitable for the delivery and installation of the wood parquet, [respondent] who advised or issued orders to the [petitioner] to suspend the delivery and installation of the wood parquet, which created a storage problem for the [petitioner]. Set up by the [petitioner] as special and affirmative defenses, are that the filing of the case is premature; that the [respondent] has no cause of action; that the obligation has been waived/extinguished; that the [respondents] failure to accept deliveries compelled the [petitioner] to store the materials in his warehouse/s and to use valuable space in his premises, which he could have utilized for the storage of materials for other customers, and also prevented him from accepting new orders from other customer causing him actual and potential losses of income; that the [respondents] extrajudicial rescission of contract is void since there is no breach or violation thereof by the [petitioner]; and that it was [respondent] which violated the terms/conditions of the contract, entitling [petitioner] to have the same judicially rescinded. The [petitioner] pleaded counterclaims of rescission of contract and payment by the [respondent] of P597,392.90 with legal interest from the filing of the complaint until fully paid or, in the alternative payment of the cost of the billings in the sum of P105,425.68 plus legal interest; actual and compensatory damages of P600,000.00 and P30,000.00, respectively; moral damages of P100,000.00, attorneys fees of P40,000.00; and litigation expenses and costs of the suit. (Words in bracket ours). In a decision dated June 2, 1994, the trial court, upon a finding that petitioner is the one who breached the parties agreement, rendered judgment for respondent, to wit:

WHEREFORE, based on the foregoing, this Court finds and so holds that the rescission of contract effected by [respondent] is valid, and [petitioner]t is thereby ordered to pay the[respondent] the following: 1. 2. P2,111,061.69 by way of actual and compensatory damages; and, P50,000.00, as attorneys fees.

No pronouncement as to cost. SO ORDERED. Explains the trial court in its decision: [T]he contract clearly and categorically stipulates that full delivery by [petitioner] of labor and materials was to be in May 1990. However, as of January 30, 1991, no deliveries have been made by [petitioner] necessitating the sending by [respondent] of a demand letter xxx. Thereafter, while [petitioner] started mobilization, the workers assigned were insufficient resulting in the very slow progress of the works for which reason Engr. Alcain sent a letter to [petitioner] instructing [petitioner] to make full-blast delivery of the materials. This, incidentally, effectively negates [petitioners] contention that [respondent] had requested for the suspension of deliveries. Finally, it was established that out of the total 60,973 sq. ft. of wood parquet, [petitioner] was able to deliver only 26,727.02 sq. ft.. In this connection [petitioner] denied this and insisted that he was actually able to deliver 29,109.82 sq. ft. Whichever of the two figures is correct, the fact remains that [petitioner] was unable to deliver the full quantity contracted by [respondent]. For purposes of the record, however, this Court believes the figure given by [respondent], which is supported by [petitioners] own statements of account where the total amount of deliveries jibes with [respondents] alleged figure. On the basis of the foregoing findings, this Court hereby finds that [respondent] has established its right to rescind the contract dated December 22, 1989, on the strength of Art. 1191 of the Civil Code. In this case, [respondent], after [petitioners] breach of his contractual obligations, considered the contract as rescinded and proceeded to contract with Hilvano Quality Parquet & Sanding Services, in order to minimize losses in view of the delay in the completion schedule of its condominium project. (Words in bracket ours). On petitioners appeal to the Court of Appeals in CA-G.R. CV No. 47702, the appellate court, in the herein assailed Decision dated January 21, 1997, affirmed that of the trial court but modified the same by reducing the amount of damages awarded, thus: WHEREFORE, the decision appealed from is AFFIRMED with the MODIFICATION that the [petitioner] be made to pay the [respondent] as actual and compensatory damages, the amount of P1,662,003.80, with interest thereon at the legal rate from the finality of this judgment until fully paid. SO ORDERED. (Words in bracket ours).

In time, petitioner and respondent filed their respective Motion for Reconsideration and Motion for Partial Reconsideration. In its Resolution dated May 20, 1998, the appellate court denied petitioners motion for lack of merit but found that of respondent as well-grounded. Accordingly, and noting that the amount of P97,699.67 had already been factored in, in the computation of the amount of P912,452.39, under the decision of the court a quo, the Court of Appeals amended its original Decision by affirming in toto the decision of the trial court, as follows: WHEREFORE, [petitioners] appeal is dismissed. The Decision appealed from is AFFIRMED IN TOTO. With costs against the [petitioner]. SO ORDERED. (Words in bracket ours). Undaunted, petitioner is now with us via the present recourse on his submissions that: A. THE SUBJECT DECISION DECLARING THE RESCISSION OF THE QUESTIONED CONTRACT BY PRIVATE RESPONDENT AS VALID AND HOLDING THE PETITIONER LIABLE FOR BREACH OF CONTRACT IS CONTRARY TO OR IN VIOLATION OF ART. 1191, NEW CIVIL CODE; B. THE AWARD TO PRIVATE RESPONDENT OF ACTUAL AND COMPENSATORY DAMAGES OF P1,662,003.80 WITH LEGAL INTEREST WAS NOT LEGALLY JUSTIFIED, OR PROVEN WITH REASONABLE DEGREE OF CERTAINTY; and C. THE SAME WAS ISSUED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF OR IN EXCESS OF JURISDICTION, AND/OR CONTRARY TO THE FACTS, EVIDENCE, JURISPRUDENCE AND LAW.[8] The petition lacks merit. It is undisputed that under their contract, petitioner and respondent had respective obligations, i.e., the former to supply and deliver the contracted volume of narra wood parquet materials and install the same at respondents condominium project by May, 1990, and the latter, to pay for said materials in accordance with the terms of payment set out under the parties agreement. But while respondent was able to fulfill that which is incumbent upon it by making a downpayment representing 40% of the agreed price upon the signing of the contract and even paid the first billing of petitioner, the latter failed to comply with his contractual commitment. For, after delivering only less than one-half of the contracted materials, petitioner failed, by the end of the agreed period, to deliver and install the remainder despite demands for him to do so. Doubtless, it is petitioner who breached the contract. Petitioner asserts that while he was ready to comply with his obligation to deliver and install the remaining wood parquet, yet respondent was not ready to accept deliveries due to the unsuitability of the work premises for the installation of the materials. Petitioners contention flies in the light of the following observations of the appellate court, to which we are in full accord: no sufficient proof was presented by the [petitioner] to substantiate his allegation. On the other hand, the [respondent] was able to prove by substantial evidence that as of May, 1990, the time when the [petitioner] was supposed to

