[G.R. No. 80479. July 28, 1989.
] In turn, appellants handed to appellee a xerox copy of the title and other papers pertaining to the property as well as an
AGUSTINA LIQUETTE TAN, petitioner, vs. COURT OF APPEALS AND SPS. MARIANO SINGSON and VISITACION
SINGSON, respondents.
Noe Villanueva for petitioner.
Jose Beltran for private respondents.
SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; RESCISSION; POWER TO RESCIND; IMPLIED IN RECIPROCAL OBLIGATIONS. — That 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 is clear from a reading of the Civil Code
provisions.
2.ID.; ID.; ID.; HOW EFFECTED. — In the absence of a stipulation to the contrary, this power must be invoked judicially; it cannot be exercised solely on a party's
own judgment that the other has committed a breach of the obligation.
3.ID.; ID.; ID.; ALLOWED ONLY IN CASE OF SUBSTANTIAL BREACH. — Rescission will not be permitted for a slight or casual breach of the contract but only for
such breaches as are so subvstantial and fundamental as to defeat the object of the parties in making the agreement.
4.ID.; ID.; ID.; ID.; DETERMINATION OF SUBSTANTIAL BREACH ADDRESSED TO THE SOUND DISCRETION OF THE COURT. — A court, in determining
whether rescission is warranted, must exercise its discretion judiciously considering that the question of whether a breach of a contract is substantial depends upon
the attendant circumstances.
5.ID.; ID.; ID.; SLIGHT DELAY IN THE PERFORMANCE OF OBLIGATION WHERE TIME IS NOT OF THE ESSENCE, NOT A GROUND. — Where time not the
essence in the agreement, a slight delay on the part of the party in the performance of their obligation, is not sufficient ground for the resolution of the agreement
more so when the delay was not totally attributable to them.
6.ID.; ID.; FAILURE OF A THIRD PERSON TO FULFILL THE CONDITION OF A CONTRACT WILL NOT PREJUDICE THE RIGHTS OF THE OBLIGOR WHO
HAVE SUBSTANTIALLY COMPLIED WITH HIS OBLIGATION. — Where the fulfillment of the condition (in a conditional obligation) does not depend on the will of
the obligor, but on that of a third person, the obligor's part of the contract is complied with, if he does all that is in his power and it then becomes incumbent upon the
other contracting party to comply with the terms of the contract.
7.ID.; ID.; DELAY IS INCURRED BY A PARTY BY A DEMAND MADE BY THE OTHER TO FULFILL OBLIGATION. — Where the sellers are ready, willing and
able to comply with their obligation to deliver title to the property subject of the sale and had already demanded that petitioner pay the full amount of the purchase
price, the petitioner must be considered as having incurred in delay.
8.ID.; ID.; BREACH OF CONTRACT; REMEDY AVAILABLE TO AGGRIEVED PARTY. — The breach of a contract gives the aggrieved party under the law and
even under general principles of fairness, the right to rescind the contract or to ask for specific performance.
9.ID.; ID.; VOIDABLE CONTRACT; CONSENT MUST BE OBTAINED THROUGH INSIDIOUS WORDS OR MACHINATIONS. — The contract of sale is not
voidable where no evidence was shown that through insidious words or machinations under Article 1338 of the Civil Code, the seller had induced the buyer to enter
into the contract.
10.ID.; ID.; COURT, WITH DISCRETIONARY POWER TO ALLOW A PERIOD WITHIN WHICH AN OBLIGATION MAY BE PERFORMED. — The Court is given a
discretionary power to allow a period within which a person in default may be permitted to perform his obligation.
DECISION
CORTES, J p:
The instant petition for review raises the main issue of whether the private respondents committed a substantial breach of their obligation so as to warrant
petitioner's exercise of her right to rescind the contract of sale under Article 1191 of the Civil Code.
