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ENRIQUE C. ABAD, JOSEPH C. G.R. No.

168108
ABAD, MA. SABINA C. ABAD,
ADELAIDA C. ABAD, CECILIA Present:
C. ABAD, VICTORIA C. ABAD,
VICTOR C. ABAD, CENON C. YNARES-SANTIAGO, J.,
ABAD, JR., AND JUANITA C. ABAD, Chairperson,
Petitioners, AUSTRIA-MARTINEZ,
CALLEJO, SR.,
CHICO-NAZARIO, and
- versus - NACHURA, JJ.

Promulgated:
GOLDLOOP PROPERTIES, INC.,
Respondent. April 13, 2007

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

DECISION

CALLEJO, SR., J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
assailing the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 77559. The ruling of the
appellate court affirmed in toto the decision of the Regional Trial Court (RTC), Pasig City, Branch 167, in
Civil Case No. 67192.
Petitioners Enrique C. Abad, Joseph C. Abad, Ma. Sabina C. Abad, Adelaida C. Abad, Cecilia C. Abad,
Victoria C. Abad, Victor C. Abad, Cenon C. Abad, Jr., and Juanita C. Abad were the owners of 13 parcels
of titled agricultural land[2] covering a total of 53,562 square meters. The lots were situated in the S.C.
Malabon Estate in Tanza, Cavite.

On August 29, 1997, respondent Goldloop Properties Inc., through its President, Emmanuel R.
Zapanta, entered into a Deed of Conditional Sale [3] with petitioners at the price of P650.00 per square
meter, or a total of P34,815,300.00 for the entire land area. The parties agreed on the following terms of
payment:

a. EARNEST MONEY

An earnest money of ONE MILLION PESOS (Php1,000,000.00) [EARNEST MONEY]


has been given by the BUYER to the SELLER on June 30, 1997, as evidenced by
MBTC Check No. 2930037 dated July 02, 1997, receipt of which is hereby
acknowledged.

b. FIRST PAYMENT

SIX MILLION SEVEN HUNDRED SIXTY-FIVE THOUSAND SIX HUNDRED SIXTY


PESOS (PHP6,765,660.00) [FIRST PAYMENT] shall be paid by the BUYER to the
SELLER on August 17, 1997 covered by MBTC Check No. 2930037198, upon signing
of this DEED OF CONDITIONAL SALE.

c. FULL PAYMENT

The remaining balance, representing full and final payment of the total contract
price, in the amount of TWENTY-SEVEN MILLION FORTY-NINE THOUSAND SIX
HUNDRED FORTY PESOS (PHP27,049,640.00) shall be paid by the BUYER to the
SELLER on or before 31 December 1997 and upon the fulfillment of the following
conditions:

c.1 The balance of the total contract price shall be paid by the
BUYER to the SELLER after verification of the total land area
through a site relocation survey, to be confirmed by the BUYER and the
SELLERS.

c.2 The remaining balance of the total contract price shall be adjusted, based
on the total land area verified through a site relocation survey, as per
confirmation made by both parties.[4]

Paragraph 8 of the Deed also provided for the consequence of respondents failure to fulfill its
obligation to pay the balance of the total consideration agreed upon:
8. In the event that the BUYER cannot comply, to fulfill his obligation to this
contract, for the balance of the total consideration, one
week before December 31, 1997, the BUYER shall forward a formal request for an
extension of the contract not to exceed 30 days (on or before January 28, 1998). This grant
of extension is afforded to the BUYER on a one-time basis and no subsequent extensions
will be granted. In the event that the BUYER fails to comply [with] his part of the
obligation within the specified extension period, the earnest money of ONE MILLION
PESOS (PHP1,000,000.00), given by the BUYER to the SELLER by way of MBTC Check
No. 2930037 dated July 02, 1997, shall be forfeited in favor of the SELLER but the first
payment check of SIX MILLION SEVEN HUNDRED SIXTY-FIVE THOUSAND SIX
HUNDRED SIXTY PESOS (PHP6,765,660.00) shall be returned to the BUYER without
any additional charges to the SELLER.[5]

In a letter[6] dated August 28, 1998, Zapanta informed Henry Abad that he would not object to the
planned sale of the properties to other parties, provided that 50% of the forfeitable amount
of P1,000,000.00 would be returned in addition to the P6,765,660.00 as provided in paragraph 8 of the
Deed of Conditional Sale. He also declared that the intended date of purchase had been adversely
affected by economic conditions which were never foreseen as a possible contingency.

However, in another letter[7] dated October 8, 1998, Zapanta informed Enrique C. Abad that the
negotiations with the banks had failed due to the continuing economic downturn and consequently, the
transaction would not be consummated. He then requested that the first payment be returned within five
days, in accordance with paragraph 8 of the deed. [8] Respondent reiterated its demand to petitioners in a
Letter[9] dated November 5, 1998.
Respondent then filed a Complaint[10] for Collection with Prayer for Writ of Attachment against
petitioners. The complaint contained the following prayer:

1. Upon filing hereof, to issue ex-parte, a temporary restraining order directing the
defendants to jointly and severally stop from executing any deed or instrument
intended to encumber or convey the ownership of the properties enumerated under
par. 1 hereof, to other parties; and after notice and hearing, to issue an injunction
containing the same tenor as that of the temporary restraining order;

2. Upon filing hereof, to issue ex-parte, a writ of attachment on such properties of


defendants sufficient to secure the satisfaction whatever favorable judgment that
plaintiff may obtain in this case;

3. After notice and hearing, to render judgment, ordering the defendants, to jointly
and severally pay plaintiff the following sums:
(a) P6,765,660.00 representing the principal amount due to plaintiff plus
interest of 24% per annum, the computation of which to commence from the
date of filing of the instant case until the said amount is fully paid;
(b) Attorneys fees equivalent to twenty-five (25%) of the principal amount
sought to be collected;
(c) P50,000.00 representing the premium of the attachment and/or injunction
bond;
(d) P50,000.00 litigation expenses;
(e) Cost of suit.

Plaintiff, further prays for such other reliefs and remedies consistent with law,
justice and equity.[11]

Trial ensued, and the parties presented their respective evidence.

On June 10, 2002, the RTC ruled in favor of respondent. In his Decision,[12] Presiding Judge
Alfredo C. Flores limited the issue to whether or not [petitioners are] entitled to the refund or return of
Php6,765,660.00 paid to [respondent] pursuant to the Deed of Conditional Sale. According to the trial
court, the purpose of the P1,000,000.00 earnest money was separate and distinct from the P6,765,660.00
first payment:
A careful and thorough study of [paragraph 8 of the Deed of Conditional Sale]
undeniably reveals that whether the contract was extended or not, the first payment in
the amount of Php6,765,660.00 shall be returned to the plaintiff. The statement but the
first payment check of six million seven hundred sixty five thousand six hundred sixty
pesos shall be returned to the buyer indubitably presupposes that the parties, although
using the words earnest money had truly considered the same as an option on the part
of the plaintiff to rescind the contract in lieu of the forfeiture of Php1,000,000.00 if, for
whatever reasons, it chooses not to pursue the contract by not paying the remaining
balance thereon either one week before 31 December 1997 if not extended or, until 28
January 1998 if extended. Put otherwise, the requirement of forwarding a formal request
for extension of the contract was provided for no other purpose than solely for the
plaintiff to save the amount of Php1,000,000.00 from being forfeited in the event it
chooses to instead exercise its option of paying the balance on or before the said
stipulated periods. In short, the purpose of paying the amount of Php6,765,660.00 is
distinct and separate from that of Php1,000,000.00.[13]

Citing Article 1370 of the Civil Code, the RTC also declared that in the event the contract of conditional
sale falters, the return of the first payment of P6,765,660.00 would be an unconditional obligation on the
part of petitioners. Moreover, the provisions of the contract should be enforced as they are read, and
should not be given an unusual significance even if to do so would appear to be in the interest of justice
or necessary to prevent hardship. The dispositive portion reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
the plaintiff and against the defendants ordering the latter, in solidum, to pay the former
the following sums, namely:

1. Php6,765,660.00 in addition to the payment of the 6% interest per annum from


the filing of the complaint until it is fully paid;
2. 10% of the principal obligation, for and as reasonable attorneys fees; and
3. Costs of suit.

For lack of sufficient factual basis, the counterclaim is dismissed.

SO ORDERED. [14]

Petitioners filed a motion for reconsideration, alleging that the trial court erroneously interpreted
paragraph 8 of the contract. Petitioners insisted that a close reading of the provision revealed that
respondent as buyer had to comply with three conditions precedent before the first payment could be
returned to it:

(a) One week before December 31, 1997, the BUYER shall forward a formal request for
an extension of the contract. x x x

(b) The extension shall not exceed 30 days (on or before 28 January 1998) x x x.

(c) The extension shall be on a one-time basis and no further extension will be
granted.[15]

Petitioners alleged that these conditions were not fulfilled, and that respondent did not request
for an extension within the stipulated period. They further alleged that whether or not plaintiff makes
that extension notice is the uncertain event or contingency upon which plaintiffs validity of its claim or
return of first payment depends, without which no right of action accrues. Thus, since respondent, as
buyer, failed to comply with the condition precedents in paragraph 8, its claim for refund did not ripen
into a demandable right. Contrary to the trial courts ruling, no such right to rescind the contract had been
granted to respondent.

For its part, respondent filed a Motion for Grant of Writ of Attachment, relying on Section 1(d)
and (e), Rule 57 of the Revised Rules of Court.

On September 16, 2002, the RTC issued an Omnibus Order denying both motions. It held that
when the sale did not materialize, the obligation of petitioners to return the first payment became
unqualified and unconditional. In accordance with the contract, only the earnest money would be
forfeited in favor of petitioners in case respondent failed to remit the balance of the purchase price. On
petitioners application of a writ of attachment, the trial court held that respondent was not guilty of fraud
in the non-performance of its obligation, grounded as it was on the interpretation of the contract.
Petitioners appealed the case to the CA on the following grounds:

1.1 THE LOWER COURT ERRED IN FINDING THAT THE RETURN OF THE
FIRST PAYMENT OF P6,765,660.00 IS AN UNCONDITIONAL OBLIGATION ON THE
PART OF THE DEFENDANTS;

1.2 THE LOWER COURT ERRED IN NOT FINDING AND DECLARING THAT
THE OBLIGATION TO RETURN THE FIRST PAYMENT OF P6,765,660.00 IS A
CONDITIONAL OBLIGATION OR IF NOT, IS AT LEAST AN OBLIGATION WITH A
PERIOD;

1.3 THE LOWER COURT ERRED IN ORDERING DEFENDANTS, IN SOLIDUM,


TO PAY PLAINTIFF P6,765,660.00 IN ADDITION TO THE PAYMENT OF 6%
INTEREST PER ANNUM FROM THE FILING OF THE COMPLAINT UNTIL IT IS
FULLY PAID, WITHOUT FIXING THE DURATION OF THE PERIOD WITHIN
WHICH DEFENDANTS HAVE TO COMPLY WITH THEIR OBLIGATION;

1.4 THE LOWER COURT ERRED IN CONCLUDING THAT PLAINTIFF IS


ENTITLED TO RECOVER ATTORNEYS FEES; and

1.5 THE LOWER COURT ERRED IN ORDERING DEFENDANTS, IN SOLIDUM,


TO PAY PLAINTIFF 10% OF THE PRINCIPAL OBLIGATION FOR AND AS
REASONABLE ATTORNEYS FEES.

The CA dismissed the appeal and affirmed in toto the ruling of the trial court.[16] Citing Article
1370 of the Civil Code and related cases,[17] it declared that if the terms of a contract are clear with no
doubt as to the intentions of the contracting parties, then the literal meaning of the stipulations shall
control. It held that the disputed paragraph 8 of the deed is plain and unambiguous: in case respondent
failed to pay the balance, the earnest money would be forfeited, but the first payment shall be returned to
respondent. The appellate court declared that petitioners obligation to return the first payment was an
unconditional one.[18]

Petitioners filed a motion for reconsideration. In its Resolution[19] dated May 4, 2005, the CA
partly granted the motion and declared that the liability of petitioners is only joint and not in solidum. The
pertinent portion of the resolution reads:

Our declaration in our Decision dated January 5, 2005, that it was an


unconditional obligation on the part of the appellants to return to the appellee the first
payment check of P6,765,660.00, [w]e meant that such obligation to return the subject
payment is a pure obligation without a condition or a term or a period, hence
demandable at once pursuant to Article 1179 of the New Civil Code.

Nonetheless, after a re-examination of the records, [w]e failed to see any basis
that appellants monetary obligations in [o]ur decision be in solidum. Verily, there is
solidary liability only when the obligation expressly so states, or when the law or nature
of the obligation requires solidarity. None of such elements exists in this case. The
subject sale agreement nor the nature of appellants obligation gave no sign that
appellants liability in the case at bar is solidary. Apropos, the decision rendered in this
case must be modified, in such a way that appellants liability to return the amount
of P6,765,660.00 and pay attorneys fees, is only joint.

ACCORDINGLY, appellants Motion for Reconsideration is partly granted in


that their liability in this case is declared only as joint, and not in solidum. In all other
respect[s], [o]urDecision dated January 5, 2005 stands.

SO ORDERED.[20]
In the instant petition for review on certiorari, petitioners present the following issues to be
resolved by the Court:

6.1.a. Whether the obligation of petitioners to return the first payment of P6,765,660.00 is
an unconditional obligation or not;

6.1.b. Whether the obligation to return the first payment of P6,765,660.00, assuming it to
be unconditional, is a pure obligation or an obligation with a period; and

6.1.c. Whether or not the court must first fix the duration of the period within which
petitioners have to comply with their obligation before respondent can demand from
petitioners the fulfillment of said obligation.[21]

Petitioners argue that respondent failed to satisfy the three suspensive conditions under the disputed
provision. Thus, they are not obliged to return the first payment (and respondents correlative right to
demand the performance of the obligation) never arose. Even assuming that the CA was correct in its
holding, the obligation should nevertheless be deemed one with a period. Petitioners claim that even if no
period was indicated in the contract it does not follow that no such period was intended; such an
obligation was with an indefinite period, or the parties simply forgot to state in their contract the definite
period for the return of said payment check. Petitioners pointed out that the parties likewise did not
stipulate that the obligation was a pure obligation, demandable at once. Thus, the remedy available to
respondent is not to demand the performance of the obligation, but to ask the court to fix the period
within which to return the first payment, pursuant to Article 1197 of the Civil Code. According to
petitioner, respondents action for collection/specific performance must be dismissed since the complaint
states no cause of action. It was thus error for the CA to order them to pay respondent P6,765,660.00 with
interest at 6% per annum without first fixing the period within which petitioners have to comply.

For its part, respondent insists that the trial and appellate courts did not commit any error in
ordering petitioners to return to it the sum of P6,765,660.00.

The petition is denied.

Paragraph 8 of the contract is clear and unambiguous. As the trial and appellate courts ruled,
unlike the P1,000,000.00 earnest money which would be forfeited in favor of petitioners in case of
respondents failure to deliver the balance of the total consideration, the first payment would be returned
to respondent. This obligation to return the first payment can be gleaned from the second part of the
disputed provision, which states: but the first payment check of SIX MILLION SEVEN HUNDRED
SIXTY-FIVE THOUSAND SIX HUNDRED SIXTY PESOS (PHP6,765,660.00) shall be returned to the
BUYER without any additional charges to the SELLER.

The Court cannot sustain petitioners contention that their obligation to return the first payment
should be deemed one with a period, and that the Court should fix the period within which they should
comply with the obligation. In the first place, there is no occasion to apply the first paragraph of Article
1197[22] since there is no showing that the parties had intended such a period. This matter was not raised
in the Answer, the Amended Answer or the Second Amended Answer which petitioners filed in the trial
court; no evidence was likewise offered to prove such intent. Indeed, the parties to a contract are bound
by their agreement,[23] considering that obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith. [24]

The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article
1370 of the Civil Code: [i]f the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control. This provision is akin to the plain
meaning rule applied by Pennsylvaniacourts, which assumes that the intent of the parties to an
instrument is embodied in the writing itself, and when the words are clear and unambiguous the intent is
to be discovered only from the express language of the agreement. [25] It also resembles the four corners
rule, a principle which allows courts in some cases to search beneath the semantic surface for clues to
meaning.[26] A courts purpose in examining a contract is to interpret the intent of the contracting parties,
as objectively manifested by them. The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is ambiguous
if it is susceptible of two reasonable alternative interpretations. Where the written terms of the contract
are not ambiguous and can only be
read one way, the court will interpret the contract as a matter of law. If the contract is determined to be
ambiguous, then the interpretation of the contract is left to the court, to resolve the ambiguity in the light
of the intrinsic evidence.[27]

In our jurisdiction, the rule is thoroughly discussed in Bautista v. Court of Appeals:[28]

The rule is that where the language of a contract is plain and unambiguous, its
meaning should be determined without reference to extrinsic facts or aids. The intention
of the parties must be gathered from that language, and from that language alone.
Stated differently, where the language of a written contract is clear and unambiguous,
the contract must be taken to mean that which, on its face, it purports to mean, unless
some good reason can be assigned to show that the words should be understood in a
different sense. Courts cannot make for the parties better or more equitable agreements
than they themselves have been satisfied to make, or rewrite contracts because they
operate harshly or inequitably as to one of the parties, or alter them for the benefit of
one party and to the detriment of the other, or by construction, relieve one of the parties
from the terms which he voluntarily consented to, or impose on him those which he did
not.
CONSIDERING THE FOREGOING, the Court resolved to DENY the petition. The Decision
and Resolution of the Court of Appeals in CA-G.R. CV No. 77559 are AFFIRMED.

SO ORDERED.

G.R. No. 96405 June 26, 1996

BALDOMERO INCIONG, JR., petitioner,


vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

ROMERO, J.:p

This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the
Regional Trial Court of Misamis Oriental, Branch 18,1 which disposed of Civil Case No. 10507 for
collection of a sum of money and damages, as follows:

WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily liable


and ordered to pay to the plaintiff Philippine Bank of Communications, Cagayan de Oro
City, the amount of FIFTY THOUSAND PESOS (P50,000.00), with interest thereon from
May 5, 1983 at 16% per annum until fully paid; and 6% per annum on the total amount due,
as liquidated damages or penalty from May 5, 1983 until fully paid; plus 10% of the total
amount due for expenses of litigation and attorney's fees; and to pay the costs.

The counterclaim, as well as the cross claim, are dismissed for lack of merit.

SO ORDERED.

Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed with
Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and severally
liable to private respondent Philippine Bank of Communications, Cagayan de Oro City branch. The
promissory note was due on May 5, 1983.

Said due date expired without the promissors having paid their obligation. Consequently, on November
14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding payment
thereof.2 On December 11, 1984 private respondent also sent by registered mail a final letter of demand to
Rene C. Naybe. Since both obligors did not respond to the demands made, private respondent filed on
January 24, 1986 a complaint for collection of the sum of P50,000.00 against the three obligors.

On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case.
However, on January 9, 1987, the lower court reconsidered the dismissal order and required the sheriff to
serve the summonses. On January 27, 1987, the lower court dismissed the case against defendant
Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons addressed to
petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.

In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy
Campos, who told him that he was a partner of Pio Tio, the branch manager of private respondent in
Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to him that Rene C.
Naybe was interested in the business and would contribute a chainsaw to the venture. He added that,
although Naybe had no money to buy the equipment, Pio Tio had assured Naybe of the approval of a
loan he would make with private respondent. Campos then persuaded petitioner to act as a "co-maker" in
the said loan. Petitioner allegedly acceded but with the understanding that he would only be a co-maker
for the loan of P50,000.00.

Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos
at his office. He affixed his signature thereto but in one copy, he indicated that he bound himself only for
the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that he was made liable
for the amount of P50,000.00.

In the aforementioned decision of the lower court, it noted that the typewritten figure "-- 50,000 --" clearly
appears directly below the admitted signature of the petitioner in the promissory note. 3 Hence, the
latter's uncorroborated testimony on his limited liability cannot prevail over the presumed regularity and
fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was "rather odd" for
petitioner to have indicated in a copy and not in the original, of the promissory note, his supposed
obligation in the amount of P5,000.00 only. Finally, the lower court held that, even granting that said
limited amount had actually been agreed upon, the same would have been merely collateral between him
and Naybe and, therefore, not binding upon the private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor
consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio Tio
denied having participated in the alleged business venture although he knew for a fact that the falcata
logs operation was encouraged by the bank for its export potential.

Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990,
affirmed that of the lower court. His motion for reconsideration of the said decision having been denied,
he filed the instant petition for review on certiorari.

On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of
Court and paragraph 2 of Circular
No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its
questioned decision.4 His motion for the reconsideration of the denial of his petition was likewise denied
with finality in the Resolution of April 24, 1991.5 Thereafter, petitioner filed a motion for leave to file a
second motion for reconsideration which, in the Resolution of May 27, 1991, the Court denied. In the
same Resolution, the Court ordered the entry of judgment in this case. 6

Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the latter motion, he
asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance with
Circular No. 1-88. Thus, on August 7, 1991, the Court granted his prayer that his petition be given due
course and reinstated the same.7

Nonetheless, we find the petition unmeritorious.

Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the
decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker in the
promissory note. It supports petitioner's allegation that they were induced to sign the promissory note on
the belief that it was only for P5,000.00, adding that it was Campos who caused the amount of the loan to
be increased to P50,000.00.

The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court of
Appeals should have declared the promissory note null and void on the following grounds: (a) the
promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b) the
loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00; (c) even
a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit
committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner
and Judge Pantanosas were not present at the time the loan was released in contravention of the bank
practice, and (g) notices of default are sent simultaneously and separately but no notice was validly sent
to him.8 Finally, petitioner contends that in signing the promissory note, his consent was vitiated by fraud
as, contrary to their agreement that the loan was only for the amount of P5,000.00, the promissory note
stated the amount of P50,000.00.

The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court is
not a trier of facts. Having lost the chance to fully ventilate his factual claims below, petitioner may no
longer be accorded the same opportunity in the absence of grave abuse of discretion on the part of the
court below. Had he presented Judge Pantanosas affidavit before the lower court, it would have
strengthened his claim that the promissory note did not reflect the correct amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with the
formalities prescribed by law but . . . a mere commercial paper which does not bear the signature of . . .
attesting witnesses," parol evidence may "overcome" the contents of the promissory note. 9 The first
paragraph of the parol evidence rule 10 states:

When the terms of an agreement have been reduced to writing, it is considered as


containing all the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents of the written
agreement.

Clearly, the rule does not specify that the written agreement be a public document.

What is required is that the agreement be in writing as the rule is in fact founded on "long experience that
written evidence is so much more certain and accurate than that which rests in fleeting memory only, that
it would be unsafe, when parties have expressed the terms of their contract in writing, to admit weaker
evidence to control and vary the stronger and to show that the
parties intended a different contract from that expressed in the writing signed by them." Thus, for the
11

parol evidence rule to apply, a written contract need not be in any particular form, or be signed by both
parties. 12 As a general rule, bills, notes and other instruments of a similar nature are not subject to be
varied or contradicted by parol or extrinsic evidence. 13

By alleging fraud in his answer, 14 petitioner was actually in the right direction towards proving that he
and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous
agreement was the inducing and moving cause of the written contract, it may be shown by parol
evidence. 15 However, fraud must be established by clear and convincing evidence, mere preponderance
of evidence, not even being adequate. 16Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and, expectedly, self-serving testimony.

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and against
Pantanosas, his co-maker, constituted a release of his obligation, especially because the dismissal of the
case against Pantanosas was upon the motion of private respondent itself. He cites as basis for his
argument, Article 2080 of the Civil Code which provides that:

The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor, they cannot be subrogated to the rights, mortgages,
and preferences of the latter.

It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as a
guarantor. This is patent even from the first sentence of the promissory note which states as follows:

Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the
City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000.00)
Pesos, Philippine Currency, together with interest . . . at the rate of SIXTEEN (16) per
cent per annum until fully paid.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation. 17 on the other hand, Article 2047 of the
Civil Code states:

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such a case the contract is called a
suretyship. (Emphasis supplied.)

While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:

A guarantor who binds himself in solidum with the principal debtor under the provisions
of the second paragraph does not become a solidary co-debtor to all intents and
purposes. There is a difference between a solidary co-debtor and a fiador in
solidum (surety). The latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the other rights, actions
and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has
no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of
the Civil Code. 18

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part
of the debt. There is a solidary liability only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires. 19

Because the promissory note involved in this case expressly states that the three signatories therein
are jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation. 20 The choice is left to the solidary creditor to determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as
having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision
of the Court of Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. 206806 June 25, 2014


ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.

DECISION

LEONEN, J.:

Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and new contracts are incompatible on every point.

Before us is a petition for review on certiorari 1 assailing the Court of Appeals’ decision2 in CA-G.R. CV
No. 95709, which stemmed from a complaint3 filed in the Regional Trial Court of Valenzuela City, Branch
171, for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the
name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill
business.4 From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to Arco Pulp
and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President,
Candida A. Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim
the value of the raw materials or deliver to him their finished products of equivalent value.6

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated
check dated April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the assurance that the
check would not bounce.8 When he deposited the check on April 18, 2007, it was dishonored for being
drawn against a closed account.9

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the
raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic
Products. The memorandum of agreement reads as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos
and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price
of ₱18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of deliveries are as follows:

....

It has been agreed further that the Local OCC materials to be used for the production of the above Test
Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at ₱6.50 per kg.
(price subject to change per advance notice). Quantity of Local OCC delivery will be based on the
quantity of Test Liner delivered to Megapack Container Corp. based on the above production schedule. 11
On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of
7,220,968.31, but no payment was made to him.13

Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the
Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer15 but failed to have its representatives attend the pre-trial hearing. Hence, the trial court allowed
Dan T. Lim to present his evidence ex parte.16

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation
to Dan T. Lim.17

Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not take
place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an exclusive
and private agreement between them. He argued that if his name was mentioned in the contract, it was
only for supplying the parties their required scrap papers, where his conformity through a separate
contract was indispensable.19

On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the
judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan
T. Lim the amount of ₱7,220,968.31 with interest at 12% per annum from the time of demand; ₱50,000.00
moral damages; ₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s fees.22

The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an
alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorney’s fees due to
the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking. 24

Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief
Executive Officer, Candida A. Santos, bring this petition for review on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement constituted a
novation of the original obligation since Eric Sy became the new debtor of respondent. They also argue
that there is no legal basis to hold petitioner Candida A. Santos personally liable for the transaction that
petitioner corporation entered into with respondent. The Court of Appeals, they allege, also erred in
awarding moral and exemplary damages and attorney’s fees to respondent who did not show proof that
he was entitled to damages.27

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no
proper novation in this case. He argues that the Court of Appeals was correct in ordering the payment of
7,220,968.31 with damages since the debt of petitioners remains unpaid. 28 He also argues that the Court of
Appeals was correct in holding petitioners solidarily liable since petitioner Candida A. Santos was "the
prime mover for such outstanding corporate liability." 29 In their reply, petitioners reiterate that novation
took place since there was nothing in the memorandum of agreement showing that the obligation was
alternative. They also argue that when respondent allowed them to deliver the finished products to Eric
Sy, the original obligation was novated.30
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC
dated November 21, 2000.31

The issues to be resolved by this court are as follows:

1. Whether the obligation between the parties was extinguished by novation

2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.

3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded

The petition is denied.

The obligation between the


parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:

Article 1199. A person alternatively bound by different prestations shall completely perform one of them.

The creditor cannot be compelled to receive part of one and part of the other undertaking.

"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election."32 The right of election is
extinguished when the party who may exercise that option categorically and unequivocally makes his or
her choice known.33

The choice of the debtor must also be communicated to the creditor who must receive notice of it since:
The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice shall the election take legal effect when consented
by the creditor, or if impugned by the latter, when declared proper by a competent court. 34

According to the factual findings of the trial court and the appellate court, the original contract between
the parties was for respondent to deliver scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp and
Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s obligation. By agreement,
petitioner Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price or(2) deliver the
finished products of equivalent value to respondent.35

The appellate court, therefore, correctly identified the obligation between the parties as an alternative
obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from respondent,
would either pay him the price of the raw materials or, in the alternative, deliver to him the finished
products of equivalent value.

When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap
papers, they exercised their option to pay the price. Respondent’s receipt of the check and his subsequent
act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to pay.
This choice was also shown by the terms of the memorandum of agreement, which was executed on the
same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and Paper’s
finished products would be to a third person, thereby extinguishing the option to deliver the finished
products of equivalent value to respondent.

The memorandum of
agreement did not constitute
a novation of the original
contract

The trial court erroneously ruled that the execution of the memorandum of agreement constituted a
novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to
deliver the finished products to a third person, it did not novate the original obligation between the
parties.

The rules on novation are outlined in the Civil Code, thus:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other. (1204)

Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)

Novation extinguishes an obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so "in
unequivocal terms" or that "the old and the new obligations be on every point incompatible with each
other."36

Novation was extensively discussed by this court in Garcia v. Llamas: 37

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by


substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from — and may even be made
without the knowledge of — the debtor, since it consists of a third person’s assumption of the obligation.
As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the
debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by
the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third
person to the rights of the creditor, an act known as subjective or personal novation. For novation to take
place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with
the old one on every point. The test of incompatibility is whether the two obligations can stand together,
each one with its own independent existence.38 (Emphasis supplied)

Because novation requires that it be clear and unequivocal, it is never presumed, thus:

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman
Law jurisprudence, the principle — novatio non praesumitur —that novation is never presumed.At
bottom, for novation tobe a jural reality, its animus must be ever present, debitum pro debito — basically
extinguishing the old obligation for the new one. 39 (Emphasis supplied) There is nothing in the
memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and
Paper to respondent would be extinguished. It also does not state that Eric Sy somehow substituted
petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that petitioner Arco Pulp and
Paper opted to deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be valid:

Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties
underscore the absence of any express disclosure or circumstances with which to deduce a clear and
unequivocal intent by the parties to novate the old agreement.40 (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first line of the memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos
and Mr. Eric Sy. . . .41

If the memorandum of agreement was intended to novate the original agreement between the parties,
respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of
agreement must also state in clear and unequivocal terms that it has replaced the original obligation of
petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their
alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to
petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor
consented to the latter as his new debtor. These acts, when taken together, clearly show that novation did
not take place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent
remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full
amount of ₱7,220,968.31.

