PHILIPPINE NATIONAL CONSTRUCTION v.

CA
Facts: On 18 November 1985, petitioner Philippine National Construction Corporation
(PNCC) executed a contract of lease with private respondents, stipulating to pay rent for
the use of land, at the monthly rate of P 20,000.00 payable yearly in advance. The said land
is to be used by petitioner as site for a rock crushing plant. The term of lease is for five years,
commencing on the date of issuance of an industrial clearance by the Ministry of Human Settlements
(Ministry).On 7 January 1986 PNCC obtained a Temporary Use Permit from the Ministry for
the proposed rock crushing project. Nine days later private respondents wrote to PNCC, asking
for the first annual rental, and assuring that they have stopped considering proposals of other
aggregates plants in favor of PNCC. In reply, PNCC argued that the contract must commence on the
date of issuance by the Ministry of an industrial clearance in their favor. It also expressed its desire to
terminate the contract it executed with respondents, due to financial, as well as technical difficulties.
Respondents refused to accede to PNCCs request for pre termination and on 19 May
1986,instituted an action against PNCC for Specific Performance with Damages. Trial court ruled in
favor of respondents and ordered PNCC to pay rentals for two years, with legal interests plus attorneys
fees. The Court of Appeals affirmed the decision of the trial court upon appeal by PNCC; hence, this
case.
Issue: W/N PNCC should be released from its contract with respondents due to unforeseen events and
causes beyond its control.
Held: First. Petitioner invites the attention of this Court to paragraph 1 of the lease contract, which
reads: "This lease shall be for a period of five (5) years, commencing on the date of issuance of the
industrial clearance by the Ministry of Human Settlements...." It then submits that the issuance of an
industrial clearance is a suspensive condition without which the rights under the contract would not be
acquired. The Temporary Use Permit is not the industrial clearance referred to in the contract; for the
said permit requires that a clearance from the National Production Control Commission be first
secured, and besides, there is a finding in the permit that the proposed project does not conform to
the Zoning Ordinance of Rodriguez, (formerly Montalban), Rizal, where the leased property is
located. Without the industrial clearance the lease contract could not become effective and petitioner
could not be compelled to perform its obligation under the contract.
Petitioner is now estopped from claiming that the Temporary Use Permit was not the industrial
clearance contemplated in the contract. In its letter dated 24 April 1986, petitioner states:
We wish to reiterate PNCC Management's previous stand that it is only obligated to pay your
clients the amount of P20,000.00 as rental payments for the one-month period of the lease,
counted from 07 January 1986 when the Industrial Permit was issued by the Ministry of Human
Settlements up to 07 February 1986 when the Notice of Termination was served on your clients.
[11]
(Underscoring Supplied).
The "Industrial Permit" mentioned in the said letter could only refer to the Temporary Use Permit issued
by the Ministry of Human Settlements on 7 January 1986. And it can be gleaned from this letter that
petitioner has considered the permit as industrial clearance; otherwise, petitioner could have simply
told the private respondents that its obligation to pay rentals has not yet arisen because the
Temporary Use Permit is not the industrial clearance contemplated by them. Instead, petitioner
recognized its obligation to pay rental counted from the date the permit was issued.
Also worth noting is the earlier letter of petitioner; thus:
[P]lease be advised of PNCC Management's decision to cancel or discontinue with the rock
crushing project due to financial as well as technical difficulties. In view thereof, we would like
to terminate our Lease Contract dated 18 November, 1985. Should you agree to the mutual
termination of our Lease Contract, kindly indicate your conformity hereto by affixing your
signature on the space provided below. May we likewise request Messrs. Rene, Jose and

Antonio, all surnamed Raymundo and Mrs. Socorro A. Raymundo as Attorney-in-Fact of Amador
S. Raymundo to sign on the spaces indicated below.[12]
It can be deduced from this letter that the suspensive condition - issuance of industrial clearance - has
already been fulfilled and that the lease contract has become operative. Otherwise, petitioner did not
have to solicit the conformity of the private respondents to the termination of the contract for the
simple reason that no juridical relation was created because of the non-fulfillment of the condition.
Moreover, the reason of petitioner in discontinuing with its project and in consequently cancelling the
lease contract was financial as well as technical difficulties, not the alleged insufficiency of the
Temporary Use Permit.
Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts that it should
be released from the obligatory force of the contract of lease because the purpose of the contract did
not materialize due to unforeseen events and causes beyond its control, i.e., due to abrupt change in
political climate after the EDSA Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations
arising therefrom have the force of law between the parties and should be complied with in good faith.
[13]
But the law recognizes exceptions to the principle of the obligatory force of contracts. One
exception is laid down in Article 1266 of the Civil Code, which reads: "The debtor in obligations to do
shall also be released when the prestation becomes legally or physically impossible without the fault of
the obligor."
Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to
obligations "to do", and not to obligations "to give". [14] An obligation "to do" includes all kinds of work
or service; while an obligation "to give" is a prestation which consists in the delivery of a movable or
an immovable thing in order to create a real right, or for the use of the recipient, or for its simple
possession, or in order to return it to its owner. [15]
The obligation to pay rentals [16] or deliver the thing in a contract of lease [17] falls within the prestation
to give; hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event
and causes mentioned by petitioner are not the legal or physical impossibilities contemplated in said
article. Besides, petitioner failed to state specifically the circumstances brought about by the abrupt
change in the political climate in the country except the alleged prevailing uncertainties in
government policies on infrastructure projects.
The principle of rebus sic stantibus[18] neither fits in with the facts of the case. Under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist
the contract also ceases to exist. [19] This theory is said to be the basis of Article 1267 of the Civil Code,
which provides:
ART. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute
application of the principle of rebus sic stantibus, which would endanger the security of contractual
relations. The parties to the contract must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional changes of circumstances that equity
demands assistance for the debtor.[20]
In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the
country after the EDSA Revolution and its poor financial condition rendered the performance of the
lease contract impractical and inimical to the corporate survival of the petitioner.
This Court cannot subscribe to this argument. As pointed out by private respondents:[21]
It is a matter of record that petitioner PNCC entered into a contract with private respondents
on November 18, 1985. Prior thereto, it is of judicial notice that after the assassination of
Senator Aquino on August 21, 1983, the country has experienced political upheavals, turmoils,
almost daily mass demonstrations, unprecedented, inflation, peace and order deterioration,
the Aquino trial and many other things that brought about the hatred of people even against
crony corporations. On November 3, 1985, Pres. Marcos, being interviewed live on U.S.
television announced that there would be a snap election scheduled for February 7, 1986.

On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the contract
of lease with private respondents with open eyes of the deteriorating conditions of the country.
Anent petitioners alleged poor financial condition, the same will neither release petitioner from the
binding effect of the contract of lease. As held in Central Bank v. Court of Appeals, [22] cited by the
private respondents, mere pecuniary inability to fulfill an engagement does not discharge a contractual
obligation, nor does it constitute a defense to an action for specific performance.
With regard to the non-materialization of petitioners particular purpose in entering into the contract
of lease, i.e., to use the leased premises as a site of a rock crushing plant, the same will not invalidate
the contract. The cause or essential purpose in a contract of lease is the use or enjoyment of a thing.
[23]
As a general principle, the motive or particular purpose of a party in entering into a contract does
not affect the validity or existence of the contract; an exception is when the realization of such motive
or particular purpose has been made a condition upon which the contract is made to depend. [24] The
exception is not apply here.
Third. According to petitioner, the award of P492,000 representing the rent for two years is excessive,
considering that it did not benefit from the property. Besides, the temporary permit, conformably with
the express provision therein, was deemed automatically revoked for failure of petitioner to use the
same within one year from the issuance thereof. Hence, the rent payable should only be for one year.
Petitioner cannot be heard to complain that the award is excessive. The temporary permit was valid
for two years but was automatically revoked because of its non-use within one year from its
issuance. The non-use of the permit and the non-entry into the property subject of the lease contract
were both imputable to petitioner and cannot, therefore, be taken advantage of in order to evade or
lessen petitioners monetary obligation. The damage or prejudice to private respondents is beyond
dispute. They unquestionably suffered pecuniary losses because of their inability to use the leased
premises. Thus, in accordance with Article 1659 of the Civil Code, [25] they are entitled to
indemnification for damages; and the award of P492,000 is fair and just under the circumstances of
the case.