The antecedents of the instant controversy had been summarized in the respondent court's decision ** as follows:
xxx xxx xxx
The evidence shows that defendants-appellants spouses (private respondents herein) are the owners of a house and lot
located at No. 34 Easter Road, Baguio City, and covered by T.C.T. No. T-13826, which were then for sale. On June 14, 1984,
plaintiff-appellee together with her agent went to see said spouses at their residence regarding the property. After appellants
had shown appellee around the house and had conversation about the encumbrances and/or liens on the property, the parties
finally agreed on the price of P1,800,000.00, with appellee to advance earnest money of P200,000.00 to enable appellants to
secure the cancellation of the mortgage and lien annotated on the title of the property and the balance of the price to be paid
by appellee on June 21, 1984. Forthwith, appellee handed to appellants a check for P200,000.00 and thereupon the parties
signed a receipt (Exh. A) in the following tenor:
xxx xxx xxx
inventory of the furnishings of the house that are included in the sale. There (3) days thereafter, i.e., on June 17, 1984,
appellee returned to appellants' house together with her daughter Corazon and one Ines, to ask for a reduction of the price to
P1,750,000.00 and appellants spouses agreed, and so another receipt entitled "Agreement" (Exh. B) was signed by the
parties as follows:
xxx xxx xxx
The very same day that appellants received the earnest money of P200,000.00, they started paying their mortgage loan with
the Development Bank of the Philippines (DBP) to clear up the title of the subject property. On June 14, 1984, appellants paid
the bank P30,000.00 per receipt, Exhibit B; on June 18, 1984 another P50,000.00 (Exh. 4-c); on June 29, 1984, P20,000.00
(Exh. 4-D); and on July 5, 1984, P70,909.59 and another P19,886.60 (Exhs. 4-F and 4-G) in full payment of the mortgage
loan. On July 9, 1984, the DBP executed a cancellation of mortgage, which was registered with the Registry of Property of
Baguio City in July 12, 1984. Appellants also paid all the taxes due and in appears on the property. It likewise appears that
appellants paid in full on July 17, 1984 the cost price of the 338 square meter lot which was awarded to appellant Visitacion
Singson per her townsite sale application for said property. And the request of the City Sheriff of Baguio City to lift the notice of
levy in execution dated February 2, 1978 in Civil Case No. Q-10202, Pio S. Acampado, et al. v. Mariano D. Singson, et al.,
was duly annotated on the back of TCT No. T-13826 on August 2, 1979.
On June 25, 1984, appellee accompanied by her daughter Corazon and her lawyer, Atty. Vicente Quitoriano, went to Baguio
City to inquire about the status of the property and appellants told her that the Development Bank of the Philippines was taking
some time processing their payments and preparing the deed of cancellation of the mortgage. On that occasion, the parties
agreed on an extension of two (2) weeks for the execution of the deed of sale. Here, the parties' respective versions on the
matter parted ways. According to appellants, it was appellee who asked for the extension because she was not yet ready to
pay the balance of P1,550,000.00. On the other hand, appellee said that it was appellants who asked for it because the title of
the property was not yet cleared. The court below believed appellee because on said date the Development Bank had not yet
executed the deed of cancellation of mortgage, and no title has yet been issued for the driveway although already fully paid
for.
Immediately, upon execution by the DBP of the deed of cancellation of mortgage of July 9, 1984, appellants tried to contact
appellee and/or her daughter Corazon to come to Baguio City for the formal execution of the deed of sale, but to no avail.
Instead, appellants received a telegram from Atty. Quitoriano cancelling the sale and demanding the return of the P200,000.00
earnest money. Appellants countered with a letter of their lawyer, Atty. Teofisto Rodes, calling on appellee to perform her part
of the contract because "the title to the house and lot right now suffers no imperfection or doubt. The levy on execution has
long been lifted, the mortgage indebtedness released, the portion of the public land used as driveway has long been awarded
and fully paid for the City of Baguio. In short, the title can now be transferred in your name upon execution of the contract of
sale. . . Your refusal will compel Us to sue for specific performance . . ."
Before appellants could make good their threat, appellee "jumped the gun", so to speak, upon them by filing in court on August
27, 1984 the case for recovery of sum of money with damages which is now this case on appeal before us.
In her complaint, appellee alleged that she gave appellants spouses P200,000.00 upon their assurances that they could
transfer to her the house and lot she was buying from them free from any liens and encumbrances, including the furnishings
thereof and the adjacent lot being used as driveway, on June 25, 1984, but that day had come and passed without appellants
being able to make good their promise, because she "discovered to her shock and dismay that she had been dealt with in bad
faith by defendants" as the mortgage on the property was not released or cancelled and the driveway was still public land and
could not be validly transferred to her as any disposition thereof would yet require approval by the Secretary of Agriculture and
Natural Resources. Hence, the suit against appellants spouses for recovery of the P200,000.00 earnest money which is, in
essence and concept, one for rescission with damages.
xxx xxx xxx
[CA Decision, pp. 1-6; Rollo, pp. 53-57.]