Petitioners are liable for


damages

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where
the breach is due to fraud or bad faith:

Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied)

Moral damages are not awarded as a matter of right but only after the party claiming it proved that the
breach was due to fraud or bad faith. As this court stated:

Moral damages are not recoverable simply because a contract has been breached. They are recoverable
only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his
contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or
abusive.42

Further, the following requisites must be proven for the recovery of moral damages:

An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be an
injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second, there
must be culpable act or omission factually established; (3) third, the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the award of
damages is predicated on any of the cases stated in Article 2219 of the Civil Code. 43
Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from his business. This has remained
unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Paper’s act of
refusing to pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an
unfunded check but also entered into a contract with a third person in an effort to evade its liability. This
proves the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in
the following instances:

Article 2219. Moral damages may be recovered in the following and analogous cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party
breaches a contract, he or she goes against Article 19 of the Civil Code, which states: Article 19. Every
person must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith.

Persons who have the right to enter into contractual relations must exercise that right with honesty and
good faith. Failure to do so results in an abuse of that right, which may become the basis of an action for
damages. Article 19, however, cannot be its sole basis:

Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of
an actionable tort. Article 19 describes the degree of care required so that an actionable tort may arise
when it is alleged together with Article 20 or Article 21.44

Article 20 and 21 of the Civil Code are as follows:


Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.

Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the damage.

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts
that are contrary to morals, good customs, and public policy:

Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have
been willful or negligent. Willful may refer to the intention to do the act and the desire to achieve the
outcome which is considered by the plaintiff in tort action as injurious. Negligence may refer to a
situation where the act was consciously done but without intending the result which the plaintiff
considers as injurious.

Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily
proscribed by law. This article requires that the act be willful, that is, that there was an intention to do the
act and a desire to achieve the outcome. In cases under Article 21, the legal issues revolve around
whether such outcome should be considered a legal injury on the part of the plaintiff or whether the
commission of the act was done in violation of the standards of care required in Article 19. 45

When parties act in bad faith and do not faithfully comply with their obligations under contract, they run
the risk of violating Article 1159 of the Civil Code:

Article 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.

Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be recovered
since it only specifies, among others, Article 21. When a party reneges on his or her obligations arising
from contracts in bad faith, the act is not only contrary to morals, good customs, and public policy; it is
also a violation of Article 1159. Breaches of contract become the basis of moral damages, not only under
Article 2220, but also under Articles 19 and 20 in relation to Article 1159.

Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires
that the breach be done fraudulently or in bad faith. In Adriano v. Lasala: 46

To recover moral damages in an action for breach of contract, the breach must be palpably wanton,
reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith must
prove its existence by clear and convincing evidence for the law always presumes good faith.

Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or interest
or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which can be
inferred from one’s conduct and/or contemporaneous statements. 47 (Emphasis supplied)

Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of
the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it
was presumably with the knowledge that it was being drawn against a closed account. Worse, it
attempted to shift their obligations to a third person without the consent of respondent.

Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that
partakes of the nature of fraud."48 Moral damages may, therefore, be awarded.

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the
following circumstances:

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether
or not they should be adjudicated.

Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must show
that he is entitled to moral, temperate or compensatory damages before the court may consider the
question of whether or not exemplary damages should be awarded.

In Tankeh v. Development Bank of the Philippines,49 we stated that:

The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from the
commission of a similar offense. The case of People v. Ranteciting People v. Dalisay held that:

Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to serve
as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton invasion of
the rights of an injured or a punishment for those guilty of outrageous conduct. These terms are
generally, but not always, used interchangeably. In common law, there is preference in the use of
exemplary damages when the award is to account for injury to feelings and for the sense of indignity and
humiliation suffered by a person as a result of an injury that has been maliciously and wantonly inflicted,
the theory being that there should be compensation for the hurt caused by the highly reprehensible
conduct of the defendant—associated with such circumstances as willfulness, wantonness, malice, gross
negligence or recklessness, oppression, insult or fraud or gross fraud—that intensifies the injury. The
terms punitive or vindictive damages are often used to refer to those species of damages that may be
awarded against a person to punish him for his outrageous conduct. In either case, these damages are
intended in good measure to deter the wrongdoer and others like him from similar conduct in the
future.50 (Emphasis supplied; citations omitted)

The requisites for the award of exemplary damages are as follows:

(1) they may be imposed by way of example in addition to compensatory damages, and only
after the claimant's right to them has been established;

(2) that they cannot be recovered as a matter of right, their determination depending upon the
amount of compensatory damages that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner.51

Business owners must always be forthright in their dealings. They cannot be allowed to renege on their
obligations, considering that these obligations were freely entered into by them. Exemplary damages may
also be awarded in this case to serve as a deterrent to those who use fraudulent means to evade their
liabilities.

Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be
recovered.

Article 2208 of the Civil Code states:

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:

(1) When exemplary damages are awarded[.]


Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation

Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to
prove that the transaction was also a personal undertaking of petitioner Santos. We disagree.

In Heirs of Fe Tan Uy v. International Exchange Bank, 52 we stated that:

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the corporation. Nevertheless, this legal
fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.

....

Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith.

While it is true that the determination of the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for
review on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the
lower court are not supported by the evidence on record or are based on a misapprehension of
facts.53 (Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for
obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2)
such negligence or bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief
Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of petitioner
corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the
face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc." 54 Any obligation arising from
these acts would not, ordinarily, be petitioner Santos’ personal undertaking for which she would be
solidarily liable with petitioner Arco Pulp and Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines: 55

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. Under the
doctrine, the corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical.56 (Emphasis supplied)

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and
Paper, stating that:

In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to
honor their undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68 issued
by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner] corporation
denied any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies
provided by law in order to protect his rights.57

We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate
veil.1âwphi1 When petitioner Arco Pulp and Paper’s obligation to respondent became due and
demandable, she not only issued an unfunded check but also contracted with a third party in an effort to
shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s
obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may
be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper.

The rate of interest due on


the obligation must be
reduced in view of Nacar v.
Gallery Frames58

In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v.
Gallery Frames,59 the rate of interest due on the obligation must be modified from 12% per annum to 6%
per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals, 60 and we have
laid down the following guidelines with regard to the rate of legal interest:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Linesare
accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest


on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.61 (Emphasis supplied; citations omitted.)

According to these guidelines, the interest due on the obligation of ₱7,220,968.31 should now be at 6% per
annum, computed from May 5, 2007, when respondent sent his letter of demand to petitioners. This
interest shall continue to be due from the finality of this decision until its full satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay
respondent Dan T. Lim the amount of ₱7,220,968.31 with interest of 6% per annum at the time of demand
until finality of judgment and its full satisfaction, with moral damages in the amount of ₱50,000.00,
exemplary damages in the amount of ₱50,000.00, and attorney's fees in the amount of ₱50,000.00.

SO ORDERED.

G.R. No. 112127 July 17, 1995

CENTRAL PHILIPPINE UNIVERSITY, petitioner,


vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ,
REDAN LOPEZ AND REMARENE LOPEZ, respondents.

BELLOSILLO, J.:

CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the
Court of Appeals which reversed that of the Regional Trial Court of Iloilo City directing petitioner to
reconvey to private respondents the property donated to it by their predecessor-in-interest.

Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of Trustees of the
Central Philippine College (now Central Philippine University [CPU]), executed a deed of donation in
favor of the latter of a parcel of land identified as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then
a portion of Lot No. 3174-B, for which Transfer Certificate of Title No. T-3910-A was issued in the name of
the donee CPU with the following annotations copied from the deed of donation —

1. The land described shall be utilized by the CPU exclusively for the establishment and
use of a medical college with all its buildings as part of the curriculum;

2. The said college shall not sell, transfer or convey to any third party nor in any way
encumber said land;

3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college shall be
under obligation to erect a cornerstone bearing that name. Any net income from the land
or any of its parks shall be put in a fund to be known as the "RAMON LOPEZ CAMPUS
FUND" to be used for improvements of said campus and erection of a building thereon.1

On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action for
annulment of donation, reconveyance and damages against CPU alleging that since 1939 up to the time
the action was filed the latter had not complied with the conditions of the donation. Private respondents
also argued that petitioner had in fact negotiated with the National Housing Authority (NHA) to
exchange the donated property with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the action had prescribed; that
it did not violate any of the conditions in the deed of donation because it never used the donated
property for any other purpose than that for which it was intended; and, that it did not sell, transfer or
convey it to any third party.

On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the donation
and declared it null and void. The court a quo further directed petitioner to execute a deed of the
reconveyance of the property in favor of the heirs of the donor, namely, private respondents herein.

Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the annotations at the back
of petitioner's certificate of title were resolutory conditions breach of which should terminate the rights of
the donee thus making the donation revocable.

The appellate court also found that while the first condition mandated petitioner to utilize the donated
property for the establishment of a medical school, the donor did not fix a period within which the
condition must be fulfilled, hence, until a period was fixed for the fulfillment of the condition, petitioner
could not be considered as having failed to comply with its part of the bargain. Thus, the appellate court
rendered its decision reversing the appealed decision and remanding the case to the court of origin for
the determination of the time within which petitioner should comply with the first condition annotated in
the certificate of title.

Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted annotations in the
certificate of title of petitioner are onerous obligations and resolutory conditions of the donation which
must be fulfilled non-compliance of which would render the donation revocable; (b) in holding that the
issue of prescription does not deserve "disquisition;" and, (c) in remanding the case to the trial court for
the fixing of the period within which petitioner would establish a medical college. 2

We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of
donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his donation
was onerous, one executed for a valuable consideration which is considered the equivalent of the
donation itself, e.g., when a donation imposes a burden equivalent to the value of the donation. A gift of
land to the City of Manila requiring the latter to erect schools, construct a children's playground and open
streets on the land was considered an onerous donation.3 Similarly, where Don Ramon Lopez donated
the subject parcel of land to petitioner but imposed an obligation upon the latter to establish a medical
college thereon, the donation must be for an onerous consideration.

Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event which
constitutes the condition. Thus, when a person donates land to another on the condition that the latter
would build upon the land a school, the condition imposed was not a condition precedent or a
suspensive condition but a resolutory one.4 It is not correct to say that the schoolhouse had to be
constructed before the donation became effective, that is, before the donee could become the owner of the
land, otherwise, it would be invading the property rights of the donor. The donation had to be valid
before the fulfillment of the condition.5 If there was no fulfillment or compliance with the condition, such
as what obtains in the instant case, the donation may now be revoked and all rights which the donee may
have acquired under it shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private respondents is unavailing.

The condition imposed by the donor, i.e., the building of a medical school upon the land donated,
depended upon the exclusive will of the donee as to when this condition shall be fulfilled. When
petitioner accepted the donation, it bound itself to comply with the condition thereof. Since the
time within which the condition should be fulfilled depended upon the exclusive will of the
petitioner, it has been held that its absolute acceptance and the acknowledgment of its obligation
provided in the deed of donation were sufficient to prevent the statute of limitations from barring
the action of private respondents upon the original contract which was the deed of donation. 6

Moreover, the time from which the cause of action accrued for the revocation of the donation and
recovery of the property donated cannot be specifically determined in the instant case. A cause of action
arises when that which should have been done is not done, or that which should not have been done is
done.7 In cases where there is no special provision for such computation, recourse must be had to the rule
that the period must be counted from the day on which the corresponding action could have been
instituted. It is the legal possibility of bringing the action which determines the starting point for the
computation of the period. In this case, the starting point begins with the expiration of a reasonable
period and opportunity for petitioner to fulfill what has been charged upon it by the donor.

The period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of the presence
of several factors and circumstances involved in the erection of an educational institution, such as
government laws and regulations pertaining to education, building requirements and property
restrictions which are beyond the control of the donee.

Thus, when the obligation does not fix a period but from its nature and circumstances it can be inferred
that a period was intended, the general rule provided in Art. 1197 of the Civil Code applies, which
provides that the courts may fix the duration thereof because the fulfillment of the obligation itself cannot
be demanded until after the court has fixed the period for compliance therewith and such period has
arrived.8

This general rule however cannot be applied considering the different set of circumstances existing in the
instant case. More than a reasonable period of fifty (50) years has already been allowed petitioner to avail
of the opportunity to comply with the condition even if it be burdensome, to make the donation in its
favor forever valid. But, unfortunately, it failed to do so. Hence, there is no more need to fix the duration
of a term of the obligation when such procedure would be a mere technicality and formality and would
serve no purpose than to delay or lead to an unnecessary and expensive multiplication of
suits. 9 Moreover, under Art. 1191 of the Civil Code, when one of the obligors cannot comply with what is
incumbent upon him, the obligee may seek rescission and the court shall decree the same unless there is
just cause authorizing the fixing of a period. In the absence of any just cause for the court to determine the
period of the compliance, there is no more obstacle for the court to decree the rescission claimed.

Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring to
incidental circumstances of a gratuitous contract should be resolved in favor of the least transmission of
rights and interests. 10Records are clear and facts are undisputed that since the execution of the deed of
donation up to the time of filing of the instant action, petitioner has failed to comply with its obligation as
donee. Petitioner has slept on its obligation for an unreasonable length of time. Hence, it is only just and
equitable now to declare the subject donation already ineffective and, for all purposes, revoked so that
petitioner as donee should now return the donated property to the heirs of the donor, private
respondents herein, by means of reconveyance.

WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is REINSTATED
and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is accordingly MODIFIED.
Consequently, petitioner is directed to reconvey to private respondents Lot No. 3174-B-1 of the
subdivision plan Psd-1144 covered by Transfer Certificate of Title No. T-3910-A within thirty (30) days
from the finality of this judgment.

Costs against petitioner.

SO ORDERED.

G.R. No. 158361 April 10, 2013

INTERNATIONAL HOTEL CORPORATION, Petitioner,


vs.
FRANCISCO B. JOAQUIN, JR. and RAFAEL SUAREZ, Respondents.

DECISION

BERSAMIN, J.:

To avoid unjust enrichment to a party from resulting out of a substantially performed contract, the
principle of quantum meruit may be used to determine his compensation in the absence of a written
agreement for that purpose. The principle of quantum meruit justifies the payment of the reasonable
value of the services rendered by him.

The Case

Under review is the decision the Court of Appeals (CA) promulgated on November 8, 2002, 1 disposing:

WHEREFORE, premises considered, the decision dated August 26, 1993 of the Regional Trial Court,
Branch 13, Manila in Civil Case No. R-82-2434 is AFFIRMED with Modification as to the amounts
awarded as follows: defendant-appellant IHC is ordered to pay plaintiff-appellant Joaquin ₱700,000.00
and plaintiff-appellant Suarez ₱200,000.00, both to be paid in cash.

SO ORDERED.

Antecedents

On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a proposal to the Board of Directors
of the International Hotel Corporation (IHC) for him to render technical assistance in securing a foreign
loan for the construction of a hotel, to be guaranteed by the Development Bank of the Philippines
(DBP).2 The proposal encompassed nine phases, namely: (1) the preparation of a new project study; (2)
the settlement of the unregistered mortgage prior to the submission of the application for guaranty for
processing by DBP; (3) the preparation of papers necessary to the application for guaranty; (4) the
securing of a foreign financier for the project; (5) the securing of the approval of the DBP Board of
Governors; (6) the actual follow up of the application with DBP 3; (7) the overall coordination in
implementing the projections of the project study; (8) the preparation of the staff for actual hotel
operations; and (9) the actual hotel operations.4

The IHC Board of Directors approved phase one to phase six of the proposal during the special board
meeting on February 11, 1969, and earmarked ₱2,000,000.00 for the project.5 Anent the financing, IHC
applied with DBP for a foreign loan guaranty. DBP processed the application, 6 and approved it on
October 24, 1969 subject to several conditions.7

On July 11, 1969, shortly after submitting the application to DBP, Joaquin wrote to IHC to request the
payment of his fees in the amount of ₱500,000.00 for the services that he had provided and would be
providing to IHC in relation to the hotel project that were outside the scope of the technical proposal.
Joaquin intimated his amenability to receive shares of stock instead of cash in view of IHC’s financial
situation.8

On July 11, 1969, the stockholders of IHC met and granted Joaquin’s request, allowing the payment for
both Joaquin and Rafael Suarez for their services in implementing the proposal.9

On June 20, 1970, Joaquin presented to the IHC Board of Directors the results of his negotiations with
potential foreign financiers. He narrowed the financiers to Roger Dunn & Company and Materials
Handling Corporation. He recommended that the Board of Directors consider Materials Handling
Corporation based on the more beneficial terms it had offered. His recommendation was accepted. 10

Negotiations with Materials Handling Corporation and, later on, with its principal, Barnes International
(Barnes), ensued. While the negotiations with Barnes were ongoing, Joaquin and Jose Valero, the
Executive Director of IHC, met with another financier, the Weston International Corporation (Weston), to
explore possible financing.11 When Barnes failed to deliver the needed loan, IHC informed DBP that it
would submit Weston for DBP’s consideration.12As a result, DBP cancelled its previous guaranty through
a letter dated December 6, 1971.13

On December 13, 1971, IHC entered into an agreement with Weston, and communicated this
development to DBP on June 26, 1972. However, DBP denied the application for guaranty for failure to
comply with the conditions contained in its November 12, 1971 letter. 14

Due to Joaquin’s failure to secure the needed loan, IHC, through its President Bautista, canceled the
17,000 shares of stock previously issued to Joaquin and Suarez as payment for their services. The latter
requested a reconsideration of the cancellation, but their request was rejected.

Consequently, Joaquin and Suarez commenced this action for specific performance, annulment, damages
and injunction by a complaint dated December 6, 1973 in the Regional Trial Court in Manila (RTC),
impleading IHC and the members of its Board of Directors, namely, Felix Angelo Bautista, Sergio O.
Rustia, Ephraim G. Gochangco, Mario B. Julian, Benjamin J. Bautista, Basilio L. Lirag, Danilo R. Lacerna
and Hermenegildo R. Reyes.15 The complaint alleged that the cancellation of the shares had been illegal,
and had deprived them of their right to participate in the meetings and elections held by IHC; that Barnes
had been recommended by IHC President Bautista, not by Joaquin; that they had failed to meet their
obligation because President Bautista and his son had intervened and negotiated with Barnes instead of
Weston; that DBP had canceled the guaranty because Barnes had failed to release the loan; and that IHC
had agreed to compensate their services with 17,000 shares of the common stock plus cash of
₱1,000,000.00.16

IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B. Julian and Benjamin J. Bautista, filed
an answer claiming that the shares issued to Joaquin and Suarez as compensation for their "past and
future services" had been issued in violation of Section 16 of the Corporation Code; that Joaquin and
Suarez had not provided a foreign financier acceptable to DBP; and that they had already received
₱96,350.00 as payment for their services.17

On their part, Lirag and Lacerna denied any knowledge of or participation in the cancellation of the
shares.18

Similarly, Gochangco and Reyes denied any knowledge of or participation in the cancellation of the
shares, and clarified that they were not directors of IHC. 19 In the course of the proceedings, Reyes died
and was substituted by Consorcia P. Reyes, the administratrix of his estate. 20

Ruling of the RTC

Under its decision rendered on August 26, 1993, the RTC held IHC liable pursuant to the second
paragraph of Article 1284 of the Civil Code, disposing thusly:

WHEREFORE, in the light of the above facts, law and jurisprudence, the Court hereby orders the
defendant International Hotel Corporation to pay plaintiff Francisco B. Joaquin, the amount of Two
Hundred Thousand Pesos (₱200,000.00) and to pay plaintiff Rafael Suarez the amount of Fifty Thousand
Pesos (₱50,000.00); that the said defendant IHC likewise pay the co-plaintiffs, attorney’s fees of
₱20,000.00, and costs of suit.

IT IS SO ORDERED.21

The RTC found that Joaquin and Suarez had failed to meet their obligations when IHC had chosen to
negotiate with Barnes rather than with Weston, the financier that Joaquin had recommended; and that the
cancellation of the shares of stock had been proper under Section 68 of the Corporation Code, which
allowed such transfer of shares to compensate only past services, not future ones.

Ruling of the CA

Both parties appealed.22

Joaquin and Suarez assigned the following errors, to wit:

DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT PLAINTIFFS-APPELLANTS FULLY


PERFORMED ALL THAT WAS INCUMBENT UPON THEM, THE HONORABLE JUDGE ERRED IN
NOT ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING THE SHARES OF STOCK
PREVIOUSLY ISSUED TO PLAINTIFFS-APPELLANTS; AND

B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO MILLION SEVEN HUNDRED PESOS


(sic) (₱2,700,000.00), INCLUDING INTEREST THEREON FROM 1973, REPRESENTING THE
TOTAL OBLIGATION DUE PLAINTIFFS-APPELLANTS.23

On the other hand, IHC attributed errors to the RTC, as follows:

I.

THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS HAVE NOTBEEN


COMPLETELY PAID FOR THEIR SERVICES, AND IN ORDERING THE DEFENDANT-APPELLANT
TO PAY TWO HUNDRED THOUSAND PESOS (₱200,000.00) AND FIFTY THOUSAND PESOS
(₱50,000.00) TO PLAINTIFFS-APPELLANTS FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ,
RESPECTIVELY.

II.

THE LOWER COURT ERRED IN AWARDING PLAINTIFFS-APPELLANTS ATTORNEY’S FEES AND


COSTS OF SUIT.24

In its questioned decision promulgated on November 8, 2002, the CA concurred with the RTC, upholding
IHC’s liability under Article 1186 of the Civil Code. It ruled that in the context of Article 1234 of the Civil
Code, Joaquin had substantially performed his obligations and had become entitled to be paid for his
services; and that the issuance of the shares of stock was ultra vires for having been issued as
consideration for future services.

Anent how much was due to Joaquin and Suarez, the CA explained thusly:

This Court does not subscribe to plaintiffs-appellants’ view that defendant-appellant IHC agreed to pay
them ₱2,000,000.00. Plaintiff-appellant Joaquin’s letter to defendant-appellee F.A. Bautista, quoting
defendant-appellant IHC’s board resolutions which supposedly authorized the payment of such amount
cannot be sustained. The resolutions are quite clear and when taken together show that said amount was
only the "estimated maximum expenses" which defendant-appellant IHC expected to incur in
accomplishing phases 1 to 6, not exclusively to plaintiffs-appellants’ compensation.This conclusion finds
support in an unnumbered board resolution of defendant-appellant IHC dated July 11, 1969:

"Incidentally, it was also taken up the necessity of giving the Technical Group a portion of the
compensation that was authorized by this corporation in its Resolution of February 11, 1969 considering
that the assistance so far given the corporation by said Technical Group in continuing our project with the
DBP and its request for guaranty for a foreign loan is 70% completed leaving only some details which are
now being processed. It is estimated that ₱400,000.00 worth of Common Stock would be reasonable for
the present accomplishments and to this effect, the President is authorized to issue the same in the name
of the Technical Group, as follows:
₱200,000.00 in common stock to Rafael Suarez, as associate in the Technical Group, and ₱200,000.00 in
common stock to Francisco G. Joaquin, Jr., also a member of the Technical Group.

It is apparent that not all of the ₱2,000,000.00 was allocated exclusively to compensate plaintiffs-
appellants. Rather, it was intended to fund the whole undertaking including their compensation. On the
same date, defendant-appellant IHC also authorized its president to pay-appellant Joaquin ₱500,000.00
either in cash or in stock or both.

The amount awarded by the lower court was therefore less than what defendant-appellant IHC agreed to
pay plaintiffs-appellants. While this Court cannot decree that the cancelled shares be restored, for they
are without a doubt null and void, still and all, defendant-appellant IHC cannot now put up its own ultra
vires act as an excuse to escape obligation to plaintiffs-appellants. Instead of shares of stock, defendant-
appellant IHC is ordered to pay plaintiff-appellant Joaquin a total of ₱700,000.00 and plaintiff-appellant
Suarez ₱200,000.00, both to be paid in cash.

Although the lower court failed to explain why it was granting the attorney’s fees, this Court nonetheless
finds its award proper given defendant-appellant IHC’s actions.25

Issues

In this appeal, the IHC raises as issues for our consideration and resolution the following:

WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING COMPENSATION AND


EVEN MODIFYING THE PAYMENT TO HEREIN RESPONDENTS DESPITE NON-FULFILLMENT OF
THEIR OBLIGATION TO HEREIN PETITIONER

II

WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING ATTORNEY’S FEES TO


RESPONDENTS26

IHC maintains that Article 1186 of the Civil Code was erroneously applied; that it had no intention of
preventing Joaquin from complying with his obligations when it adopted his recommendation to
negotiate with Barnes; that Article 1234 of the Civil Code applied only if there was a merely slight
deviation from the obligation, and the omission or defect was technical and unimportant; that substantial
compliance was unacceptable because the foreign loan was material and was, in fact, the ultimate goal of
its contract with Joaquin and Suarez; that because the obligation was indivisible and subject to a
suspensive condition, Article 1181 of the Civil Code 27 applied, under which a partial performance was
equivalent to non-performance; and that the award of attorney’s fees should be deleted for lack of legal
and factual bases.

On the part of respondents, only Joaquin filed a comment, 28 arguing that the petition was fatally defective
for raising questions of fact; that the obligation was divisible and capable of partial performance; and that
the suspensive condition was deemed fulfilled through IHC’s own actions. 29
Ruling

We deny the petition for review on certiorari subject to the ensuing disquisitions.

1.

IHC raises questions of law

We first consider and resolve whether IHC’s petition improperly raised questions of fact.

A question of law exists when there is doubt as to what the law is on a certain state of facts, but, in
contrast, a question of fact exists when the doubt arises as to the truth or falsity of the facts alleged. A
question of law does not involve an examination of the probative value of the evidence presented by the
litigants or by any of them; the resolution of the issue must rest solely on what the law provides on the
given set of circumstances.30 When there is no dispute as to the facts, the question of whether or not the
conclusion drawn from the facts is correct is a question of law.31

Considering that what IHC seeks to review is the CA’s application of the law on the facts presented
therein, there is no doubt that IHC raises questions of law. The basic issue posed here is whether the
conclusions drawn by the CA were correct under the pertinent laws.

2.

Article 1186 and Article 1234 of the Civil Code cannot be the source of IHC’s obligation to pay
respondents IHC argues that it should not be held liable because: (a) it was Joaquin who had
recommended Barnes; and (b) IHC’s negotiation with Barnes had been neither intentional nor willfully
intended to prevent Joaquin from complying with his obligations.

IHC’s argument is meritorious.

Article 1186 of the Civil Code reads:

Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

This provision refers to the constructive fulfillment of a suspensive condition, 32 whose application calls
for two requisites, namely: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b)
the actual prevention of the fulfillment. Mere intention of the debtor to prevent the happening of the
condition, or to place ineffective obstacles to its compliance, without actually preventing the fulfillment,
is insufficient.33

The error lies in the CA’s failure to determine IHC’s intent to pre-empt Joaquin from meeting his
obligations. The June 20, 1970 minutes of IHC’s special board meeting discloses that Joaquin impressed
upon the members of the Board that Materials Handling was offering more favorable terms for IHC, to
wit:

xxxx
At the meeting all the members of the Board of Directors of the International Hotel Corporation were
present with the exception of Directors Benjamin J. Bautista and Sergio O. Rustia who asked to be
excused because of previous engagements. In that meeting, the President called on Mr. Francisco G.
Joaquin, Jr. to explain the different negotiations he had conducted relative to obtaining the needed
financing for the hotel project in keeping with the authority given to him in a resolution approved by the
Board of Directors.

Mr. Joaquin presently explained that he contacted several local and foreign financiers through different
brokers and after examining the different offers he narrowed down his choice to two (2), to wit: the
foreign financier recommended by George Wright of the Roger Dunn & Company and the offer made by
the Materials Handling Corporation.

After explaining the advantages and disadvantages to our corporation of the two (2) offers specifically
with regard to the terms and repayment of the loan and the rate of interest requested by them, he
concluded that the offer made by the Materials Handling Corporation is much more advantageous
because the terms and conditions of payment as well as the rate of interest are much more reasonable and
would be much less onerous to our corporation. However, he explained that the corporation accepted, in
principle, the offer of Roger Dunn, per the corporation’s telegrams to Mr. Rudolph Meir of the Private
Bank of Zurich, Switzerland, and until such time as the corporation’s negotiations with Roger Dunn is
terminated, we are committed, on one way or the other, to their financing.

It was decided by the Directors that, should the negotiations with Roger Dunn materialize, at the same
time as the offer of Materials Handling Corporation, that the funds committed by Roger Dunn may be
diverted to other borrowers of the Development Bank of the Philippines. With this condition, Director
Joaquin showed the advantages of the offer of Materials Handling Corporation. Mr. Joaquin also
informed the corporation that, as of this date, the bank confirmation of Roger Dunn & Company has not
been received. In view of the fact that the corporation is racing against time in securing its financing, he
recommended that the corporation entertain other offers.

After a brief exchange of views on the part of the Directors present and after hearing the clarification and
explanation made by Mr. C. M. Javier who was present and who represented the Materials Handling
Corporation, the Directors present approved unanimously the recommendation of Mr. Joaquin to
entertain the offer of Materials Handling Corporation. 34

Evidently, IHC only relied on the opinion of its consultant in deciding to transact with Materials
Handling and, later on, with Barnes. In negotiating with Barnes, IHC had no intention, willful or
otherwise, to prevent Joaquin and Suarez from meeting their undertaking. Such absence of any intention
negated the basis for the CA’s reliance on Article 1186 of the Civil Code.

Nor do we agree with the CA’s upholding of IHC’s liability by virtue of Joaquin and Suarez’s substantial
performance. In so ruling, the CA applied Article 1234 of the Civil Code, which states:

Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the obligee.

It is well to note that Article 1234 applies only when an obligor admits breaching the contract 35 after
honestly and faithfully performing all the material elements thereof except for some technical aspects that
cause no serious harm to the obligee.36 IHC correctly submits that the provision refers to an omission or
deviation that is slight, or technical and unimportant, and does not affect the real purpose of the contract.

Tolentino explains the character of the obligor’s breach under Article 1234 in the following manner, to
wit:

In order that there may be substantial performance of an obligation, there must have been an attempt in
good faith to perform, without any willful or intentional departure therefrom. The deviation from the
obligation must be slight, and the omission or defect must be technical and unimportant, and must not
pervade the whole or be so material that the object which the parties intended to accomplish in a
particular manner is not attained. The non-performance of a material part of a contract will prevent the
performance from amounting to a substantial compliance.

The party claiming substantial performance must show that he has attempted in good faith to perform his
contract, but has through oversight, misunderstanding or any excusable neglect failed to completely
perform in certain negligible respects, for which the other party may be adequately indemnified by an
allowance and deduction from the contract price or by an award of damages. But a party who knowingly
and wilfully fails to perform his contract in any respect, or omits to perform a material part of it, cannot
be permitted, under the protection of this rule, to compel the other party, and the trend of the more recent
decisions is to hold that the percentage of omitted or irregular performance may in and of itself be
sufficient to show that there had not been a substantial performance. 37

By reason of the inconsequential nature of the breach or omission, the law deems the performance as
substantial, making it the obligee’s duty to pay.38 The compulsion of payment is predicated on the
substantial benefit derived by the obligee from the partial performance. Although compelled to pay, the
obligee is nonetheless entitled to an allowance for the sum required to remedy omissions or defects and
to complete the work agreed upon.39

Conversely, the principle of substantial performance is inappropriate when the incomplete performance
constitutes a material breach of the contract. A contractual breach is material if it will adversely affect the
nature of the obligation that the obligor promised to deliver, the benefits that the obligee expects to
receive after full compliance, and the extent that the non-performance defeated the purposes of the
contract.40 Accordingly, for the principle embodied in Article 1234 to apply, the failure of Joaquin and
Suarez to comply with their commitment should not defeat the ultimate purpose of the contract.