make complete delivery there was already available in the condominium building any space from the basement to the fourteenth floor, and the [petitioner] could have chosen from any of those. (Words in bracket ours). Indeed, there can be denying of petitioners breach of his contractual obligation, more so when, as here, the two courts below were one in holding so. This brings to mind the settled rule of jurisprudence that factual findings of the Court of Appeals, particularly when affirmatory of those of the trial court, are binding upon this Court.[10] Unless the evidence on record clearly do not support such findings or that the same were arrived at based on a patent misunderstanding of facts, situations which do not obtain in this case, this Court is not at liberty to disturb what has been found below and supplant them with its own. This is, as it should be. For, in petitions for review on certiorari as a mode of appeal under Rule 45, only questions of law may be raised. This Court is not the proper venue to consider factual issues as it is not a trier of facts. With the reality that petitioner has failed to comply with his prestations under his contract with respondent, the latter is vested by law with the right to rescind the parties agreement, conformably with Article 1191 of the Civil Code, which partly reads: Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter should become impossible. Explicit it is from the foregoing that in reciprocal obligations, or those which arise from the same cause, and in which each party is a debtor and a creditor of the other, in the sense that the obligation of one is dependent upon the obligation of the other, the right to rescind is implied such that absent any provision providing for a right to rescind, the parties may nevertheless rescind the contract should the other obligor fail to comply with its obligations. It must be stressed, though, that the right to rescind a contract for nonperformance of its stipulations is not absolute. The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental violations as would defeat the very object of the parties in making the agreement. Here, contrary to petitioners asseveration, the breach he committed cannot, by any measure, be considered as slight or casual. For sure, petitioners failure to make complete delivery and installation way beyond the time stipulated despite respondents demands, is doubtless a substantial and fundamental breach, more so when viewed in the light of the large amount of money respondent had to pay another contractor to complete petitioners unfinished work. Again, to quote from the challenged decision of the appellate court: The [petitioner] also asserts that the breach was merely casual that does not warrant a rescission. While apparently, the [petitioner] agreed to complete delivery and installation of the narra wood parquet to the [respondents] condominium project by May, 1990, yet on three occasions the [respondents] counsel sent letters

demanding compliance with the [petitioners] obligation. At that time, only 26,727.02 sq. ft. of parquet out of a total of 60, 973 sq. ft., or less than one half of the contracted volume, had been delivered. Hence, the [respondent] was finally forced to contract the services of another company and had to pay the sum of P1,198,609.30 for the completion of the unfinished work. The large cost of completion of the [petitioners] unfinished work can only evidence the gravity of the [petitioners] failure to comply with the terms of the contract. (Words in bracket ours). Likewise, contrary to petitioners claim, it cannot be said that he had no inkling whatsoever of respondents recourse to rescission. True, the act of a party in treating a contract as cancelled or resolved on account of infractions by the other party must be made known to the other. In this case, however, petitioner cannot feign ignorance of respondents intention to rescind, fully aware, as he was, of his non-compliance with what was incumbent upon him, not to mention the several letters respondent sent to him demanding compliance with his obligation. In fine, we thus rule and so hold that respondent acted well within its rights in unilaterally terminating its contract with petitioner and in entering into a new one with a third person in order to minimize its losses, without prior need of resorting to judicial action. As we once said in University of the Philippines v. De los Angeles, involving the question of whether the injured party may consider the contract as rescinded even before any judicial pronouncement has been made to that effect: the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the others breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages. We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. This brings us to the propriety of the award for actual or compensatory damages, attorney's fees and litigation expenses. Under Articles 2199 and 2200 of the Civil Code, actual or compensatory damages are those awarded in satisfaction of or in recompense for loss or injury sustained. They proceed from a sense of natural justice and are designed to repair the wrong that has been done.

Citing Producers Bank of the Philippines vs. CA, this Court, in the subsequent case of Terminal Facilities and Services Corporation vs Philippine Ports Authority ruled: There are two kinds of actual or compensatory damages: one is the loss of what a person already possesses, and the other is the failure to receive as a benefit that which would have pertained to him. In the latter instance, the familiar rule is that damages consisting of unrealized profits, frequently referred as ganacias frustradas or lucrum cessans, are not to be granted on the basis of mere speculation, conjecture, or surmise, but rather by reference to some reasonably definite standard such as market value, established experience, or direct inference from known circumstances. Absolute certainty, however, is not necessary to establish the amount of ganacias frustradas or lucrum cessans. As we have said in Producers Bank of the Philippines, supra: When the existence of a loss is established, absolute certainty as to its amount is not required. The benefit to be derived from a contract which one of the parties has absolutely failed to perform is of necessity to some extent, a matter of speculation, but the injured party is not to be denied for this reason alone. He must produce the best evidence of which his case is susceptible and if that evidence warrants the inference that he has been damaged by the loss of profits which he might with reasonable certainty have anticipated but for the defendants wrongful act, he is entitled to recover. Gauged by the aforequoted test, the evidence adduced by respondent is sufficient enough to substantiate its claim for actual or compensatory damages in the amount of P 2,111,061. 69. As found by the trial court and affirmed by the Court of Appeals: Clearly, [respondent] must be indemnified for the following damages it sustained by reason of [petitioners] breach of contract. Finding [respondents] claim justified, this court awards the following: P912, 452.39, representing [respondents] estimated losses on new price, unliquidated damages and cost of money, as substantiated by Exibit Q; and P 1,198,609.30, representing the cost incurred by [respondent] in engaging the services of Hilvano Quality Parquet and Sanding Services for the completion of the work unfinished by [petitioner] (Exibit C4, par. 24) (Words in bracket ours). Finally, on the matter of attorneys fees, respondents entitlement thereto is beyond cavil, what with the fact that respondent was compelled to litigate and incurred expenses relative thereto by reason of petitioners breach of his contractual obligations. WHEREFORE, the instant petition is DENIED and the assailed Decision and Resolution of the appellate court AFFIRMED. Costs against petitioner. SO ORDERED. CANCIO C. GARCIA Associate Justice WE CONCUR:

ARTEMIO V. PANGANIBAN Associate Justice Chairman ANGELINA SANDOVAL-GUTIERREZ Associate Justice RENATO C. CORONA Associate Justice CONCHITA CARPIO MORALES Associate Justice ATTESTATION I attest that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. ARTEMIO V. PANGANIBAN Associate Justice Chairman, Third Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman's Attestation, it is hereby certified that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. HILARIO G. DAVIDE, JR. Chief Justice Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 2001 February 14, 1907 SALVADOR PANGANIBAN, plaintiff-appellee, vs. AGUSTIN CUEVAS, defendant-appellant. Del-Pan, Ortigas, & Fisher for appellant. Isabelo Artacho for appellee. ARELLANO, C.J.: This is an appeal from a judgment of the Court of First Instance of the Province of Pangasinan, wherein it was held that the land and camarin in question were the property of Salvador Panganiban, and the defendant, Agustin Cuevas, was ordered to return the said property to the plaintiff, Panganiban, and to pay the costs of proceedings, the court reserving to the said plaintiff the right to bring an action for damages against the defendant and holding that the deposit in the hands of the clerk, amounting to 200 pesos, Mexican currency, made by Cuevas was improperly

made, which said sum the court ordered refunded to the said Cuevas. This case was tried in accordance with the provisions of the former Code of Civil Procedure, and it appears: (1) That on the 10th of December, 1897, Salvador Panganiban was the owner of a camarin and lot, the camarinbeing of bamboo nipa construction, divided into five apartments, each apartment having two doors opening on the front, the whole property being more specifically described in the instrument executed by the said Panganiban, wherein he sold and transferred the same to one Francisco Gonzales for the sum of 1,300 pesos, it having been stipulated therein, among other things: "Seventh. The vendor reserves the right to repurchase the property within six months from date, after complying with the obligations mentioned in article 1518 of the Civil Code, and in case of his failure to do so within the tome stipulated, the vendee will pay to him the additional sum of 200 pesos and will become the absolute owner of the property and the vendee may dispose of the same, as long as the condition subsequent continues to exist with the limitations provided by the Mortgage Law, of the provisions of which he has been duly informed." (Record, p. 45.) This deed was recorded in the Register of Property on the 13th of August, 1900. (2) That on the let of August, 1900, Francisco Gonzales sold the property to Agustin Cuevas for the same price, the following statement appearing in the deed of sale: "Second. That the vendor (Panganiban) reserves to himself the right to repurchase the property thus sold within the period of six months from the tenth of December, 1897, for the same price, thirteen hundred pesos, and in case he fails to do so, the said Gonzales will pay to the vendor, Salvador Panganiban, the additional sum of two hundred pesos. . . ." (Record, p. 49.) This instrument was recorded on the same date as the instrument executed on the 13th of August, 1900. (3) That on the said 13th of August, 1900, Cuevas Asked for and was granted, in ex parte proceedings, the judicial possession of the property on the 14th of the said month, notice thereof having been given to those who occupied the various apartments, among them Panganiban's wife in the latter's absence. (Record, pp. 5255.) Subsequently, on the 10th of August, he attempted to pay Panganiban the sum of 200 pesos, which he deposited in court, and Cuevas, in a petition presented to the said court stated: ". . . I have succeeded to all the rights of the former purchaser, Francisco Gonzales, and desiring to acquire the ownership of the property irrevocably, I deposit the additional sum of two hundred pesos which my grantor undertook to pay. . . ." (Record, p. 133.) This sum Panganiban refused to receive. (Record, p. 135.) (4) That on the 1st of October of the same year, 1900, Cuevas brought an action for ejectment against Panganiban. (Record, pp. 138141.) (5) And that on the 12th of the same month Panganiban filed a complaint in this action for the recovery of possession, the proceedings in the action for ejectment having been suspended. (Record, pp. 27-39.) Such are the antecedents of the present case. The complaint contains the following allegation: (1) That in the month of May, 1898, Panganiban attempted to effect the repurchase of the property, but the creditor, Gonzales, being absent from his place of residence on account of the war, he was unable to do so, nor was he able to deposit the purchase price with the clerk of the court for the same reason; and (2) that the revolution broke out that time and the land and improvements in question were seizes by the Filipino government from Francisco Gonzales, the property having been redeemed by Panganiban from the Filipino government on the 12th of

November, 1898. These facts the plaintiff attempted to prove by the records of the proceedings relating to the said seizure and repurchase, which records he attached to his complaint and made a part thereof, and further by the receipt of the purchase price paid to the revolutionary government which had seized the land from Gonzales. The defendant, Cuevas, objected to the introduction of evidence upon these points, admitting the facts, and stated: "(1) That both parties were bound by the terms of the contract which is the basis of this action: (2) that there is no doubt that the deposit alleged to have been made by the plaintiff could not have been made: and (3) that the other facts alleged by the plaintiff, even though they were fully established, such as the fact that Panganiban was absent from the town. . ., that Hison was then commissioned by the Filipino government to resell the property, and other facts of minor importance, would not change the essence of the question. . . .," (Record, p. 120.) From the evidence of record we draw the following conclusions: The appelle alleges, and the appellant admits, that the property in question was repurchased (properly or improperly) by the appellee from the revolutionary government. The first, second, third, and sixth assignments of error refer to this point. The fact was established by the original document appearing on page 180 of the record and by the testimony of the witnesses for the appelle, uncontradicted by the appellant. It is a fact admitted by the appellant that the property of Francisco Gonzales was seized by the revolutionary government and subsequently returned to him by the latter. Several witnesses testified, and their testimony appears uncontradicted by the appellant, that when the property seized from Francisco Gonzales, among the same the house and lot in question, was returned to him, the latter property was retained by the revolutionary government without any protest on his part, and that on November, 1898, the said house and lot was resold to Panganiban by the revolutionary government some time before Gonzalez's property was returned to him. It is an evident fact that from November, 1898, until the 15th of August, 1900, when Cuevas took judicial possession of the property by an ex parte proceeding, Panganiban had been in the quiet and peaceful possession of the property. This fact was established by the testimony of the witnesses referred to and by the judicial proceedings introduced in evidence in this case, from which it appears that when the occupants of the various apartments of Panganiban's house were notified of the judicial possession given to Cuevas, Faustina Terrado, "who occupied one of the apartments of the said house," was else notified, as the "wife of Salvador Panganiban, who was absent when the notice was served upon the said occupant." (Record, p. 54.) If Panganiban had not been absent and had simply objected to the possession sought by Cuevas, the latter could not have been given possession of the premises in such an ex parte proceedings as that instituted by him for this purpose, and it would have necessary for Cuevas to bring an ordinary action, everything remaining as it was prior to the institution of such ex parte proceeding. It was sufficient to restore everything to its former condition in order to preserve the regularity and consistency required in judicial proceedings by the old Code of Civil Procedure, which provided that the proper action in such cases should be a plenary action for possession.