The Regional Trial Court which took cognizance of Civil Case No. 3709-V filed by petitioner Agustina Liquette Tan rendered a decision disposing of the case as
follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants:
(1)Ordering the rescission of the contracts entered into by and between plaintiff and the defendants, which are embodied in
Exhs. "A" or "1 and "B" or "2";
(2)Ordering the defendants, spouses Mariano Singson and Visitacion Singson to return to plaintiff the P200,000.00 earnest
money given by her to defendants;
1
 (3)Ordering the defendants to pay plaintiff interest at the rate of 12% per annum on the P200,000.00 from the filing of the
complaint until fully paid;
(4)Ordering the defendant (sic) to pay plaintiff moral damages in the sum of P50,000.00;
(5)Ordering the defendants to pay plaintiff the amount of P20,000.00 as attorney's fees; and
(6)Ordering the defendants to pay the costs of this suit.
SO ORDERED. [Rollo. pp. 49-50.]
Private respondents interposed an appeal from said decision alleging that the trial court erred.
I.. . . in considering the consent of appellee to the agreement was vitiated by fraud.
II.. . . in resolving in favor of the appellee the sole right of rescission.
III.. . . in considering the adjacent lot as part of the sale agreed upon by the parties.
IV.. . . in deciding the case in favor of the appellee and awarding damages.
On August 24, 1987, the respondent Court of Appeals promulgated a decision reversing that of the trial court, the decretal portion of which reads as follows:
WHEREFORE, the appealed decision is REVERSED and SET ASIDE and a new one is hereby entered ordering immediately
upon the finality of this judgment appellants spouses to execute and sign an absolute deed of sale conveying to appellee free
from any lien or encumbrance the house and lot covered by T.C.T. No. 13826 of the Registry of Deeds of Baguio City together
with the furnishings and appliances listed in Exhibit C and the adjacent lot used as driveway covered by the Order of Award,
Exhibit E-3 and appellee to pay appellants spouses the sum of P1,550,000.00 plus interest at the legal rate from the finality of
this judgment until fully paid.
SO ORDERED. [Rollo, p. 61.]
Petitioners filed the instant petition for review on certiorari assailing the conclusion of the respondent Court of Appeals that the private respondents had not
committed a substantial breach of their obligation and therefore, there was no legal basis for the judgment ordering rescission of the contract. Petitioners maintain
that since private respondents were not prepared to convey the title to the subject property on the date agreed upon in view of the various liens and encumbrances
thereon, the former are entitled to rescind the contract pursuant to Article 1191 of the Civil Code which 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.
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.
After a thorough examination of the allegations contained in the parties' pleadings, the Court finds the instant petition to be devoid of any merit.
That 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 is clear from a
reading of the Civil Code provisions. However, it is equally settled that, in the absence of a stipulation to the contrary, this power must be invoked judicially; it
cannot be exercised solely on a party's own judgment that the other has committed a breach of the obligation. Where there is nothing in the contract empowering
the petitioner to rescind it without resort to the courts, the petitioner's action in unilaterally terminating the contract in this case is unjustified [Philippine Amusement
Enterprises, Inc. v. Natividad, G.R. No. L-12876. September 29, 1967, 21 SCRA 284].
In this case, petitioner received on July 17, 1984 through her daughter Cora Tan Singson, a telegram from private respondent Visitacion Singson advising the
former that the papers for the sale of the property are ready for final execution. The parties likewise met on June 25, 1984, the day agreed upon for the full payment
of the purchase price, and they agreed on a further extension of two weeks for the execution of the deed of sale. Despite this agreement, private respondents
suddenly received a telegram from Atty. Quitoriano, counsel for the petitioner, unilaterally stopping the sale and demanding the return of the earnest money paid by
petitioner [Exhibit "9", Original Records, p. 99].