The primary objective of the parties in entering into the services agreement was to obtain a foreign loan to
finance the construction of IHC’s hotel project. This objective could be inferred from IHC’s approval of
phase 1 to phase 6 of the proposal. Phase 1 and phase 2, respectively the preparation of a new project
study and the settlement of the unregistered mortgage, would pave the way for Joaquin and Suarez to
render assistance to IHC in applying for the DBP guaranty and thereafter to look for an able and willing
foreign financial institution acceptable to DBP. All the steps that Joaquin and Suarez undertook to
accomplish had a single objective – to secure a loan to fund the construction and eventual operations of
the hotel of IHC. In that regard, Joaquin himself admitted that his assistance was specifically sought to
seek financing for IHC’s hotel project.41

Needless to say, finding the foreign financier that DBP would guarantee was the essence of the parties’
contract, so that the failure to completely satisfy such obligation could not be characterized as slight and
unimportant as to have resulted in Joaquin and Suarez’s substantial performance that consequentially
benefitted IHC. Whatever benefits IHC gained from their services could only be minimal, and were even
probably outweighed by whatever losses IHC suffered from the delayed construction of its hotel.
Consequently, Article 1234 did not apply.

3.

IHC is nonetheless liable to pay under the rule on constructive fulfillment of a mixed conditional
obligation

Notwithstanding the inapplicability of Article 1186 and Article 1234 of the Civil Code, IHC was liable
based on the nature of the obligation.

Considering that the agreement between the parties was not circumscribed by a definite period, its
termination was subject to a condition – the happening of a future and uncertain event.42 The prevailing
rule in conditional obligations is that the acquisition of rights, as well as the extinguishment or loss of
those already acquired, shall depend upon the happening of the event that constitutes the condition. 43

To recall, both the RTC and the CA held that Joaquin and Suarez’s obligation was subject to the
suspensive condition of successfully securing a foreign loan guaranteed by DBP. IHC agrees with both
lower courts, and even argues that the obligation with a suspensive condition did not arise when the
event or occurrence did not happen. In that instance, partial performance of the contract subject to the
suspensive condition was tantamount to no performance at all. As such, the respondents were not
entitled to any compensation.

We have to disagree with IHC’s argument.

To secure a DBP-guaranteed foreign loan did not solely depend on the diligence or the sole will of the
respondents because it required the action and discretion of third persons – an able and willing foreign
financial institution to provide the needed funds, and the DBP Board of Governors to guarantee the loan.
Such third persons could not be legally compelled to act in a manner favorable to IHC. There is no
question that when the fulfillment of a condition is dependent partly on the will of one of the contracting
parties,44 or of the obligor, and partly on chance, hazard or the will of a third person, the obligation is
mixed.45 The existing rule in a mixed conditional obligation is that when the condition was not fulfilled
but the obligor did all in his power to comply with the obligation, the condition should be deemed
satisfied.46

Considering that the respondents were able to secure an agreement with Weston, and subsequently tried
to reverse the prior cancellation of the guaranty by DBP, we rule that they thereby constructively fulfilled
their obligation.

4.

Quantum meruit should apply in the absence of an express agreement on the fees

The next issue to resolve is the amount of the fees that IHC should pay to Joaquin and Suarez.
Joaquin claimed that aside from the approved ₱2,000,000.00 fee to implement phase 1 to phase 6, the IHC
Board of Directors had approved an additional ₱500,000.00 as payment for his services. The RTC declared
that he and Suarez were entitled to ₱200,000.00 each, but the CA revised the amounts to ₱700,000.00 for
Joaquin and ₱200,000.00 for Suarez.

Anent the ₱2,000,000.00, the CA rightly concluded that the full amount of ₱2,000,000.00 could not be
awarded to respondents because such amount was not allocated exclusively to compensate respondents,
but was intended to be the estimated maximum to fund the expenses in undertaking phase 6 of the scope
of services. Its conclusion was unquestionably borne out by the minutes of the February 11, 1969 meeting,
viz:

xxxx

II

The preparation of the necessary papers for the DBP including the preparation of the application, the
presentation of the mechanics of financing, the actual follow up with the different departments of the
DBP which includes the explanation of the feasibility studies up to the approval of the loan, conditioned
on the DBP’s acceptance of the project as feasible. The estimated expenses for this particular phase would
be contingent, i.e. upon DBP’s approval of the plan now being studied and prepared, is somewhere
around ₱2,000,000.00.

After a brief discussion on the matter, the Board on motion duly made and seconded, unanimously
adopted a resolution of the following tenor:

RESOLUTION NO. ______


(Series of 1969)

"RESOLVED, as it is hereby RESOLVED, that if the Reparations allocation and the plan being negotiated
with the DBP is realized the estimated maximum expenses of ₱2,000,000.00 for this phase is hereby
authorized subject to the sound discretion of the committee composed of Justice Felix Angelo Bautista,
Jose N. Valero and Ephraim G. Gochangco."47 (Emphasis supplied)

Joaquin’s claim for the additional sum of ₱500,000.00 was similarly without factual and legal bases. He
had requested the payment of that amount to cover services rendered and still to be rendered to IHC
separately from those covered by the first six phases of the scope of work. However, there is no reason to
hold IHC liable for that amount due to his failure to present sufficient proof of the services rendered
towards that end. Furthermore, his July 11, 1969 letter revealed that the additional services that he had
supposedly rendered were identical to those enumerated in the technical proposal, thus:

The Board of Directors

International Hotel Corporation

Thru: Justice Felix Angelo Bautista


President & Chairman of the Board
Gentlemen:

I have the honor to request this Body for its deliberation and action on the fees for my services rendered
and to be rendered to the hotel project and to the corporation. These fees are separate from the fees you
have approved in your previous Board Resolution, since my fees are separate. I realize the position of the
corporation at present, in that it is not in a financial position to pay my services in cash, therefore, I am
requesting this Body to consider payment of my fees even in the form of shares of stock, as you have
done to the other technical men and for other services rendered to the corporation by other people.

Inasmuch as my fees are contingent on the successful implementation of this project, I request that my
fees be based on a percentage of the total project cost. The fees which I consider reasonable for the
services that I have rendered to the project up to the completion of its construction is ₱500,000.00. I
believe said amount is reasonable since this is approximately only ¾ of 1% of the total project cost.

So far, I have accomplished Phases 1-5 of my report dated February 1, 1969 and which you authorized us
to do under Board Resolution of February 11, 1969. It is only Phase 6 which now remains to be
implemented. For my appointment as Consultant dated May 12, 1969 and the Board Resolution dated
June 23, 1969 wherein I was appointed to the Technical Committee, it now follows that I have been also
authorized to implement part of Phases 7 & 8.

A brief summary of my accomplished work has been as follows:

1. I have revised and made the new Project Study of your hotel project, making it bankable and
feasible.

2. I have reduced the total cost of your project by approximately ₱24,735,000.00.

3. I have seen to it that a registered mortgage with the Reparations Commission did not affect the
application with the IBP for approval to processing.

4. I have prepared the application papers acceptable to the DBP by means of an advance analysis
and the presentation of the financial mechanics, which was accepted by the DBP.

5. I have presented the financial mechanics of the loan wherein the requirement of the DBP for an
additional ₱19,000,000.00 in equity from the corporation became unnecessary.

6. The explanation of the financial mechanics and the justification of this project was instrumental
in changing the original recommendation of the Investment Banking Department of the DBP,
which recommended disapproval of this application, to the present recommendation of the Real
Estate Department which is for the approval of this project for proceeding.

7. I have submitted to you several offers already of foreign financiers which are in your files. We
are presently arranging the said financiers to confirm their funds to the DBP for our project,

8. We have secured the approval of the DBP to process the loan application of this corporation as
per its letter July 2, 1969.
9. We have performed other services for the corporation which led to the cooperation and
understanding of the different factions of this corporation.

I have rendered services to your corporation for the past 6 months with no clear understanding as to the
compensation of my services. All I have drawn from the corporation is the amount of ₱500.00 dated May
12, 1969 and personal payment advanced by Justice Felix Angelo Bautista in the amount of ₱1,000.00.

I am, therefore, requesting this Body for their approval of my fees. I have shown my good faith and
willingness to render services to your corporation which is evidenced by my continued services in the
past 6 months as well as the accomplishments above mentioned. I believe that the final completion of this
hotel, at least for the processing of the DBP up to the completion of the construction, will take
approximately another 2 ½ years. In view of the above, I again reiterate my request for your approval of
my fees. When the corporation is in a better financial position, I will request for a withdrawal of a
monthly allowance, said amount to be determined by this Body.

Very truly yours,

(Sgd.)
Francisco G., Joaquin, Jr.48
(Emphasis supplied)

Joaquin could not even rest his claim on the approval by IHC’s Board of Directors. The approval
apparently arose from the confusion between the supposedly separate services that Joaquin had rendered
and those to be done under the technical proposal. The minutes of the July 11, 1969 board meeting (when
the Board of Directors allowed the payment for Joaquin’s past services and for the 70% project
completion by the technical group) showed as follows:

III

The Third order of business is the compensation of Mr. Francisco G. Joaquin, Jr. for his services in the
corporation.

After a brief discussion that ensued, upon motion duly made and seconded, the stockholders
unanimously approved a resolution of the following tenor:

RESOLUTION NO. ___


(Series of 1969)

"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a compensation in the amount of Five Hundred
Thousand (₱500,000.00) Pesos for his past services and services still to be rendered in the future to the
corporation up to the completion of the Project.1âwphi1 The President is given full discretion to discuss
with Mr. Joaquin the manner of payment of said compensation, authorizing him to pay part in stock and
part in cash."

Incidentally, it was also taken up the necessity of giving the Technical Group a portion of the
compensation that was authorized by this corporation in its Resolution of February 11, 1969 considering
that the assistance so far given the corporation by said Technical Group in continuing our project with the
DBP and its request for guaranty for a foreign loan is 70% completed leaving only some details which are
now being processed. It is estimated that ₱400,000.00 worth of Common Stock would be reasonable for
the present accomplishments and to this effect, the President is authorized to issue the same in the name
of the Technical Group, as follows:

₱200,000.00 in Common Stock to Rafael Suarez, an associate in the Technical Group, and ₱200,000.00 in
Common stock to Francisco G. Joaquin, Jr., also a member of the Technical Group. 49

Lastly, the amount purportedly included services still to be rendered that supposedly extended until the
completion of the construction of the hotel. It is basic, however, that in obligations to do, there can be no
payment unless the obligation has been completely rendered.50

It is notable that the confusion on the amounts of compensation arose from the parties’ inability to agree
on the fees that respondents should receive. Considering the absence of an agreement, and in view of
respondents’ constructive fulfillment of their obligation, the Court has to apply the principle of quantum
meruit in determining how much was still due and owing to respondents. Under the principle of
quantum meruit, a contractor is allowed to recover the reasonable value of the services rendered despite
the lack of a written contract.51 The measure of recovery under the principle should relate to the
reasonable value of the services performed.52 The principle prevents undue enrichment based on the
equitable postulate that it is unjust for a person to retain any benefit without paying for it. Being
predicated on equity, the principle should only be applied if no express contract was entered into, and no
specific statutory provision was applicable.53

Under the established circumstances, we deem the total amount of ₱200,000.00 to be reasonable
compensation for respondents’ services under the principle of quantum meruit.

Finally, we sustain IHC’s position that the grant of attorney’s fees lacked factual or legal basis. Attorney’s
fees are not awarded every time a party prevails in a suit because of the policy that no premium should
be placed on the right to litigate. There should be factual or legal support in the records before the award
of such fees is sustained. It is not enough justification for the award simply because respondents were
compelled to protect their rights.54

ACCORDINGLY, the Court DENIES the petition for review on certiorari; and AFFIRMS the decision of
the Court of Appeals promulgated on November 8, 2002 in C.A.-G.R. No. 47094 subject to the
MODIFICATIONS that: (a) International Hotel Corporation is ordered to. pay Francisco G. Joaquin, Jr.
and Rafael Suarez ₱100,000.00 each as compensation for their services, and (b) the award of ₱20,000.00 as
attorney's fees is deleted.

No costs of suit.

SO ORDERED.

LINA CALILAP-ASMERON, G.R. No. 157330


Petitioner,
Present:
CORONA, C.J., Chairperson,
- versus - LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.
DEVELOPMENT BANK OF THE
PHILIPPINES, PABLO CRUZ,*TRINIDAD Promulgated:
CABANTOG,** ENI S.P. ATIENZA and
EMERENCIANA CABANTOG, November 23, 2011
Respondents.
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J.:
The petitioner challenges the decision promulgated on June 21, 2002, [1] whereby the Court of Appeals
(CA) affirmed the adverse decision rendered by the Regional Trial Court, Branch 11, in Malolos, Bulacan
(RTC) in Civil Case No. 50-M-87 entitled Lina Calilap-Asmeron v. Development Bank of the Philippines, Pablo
Cruz, Trinidad Cabantog, Eni S.P. Atienza, and Emerenciana Cabantog, [2] an action initiated to set aside the
defendant banks rescission of a deed of conditional sale involving foreclosed property, and to annul the
subsequent sales of the property to other persons.

Antecedents
On March 17, 1975, the petitioner and her brother Celedonio Calilap constituted a real estate mortgage
over two parcels of land covered by Transfer Certificate of Title (TCT) No. T-164117 and TCT No.T-
160929, both of the Registry of Deeds of Bulacan, to secure the performance of their loan obligation with
respondent Development Bank of the Philippines (DBP). [3] With the principal obligation being ultimately
unpaid, DBP foreclosed the mortgage. The mortgaged parcels of land were then sold to DBP as the
highest bidder. The one-year redemption period expired on September 1, 1981.[4]

As to what thereafter transpired, the petitioner and DBP tendered conflicting versions.

I
Version of Petitioner

The thrust of the petitioners suit is that DBP accorded to her a preferential right to repurchase the
property covered by TCT No. 164117.[5] Her version follows.
In August 1982, the petitioner negotiated with DBP to buy back the property covered by TCT No.
164117 by offering P15,000.00 as downpayment. Her offer was rejected by an executive officer of DBPs
Acquired Assets Department, who required her to pay the full purchase price of P55,500.00 for the
property within ten days.[6] She returned to DBP with the amount, only to be told that DBP would not sell
back only one lot. Being made to believe that the lot covered by TCT No. 164117 would be released after
paying two amortizations for the other lot (TCT No. 160929), however, she signed the deed of conditional
sale covering both lots for the total consideration of P157,000.00.[7] When she later on requested the release
of the property under TCT No. 164117 after paying two quarterly amortizations, DBP did not approve the
release. She continued paying the amortizations until she had paid P40,000.00 in all, at which point she
sought again the release of the lot under TCT No. 164117. DBP still denied her request, warning that it
would rescind the contract should her remaining amortizations be still not paid. On August 7, 1985, DBP
rescinded the deed of conditional sale over her objections. [8]

On November 25, 1987, DBP sold the lot covered by TCT No. 164117 to respondent Pablo
Cruz via a deed of absolute sale.[9] The petitioner consequently filed a complaint for the rescission of the
sale to Cruz on January 30, 1987.[10] Notwithstanding their knowledge of her pending suit against Cruz,
respondents Emerenciana Cabantog and Eni S.P. Atienza still bought the property from Cruz. [11] Hence,
Cabantog and Atienza were impleaded as additional defendants by amendment.

II
Version of Respondents

DBP insisted that the petitioners real intention had been to repurchase the two lots on installment basis.
She manifested her real intention to that effect in writing through her letter dated September 14, 1981,
thus:

September 14, 1981

DEVELOPMENT BANK OF THE PHIL.


Acquired Assests [sic] Department
Makati, Metro Manila

ATTENTION: MR. J.A. SANCHEZ, JR.


Assistant Manager
------------------------------------------------------------

Dear Sir:
I wish to inform your good office that I am interested to reacquire the mortgage
properties consisting of two (2) parcels of land under TCT Nos. T-160929 and T-164117
located at Sumapa, Malolos, Bulacan.

I would like to reacquire the above stated properties under installment basis but I am
requesting your goodselves [sic] to extend an extension of time up to the first week of
November, 1981 for my money is coming by that time.

Your kind consideration on the above request is most highly appreciated, I remain.

Very truly yours,

(sgd.)
LINA CALILAP-ASMERON
Co-maker[12]

The petitioner also sent a telegram on September 15, 1981,[13] whereby she similarly expressed to
DBP her interest in reacquiring the properties. On November 16, 1981, DBP received another telegram
from her,[14] requesting DBP to put the bidding of the properties on hold. A year later, she sent a letter
dated August 31, 1982 to reiterate her intention to repurchase the two properties and to offer to
deposit P55,500.00 as initial payment, to wit:

August 31, 1982

The Manager
Acquired Assets Management Department
Development Bank of the Philippines
Makati, Metro Manila

Dear Sir:

This has reference to our former properties consisting of two parcels of land with an
aggregate area of 2,082.5 sq.m. covered by TCT Nos. T-160929 and T-164117 together
with all the improvements erected thereon located at Bo. Sumpang Matanda, Malolos,
Bulacan.

I wish to inform you that in view of my intense desire to preserve said properties for our
familys use, I am offering to buy back these properties for P157,000.00, payable on terms,
balance to be paid in five (5) years on the quarterly amortization plan.

This is my last appeal for your assistance in my wish to preserve these properties and
should I fail to consummate the sale, I bind myself to whatever rules and regulations the
Bank may impose with regards to my deposit.
If this offer is acceptable to you, I am willing to deposit the amount of P55,500.00 on or
before September 10, 1982.

May I be advised accordingly?

Thank you.

Very truly yours,


(Sgd.)
LINA CALILAP-ASMERON[15]

The petitioner subsequently made the downpayment on September 10, 1992, [16] and DBP formally
accepted the offer through its letter dated September 14, 1982, stating therein the terms and
conditions.[17] Said terms and conditions, which were later embodied in the deed of conditional sale
executed on January 21, 1983, included one that bound her to pay the first amortization of P7,304.15 three
months from the execution of the deed, and the remaining amortizations to be due and payable every
three months thereafter.[18]

DBP presented the duplicate copies of the receipts indicating her timely payment for the first
quarterly amortization; however, she incurred delays in her subsequent installments. [19] She made her last
payment amounting to P4,500.00 on March 12, 1985,[20] leaving five quarterly amortizations unpaid.[21]

On January 20, 1986, the petitioner sent a handwritten letter requesting DBP to put on hold any plans of
selling the subject property, viz:

January 20, 1986

Mr. V.M. Macapagal


Executive Officer
Acquired Assets Mgmt. Division
Development Bank of the Philippines
Makati, Metro Manila

Dear Sir:

This is with reference regarding my Sale Acct. No. 617 under the name of my late brother
Celedonio R. Calilap which are located in Sumapa, Malolos, Bulacan.

In connection with these properties, I have already made an arrangement that Im going
to pay my whole obligations through a private financier under your Incentive Plan,
which according to my last communication with them it was extended so I have to make
an advance notice of four (4) days before paying so I may know the exact amount.
I wanted it to be formal, so I send [sic] a letter to your good office for the reason
that last January 17, 1986, your appraiser went to our place and made an assessment of
my properties. May I request again to please hold any sale of the said property for Im
doing my best to settle my obligation at the soonest possible time, for sure after a week or
two after the snap election.

Thank you very much for your kind consideration and hoping for your help regarding
my request.

Respectfully yours,
(sgd.)
LINA CALILAP-ASMERON[22]

DBP replied by its letter dated February 5, 1986, [23] demanding payment of the petitioners
remaining obligation of P121,013.75 in cash, otherwise, it would be constrained to sell the property. She
responded via telegram,[24] informing DBP that she would be arriving on March 4, 1986. The telegram was
followed by a handwritten letter dated March 5, 1986 [25] stating her willingness to pay 10% of her
outstanding obligations.

On March 12, 1986, DBP demanded the immediate remittance of the promised
amount via telegram.[26] When she did not pay the six quarterly amortizations, DBP rescinded the deed of
conditional sale and applied for a writ of possession on November 17, 1986 in the RTC (Branch 17) in
Malolos, Bulacan. Its application for the writ of possession was granted on November 18, 1986.[27]

Ruling of the RTC


Finding the petitioners complaint lacking in merit, the RTC (Branch 11) rendered its decision on
December 28, 1994 dismissing the case.[28] It observed that the stipulations in the deed of conditional sale
and the tenor of the petitioners communications to DBP clearly indicated that she had intended to
repurchase both foreclosed properties, not just the property covered by TCT No. T-164117, thusly:
Lettered as she is, the plaintiff cannot now seek refuge on the excuse that what she
intends to buy was only the property covered by TCT No. T-164117. The contents of her
letter to the Manager of the Acquired Assets Division of DBP dated August 31, 1982 (Exh.
1 and its submarkings) and to Asst. Manager J.A. Sanchez of the DBP dated September
14, 1981 (Exh. 2) clearly demonstrate in unequivocal terms that she intended to reacquire
both of her foreclosed properties. Moreso, the telegrams sent by her (Exhs. 3 & 4) to
defendant bank clearly indicates the same intention.
The aforequoted terms and conditions in the conditional sale which defendant
failed to comply are clear and not susceptible whatsoever to any other interpretation as
to the intention of the contracting parties. It is settled and fundamental that if the terms
of the contract are clear and leave no doubt upon the intention of the contracting parties,
the literal meaning of the stipulations shall control (Art. 1370, Civil Code; Filoil
Marketing Corp. vs. IAC GR 67115; Mercantile Ins. Corp. vs.Ysmael GR 43862; Baliuag
Transit Corp. vs. CA GR 80447). In addition, her subsequent acts of writing DBP and
complying with the terms of the conditional sale bolster the fact of her acquiescence in
the said contract which she voluntarily entered into and she cannot now take a contrary
position.[29]

Ruling of the CA

The petitioner appealed, contending that:

I
THE LOWER COURT GROSSLY ERRED IN NOT ANNULLING THE RESCISSION
MADE BY THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) OF THE
CONDITIONAL SALE OF JANUARY 4, 1983, APPELLANT HAVING ALREADY PAID
A SUBSTANTIAL AMOUNT OF P100,000.00 OR ABOUT TWO-THIRDS OF THE PRICE
OR CONSIDERATION.

II
THE LOWER COURT ERRED IN NOT ANNULLING THE SALE MADE BY DBP TO
PABLO CRUZ AS WELL AS THE SALE MADE BY THE LATTER TO THE OTHER
DEFENDANTS.

Yet, on June 21, 2002, the CA affirmed the RTC, [30] pointing out that the petitioner had not
presented testimonial or documentary evidence to support or corroborate her claim that she had been
misled into signing the deed of conditional sale. It ruled that DBP could rescind the contract pursuant to
the terms of the deed of conditional sale itself, and that DBP exercised its right to rescind only after she
had failed to pay her quarterly amortizations.[31]

Issues
In her present appeal, the petitioner submits:

I
THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE
ERROR WHEN IT DISREGARDED THE TESTIMONIAL EVIDENCE ADDUCED BY
THE PETITIONER, WHICH CLEARLY DETAILED THE TRUTH SURROUNDING THE
EXECUTION OF THE DEED OF CONDITIONAL SALE OF THE SUBJECT LOT TO
RESPONDENT CRUZ, AND THE LATTER TO CO-RESPONDENTS CABANTOG AND
ATIENZA NULL AND VOID

II
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT AFFIRMED
THE DECISION OF THE LOWER COURT UPHOLDING THE RESPONDENT BANKS
RESCISSION OF THE DEED OF CONDITIONAL SALE CONSIDERING THAT THE
PETITIONER HAD ALREADY PAID A SUBSTANTIAL AMOUNT OF PHP100,000.00
OR ABOUT TWO-THIRD OF THE FULL CONSIDERATION OF PHP157,000.00.

The petitioner avers that her testimonial evidence sufficiently established the facts behind the execution
of the deed of conditional sale; that she thereby proved that she had not fully understood the terms
contained in the deed; that DBP could not resort to rescission because her nonpayment of the
amortizations was only a slight or casual breach; and that the sale made by DBP to Cruz was tainted with
bad faith, which was also true with the sale from Cruz to Cabantog and Atienza.

DBP counters that the petitioner is raising questions of fact in her present appeal, which is not allowed
under Rule 45 of the Rules of Court; and that it had the right to rescind the deed of conditional sale under
Article 1191 of the Civil Code.

On her part, Remedios Lim-Cruz, who had substituted her deceased husband, argues that the petitioner
did not prove bad faith on the part of her husband in purchasing the property from DBP; and that her
husband had relied in good faith on the title of DBP as the registered owner of the property at the time of
the sale.

Ruling

The appeal lacks merit.

I
Appeal under Rule 45 is
limited to questions of law only

The petitioners submissions, that her testimonial evidence sufficiently established the facts
behind the execution of the deed of conditional sale, and that she had not fully understood the terms
contained in the deed of conditional sale, involved questions of fact, for the consideration and resolution
of them would definitely require the appreciation of evidence. As such, her petition for review is
dismissible for raising factual issues. Under Rule 45 of the Rules of Court, only questions of law may be the
proper subject of an appeal in this Court. The version of Section 1 of Rule 45 in force at the time the
petitioner commenced her present recourse on April 28, 2003 expressly so stated, to wit:
Section 1. Filing of petition with Supreme Court. A party desiring to appeal
by certiorari from a judgment or final order or resolution of the Court of Appeals, the
Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law,
may file with the Supreme Court a verified petition for review on certiorari. The petition
shall raise only questions of law which must be distinctly set forth. (1a, 2a) (emphasis
supplied)[32]

To be sure, we have not lacked in reminding that in exercising its power of review the Court is
not a trier of facts and does not normally undertake the re-examination of the evidence presented by the
contending parties during the trial of the case. For that reason, the findings of facts of the CA are
conclusive and binding on the Court.

It is true that the Court has recognized several exceptions, in which it has undertaken the review
and re-appreciation of the evidence. Among the exceptions have been: (a) when the findings of the CA
are grounded entirely on speculation, surmises or conjectures; (b) when the inference made by the CA is
manifestly mistaken, absurd or impossible; (c) when there is grave abuse of discretion on the part of the
CA; (d) when the judgment of the CA is based on a misapprehension of facts; (e) when the findings of
facts of the CA are conflicting; (f) when the CA, in making its findings, went beyond the issues of the case,
or its findings are contrary to the admissions of both the appellant and the appellee; (g) when the findings
of the CA are contrary to those of the trial court; (h) when the findings of the CA are conclusions without
citation of specific evidence on which they are based; (i) when the facts set forth in the petition as well as
in the petitioners main and reply briefs are not disputed by the respondent; (j) when the findings of fact
of the CA are premised on the supposed absence of evidence and contradicted by the evidence on record;
and (k) when the CA manifestly overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion. [33]

Although the petitioner submits that the CA made findings of fact not supported by the evidence
on record, this case does not fall under any of the recognized exceptions. Her claim that she had
established the circumstances to prove her having been misled into signing the deed of conditional sale
was unfounded, for the findings of fact of the CA rested on the records, as the following excerpt from the
assailed decision of the CA indicates:

Appellant would like this Court to believe that she was misled by appellee DBPs
representatives into signing the Deed of Conditional Sale even if her original intention
was to buy back only one of the properties, i.e., that which was covered by TCT No. T-
164117. However, a closer scrutiny of the evidence on record reveals that aside from
her bare allegations as to the circumstances leading to the signing of said Deed of
Conditional Sale, the appellant has not presented other evidence, testimonial or
documentary, to support or corroborate her claims. On the other hand, appellee DBP
has presented the letter dated August 31, 1982 signed by appellant herself and addressed
to the Manager of the Acquired Assets Management Department of the appellee DBP,
expressing her intentions to buy back her foreclosed properties. In fact, she offered
therein to pay a total of P157,000.00 for the two properties with P55,500.00 to be
advanced by her as deposit and the balance to be paid in five (5) years under a
quarterly amortization plan. Said letter has not been categorically denied by the
appellant as during her testimony she merely feigned any recollections of its content.
Moreover, it is well-settled that bad faith cannot be presumed and must be established by
clear and convincing evidence.[34] (emphasis supplied)

The petitioner apparently relied solely on her bare testimony to establish her allegation of having been
misled, and did not present other evidence for the purpose. She seemingly forgot that, firstly, her bare
allegation of having been misled was not tantamount to proof, and that, secondly, she, as the party
alleging a disputed fact, carried the burden of proving her allegation. [35] In other words, her main duty
was to establish her allegation by preponderance of evidence, because her failure to do so would result in
her defeat.[36]Alas, she did not discharge her burden.

On the other hand, the records contained clear indicia of her real intention vis--vis her
reacquisition of the two foreclosed properties. The letters and telegrams she had dispatched to DBP
expressed the singular intention to repurchase both lots, not just the one covered by TCT No. 164711. That
intention even became more evident and more definite when she set down the payment terms for the
repurchase of both lots in her letter of August 31, 1982. Given all these, the CA rightly concluded that her
written communications to DBP had revealed her earnest desire to re-acquire both foreclosed properties.

II
Article 1332 of the Civil Code
did not apply to the petitioner

The petitioner would have us consider that she had not given her full consent to the deed of conditional
sale on account of her lack of legal and technical knowledge. In effect, she pleads for the application of
Article 1332 of the Civil Code, which provides:

Article 1332. When one of the parties is unable to read, or if the contract is in a language
not understood by him, and mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to the former.

We cannot accede to the petitioners plea.


The pertinent terms of the deed of conditional sale read:

NOW THEREFORE for and in consideration of the foregoing premises and for the total
sum of ONE HUNDRED FIFTY SEVEN THOUSAND PESOS (P157,000.00), Philippine
Currency, to be fully paid as hereinafter set forth, the VENDOR agrees to convey by way
of sale and the VENDEE agrees to buy the above stated properties covered by TCT Nos.
T-160929 and T-164117, more particularly described at the back hereof under the
following terms and conditions:

That the downpayment shall be P55,500 and the balance of P101,500 to be


paid in five (5) years on the quarterly amortization plan at 15% interest per
annum the first amortization of P7,304.15 shall be due and payable 3 mos. from
the date of execution of the Deed of Conditional Sale and all subsequent
amortizations shall be due and payable every three (3) months thereafter;

That if the vendee fails to sign the sale document within 15 days from date
of receipt of our notice of approval of the offer, the approval hereof shall be
deemed automatically revoked and the deposit forfeited in accordance with
the rules and regulations of the Bank.