Panganiban was in possession of the property in question from November, 1898, until the 14th of August, 1900 that is to say, for more than a year quietly and peacefully, with title in good faith. He could not therefore, be called upon to surrender the said possession, particularly in view of the fact that he had not acquired the same by forcible or unlawful means. Cuevas or Gonzalez had a right to deposit the 200 pesos in court and attempt to acquire in a separate action the ownership of the property in question by virtue of the stipulation contained in the deed. In view of the fact that all these rights and actions have been discussed in these proceedings, this court, by virtue of the authority and powers vested in it, will now proceed to decide all the questions raised on this appeal. The first question relates to the repurchase made by the appelle, as to which the appellant claims that the Court of First Instance erred in deciding that the sale made by the revolutionary government was valid and that all the obligations incurred by Panganiban in favor of Gonzalez had been extinguished as the result of the repurchase. (Assignments of error 1,2,3, and 6.) The appelle in his complaint relied, however, for the validity and efficacy of the said sale upon article 1164 and paragraph 2, article 1163, of the Civil Code, and his brief filed in this court he relies upon the provisions of paragraph 3, article 1203, and articles 1209, 1210,1249 and 1253 of the same code. Article 1164 of the Civil Code provides that "a payment made in good faith to the person who is in possession of the credit shall release the debtor," and article 1163, paragraph 2, reads as follows: "A payment made to a third person shall also be valid in so far as it may have been beneficial to the creditor." But the revolutionary government to which the payment was made not in possession of the credit; it did nothing but seize the property of the vendor, including the house and lot in question. Seizure is not, in itself, a confiscation. The appellee in his brief admits that there was no confiscation. The reason why the seizure was made does not appear. A seizure or embargo is nothing but a prohibition enjoining the owner from disposing of his property. By the mere embargo of a property the owner does not lose his title thereto. The authorities (lawful or unlawful) who, legally or illegally, order the seizure do not become the owners of the same. What the vendor in this case did was to attempt to reacquire the ownership of the property transferred to the vendee from a third person to whom the property had not been transferred by the said vendee in any manner whatsoever. Therefore, the vendor from a person who was not the owner of the same. This is obvious. If the revolutionary government, by reason of the seizure or the embargo, did not acquire the title to the property or vested in the vendee, neither could the purchaser have acquired from the latter, even though an embargo, the credit which the said vendee had under the right of redemption in case such redemption should take place; the property of the vendee thus seized had included the right to demand the stipulated price for the repurchase, perhaps the payment of such price to the person rightfully entitled to it under the embargo would have been proper. But there was nothing, it is alleged, but an embargo of the real estate of the vendee including the property in question. So that article 1164 of the Civil Code is not applicable to the case at bar, nor is paragraph 2 of article 1163 applicable to this case, because there is nothing in the record to show that a payment made by Panganiban to the revolutionary government was for the benefit of Gonzalez. "That the creditor was benefited by the payment made to a third person by his debtor can not be

presumed, and must, therefore, be satisfactorily established by the person interested in proving this fact." Manresa, 8 Civil Code, 257.) Finally assuming, without deciding, that the payment of the 1,300 pesos in question to the revolutionary government was properly made, yet it does not appear that the deed of sale had been canceled that is to say, that no other deed of repurchase canceling the said deed of sale had been executed in short, the obligation the payment of which was necessary to redeem the property was not canceled. This is also one of the conclusions arrived at by the court below in the decision. A credit is not extinguished against the will of creditor except by the judgment of a court or by the expiration of the period prescribed by the statue of limitations. Paragraph 3 of article 1203 provides that "obligations may be modified by subrogating a third person to the rights of the creditor." Article 1209 provides that "the subrogation of a third person to the rights of a creditor can not be presumed except in the cases expressly mentioned in the code, it being necessary in other cases to prove such subrogation clearly in order that it may be effective." Paragraph 3 of article 1210 provides that "when the person who is interested in the fulfillment of the obligation pays, subrogation shall be presumed." Article 1249 provides that "presumptions are not admissible, except when the fact from which they are to be deduced is fully proved." And article 1253 provides that "in order that presumptions, not established by law, may be admitted as means of evidence, it is indispensable that between the fact demonstrated and the one it is desired to deduce there should exist a precise and direct connection according to the rules of human judgment." All these provisions of law are relied upon by the appellee in his brief in support of the following proposition: "All the facts above set out, and particularly those relating to the embargo and the deposit of the property of Gonzalez and the return of the same after redemption, established the presumption of the existence of an obligation on the part of Gonzalez in favor of the so called Philippine government either for war taxes or some other indebtedness. . . ." (Brief, p. 9.) But no other fact except the embargo of Gonzalez's property and the return of the same to Panganiban having been proved, the contention of the appellee is absolutely contrary to the provision of article 1209 of the Civil Code above quoted. In conclusion, we hold that the court below committed the errors pointed out by the appellant under the first, second, third, and sixth assignments. The payment made by Panganiban to the revolutionary government of the 1,300 pesos which he should have paid to Francisco Gonzalez in order to redeem the property, could not have extinguished the obligation incurred by him in favor of the latter. The supreme court of Spain, in a judgment rendered on the 28th of February, 1896, said: "The payment of the debt in order to extinguish the obligation must be made to the person or persons in whose favor it was incurred or to his or their duly authorized agent. It follows, therefore, that the payment made to a third person, even through error and in good faith, shall not release the debtor of the obligation to pay and will not deprive the creditor of his right to demand payment. If it becomes impossible to recover what was unduly paid, any loss resulting therefrom shall be borne by the deceived debtor, who is the only one responsible for his own acts unless there is a stipulation to the contrary or unless the creditor himself is responsible for the wrongful payment." The fourth and fifth assignments of error relate to the second question, in so far as the appellant claims that the court below erred in holding that neither Gonzalez nor Cuevas ever had a title to the property in question, they not having paid as