Petitioner, in rescinding the sale, claims that a substantial breach of the obligation has been committed by the private respondents as indicated by the following
facts proved to be existing as of the date agreed upon for the consummation of the sale:
1.That no title has yet been issued by the Registry of Deeds of the City of Baguio in the name of either of the respondents in
connection with the 338-square meter lot where the driveway is located;
2.That the private respondents have not paid in full the total consideration for the said lot to the City of Baguio because they
were able to complete the payment of the purchase price only on July 17, 1984 as found out by the respondent court in its
decision (Please see page 8 of the Court of Appeals' decision, Annex "B");
3.That private respondents have not acquired the "previous consent of the Secretary of Natural Resources" for the said
transfer to the petitioner as required by the award;
4.That the restrictions indicated in the AWARD makes whatever conveyance to be made by the awardee of the lot within the
prohibited period as null and void and could cause the forfeiture of all the payments already made as well as the
improvements introduced therein;
5.That there are still liens and encumbrances insofar as TCT No. T-13826 consisting of a mortgage with the DBP and a notice
of levy and Writ of Execution. [Rollo, pp. 14-15.]
Alternatively, petitioner seeks annulment of the contract on the ground of fraud since private respondents had misrepresented to her that they could validly convey
title to the property subject of the contract which however is encumbered with various existing liens.
1.The alleged breach of the obligation by the private respondents, which consists in a mere delay for a few days in clearing the title to the property, cannot be
considered substantial enough to warrant rescission of the contract.
A thorough review of the records clearly indicates that private respondents had substantially complied with their undertaking of clearing the title to the property
which has a total land area of 886 square meters. It must be pointed out that the subject lot consists of private land, with an area of 548 square meters, covered by
TCT No. T-13826 and of a portion of the public land which has been awarded to the private respondents under Townsite Sales Application No. 7-676-A. While TCT
No. T-13826 was subject to a mortgage in favor of DBP, private respondents, upon receipt of the earnest money paid by petitioner, utilized the same to settle its
obligations with DBP thus enabling them to secure a cancellation of the existing mortgage, which was duly noted in the title to the property [See Original Records,
p. 94].
It is a settled principle of law that rescission will not be permitted for a slight or casual breach of the contract but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the agreement [Universal Food Corporation v. Court of Appeals, G.R. No. L-29155, May 13, 1970, 33
SCRA 1; Philippine Amusement Enterprises, Inc. v. Natividad, supra; Roque v. Lapuz, G.R. No. L-32811, March 31, 1980, 96 SCRA 741] . A court, in determining
whether rescission is warranted, must exercise its discretion judiciously considering that the question of whether a breach of a contract is substantial depends upon
the attendant circumstances [Corpus v. Alikpala, et al., G.R. Nos. L-23720 and L-23707, January 17, 1968, 22 SCRA 104].
In this case, as to the lot covered by TCT No. T-13826, it is true that as of June 25, 1984, the date set for the execution of the final deed of sale, the mortgage lien
in favor of DBP annotated in the title has not yet been cancelled as it took DBP some time in processing the papers relative thereto. However, just a few days after,
or on July 12, 1984, the cancellation of the DBP mortgage was entered by the Register of Deeds and duly noted on the title. Time not being of the essence in the
agreement, a slight delay on the part of the private respondents in the performance of their obligation, is not sufficient ground for the resolution of the agreement
[Biando and Espanto v. Embestro and Bardaje, 105 Phil. 1164 (1959)], more so when the delay was not totally attributable to them.
As to the notice of levy and execution annotated on TCT No. T-13826, a request to lift the same had already been filed with the Register of Deeds and duly noted
on the title [Original Records, p. 95]. The fact that said notice had not yet been cancelled by the Register of Deeds as of June 25, 1984 cannot prejudice the sellers
who must be deemed to have substantially complied with their obligation. The rule in this jurisdiction is that where the fulfillment of the condition (in a conditional
obligation) does not depend on the will of the obligor, but on that of a third person, the obligor's part of the contract is complied with, if he does all that is in his
power and it then becomes incumbent upon the other contracting party to comply with the terms of the contract [Article 1182, Civil Code; Smith Bell and Co. v.
Sotelo Matti, 44 Phil. 874 (1922)].
On the other hand, private respondents' interest in the public land used as a driveway can likewise be conveyed to petitioner although no title has yet been issued
in the name of Visitacion Singson. Such portion of the public land has long been awarded to Singson in 1972 and payment of the purchase price thereof has
already been completed as of July 17, 1984. The fact that the consent of the Secretary of Agriculture and Natural Resources to the sale of the property to petitioner
has not yet been secured cannot be considered a substantial breach of private respondents' obligation under the contract of sale.