The Vendee/s may pay the whole or part of the account under this contract
at anytime during the term hereof; provided, however, that if the vendee/s is in
default in the payment of at least six monthly amortizations, if payable
monthly; two quarterly amortizations, if payable quarterly; one semi-annual
and annual amortization if payable semi-annually and annually, the Vendor
may, in its option, declare the whole account due and payable.
xxx
The title to the real estate property and all improvements thereon shall
remain in the name of the vendor until after the purchase price, advances and
interest shall have been fully paid. The Vendee/s agrees that in the event of his
failure to pay the amortizations or installments as herein provided for, the
contract shall, at the option of the Vendor, be deemed and considered
annulled, and he shall forfeit, and by these presents, hereby waives whatever
right he might have acquired to the said property. The Vendor shall then be at
liberty to dispose of same as if this contract has never been made; and in the
event of such annulment, all sums of money paid under the contract shall be
considered and treated as rentals for the use of the property, and the Vendee/s
waives all rights to ask or demand the return thereof and he further agrees to
vacate peacefully and quietly said property, hereby waiving in favor of the
Vendor whatever expenses he may have incurred in the property in the form
of improvement or under any concept, without any right to reimbursement
whatsoever.
xxx
It is hereby agreed, covenanted and stipulated by and between the parties
hereto that should the Vendor decide to rescind this contract in view of the
failure of the Vendee/s to pay the amortization/installments, when due, or
otherwise fail/s to comply with any of the terms and conditions herein
stipulated, and the Vendee/s refuse/s to peacefully deliver the possession of the
property hereinbove mentioned to the Vendor, thereby obliging the Vendor to
file suit in court with the view to taking possession thereof, the Vendee/s
hereby agree/s to pay all the expenses of the suit incident thereto, all the
damages that may be incurred thereby, as well as attorneys fees which it is
hereby agreed, shall be 10% of the total amount due and outstanding, but in no
case shall it be less than P100.00.[37]

It is quite notable that the petitioner did not specify which of the stipulations of the deed of conditional
sale she had difficulty or deficiency in understanding. Her generalized averment of having been misled
should, therefore, be brushed aside as nothing but a last attempt to salvage a hopeless position. Our
impression is that the stipulations of the deed of conditional sale were simply worded and plain enough
for even one with a slight knowledge of English to easily understand.

The petitioner was not illiterate. She had appeared to the trial court to be educated, its cogent
observation of her as lettered (supra, at p. 7 hereof) being based on how she had composed her
correspondences to DBP. Her testimony also revealed that she had no difficulty understanding English,
as the following excerpt shows:

ATTY. CUISON
Q : Mrs. Witness, last time you identified the document, captioned as Deed of
Conditional Sale which was executed last January 21, 1983, it was read in English
language, correct?
A : Yes, sir.
Q : And, could you testify in this Court without in need of interpreter?
A : Yes, sir.
Q : So, you are aware or comfortable with the English language?
A : Yes, sir.[38]

Nor was the petitioners ignorance of the true nature of the deed of conditional sale probably true. By her
own admission, she had asked the bank officer why she had been made to sign a deed of conditional sale
instead of an absolute sale, which in itself reflected her full discernment of the matters subject of her
dealings with DBP, to wit:
COURT:

Q : Now, before you signed this Deed of Conditional Sale sometime on January 21,
1983, did you read this document?

A : Yes, your Honor, and I even told the officer of the Bank, that why it should be a
Deed of Probitional Sale when in fact it should be a Deed of Absolute Sale
because I paid already the full amount of P55,500.00 for the property covered
by TCT No. 164117 and they told me that after a few amortizations on the other
property, they are going to release the property which was paid in full but did
not push through, Your Honor.[39]

Thereby revealed was her distinctive ability to understand written and spoken English, the language in
which the terms of the contract she signed had been written.

Clearly, Article 1332 of the Civil Code does not apply to the petitioner. According to Lim v. Court of
Appeals,[40] the provision came into being because a sizeable percentage of the countrys populace had
comprised of illiterates, and the documents at the time had been written either in English or Spanish, viz:

In calibrating the credibility of the witnesses on this issue, we take our mandate
from Article 1332 of the Civil Code which provides: When one of the parties is unable to
read, or if the contract is in a language not understood by him, and mistake or fraud is
alleged, the person enforcing the contract must show that the terms thereof have been
fully explained to the former. This substantive law came into being due to the finding
of the Code Commission that there is still a fairly large number of illiterates in this
country, and documents are usually drawn up in English or Spanish. It is also in
accord with our state policy of promoting social justice. It also supplements Article 24
of the Civil Code which calls on court to be vigilant in the protection of the rights of
those who are disadvantaged in life.[41] (Emphasis supplied)

III
DBP validly exercised its right to rescind the
deed of conditional sale upon the petitioners default

The petitioner argues that despite the right to rescind due to nonpayment being stipulated in the deed of
conditional sale, DBP could not exercise its right because her nonpayment of an obligation constituted
only a slight or casual breach that did not warrant rescission. Moreover, she posits that Article 1191[42] of
the Civil Code empowers the court to fix the period within which the obligor may comply with the
obligation.

The petitioners argument lacks persuasion.

Firstly, a contract is the law between the parties. Absent any allegation and proof that the
contract is contrary to law, morals, good customs, public order or public policy, it should be complied
with in good faith.[43] As such, the petitioner, being one of the parties in the deed of conditional sale, could
not be allowed to conveniently renounce the stipulations that she had knowingly and freely agreed to.
Secondly, the issue of whether or not DBP validly exercised the right to rescind is a factual one
that the RTC and the CA already passed upon and determined. The Court, which is not a trier of facts,
adopts their findings, and sustains the exercise by DBP of its right to rescind following the petitioners
failure to pay her six monthly amortizations, and after her being given due notice of the notarial
rescission.[44] As a consequence of the valid rescission, DBP had the legal right to thereafter sell the
property to a person other than the petitioner, like Cruz. In turn, Cruz could validly sell the property to
Cabantog and Trinidad, which he did.
And, thirdly, Article 1191 of the Civil Code did not prohibit the parties from entering into an agreement
whereby a violation of the terms of the contract would result to its cancellation. In Pangilinan v. Court of
Appeals,[45] the Court upheld the vendors right in a contract to sell to extrajudicially cancel the contract
upon failure of the vendee to pay the installments and even to retain the sums already paid, holding:

[Article 1191 of the Civil Code] makes it available to the injured party alternative
remedies such as the power to rescind or enforce fulfillment of the contract, with
damages in either case if the obligor does not comply with what is incumbent upon him.
There is nothing in this law which prohibits the parties from entering into an
agreement that a violation of the terms of the contract would cause its cancellation
even without court intervention. The rationale for the foregoing is that in contracts
providing for automatic revocation, judicial intervention is necessary not for purposes
of obtaining a judicial declaration rescinding a contract already deemed rescinded by
virtue of an agreement providing for rescission even without judicial intervention, but
in order to determine whether or not the rescission was proper. Where such propriety
is sustained, the decision of the court will be merely declaratory of the revocation, but
it is not itself the revocatory act. Moreover, the vendors right in contracts to sell with
reserved title to extrajudicially cancel the sale upon failure of the vendee to pay the
stipulated installments and retain the sums and installments already received has long
been recognized by the well-established doctrine of 39 years standing. The validity of
the stipulation in the contract providing for automatic rescission upon non-payment
cannot be doubted. It is in the nature of an agreement granting a party the right to
rescind a contract unilaterally in case of breach without need of going to court. Thus,
rescission under Article 1191 was inevitable due to petitioners failure to pay the
stipulated price within the original period fixed in the agreement.
ACCORDINGLY, the petition for review is DENIED for lack of merit, and the decision of the Court of
Appeals promulgated on June 21, 2002 is AFFIRMED.

Costs of suit shall be paid by the petitioner.

SO ORDERED.

ANTONIO R. CORTES (in his G.R. No. 126083


capacity as Administrator of the
estate of Claro S. Cortes),
Petitioner, Present:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ.
HON. COURT OF APPEALS
and VILLA ESPERANZA Promulgated:
DEVELOPMENT CORPORATION,
Respondents. July 12, 2006

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

DECISION

YNARES-SANTIAGO, J.:

The instant petition for review seeks the reversal of the June 13, 1996 Decision [1] of the Court of Appeals
in CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision [2]of the Regional Trial Court of Makati,
Branch 138, which rescinded the contract of sale entered into by petitioner Antonio Cortes (Cortes) and
private respondent Villa Esperanza Development Corporation (Corporation).

The antecedents show that for the purchase price of P3,700,000.00, the Corporation as buyer, and Cortes
as seller, entered into a contract of sale over the lots covered by Transfer Certificate of Title (TCT) No.
31113-A, TCT No. 31913-A and TCT No. 32013-A, located at Baclaran, Paraaque, Metro Manila. On
various dates in 1983, the Corporation advanced to Cortes the total sum of P1,213,000.00. Sometime in
September 1983, the parties executed a deed of absolute sale containing the following terms:[3]
1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWO
MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine
Currency, less all advances paid by the Vendee to the Vendor in connection with the sale;

2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00]


PESOS, Phil. Currency shall be payable within ONE (1) YEAR from date of execution of
this instrument, payment of which shall be secured by an IRREVOCABLE STANDBY
LETTER OF CREDIT to be issued by any reputable local banking institution acceptable to
the Vendor.

xxxx

4. All expense for the registration of this document with the Register of Deeds
concerned, including the transfer tax, shall be divided equally between the Vendor and
the Vendee.Payment of the capital gains shall be exclusively for the account of the
Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale. [4]
Said Deed was retained by Cortes for notarization.

On January 14, 1985, the Corporation filed the instant case[5] for specific performance seeking to
compel Cortes to deliver the TCTs and the original copy of the Deed of Absolute Sale. According to the
Corporation, despite its readiness and ability to pay the purchase price, Cortes refused delivery of the
sought documents. It thus prayed for the award of damages, attorneys fees and litigation expenses
arising from Cortes refusal to deliver the same documents.
In his Answer with counterclaim,[6] Cortes claimed that the owners duplicate copy of the three TCTs were
surrendered to the Corporation and it is the latter which refused to pay in full the agreed down
payment. He added that portion of the subject property is occupied by his lessee who agreed to vacate
the premises upon payment of disturbance fee.However, due to the Corporations failure to pay in full the
sum of P2,200,000.00, he in turn failed to fully pay the disturbance fee of the lessee who now refused to
pay monthly rentals. He thus prayed that the Corporation be ordered to pay the outstanding balance plus
interest and in the alternative, to cancel the sale and forfeit the P1,213,000.00 partial down payment, with
damages in either case.

On June 24, 1993, the trial court rendered a decision rescinding the sale and directed Cortes to return to
the Corporation the amount of P1,213,000.00, plus interest. It ruled that pursuant to the contract of the
parties, the Corporation should have fully paid the amount of P2,200,000.00 upon the execution of the
contract. It stressed that such is the law between the parties because the Corporation failed to present
evidence that there was another agreement that modified the terms of payment as stated in the
contract. And, having failed to pay in full the amount of P2,200,000.00 despite Cortes delivery of the Deed
of Absolute Sale and the TCTs, rescission of the contract is proper.

In its motion for reconsideration, the Corporation contended that the trial court failed to consider their
agreement that it would pay the balance of the down payment when Cortes delivers the TCTs. The
motion was, however, denied by the trial court holding that the rescission should stand because the
Corporation did not act on the offer of Cortes counsel to deliver the TCTs upon payment of the balance of
the down payment. Thus:

The Court finds no merit in the [Corporations] Motion for Reconsideration. As stated in
the decision sought to be reconsidered, [Cortes] counsel at the pre-trial of this case,
proposed that if [the Corporation] completes the down payment agreed upon and make
arrangement for the payment of the balances of the purchase price, [Cortes] would sign
the Deed of Sale and turn over the certificate of title to the [Corporation]. [The
Corporation] did nothing to comply with its undertaking under the agreement between
the parties.

WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is


hereby DENIED.
SO ORDERED.[7]

On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes to
execute a Deed of Absolute Sale conveying the properties and to deliver the same to the Corporation
together with the TCTs, simultaneous with the Corporations payment of the balance of the purchase price
of P2,487,000.00. It found that the parties agreed that the Corporation will fully pay the balance of the
down payment upon Cortes delivery of the three TCTs to the Corporation. The records show that no such
delivery was made, hence, the Corporation was not remiss in the performance of its obligation and
therefore justified in not paying the balance. The decretal portion thereof, provides:

WHEREFORE, premises considered, [the Corporations] appeal is GRANTED. The


decision appealed from is hereby REVERSED and SET ASIDE and a new judgment
rendered ordering [Cortes] to execute a deed of absolute sale conveying to [the
Corporation] the parcels of land subject of and described in the deed of absolute sale,
Exhibit D. Simultaneously with the execution of the deed of absolute sale and the
delivery of the corresponding owners duplicate copies of TCT Nos. 31113-A, 31931-A
and 32013-A of the Registry of Deeds for the Province of Rizal, Metro Manila, District IV,
[the Corporation] shall pay [Cortes] the balance of the purchase price of P2,487,000.00. As
agreed upon in paragraph 4 of the Deed of Absolute Sale, Exhibit D, under terms and
conditions, All expenses for the registration of this document (the deed of sale) with the
Register of Deeds concerned, including the transfer tax, shall be divided equally between
[Cortes and the Corporation]. Payment of the capital gains shall be exclusively for the
account of the Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing
of sale.There is no pronouncement as to costs.

SO ORDERED.[8]

Cortes filed the instant petition praying that the decision of the trial court rescinding the sale be
reinstated.

There is no doubt that the contract of sale in question gave rise to a reciprocal obligation of the
parties. Reciprocal obligations are those which arise from the same cause, and which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.[9]
Article 1191 of the Civil Code, states:

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.

xxxx

As to when said failure or delay in performance arise, Article 1169 of the same Code provides
that

ART. 1169

xxxx

In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon
him. From the moment one of the parties fulfills his obligation, delay by the other
begins. (Emphasis supplied)

The issue therefore is whether there is delay in the performance of the parties obligation that
would justify the rescission of the contract of sale. To resolve this issue, we must first determine the true
agreement of the parties.

The settled rule is that the decisive factor in evaluating an agreement is the intention of the
parties, as shown not necessarily by the terminology used in the contract but by their conduct, words,
actions and deeds prior to, during and immediately after executing the agreement. As such, therefore,
documentary and parol evidence may be submitted and admitted to prove such intention. [10]

In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation shall pay
in full the P2,200,000.00 down payment upon execution of the contract.However, as correctly noted by the
Court of Appeals, the transcript of stenographic notes reveal Cortes admission that he agreed that the
Corporations full payment of the sum of P2,200,000.00 would depend upon his delivery of the TCTs of
the three lots. In fact, his main defense in the Answer is that, he performed what is incumbent upon him
by delivering to the Corporation the TCTs and the carbon duplicate of the Deed of Absolute Sale, but the
latter refused to pay in full the down payment.[11] Pertinent portion of the transcript, reads:

[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has
not been paid in full the agreed down payment?
A Well, the broker told me that the down payment will be given if I surrender the titles.
Q Do you mean to say that the plaintiff agreed to pay in full the down payment of
P2,200,000.00 provided you surrender or entrust to the plaintiff the titles?
A Yes, sir.[12]

What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that the title
of the lots will be transferred in the name of the Corporation upon full payment of the P2,200,000.00
down payment. Thus

ATTY. ANTARAN
Q Of course, you have it transferred in the name of the plaintiff, the title?
A Upon full payment.

xxxx

ATTY. SARTE
Q When you said upon full payment, are you referring to the agreed down payment of
P2,200,000.00?
A Yes, sir.[13]

By agreeing to transfer title upon full payment of P2,200,000.00, Cortes impliedly agreed to
deliver the TCTs to the Corporation in order to effect said transfer. Hence, the phrase execution of this
instrument [14] as appearing in the Deed of Absolute Sale, and which event would give rise to the
Corporations obligation to pay in full the amount of P2,200,000.00, can not be construed as referring
solely to the signing of the deed. The meaning of execution in the instant case is not limited to the signing
of a contract but includes as well the performance or implementation or accomplishment of the parties
agreement.[15] With the transfer of titles as the corresponding reciprocal obligation of payment, Cortes
obligation is not only to affix his signature in the Deed, but to set into motion the process that would
facilitate the transfer of title of the lots, i.e., to have the Deed notarized and to surrender the original copy
thereof to the Corporation together with the TCTs.

Having established the true agreement of the parties, the Court must now determine whether
Cortes delivered the TCTs and the original Deed to the Corporation. The Court of Appeals found that
Cortes never surrendered said documents to the Corporation. Cortes testified that he delivered the same
to Manny Sanchez, the son of the broker, and that Manny told him that her mother, Marcosa Sanchez,
delivered the same to the Corporation.

Q Do you have any proof to show that you have indeed surrendered these titles to the
plaintiff?
A Yes, sir.
Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt
with that receipt that you have mentioned?
A That is the receipt of the real estate broker when she received the titles.

Q On top of the printed name is Manny Sanchez, there is a signature, do you know who
is that Manny Sanchez?
A That is the son of the broker.

xxxx

Q May we know the full name of the real estate broker?


A Marcosa Sanchez

xxxx

Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the
plaintiff?
A That is what [s]he told me. She gave them to the plaintiff.

x x x x.[16]

ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the plaintiff?

xxxx

Q It is in the hands of the broker but there is no showing that it is in the hands of the
plaintiff?
A Yes, sir.

COURT
Q How do you know that it was delivered to the plaintiff by the son of the broker?
A The broker told me that she delivered the title to the plaintiff.

ATTY. ANTARAN
Q Did she not show you any receipt that she delivered to [Mr.] Dragon [17] the title
without any receipt?
A I have not seen any receipt.

Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or
not. It is only upon the allegation of the broker?
A Yes, sir.[18]

However, Marcosa Sanchezs unrebutted testimony is that, she did not receive the TCTs. She also
denied knowledge of delivery thereof to her son, Manny, thus:
Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he
allegedly gave you the title to the property in question, is it true?
A I did not receive the title.

Q He likewise said that the title was delivered to your son, do you know about that?
A I do not know anything about that.[19]

What further strengthened the findings of the Court of Appeals that Cortes did not surrender the subject
documents was the offer of Cortes counsel at the pre-trial to deliver the TCTs and the Deed of Absolute
Sale if the Corporation will pay the balance of the down payment. Indeed, if the said documents were
already in the hands of the Corporation, there was no need for Cortes counsel to make such offer.

Since Cortes did not perform his obligation to have the Deed notarized and to surrender the same
together with the TCTs, the trial court erred in concluding that he performed his part in the contract of
sale and that it is the Corporation alone that was remiss in the performance of its obligation. Actually,
both parties were in delay. Considering that their obligation was reciprocal, performance thereof must be
simultaneous. The mutual inaction of Cortes and the Corporation therefore gave rise to a compensation
morae or default on the part of both parties because neither has completed their part in their reciprocal
obligation.[20] Cortes is yet to deliver the original copy of the notarized Deed and the TCTs, while the
Corporation is yet to pay in full the agreed down payment of P2,200,000.00. This mutual delay of the
parties cancels out the effects of default,[21] such that it is as if no one is guilty of delay.[22]

We find no merit in Cortes contention that the failure of the Corporation to act on the proposed
settlement at the pre-trial must be construed against the latter. Cortes argued that with his counsels offer
to surrender the original Deed and the TCTs, the Corporation should have consigned the balance of the
down payment. This argument would have been correct if Cortes actually surrendered the Deed and the
TCTs to the Corporation. With such delivery, the Corporation would have been placed in default if it
chose not to pay in full the required down payment. Under Article 1169 of the Civil Code, from the
moment one of the parties fulfills his obligation, delay by the other begins. Since Cortes did not perform
his part, the provision of the contract requiring the Corporation to pay in full the down payment never
acquired obligatory force. Moreover, the Corporation could not be faulted for not automatically heeding
to the offer of Cortes. For one, its complaint has a prayer for damages which it may not want to waive by
agreeing to the offer of Cortes counsel. For another, the previous representation of Cortes that the TCTs
were already delivered to the Corporation when no such delivery was in fact made, is enough reason for
the Corporation to be more cautious in dealing with him.
The Court of Appeals therefore correctly ordered the parties to perform their respective
obligation in the contract of sale, i.e., for Cortes to, among others, deliver the necessary documents to the
Corporation and for the latter to pay in full, not only the down payment, but the entire purchase
price. And since the Corporation did not question the Court of Appeals decision and even prayed for its
affirmance, its payment should rightfully consist not only of the amount of P987,000.00, representing the
balance of the P2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining balance
in the P3,700,000.00 purchase price.

WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of Appeals in CA-G.R.
CV No. 47856, is AFFIRMED.

SO ORDERED.

G.R. No. 185765, September 28, 2016

PHILIPPINE ECONOMIC ZONE AUTHORITY, Petitioner, v. PILHINO SALES


CORPORATION, Respondent.

DECISION

LEONEN, J.:

Although the provisions of a contract are legally null and void, the stipulated method of computing
liquidated damages may be accepted as evidence of the intent of the parties. The provisions, therefore,
can be basis for finding a factual anchor for liquidated damages. The liable party may nevertheless
present better evidence to establish a more accurate basis for awarding damages. In this case, the
respondent failed to do so.

This resolves a Petition for Review on Certiorari1 praying that the assailed May 2, 2008 Decision2 and
November 25, 2008 Resolution3 of the Court of Appeals in CA G.R. CV No. 86406 be reversed and set
aside and that the Decision4 dated November 2, 2005 of Branch 108 of the Regional Trial Court of Pasay
City in Civil Case No. 00-0343 be reinstated.

The Regional Trial Court's November 2, 2005 Decision ruled in favor of petitioner Philippine Economic
Zone Authority, which, as plaintiff, brought an action for rescission of contract and damages against the
defendant, now respondent Pilhino Sales Corporation (Pilhino). 5chanrobleslaw

The assailed Court of Appeals Decision partly granted Pilhino's appeal by reducing the amount of
liquidated damages due from it to the Philippine Economic Zone Authority, and by deleting the
forfeiture of its performance bond.6 The assailed Court of Appeals Resolution denied the Philippine
Economic Zone Authority's Motion for Reconsideration. 7chanrobleslaw
The facts are not disputed, and all that is in issue is the consequence of Pilhino's contractual breach.

On October 4, 1997, the Philippine Economic Zone Authority published an invitation to bid in the
Business Daily for its acquisition of two (2) brand new fire truck units "with a capacity of 4,000-5,000 liters
[of] water and 500-1,000 liters [of chemical foam,] with complete accessories." 8chanrobleslaw

Three (3) companies participated in the bidding: Starbilt Enterprise, Inc., Shurway Industries, Inc., and
Pilhino.9 Pilhino secured the contract for the acquisition of the fire trucks.10 The contract price was
initially at P3,000,000.00 per truck, but this was reduced after negotiation to P2,900,000.00 per
truck.11chanrobleslaw

The contract awarded to Pilhino stipulated that Pilhino was to deliver to the Philippine Economic Zone
Authority two (2) FF3HP brand fire trucks within 45 days of receipt of a purchase order from the
Philippine Economic Zone Authority.12 A further stipulation stated that "[i]n case of fail[u]re to deliver
the . . . good on the date specified . . . , the Supplier agree[s] to pay penalty at the rate of 1/10 of 1% of the
total contract price for each days [sic] commencing on the first day after the date stipulated
above."13chanrobleslaw

The Philippine Economic Zone Authority furnished Pilhino with a purchase order dated November 6,
1997.14 Pilhino failed to deliver the trucks as it had committed. 15 This prompted the Philippine Economic
Zone Authority to make formal demands on Pilhino on July 27, 1998 16 and on February 23, 1999.17 As
Pilhino still failed to comply, the Philippine Economic Zone Authority filed before the Regional Trial
Court of Pasay City a Complaint18 for rescission of contract and damages. This was docketed as Civil
Case No. 00-0343 and raffled to Branch 108. 19chanrobleslaw

In its defense, Pilhino claimed that there was no starting date from which its obligation to deliver could
be reckoned, considering that the Complaint supposedly failed to allege acceptance by Pilhino of the
purchase order.20 Pilhino suggested that there was not even a meeting of minds between it and the
Philippine Economic Zone Authority.21chanrobleslaw

In its November 2, 2005 Decision,22 the Regional Trial Court ruled for the Philippine Economic Zone
Authority. The dispositive portion of the Decision reads:ChanRoblesVirtualawlibrary

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering
the latter to:

1. Pay the plaintiff in liquidated damages a[t] the rate of 1/10 of 1% of the total contract
price of Php 5,800,000.00 for each day of delay commencing from June 19, 1998.

2. Pay the plaintiff exemplary damages in the amount of Php 100,00[0].00.

3. That the contract be declared rescinded and the performance bond posted by the
defendant be forfeited in favor of the plaintiff.

4. For defendant to pay the cost of the suit.

SO ORDERED.23chanroblesvirtuallawlibrary
Pilhino then appealed before the Court of Appeals.

In its assailed May 2, 2008 Decision,24 the Court of Appeals partly granted Pilhino's appeal by deleting the
forfeiture of Pilhino's performance bond and pegging the liquidated damages due from it to the
Philippine Economic Zone Authority in the amount of P1,400,000.00.

The Court of Appeals debunked Pilhino's claim that there was no meeting of minds. It emphasized that
Pilhino "manifested its acquiescence . . . [to] the Purchase Order . . . when it submitted to [the Philippine
Economic Zone Authority] a Performance Bond dated 02 June 1999 and Indemnity Agreement dated 09
June 1998 duly signed by its Vice President." 25cralawred It added that in a subsequent letter dated March
29, 199926 "signed by [Pilhino's] Hino Division Manager Edgar R. Santiago and noted by VP-Operations
Roberto R. Garcia, [Pilhino] admitted that it can no longer meet the requirements regarding the
specification on the two (2) units of fire truck[s]." 27chanrobleslaw

In this March 29, 1999 letter, Pilhino not only acknowledged its inability to meet its obligations but also
proposed a modified arrangement with the Philippine Economic Zone
Authority:ChanRoblesVirtualawlibrary
[P]lease allow us to submit our new proposal for your consideration (please see attached specifications).
Our price for this new specification if P3,600,000.00/unit. However, we are willing to shoulder the
difference between the original price of P2,900,000.00/unit and P3,600,000.00 in lieu of the penalty. May
we also request your good office to stop the accumulation of the penalty [.] 28chanroblesvirtuallawlibrary
In calibrating the amount of liquidated damages, the Court of Appeals cited Articles 122929 and 222730of
the Civil Code. It reasoned that through its March 29, 1999 letter, Pilhino made an attempt at rectification
or mitigation:ChanRoblesVirtualawlibrary
In the instant case, we consider the supervening reality that after appellant's failure to deliver to appellee
the two (2) brand new units of fire trucks in accordance with the specifications previously agreed upon,
appellant nevertheless tried to remedy the situation by offering to appellee new specifications at
P3,600,000.00 per unit; and expressed willingness to shoulder the difference between the original price
(based on the contract) of P2,900,000.00 per unit and the price corresponding to the new specifications.
Further, it is undisputed that appellee has not paid any amount to appellant in connection with said
undelivered two (2) brand new units of fire trucks. We thus equitably reduce said liquidated damages to
P1,400,000.00, which is the difference between the contract price of P5,800,000.00 and P7,200,000.00 based
on the new specifications for two (2) new units of fire trucks. 31chanroblesvirtuallawlibrary
The Philippine Economic Zone Authority moved for reconsideration of the modifications to the Regional
Trial Court's award. As this Motion was denied in the Court of Appeals' assailed November 25, 2008
Resolution,32 the Philippine Economic Zone Authority filed the present Petition.

Petitioner asks for the reinstatement of the Regional Trial Court's award asserting that it already suffered
damage when respondent Pilhino Sales Corporation failed to deliver the trucks on time; 33 that the
contractually stipulated penalty of 1/10 of 1% of the contract price for every day of delay was neither
unreasonable34 nor contrary to law, morals, or public order;35 that the stipulation on liquidated damages
was freely entered into by it and respondent;36 and that the Court of Appeals' computation had no basis
in fact and law.37 Regarding respondent's supposed attempt at mitigation, petitioner notes that by the
time the offer was made, the Complaint for rescission and damages had already been filed 38 and was,
therefore, inconsequential and hardly a remedy.

Commenting on petitioner's Petition,39 respondent raises the question of:ChanRoblesVirtualawlibrary


Whether or not a contract can be rescinded and declared void ab initio, and then thus rescinded, can a
stipulation for liquidated damages or penalty contained in that very same contract be given separate life,
force and effect, that is, separate and distinct from the rescinded and voided contract
itself?40chanroblesvirtuallawlibrary
Therefore, respondent suggests that with the rescission of its contract with petitioner must have come the
negation of the contractual stipulation on liquidated damages and the obliteration of its liability for such
liquidated damages.41chanrobleslaw

We resolve the twin issues of:

chanRoblesvirtualLawlibraryFirst, the propriety of an award based on contractually stipulated liquidated


damages notwithstanding the rescission of the same contract stipulating it; and cralawlawlibrary

Second, on the assumption that such award is proper, the propriety of the Court of Appeals' reduction of
the liquidated damages due to petitioner.

Respondent's intimation that with the rescission of a contract necessarily and inexorably follows the
obliteration of liability for what the same contracts stipulates as liquidated damages 42 is entirely
misplaced.

A contract of. sale, such as that entered into by petitioner and respondent, entails reciprocal obligations.
As explained in Spouses Velarde v. Court of Appeals,43 "[i]n a contract of sale, the seller obligates itself to
transfer the ownership of and deliver a determinate thing, and the buyer to pay therefor a price certain in
money or its equivalent."44chanrobleslaw

Rescission on account of breach of reciprocal obligations is provided for in Article 1191 of the Civil
Code:ChanRoblesVirtualawlibrary
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the
latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law. (Emphasis supplied)
Respondent correctly notes that rescission under Article 1911 results in mutual restitution. Jurisprudence
has long settled that the restoration of the contracting parties to their original state is the very essence of
rescission. In Spouses Velarde:ChanRoblesVirtualawlibrary
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments . . .
should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the
former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a
contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it
and release the parties from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made. 45 (Citations omitted)
Laperal v. Solid Homes, Inc.46 has explained how the restitution spoken of in rescission under Article 1385
of the Civil Code equally holds true for rescission under Article 1191 of the Civil
Code:ChanRoblesVirtualawlibrary
Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was taken, used the term
"resolution", the amendment thereto (presently, Article 1191) explicitly and clearly used the term
"rescission". Unless Article 1191 is subsequently amended to revert back to the term "resolution", this
Court has no alternative but to apply the law, as it is written.