MAGAT, JR. v CA
(http://lazystudentdigest.blogspot.com/2014/08/victorino-magat-jr-vs-court-ofappeals.html)
Facts:
Guerrero is the President and Chairman of the Guerrero Transport Services (GTS), a
single proprietorship. IN 1972, the GTS won a bidding to operate a fleet of taxicabs in Subic. As the
highest bidder, Guerrero was required to have four door, four wheel, radio controlled, meter controlled
and sedans taxi services.

Guerrero and Magat, General Manager of the Spectrum Electronic Laboratories, executed a
letter-contract for the purchase of transceivers at $77,620.59 FOB, Yokohoma. Magat was to deliver
within the 60-90 days after receiving from the Guerrero the assigned frequency. Magat then contacted
his Japanese supplier (Koide & Co., Ltd.) and placed an order for the transceivers.

On Sept. 22, 1972, in the event of the Martial Law, the then President Marcos issued the Letter
of Instructions (LOI) no. 1 which stated: SEIZURE AND CONTROL OF ALL PRIVATELY OWNED
NEWSPAPERS, MAGAZINES, RADIO AND TELEVISION FACILITIES AND ALL OTHER MEDIA OF
COMMUNICATION., said LOI was for the prevention of Propaganda actions against the government.

On Sept. 25, 1972. Pursuant to the LOI, the Radio Control Office issued Administrative Circular
no. 4, which stated: SUSPENDING THE ACCEPTANCE AND PROCESSING OF APPLICATIONS FOR RADIO
STATION CONSTRUCTION PERMITS AND FOR PERMITS TO OWN AND/OR POSSESS RADIO
TRANSMITTERS OR TRANSCEIVERS. said circular suspended the sale and purchase of radio
transmitters or transceivers.

The permit to import the transceivers was denied because of the Martial Law

Guerrero was not able to obtain the necessary letter of credit. He then did not continue with the
contract.

Issue: W/N there was an unforeseen event that took place, such that the contract in this case cannot
be executed.
Held: The contract was valid; the radio transceivers were not contraband.
"Contraband" generally refers to "any property which is unlawful to produce or possess." It refers to
goods which are exported and imported into a country against its laws. [38]
In declaring the contract void ab initio, the Court of Appeals ruled that the importation of the
transceivers meant the inevitable passing of such goods through Philippine Ports, where the LOI and
the Administrative Circular have to be observed and applied with full force and effect. [39] The Court of
Appeals declared that the proposed importation of such goods was contrary to law, hence, the nullity
of the contract.[40]
We do not agree. The contract was not void ab initio. Nowhere in the LOI and Admin. Circular is there
an express ban on the importation of transceivers.
The LOI and Administrative Circular did not render "radios and transceivers" illegal per se. The
Administrative Circular merely ordered the Radio Control Office to suspend the "acceptance and
processing .... of applications... for permits to possess, own, transfer, purchase and sell radio
transmitters and transceivers..."[41] Therefore, possession and importation of the radio transmitters and
transceivers was legal provided one had the necessary license for it. [42] Transceivers were not
prohibited but merely regulated goods. The LOI and Administrative Circular did not render the
transceivers outside the commerce of man. They were valid objects of the contract. [43]
Affirming the validity of the contract, we next discuss whether the contract was breached.
Guerrero testified that a permit to import the transceivers from Japan was denied by the
Radio Control Board. He stated that he, together with Aligada, Victorino and a certain John
Dauden personally went to the Radio Control Office, and were denied a permit to import.
They also went to the Office of the President, where Secretary Ronaldo B. Zamora
explained that radios were "banned like guns because of martial law." [44] Guerrero testified
that this prevented him from securing a letter of credit from the Central Bank. [45] This
testimony was not rebutted.
The law provides that "[w]hen the service (required by the contract) has become so
manifestly beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part." [46] Here, Guerrero's inability to secure a letter of credit and
to comply with his obligation was a direct consequence of the denial of the permit to
import. For this, he cannot be faulted.
Even if we assume that there
awarded. Damnum absque injuria.

was

breach

of

contract,

damages

cannot

be

There was no bad faith.[47] Bad faith does not simply connote bad judgment or negligence.
It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It
means a breach of a known duty through some motive or interest or ill will that partakes of
the nature of fraud.[48] Guerrero honestly relied on the representations of the Radio Control
Office and the Office of the President.
True, Guerrero borrowed equipment from the Subic Naval Base authorities at zero cost.
[49]
This does not automatically translate to bad faith. Guerrero was faced with the danger

of the cancellation of his contract with Subic Naval Base. He borrowed equipment as a
prudent and swift alternative. There was no proof that he resorted to this option with a
deliberate and malicious intent to dishonor his contract with Victorino. An award of
damages surely cannot be based on mere hypotheses, conjectures and surmises. Good
faith is presumed, the burden of proving bad faith rests on the one alleging it.
[50]
Petitioners did not effectively discharge the burden in this case.
Only the testimony of Aligada was presented to substantiate petitioners' claim for unrealized profits.
[57]
Aligada testified that as a result of the cancellation of the contract, Victorino had to suspend
transactions with his Japanese supplier for six (6) months. Aligada stated that the volume of Victorino's
business with Subic Naval Base also diminished significantly. Aligada approximated that Victorino's
unrealized business opportunities amounted to P400,000.00.[58] Being a witness for Victorino's
heirs and standing to gain from the contract's fulfillment, Aligada's testimony is selfserving. It is also hearsay. We fail to see how this "evidence" proves actual damages with
a "reasonable degree of certainty." [59] If proof is "flimsy", we cannot award actual damages.
[60]

BPI v. CA
Facts: Private respondent Edvin F. Reyes opened Savings Account No. 3 185-0172-56 at petitioner
Bank of the Philippine Islands (BPI) Cubao, Shopping Center Branch. It is a joint AND/OR account
with his wife, Sonia S. Reyes.
Private respondent also held a joint AND/OR Savings Account No. 3185-0128-82 with his
grandmother, Emeteria M. Fernandez,opened3 on February 11, 1986 at the same BPI branch. He
regularly deposited in this account the U.S. Treasury Warrants payable to the order of Emeteria M.
Fernandez as her monthly pension.
Emeteria M. Fernandez died on December 28, 1989 without the knowledge of the U.S. Treasury
Department. She was still sent U.S. Treasury Warrant No. 21667302 dated January 1, 1990 in the
amount of U.S. $377.003 or P10,556.00. On January 4, 1990, private respondent deposited the
said U.S. treasury check of Fernandez in Savings Account No. 3 185-0128-82. The U.S. Veterans
Administration Office in Manila conditionally cleared the check.4 The check was then sent to the United
States for further clearing.5
Two months after or on March 8, 1990, private respondent closed Savings Account No. 3 185-0128-82
and transferred its funds amounting to P13,112.91 to Savings Account No. 3 185-0172-56, the joint
account with his wife.
On January 16, 1991, U.S. Treasury Warrant No. 21667302 was dishonored as it was discovered that
Fernandez died three (3) daysprior to its issuance. The U.S. Department of Treasury requested
petitioner bank for a refund. 6 For the first time petitioner bank came to know of the death of
Fernandez.
On February 19, 1991, private respondent received a PT & T urgent telegram from petitioner bank
requesting him to contact Manager Grace S. Romero or Assistant Manager Carmen Bernardo. When he
called up the bank, he was informed that the treasury check was the subject of a claim by Citibank NA,
correspondent of petitioner bank. He assured petitioners that he would drop by the bank to look into
the matter. He also verbally authorized them to debit from his other joint account the amount
stated in the dishonored U.S. Treasury Warrant. 7 On the same day, petitioner bank debited the amount
of P10,556.00 from private respondents Savings Account No. 3185-0172-56.