In Juanico and Barredo v. American Land Commercial Co., Inc., et al. [97 Phil. 221 1955)], this Court had ruled that the prior approval of the Secretary of
Agriculture and Natural Resources is required only in cases of sale and encumbrance of the public land during the pendency of the application by the purchaser
and before his compliance with the requirements of the law. Thus:
. . . But such approval becomes unnecessary after the purchaser had complied with all the requirements of the law, even if the
patent has not been actually issued, for in that case the rights of the purchaser are already deemed vested, the issuance of
the patent being a mere ceremony. Thus, "the execution and delivery of the patent after the right to it has become complete,
are the mere ministerial acts of the officers charged with that duty" . . . And, as it has been held, "One who has done
everything which is necessary in order to entitle him to receive a patent for public land has, even before the patent is actually
issued by the land department, a complete acquitable estate in the land which he can sell and convey, mortgage or lease. A
fortiori a contract to convey land made before the issuance of a patent but after final proof has been made and the land paid
for is not illegal". . .
2
 [At 227: Emphasis supplied.]
Here, since the land in question had already been awarded to private respondents since 1972 and all the requirements of the law for the purchase of public land
were subsequently complied with, private respondents, as owners of said property, can properly convey title thereto to petitioner.
Inasmuch as the private respondents are ready, willing and able to comply with their obligation to deliver title to the property subject of the sale and had already
demanded that petitioner pay the full amount of the purchase price, the petitioner must be considered as having incurred in delay. This conclusion is warranted by
the clear provision of Article 1169 of the Civil Code which states:
Art. 1169.Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra-judicially
demands from them the fulfillment of their obligation.
xxx xxx xxx
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.
It is basic that the breach of a contract gives the aggrieved party under the law and even under general principles of fairness, the right to rescind the contract or to
ask for specific performance [Nagarmull v. Binalbagan-Isabela Sugar Co., Inc., G.R. No. L-22470, May 28, 1970, 33 SCRA 46.] Petitioner having failed to comply
with her obligation of paying the balance of the purchase price despite demands by private respondents, private respondents were clearly entitled to their
counterclaim for specific performance, as correctly adjudged by the respondent court.
2.The claim that petitioner's consent to the contract was vitiated by fraud and, therefore, the contract in question is voidable is patently unmeritorious. The contract
of sale is not voidable where no evidence was shown that through insidious words or machinations under Article 1338 of the Civil Code, the seller had induced the
buyer to enter into the contract (Caram v. Laureta, Jr., G.R. No. L-28740, February 24, 1981, 103 SCRA 7].
In this case, the evidence on record fully supports the finding of the appellate court that private respondents did not represent to petitioner that the house and lot
they were selling were free from liens and encumbrances. Rather, they told her that the property was mortgaged to the DBP which was why they asked her to
advance P200,000.00 as earnest money so that they could settle the mortgage indebtedness and clear up the title [Rollo, p. 60]. The testimony of petitioner herself
shows that she was furnished with xerox copies of the title, at the back of which was a memorandum of the encumbrances of the property [TSN, September 30,
1985, p. 4]. Further, it is undisputed that at the time petitioner entered into the agreement in question, she was accompanied by her daughter Corazon and one
Maria Lorenzo whom she could have asked to explain the particulars of the transaction that she could not understand [Rollo, p. 61].
One final point, the decision of the respondent Court of Appeals ordered execution by private respondents of the absolute deed of sale conveying the subject
property to petitioner and payment by petitioner of the balance of the purchase price immediately upon finality of such judgment. However, under the third
paragraph of Article 1191 of the Civil Code, the Court is given a discretionary power to allow a period within which a person in default may be permitted to perform
his obligation [Kapisanan Banahaw v. Dejarme and Alvero, 55 Phil. 339 (1930)]. Considering the huge amount of money involved in this sale, the Court, in the
exercise of its sound discretion, hereby fixes a period of ninety (90) days within which petitioner shall pay the balance of the purchase price amounting to one
million and five hundred fifty thousand pesos (P1,550,000.00) plus interest thereon at the legal rate from finality of this judgment until fully paid. After such payment
has been made, the private respondents are ordered to sign and execute the necessary absolute deed of sale in favor of petitioner.