stipulated in the contract the additional 200 pesos, and in holding that the irrevocability of the sale depended upon the payment of the said additional sum of 200 pesos. The question arises whether there were one or two conditions stipulated in the contract which should be complied with in order to make the conditional sale irrevocable. The appellant contends that there was only one condition stipulated, to wit, the lapse of a period of six months, whereas the appellee claims that there were two conditions, viz, the lapse of the period of six months and the payment of 200 pesos in addition to the purchase price. This question may be decided as a matter of fact by reference to appellant's own statement as set out in the third paragraph of this decision, wherein he is quoted as saying: "Desiring to acquire the ownership of the property irrevocably, I deposit the additional sum of two hundred pesos. . . ." So that prior to that deposit he had the conviction of he had not as yet acquired the ownership of the property irrevocably. And as a matter of law, first, by the terms of the agreement itself, according to which, after setting forth the true conditions, to wit, the lapse of the time provided therein and the additional payment of 200 pesos, the appellant, referring to the acquisition of the ownership in an irrevocable manner, stipulated as follows: "Shall pay the sum of two hundred pesos in addition to the sum already stated, the vendee acquiring the ownership of the property irrevocably;" and, second, because the agreement to pay an additional sum of 200 pesos presupposes that the first conditional sale was made in consideration of the sum of 1.300 pesos, but the consideration for the irrevocable and definite sale was 1,500 pesos; and it is well known that where property is sold, the consideration therefor being paid at the time of the sale, title does not pass to the vendee unless the property is actually delivered and the purchase price actually received. There can be no question, therefore, that up to the 10th of August, 1900, when Cuevas deposited the 200 pesos in court for the purpose, as stated, of acquiring the ownership irrevocably, the property could have been redeemed. The third question is whether after the deposit of the 200 pesos on August 10, 1900, the vendor lost his right to repurchase the property. The provisions of the Civil Code relating to this subject are as follows: "Consignation shall be made by depositing the things due at the disposal of the judicial authorities before whom the tender shall be proved in a proper case and the notice of the consignation in other cases." (Art. 1178.) There is nothing in the record to show that Cuevas tendered the payment of the 200 pesos in question to Panganiban or that he gave notice of his intention to deposit the said sum in court in case said tender was refused by Panganiban. According to article 1176, "If the creditor to whom the tender of payment has been made should refuse to accept it, without reason, the debtor shall remain released from all liability by the consignation of the thing due," and, further, that "the same effect shall be produced by the consignation alone when made in the absence of the creditor, or when the latter shall be incapacitated to accept the payment when it is due, and when several persons claim to have a right to collect it, or when the instrument mentioning the obligation has been mislaid." There being no evidence of anything except the consignation and the plaintiff Panganiban not being either absent or incapacitated so that the consignation alone could have produced the effect of releasing the debtor, it follows that the consignation made by Cuevas did not produce the effect which it would have produced had it been made as provided in the code. It is therefore evident that Cuevas never complied with the condition stipulated in the contract in order to acquire the ownership irrevocably.

It appears, therefore, from the facts as established in this case: (1) That Salvador Panganiban did not comply with the condition stipulated in the contract in order to reacquire the ownership of the property sold by him on condition of redemption, for the reason that he did not pay the price agreed upon to the creditor or to his duly authorized agent or to the person entitled to receive the same for the creditor. (2) That Agustin Cuevas did not comply with the other condition imposed upon him (or upon Gonzalez) by the terms of the contract in order to acquire the ownership of the property irrevocably, as he did not make the additional payment agreed upon for the definite sale of the property in such a manner as would have relieved him of this liability under the law. So that even after the 10th of August, 1900, and up to the present date, the redemption of the property could have been effected and the parties could have enforced their respective rights as though nothing had been done, for nothing was done in the manner prescribed by law so as to have sufficient force to create a juridical status or become res adjudicata. The judgment of the court below is accordingly reversed without special provision as to costs. And being of the opinion that this action was brought for the purpose of securing the repurchase of the property, and for this purpose we shall consider the complaint amended so as to make it conform to the facts established by the evidence, we hold that Salvador Panganiban may repurchase the property if he so desires; and the court below is accordingly directed to require the said Panganiban to comply with the provisions of article 1518 of the Civil Code, and in case he complies therewith to the satisfaction of the court, to enter judgment authorizing the repurchase and requiring Agustin Cuevas to execute the deed of resale, cancelling the former deed of sale and the entry thereof made in the Registry of Property, or otherwise to dismiss the action. After the expiration of twenty days let judgment be entered in accordance herewith and ten days thereafter the case be remanded to the court below for execution. So ordered. Republic of the Philippines SUPREME COURT Manila EN BANC DECISION September 1, 1919

G.R. No. 14370 THE UNITED STATES, plaintiff-appellee, vs. VARADERO DE LA QUINTA, CELERINO B. ARELLANO and CIRILO JOSE, defendants-appellants. Manuel Garcia Goyena for appellants. Assistant Attorney-General Gerkin for appellee. Malcolm, J.: No better starting place for this opinion can be found than the decision of the Court of First Instance of Manila which awarded the plaintiff the sum of P13,961.76 with interest and costs. With difficulty could the fair and concise statement of the case and of the facts by the trial judge be improved upon. The decision, accordingly incorporated as an integral part of this opinion, quoted in full, reads as follows: This is an action to recover the sum of P13,961.76 for the non-performance of a guaranteed proposal to construct two scows for the plaintiff.