Again, since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the
obligation to return the things which were the object of the contract, together with their fruits, and the
price with its interest," the Court finds no justification to sustain petitioners' position that said Article
1385 does not apply to rescission under Article 1191.

In Palay, Inc. vs. Clave, this Court applied Article 1385 in a case involving "resolution" under Article 1191,
thus:ChanRoblesVirtualawlibrary
Regarding the second issue on refund of the installment payments made by private respondent. Article
1385 of the Civil Code provides:ChanRoblesVirtualawlibrary
"ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to restore.

"Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

"In this case, indemnity for damages may be demanded from the person causing the loss."
As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no evidence on record that other lots are
still available, private respondent is entitled to the refund of installments paid plus interest at the legal
rate of 12% computed from the date of the institution of the action. It would be most inequitable if
petitioners were to be allowed to retain private respondent's payments and at the same time appropriate
the proceeds of the second sale to another.
Applying the clear language of the law and the consistent jurisprudence on the matter, therefore, the
Court rules that rescission under Article 1191 in the present case, carries with it the corresponding
obligation of restitution.47 (Citations omitted)
Contrary to respondent's assertion, mutual restitution under Article 1191 is, however, no license for the
negation of contractually stipulated liquidated damages.

Article 1191 itself clearly states that the options of rescission and specific performance come with "with
the payment of damages in either case." The very same breach or delay in performance that triggers
rescission is what makes damages due.
When the contracting parties, by their own free acts of will, agreed on what these damages ought to be,
they established the law between themselves. Their contemplation of the consequences proper in the
event of a breach has been articulated. When courts are, thereafter, confronted with the need to award
damages in tandem with rescission, courts must not lose sight of how the parties have explicitly stated, in
their own language, these consequences. To uphold both Article 1191 of the Civil Code and the parties'
will, contractually stipulated liquidated damages must, as a rule, 48 be maintained.

What respondent purports to be the ensuing nullification of liquidated damages is not a novel question in
jurisprudence. This matter has been settled, and respondent's position has been rebuked.
In Laperal:ChanRoblesVirtualawlibrary
This notwithstanding, the Court does not agree with the Court of Appeals that, as a consequence of the
obligation of mutual restitution in this case, petitioners should return the amount of P5,200,833.27 to
respondent.

Article 1191 states that "the injured party may choose between fulfillment and rescission of the obligation,
with the payment of damages in either case." In other words, while petitioners are indeed obliged to
return the said amount to respondent under Article 1385, assuming said figure is correct, respondent is at
the same time liable to petitioners in the same amount as liquidated damages by virtue of the
forfeiture/penalty clause as freely stipulated upon by the parties in the Addendum, paragraphs 1 and 2 of
which respectively read:ChanRoblesVirtualawlibrary
WHEREAS, included as part of said agreement are the following:

chanRoblesvirtualLawlibrary1. Further to the stipulations on paragraph 10, upon default of


performances, violations and/or non-compliance with the terms and conditions herein agreed upon by
the DEVELOPER wherein it appears that the DEVELOPER deliberately abandoned or discontinued the
work on the project, said party shall lose any entitlement, if any, to any refund and/or advances it may
have incurred in connection with or relative to previous development works in the subdivision; likewise,
all improvements of whatever nature and kind introduced by the DEVELOPER on the property, existing
as of the date of default or violation, shall automatically belong to the OWNER without obligation on his
part to pay for the costs thereof.

2. Similarly with the same condition of default or violation obtaining, as stated in paragraph 10 of said
agreement, all advances made and remittances of proceeds from reservations and sales given by the
DEVELOPER to the OWNER as provided for in this agreement shall be deemed absolutely forfeited in
favor of the OWNER, resulting to waiver of DEVELOPER'S rights, if any, with respect to said amount(s).
If this Court recognized the right of the parties to stipulate on an extrajudicial rescission under Article
1191, there is no reason why this Court will not allow the parties to stipulate on the matter of damages in
case of such rescission under Book IV, Title VIII, Chapter 3, Section 2 of the Civil Code governing
liquidated damages.49 (Citations omitted)
We see no reason for departing from this. It is true that Laperal involved extrajudicial rescission, while this
case involves rescission through judicial action. The distinction between judicial and extrajudicial
rescission is in how extrajudicial rescission is possible only when the contract has an express stipulation
to that effect.50 This distinction does not diminish the rights of a contracting party under Article 1191 of
the Civil Code and is immaterial for purposes of the availability of liquidated damages.

To sustain respondent's claim would be to sustain an absurdity and an injustice. Respondent's position
suggests that with rescission must necessarily come the obliteration of the punitive consequence which,
to begin with, was the product of its own (along with the other contracting party's) volition. Its position
turns delinquency into a profitable enterprise, enabling contractual breach to itself be the means for
evading its own fallout. It is a position we cannot tolerate.

II

In calibrating the amount of liquidated damages, the Court of Appeals relied on how respondent
supposedly attempted to rectify things "by offering to [petitioner] new specifications at P3,600,000.00 per
unit; and expressed willingness to shoulder the difference between the original price (based on the
contract) of P2,900,000.00 per unit and the price corresponding to the new specifications." 51chanrobleslaw

As underscored by petitioner, however, this offer was inconsequential and hardly a remedy to the
predicament it found itself in.

Petitioner already suffered damage by respondent's mere delay. Philippine Economic Zone Authority
Director General Lilia B. De Lima's internal memorandum to its Board of Directors emphasized what
was, at the time, the specific urgency of obtaining fire trucks:ChanRoblesVirtualawlibrary
1. With the increase in the number of locator-enterprises at the regular zones, there is a need for
additional units of fire trucks to address any eventuality. The onset of the El Niño phenomena further makes it
imperative that PEZA be more prepared.

2. At present, there are only six (6) units of serviceable fire trucks distributed as follows:

chanRoblesvirtualLawlibrary
Bataan EZ 2
Baguio City EZ 1
Cavite EZ 1
Mactan EZ 252 (Emphasis supplied)
The Court of Appeals itself recognized that "time was of the essence when the contract . . . was awarded
to [respondent] and the non-compliance therewith exposed [petitioner's] operations [at]
risk."53chanrobleslaw

Respondent's attempt at rectification came too late and under such circumstances that petitioner was no
longer even in a position to accept respondent's offer. As petitioner notes, by the time respondent made
its offer, the Complaint for rescission and damages had already been filed before the Regional-Trial Court
of Pasay City.54 If at all, the offer was nothing more than a belated reaction to undercut litigation.

By the time respondent made its attempt at rectification, petitioner was no longer capable of
accommodating contractual modifications. Jurisprudence has established the impropriety of modifying
awarded contracts that were previously subjected to public bidding, such as that between petitioner and
respondent:ChanRoblesVirtualawlibrary
An essential element of a publicly bidded contract is that all bidders must be on equal footing. Not
simply in terms of application of the procedural rules and regulations imposed by the relevant
government agency, but more importantly, on the contract bidded upon. Each bidder must be able to bid
on the same thing. The rationale is obvious. If the winning bidder is allowed to later include or modify certain
provisions in the contract awarded such that the contract is altered in any material respect, then the essence of fair
competition in the public bidding is destroyed. A public bidding would indeed be a farce if after the contract is
awarded, the winning bidder may modify the contract and include provisions which are favorable to it that
were not previously made available to the other bidders. Thus:ChanRoblesVirtualawlibrary
It is inherent in public biddings that there shall be a fair competition among the bidders. The
specifications in such biddings provide the common ground or basis for the bidders. The specifications
should, accordingly, operate equally or indiscriminately upon all bidders.
The same rule was restated by Chief Justice Stuart of the Supreme Court of
Minnesota:ChanRoblesVirtualawlibrary
The law is well settled that where, as in this case, municipal authorities can only let a contract for public
work to the lowest responsible bidder, the proposals and specifications therefore must be so framed as to
permit free and full competition. Nor can they enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the terms and specifications upon which the bids were
invited.55 (Emphasis supplied)
By definition, liquidated damages are a penalty, meant to impress upon defaulting obligors
the graverconsequences of their own culpability. Liquidated damages must necessarily make non-
compliance more cumbersome than compliance. Otherwise, contracts might as well make no threat of a
penalty at all:ChanRoblesVirtualawlibrary
Liquidated damages are those that the parties agree to be paid in case of a breach. As worded, the
amount agreed upon answers for damages suffered by the owner due to delays in the completion of the
project. Under Philippine laws, these damages take the nature of penalties. A penal clause is an accessory
undertaking to assume greater liability in case of a breach. It is attached to an obligation in order to
ensure performance.56(Citations omitted)
Respondent cannot now balk at the natural result of its own breach. As for the Court of Appeals, we find
it to be in error in frustrating the express terms of the contract that respondent actively endeavored to be
awarded to it. The exigencies that impelled petitioner to obtain fire trucks made it imperative for
respondent to act with dispatch. Instead, it dragged its feet, left petitioner with inadequate means for
addressing the very emergencies that engendered the need for fire trucks, and forced it into litigation to
enforce its rights.

WHEREFORE, the Petition is GRANTED. The assailed May 2, 2008 Decision and November 25, 2008
Resolution of the Court of Appeals in CA G.R. CV No. 86406 are REVERSED and SET ASIDE. The
Decision dated November 2, 2005 of Branch 108 of the Regional Trial Court of Pasay City in Civil Case
No. 00-0343 is REINSTATED.

SO ORDERED.chanRoblesvirtualLawlibrary
G.R. No. 180144 September 24, 2014

LEONARDO BOGNOT, Petitioner,


vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J.
BERNARDEZ, Respondent.

DECISION

BRION, J.:

Before the Court is the petition for review on certiorari 1 filed by Leonardo Bognot (petitioner) assailing
the March 28, 2007 decision2 and the October 15, 2007 resolution3 of the Court of Appeals (CA) in CA-G.R.
CV No. 66915.

Background Facts

RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its
borrowers within Metro Manila. It is duly represented by its General Manager, Mr. Dario J. Bernardez
(Bernardez).

Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot (collectively
referred to as the "Bognot siblings"), applied for and obtained a loan of Five Hundred Thousand Pesos
(₱500,000.00) from the respondent, payable on November 30, 1996.4 The loan was evidenced by a
promissory note and was secured by a post dated check5 dated November 30, 1996.

Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He paid
a renewal fee of ₱54,600.00 for each renewal, issued a new post-dated checkas security, and executed
and/or renewed the promissory note previouslyissued. The respondent on the other hand, cancelled and
returned to the petitioner the post-dated checks issued prior to their renewal.

Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as principal
and signed Promissory Note No. 97-0356 payable on April 1, 1997; his co-maker was again Rolando. As
security for the loan, the petitioner also issued BPI Check No. 0595236, 7 post dated to April 1, 1997.8

Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by the
Official Receipt No. 7979 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly signed
by Bernardez. The petitioner purportedly paid the renewal fees and issued a post-dated check dated June
30, 1997 as security. As had been done in the past, the respondent superimposed the date "June 30, 1997"
on the upper right portion of Promissory Note No. 97-035 to make it appear that it would mature on the
said date.

Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the
respondent’s office and applied for another renewal of the loan. She issued in favor of the respondent
Promissory Note No. 97-051, and International Bank Exchange (IBE) Check No. 00012522, dated July 30,
1997, in the amount of ₱54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan documents for the Bognot siblings’ signatures and
replacement, Mrs. Bognot asked the respondent’s clerk to release to her the promissory note, the
disclosure statement, and the check dated July 30, 1997. Mrs. Bognot, however, never returned these
documents nor issued a new post-dated check. Consequently, the respondent sent the petitioner follow-
up letters demanding payment of the loan, plus interest and penalty charges. These demands went
unheeded.

On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money before
the Regional Trial Court (RTC) against the Bognot siblings. The respondent mainly alleged that the loan
renewal payable on June 30, 1997 which the Bognot siblings applied for remained unpaid; that before
June30, 1997, Mrs. Bognot applied for another loan extension and issued IBE Check No. 00012522 as
payment for the renewal fee; that Mrs. Bognot convinced the respondent’s clerk to release to her the
promissory note and the other loan documents; that since Mrs. Bognot never issued any replacement
check, no loanextension took place and the loan, originally payable on June 30, 1997, became due on this
date; and despite repeated demands, the Bognot siblings failed to pay their joint and solidary obligation.

Summons were served on the Bognotsiblings. However, only the petitioner filed his answer.

In his Answer,10 the petitioner claimed that the complaint states no cause of action because the
respondent’s claim had been paid, waived, abandoned or otherwise extinguished. He denied being a
party to any loan application and/or renewal in May 1997. He also denied having issued the BPI check
post-dated to June 30, 1997, as well as the promissory note dated June 30, 1997, claiming that this note
had been tampered. He claimed that the one (1) month loan contracted by Rolando and his wife in
November 1996 which was lastly renewed in March 1997 had already been fully paid and extinguished in
April 1997.11

Trial on the merits thereafter ensued.

The Regional Trial Court Ruling

In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s favor and ordered the Bognot
siblings to pay the amount of the loan, plus interest and penalty charges. It considered the wordings of
the promissory note and found that the loan they contracted was joint and solidary. It also noted that the
petitioner signed the promissory note as a principal (and not merely as a guarantor), while Rolando was
the co-maker. It brushed the petitioner’s defense of full payment aside, ruling that the respondent had
successfully proven, by preponderance of evidence, the nonpayment of the loan. The trial court said:

Records likewise reveal that while he claims that the obligation had been fully paid in his Answer, he did
not, in order to protect his right filed (sic) a cross-claim against his co-defendant Rolando Bognot despite
the fact that the latter did not file any responsive pleading.

In fine, defendants are liable solidarily to plaintiff and must pay the loan of ₱500,000.00 plus 5% interest
monthly as well as 10% monthly penalty charges from the filing of the complaint on December 3, 1997
until fully paid. As plaintiff was constrained to engage the services of counsel in order to protect his
right,defendants are directed to pay the former jointly and severally the amount of ₱50,000.00 as and by
way of attorney’s fee.
The petitioner appealed the decision to the Court of Appeals.

The Court of Appeals Ruling

In its decision dated March 28, 2007, the CA affirmed the RTC’s findings. It found the petitioner’s defense
of payment untenable and unsupported by clear and convincing evidence. It observed that the petitioner
did not present any evidence showing that the check dated June 30, 1997 had, in fact, been encashed by
the respondent and the proceeds applied to the loan, or any official receipt evidencing the payment of the
loan. It further stated that the only document relied uponby the petitioner to substantiate his defense was
the April 1, 1997 checkhe issued which was cancelled and returned to him by the respondent.

The CA, however, noted the respondent’s established policy of cancelling and returning the post-dated
checks previously issued, as well as the subsequent loan renewals applied for by the petitioner, as
manifested by the official receipts under his name. The CA thus ruled that the petitioner failed to
discharge the burden of proving payment.

The petitioner moved for the reconsideration of the decision, but the CA denied his motion in its
resolution of October 15, 2007, hence, the present recourse to us pursuant toRule 45 of the Rules of Court.

The Petition

The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his wife. He
claimed that based on the legal presumption provided by Article 1271 of the Civil Code, 13 his obligation
had been discharged by virtue of his possession of the post-dated check (stamped "CANCELLED") that
evidenced his indebtedness. He argued that it was Mrs. Bognot who subsequently assumed the
obligation by renewing the loan, paying the fees and charges, and issuing a check. Thus, there is an
entirely new obligation whose payment is her sole responsibility.

The petitioner also argued that as a result of the alteration of the promissory note without his consent
(e.g., the superimposition of the date "June 30, 1997" on the upper right portion of Promissory Note No.
97-035 to make it appear that it would mature on this date), the respondent can no longer collect on the
tampered note, let alone, hold him solidarily liable with Rolando for the payment of the loan. He
maintained that even without the proof of payment, the material alteration of the promissory note is
sufficient to extinguish his liability.

Lastly, he claimed that he had been released from his indebtedness by novation when Mrs. Bognot
renewed the loan and assumed the indebtedness.

The Case for the Respondents

The respondent submits that the issues the petitioner raised hinge on the appreciation of the adduced
evidence and of the factual lower courts’ findings that, as a rule, are notreviewable by this Court.

The Issues

The case presents to us the following issues:


1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with
Rolando;

2. Whether the petitioner is relieved from liability by reason of the material alteration in the
promissory note; and

3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii) novation by
substitution of debtors.

Our Ruling

We find the petition partly meritorious.

As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of
law.14 Appreciation of evidence and inquiry on the correctness of the appellate court's factual findings are
not the functions of this Court; we are not a trier of facts. 15

A question of law exists when the doubt or dispute relates to the application of the law on given facts. On
the other hand, a question of fact exists when the doubt or dispute relates to the truth or falsity of the
parties’ factual allegations.16

As the respondent correctly pointedout, the petitioner’s allegations are factual issuesthat are not proper
for the petition he filed. In the absence of compelling reasons, the Court cannot re-examine, review or re-
evaluate the evidence and the lower courts’ factual conclusions. This is especially true when the CA
affirmed the lower court’s findings, as in this case. Since the CA’s findings of facts affirmed those of the
trial court, they are binding on this Court, rendering any further factual review unnecessary.

If only to lay the issues raised - both factual and legal – to rest, we shall proceed to discuss their merits
and demerits.

No Evidence Was Presented to Establish the Fact of Payment

Jurisprudence tells us that one who pleads payment has the burden of proving it; 17 the burden rests on
the defendant to prove payment, rather than on the plaintiff to prove non-payment.18 Indeed, once the
existence of an indebtedness is duly established by evidence, the burden of showing with legal certainty
that the obligation has been discharged by payment rests on the debtor. 19

In the present case, the petitioner failed to satisfactorily prove that his obligation had already been
extinguished by payment. As the CA correctly noted, the petitioner failed to present any evidence that
the respondent had in fact encashed his check and applied the proceeds to the payment of the loan.
Neither did he present official receipts evidencing payment, nor any proof that the check had been
dishonored.

We note that the petitioner merely relied on the respondent’s cancellation and return to him of the check
dated April 1, 1997. The evidence shows that this check was issued to secure the indebtedness. The acts
imputed on the respondent, standing alone, do not constitute sufficient evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides:

xxxx

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired. (Emphasis supplied)

Also, we held in Bank of the Philippine Islands v. Spouses Royeca: 20

Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore,
cannot constitute a valid tender of payment. Since a negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery
of checks does not discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized.(Emphasis supplied)

Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in
cases where a private document evidencing a credit was voluntarily returned by the creditor to the
debtor), this presumption is merely prima facieand is not conclusive; the presumption loses efficacy when
faced with evidence to the contrary.

Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation of the
credit where more convincing evidence would be required than what normally would be called for to
prove payment.21Thus, reliance by the petitioner on the legal presumption to prove payment is
misplaced.

To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check
dated April 1, 1997, simply established his renewal of the loan – not the fact of payment. Furthermore, it
has been established during trial, through repeated acts, that the respondent cancelled and surrendered
the post-dated check previously issued whenever the loan is renewed. We trace whatwould amount to a
practice under the facts of this case, to the following testimonial exchanges:

Civil Case No. 97-0572

TSN December 14, 1998, Page 13.

Atty. Almeda:

Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the debtor which he
or she must pay before a renewal is allowed. I show you Exhibit "3" official receipt of plaintiff dated July
3, 1997, would this be your official receipt which you issued to your client which they make renewal of
the loan?

A: Yes, sir.

xxx xxx xxx


Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal has
already been cancelled, is that correct?

A: Yes, sir.

Q: It is also true to say that all promissory notes and all postdated checks covered by the old loan which
have been the subject of the renewal are deemed cancelled and replaced is that correct?

A: Yes, sir. xxx22

Civil Case No. 97-0572

TSN November 27, 1998, Page 27.

Q: What happened to the check that Mr. Bognot issued?

Court: There are two Bognots. Who in particular?

Q: Leonardo Bognot, Your Honor.

A: Every month, they were renewed, he issued a new check, sir.

Q: Do you have a copy of the checks?

A: We returned the check upon renewing the loan.23

In light of these exchanges, wefind that the petitioner failed to discharge his burden ofproving payment.

The Alteration of the Promissory Note

Did Not Relieve the Petitioner From Liability

We now come to the issue of material alteration. The petitioner raised as defense the alleged material
alteration of Promissory Note No. 97-035 as basis to claim release from his loan. He alleged that the
respondent’s superimposition of the due date "June 30, 1997" on the promissory note without his consent
effectively relieved him of liability.

We find this defense untenable.

Although the respondent did not dispute the fact of alteration, he nevertheless denied that the alteration
was done without the petitioner’s consent. The parties’ Pre-Trial Order dated November 3, 1998 24 states
that:

xxx There being no possibility of a possible compromise agreement, stipulations, admissions, and denials
were made, to wit:

FOR DEFENDANT LEONARDO BOGNOT


13. That the promissory note subject of this case marked as Annex "A" of the complaint was originally
dated April 1, 1997 with a superimposed rubber stamp mark "June 30, 1997" to which the plaintiff
admitted the superimposition.

14. The superimposition was done without the knowledge, consent or prior consultation with Leonardo
Bognot which was denied by plaintiff."25 (Emphasis supplied)

Significantly, the respondent also admitted in the Pre-Trial Order that part of its company practice is to
rubber stamp, or make a superimposition through a rubber stamp, the old promissory note which has
been renewed to make it appear that there is a new loan obligation. The petitioner did not rebut this
statement. To our mind, the failure to rebut is tantamount to an admission of the respondent’s
allegations:

"22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a rubber
stamp on old promissory note which has been renewed to make it appear that there is a new loan
obligation to which the plaintiff admitted." (Emphasis Supplied). 26

Even assuming that the note had indeed been tampered without the petitioner’s consent, the latter cannot
totally avoid payment of his obligation to the respondent based on the contract of loan.

Based on the records, the Bognot Siblings had applied for and were granted a loan of ₱500,000.00 by the
respondent. The loan was evidenced by a promissory note and secured by a post-dated check27 dated
November 30, 1996. In fact, the petitioner himself admitted his loan application was evidenced by the
Promissory Note dated April 1, 1997.28 This loan was renewed several times by the petitioner, after
paying the renewal fees, as shown by the Official Receipt Nos. 797 29 and 58730 dated May 5 and July 3,
1997, respectively. These official receipts were issued in the name of the petitioner. Although the
petitioner had insisted that the loan had been extinguished, no other evidence was presented to prove
payment other than the cancelled and returnedpost-dated check.

Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability to the
respondent solely on the ground that the Promissory Note in question was tampered. Notably, the
existence of the obligation, as well as its subsequent renewals, have been duly established by: first, the
petitioner’s application for the loan; second, his admission that the loan had been obtained from the
respondent; third, the post-dated checks issued by the petitioner to secure the loan; fourth, the testimony
of Mr. Bernardez on the grant, renewal and non-payment of the loan; fifth, proof of non-payment of the
loan; sixth, the loan renewals; and seventh, the approval and receipt of the loan renewals.

In Guinsatao v. Court of Appeals,31 this Court pointed out that while a promissory note is evidence of an
indebtedness, it is not the only evidence, for the existence of the obligation can be proven by other
documentary evidence such as a written memorandum signed by the parties. In Pacheco v. Court of
Appeals,32 this Court likewise expressly recognized that a check constitutes anevidence of indebtedness
and is a veritable proof of an obligation. It canbe used in lieu of and for the same purpose as a promissory
note and can therefore be presented to establish the existence of indebtedness.33

In the present petition, we find that the totality of the evidence on record sufficiently established the
existence of the petitioner’s indebtedness (and liability) based on the contract ofloan. Even with the
tampered promissory note, we hold that the petitioner can still be held liable for the unpaid loan.
The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be Entertained

It has not escaped the Court’s attention that the petitioner raised the argument that the obligation had
been extinguished by novation. The petitioner never raised this issue before the lower courts.

It is a settled principle of law thatno issue may be raised on appeal unless it has been brought before the
lower tribunal for its consideration.34 Matters neither alleged in the pleadingsnor raised during the
proceedings below cannot be ventilated for the first time on appeal before the Supreme Court. 35

In any event, we find no merit in the defense of novation as we discuss at length below. Novation cannot
be presumed and must be clearly and unequivocably proven.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by


substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor.36

Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists insubstituting a new debtor in the place of the originalone, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in Articles 1236 and 1237."

To give novation legal effect, the original debtor must be expressly released from the obligation, and the
new debtor must assume the original debtor’s place in the contractual relationship. Depending on who
took the initiative, novation by substitution of debtor has two forms – substitution by expromision and
substitution by delegacion. The difference between these two was explained in Garcia v. Llamas: 37

"In expromision, the initiative for the change does not come from -- and may even be made without the
knowledge of -- the debtor, since it consists of a third person’s assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary."

In both cases, the original debtor must be released from the obligation; otherwise, there can be no valid
novation.38Furthermore, novation by substitution of debtor must alwaysbe made with the consent of the
creditor.39

The petitioner contends thatnovation took place through a substitution of debtors when Mrs. Bognot
renewed the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by paying
the renewal fees and charges, and by executing a new promissory note. He further claimed that she
issued her own check40 to cover the renewal fees, which fact, according to the petitioner, was done with
the respondent’s consent.

Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She
merely attempted to renew the original loan by executing a new promissory note 41 and check. The
purported one month renewal of the loan, however, did not push through, as Mrs. Bognot did not return
the documents or issue a new post dated check. Since the loan was not renewed for another month, the
originaldue date, June 30,1997, continued to stand.

More importantly, the respondent never agreed to release the petitioner from his obligation. That the
respondent initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement and
the petitioner’s previous check dated June 30, 1997, does not ipso factoresult in novation. Neither will this
acquiescence constitute an implied acceptance of the substitution of the debtor.

In order to give novation legal effect, the creditor should consent to the substitution of a new debtor.
Novation must be clearly and unequivocally shown, and cannot be presumed.

Since the petitioner failed to show thatthe respondent assented to the substitution, no valid novation took
place with the effect of releasing the petitioner from his obligation to the respondent.

Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the
petitioner, the respondent can still enforce the payment of the obligation against the original debtor. Mere
acquiescence to the renewal of the loan, when there is clearly no agreement to release the petitioner from
his responsibility, does not constitute novation.

The Nature of the Petitioner’s Liability

On the nature of the petitioner’s liability, we rule however, that the CA erred in holding the petitioner
solidarily liable with Rolando.

A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the whole obligation from any or all of the
debtors.42 There is solidary liability when the obligation expressly so states, when the law so provides, or
when the nature of the obligation so requires.43 Thus, when the obligor undertakes to be "jointly and
severally" liable, the obligation is solidary,

In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on
Promissory Note No. 97-035 dated June 30, 1997. Under the promissory note, the Bognot Siblings defined
the parameters of their obligation as follows:

"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY RESOURCES
INVESTORS RRI LENDING CORPO. or Order, its office at Paranaque, M.M. the principal sum of Five
Hundred Thousand PESOS (₱500,000.00), PhilippineCurrency, with interest thereon at the rate of Five
percent (5%) per month/annum, payable in One Installment (01) equal daily/weekly/semi-
monthly/monthly of PESOS Five Hundred Thousand Pesos (₱500,000.00), first installment to become due
on June 30, 1997. xxx"44 (Emphasis Ours).

Although the phrase "jointly and severally" in the promissory note clearly and unmistakably provided for
the solidary liability of the parties, we note and stress that the promissory note is merely a photocopyof
the original, which was never produced.
Under the best evidence rule, whenthe subject of inquiry is the contents of a document, no evidence
isadmissible other than the original document itself except in the instances mentioned in Section 3, Rule
130 of the Revised Rules of Court.45

The records show that the respondent had the custody of the original promissory note dated April 1,
1997, with a superimposed rubber stamp mark "June 30, 1997", and that it had been given every
opportunity to present it. The respondent even admitted during pre-trial that it could not present the
original promissory note because it is in the custody of its cashier who is stranded in Bicol. 46 Since the
respondent never produced the original of the promissory note, much less offered to produce it, the
photocopy of the promissory note cannot be admitted as evidence. Other than the promissory note in
question, the respondent has not presented any other evidence to support a finding of solidary liability.
As we earlier noted, both lower courts completely relied on the note when they found the Bognot
siblingssolidarily liable.

The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be positively and
clearly expressed and cannot be presumed.47

In view of the inadmissibility of the promissory note, and in the absence of evidence showing that the
petitioner had bound himself solidarily with Rolando for the payment of the loan, we cannot but
conclude that the obligation to pay is only joint.48

The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be Equitably
Reduced

Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the
respondentfor the unpaid loan, we find the imposition of the 5% monthly interest to be excessive,
iniquitous, unconscionable and exorbitant, and hence, contrary to morals and jurisprudence. Although
parties to a loan agreement have wide latitude to stipulate on the applicable interest rate under Central
Bank Circular No. 905 s. 1982 (which suspended the Usury Law ceiling on interest effective January 1,
1983), we stress that unconscionable interest rates may still be declared illegal. 49

In several cases, we haveruled that stipulations authorizing iniquitous or unconscionable interests are
contrary to morals and are illegal. In Medel v. Court of Appeals, 50 we annulled a stipulated 5.5% per
month or 66% per annum interest on a ₱500,000.00 loan, and a 6% per month or 72% per annum interest
on a ₱60,000.00 loan, respectively, for being excessive, iniquitous, unconscionableand exorbitant.1âwphi1

We reiterated this ruling in Chua v. Timan,51 where we held that the stipulated interest rates of 3% per
month and higher are excessive, iniquitous, unconscionable and exorbitant, and must therefore be
reduced to 12% per annum.

Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5% per month,
(or 60% per annum) in the promissory note is excessive, unconscionable, contrary to morals and is thus
illegal. It is void ab initiofor violating Article 1306 52 of the Civil Code.1âwphi1 We accordingly find it
equitable to reduce the interest rate from 5% per month to 1% per month or 12% per annum in line with
the prevailing jurisprudence.
WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of Appeals in CA-
G.R. CV No. 66915 is hereby AFFIRMED with MODIFICATION, as follows:

1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot are JOINTLY LIABLE to
pay the sum of ₱500,000.00 plus 12% interest per annum from December 3, 1997 until fully paid.

2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.

Costs against petitioner Leonardo A. Bognot.

SO ORDERED.

G.R. No. 188944 July 9, 2014

SPOUSES RODOLFO BEROT AND LILIA BEROT, Petitioners,


vs.
FELIPE C. SIAPNO, Respondent.

DECISION

SERENO, CJ:

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Revised Rules on Civil
Procedure assailing the Court of Appeals (CA) Decision dated 29 January 2009 in CA-G.R. CV No.
87995.1 The assailed CA Decision affirmed with modification the Decision2 in Civil Case No. 2004-0246-D
issued by the Regional Trial Court (RTC), First Judicial Region of Dagupan City, Branch 42. The RTC
Decision allowed the foreclosure of a mortgaged property despite the objections of petitioners claiming,
among others, that its registered owner was impleaded in the suit despite being deceased.