On February 21, 1991, private respondent with his lawyer Humphrey Tumaneng visited the petitioner
bank and the refund documents were shown to them. Surprisingly, private respondent demanded
from petitioner bank restitution of the debited amount. He claimed that because of the debit, he failed
to withdraw his money when he needed them. He then filed a suit for Damages8 against petitioners
before the Regional Trial Court of Quezon City, Branch 79.
Petitioners contested the complaint and counter-claimed for moral and exemplary damages. By way of
Special and Affirmative Defense, they averred that private respondent gave them
his express verbal authorization to debit the questioned amount. They claimed that private
respondent later refused to execute a written authority.9
Issue: 1.) W/N private respondent verbally authorized petitioner bank to debit his joint account with
his wife for the amount of the returned U.S. Treasury Warrant.
2.) W/N compensation is in order.
Held:
1.) Petitioners were able to prove this verbal authority by preponderance
evidence. The testimonies of Bernardo and Romero deserve credence. Bernardo testified:
xxx

xxx

Q: After that, what

A:

xxx

happened?

x x x Dr. Reyes called me up and I informed him about the return of the U.S. Treasury
Warrant and we are requested to reimburse for the amount.

Q: What was his response if any?

A:
xxx

Dont you worry about it, there is no personal problem.

xxx

xxx

Q: And so what was his response?

A:

He said that dont you worry about it.

xxx

xxx

xxx

Q: You said that you asked him the advice and he did not answer, what advice are you
referring to?
A:

In our conversation, he promised me that he will give me written confirmation

or authorization.13

The conversation was promptly relayed to Romero who testified:

xxx

xxx

xxx

of

Q: x x x Was there any opportunity wherein said Mrs. Bernardo was able to convey to you
the contents of their conversation?
A:

This was immediately relayed to me as manager of the Bank of the Philippine Islands, sir.

Q: What, if any was the content of her conversation, if you know?

A:

xxx

Mr. Reyes instructed Mrs. Bernardo to debit his account with the bank. His
account was maintained jointly with his wife then he promised to drop by to
give us a written confirmation, sir.
xxx

xxx

Q:

You said that you authorized the debiting of the account on February 19, 1991, is that
correct?

A:

I did not authorize, we merely followed the instruction of Mr. Reyes, sir. 14

We are not disposed to believe private respondents allegation that he did not give any verbal
authorization. His testimony is uncorroborated. Nor does he inspire credence. His past and
fraudulent conduct is an evidence against him. 15 He concealed from petitioner bank the death of
Fernandez on December 28, 1989.16 As of that date, he knew that Fernandez was no longer entitled
to receive any pension. Nonetheless, he still received the U.S. Treasury Warrant of Fernandez, and
on January 4, 1990 deposited the same in Savings Account No. 3185-0128-82. To pre-empt a refund,
private respondent closed his joint account with Fernandez (Savings Account No. 31-85- 0128-82)
on March 8, 1990 and transferred its balance to his joint account with his wife (Savings Account No.
3 185-0172-56). Worse, private respondent declared under the penalties of perjury in the withdrawal
slip17 dated March 8, 1990 that his co-depositor, Fernandez, is still living. By his acts, private
respondent has stripped himself of credibility.
2.) More importantly, the respondent court erred when it failed to rule that legal compensation is
proper. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.18 Article 1290 of the Civil Code provides that when all the requisites
mentioned in Article 1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and debtors
are not aware of the compensation. Legal compensation operates even against the will of the
interested parties and even without the consent of them.19 Since this compensation takes
place ipso jure, its effects arise on the very day on which all its requisites concur. 20 When used as a
defense, it retroacts to the date when its requisites are fulfilled. 21
Article 1279 states that in order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
The elements of legal compensation are all present in the case at bar. The obligors bound
principally are at the same time creditors of each other. Petitioner bank stands as a debtor
of the private respondent, a depositor. At the same time, said bank is the creditor of the
private respondent with respect to the dishonored U.S. Treasury Warrant which the latter
illegally transferred to his joint account. The debts involved consist of a sum of
money. They are due, liquidated, and demandable. They are not claimed by a third
person.
It is true that the joint account of private respondent and his wife was debited in the case at bar. We
hold that the presence of private respondents wife does not negate the element of
mutuality of parties, i.e., that they must be creditors and debtors of each other in their
own right. The wife of private respondent is not a party in the case at bar. She never
asserted any right to the debited U.S. Treasury Warrant. Indeed, the right of the petitioner
bank to make the debit is clear and cannot be doubted. To frustrate the application of
legal compensation on the ground that the parties are not all mutually obligated would
result in unjust enrichment on the part of the private respondent and his wife who herself
out of honesty has not objected to the debit.
The rule as to mutuality is strictly applied at law. But not in equity, where to allow the
same would defeat a clear right or permit irremediable injustice.
PNB v. CA1

1 Does a local bank, while acting as local correspondent bank, have the right to intercept
funds being coursed through it by its foreign counterpart for transmittal and deposit to the
account of an individual with another local bank, and apply the said funds to certain
obligations owed to it by the said individual?
As reiterated by the SC
TCs ruling: "'Article 1279 of the Civil Code provides:
"'In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also
of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there by any retention or controversy, commenced by third persons and communicated in
due time to the debtor."'
"'In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts consist in a sum of money, are both
due, liquidated and demandable, and over neither of them is there a retention or controversy commenced by third persons and
communicated in due time to the debtor. The question, however, is, where both of the obligors bound principally, and was each one
of them a debtor and creditor of the other at the same time?
"'Analyzing now the relationship between the parties, it appears that:

Facts: '(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from
remittances of the plaintiff's principals (sic) abroad. These were admitted by the defendant, subject to
the affirmative defenses of compensation for what is owing to it on the principle of
solution (sic) indebiti;
"'(b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to be credited
to his account at Citibank, Greenhills Branch; the second was from Libya, and was intended to be
deposited at the plaintiff's account with the defendant, No. 830-2410;
(c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of
P2,627.11 by means of a letter dated December 4, 1986 (Exh. D). This was answered by the
defendant on December 22, 1986 (Exh. 13), inviting the plaintiff to come for a conference;
"'(a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and debtor respectively (Guingona, et
al. vs. City Fiscal, et al., 128 SCRA 577);
"'(b) As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign bank and local bank
asking the latter to pay an amount to a beneficiary is a stipulation pour autrui. (Bank of America NT & SA vs. IAC, 145 SCRA 419).
"'A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion, 79 SCRA 193; Bonifacio
Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils. 475).
"'Thus between the defendant bank (as the local correspondent of the National Commercial Bank of Jeddah) and the plaintiff as
beneficiary, there is created an implied trust pursuant to Art. 1453 of the Civil Code, quoted as follows:
"'When the property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the
grantor, there is an implied trust in favor of the person whose benefit is contemplated (sic).
"'c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly received something (sic) by mistake (i.e., the 2
double credits, although he had no right to demand it), became obligated to the defendant to return what he unduly received. Thus,
there was created between them a relationship of obligor and obligee, or of debtor and creditor under a quasi-contract.
"In view of the foregoing, the Court is of the opinion that the parties are not both principally bound with respect to the $2,627.11
from Jeddah neither are they at the same time principal creditor of the other. Therefore, as matters stand, the parties' obligations
are not subject to compensation or set off under Art. 1279 of the Civil Code, for the reason that the defendant is not a principal
debtor nor is the plaintiff a principal creditor insofar as the amount of $2,627.11 is concerned. They are debtor and creditor only
with respect to the double payments; but are trustee-beneficiary as to the fund transfer of $2,627.11.
"'Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits. On the other hand, the
defendant was an implied trustee, who was obliged to deliver to the Citibank for the benefit of the plaintiff the sum of $2,627.11.
"'Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of $5,179.23 and $5,885.38
erroneously doubly credited to his account, the defendant's actuation in intercepting the amount of $2,627.11 supposed to be
remitted to another bank is not only improper; it will also erode the trust and confidence of the international banking community in
the banking system of the country, something we can ill afford at this time when we need to attract and invite deposits of foreign
currencies."'
"It would have been different has the telex advice from NCB of Jeddah been for deposit of $2,627.11 to plaintiffs account No. 8302410 with the defendant bank. However, the defendant alleged this for the first time in its Memorandum (Pls. see par. 16, p. 6 of
defendant's Memorandum). There was neither any allegation thereof in its pleadings, nor was there any evidence to prove such
fact. On the contrary, the defendant admitted that the telex advice was for credit of the amount of $2,627.11 to plaintiffs account
with Citibank, Greenhills, San Juan, MetroManila (Pls. see par. of defendant's Answer with Compulsory Counterclaim, in relation to
plaintiff's Complaint). Hence, it is submitted that the set-off or compensation of $2,627.11 against the double payments to plaintiff's
account is not in accordance with law.
"'On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing, there was no express contract of
agency. On the other hand, were we to infer that there was an implied agency, the same would not be between the plaintiff and
defendant, but rather, between the National Commercial Bank of Jeddah as principal on the one hand, and the defendant as agent
on the other. Thus, in case of violation of the agency, the cause of action would accrue to the NCB and not to the plaintiff.