It appears from the evidence that on February 23, 1916, the plaintiff, through the depot quartermaster of the United States Army at Manila, invited proposals for the construction of the two scows. In response to the invitation, the defendants Cho Chung Chac and Cho Chung Chee, doing business under the firm name of the Varadero de la Quinta, submitted a proposal to build the scows for the sum of $15,850 United States currency. The proposal by its terms was effective for 60 days after the opening of the bids, and bound the bidder to complete the construction within 90 working days after formal notification of award. It also contained the following clause: 2. This proposal is made with a full knowledge on the part of the undersigned of the kind, quantity and quality of the supplies and services required; and should the undersigned receive written notice of the acceptance of this bid, or any part thereof, within sixty (60) days after the date of opening same, he will deliver or person the accepted items within the time and in accordance with the terms of said proposal and acceptance or will if so required by the United States enter into contracts within ten days after such notification of acceptance in accordance with the terms of said proposal and acceptance, and will give bond with good and sufficient sureties for the faithful and proper fulfillment of such contract. The proposal was guaranteed by the defendants Arellano and Jose in the following terms: The undersigned, Celerino B. Arellano, of Manila in the county of Manila, and state of Philippine Islands and Cirilo Jose, of Manila, in the county of Manila, and state of Philippine Islands, hereby guarantee that the foregoing proposal, if not withdrawn prior to the opening thereof shall remain open for sixty (60) days thereafter, unless accepted or rejected within that time; and if it be accepted in any or all of its terms or any part or parts thereof, within said period of sixty (60) days, the said bidder will, upon written notice of such acceptance, deliver or perform the accepted items within the time and in accordance with the terms of said proposal and acceptance, or will, if required by the United States, or its legal representative, within ten (10) days after written notification of such acceptance, enter into contract with the proper officer of the United States, for the delivery or performance of the accepted items in accordance with the terms of the said proposal and acceptance and will give bond with good and sufficient sureties, for the faithful and proper fulfillment of such contract. And we bind ourselves, our heirs, executors, administrators, and successors, jointly and severally, to pay the United States in case the said bidder shall withdraw said proposal within said period of sixty (60) days or shall fail to furnish such articles and services in accordance with said proposal as accepted, or shall fail to enter into such contract and furnish such bond, if so required within ten days after said notice of acceptance, the difference in money between the amount of the proposal of Said bidder on the articles and services so accepted and the amount for which the proper office of the United States may procure the same from other parties, if the latter amount be in excess of the former. Given under our hands and seals this 1st day of March, 1916. Witnesses: F. GARCIA as to CELERINO B. ARELLANO R. OESON, as to C. JOSE. The bids were opened March 3, 1916, and 45 days thereafter the Varadero de la Quinta was formally notified that its bid was accepted. The notification reads: OFFICE OF DEPOT QUARTERMASTER MANILA, P. I. April 17, 1916. From: Depot Q. M. To: Varadero de la Quinta, 549 Echague St., Manila. Subject: Construction of two scows. 1. You are informed that your bid, submitted in response to circular proposal, of this office dated February 23d, 1916, for the construction of two scows, is

accepted, viz: $15,850.00, and the same to be completed in ninety (90) working days. 2. Work is to be begun immediately, and to be completed in time as stated above. 3. Formal contract covering the above work will be made in the office of the Department Quartermaster, and will be dated April 17, 1916. You are requested to advise the name and designation of the office who will sign the contract in behalf of the Corporation, and the names of the sureties who will justify in the sum of $8,000, or corporate surety may be furnished if desired. Prompt acknowledgment of this acceptance is requested. M. GRAY ZALINSKI, Colonel, Q. M. Corps. HAT/T L/A 74216029 Under date of April 27, 1916, the Varadero de la Quinta addressed to the Department Quartermaster a request for a six months extension of time commencing the work, on the ground that there was not a sufficient supply of suitable lumber in the local market. This request was under date of April 29 denied by the Department Quartermaster, who called attention to the fact that his office was informed that the firm of Norton & Harrison had on hand a large stock of suitable lumber which they still were willing to sell at the price quoted the Varadero de la Quinta at the time its bid was submitted. After some further correspondence, and several ineffective efforts to furnish a bond satisfactory to the Quartermaster Department, the Varadero de la Quinta was on May 17, 1916, notified that unless the work was undertaken immediately and satisfactory bond given by one oclock in the afternoon of May 20, 1916, steps would be taken to guard the interests of the government by either awarding the contract to the next lowest bidder, during the work by purchase of material and hiring of labor, or such other manner as is deemed necessary. The scows were finally constructed by the Insular Collector of Customs at a total cost to the United States Government of $22,830.88, United States currency, or an excess of $6,980.88, United States currency, over the defendants bid, for the recovery of which excess this action is brought. Upon the facts stated, the defendants are clearly liable for the difference between the amount of their bid and the actual cost to the plaintiff of the construction of the scows. The defendants contention that the plaintiffs failure to take immediate advantage of the provision in the proposal binding the bidder to enter into contract and furnish bond within ten days constituted a waiver, merits no serious consideration. Neither is their any force in the argument that the plaintiff should have waited until the termination of the 90 days period before taking the contract out of the hands of the defendants. As far as the record shows the defendants, after their bid was accepted, never offered to complete the construction of the scows within the period specified in their proposal; in fact, the burden of their contention is that they were unable to obtain the necessary materials and hence required an extension of the time. But be this as it may, their proposal bound them to enter into a formal contract and give a satisfactory bond within ten days from the acceptance of the bid, or in default thereof to pay the difference in money between the amount of their proposal and the actual cost. There is no basis for equitable relief from this agreement; time must be regarded as of the essence in a contract for military supplies. Wherefore, it is hereby ordered and adjuged that the plaintiff have and recover judgment against the defendants Cho Chung Chac and Cho Chung Chee, jointly and severally as principals, and against the defendants Celerino B. Arellano and Cirilo Jose, jointly and severally, as sureties, for the sum of P13,961.76, with interest at the rate of 6 per cent per annum from the 7th day of August, 1917, and with the costs. Execution will not issue against the sureties until a writ of execution against the principals has been returned unsatisfied in whole or in part.