THE FACTS

Considering that there are no factual issues in this case, we adopt the findings of fact of the CA, as
follows:

On May 23, 2002, Macaria Berot (or "Macaria") and spouses Rodolfo A. Berot (or "appellant") and Lilia P.
Berot (or "Lilia") obtained a loan from Felipe C. Siapno (or "appellee") in the sum of ₱250,000.00, payable
within one year together with interest thereon at the rate of 2% per annum from that date until fully paid.

As security for the loan, Macaria, appellant and Lilia (or "mortgagors", when collectively)mortgaged to
appellee a portion, consisting of 147 square meters (or "contested property"), of that parcel of land with
an area of 718 square meters, situated in Banaoang, Calasiao, Pangasinan and covered by Tax Declaration
No. 1123 in the names of Macaria and her husband Pedro Berot (or "Pedro"), deceased. On June 23, 2003,
Macaria died.
Because of the mortgagors’ default,appellee filed an action against them for foreclosure of mortgageand
damages on July 15, 2004 in the Regional Trial Court of Dagupan City (Branch 42). The action was
anchored on the averment that the mortgagors failed and refused to pay the abovementioned sum of
₱250,000.00 plus the stipulated interest of 2% per month despite lapse of one year from May 23, 2002.

In answer, appellant and Lilia (or "Berot spouses", when collectively [referred to]) alleged that the
contested property was the inheritance of the former from his deceased father, Pedro; that on said
property is their family home; that the mortgage is void as it was constituted over the family home
without the consent of their children, who are the beneficiaries thereof; thattheir obligation is only joint;
and that the lower court has no jurisdiction over Macaria for the reason that no summons was served on
her as she was already dead.

With leave of court, the complaint was amended by substituting the estate of Macaria in her stead. Thus,
the defendants named in the amended complaint are now the "ESTATE OF MACARIA BEROT,
represented by Rodolfo A. Berot, RODOLFO A. BEROT and LILIA P. BEROT".

After trial, the lower court rendered a decision dated June 30, 2006, the decretal portion of which reads:

WHEREFORE, the Court hereby renders judgment allowing the foreclosure of the subject mortgage.
Accordingly, the defendants are hereby ordered to pay to the plaintiff within ninety (90) days from notice
of thisDecision the amount of ₱250,000.00 representing the principal loan, with interest at two (2%)
percent monthly from February, 2004 the month when they stopped paying the agreed interest up to
satisfaction of the claim and 30% of the amount to be collected as and for attorney’s fees. Defendants are
also assessed to pay the sum of ₱20,000.00 as litigation expenses and another sum of ₱10,000.00 as
exemplary damages for their refusal to pay their aforestated loan obligation. If within the aforestated 90-
day period the defendants fail to pay plaintiff the above-mentioned amounts, the sale of the property
subject of the mortgage shall be made and the proceeds of the sale to be delivered to the plaintiff to cover
the debt and charges mentioned above, and after such payments the excess, if any shall be delivered to
the defendants.

SO ORDERED.

Appellant filed a motion for reconsideration of the decision but it was denied per order dated September
8, 2006. Hence, this appeal interposed by appellant imputing errors to the lower court in –

1. SUBSTITUTING AS DEFENDANT THE ESTATE OF MACARIA BEROT WHICH HAS NO


PERSONALITY TO SUE AND TO BE SUED;

2. APPOINTING RODOLFO BEROT AS A REPRESENTATIVE OF THE ESTATE OF THE DECEASED


MACARIA BEROT TO THE PREJUDICE OF THE OTHER HEIRS, GRANTING FOR THE SAKE OF
ARGUMENT THAT THE ESTATE OF MACARIA BEROT HAS A PERSONALITY TO SUE AND BE
SUED;

3. NOT FINDING THE MORTGAGE NULL AND VOID, WHICH WAS ENTERED INTOWITHOUT THE
WRITTEN CONSENT OF THE BENEFICIARIES OF THE FAMILY HOME WHO WERE OF LEGAL
AGE;
4. MAKING DEFENDANTS LIABLE FOR THE ENTIRE OBLIGATION OF PH250,000.00, WHEN THE
OBLIGATION IS ONLY JOINT;

5. IMPOSING ATTORNEY’S FEE(S) IN THE DISPOSITIVE PORTION WITHOUT MAKING A FINDING


OF THE BASIS THEREOF IN THE BODY; and

6. IMPOSING EXEMPLARY DAMAGES AND LITIGATION EXPENSES.

Appellant contends that the substitution of the estate of Macaria for her is improper as the estate has no
legal personality to be sued.3

On 29 January 2009, the CA, through its Seventh Division, promulgated a Decision that affirmed the RTC
Decision but with modification where it deleted the award of exemplary damages, attorney’s fees and
expenses of litigation. The appellate court explained in its ruling that petitioners correctly argued that a
decedent’s estate is not a legal entity and thus, cannot sue or be sued. However,it noted that petitioners
failed to object to the trial court’s exercise of jurisdiction over the estate of Macaria when the latter was
impleaded by respondents by amending the original complaint. 4 Adopting the rationale of the trial court
on this matter, the CA held:

As aptly observed by the trial court:

It may be recalled that when the plaintiff filed his Amended Complaint substituting the estate of Macaria
Berot in place of Macaria Berot as party defendant, defendants made no objection thereto. Not even an
amended answer was filed by the defendants questioning the substitution of the estate of Macaria Berot.
For these reasons, the defendants are deemed to have waivedany objection on the personality of the
estate of Macaria Berot. Section 1, Rule 9 of the Rules of Court provides that, ‘Defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived. (Order dated September 8,
2006)5 [Underscoring supplied]

The CA also found the action of respondent to be procedurally correct under Section 7, Rule 86 of the
Rules ofCourt, when it decided to foreclose on the mortgage of petitioner and prove his deficiency as an
ordinary claim.6The CA did not make a categorical finding that the nature of the obligation was joint or
solidary on the part of petitioners.7 It neither sustained their argument that the mortgage was invalidfor
having beenconstituted over a family home without the written consent of the beneficiaries who were of
legal age.8 However, it upheld their argument that the award of exemplary damages and attorney’s fees
in favor ofrespondent was improper for lack of basis,9 when it ruled thus:

WHEREFORE, the appealed decision is AFFIRMED with MODIFICATION in that the award of
exemplary damages, attorney’s fees and expenses of litigation is DELETED.

SO ORDERED.10

Petitioners moved for the reconsideration of the CA Decision, but their motion was denied through a
Resolution dated 9 July 2009.11 Aggrieved by the denial of their Motion for Reconsideration, they now
come to us through a Petition for Review on Certiorari under Rule 45, proffering purely questions of law.

THE ISSUES
The following are the issues presented by petitioners for resolution by this Court:

The Court of Appeals erred in:

1. Holding that the intestate estate of Macaria Berot could be a proper party by waiver expressly or
impliedly by voluntary appearance;

2. In not holding that the obligation is joint12

THE COURT’S RULING

We DENYthe Petition for lack of merit.

Petitioners were correct when they argued that upon Macaria Berot’s death on 23 June 2003, her legal
personality ceased, and she could no longer be impleaded as respondent in the foreclosure suit. It is also
true that her death opened to her heirs the succession of her estate, which in this case was an intestate
succession. The CA, in fact, sustained petitioners’ position that a deceased person’s estate has no legal
personality to be sued. Citing the Court’s ruling in Ventura v. Militante,13 it correctly ruled that a
decedent does not have the capacity to be sued and may not be madea defendant in a case:

A deceased person does not have suchlegal entity asis necessary to bring action so much so that a motion
to substitute cannot lie and should be denied by the court. An action begun by a decedent’s estate cannot
be said to have been begun by a legal person, since an estate is not a legal entity; such an action is a
nullity and a motion to amend the party plaintiff will not, likewise, lie, there being nothing before the
court to amend. Considering that capacity to be sued isa correlative of the capacity to sue, to the same
extent, a decedent does not have the capacity to be sued and may not be named a party defendant in a
court action.

When respondent filed the foreclosure case on 15 June 2004 and impleaded Macaria Berot as respondent,
the latter had already passed away the previous year, on 23 June 2003. In their Answer14 to the
Complaint, petitioners countered among others, that the trial court did not have jurisdiction over
Macaria, because no summons was served on her, precisely for the reason that she had already died.
Respondent then amended his Complaint with leave of court and substituted the deceased Macaria by
impleading her intestate estate and identified Rodolfo Berot as the estate’s representative. Thereafter, the
case proceeded on the merits at the trial, where this case originated and where the Decision was
promulgated.

It can be gleaned from the records ofthe case that petitioners did not object when the estate of Macaria
was impleaded as respondent in the foreclosure case. Petitioner Rodolfo Berot did not object either when
the original Complaint was amended and respondent impleaded him as the administrator of Macaria’s
estate, in addition to his being impleaded as an individual respondent in the case. Thus, the trial and
appellate courts were correct in ruling that, indeed, petitionersimpliedly waived any objection to the trial
court’s exercise of jurisdiction over their persons at the inception of the case. In resolving the Motion for
Reconsideration of petitioners as defendants in Civil Case No. 2004-0246-D, the RTC was in point when it
ruled:
It may be recalled that when the plaintiff filed his Amended Complaint substituting the estate of Macaria
Berot in place of Macaria Berot as party defendant, defendants made no objections thereto. Not even an
amended answer was filed by the defendants questioning the substitution of the estate of Macaria Berot.
For these reasons, the defendants are deemed to have waivedany objection on the personality of the
estate of Macaria Berot. Section 1, Rule 9 of the Rules of Court provides that, "Defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed waived. x x x. (Underscoring ours) 15

Indeed, the defense of lack of jurisdiction over the person of the defendant is one that may bewaived by a
party to a case. In order to avail of that defense, one must timely raise an objection before the court.16

The records of the case show that on 9 November 2004, a hearing was held on the Motion for Leave to
Filefiled by respondent to have her amended Complaint admitted. During the said hearing, the counsel
for petitioners did not interpose an objection to the said Motion for Leave. 17 On 18 March 2005, a hearing
was held on respondent’s Motion to Admit Amended Complaint, wherein counselfor petitioners again
failed to interpose any objection.18 Thus, the trial court admitted respondent’s Amended Complaint and
ordered thata copy and a summons be served anew on petitioners. 19

In an Order20 dated 14 April 2005, the RTC noted that petitioners received the summons and the copy of
the amended Complaint on 3 February 2005 and yet they did not file an Answer. During the trial on the
merits that followed, petitioners failed to interpose any objection to the trial court’s exercise of
jurisdiction over the estate of Macaria Berot. Clearly, their full participation in the proceedings of the case
can only be construed as a waiver of any objection to or defense of the trial court’s supposed lack of
jurisdiction over the estate.

In Gonzales v. Balikatan Kilusang Bayan sa Panlalapi, Inc., 21 we held that a party’s appearance in a case is
equivalent to a service of summons and that objections must be timely raised:

In this regard, petitioners should be reminded of the provision in the Rules of Court that a
defendant’svoluntary appearance in an action shall be equivalent to service of summons. Further, the lack
of jurisdiction over the person of the defendant may be waived either expressly or impliedly. When a
defendant voluntarily appears, he is deemed to have submitted himself to the jurisdiction of the court. If
he does not wish to waive this defense, he must do so seasonably by motion, and object thereto.

It should be noted that Rodolfo Berot is the son of the deceased Macaria 22 and as such, he is a compulsory
heir of his mother. His substitution is mandated by Section 16, Rule 3 of the Revised Rules of Court.
Notably, there is no indication inthe records of the case that he had other siblings who would have been
his co-heirs. The lower and appellate courts veered from the real issue whether the proper parties have
been impleaded. They instead focused on the issue whether there was need for a formal substitution
when the deceasedMacaria, and later its estate, was impleaded. As the compulsory heir of the estate of
Macaria, Rodolfo is the real party in interest in accordance with Section 2, Rule 3 of the Revised Rules of
Court. At the time of the filing of the complaint for foreclosure, as well as the time it was amended to
implead the estate of Macaria, it is Rodolfo – as heir – who is the real party in interest. He stands to be
benefitted or injured by the judgment in the suit.

Rodolfo is also Macaria’s co-defendant in the foreclosure proceedings in his own capacity as co-borrower
ofthe loan. He participated in the proceedings of the case, from the initial hearing of the case, and most
particularly when respondent filed his amended complaint impleading the estate of Macaria. When
respondent amended his complaint, Rodolfo did not file an amended Answer nor raise any objection,
even if he was also identified therein as the representative ofthe estate of the deceased Macaria. The lower
court noted this omission by Rodolfo in its Order dated 8 September 2006 ruling on his Motionfor
Reconsideration to the said court’s Decision dated 30 June 2006. Thus, his continued participation in the
proceedings clearly shows that the lower court acquired jurisdiction over the heir of Macaria.

In Regional Agrarian Reform Adjudication Board v. Court of Appeals, 23 we ruled that:

[W]e have to point out that the confusion in this case was brought about by respondents themselves
when they included in their complaint two defendants who were already dead. Instead of impleading the
decedent’s heirs and current occupants of the landholding, respondents filed their complaint against the
decedents, contrary to the following provision of the 1994 DARAB Rules of Procedure:

RULE V

PARTIES, CAPTION AND SERVICE OF PLEADINGS

SECTION 1. Parties in Interest. Every agrarian case must be initiated and defended inthe name of the real
party in interest. x x x.

A real party in interest is defined as "the party who stands to be benefited or injured by the judgment in
the suit, or the party entitled to the avails of a suit." The real parties in interest, at the time the complaint
was filed, were no longer the decedents Avelino and Pedro, but rather their respective heirs who are
entitled to succeed to their rights (whether as agricultural lessees or as farmers-beneficiaries) under our
agrarian laws. They are the ones who, as heirs of the decedents and actualtillers, stand to be removed
from the landholding and made to pay back rentals to respondents if the complaint is sustained.

Since respondents failed to correcttheir error (they did not amend the erroneous caption of their
complaint to include the real parties-ininterest), they cannot be insulated from the confusion which it
engendered in the proceedings below. But at any rate, notwithstanding the erroneous caption and the
absence of a formal substitution of parties, jurisdiction was acquired over the heirs of Avelino and Pedro
who voluntarily participated in the proceedings below. This Court has ruled that formal substitution of
parties is not necessary when the heirs themselves voluntarily appeared, participated, and presented
evidence during the proceedings.

As such, formal substitution of the parties in this case is not necessary.

In Vda. De Salazar v. Court of Appeals24 we ruled that a formal substitution of the heirs in place of the
deceased is no longer necessary if the heirs continued to appear and participated in the proceedings of
the case. In the cited case, we explained the rationale of our ruling and related it to the due process issue,
to wit:

We are not unaware of several cases where we have ruled that a party having died in an action that
survives, the trial held by the court without appearance of the deceased's legal representative or
substitution of heirs and the judgment rendered after such trial, are null and void because the court
acquired no jurisdiction over the persons of the legal representatives or of the heirs upon whom the trial
and the judgment would be binding. This general rule notwithstanding, in denying petitioner's motion
for reconsideration, the Court of Appeals correctly ruled that formal substitution of heirs is not necessary
when the heirs themselves voluntarily appeared, participated in the case and presented evidence in
defense of deceased defendant. Attending the case at bench, after all, are these particular circumstances
which negate petitioner's belated and seemingly ostensible claim of violation of her rights to due process.
We should not lose sight of the principle underlying the general rule that formal substitution of heirs
must be effectuated for them to be bound by a subsequent judgment. Such had been the general rule
established not because the rule on substitution of heirs and that on appointment of a legal representative
are jurisdictional requirements per se but because non-compliance therewith results in the undeniable
violation of the right to due process of those who, though not duly notified of the proceedings, are
substantially affected by the decision rendered therein. Viewing the rule on substitution of heirs in this
light, the Court of Appeals,in the resolution denying petitioner's motion for reconsideration, thus
expounded:

Although the jurisprudential rule is that failure to make the substitution is a jurisdictional defect, it
should be noted that the purpose of this procedural rule is to comply with due process requirements. The
original party having died, he could not continue, to defend himself in court despite the fact that the
action survived him. For the case to continue, the real party in interest must be substituted for the
deceased. The real party in interest is the one who would beaffected by the judgment. It could be the
administrator or executor or the heirs. In the instant case, the heirs are the proper substitutes. Substitution
gives them the opportunity to continue the defense for the deceased. Substitution is important because
such opportunity to defend is a requirement to comply with due process. Such substitution consists of
making the proper changes in the caption of the case which may be called the formal aspect of it. Such
substitution also includes the process of letting the substitutes know that they shall be bound by any
judgment in the case and that they should therefore actively participate in the defense of the deceased.
This part may be called the substantive aspect. This is the heart of the procedural rule because this
substantive aspect is the one that truly embodies and gives effect to the purpose of the rule. It is this
court's view that compliance with the substantive aspect of the rule despite failure to comply with the
formal aspect may he considered substantial compliance.Such is the situation in the case at bench because
the only inference that could be deduced from the following facts was that there was active participation
of the heirs in the defense ofthe deceased after his death:

1. The original lawyer did not stop representing the deceased. It would be absurd to think that the lawyer
would continue to represent somebody if nobody is paying him his fees. The lawyer continued to
represent him in the litigation before the trial court which lasted for about two more years. A dead party
cannot pay him any fee. With or without payment of fees, the fact remains that the said counsel was
allowed by the petitioner who was well aware of the instant litigation to continue appearing as counsel
until August 23, 1993 when the challenged decision was rendered;

2. After the death of the defendant, his wife, who is the petitioner in the instant case, even testified in the
court and declared that her husband is already deceased. She knew therefore that there was a litigation
against her husband and that somehow her interest and those of her children were involved;

3. This petition for annulmentof judgment was filed only after the appeal was decided against the
defendant on April 3, 1995, more than one and a half year (sic) after the decision was rendered (even if we
were to give credence to petitioner's manifestation that she was notaware that an appeal had been made);
4. The Supreme Court has already established that there is such a thing as jurisdiction byestoppel. This
principle was established even in cases where jurisdiction over the subject matter was being questioned.
In the instant case, only jurisdiction over the person of the heirs is in issue. Jurisdiction over the person
may be acquired by the court more easily than jurisdiction over the subject matter. Jurisdiction over the
person may be acquired by the simple appearance of the person in court as did herein petitioner appear;

5. The case cited by the herein petitioner (Ferreria et al. vs. Manuela Ibarra vda. de Gonzales, etal.) cannot
be availed of to support the said petitioner's contention relative to nonacquisition of jurisdiction by the
court. In that case, Manolita Gonzales was not served notice and, more importantly, she never appeared
in court, unlike herein petitioner who appeared and even testified regarding the death of her husband.

In this case, Rodolfo’s continued appearance and participation in the proceedings of the case dispensed
with the formal substitution of the heirs in place of the deceased Macaria. The failure of petitioners to
timely object to the trial court’s exercise of jurisdiction over the estate of Macaria Berot amounted to a
waiver on their part. Consequently, it would be too late for them at this point to raise that defense to
merit the reversal of the assailed decision of the trial court. We are left with no option other than to
sustain the CA’s affirmation of the trial court’s Decision on this matter.

On the second issue of whether the nature of the loan obligation contracted by petitioners is joint or
solidary, we rule that it is joint.

Under Article 1207 of the Civil Code of the Philippines, the general rule is that when there is a
concurrence of two or more debtors under a single obligation, the obligation is presumed to be joint:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, orthat each one of the latter
is bound to render, entire compliance with the prestations. There is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

The law further provides that to consider the obligation as solidary in nature, it must expressly be stated
as such, or the law or the nature of the obligation itself must require solidarity. In PH Credit Corporation
v. Court of Appeals,25we held that:

A solidaryobligation is one in which each of the debtors is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors. On
the other hand, a jointobligation is one in which each debtors is liable only for a proportionate part of the
debt, and the creditor is entitled to demand only a proportionate part of the credit from each debtor. The
wellentrenched rule is that solidary obligations cannot be inferred lightly. They must be positively and
clearly expressed. A liability is solidary "only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires."

In the instant case, the trial court expressly ruled that the nature of petitioners’ obligation to respondent
was solidary.26 It scrutinized the real estate mortgage and arrived at the conclusion that petitioners had
bound themselves to secure their loan obligation by way of a realestate mortgage in the event that they
failed to settle it.27But such pronouncement was not expressly stated in its 30 June 2006 Decision. This was
probably the reason why, when the trial court Decision was appealed to it, the CA did not squarely
address the issue when the latter ruled that:
It is noteworthy that the appealed decision makes no pronouncement that the obligation of the
mortgagors is solidary; and that said decision has not been modifiedby the trial court. Hence, it is
unnecessary for US to make a declaration on the nature of the obligation of the mortgagors. 28 However, a
closer scrutiny of the records would reveal that the RTC expressly pronounced that the obligation of
petitioners to the respondent was solidary. In resolving petitioners’ Motion for Reconsideration to its 30
June 2006 Decision, the trial court categorically ruled that:

Defendants [sic] obligation with plaintiff is solidary. A careful scrutiny of the Real Estate Mortgage(Exh.
"A") will show that all the defendants, for a single loan, bind themselves to cede, transfer, and convey by
way of real estate mortgage all their rights, interest and participation in the subject parcelof land
including the improvements thereon in favor of the plaintiff, and warrant the same to be free from liens
and encumbrances, and that should theyfail to perform their obligation the mortgage will be foreclosed.
From this it can be gleaned that each of the defendants obligated himself/herself to perform the said
solidary obligation with the plaintiff.29 We do not agree with this finding by the trial court.

We have scoured the records of the case, but found no record of the principal loan instrument, except an
evidence that the realestate mortgage was executed by Macaria and petitioners. When petitioner Rodolfo
Berot testified in court, he admitted that heand his mother, Macaria had contracted the loan for their
benefit:

Q: On the Real Estate Mortgage, you and your mother obtained a loan from Mr. Siapno in the amountof
₱250,000.00, now as between you and your mother whose loan is that?

A: It is the loan of my mother and myself, sir. 30

The testimony of petitioner Rodolfo only established that there was that existing loan to respondent, and
that the subject property was mortgaged as security for the said obligation. His admission of the existence
of the loan made him and his late mother liable to respondent. We have examined the contents of the real
estate mortgagebut found no indication in the plain wordings of the instrument that the debtors – the late
Macaria and herein petitioners – had expressly intended to make their obligation to respondent solidary
in nature. Absent from the mortgage are the express and indubitable terms characterizing the obligation
as solidary. Respondent was not able to prove by a preponderance of evidence that petitioners' obligation
to him was solidary. Hence, applicable to this case is the presumption under the law that the nature of the
obligation herein can only be considered as joint. It is incumbent upon the party alleging otherwise to
prove with a preponderance of evidence that petitioners' obligation under the loan contract is indeed
solidary in character.31

The CA properly upheld respondent's course of action as an availment of the second remedy provided
under Section 7, Rule 86 of the 1997 Revised Rules of Court. 32 Under the said provision for claims against
an estate, a mortgagee has the legal option to institute a foreclosure suit and to recover upon the security,
which is the mortgaged property.

During her lifetime, Macaria was the registered owner of the mortgaged property, subject of the assailed
foreclosure. Considering that she had validly mortgaged the property to secure a loan obligation, and
given our ruling in this case that the obligation is joint, her intestate estate is liable to a third of the loan
contracted during her lifetime. Thus, the foreclosure of the property may proceed, but would be
answerable only to the extent of the liability of Macaria to respondent. WHEREFORE, the CA Decision in
CA-G.R. CV No. 87995 sustaining the RTC Decision in Civil Case No. 2004-0246-D is hereby AFFIRMED
with the MODIFICATION that the obligation of petitioners and the estate of Macaria Berot is declared as
joint in nature.

SO ORDERED.

August 17, 2016

G.R. No. 207586

AFP RETIREMENT AND SEPARATION BENEFITS SYSTEM (AFPRSBS), Petitioner


vs.
EDUARDO SANVICTORES, Respondent

DECISION

MENDOZA, J.:

Assailed in this Petition for Review on Certiorari is the November 28, 2012 Decision1 and the June 6, 2013
Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 118427, which affirmed the June 22, 2010
Decision3 of the Office of the President (OP), upholding the August 31, 2007 Decision4 of the Housing and
Land Use Regulatory Board-Board of Commissioners (HLURB Board). The decision of the HLURB Board
dismissed the appeal filed by petitioner AFP Retirement and Separation Benefits System (AFPRSBS)
together with Prime East Properties, Inc. (PEPI), questioning the order of rescission of the contract of sale
of the subject parcel of land.

The Antecedents

The records show that sometime in 1994, PEPI, formerly Antipolo Properties, Inc., offered to Eduardo
Sanvictores (Sanvictores) for sale on installment basis a parcel of land in Village East Executive Homes, a
subdivision project, designated as Lot 5, Block 64, Phase II, covering an area of approximately 204 square
meters, and situated in Tayuman, Pantok, Binangonan, Rizal; that on April 20, 1994, Sanvictores paid the
required down payment of ₱81,949.04; that on June 9, 1994, a Contract to Sell5 was executed by and
between PEPI and AFPRSBS, as the seller, and Sanvictores, as the buyer; that on February 27, 1999,
Sanvictores paid in full the purchase price of the subject property in the amount of ₱534,378.79; that
despite the full payment, PEPI and AFPRSBS failed to execute the corresponding deed of absolute sale on
the subject property and deliver the corresponding title thereto; that on September 6, 2000, Sanvictores
demanded from PEPI the execution of the deed of sale and the delivery of the transfer certificate of title;
that PEPI claimed that the title of the subject property was still with the Philippine National Bank (PNB)
and could not be released due to the economic crisis; that despite several follow-ups with PEPI, the latter
did not communicate with Sanvictores for a period of four (4) years; and that, thereafter, Sanvictores filed
a complaint for rescission of the contract to sell, refund of payment, damages, and attorney's fees against
PEPI and AFPRSBS before the HLRUB.
In its defense, PEPI argued, among others, that the complaint should be dismissed for lack of cause of
action; that it could not be faulted for the delay in the delivery of the title due to force majeure; that it
substantially complied with its obligations in good faith; and that it was always transparent in dealing
with the public.

For its part, AFPRSBS countered that it was not the owner and developer of Village East Executive
Homes but PEPI; that PEPI alone was the seller; and that Norma Espina (Espina) was neither the
treasurer nor the authorized representative of AFPRSBS, but the Treasurer of PEPI.

The Decision of the HLURB Arbiter

On March 27, 2006, the HLURB Arbiter rendered a decision 6 in favor of Sanvictores, the dispositive
portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Declaring the Contract to Sell executed by and between the complainant and the respondents covering
the subject property as RESCINDED, and

2. Ordering the respondents to pay jointly and severally the complainant the following sums:

a) The amount of FIVE HUNDRED THIRTY FOUR THOUSAND THREE HUNDRED


SEVENTI EIGHT PESOS & 79/100 (₱534,378.79) plus twelve percent (12%) interest per
annum to be computed from the date of the filing of the complaint on September 20, 2001
until fully paid,

b) The amount of TEN THOUSAND PESOS (₱10,000.00) as moral damages,

c) The amount of TEN THOUSAND PESOS (₱10,000.00) as exemplary damages,

d) The amount of TEN THOUSAND PESOS (₱10,000.00) as attorney's fees,

e) The costs of litigation, and

f) An administrative fine of TEN THOUSAND PESOS (₱10,000.00) payable to this Office


fifteen (15) days upon receipt of this decision, for violation of Section 20 in relation to
Section 38 of PD 957.

SO ORDERED.7

The HLRUB Arbiter ruled that Sanvictores was entitled to the reliefs he prayed for in the complaint and
that the rescission of the contract to sell was just and proper because of the unjustified refusal of the seller
to execute the deed of absolute sale and to deliver the title of the subject property despite the full
payment of the purchase price. The seller's unjustified refusal constituted a substantive breach of its legal
and contractual obligation.

Decision of the HLURB Board


On August 31, 2007, acting on the appeal of PEPI and AFPRSBS, the HLURB Board affirmed the decision
of the HLURB Arbiter as it found no reversible error in the findings of fact and conclusions of the HLURB
Arbiter.

The respective motions for reconsideration of PEPI and AFPRSBS were denied by the HLURB
Board.1âwphi1

The Decision of the Office of the President

PEPI and AFPRSBS filed separate appeals before the OP with AFPRSBS insisting that it should not be
held jointly and severally liable with PEPI for the refund, administrative fine and the payment of the
interest. On June 22, 2010, the OP upheld the decision of the HLURB Board. It stated that in the contract
to sell "PEPI and AFPRSBS were referred to singly as the 'seller,' and there were no delineations
whatsoever as to their rights and obligations."8Hence, the OP concluded that their obligation to
Sanvictores was joint and several.

Motions for reconsideration were separately filed by PEPI and AFPRSBS, but both were denied by the OP
in its February 8, 2011 Resolution. 9

AFPRSBS alone filed a petition for review before the CA.

The CA Decision

On November 28, 2012, the CA affirmed the decision of the OP. The CA echoed the view of the OP that
PEPI and AFPRSBS were indicated as the "Seller" in the subject contract, without any delineation
whatsoever as to the rights and obligations of the respective parties. It wrote that PEPI and AFPRSBS
came to the contracting table with the intention to be bound jointly and severally. Hence, the CA
concluded that the nature of the obligation of PEPI and AFPRSBS under the subject contract was solidary
pursuant to Article 1207 of the Civil Code. 10 It sustained the award of moral and exemplary damages but
lowered the interest rate on the award of actual damages to 6% per annum. Thus, it disposed as follows:

WHEREFORE, in view of the foregoing, the Petition is hereby DENIED and the Decision dated June 22,
2010 is AFFIRMED with modification that the interest rate on the actual damages in the amount of FIVE
HUNDRED THIRTY FOUR THOUSAND THREE HUNDRED SEVENTY EIGHT PESOS & 79/100
(₱534,378.79), is REDUCED to six percent (6%) per annum.

SO ORDERED. 11

The CA denied the motion for reconsideration filed by AFPRSBS in its June 6, 2013 Resolution.

Hence, this petition with the following

ASSIGNMENT OF ERRORS

The Honorable Court of Appeals committed grave abuse of discretion and misconstrued the facts and
misapplied the law when:
I It held Petitioner AFPRSBS jointly and severally liable with PEPI to the Respondent

II It held herein Petitioner AFPRSBS liable for moral and exemplary damages, costs of litigation and
attorney's fees.

III It held Petitioner AFPRSBS to pay administrative fine of ten thousand pesos (Pl0,000.00) payable to
HLURB for violation of Section 20 in relation to Section 38 of P.D. 957.