"'(d) There were indeed two instances in the past, one in November 1980 and the other in January
1981 when the plaintiff's account No. 830-2410 was doubly credited with the equivalents of $5,679.23
and $5,885.38, respectively, which amounted to an aggregate amount of P87,380.44. The defendant's
evidence on this point (Exhs. 1 thru 11, 14 and 15; see also Annexes C and E to defendant's Answer),
were never refuted nor impugned by the plaintiff. He claims, however, that plaintiffs claim has
prescribed.
"'(e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits
erroneously made on plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5
years and 11 months from November 1980, and 5 years and 9 months from January 1981. Such letter

"'The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's Exh. "E", which is a receipt issued to
the plaintiff by the defendant for the amount of P34,340.00 in "full settlement of accounts receivables with RICB Fund Transfer
Department, PNB-Escolta base on Legal Department Memo dated February 28, 1987" seems to uphold the defendant's theory that
the said amount was voluntarily delivered by the plaintiff to the defendant as alleged in the last paragraph of defendant's
memorandum. The same is in accordance with the defendant's answer, as follows:
"The retention and application of the amount of P34,340.38 was done in a manner consonant with basic due process considering
that plaintiff was not onlyfurnished documented proof of the cause but was also given the opportunity to con(tro)vert such Proof.
"Moreover, plaintiff, through counsel, communicated his unequivocal and unconditional consent to the retention and application of t
he amount inquestion." (Pls. see paragraphs 8-9, defendant's Answer with Compulsory Counterclaim to Plaintiff's Supplemental
Complaint)."
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating that such receipt was handed over to
the plaintiff when he "paid" or allowed the deduction from the amount of $28,392.38 from Libya.
"'At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from Brega Petroleum Marketing Company
of Libya (from where the P34,340.38 was deducted) was intended for credit and deposit in plaintiff's account at the defendant's
Bank CA No. 830-2410 (per par. 1, page 2, Memorandum for the plaintiff). Such being the case, the Court believes that insofar as
the amount of P34,340.38 is concerned, all the requirements of Art. 1279 of the Civil Code are present, and the said amount may
properly be the subject of compensation or set-off. And since all the requisites of Art. 1279 of the Civil Code are present (insofar as
the amount of P34,392.38 is concerned), compensation takes place by operation of law (Art. 1286, Ibid.), albeit only partial with
respect to plaintiff's indebtedness of P7,380.44.
CAa ruling:
"The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi Arabia, thru the National Commercial Bank
of Jeddah, Saudi Arabia (NCB, for short), for the credit/account of Plaintiff with the Citibank, Greenhills Branch, San Juan, Metro
Manila, coursed thru the PNB's head office, the NCB's corresponden(t) bank in the Philippines.
"The
credit
account,
or
simply
account
means
that the amount stated in the telegraphic money transfer is to be credited in the account of plaintiff with theCitibank, and, in that se
nse, presupposes a creditor-debtor relationship between the plaintiff, as creditor and the Citibank, as debtor. Withal thetelegraphic
money transfer, no such creditor-debtor relationship could have been created between the plaintiff and defendant.
"The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN from the NCB in Saudi Arabia, and since
the PNB is the NCB's corresponden(t) bank in the Philippines, there is created between the two banks a sort of communication
exchange for the corresponden(t) bank to transmit and/or remit and/or pay the value of the telegraphic transfer in accordance with
the dictate of the correspondence exchange. Some such responsibility of the corresponden(t) bank is akin to Section 7 of the Rules
and Regulations Implementing E.O. 857, as amended by E.O. 925, "x x x to take charge of the prompt payment" of the telegraphic
transfer,
that
is,
by transmitting the telegraphic money transfer to the Citibank so that the amountcan be promptly credited to the account of the pla
intiff with the said bank. That is all that the PNB can do under the remittance arrangement that it haswith the NCB. With
its
responsibility as defined as well as by the nature of its banking business and the responsibility attached to it, and through which the
industry, trade and commerce of all countries and communities are carried on, the PNB's liability as corresponden(t) bank continues
until it has completgely (sic) performed and discharged it(s) obligation thereunder."

was answered by the plaintiff on December 2, 1986 (Annex C, Complaint). This plaintiff's letter was
likewise replied to by the defendant through Exh. 13;
"'(f) The deduction of P34,340.38 was made by the defendant not without the knowledge and consent
of the plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the
defendant.
"'There is no question that the two erroneous double payments made to plaintiff's accounts in 1980
and 1981 created an extra-contractual obligation on the part of the plaintiff in favor of the defendant,
under the principle of solutio indebiti, as follows:
"'If something is received when there is no right to demand it, and it was unduly delivered throughg
(sic) mistake, the obligation to return it arises."' (Article 2154, Civil Code of the Phil.)
Issue: 1.) W/N the herein petitioner was legally justified in making the compensation or set-off against
the two remittances coursed through it in favor of private respondent to recover on the double credits
it erroneously made in 1980 and 1981, based on the principle of solutio indebiti
2.) W/N petitioner's claim is barred by the statute of limitations.
Held: We note that in framing the issue in the manner aforecited, the petitioner implicitly admits the
correctness of the respondent Court's affirmance of the trial court's ruling finding herein petitioner
liable to private respondent for the sum of US$2,627.11 or its peso equivalent. And it could not have
done otherwise. After a careful scrutiny of both the decision of the trial court and that of the appellate
court, we find no reversible error whatsoever in either ruling, and see no need to add to the extensive
discussions already made regarding the non-existence of all the requisites for legal compensation to
take place.
But petitioner has adopted a novel theory, contending that since respondent Court found that private
respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor of private
respondent (resulting in legal compensation), the (h)onorable respondent court should have ordered
private respondent to pay PNB what the latter is bound by the trial court's decision to return the
former.[7]
By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial court
and the appellate Court, and have this Court validate its original misdeed, thereby making a mockery
of the entire judicial process of this country. What the petitioner bank is effectively saying is that since
the respondent Court of Appeals ruled that petitioner bank could not do a shortcut and simply
intercept funds being coursed through it, for transmittal to another bank, and eventually to be
deposited to the account of an individual who happens to owe some amount of money to the
petitioner, and because respondent Court ordered petitioner bank to return the intercepted amount to
said individual, who in turn was found by the appellate Court to be indebted to petitioner bank,
THEREFORE, there must now be legal compensation of the amounts each owes the other, and hence,
there is no need for petitioner bank to actually return the amount, andfinally, that petitioner bank ends
up in exactly the same position as when it first took the improper and unwarranted shortcut by
intercepting the said money transfer, notwithstanding the assailed Decision saying that this could not
be done!