Appellants first assignment or error goes to the overruling of their demurrer by the trial court, and is to the effect that there is a misjoinder of parties defendant in that the contract of the defendants Celerino B. Arellano and Cirilo Jose being one of guaranty, the liability of the principal debtor and the guarantors cannot properly be decided in one and the same action. Appellants may be technically correct in their demonstration of the proposition that Arellano and Jose were not sureties, as stated by the trial court, but were, in fact, guarantors of the contract. The distinction made between the contract of guaranty and the contract of suretyship under the American law is, however, more shadowy than substantial and is not emphasized at all under the English law. The vital difference between the contract of a surety and that of a guarantor is sometimes said to be, that a surety is charged as an original promissor while the engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary. (12 R. C. L., 1057; Homewood Peoples Bank vs. Hastings [1919], 106 Atl., 308 and note in 89 Central Law Journal, July 4, 1919, p. 15.) It would then follow that a guarantor not being a joint contractor with his principal, cannot, as a general rule, be used with his principal. Admitting although not necessarily conceding, that this is the correct rule of pleading, yet adherence to the same at this stage of the proceedings and under the situation in which we find the case, would serve merely to delay the ultimate accounting of the guarantors. Be it remembered that the concluding sentence of the judgment reads: Execution will not issue against the sureties (guarantors) until a writ of execution against the principals has been returned unsatisfied in whole or in part. In other words, it having been proved that the principal is not able to perform a contract which he has made and for which in a cumulative, collateral agreement, the guarantors become liable, the latter must respond for the damages if the same be not satisfied by their principal. No different result would be attained if plaintiff were forced to institute separate actions against the principal and the guarantors. (See Haldane vs. United States [1895], 69 Fed., 819.) The appellants are correct in contending that an error was committed by the lower court in finding the defendant Cho Chung Chee liable as a principal in this action. The record discloses what is styled a stipulation, by which it is admitted by the defendants that Cho Chung Chac is the sole owner of the business establishment known as the Varadero de la Quinta, and this is corroborated by defendants exhibits which speak of the Varadero de la Quinta, Cho Chung Chac, sole proprietor, by Cho Chung Chee, attorney-in-fact. With the modification just indicated, all the other contentious issues appear to be covered fully in the decision of the trial court. In one way or another they relate to the contract between the United States and the Varadero de la Quinta. Examining the facts as one may, the terms of this agreement are plain and definite. Skeletonized they are The bid of the Varadero de la Quinta accepted bid guaranteed by Arellano and Jose pleas for extensions of time no modification consented to Varadero de la Quinta fails to carry out agreement principal liable for excess cost guarantors notified of default although not necessary guarantors likewise liable. With these facts, one of two hypotheses can be reasonably assumed. The first assumption is that there was an absolute impossibility of performance of the contract because of inability to secure lumber of the kind, quantity and quality specially called for by the specifications in the Manila market, and the second that the contractor could have secured the lumber but at such a figure as would not have permitted of a profit. On the supposition that no such lumber as was needed to construct the scows could be found in the city of Manila and that the authorities of the United States Army would not agree to an extension of time, nevertheless, the principal and the guarantors cannot escape from their agreement. This is not a case of an impossibilty existing at the time of the contract and known to both parties. It is rather a case of where two parties enter into a contract and the performance becomes impossible subsequent thereto. In such instances, the courts invariably refer to the old and leading case of Paradine vs. Jane ([1647], Aleyn, 26; 82 Eng. L. & Eq. Rep., 897). Here, the original rule of English law, with the

reasons therefor, and the exceptions thereto, is made clear in its insistence that when a party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. The reason for the rule is obvious, for if one of two innocent persons must sustain a loss, the law should leave it where the agreement of the parties has put it. Although in the course of time, the rigor of this ancient doctrine has been modified, it still remains as a cornerstone in the law of contracts. Thus, the United States Supreme Court in the case of Day vs. United States ([1917], 245 U. S., 159) said; One who makes a contract never can be absolutely certain that he will be able to perform it when the time comes, and the very essence of it is that he takes the risk within the limits of his undertaking. The modern cases may have abated somewhat the absoluteness of the older ones in determining the scope of the undertaking by the literal meaning of the words alone. (The Kronprinzessin Cecilie, 244 U. S., 12, 22). But when the scope of the undertaking is fixed, that is merely another way of saying that the contractor takes the risk of the obstacles to that extent. Again, if, as argued by counsel, the war be deemed to have affected the instant contract the effect would be as summarized in a statement of the law adopted in the report of the Pre-War Contract Committee of Great Britain, dated January 12, 1918, wherein it is said: Prima facie if a man binds himself by contract unconditionally to do that which turns out to be impossible, he will be held to his bargain and have to pay damages for his failure to perform. If, however, the impossibility arises from a cause that neither party can be reasonably have contemplated when the contract was made, and as to which the terms of the contract make no provision, a man will not be so bound; the matter being unforeseen, he is not taken to have promised unconditionally nor, for the same reason, has he stipulated for any condition of excuse. (Report of the Pre-War Contract Committee dated January 12, 1918, Cd. 8975 of 1918; The Law Quarterly Review, January, 1919, p. 95.) From these authorities and facts, we can reach no other conclusion than that since impossibility of performance was not known to both parties at the time of making the contract, since performance has not been prevented by the acts of the United States, since the contract related to nothing which was unlawful, and since the modificatory rules growing out of war conditions do not affect the same, the contractor and his guarantors are not excused from the consequences of nonperformance. The second assumption we have mentioned is, after all, the more tenable. We think it fairly shown from the evidence that one of the large dealers in the city of Manila had on hand a sufficient supply of Oregon pine such as was needed to construct the scows. This being so, the contractor could make propositions without number to the plaintiff, but if they were not accepted by the plaintiff, the contractor would still be held to his agreement. The excuses offered for failure to carry out the agreement while they might arouse sympathy would certainly not furnish a legal defense. Mere increase of the cost of performance or unexpectedly burdensome and oppressive war conditions are insufficient pleas. (See Blackburn, Robbin Co., Ltd., vs. Allen & Sons [1918], 2 K. B., 267.) Contracts with the Government, like other contracts, must be performed according to their tenor. Judgment is modified so that so much as adjudges Cho Chung Chee liable as principal is eliminated, and, as thus modified, judgment is affirmed with interest, and with the costs of this instance against the appellants. So ordered. Torres, Johnson, Araullo, Avanceena, and Moir, JJ., concur. THIRD DIVISION [G.R. No. 138677. February 12, 2002]