Position of AFPRSBS In advocacy of its position, AFPRSBS argues that it was not the owner/developer of
the Village East Executive Homes subdivision, but PEPI; that all the certificates of title of the lots in the
said subdivision project were in the name and possession of PEPI; that it was not the seller of the subject
property, but PEPI; that although it appeared in the contract to sell that AFPRSBS was a co-seller of the
subject lot, it was not signed by any of its authorized representative; that the contract to sell was signed
by Espina, the Treasurer and the authorized representative of PEPI; that because it was not a party in the
said contract, it could not be affected, favored or prejudiced thereby; that under Article 1311 of the Civil
Code, contracts take effect only between the parties, their assigns and heirs; that it never dealt with
Sanvictores with respect to the sale of the subject subdivision lot; that its officers and employees never
made any representation to him relative to the subject lot; that the transaction and the communications
were exclusively held between Sanvictores and PEPI as evidenced by his passbook and the letter of PEPI
addressed to him, dated September 26, 2000; that the failure to deliver the title to Sanvictores was due to
the mortgage of the subject lot by PEPI to PNB; that it was not a party or privy to the said mortgage; that
the mortgage was executed solely by PEPI to secure the loan it obtained from PNB as shown by the Loan
Agreement and the Real Estate Mortgage; that assuming that it would be adjudged liable to Sanvictores
on the basis of the said contract to sell, its liability would only be joint and not in solidum with PEPI; that
solidary liability could not be presumed; and that it could not be liable for damages and administrative
fine because it was not the owner or developer of the subject parcel of land.

Counter-Position of Sanvictores

Sanvictores countered that both PEPI and AFPRSBS were referred to as the "seller" in the contract to sell;
that the signatures of their respective representatives, Espina and Menandro Mena (Mena), appeared in
the said contract; that AFPRSBS could not disclaim liability by the mere expedient of denying that it was
not a party to the transaction and that the person who signed the contract was not authorized; that
AFPRSBS should be estopped in denying the authority of their representative because it gave the latter
the apparent authority to represent it in the subject transaction; that there was nothing on the face of the
notarized contract to sell that would arouse any suspicion that Espina and Mena were not authorized by
PEPI and AFPRSBS, respectively; that PEPI and AFPRSBS were referred to in the entire contract as
"Seller" and not "Sellers," denoting that they were only one; that they came to the contracting table with
the intention to be bound jointly and severally; that there was no delineation whatsoever as to their rights
and obligations; that PEPI and AFPRSBS represented themselves as the "Seller" in the contract to sell and
they appeared to be partners; and that AFPRSBS should be liable for moral and exemplary damages,
costs of litigation and attorney's fees.

The Court's Ruling

The petition lacks merit.


In a wealth of cases, the Court has consistently ruled that factual findings and conclusions of an
adjudicative body, especially when affirmed on appeal and supported by enough evidence, are entitled to
great weight, full respect and even finality by this Court, because administrative agencies or quasi-
judicial bodies are clothed with special knowledge and expertise on specific matters within their
jurisdiction. In the absence of any proof showing grave abuse of discretion, the appellate courts will not
disturb their factual findings and conclusions.

In the case at bench, the HLURB, the OP and the CA were one in ruling that AFPRSBS was jointly and
severally liable with PEPI to Sanvictores. The Court reviewed the records and found their factual findings
and conclusions to be in accordance with the evidentiary records.

In Spouses Berot v. Siapno, 12 the Court defined solidary obligation as one in which each of the debtors is
liable for the entire obligation, and each of the creditors is entitled to demand the satisfaction of the whole
obligation from any or all of the debtors. On the other hand, a joint obligation is one in which each debtor
is liable only for a proportionate part of the debt, and the creditor is entitled to demand only a
proportionate part of the credit from each debtor. The well-entrenched rule is that solidary obligations
cannot be inferred lightly. They must be positively and clearly expressed. A liability is solidary "only
when the obligation expressly so states, when the law so provides or when the nature of the obligation so
requires." In this regard, Article 1207 of the Civil Code provides:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the latter
is bound to render, entire compliance with the prestation. There is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

As can be gleaned therefrom, Article 1207 does not presume solidary liability unless: 1] the obligation
expressly so states; or 2] the law or nature requires solidarity. 13

Here, there is no doubt that the nature of the obligation of PEPI and AFPRSBS under the subject contract
to sell was solidary. In the said contract, PEPI and AFPRSBS were expressly referred to as the "SELLER"
while Sanvictores was referred to as the "BUYER." Indeed, the contract to sell did not state "SELLERS" but
"SELLER." This could only mean that PEPI and AFPRSBS were considered as one seller in the contract. As
correctly pointed out by the administrative tribunals below and the CA, there was no delineation as to
their rights and obligations.

Also in the said contract, the signatories were Espina, representing PEPI; Mena, representing AFPRSBS;
and Sanvictores. Espina signed under PEPI as seller while Mena signed under AFPRSBS also as seller.
Furthermore, the signatures of Espina and Mena were affixed again in the last portion of the Deed of
Restrictions 14 under the word "OWNER" with Espina signing for PEPI and Mena for AFPRSBS.

AFPRSBS repeatedly argues that the contract was not signed by any of its authorized representative. It
was resolute in its claim that Espina was not its treasurer or authorized representative. Conveniently,
however, it remained silent as to Mena. It never denied that Mena was its representative.

Indeed, there could be no other conclusion except that PEPI and AFPRSBS came to the contracting table
with the intention to be bound jointly and severally. AFPRSBS is estopped from denying Mena's
authority to represent it. It is quite obvious that AFPRSBS clothed Mena with apparent authority to act on
its behalf in the execution of the contract to sell. There is estoppel when the principal has clothed the
agent with indicia of authority as to lead a reasonably prudent person to believe that the agent actually
has such authority. 15 "In an agency by estoppel or apparent authority, "the principal is bound by the acts
of his agent with the apparent authority which he knowingly permits the agent to assume, or which he
holds the agent out to the public as possessing." 16 "A corporation may be held in estoppel from denying
as against innocent third persons the authority of its officers or agents who have been clothed by it with
ostensible or apparent authority." 17

WHEREFORE the petition is DENIED.

SO ORDERED.
HEIRS OF SERVANDO FRANCO, G.R. No. 159709
Petitioners,
Present:

LEONARDO-DE CASTRO,
- versus - Acting Chairperson,
BERSAMIN,
DEL CASTILLO,
VILLARAMA, JR, and
PERLAS-BERNABE, JJ.
SPOUSES VERONICA AND DANILO Promulgated:
GONZALES,
Respondents. June 27, 2012
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J.:
There is novation when there is an irreconcilable incompatibility between the old and the new
obligations. There is no novation in case of only slight modifications; hence, the old obligation prevails.

The petitioners challenge the decision promulgated on March 19, 2003,[1] whereby the Court of Appeals
(CA) upheld the issuance of a writ of execution by the Regional Trial Court (RTC), Branch 16, in Malolos,
Bulacan.

Antecedents
The Court adopts the following summary of the antecedents rendered by the Court in Medel v.
Court of Appeals,[2] the case from which this case originated, to wit:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and
Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was
engaged in the money lending business under the name Gonzales Credit Enterprises, in
the amount te, payable in two months. Veronica gave only the amount of P47,000.00, to
the borrowers, as she retained P3,000.00, as advance interest for one month at 6% per
month. Servado and Leticia executed a promissory note for P50,000.00, to evidence the
loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from Veronica another loan
in the amount of P90,000.00, payable in two months, at 6% interest per month. They
executed a promissory note to evidence the loan, maturing on January 19, 1986. They
received only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in
the amount of P300,000.00, maturing in one month, secured by a real estate mortgage
over a property belonging to Leticia Makalintal Yaptinchay, who issued a special power
of attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando
and Leticia executed a promissory note in favor of Veronica to pay the sum
of P300,000.00, after a month, or on July 11, 1986. However, only the sum of P275,000.00,
was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on
maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from
Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a total
of P500,000.00, payable on August 23, 1986. They executed a promissory note, reading as
follows:

Baliwag, Bulacan July 23, 1986

Maturity Date August 23, 1986

P500,000.00

FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the
order of VERONICA R. GONZALES doing business in the business style of
GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo
G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED
THOUSAND ..... (P500,000.00) Philippine
Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2%
service charge per annum from date hereof until fully paid according to the
amortization schedule contained herein. (Underscoring supplied)

Payment will be made in full at the maturity date.

Should I/WE fail to pay any amortization or portion hereof when due, all
the other installments together with all interest accrued shall immediately be
due and payable and I/WE hereby agree to pay
an additional amount equivalent to one per cent (1%) per month of the amount
due and demandable as penalty charges in the form of liquidated damages unt
il fully paid; and the
further sum of TWENTY FIVE PER CENT (25%) thereof in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total
amount due and demandable, exclusive of costs and judicial or extra judicial
expenses. (Underscoring supplied)
I, WE further agree that in the event the present rate of interest on loan is
increased by law or the Central Bank of the Philippines, the holder shall have
the option to apply and collect the increased interest charges without notice
although the original interest have already been collected wholly or partially
unless the contrary is required by law.

It is also a special condition of this contract that the parties herein agree
that the amount of peso-obligation under this agreement is based on the
present value of peso, and if there be any change in the value thereof, due to
extraordinary inflation or deflation, or any other cause or reason, then the
peso-obligation herein contracted shall be adjusted in accordance with the
value of the peso then prevailing at the time of the complete fulfillment of
obligation.

Demand and notice of dishonor waived. Holder may accept partial


payments and grant renewals of this note or extension of payments, reserving
rights against each and all indorsers and all parties to this note.

IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the


debtors waive all his/their rights under the provisions of Section 12, Rule 39, of
the Revised Rules of Court.

On maturity of the loan, the borrowers failed to pay the indebtedness


of P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory
note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G.


Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan,
a complaint for collection of the full amount of the loan including interests and other
charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant
Servando alleged that he did not obtain any loan from the plaintiffs; that it was
defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum
of P500,000.00, and actually received the amount and benefited therefrom; that the loan
was secured by a real estate mortgage executed in favor of the plaintiffs, and that he
(Servando Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10,1990, defendants Leticia and Rafael
Medel alleged that the loan was the transaction of Leticia Yaptinchay, who executed a
mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month with additional service
charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for
attorney's fees of 25% of the amount due is unconscionable, illegal and excessive, and
that substantial payments made were applied to interest, penalties and other charges.

After due trial, the lower court declared that the due execution and genuineness of
the four promissory notes had been duly proved, and ruled that although the Usury Law
had been repealed, the interest charged by the plaintiffs on the loans was unconscionable
and "revolting to the conscience". Hence, the trial court applied "the provision of the New
[Civil] Code" that the "legal rate of interest for loan or forbearance of money, goods or
credit is 12% per annum."

Accordingly, on December 9, 1991, the trial court rendered judgment, the


dispositive portion of which reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered, as


follows:

1. Ordering the defendants Servando Franco and Leticia Medel, jointly and
severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per
annum from November 7, 1985 and 1% per month as penalty, until the entire
amount is paid in full.

2. Ordering the defendants Servando Franco and Leticia Y. Medel to


plaintiffs, jointly and severally the amount of P84,000.00 with 12% interest per
annum and 1% per cent per month as penalty from November 19,1985 until the
whole amount is fully paid;

3. Ordering the defendants to pay the plaintiffs, jointly and severally, the
amount of P285,000.00 plus 12% interest per annum and 1% per month as
penalty from July 11, 1986, until the whole amount is fully paid;

4. Ordering the defendants to pay plaintiffs, jointly and severally, the


amount of P50,000.00 as attorney's fees;

5. All counterclaims are hereby dismissed.

With costs against the defendants.

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which


consolidated all the unpaid loans of the defendants, is the law that governs the parties.
They further argued that Circular No. 416 of the Central Bank prescribing the rate of
interest for loans or forbearance of money, goods or credit at 12% per annum, applies
only in the absence of a stipulation on interest rate, but not when the parties agreed
thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that


the Usury Law having become legally inexistent with the promulgation by the Central
Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interest
that may be charged on the loan. The Court of Appeals further held that "the imposition
of an additional amount equivalent to 1% per month of the amount due and demandable
as penalty charges in the form of liquidated damages until fully paid was allowed by
law.
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision
reversing that of the Regional Trial Court, disposing as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that


defendants are hereby ordered to pay the plaintiffs the sum of P500,000.00,
plus 5.5% per month interest and 2% service charge per annum effective July
23, 1986, plus 1% per month of the total amount due and demandable as
penalty charges effective August 24, 1986, until the entire amount is fully paid.

The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And


so is the imposition of costs against the defendants.

SO ORDERED.

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the


said decision. By resolution dated November 25, 1997, the Court of Appeals denied the
motion.[3]
On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the
interest for being iniquitous or unconscionable, and revived the judgment of the RTC rendered on
December 9, 1991, viz:

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the
Court of Appeals promulgated on March 21, 1997, and its resolution dated November 25,
1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in
Civil Case No. 134-M-90, involving the same parties.

No pronouncement as to costs in this instance.

SO ORDERED.[4]

Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for
execution.[5] Servando Franco opposed,[6] claiming that he and the respondents had agreed to fix the entire
obligation at P775,000.00.[7] According to Servando, their agreement, which was allegedly embodied in a
receipt dated February 5, 1992,[8] whereby he made an initial payment of P400,000.00 and promised to pay
the balance of P375,000.00 on February 29, 1992, superseded the July 23, 1986 promissory note.

The RTC granted the motion for execution over Servandos opposition, thus:

There is no doubt that the decision dated December 9, 1991 had already been
affirmed and had already become final and executory. Thus, in accordance with Sec. 1 of
Rule 39 of the 1997 Rules of Civil Procedure, execution shall issue as a matter of right. It
has likewise been ruled that a judgment which has acquired finality becomes immutable
and unalterable and hence may no longer be modified at any respect except only to
correct clerical errors or mistakes (Korean Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In
this respect, the decision deserves to be respected.

The argument about the modification of the contract or non-participation of


defendant Servando Franco in the proceedings on appeal on the alleged belief that the
payment he made had already absolved him from liability is of no moment. Primarily,
the decision was for him and Leticia Medel to pay the plaintiffs jointly and severally the
amounts stated in the Decision. In other words, the liability of the defendants thereunder
is solidary. Based on this aspect alone, the new defense raised by defendant Franco is
unavailing.

WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion
for Execution of Judgment.

Accordingly, let a writ of execution be issued for implementation by the Deputy


Sheriff of this Court.

SO ORDERED.[9]

On March 8, 2001, the RTC issued the writ of execution.[10]

Servando moved for reconsideration,[11] but the RTC denied his motion.[12]

On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that the execution was
proper because of Servandos failure to comply with the terms of the compromise agreement, stating:[13]

Petitioner cannot deny the fact that there was no full compliance with the tenor of
the compromise agreement. Private respondents on their part did not disregard the
payments made by the petitioner. They even offered that whatever payments made by
petitioner, it can be deducted from the principal obligation including interest. However,
private respondents posit that the payments made cannot alter, modify or revoke the
decision of the Supreme Court in the instant case.

In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the
Supreme Court ruled that:

When the terms of the compromise judgment is violated, the aggrieved


party must move for its execution, not its invalidation.
It is clear from the aforementioned jurisprudence that even if there is a compromise
agreement and the terms have been violated, the aggrieved party, such as the private
respondents, has the right to move for the issuance of a writ of execution of the final
judgment subject of the compromise agreement.

Moreover, under the circumstances of this case, petitioner does not stand to suffer
any harm or prejudice for the simple reason that what has been asked by private
respondents to be the subject of a writ of execution is only the balance of petitioners
obligation after deducting the payments made on the basis of the compromise
agreement.

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE


COURSE and consequently DISMISSED for lack of merit.

SO ORDERED.
His motion for reconsideration having been denied, [14] Servando appealed. He was eventually substituted
by his heirs, now the petitioners herein, on account of his intervening death. The substitution was
pursuant to the resolution dated June 15, 2005.[15]

Issue

The petitioners submit that the CA erred in ruling that:

I
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL
COURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE
AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY 1992.

II
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON
THE DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT
OF MALOLOS, BULACAN AND NOT ON THE COMPROMISE AGREEMENT
EXECUTED IN 1992.

The petitioners insist that the RTC could not validly enforce a judgment based on a promissory note that
had been already novated; that the promissory note had been impliedly novated when the principal
obligation of P500,000.00 had been fixed at P750,000.00, and the maturity date had been extended from
August 23, 1986 to February 29, 1992.

In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final and
executory decision of the Court; that novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum receipt; that Servandos previous
payment would be deducted from the total liability of the debtors based on the RTCs decision.

Issue
Was there a novation of the August 23, 1986 promissory note when respondent Veronica
Gonzales issued the February 5, 1992 receipt?

Ruling

The petition lacks merits.

I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt

To buttress their claim of novation, the petitioners rely on the receipt issued on February 5, 1992 by
respondent Veronica whereby Servandos obligation was fixed at P750,000.00. They insist that even the
maturity date was extended until February 29, 1992. Such changes, they assert, were incompatible with
those of the original agreement under the promissory note.

The petitioners assertion is wrong.

A novation arises when there is a substitution of an obligation by a subsequent one that extinguishes the
first, either by changing the object or the principal conditions, or by substituting the person of the debtor,
or by subrogating a third person in the rights of the creditor. [16] For a valid novation to take place, there
must be, therefore: (a) a previous valid obligation; (b) an agreement of the parties to make a new contract;
(c) an extinguishment of the old contract; and (d) a valid new contract.[17] In short, the new obligation
extinguishes the prior agreement only when the substitution is unequivocally declared, or the old and the
new obligations are incompatible on every point. A compromise of a final judgment operates as a
novation of the judgment obligation upon compliance with either of these two conditions. [18]

The receipt dated February 5, 1992, excerpted below, did not create a new obligation incompatible with
the old one under the promissory note, viz:

February 5, 1992
Received from SERVANDO FRANCO BPI Managers Check No. 001700 in the
amount of P400,00.00 as partial payment of loan. Balance of P375,000.00 to be paid on or
before FEBRUARY 29, 1992. In case of default an interest will be charged as stipulated in
the promissory note subject of this case.

(Sgd)
V. Gonzalez[19]

To be clear, novation is not presumed. This means that the parties to a contract should expressly agree to
abrogate the old contract in favor of a new one. In the absence of the express agreement, the old and the
new obligations must be incompatible on every point. [20] According to California Bus Lines, Inc. v. State
Investment House, Inc.:[21]

The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. The term expressly means
that the contracting parties incontrovertibly disclose that their object in executing the
new contract is to extinguish the old one. Upon the other hand, no specific form is
required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety, however, would be an irreconcilable incompatibility
between the old and the new obligations.
There is incompatibility when the two obligations cannot stand together, each one having its independent
existence. If the two obligations cannot stand together, the latter obligation novates the first.[22] Changes
that breed incompatibility must be essential in nature and not merely accidental. The incompatibility
must affect any of the essential elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change is merely modificatory in nature and insufficient to extinguish the original
obligation.[23]

In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the respondents
only thereby recognized the original obligation by stating in the receipt that the P400,000.00 was partial
payment of loan and by referring to the promissory note subject of the case in imposing the interest.
The loan mentioned in the receipt was still the same loan involving the P500,000.00 extended to
Servando. Advertence to the interest stipulated in the promissory note indicated that the contract still
subsisted, not replaced and extinguished, as the petitioners claim.

The receipt dated February 5, 1992 was only the proof of Servandos payment of his obligation as
confirmed by the decision of the RTC. It did not establish the novation of his agreement with the
respondents. Indeed, the Court has ruled that an obligation to pay a sum of money is not novated by an
instrument that expressly recognizes the old, or changes only the terms of payment, or adds other
obligations not incompatible with the old ones, or the new contract merely supplements the old one. [24] A
new contract that is a mere reiteration, acknowledgment or ratification of the old contract with slight
modifications or alterations as to the cause or object or principal conditions can stand together with the
former one, and there can be no incompatibility between them. [25] Moreover, a creditors acceptance of
payment after demand does not operate as a modification of the original contract. [26]

Worth noting is that Servandos liability was joint and solidary with his co-debtors. In a solidary
obligation, the creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously.[27] The choice to determine against whom the collection is enforced belongs to the
creditor until the obligation is fully satisfied.[28] Thus, the obligation was being enforced against Servando,
who, in order to escape liability, should have presented evidence to prove that his obligation had already
been cancelled by the new obligation or that another debtor had assumed his place. In case of change in
the person of the debtor, the substitution must be clear and express, [29] and made with the consent of the
creditor.[30] Yet, these circumstances did not obtain herein, proving precisely that Servando remained a
solidary debtor against whom the entire or part of the obligation might be enforced.

Lastly, the extension of the maturity date did not constitute a novation of the previous agreement. It is
settled that an extension of the term or period of the maturity date does not result in novation.[31]
II
Total liability to be reduced by P400,000.00

The petitioners argue that Servandos remaining liability amounted to only P375,000.00, the balance
indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet due because the
respondents did not yet make a demand for payment.

The petitioners cannot be upheld.

The balance of P375,000.00 was premised on the taking place of a novation. However, as found now,
novation did not take place. Accordingly, Servandos obligation, being solidary, remained to be that
decreed in the December 9, 1991 decision of the RTC, inclusive of interests, less the amount of P400,000.00
that was meanwhile paid by him.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on March
19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with the execution
based on its decision rendered on December 9, 1991, deducting the amount of P400,000.00 already paid
by the late Servando Franco; and DIRECTS the petitioners to pay the costs of suit.
SO ORDERED.

LAND BANK OF THE PHILIPPINES, G.R. No. 190755


Petitioner,
Present:

CORONA, C.J., Chairperson,


- versus - VELASCO, JR.,
LEONARDO-DE CASTRO,
PERALTA,* and
PEREZ, JJ.
ALFREDO ONG,
Respondent. Promulgated:
November 24, 2010
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

This is an appeal from the October 20, 2009 Decision of the Court of Appeals (CA) in CA-G.R. CR-CV No.
84445 entitled Alfredo Ong v. Land Bank of the Philippines, which affirmed the Decision of the Regional Trial
Court (RTC), Branch 17 in Tabaco City.

The Facts

On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land Bank Legazpi
City in the amount of PhP 16 million. The loan was secured by three (3) residential lots, five (5) cargo
trucks, and a warehouse. Under the loan agreement, PhP 6 million of the loan would be short-term and
would mature on February 28, 1997, while the balance of PhP 10 million would be payable in seven (7)
years. The Notice of Loan Approval dated February 22, 1996 contained an acceleration clause wherein
any default in payment of amortizations or other charges would accelerate the maturity of the loan. [1]

Subsequently, however, the Spouses Sy found they could no longer pay their loan. On
December 9, 1996, they sold three (3) of their mortgaged parcels of land for PhP 150,000 to Angelina
Gloria Ong, Evangelines mother, under a Deed of Sale with Assumption of Mortgage. The relevant
portion of the document[2] is quoted as follows:
WHEREAS, we are no longer in a position to settle our obligation with the bank;
NOW THEREFORE, for and in consideration of the sum of ONE HUNDRED FIFTY
THOUSAND PESOS (P150,000.00) Philippine Currency, we hereby these presents SELL,
CEDE, TRANSFER and CONVEY, by way of sale unto ANGELINA GLORIA ONG, also of
legal age, Filipino citizen, married to Alfredo Ong, and also a resident of Tabaco, Albay,
Philippines, their heirs and assigns, the above-mentioned debt with the said LAND BANK
OF THE PHILIPPINES, and by reason hereof they can make the necessary representation
with the bank for the proper restructuring of the loan with the said bank in their favor;

That as soon as our obligation has been duly settled, the bank is authorized to
release the mortgage in favor of the vendees and for this purpose VENDEES can register
this instrument with the Register of Deeds for the issuance of the titles already in their
names.

IN WITNESS WHEREOF, we have hereunto affixed our signatures this 9 th day of


December 1996 at Tabaco, Albay, Philippines.

(signed) (signed)
EVANGELINE O. SY JOHNSON B. SY
Vendor Vendor

Evangelines father, petitioner Alfredo Ong, later went to Land Bank to inform it about the sale
and assumption of mortgage.[3] Atty. Edna Hingco, the Legazpi City Land Bank Branch Head, told
Alfredo and his counsel Atty. Ireneo de Lumen that there was nothing wrong with the agreement with
the Spouses Sy but provided them with requirements for the assumption of mortgage. They were also
told that Alfredo should pay part of the principal which was computed at PhP 750,000 and to update
due or accrued interests on the promissory notes so that Atty. Hingco could easily approve the
assumption of mortgage. Two weeks later, Alfredo issued a check for PhP 750,000 and personally gave
it to Atty. Hingco. A receipt was issued for his payment. He also submitted the other documents
required by Land Bank, such as financial statements for 1994 and 1995. Atty. Hingco then informed
Alfredo that the certificate of title of the Spouses Sy would be transferred in his name but this never
materialized. No notice of transfer was sent to him.[4]

Alfredo later found out that his application for assumption of mortgage was not approved by
Land Bank. The bank learned from its credit investigation report that the Ongs had a real estate
mortgage in the amount of PhP 18,300,000 with another bank that was past due. Alfredo claimed that
this was fully paid later on. Nonetheless, Land Bank foreclosed the mortgage of the Spouses Sy after
several months. Alfredo only learned of the foreclosure when he saw the subject mortgage properties
included in a Notice of Foreclosure of Mortgage and Auction Sale at the RTC in Tabaco, Albay.
Alfredos other counsel, Atty. Madrilejos, subsequently talked to Land Banks lawyer and was told that
the PhP 750,000 he paid would be returned to him. [5]

On December 12, 1997, Alfredo initiated an action for recovery of sum of money with damages
against Land Bank in Civil Case No. T-1941, as Alfredos payment was not returned by Land
Bank. Alfredo maintained that Land Banks foreclosure without informing him of the denial of his
assumption of the mortgage was done in bad faith. He argued that he was lured into believing that his
payment of PhP 750,000 would cause Land Bank to approve his assumption of the loan of the Spouses
Sy and the transfer of the mortgaged properties in his and his wifes name. [6] He also claimed incurring
expenses for attorneys fees of PhP 150,000, filing fee of PhP 15,000, and PhP 250,000 in moral
damages.[7]

Testifying for Land Bank, Atty. Hingco claimed during trial that as branch manager she had no authority
to approve loans and could not assure anybody that their assumption of mortgage would be approved.
She testified that the breakdown of Alfredos payment was as follows:

PhP 101,409.59 applied to principal


216,246.56 accrued interests receivable
396,571.77 interests
18,766.10 penalties
16,805.98 accounts receivable
----------------
Total: 750,000.00

According to Atty. Hingco, the bank processes an assumption of mortgage as a new loan, since the new
borrower is considered a new client. They used character, capacity, capital, collateral, and conditions in
determining who can qualify to assume a loan. Alfredos proposal to assume the loan, she explained, was
referred to a separate office, the Lending Center. [8]
During cross-examination, Atty. Hingco testified that several months after Alfredo made the tender of
payment, she received word that the Lending Center rejected Alfredos loan application. She stated that it
was the Lending Center and not her that should have informed Alfredo about the denial of his and his
wifes assumption of mortgage. She added that although she told Alfredo that the agreement between the
spouses Sy and Alfredo was valid between them and that the bank would accept payments from him,
Alfredo did not pay any further amount so the foreclosure of the loan collaterals ensued. She admitted
that Alfredo demanded the return of the PhP 750,000 but said that there was no written demand before
the case against the bank was filed in court. She said that Alfredo had made the payment of PhP 750,000
even before he applied for the assumption of mortgage and that the bank received the said amount
because the subject account was past due and demandable; and the Deed of Assumption of Mortgage
was not used as the basis for the payment. [9]

The Ruling of the Trial Court

The RTC held that the contract approving the assumption of mortgage was not perfected as a result of the
credit investigation conducted on Alfredo. It noted that Alfredo was not even informed of the
disapproval of the assumption of mortgage but was just told that the accounts of the spouses Sy had
matured and gone unpaid. It ruled that under the principle of equity and justice, the bank should return
the amount Alfredo had paid with interest at 12% per annum computed from the filing of the complaint.
The RTC further held that Alfredo was entitled to attorneys fees and litigation expenses for being
compelled to litigate.[10]

The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, a decision is rendered, ordering defendant


bank to pay plaintiff, Alfredo Ong the amount of P750,000.00 with interest at 12% per
annum computed from Dec. 12, 1997 and attorneys fees and litigation expenses of
P50,000.00.

Costs against defendant bank.


SO ORDERED.[11]

The Ruling of the Appellate Court

On appeal, Land Bank faulted the trial court for (1) holding that the payment of PhP 750,000 made by
Ong was one of the requirements for the approval of his proposal to assume the mortgage of the Sy
spouses; (2) erroneously ordering Land Bank to return the amount of PhP 750,000 to Ong on the ground
of its failure to effect novation; and (3) erroneously affirming the award of PhP 50,000 to Ong as
attorneys fees and litigation expenses.

The CA affirmed the RTC Decision.[12] It held that Alfredos recourse is not against the Sy
spouses. According to the appellate court, the payment of PhP 750,000 was for the approval of his
assumption of mortgage and not for payment of arrears incurred by the Sy spouses. As such, it ruled that
it would be incorrect to consider Alfredo a third person with no interest in the fulfillment of the
obligation under Article 1236 of the Civil Code. Although Land Bank was not bound by the Deed
between Alfredo and the Spouses Sy, the appellate court found that Alfredo and Land Banks active
preparations for Alfredos assumption of mortgage essentially novated the agreement.

On January 5, 2010, the CA denied Land Banks motion for reconsideration for lack of merit. Hence, Land
Bank appealed to us.

The Issues

Whether the Court of Appeals erred in holding that Art. 1236 of the Civil Code does not
apply and in finding that there is no novation.

II

Whether the Court of Appeals misconstrued the evidence and the law when it affirmed
the trial court decisions ordering Land Bank to pay Ong the amount of Php750,000.00
with interest at 12% annum.

III

Whether the Court of Appeals committed reversible error when it affirmed the award of
Php50,000.00 to Ong as attorneys fees and expenses of litigation.

The Ruling of this Court

We affirm with modification the appealed decision.

Recourse is against Land Bank

Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should have sought
recourse against the Spouses Sy instead of Land Bank. Art. 1236 provides:

The creditor is not bound to accept payment or performance by a third person who has
no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if
he paid without the knowledge or against the will of the debtor, he can recover only
insofar as the payment has been beneficial to the debtor.
We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land Bank
was not bound to accept Alfredos payment, since as far as the former was concerned, he did not have an
interest in the payment of the loan of the Spouses Sy. However, in the context of the second part of said
paragraph, Alfredo was not making payment to fulfill the obligation of the Spouses Sy. Alfredo made a
conditional payment so that the properties subject of the Deed of Sale with Assumption of Mortgage
would be titled in his name. It is clear from the records that Land Bank required Alfredo to make
payment before his assumption of mortgage would be approved. He was informed that the certificate of
title would be transferred accordingly. He, thus, made payment not as a debtor but as a prospective
mortgagor. But the trial court stated:

[T]he contract was not perfected or consummated because of the adverse finding
in the credit investigation which led to the disapproval of the proposed assumption.
There was no evidence presented that plaintiff was informed of the disapproval. What he
received was a letter dated May 22, 1997 informing him that the account of spouses Sy
had matured but there [were] no payments. This was sent even before the conduct of the
credit investigation on June 20, 1997 which led to the disapproval of the proposed
assumption of the loans of spouses Sy.[13]

Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the obligation of the
Spouses Sy, since his interest hinged on Land Banks approval of his application, which was denied. The
circumstances of the instant case show that the second paragraph of Art. 1236 does not apply. As Alfredo
made the payment for his own interest and not on behalf of the Spouses Sy, recourse is not against the
latter. And as Alfredo was not paying for another, he cannot demand from the debtors, the Spouses Sy,
what he has paid.