We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the
petitioner bank, with the not impossible intention of using this case as a precedent for similar acts of
interception in the future. This piratical attitude of the nation's premier bank deserves a warning that
it should not abuse the justice system in its collection efforts, particularly since we are aware that if
the petitioner bank had been in good faith, it could have easily disposed of this controversy in ten
minutes flat by means of an exchange of checks with private respondent for the same amount. The
litigation could have ended there, but it did not. Instead, this plainly unmeritorious case had to clog
our docket and take up the valuable time of this Court.

EGV REALTY v. CA
Facts: Petitioner E.G.V. Realty Development Corporation (hereinafter referred to as E.G.V. Realty) is
the
owner/developer
of
a
seven-storey
condominium
building
known
as
Cristina
Condominium. Cristina Condominium Corporation (hereinafter referred to as CCC) holds title to all
common areas of Cristina Condominium and is in charge of managing, maintaining and administering
the condominiums common areas and providing for the buildings security. Respondent Unisphere
International, Inc. (hereinafter referred to as Unisphere) is the owner/occupant of Unit 301 of said
condominium. Respondent Unispheres Unit 301 was allegedly robbed of various items valued
at P6,165.00. The incident was reported to petitioner CCC. Thereafter, another robbery allegedly
occurred at Unit 301 where the items carted away were valued at P6,130.00, bringing the total value
of items lost to P12,295.00. This incident was likewise reported to petitioner CCC. Afte such incident,
respondent Unisphere demanded compensation and reimbursement from petitioner CCC for the losses
incurred as a result of the robbery. Petitioner CCC denied any liability for the losses claimed to have
been incurred by respondent Unisphere, stating that the goods lost belonged to Amtrade, a third party.
As a consequence of the denial, respondent Unisphere withheld payment of its monthly dues starting
November 1982.
On September 13, 1983, respondent Unisphere received a letter from petitioner CCC demanding
payment of past dues. Petitioner E.G.V. Realty executed a Deed of Absolute Sale over Unit 301 in favor
of respondent Unisphere. Thereafter, Condominium Certificate of Title No. 7010 was issued in
respondent Unispheres name bearing the annotation of a lien in favor of petitioner E.G.V. Realty for
the unpaid condominium dues in the amount of P13,142.67. On January 28, 1987, petitioners E.G.V.
Realty and CCC jointly filed a petition with the Securities and Exchange Commission (SEC) for the
collection of the unpaid monthly dues in the amount of P13,142.67 against respondent Unisphere.
In its answer, respondent Unisphere alleged that it could not be deemed in default in the payment
of said unpaid dues because its tardiness was occasioned by the petitioners' failure to comply
with what was incumbent upon them, that is, to provide security for the building premises
in order to prevent, if not to stop, the robberies taking place therein.
Issue: W/N set-off or compensation has taken place in the instant case.
Held: It is petitioners assertion that the ruling of the Court of Appeals to offset the alleged losses as a
result of the robberies in the amount of P12,295.00 from the unpaid monthly dues of P13,142.67 is
unfounded because respondent Unisphere is not the owner of the goods lost but a third party,
Amtrade. Respondent Unisphere, on its part, claims that this issue is factual, hence, not a proper issue
to raise before this Court.
Actually, the issue for our consideration is whether or not set-off or compensation has taken place in
the instant case. The Court of Appeals dissertation on the matter is commendably instructive, but,
lamentably, it reached a different conclusion. We quote pertinent portions of the assailed decision:

Compensation or offset under the New Civil Code takes place only when two persons or entities in their
own rights, are creditors and debtors of each other. (Art. 1278). xxx
A distinction must be made between a debt and a mere claim. A debt is an amount actually
ascertained. It is a claim which has been formally passed upon by the courts or quasi-judicial bodies to
which it can in law be submitted and has been declared to be a debt. A claim, on the other hand, is a
debt in embryo. It is mere evidence of a debt and must pass thru the process prescribed by law before
it develops into what is properly called a debt. (Vallarta vs. CA, 163 SCRA 587). Absent, however, any
such categorical admission by an obligor or final adjudication, no compensation or off-set can take
place. Unless admitted by a debtor himself, the conclusion that he is in truth indebted to another
cannot be definitely and finally pronounced, no matter how convinced he may be from the examination
of the pertinent records of the validity of that conclusion the indebtedness must be one that is
admitted by the alleged debtor or pronounced by final judgment of a competent court or in this case
by the Commission (Villanueva vs. Tantuico, 182 SCRA 263).
There can be no doubt that Unisphere is indebted to the Corporation for its unpaid monthly dues in the
amount of P13,142.67. This is admitted. But whether the Corporation is indebted to Unisphere is
vigorously disputed by the former.
It appears quite clear that the offsetting of debts does not extend to unliquidated, disputed
claims arising from tort or breach of contract. (Compania General de Tobacos vs. French and
Unson, 39 Phil. 34; Lorenzo and Martinez vs. herrero, 17 Phil. 29).
It must be noted that Unisphere just stopped paying its monthly dues to the Corporation on September
23, 1983 without notifying the latter. It was only on February 24, 1984, or five months after, that it
informed the corporation of its suspension of payment of the condominium dues to offset the losses it
suffered because of the robberies.
In resisting the finding which underscores their negligence, E.G.V. Realty and Cristina condominium
corporation, would have this Court appreciate in their favor the admission of Mr. Alfonso Zamora of
Unisphere that there was no such agreement among the unit owners that any member who incurred
losses will be indemnified from the common contribution. (TSN, July 7, 1987, p. 60).
The herein appellees further argue that the cause of action for reimbursement of the value of the items
lost because of the robberies should be against the security agency and not the Corporation.
On the other hand, Unisphere invokes ART. 1170 of the Civil Code which provides:
ART. 1170.- Those who in the performance of their obligations are guilty of fraud, negligence, or delay
and those who in any manner contravene the tenor thereof, are liable for damages.
There is weight in the initial factual findings of the SEC Hearing Officer with respect to the losses
suffered by Unisphere in the amount of P12,295.00:
Plaintiff likewise does not dispute the fact of robbery that occurred on November 28, 1981 and July 26,
1982 inside 301 Cristina Condominium.
Plaintiff admits that it had secured the services of Jimenez Protective and Security Agency
to safeguard the Condominium premises under its instructions and supervision, but which
failed to detect the robbery incidents that occurred twice at Unit 301 of respondent,
canting (sic) away bulk items.