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF APPEALS & SECURITY BANK & TRUST COMPANY,respondents. DECISION VITUG, J.: Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan, et al." Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount of P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissory note binding themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per annum upon maturity and to pay a penalty of 5% every month on the outstanding principal and interest in case of default. In addition, petitioners agreed to pay 10% of the total amount due by way of attorneys fees if the matter were indorsed to a lawyer for collection or if a suit were instituted to enforce payment. The obligation matured on 8 September 1981; the bank, however, granted an extension but only up until 29 December 1981. Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to petitioners informing them that they had five days within which to make full payment. Since petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with the Regional Trial Court of Makati, Branch 143, a complaint for recovery of the due amount. After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27 March 1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing of the case reset on two consecutive occasions. In view of the absence of petitioners and their counsel on 28 August 1985, the third hearing date, the bank moved, and the trial court resolved, to consider the case submitted for decision. Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of the trial court declaring them as having waived their right to present evidence and prayed that they be allowed to prove their case. The court a quo denied the motion in an order, dated 5 September 1988, and on 20 October 1989, it rendered its decision, the dispositive portion of which read: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter to pay, jointly and severally, to the plaintiff, as follows: "1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2% service charge and 5% per month penalty charge, commencing on 20 May 1982 until fully paid; "2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as attorneys fees; and "3. To pay the costs of the suit. Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court of their motion to present evidence and assailing the imposition of the 2% service charge, the 5% per month penalty charge and 10% attorney's fees. In its decision of 7 March 1996, the appellate court affirmed the judgment of the trial court except on the matter of the 2% service charge which was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied with the

decision of the appellate court, both parties filed their respective motions for reconsideration. Petitioners prayed for the reduction of the 5% stipulated penalty for being unconscionable. The bank, on the other hand, asked that the payment of interest and penalty be commenced not from the date of filing of complaint but from the time of default as so stipulated in the contract of the parties. On 28 October 1998, the Court of Appeals resolved the two motions thusly: We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon must commence not on the date of filing of the complaint as we have previously held in our decision but on the date when the obligation became due. Default generally begins from the moment the creditor demands the performance of the obligation. However, demand is not necessary to render the obligor in default when the obligation or the law so provides. In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest in case of non-payment from the date of default. While we maintain that defendants-appellants must be bound by the contract which they acknowledged and signed, we take cognizance of their plea for the application of the provisions of Article 1229 x x x. Considering that defendants-appellants partially complied with their obligation under the promissory note by the reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will finally settle their obligation, it is our view and we so hold that in the interest of justice and public policy, a penalty of 3% per month or 36% per annum would suffice. WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank and Trust Company the following: 1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per month penalty charge commencing May 20, 1982 until fully paid; 2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys fees. On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly discovered evidence, alleging that while the case was pending before the trial court, petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure the existing indebtedness of petitioners Ligutan and dela Llana with the bank. Petitioners contended that the execution of the real estate mortgage had the effect of novating the contract between them and the bank. Petitioners further averred that the mortgage was extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the bank did not credit them with the proceeds of the sale. The appellate court denied the omnibus motion for reconsideration and to admit newly discovered evidence, ratiocinating that such a second motion for reconsideration cannot be entertained under Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered evidence being invoked by petitioners had actually been known to them when the case was brought on appeal and when the first motion for reconsideration was filed. Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting thusly -

I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by private respondent bank on petitioners loan obligation are still manifestly exorbitant, iniquitous and unconscionable. II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten (10%) percent award of attorneys fees which is highly and grossly excessive, unreasonable and unconscionable. III. The respondent Court of Appeals gravely erred in not admitting petitioners newly discovered evidence which could not have been timely produced during the trial of this case. IV. The respondent Court of Appeals seriously erred in not holding that there was a novation of the cause of action of private respondents complaint in the instant case due to the subsequent execution of the real estate mortgage during the pendency of this case and the subsequent foreclosure of the mortgage. Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be deleted by petitioners was even insufficient to fully cover and compensate for the cost of money brought about by the radical devaluation and decrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence. The Bank would stress that only the amount of P5,584.00 had been remitted out of the entire loan of P120,000.00. A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the obligation and to provide, in effect, for what could be the liquidated damages resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. Although a court may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with. The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals, just an example, the Court has tempered the penalty charges after taking into account the debtors pitiful situation and its offer to settle the entire obligation with the creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular performance is made by the debtor. The stipulated penalty might even be deleted such as when there has been substantial performance in good faith by the obligor, when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so exist as to warrant it. The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest from 5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention the repeated acts of breach by

petitioners of their contractual obligation, the Court sees no cogent ground to modify the ruling of the appellate court. Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that has not been raised and ventilated before the courts below. In any event, the interest stipulation, on its face, does not appear as being that excessive. The essence or rationale for the payment of interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be demanded. What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a bank's existence. Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of services rendered by counsel for the bank and the nature of the case. Bearing in mind that the rate of attorneys fees has been agreed to by the parties and intended to answer not only for litigation expenses but also for collection efforts as well, the Court, like the appellate court, deems the award of 10% attorneys fees to be reasonable. Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to admit newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a judgment or final resolution by the same party shall be entertained. Considering that the instant motion is already a second motion for reconsideration, the same must therefore be denied. Furthermore, it would appear from the records available to this court that the newly-discovered evidence being invoked by defendants-appellants have actually been existent when the case was brought on appeal to this court as well as when the first motion for reconsideration was filed. Hence, it is quite surprising why defendants-appellants raised the alleged newly-discovered evidence only at this stage when they could have done so in the earlier pleadings filed before this court. The propriety or acceptability of such a second motion for reconsideration is not contingent upon the averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore presented and rejected. Otherwise, attainment of finality of a judgment might be stayed off indefinitely, depending on the partys ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice to the rights of the movant for reconsideration. At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would not have resulted in the extinguishment of the original contract of loan because of novation. Petitioners acknowledge that the real estate mortgage contract does not contain any express stipulation by the parties intending it to supersede the existing loan agreement between the petitioners and the bank. Respondent bank has correctly postulated that the mortgage is but an accessory contract to secure the loan in the promissory note.

Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to the new contract; third, the extinguishment of the obligation; and fourth, the validity of the new one. In order that an obligation may be 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 obligation be on every point incompatible with each other. An obligation to pay a sum of money is not extinctively novated by a new instrument which merely changes the terms of payment or adding compatible covenants or where the old contract is merely supplemented by the new one. When not expressed, incompatibility is required so as to ensure that the parties have indeed intended such novation despite their failure to express it in categorical terms. The incompatibility, to be sure, should take place in any of the essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease of things, or from negotiorum gestio to agency, or from a mortgage to antichresis, or from a sale to one of loan; (2) the object or principal conditions, such as a change of the nature of the prestation; or (3) the subjects, such as the substitution of a debtor or the subrogation of the creditor. Extinctive novationdoes not necessarily imply that the new agreement should be complete by itself; certain terms and conditions may be carried, expressly or by implication, over to the new obligation. WHEREFORE, the petition is DENIED. SO ORDERED.