WHEREFORE, the assailed decision of the respondent Court of Appeals granting the counterclaim for specific performance of herein private respondents is hereby
AFFIRMED with the MODIFICATION that the petitioner is given a period of ninety (90) days within which to pay the sum of one million and five hundred fifty
thousand pesos (P1,550,000.00) representing the balance of the purchase price, with interest thereon at the legal rate from the finality of this judgment until fully
paid. The private respondents are ordered to sign and execute the absolute deed of sale after the petitioner has completed payment of the purchase price and the
interest thereon.
SO ORDERED.
Fernan, (C.J.), Gutierrez, Jr., Feliciano and Bidin, JJ., concur.
Footnotes
**Penned by Justice Manuel T. Reyes and concurred in by Justices Oscar R. Victoriano and Hector C. Fule.
[G.R. No. 108346. July 11, 2001.]
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A.
RAYMUNDO and GEORGE RAYMUNDO, respondents.
Marciano J. Cagatan and Mariano R. Logarta for petitioners.
M.B. Tomacruz for private respondents.
SYNOPSIS
Petitioners entered into a deed of sale with assumption of mortgage with private respondents paying a downpayment of P800,000 and assuming the mortgage
amount of P1.8M in favor of BPI. Petitioners further agreed "to strictly and faithfully comply with all the terms and conditions appearing in the real estate mortgage
signed and executed by the vendor in favor of BPI . . . as if the same were originally signed and executed by the vendee." As part of the deed, petitioner Avelina
with her husband's consent executed an undertaking that during the pendency of the application for the assumption of mortgage she agreed to continue paying said
loan in accordance with the mortgage deed and that in the event of violation of any of the terms and conditions of the deed of real estate mortgage, she agreed that
the P800,000 downpayment shall be forfeited as liquidated damages and the deed of sale with assumption of mortgage shall be deemed automatically cancelled.
When the bank denied the application for assumption of mortgage, petitioners stopped making payments. Thus, notice of cancellation/rescission was sent to
petitioners for non-performance of their obligation. Aggrieved, petitioners filed a complaint against private respondent for specific performance, nullity of
cancellation, writ of possession and damages. Both parties admitted that their agreement mandated that petitioners should pay the purchase price balance of
P1.8M to private respondents in case the request to assume the mortgage would be disapproved. The trial court dismissed the complaint, but on reconsideration,
directed the parties to proceed with the sale. On appeal, the Court of Appeals upheld the validity of the rescission. Hence, this recourse. ADCIca
The failure of the vendee to pay the balance of the purchase price constitutes a breach on the performance of a reciprocal obligation, and not a violation of the
terms and conditions of the mortgage contract. This gave rise to the vendor's right to rescind the contract. However, the automatic rescission and forfeiture of
payment clauses in the mortgage contract does not apply. Considering that the rescission of the contract was based on Article 1191 of the Civil Code, mutual
restitution by the parties is required.
SYLLABUS
1.CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE AT BAR. — In 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. Private respondents had already performed their obligation
through the execution of the Deed of Sale, which effectively transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery
or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery.
2.ID.; ID.; RESCISSION; OBLIGOR'S FAILURE TO COMPLY WITH EXISTING OBLIGATION. — The right of rescission of a party to an obligation under Article
1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. The breach contemplated in the said
provision is the obligor's failure to comply with an existing obligation. When the obligor cannot comply with what is incumbent upon it, the obligee may seek
rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission. IEHScT
3.ID.; ID.; ID.; ID.; CASE AT BAR. — In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of
sale, a violation that consequently gave rise to private respondents' right to rescind the same in accordance with law.
4.ID.; ID.; ID.; FORFEITURE OF PAYMENT DOES NOT APPLY WHERE BREACH WAS NON-PERFORMANCE; MUTUAL RESTITUTION, REQUIRED. — As
discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the
mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions
shall govern and regulate the resolution of this controversy. 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 in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private
respondents, lest the latter unjustly enrich themselves at the expense of the former.
5.ID.; ID.; ID.; OBLIGATION CREATED. — 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. IDAEHT
DECISION
PANGANIBAN, J p:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract, entitles the injured party to rescind the
obligation. Rescission abrogates the contract from its inception and requires a mutual restitution of benefits received.
3
 The Case
Before us is a Petition for Review on Certiorari 1 questioning the Decision 2 of the Court of Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well
as its Resolution 3 dated December 29, 1992 denying petitioner's motion for reconsideration. 4
The dispositive portion of the assailed Decision reads:
"WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the Decision dated November 14,
1990 dismissing the [C]omplaint is REINSTATED. The bonds posted by plaintiffs-appellees and defendants-appellants are
hereby RELEASED." 5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
" . . .. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel of land, together with the
house and other improvements thereon, located at 1918 Kamias St., Dasmariñas Village, Makati and covered by TCT No.