xxx xxx

xxx

From the undisputed facts, plaintiff was remissed (sic) within its obligation to provide safety to
respondent inside its unit. This was demonstrated by the fact that two robbery incidents befell
respondents under the negligent eye of plaintiffs hired security guards. It can be safely pronounced
that plaintiff has not complied with what was incumbent upon it to do in a proper manner.
Since it has been determined and proven by the evidence presented before the hearing office of
respondent SEC that Unisphere indeed suffered losses because of the robbery incidents and since it
(Unisphere) did not refute its liability to the corporation for the unpaid monthly dues in the amount of
P13,142. 67, this amount should be set-off against the aforestated losses of Unisphere. [7]
We fully agree with the appellate courts dissertation on the nature and character of a setoff or compensation. However, we cannot subscribe to its conclusion that a set-off or
compensation took place in this case.
In Article 1278 of the Civil Code, compensation is said to take place when two persons, in
their own right, are creditors and debtors of each other. Compensation is a mode of
extinguishing to the concurrent amount, the obligations of those persons who in their own
right are reciprocally debtors an creditors of each other and the offsetting of two
obligations which are reciprocally extinguished if they are of equal value, or extinguished
to the concurrent amount if of different values.[8] Article 1279 of the same Code provides:
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
Absent any showing that all of these requisites exist, compensation may not take place.
While respondent Unisphere does not deny its liability for its unpaid dues to petitioners,
the latter do not admit any responsibility for the loss suffered by the former occasioned by
the burglary. At best, what respondent Unisphere has against petitioners is just a claim,
not a debt. Such being the case, it is not enforceable in court. It is only the debts that are
enforceable in court, there being no apparent defenses inherent in them.[9] Respondent
Unispheres claim for its loss has not been passed upon by any legal authority so as to
elevate it to the level of a debt. So we held in Alfonso Vallarta v. Court of Appeals, et al.,
[10]
that:
Compensation or offset takes place by operation of law when two (2) persons, in their own
right, are creditor and debtor of each other. For compensation to take place, a distinction

must be made between a debt and a mere claim. A debt is a claim which has been formally
passed upon by the highest authority to which it can in law be submitted and has been
declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence
of a debt and must pass thru the process prescribed by law before it develops into what is
properly called a debt.[11]
Tested by the foregoing yardstick, it has not been sufficiently established that
compensation or set-off is proper here as there is lack of evidence to show that petitioners
E.G.V. Realty and CCC and respondent Unisphere are mutually debtors and creditors to
each other.
Considering the foregoing disquisition, therefore, we find that respondent Court of Appeals committed
reversible error in ruling that compensation or set-off is proper in the instant case.

METROBANK v. TONDA
Facts: Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda, hereinafter referred to as the TONDA,
applied for and were granted commercial letters of credit by petitioner Metropolitan Bank and Trust
Company, hereinafter referred to as METROBANK for a period of eight (8) months beginning June 14,
1990 to February 1, 1991 in connection with the importation of raw textile materials to be used in the
manufacturing of garments. The TONDA acting both in their capacity as officers of Honey Tree Apparel
Corporation (HTAC) and in their personal capacities, executed eleven (11) trust receipts to secure the
release of the raw materials to HTAC. The imported fabrics with a principal value of P2,803,000.00
were withdrawn by HTAC under the 11 trust receipts executed by the TONDA. Due to their failure to
settle their obligations under the trust receipts upon maturity, METROBANK through counsel, sent a
letter dated August 10, 1992, making its final demand upon the TONDA to settle their past due TR/LC
accounts on or before August 15, 1992. They were informed that by said date, the obligations would
amount to P4,870,499.13. Despite repeated demands therefor, the TONDA failed to comply with their
obligations stated in the trust receipts agreements, i.e. the TONDA failed to account to METROBANK
the goods and/or proceeds of sale of the merchandise, subject of the trust receipts. The RTC convicted
the spouses. However, the Court of Appeals citing the case of Tan Tiong Tick vs. American
Apothecaries implied that in making the deposit, the TONDA are entitled to set off, by way of
compensation, their obligations to METROBANK on their trust receipt liability.
Issue:
Held: First, the amount of P2.8 million was not directly paid to METROBANK to settle the trust receipt
accounts, but deposited in a joint account of Joaquin G. Tonda and a certain Wang Tien En. In a letter
dated February 28, 1992, signed by HTAC's Vice President for Finance, METROBANK was informed that
the amount "may be applied anytime to the payment of the trust receipts account upon
implementation of the parties of the terms of the restructuring." [13] The parties failed to agree on the
terms of the loan restructuring agreement as the offer by the TONDAS to restructure the loan was
followed by a series of counter-offers which yielded nothing. It is axiomatic that acceptance of an offer
must be unqualified and absolute[14] to perfect a contract. The alleged payment of the trust receipts
accounts never became effectual on account of the failure of the parties to finalize a loan restructuring
arrangement.
Second, the handwritten note by the METROBANK officer acknowledging receipt of the checks
amounting to P2.8 Million made no reference to the TONDAS' trust receipt obligations, and we cannot
presume that it was anything more than an ordinary bank deposit. The Court of Appeals citing the case
of Tan Tiong Tick vs. American Apothecories [15] implied that in making the deposit, the TONDAS are
entitled to set off, by way of compensation, their obligations to METROBANK. However, Article 1288 of
the Civil Code provides that "compensation shall not be proper when one of the debts consists
in civil liability arising from a penal offense" as in the case at bar. Theraison d'etre for this

is that, "if one of the debts consists in civil liability arising from a penal offense,
compensation would be improper and inadvisable because the satisfaction of such
obligation is imperative."[16]
Third, reliance on the negotiations for the settlement of the trust receipts obligations between the
TONDAS and METROBANK is simply misplaced. The negotiations pertain and affect only the civil
aspect of the case but does not preclude prosecution for the offense already committed. It has been
held that "[a]ny compromise relating to the civil liability arising from an offense does not automatically
terminate the criminal proceeding against or extinguish the criminal liability of the malefactor." [17] All
told, the P2.8 Million deposit could not be considered as having settled the trust receipts obligations of
the TONDAS to the end of extinguishing any incipient criminal culpability arising therefrom.
Hence, it has been held in Office of the Court Administrator vs. Soriano[18] that:
xxx it is too well-settled for any serious argument that whether in malversation of public funds or
estafa, payment, indemnification, or reimbursement of, or compromise as to, the amounts or funds
malversed or misappropriated, after the commission of the crime, affects only the civil liability of the
offender but does not extinguish his criminal liability or relieve him from the penalty prescribed by law
for the offense committed, because both crimes are public offenses against the people that must be
prosecuted and penalized by the Government on its own motion, though complete reparation should
have been made of the damage suffered by the offended parties. xxx."
As to the statement of the Court of Appeals that there is no evidence that METROBANK has
been damaged by the proposal and the deposit, it must be clarified that the damage can be traced
from the non-fulfillment of an entrustee's obligation under the trust receipts. The nature of trust
receipt agreements and the damage caused to trade circles and the banking community in case of
violation thereof was explained in Vintola vs. IBAA[19] and echoed in People vs. Nitafan[20], as follows:
"[t]rust receipt arrangements do not involve a simple loan transaction between a creditor and a debtorimporter. Apart from a loan feature, the trust receipt arrangement has a security feature that is
covered by the trust receipt itself. The second feature is what provides the much needed financial
assistance to traders in the importation or purchase of goods or merchandise through the use of those
goods or merchandise as collateral for the advancements made by the bank. The title of the bank to
the security is the one sought to be protected and not the loan which is a separate and distinct
agreement."
xxx xxx

xxx.