Novation of the loan agreement

Land Bank also faults the CA for finding that novation applies to the instant case. It reasons that a
substitution of debtors was made without its consent; thus, it was not bound to recognize the substitution
under the rules on novation.

On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance
Corporation[14] provides the following discussion:

Novation, in its broad concept, may either be extinctive or modificatory. It is


extinctive when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old obligation subsists to
the extent it remains compatible with the amendatory agreement. An extinctive novation
results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal). Under this mode, novation would have dual functions ─
one to extinguish an existing obligation, the other to substitute a new one in its place ─
requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the extinguishment of the old
obligation; and (4) the birth of a valid new obligation. x x x

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 obligations be on every point incompatible with each other. The test of
incompatibility is whether or not the two obligations can stand together, each one having
its independent existence. x x x (Emphasis supplied.)

Furthermore, Art. 1293 of the Civil Code states:

Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.

We do not agree, then, with the CA in holding that there was a novation in the contract between the
parties. Not all the elements of novation were present. Novation must be expressly consented
to. Moreover, the conflicting intention and acts of the parties underscore the absence of any express
disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate
the old agreement.[15] Land Bank is thus correct when it argues that there was no novation in the
following:

[W]hether or not Alfredo Ong has an interest in the obligation and payment was
made with the knowledge or consent of Spouses Sy, he may still pay the obligation for the
reason that even before he paid the amount of P750,000.00 on January 31, 1997, the
substitution of debtors was already perfected by and between Spouses Sy and Spouses
Ong as evidenced by a Deed of Sale with Assumption of Mortgage executed by them on
December 9, 1996. And since the substitution of debtors was made without the consent of
Land Bank a requirement which is indispensable in order to effect a novation of the
obligation, it is therefore not bound to recognize the substitution of debtors. Land Bank
did not intervene in the contract between Spouses Sy and Spouses Ong and did not
expressly give its consent to this substitution.[16]

Unjust enrichment
Land Bank maintains that the trial court erroneously applied the principle of equity and justice in
ordering it to return the PhP 750,000 paid by Alfredo. Alfredo was allegedly in bad faith and in estoppel.
Land Bank contends that it enjoyed the presumption of regularity and was in good faith when it accepted
Alfredos tender of PhP 750,000. It reasons that it did not unduly enrich itself at Alfredos expense during
the foreclosure of the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the
Spouses Sys outstanding loan obligation. Alfredos recourse then, according to Land Bank, is to have his
payment reimbursed by the Spouses Sy.

We rule that Land Bank is still liable for the return of the PhP 750,000 based on the principle of
unjust enrichment. Land Bank is correct in arguing that it has no obligation as creditor to recognize
Alfredo as a person with interest in the fulfillment of the obligation. But while Land Bank is not bound to
accept the substitution of debtors in the subject real estate mortgage, it is estopped by its action of
accepting Alfredos payment from arguing that it does not have to recognize Alfredo as the new debtor.
The elements of estoppel are:

First, the actor who usually must have knowledge, notice or suspicion of the true
facts, communicates something to another in a misleading way, either by words, conduct
or silence; second, the other in fact relies, and relies reasonably or justifiably, upon that
communication; third, the other would be harmed materially if the actor is later
permitted to assert any claim inconsistent with his earlier conduct; and fourth, the actor
knows, expects or foresees that the other would act upon the information given or that a
reasonable person in the actors position would expect or foresee such action.[17]

By accepting Alfredos payment and keeping silent on the status of Alfredos application, Land
Bank misled Alfredo to believe that he had for all intents and purposes stepped into the shoes of the
Spouses Sy.

The defense of Land Bank Legazpi City Branch Manager Atty. Hingco that it was the banks
Lending Center that should have notified Alfredo of his assumption of mortgage disapproval is
unavailing. The Lending Centers lack of notice of disapproval, the Tabaco Branchs silence on the
disapproval, and the banks subsequent actions show a failure of the bank as a whole, first, to notify
Alfredo that he is not a recognized debtor in the eyes of the bank; and second, to apprise him of how and
when he could collect on the payment that the bank no longer had a right to keep.
We turn then on the principle upon which Land Bank must return Alfredos payment. Unjust
enrichment exists when a person unjustly retains a benefit to the loss of another, or when a person retains
money or property of another against the fundamental principles of justice, equity and good
conscience.[18] There is unjust enrichment under Art. 22 of the Civil Code when (1) a person is unjustly
benefited, and (2) such benefit is derived at the expense of or with damages to another. [19]

Additionally, unjust enrichment has been applied to actions called accion in rem verso. In order
that the accion in rem verso may prosper, the following conditions must concur: (1) that the defendant has
been enriched; (2) that the plaintiff has suffered a loss; (3) that the enrichment of the defendant is without
just or legal ground; and (4) that the plaintiff has no other action based on contract, quasi-contract, crime,
or quasi-delict.[20] The principle of unjust enrichment essentially contemplates payment when there is no
duty to pay, and the person who receives the payment has no right to receive it. [21]

The principle applies to the parties in the instant case, as, Alfredo, having been deemed
disqualified from assuming the loan, had no duty to pay petitioner bank and the latter had no right to
receive it.

Moreover, the Civil Code likewise requires under Art. 19 that [e]very person must, in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty
and good faith. Land Bank, however, did not even bother to inform Alfredo that it was no longer
approving his assumption of the Spouses Sys mortgage. Yet it acknowledged his interest in the loan
when the branch head of the bank wrote to tell him that his daughters loan had not been paid. [22] Land
Bank made Alfredo believe that with the payment of PhP 750,000, he would be able to assume the
mortgage of the Spouses Sy. The act of receiving payment without returning it when demanded is
contrary to the adage of giving someone what is due to him. The outcome of the application would have
been different had Land Bank first conducted the credit investigation before accepting Alfredos payment.
He would have been notified that his assumption of mortgage had been disapproved; and he would not
have taken the futile action of paying PhP 750,000. The procedure Land Bank took in acting on Alfredos
application cannot be said to have been fair and proper.

As to the claim that the trial court erred in applying equity to Alfredos case, we hold that Alfredo had no
other remedy to recover from Land Bank and the lower court properly exercised its equity jurisdiction in
resolving the collection suit. As we have held in one case:

Equity, as the complement of legal jurisdiction, seeks to reach and complete justice
where courts of law, through the inflexibility of their rules and want of power to adapt
their judgments to the special circumstances of cases, are incompetent to do so. Equity
regards the spirit and not the letter, the intent and not the form, the substance rather
than the circumstance, as it is variously expressed by different courts. [23]
Another claim made by Land Bank is the presumption of regularity it enjoys and that it was in
good faith when it accepted Alfredos tender of PhP 750,000.

The defense of good faith fails to convince given Land Banks actions. Alfredo was not treated as a
mere prospective borrower. After he had paid PhP 750,000, he was made to sign bank documents
including a promissory note and real estate mortgage. He was assured by Atty. Hingco that the titles to
the properties covered by the Spouses Sys real estate mortgage would be transferred in his name, and
upon payment of the PhP 750,000, the account would be considered current and renewed in his name. [24]

Land Bank posits as a defense that it did not unduly enrich itself at Alfredos expense during the
foreclosure of the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the
Spouses Sys outstanding loan obligation. It is observed that this is the first time Land Bank is revealing
this defense. However, issues, arguments, theories, and causes not raised below may no longer be posed
on appeal.[25] Land Banks contention, thus, cannot be entertained at this point.

Land Bank further questions the lower courts decision on the basis of the inconsistencies made by
Alfredo on the witness stand. It argues that Alfredo was not a credible witness and his testimony failed to
overcome the presumption of regularity in the performance of regular duties on the part of Land Bank.

This claim, however, touches on factual findings by the trial court, and we defer to these findings of the
trial court as sustained by the appellate court. These are generally binding on us. While there are
exceptions to this rule, Land Bank has not satisfactorily shown that any of them is applicable to this
issue.[26] Hence, the rule that the trial court is in a unique position to observe the demeanor of witnesses
should be applied and respected[27] in the instant case.

In sum, we hold that Land Bank may not keep the PhP 750,000 paid by Alfredo as it had already
foreclosed on the mortgaged lands.

Interest and attorneys fees

As to the applicable interest rate, we reiterate the guidelines found in Eastern Shipping Lines, Inc.
v. Court of Appeals:[28]
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:

1. When the obligation is breached, and it consists in the payment of a sum of


money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is


breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.

No evidence was presented by Alfredo that he had sent a written demand to Land Bank before he filed
the collection suit. Only the verbal agreement between the lawyers of the parties on the return of the
payment was mentioned.[29] Consequently, the obligation of Land Bank to return the payment made by
Alfredo upon the formers denial of the latters application for assumption of mortgage must be reckoned
from the date of judicial demand on December 12, 1997, as correctly determined by the trial court and
affirmed by the appellate court.

The next question is the propriety of the imposition of interest and the proper imposable rate of
applicable interest. The RTC granted the rate of 12% per annum which was affirmed by the CA. From the
above-quoted guidelines, however, the proper imposable interest rate is 6% per annum pursuant to Art.
2209 of the Civil Code. Sunga-Chan v. Court of Appeals is illuminating in this regard:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum
under Central Bank (CB) Circular No. 416 shall be adjudged only in cases involving the
loan or forbearance of money. And for transactions involving payment of indemnities in
the concept of damages arising from default in the performance of obligations in
general and/or for money judgment not involving a loan or forbearance of money, goods,
or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6%
interest. Art. 2209 pertinently provides:

Art. 2209. If the obligation consists in the payment of a sum of money,


and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per
annum.

The term forbearance, within the context of usury law, has been described as a
contractual obligation of a lender or creditor to refrain, during a given period of time, from
requiring the borrower or debtor to repay the loan or debt then due and payable.

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if
proper, and the applicable rate, as follows: The 12% per annum rate under CB Circular No.
416 shall apply only to loans or forbearance of money, goods, or credits, as well as to
judgments involving such loan or forbearance of money, goods, or credit, while the 6%
per annum under Art. 2209 of the Civil Code applies when the transaction involves the
payment of indemnities in the concept of damage arising from the breach or a delay in
the performance of obligations in general, with the application of both rates reckoned
from the time the complaint was filed until the [adjudged] amount is fully paid. In either
instance, the reckoning period for the commencement of the running of the legal interest
shall be subject to the condition that the courts are vested with discretion, depending on
the equities of each case, on the award of interest.[30](Emphasis supplied.)

Based on our ruling above, forbearance of money refers to the contractual obligation of the lender or
creditor to desist for a fixed period from requiring the borrower or debtor to repay the loan or debt then
due and for which 12% per annum is imposed as interest in the absence of a stipulated rate. In the instant
case, Alfredos conditional payment to Land Bank does not constitute forbearance of money, since there
was no agreement or obligation for Alfredo to pay Land Bank the amount of PhP 750,000, and the
obligation of Land Bank to return what Alfredo has conditionally paid is still in dispute and has not yet
been determined. Thus, it cannot be said that Land Banks alleged obligation has become a forbearance of
money.

On the award of attorneys fees, attorneys fees and expenses of litigation were awarded because
Alfredo was compelled to litigate due to the unjust refusal of Land Bank to refund the amount he paid.
There are instances when it is just and equitable to award attorneys fees and expenses of litigation.[31] Art.
2208 of the Civil Code pertinently states:
In the absence of stipulation, attorneys fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

xxxx

(2) When the defendants act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest.

Given that Alfredo was indeed compelled to litigate against Land Bank and incur expenses to
protect his interest, we find that the award falls under the exception above and is, thus, proper given the
circumstances.

On a final note. The instant case would not have been litigated had Land Bank been more circumspect in
dealing with Alfredo. The bank chose to accept payment from Alfredo even before a credit investigation
was underway, a procedure worsened by the failure to even inform him of his credit standings impact on
his assumption of mortgage. It was, therefore, negligent to a certain degree in handling the transaction
with Alfredo. It should be remembered that the business of a bank is affected with public interest and it
should observe a higher standard of diligence when dealing with the public.[32]

WHEREFORE, the appeal is DENIED. The CA Decision in CA-G.R. CR-CV No. 84445
is AFFIRMED with MODIFICATION in that the amount of PhP 750,000 will earn interest at 6% per
annum reckoned from December 12, 1997, and the total aggregate monetary awards will in turn earn 12%
per annum from the finality of this Decision until fully paid.

SO ORDERED.
GLEN PASCUAL Y G.R. No. 162286
MALUMAY alias YEYE and PAULITO
PASCUAL Y JUDALENA aliasBOYET,
Present:
Petitioners,

YNARES-SANTIAGO, J.,

Chairperson,
-versus-

CARPIO,*

CORONA,**

NACHURA, and

PERALTA, JJ.

PEOPLE OF THE PHILIPPINES,

Promulgated:
Respondent.

June 5, 2009

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

DECISION

PERALTA, J.:

Before this Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, in connection with Section 2, Rule 125 of the Rules of Criminal Procedure, seeking to set aside
the entry of judgment in CA-G.R. CR No. 26329 and to reinstate the appeal of herein petitioners before
the Court of Appeals (CA).
The instant petition is brought about by the following factual and procedural antecedents:

On July 25, 1996, Criminal Case No. 96-151438 for homicide was filed against petitioners with the
Regional Trial Court (RTC) of Manila, Branch 6, the Information on which reads:

That on or about June 30, 1996, in the City of Manila, Philippines, the said
accused, conspiring and confederating together with two others whose true names, real
identities and present whereabouts are still unknown and helping one another, did then
and there wilfully, unlawfully and feloniously, with intent to kill, attack, assault and use
personal violence upon the person of TEOFILO CORNEL Y DACASIN, by then and there
kicking, boxing the latter on the different parts of his body and, thereafter, striking him in
the head with a stone, thereby inflicting upon him mortal and fatal wounds which were
the direct and immediate cause of his death thereafter.

CONTRARY TO LAW.[1]

During their arraignment on January 31, 1997, petitioners, with the assistance of their counsel de
parte, pleaded not guilty.

At the trial, the RTC found the following facts based on the testimonies of prosecution witnesses
Rodolfo C. Cortez (Cortez), an eyewitness to the mauling incident which led to the killing of the victim;
Edgardo Ko (Ko), the police investigator of the case; Flora Cornel (Flora), who testified as to the civil
liability of the case, she, being the mother of the victim; and the testimony of petitioner Paulito Pascual,
for the defense:
On June 30, 1996, at about 12:30 in the morning, Rodolfo Cortez was on his way to buy liempo at
Andok's Litson Manok (Andok's) located at the corner of Palawan and Rosalito Streets, along G. Tuazon,
Sampaloc, Manila. Cortez was approaching Andok's when he saw a male person sporting long hair being
kicked, mauled and ganged up on by six persons in front of the same store. Cortez recognized two of the
six persons as petitioners Glen Pascual alias Yeye and Paulito Pascual alias Boyet, as the former
sometimes played basketball with Cortez and the latter lived in Masbate Street, the next street from Leo
Street, where Cortez lived. Petitioner Glen Pascual hit the head of the victim with a knapsack, which
caused the victim to fall with his face down. While the victim was lying prostrate on the ground,
petitioners Glen Pascual and Paulito Pascual continuously kicked the said victim. Cortez next saw
petitioner Glen Pascual with a shiny instrument, which the latter struck on the neck area (the lower
earlobe) of the victim. After that, Cortez heard somebody shout the name Yeye, which made petitioner
Glen Pascual turn around, prompting both of them to have an eye to eye contact. [2]

The following day, after the mauling incident, while Cortez was on his way home from work, he
passed by the barangay hall and noticed that somebody was lying in state. Cortez entered
the barangay hall and recognized the corpse inside the coffin as the same victim who was mauled the
night before. Cortez informed somebody, who turned out to be the brother of the victim, about the
mauling incident which led to the killing of the victim and told the latter that he was willing to testify as
to the incident he witnessed.[3]Thus, on July 2, 1996, Cortez executed an Affidavit [4] stating what he
witnessed during the mauling.

Edgardo Ko testified that on June 30, 1996, at 10:00 in the morning, while he was in his office at
the Western Police District, Homicide Section, he received a telephone call from Senior Police Officer
(SPO4) Domingo Almeda of the Balic-Balic Police Station informing him that a victim of a mauling
incident was admitted dead on arrival at the Ospital ng Sampaloc. Hearing said information, he and PO3
Diomedes Labarda then proceeded to the said hospital and traced the victim's body inside the emergency
room. Upon seeing the victims body, Ko examined it. It showed lacerated wounds at the back of his head,
busted lips and a puncture wound on the chin. He also came to know the name of the victim as Teofilo
Cornel y Dacasin (Teofilo). Afterwards, Ko and his companion proceeded to the scene of the mauling
incident. They conducted an ocular inspection and found splashes of blood along the gutter of the road.
They also found the bloodstained, gray and aquamarine colored knapsack containing assorted
technician's tools and clothing which allegedly belonged to the victim. They recovered said bag at the
Pascual compound at 1024 Rosalito Street, Sampaloc, Manila.[5]
The autopsy conducted by Dr. Antonio S. Vertido, Medico-Legal Officer of the National Bureau
of Investigation (NBI), upon a letter-request of the victim's brother, indicated the following: (1) the victim
suffered fractures, linear, on the right and left fronto-temporo-parietal bones; (2) as a result of the said
injuries, the victim suffered hematoma on the scalp, generalized, and hemorrhages, subdural, on the right
and left cerebral- hemisphere; (3) the injuries could have been caused by a blunt instrument like a lead
pipe or a 2x2 piece of wood; (4) considering that the victim suffered fractures on both sides of his head,
the blunt instrument could have been used twice in inflicting the wounds; (5) that the person who
inflicted the blunt instrument could have been one arm's length from the victim, and that if the blunt
instrument was placed inside a bag and that bag was used to hit the head of the victim, the same would
still be a blunt instrument and could have produced the same injuries; (6) that the external injuries like
lacerated wounds, hematoma, and contusions were also caused by a blunt instrument; (7) that these
wounds could have been sustained also if the victim was boxed and kicked, because a closed fist is a
blunt object; and (8) that in view of the location of the external injuries in the anterior position of the body
of the victim, the assailant and the victim could have been facing each other about an arms length from
each other.[6]

On the other hand, petitioner Paulito Pascual, in his testimony, narrated that on June 30, 1996, he
went to sleep at around 11:30 in the evening and woke up at about 12:30 to 1:00 in the morning because
his housemaid arrived and informed him that there was a commotion outside his house. He went outside
the house but did not see any commotion; instead, he saw a lone person lying prostrate along G. Tuazon
Street. He returned to the house and asked the housemaid as to the identity of the person lying prostrate
on the ground. While he was inside his house, three policemen entered and invited him for investigation
while four other policemen remained outside the compound where the house was located and held his
relatives, i.e., Balam Pascual, Eddie Mamaril and Tiyo Van Pascual for questioning. They all boarded an
owner-type jeepney and the policemen brought them to the police headquarters at Police Station 5. The
policemen did not show him any warrant for his arrest or for the arrest of his other relatives. They were
detained at the police station for one week. Thereafter, he was transferred to the Manila City Jail. He did
not know the victim or the name and identity of the person he saw lying prostrate outside his house. [7]
After trial, the RTC found petitioners guilty beyond reasonable doubt of the crime charged. The
dispositive portion of the Decision[8] dated September 7, 2001 reads as follows:

WHEREFORE, in view of the afore-going, the Court finds accused GLEN


PASCUAL Y MALUMAY alias YEYE and PAULITO PASCUAL Y JUDALENA alias
BOYET GUILTY beyond reasonable doubt of the crime of HOMICIDE. The Court hereby
sentences them to suffer an indeterminate sentence of SIX (6) YEARS AND ONE (1) DAY
TO TWELVE (12) YEARS and to jointly and severally pay the mother of the victim, Mrs.
Flora Cornel the following amounts:

a. P50,000.00 for the death of Teofilo Cornel y Dacasin;

b. P50,000.00 as reimbursement of burial expenses; and

c. P50,000.00 as moral damages.

SO ORDERED.[9]

Due to the conviction, petitioners filed an Urgent Motion for Reconsideration [10] dated September
25, 2001, which was denied by the trial court.[11]

Consequently, petitioners filed an Urgent Notice of Appeal[12] on October 17, 2001 and, on July 9,
2002, the CA issued a notice[13] to petitioner's former counsel, Atty. Edilberto R. Balce, requiring
petitioners to file their brief within thirty (30) days from receipt of the said notice. On August 13, 2002,
petitioners filed through their new counsel, Atty. Humberto B. Basco, an Urgent Ex-Parte Motion for
Extension of Time to Submit Appeal Brief,[14] which was granted by the CA in a
Resolution[15] dated October 15, 2002. However, no brief was filed by petitioners.

For failure of petitioners to file the required brief, their appeal was deemed abandoned and
dismissed, pursuant to Section 8, Rule 124 of the Revised Rules of Criminal Procedure, by the CA
on February 13, 2003.[16] And, as a consequence thereof, an Entry of Judgment was made on March 8,
2003.
Subsequently, petitioners filed an Urgent Omnibus Motion[17] dated September 10, 2003 with the
CA alleging that the dismissal of the appeal amounted to punishing them for something which they did
not do or in which they had no participation whatsoever. They also argued that the dismissal of the
appeal and the entry of judgment did not preclude the CA from reinstating the appeal, as there were
instances when the same court had set aside entries of judgments and reinstated appeals due to the
failure of counsels to file appellants' briefs.

The Office of the Solicitor General (OSG), in its Comment [18] dated January 28, 2004, argued that
the claim of the petitioners that they were not informed by their counsel of the filing of the motion for
extension of the period for the filing of their brief and the dismissal of the appeal on account of the non-
filing of the said required pleading, was devoid of any merit. The OSG pointed out that the petitioners
were aware of the notice to file brief, since what they disclaimed knowledge of were merely the motion
for extension filed by their counsel and the resolution dismissing the appeal. It was also observed by the
OSG that the lack of coordination by the petitioners with their counsel respecting the appeal may be
attributed to the possibility that petitioners were confused as to who their counsel was, as shown in their
Omnibus Motion, wherein they referred to their counsel as Atty. Humberto Basco on page 1 and as Atty.
Edilberto R. Balce on page 3, which indicate that the petitioners did not even bother to know who their
counsel was. It was also claimed by the OSG that petitioners omitted to state in their Motion the date
when they discovered the dismissal of their appeal and, thereby, hiding the unreasonable delay
or laches on their part with regard to their Urgent Motion, which was filed more than 11 months since the
Resolution dismissing the appeal was promulgated. In sum, the OSG, citing jurisprudence,[19] contended
that a client is bound by the actions of his counsel, as well as by his mistake or negligence, and that a
party cannot blame his counsel for negligence when he himself is guilty of neglect.

In their Reply (to Comment)[20] dated February 10, 2004, petitioners argued that they relied on the
supposed professionalism of every member of the Bar. They also claimed that no amount of prodding
would guarantee that the brief would be prepared and filed on time, as the lawyer concerned was
negligent. According to them, if they made any mistake, it was their act of trusting their lawyer and not
their failure to follow up the status of the case. It was also their contention that they should not be blamed
for the fact that they had not secured the services of a counsel because they tried hard to convince
lawyers to handle their case, but they seemed to believe that their case was hopeless. Finally, citing
jurisprudence,[21] they state that procedural rules should be liberally construed in order to promote their
object and assist the parties in obtaining just, speedy and inexpensive determination of every action or
proceeding.

In its Resolution[22] dated February 18, 2004, the CA denied the Urgent Omnibus Motion
dated September 10, 2003 of petitioners by agreeing with the OSG that petitioners were aware of the
notice to file brief, and that they themselves were guilty of neglect for failing to monitor the status of their
appeal. The CA also ruled that petitioners did not state when they discovered the dismissal of their
appeal, the omission of which appears to hide their own delay in filing the motion, which was one for
reconsideration of a final resolution and, hence, subject to a reglementary period.

On March 11, 2004, petitioners filed a Motion for Extension of Time to File Petition for Review
on Certiorari,[23] which was denied by this Court in a Resolution[24]dated April 12, 2004 for petitioners'
failure to show that they had not lost the fifteen (15)-day reglementary period within which to appeal
pursuant to Section 2, Rule 45 of the 1997 Rules of Civil Procedure, as amended, in view of the lack of
statement of the date of receipt of the assailed judgment of the CA.

The present petition was filed on April 6, 2004.

On May 18, 2004, petitioners filed a Motion for Reconsideration of this Court's Resolution
dated April 12, 2004 on the ground of negligence of their counsel. They claimed that they could not
comply with the requirement to indicate in their petition the date when they received the Resolution of
the CA dismissing their appeal, because they never received a copy of the Resolution of the CA; and that
their counsel was so grossly negligent that he did not even bother to inform petitioners of the
developments in their appeal. In its Resolution dated May 24, 2004, this Court required the OSG to file a
comment on the petition and on the motion for reconsideration.

In its Comment on the petition dated September 2, 2004, the OSG argued that the petitioners were
likewise at fault for the dismissal of their appeal because they failed to diligently monitor the status of
their appeal. The OSG reiterated the arguments it raised in its Comment dated January 28, 2004. Anent
the petitioners motion for reconsideration, the OSG countered that despite the provisions of Section 6,
Rule 1 of the Rules of Court, which provides that the said procedural rules, as a general rule, are liberally
construed, periods for filing an appeal or a motion for reconsideration are strictly enforced. Thus,
according to the OSG, having had actual notice of the issuance of the Resolution of the CA dismissing
their appeal, petitioners should have indicated the date of such notice in their petition with this Court,
which inclusion is necessary to establish compliance with Section 2, Rule 45 of the Rules of Court.

On October 13, 2004, the Court granted petitioners' Motion for Reconsideration of its Resolution
dated April 12, 2004 denying petitioners' Motion for Extension to File Petition dated March 11, 2004. In
the same Resolution, this Court gave due course to the instant petition and required the parties to submit
their respective memoranda within thirty (30) days from notice.

On November 30, 2004, petitioners submitted their Memorandum, and on February 4, 2005, the
OSG filed a Manifestation and Motion praying that it be allowed to adopt its Comment dated September
2, 2004 as its Memorandum, which the Court granted on March 16, 2005.

The issues raised in this petition are:

THE DISMISSAL OF PETITIONERS APPEAL AMOUNTED TO PENALIZING THEM


FOR SOMETHING OVER WHICH THEY HAD NO CONTROL WHATSOEVER.

THE HONORABLE COURT OF APPEALS ERRED IN RIGIDLY APPLYING THE RULES


RATHER THAN THE SPIRIT BEHIND THEM.

The petition has no merit.


Petitioners insist that they relied on the supposed professionalism of their counsel. According to
them, having received the notice from the Court of Appeals to file a brief, their counsel was supposed to
know his duty, not only as their counsel but also as an officer of the court; and they conclude that they
should not be blamed and penalized if the conduct of their counsel fell way short of what was expected of
him. This reasoning of petitioners merits no consideration.

It is a well-settled rule that the client is bound by the counsel's conduct, negligence, and mistakes
in handling the case; and the client cannot be heard to complain that the result might have been different
had his lawyer proceeded differently.[25]

In People of the Philippines and Bricio Ygana v. Rafael Bitanga,[26] an exception to the foregoing rule is
enunciated, and that is when the negligence of counsel had been so egregious that it prejudiced his
client's interest and denied him his day in court. For this exception to apply, however, the gross
negligence of counsel should not be accompanied by his client's own negligence or malice. [27] Clients have
the duty to be vigilant of their interests by keeping themselves up to date on the status of their
case.[28]Failing in this duty, they suffer whatever adverse judgment is rendered against them.

The CA is correct in its finding that petitioners were aware of the notice to file brief, since what
the petitioners disclaimed knowledge of was only their counsel's motion for extension to file the brief. The
previous pleadings, as well as the petition itself, are without any claim by petitioners that they had no
knowledge of the notice to file brief with the CA. No allegation was even made that after the discovery of
the dismissal of their case by the CA, petitioners asked or confronted their lawyer for the latter's failure to
file the brief. It is the duty of a party-litigant to be in contact with his counsel from time to time in order to
be informed of the progress of his case.[29]

All of the above would lead anyone to conclude that petitioners were not vigilant. Although there
is no doubt that petitioners' counsel was negligent, such negligence was not so gross because it still
afforded petitioners the necessary remedy, provided that they themselves were not negligent. Hence, the
negligence of their counsel binds them. A contrary view would be inimical to the greater interest of
dispensing justice. For all that a losing party would need to do is invoke the mistake or negligence of
his counsel as a ground for reversing or setting aside a judgment adverse to him, thereby putting no end
to litigation. To allow this obnoxious practice would be to put a premium on the willful and intentional
commission of errors by accused persons and their counsel, with a view to securing favorable rulings in
cases of conviction.[30]

Petitioners likewise argue that the CA rigidly applied the rules rather than the spirit behind
them. They proceeded to cite a case wherein the rules were relaxed and the relief sought, which was the
cancellation of the entry of judgment by the CA, was ordered upon the finding of negligence on the part
of the counsel. However, the cited case bears scant resemblance to the instant case. As discussed earlier,
petitioners' counsel may have committed negligence, but such was not so gross as to deprive them of
their right to due process. On the contrary, Mario S. Mariveles v. Court of Appeals,[31] which petitioners cited,
the negligence committed by the counsel was so great that the rights of the accused were
prejudiced. Thus:

It is true that the failure of counsel to file brief for the appellant which led to the
dismissal of the appeal does not necessarily warrant the reinstatement thereof. However,
where the negligence of the counsel is so great that the rights of the accused are prejudiced
and he is prevented from presenting his defense, especially where appellant raises issues
which place in serious doubt the correctness of the trial court's judgment of conviction, the
aforesaid rule must not be rigidly applied to avoid a miscarriage of justice. These teachings
of jurisprudence are present in the case at bar.

Hence, the above case is inapplicable to the instant case.

WHEREFORE, the petition is DENIED, and the Resolution dated February 18, 2004 of the Court
of Appeals in CA-G.R. CR No. 26329 is AFFIRMED.

SO ORDERED.