"Trust receipts are indispensable contracts in international and domestic business transactions. The
prevalent use of trust receipts, the danger of their misuse and/or misappropriation of the goods or
proceeds realized from the sale of goods, documents or instruments held in trust for entruster-banks,
and the need for regulation of trust receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of P.D. 115. As correctly observed by the
Solicitor General, P.D. 115, like Bata Pambansa Blg. 22, punishes the act "not as an offense against
property, but as an offense against public order. x x x The misuse of trust receipts therefore should be
deterred to prevent any possible havoc in trade circles and the banking community. (citing Lozano vs.
Martinez, 146 SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding public interest that the
law now specifically designates a breach of a trust receipt agreement to be an act that "shall" make
one liable foe estafa."
The finding that there was no fraud and deceit is likewise misplaced Considering that the offense
is punished as a malum prohibitumregardless of the existence of intent or malice. A mere failure to

deliver the proceeds of the sale or the goods if not sold, constitutes a criminal offense that causes
prejudice not only to another, but more to the public interest. [21]
TRINIDAD v. ACAPULCO
Facts: On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the
nullification of a sale she made in favor of petitioner Hermenegildo M. Trinidad. She alleged: Sometime
in February 1991, a certain Primitivo Caete requested her to sell a Mercedes Benz for P580,000.00.
Caete also said that if respondent herself will buy the car, Caete was willing to sell it
for P500,000.00. Petitioner borrowed the car from respondent for two days but instead of returning the
car as promised, petitioner told respondent to buy the car from Caete forP500,000.00 and that
petitioner would pay respondent after petitioner returns from Davao. Following petitioners
instructions, respondent requested Caete to execute a deed of sale covering the car in respondents
favor forP500,000.00 for which respondent issued three checks in favor of Caete. Respondent
thereafter executed a deed of sale in favor of petitioner even though petitioner did not pay her any
consideration for the sale. When petitioner returned from Davao, he refused to pay respondent the
amount of P500,000.00 saying that said amount would just be deducted from whatever outstanding
obligation respondent had with petitioner. Due to petitioners failure to pay respondent, the checks
that respondent issued in favor of Caete bounced, thus criminal charges were filed against
her.3 Respondent then prayed that the deed of sale between her and petitioner be declared null and
void; that the car be returned to her; and that petitioner be ordered to pay damages. 4
In his Answer petitioner contended that: it is not true that he borrowed the car and that any demand
was made to return it; he also did not give any instructions to respondent to buy the car from Caete
because as early as September 28, 1990, Caete has already sold the car to respondent
for P500,000.00; at the time respondent executed the deed of sale in his favor on March 4, 1991,
respondent was already in possession of the deed of sale from Caete; the amount of P500,000.00 was
fully paid by way of dation in payment to partially extinguish respondents obligation with petitioner;
the contract entered into was a true sale of a motor vehicle and the mode of payment was that of
dation in payment agreed upon at the time of the sale. 5
Petitioner also filed a Supplemental Motion and for the first time averred that assuming that
respondent did not agree to having the purchase price charged against the P566,000.00 she owed
petitioner, nonetheless, with or without her consent and/or knowledge, the obligations parties owed to
each other were extinguished by operation of law or through legal compensation in the amount
of P500,000.00.12
The RTC issued an Order dated October 18, 1992 denying the Motion for Reconsideration and
Supplemental Motion of petitioner stating that the claim of dacion en pago is inexistent in this case
and the defense of legal compensation was not alleged or pleaded in petitioners Answer. 13
Petitioner appealed to the CA which affirmed the Decision of the trial court, finding that the issue of
legal compensation was filed too late as it was brought up only in the supplemental motion for
reconsideration; that the parties agreed that the issue to be tried was whether or not there was dacion
en pago; that dacion en pago however is not present in this case as the parties did not give their
consent thereto; that there can also be no legal compensation as one of the obligations of this case did
not entail payment of a monetary debt but the delivery of a car; and that the admission of petitioner
that the sale price of the car was not paid entitled respondent to file the action for rescission of sale.
Petitioner argues that: the purchase price of the car had been automatically offset by respondents
own monetary obligation of P566,000.00, even if he and respondent had not agreed to offsetting
following Article 129016 of the Civil Code; Bank of the Philippine Islands v. Court of Appeals 17 also held
that compensation shall take place when two persons, in their own right, are creditors and debtors of

each other; legal compensation takes place by operation of law and may be taken up even though it is
not raised in the pleadings or during trial; it is the duty of courts to grant the relief to which the parties
are entitled as shown by the allegations and the facts proven at the trial; here, while petitioner claimed
dation in payment, there was more than enough testimony and admissions to prove elements of legal
compensation; failure to pay the agreed purchase price does not make the contract of sale fictitious
and null and void; the CA erred in not ordering respondent to pay petitioner the balance of her partially
extinguished indebtedness and in assessing damages against him as there was no basis therefor. 18
In her Comment, respondent counters that: it was only in the Supplemental Motion for Reconsideration
of the decision of the trial court that petitioner changed his theory and started claiming legal
compensation as a defense; the CA did not commit any error in rejecting the belated new defense of
petitioner as it would be offensive to the basic rule of fair play, justice and due process; Article 1279 of
the Civil Code also states that for legal compensation to be proper both debts should consist of sum of
money; in this case, one of the obligations does not entail payment of money but delivery of a car. 19
Petitioner merely reiterated his arguments in his Memorandum, 20 while respondent in hers, further
averred that: she is not the owner of the car, but was only in possession thereof in order to sell it at a
price of P580,000.00 withP80,000.00 going to her; both the trial court and the CA failed to make a
finding as to the exact amount respondent owed petitioners. 21
Stripped to its basics, what petitioner is contending is that legal compensation should be appreciated,
though not expressly stated in his Answer to the Complaint before the trial court, as his allegations
therein and the facts proven at the trial show the presence of legal compensation. He further argues
that, in any case, legal compensation takes place by operation of law even without the consent of the
interested parties.
Issue: W/N the issue of legal compensation was raised too late.
Held: Compensation takes effect by operation of law even without the consent or knowledge of the
parties concerned when all the requisites mentioned in Article 1279 of the Civil Code are
present.26 This is in consonance with Article 1290 of the Civil Code which provides that:
Article 1290. When all the requisites mentioned in article 1279 are present, compensation
takes effect by operation of law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation.
Since it takes place ipso jure,27 when used as a defense, it retroacts to the date when all its
requisites are fulfilled.28
Article 1279 provides that in order that compensation may be proper, it is necessary:
(1) that each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) that both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) that the two debts be due;
(4) that they be liquidated and demandable;

(5) that over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.
Here, petitioners stance is that legal compensation has taken place and operates even against the will
of the parties because: (a) respondent and petitioner were personally both creditor and debtor of each
other; (b) the monetary obligation of respondent was P566,000.00 and that of the petitioner
was P500,000.00 showing that both indebtedness were monetary obligations the amount of which
were also both known and liquidated; (c) both monetary obligations had become due and demandable
petitioners obligation as shown in the deed of sale and respondents indebtedness as shown in the
dishonored checks; and (d) neither of the debts or obligations are subject of a controversy commenced
by a third person.
While the proceedings in the RTC focused on ascertaining the presence of the elements of dacion en
pago, it was likewise proven that petitioner owed respondent the amount of P500,000.00 while
respondent owed petitionerP566,000.00; that both debts are due, liquidated and demandable, and;
that neither of the debts or obligations are subject of a controversy commenced by a third person.
Respondent in her cross-examination categorically admitted that she is indebted to petitioner as
follows:
Q But you will admit that you have borrowed several times from Mr. Trinidad some money?
A Yes.
Q And in fact the total amount of money that you have borrowed from Mr. Trinidad reaches
to P566,000.00, right?
A Yes.
Q And in fact you have issued checks to cover for this account?
A Yes.
Q There were several checks you have issued, right?
A Yes.
Q And all of these checks bounced?
A Yes.29
xxxx
Q x x x It is now very clear, Mrs. Acapulco, that at the time you executed a deed of absolute
sale of the car in favor of Hermenegildo Trinidad you have an outstanding account with him
in the amount of P566,000.00?
A Yes.30
Ignoring this admission would only result in added burden to petitioner as well as the
courts as petitioner will be forced to file a separate case for collection of sum of money just

so he could enforce his right to collect from respondent. This is precisely what
compensation seeks to avoid as its aim is to prevent unnecessary suits and payments
through the mutual extinction of concurring debts by operation of law.31
The claim of respondent that there could be no legal compensation in this case as one of the
obligations consists of delivery of a car and not a sum of money must also fail. Respondent sold the
car to petitioner on March 4, 1991 forP500,000.00 while she filed her complaint for
nullification of the sale only on May 6, 1991. As legal compensation takes place ipso jure,
and retroacts to the date when its requisites are fulfilled, legal compensation has already
taken place at the time of the sale. At such time, petitioner owed respondent the sum
of P500,000.00 which is the price of the vehicle.
Consequently, by operation of law, the P500,000.00 which petitioner owed respondent is
off-set against theP566,000.00 owed by respondent to petitioner, leaving a balance
of P66,000.00, which respondent should pay with 12% interest per annum from date of
judicial or extrajudicial deed.32 Since there was no extrajudicial deed in this case, the
interest shall be resolved from the date petitioner filed its Supplemental Motion for
Reconsideration invoking for the first time legal compensation, that is, May 20, 1992.
INSULAR INVESTMENT v. CAPITAL ONE2
Facts: Insular Investment and Trust Corporation (IITC) and Capital One Equities Corp. (COEC) and
Planters Development Bank (PDB) have been regularly engaged in trading, sale and purchase of
Philippine Treasury bills. On various dates, IITC had purchased from COEC. IITC purchased from COEC
treasury bills worth P 260, 683, 392.51 and was able to deliver only 121, 050,000. On May 2, 1994,
COEC purchased from IITC P 186,790,000 worth of treasury bills. PDC issued confirmation on the sale in
favor of IITC.
On May 10, 1994, COEC demanded a letter from IITC the physical delivery of the securities last May 2,
1994. Then, on its May 18, 1994 letter to PDB, IITC requested, on behalf of COEC, the delivery of IITC
treasury bills, which had been fully paid. On May 30, 1994, COEC protested the tenor of IITCs letter to
PDB and took exception to IITCs assertion that it merely acted as a facilitator with regard to the sale of
the treasury bills.
IITC sent COEC a letter dated June 3, 1994, demanding that COEC deliver to it (IITC)
the P139,833,392.00 worth of treasury bills or return the full purchase price. In either case, it also
demanded that COEC (1) pay IITC the amount of P1,729,069.50 representing business opportunity lost
due to the non-delivery of the treasury bills, and (2) deliver treasury bills worth P121,050,000 with the
same maturity dates originally purchased by IITC.
COEC sent a letter-reply dated June 9, 1994 to IITC in which it acknowledged its obligation to deliver
the treasury bills worth P139,833,392.00 which it sold to IITC and formally demanded the delivery of

Issue: W/N IITC acts as a conduit between COEC and PDB?Held: No, IITC did not act as a conduit in the transactions between IITC
and PDB because IITC acted as principal purchaser from PDB and principal seller to COEC, and not simply as a conduit between PDB
and COEC.
Thus, the petition was partly granted, the CAs decision was set aside and reinstate the modified decision of the RTC ruling in favor
of COEC. Also, PDB was also was found liable.

the treasury bills worthP186,774,739.49 which it purchased from IITC. COEC also demanded the
payment of lost profits in the amount ofP3,253,250.00. Considering that COEC and IITC both have
claims against each other for the delivery of treasury bills, COEC proposed that a legal set-off be
effected, which would result in IITC owing COEC the difference of P46,941,446.49.
In its June 13, 1994 letter to COEC, IITC rejected the suggestion for a legal setting-off of obligations,
alleging that it merely acted as a facilitator between PDB and COEC. Despite repeated demands,
however, PDB failed to deliver the balance of P136,790,000.00 worth of treasury bills which IITC
purchased from PDB allegedly for COEC. COEC was likewise unable to deliver the remaining IITC T-Bills
amounting to P119,633,392.00. Neither PDB and COEC returned the purchase price for the duly paid
treasury bills.
Thus COEC filed a complaint with the RTC which found that COEC still has obligations to pay IITC
IITC P119,633,392.00 worth of treasury bills. However, since IITC and COEC were both debtors and
creditors of each other, the RTC off-set their debts, resulting in a difference of P17,056,608.00 in favor
of COEC. As to PDBs liability, it ruled that PDB had the obligation to pay P136,790,000.00 to IITC. Thus,
the trial court ordered (a) IITC to pay COEC P17,056,608.00 with interest at the rate of 6% from June
10, 1994 until full payment and (b) PDB to pay IITC P136,790,000.00 with interest at the rate of 6%
from March 21, 1995 until full payment.
Issue: W/N COEC can set-off its obligation to IITC as against the latters obligation to it.
Held:
Set-off allowed
IITC argues that the RTC and the CA erred in holding that COEC can validly set off its claims for the
undelivered IITC T-Bills against the COEC T-Bills. [45] IITC reiterates that COEC did not become a creditor
of IITC because the former did not pay the latter for the purchased treasury bills. Rather, it was PDB
which received the proceeds of the payment from COEC. [46] In addition, their obligations do not consist
of a sum or money. Neither are they of the same kind because the obligations call for the delivery of
specific determinate things treasury bills with specific maturity dates and various interest
rates. Thus, legal compensation cannot take place.[47]
COEC, on the other hand, points out that it has already unquestionably proven that IITC acted as a
principal, and not as a conduit, in the sale of treasury bills to COEC. [48] Furthermore, it asserts that the
treasury bills in question are generic in nature because the confirmations of sale and purchase do not
mention specific treasury bills with serial numbers. [49] The securities were sold as indeterminate
objects which have a monetary equivalent, as acknowledged by the parties in the Tripartite
Agreement.[50] As such, because both IITC and COEC are principal creditors of the other over debts
which consist of consumable things or a sum of money, the RTC correctly ruled that COEC may validly
set-off its claims for undelivered treasury bills against that of IITCs claims. [51]
The Court finds in favor of respondent COEC.
The applicable provisions of law are Articles 1278, 1279 and 1290 of the Civil Code of
the Philippines:
Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.
xxx
Art. 1290. When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and debtors are not aware of the
compensation.
Based on the foregoing, in order for compensation to be valid, the five requisites mentioned in
the abovequoted Article 1279 should be present, as in the case at bench. The lower courts have
already determined, to which this Court concurs, that IITC acted as a principal in the purchase of
treasury bills from PDB and in the subsequent sale to COEC of the COEC T-Bills. Thus, COEC and IITC
are principal creditors of each other in relation to the sale of the COEC T-Bills and IITC T-Bills,
respectively.
IITC also claims that the COEC T-Bills cannot be set-off against the IITC T-Bills because the latter
are specific determinate things which consist of treasury bills with specific maturity dates and various
interest rates.[52] IITCs actions belie its own assertion. The fact that IITC accepted the assignment by
COEC of Central Bank Bills with an aggregate face value ofP20,000,000.00 as payment of part of the
IITC T-Bills is evidence of IITCs willingness to accept other forms of security as satisfaction of COECs
obligation. It should be noted that the second requisite only requires that the thing be of the same
kind and quality. The COEC T-Bills and the IITC T-Bills are both government securities which, while
having differing interest rates and dates of maturity, have each been assigned a certain face value to
determine their monetary equivalent. In fact, in the Tripartite Agreement, the COEC-IITC Agreement
and in the memoranda of the parties, the parties recognized the monetary value of the treasury bills in
question, and, in some instances, treated them as sums of money. [53] Thus, they are of the same kind
and are capable of being subject to compensation.
The third, fourth and fifth requirements are clearly present and are not denied by the
parties. Both debts are due and demandable because both remain unsatisfied, despite payment made
by IITC for the IITC T-Bills and by COEC for the COEC T-Bills. Moreover, COEC readily admits that it has
an outstanding balance in favor of IITC. [54] Conversely, IITC has been found by the lower courts to be
liable, as principal seller, for the delivery of the COEC T-Bills. [55] The debts are also liquidated because
their existence and amount are determined. [56] Finally, there exists no retention or controversy over
the COEC T-Bills and the IITC T-Bills.
Because all the stipulations under Article 1279 are present in this case, compensation can take
place. COEC is allowed to set-off its obligation to deliver the IITC T-Bills against IITCs obligation to
deliver the COEC T-Bills.