142177. Defendant George Raymundo [herein private respondent] is David's father who negotiated with plaintiffs Avelina and
Mariano Velarde [herein petitioners] for the sale of said property, which was, however, under lease (Exh. '6', p. 232, Record of
Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed by
defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following terms and
conditions:
'xxx xxx xxx
'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from the VENDEE, to his
entire and complete satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS,
CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and valid title as provided by
law, unto the VENDEE, her heirs, successors and assigns, the parcel of land mentioned and described
above, together with the house and other improvements thereon.
'That the aforesaid parcel of land, together with the house and other improvements thereon, were mortgaged
by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, to secure the payment
of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage signed and executed by the VENDOR in favor of the said Bank of the
Philippine Islands, on _________ and which Real Estate Mortgage was ratified before Notary Public for
Makati, _________, as Doc. No. _____, Page No. ____, Book No. ____, Series of 1986 of his Notarial
Register.
'That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage obligations
on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, in favor of Bank of the Philippine Islands, in the name of the VENDOR,
and further agrees to strictly and faithfully comply with all the terms and conditions appearing in the Real
Estate Mortgage signed and executed by the VENDOR in favor of BPI, including interests and other charges
for late payment levied by the Bank, as if the same were originally signed and executed by the VENDEE.
'It is further agreed and understood by the parties herein that the capital gains tax and documentary stamps
on the sale shall be for the account of the VENDOR; whereas, the registration fees and transfer tax thereon
shall be for the account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her husband, Mariano,
executed an Undertaking (Exh. 'C', pp. 13-14, Record). the pertinent Portions of which read, as follows:
'xxx xxx xxx
'Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum of
EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage
obligations on the property with the Bank of the Philippine Islands in the amount of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the terms and
conditions of the Deed of Real Estate Mortgage dated _________, signed and executed by Mr. David A.
Raymundo with the said Bank, acknowledged before Notary Public for Makati, ______, as Doc. No. ___,
Page No. ____, Book No. _____, Series of 1986 of his Notarial Register.
'WHEREAS, while my application for the assumption of the mortgage obligations on the property is not yet
approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property with the
Bank in the name of Mr. David A. Raymundo, in accordance with the terms and conditions of the said Deed of
Real Estate Mortgage, including all interests and other charges for late payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes of attesting
and confirming our private understanding concerning the said mortgage obligations to be assumed. cCEAHT
'NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of the mortgage
obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency,
with the Bank of the Philippine islands, I, Mrs. Avelina D. Velarde, with the consent of my husband, Mariano Z.
Velarde, do hereby bind and obligate myself, my heirs, successors and assigns, to strictly and faithfully
comply with the following terms and conditions:
'1.That until such time as my assumption of the mortgage obligations on the property purchased is approved
by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan in accordance
with the terms and conditions of the Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo,
the original Mortgagor.
'2.That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage, I
hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the Philippine
Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and by way of
liquidated damages, without necessity of notice or any judicial declaration to that effect, and Mr. David A.
Raymundo shall resume total and complete ownership and possession of the property sold by way of Deed of
Sale with Assumption of Mortgage, and the same shall be deemed automatically cancelled and be of no
further force or effect, in the same manner as if (the) same had never been executed or entered into.
'3.That I am executing this Undertaking for purposes of binding myself, my heirs, successors and assigns, to
strictly and faithfully comply with the terms and conditions of the mortgage obligations with the Bank of the
Philippine Islands, and the covenants, stipulations and provisions of this Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] hereby confirm
and agree to the undertakings of the Vendee pertinent to the assumption of the mortgage obligations by the
Vendee with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14, Record).'
"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8 million was from the proceeds of a loan that
plaintiffs were to secure from a bank with defendant's help. Defendants had a standing approved credit line with the Bank of
the Philippine Islands (BPI). The parties agreed to avail of this, subject to BPI's approval of an application for assumption of
mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to continue paying the monthly interests of
the loan secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the aforementioned mortgage for
three (3) months as follows: September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986 at
P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17 and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage with BPI was not approved
(Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-payment to the mortgage
bank constitute[d] non-performance of their obligation (Exh. '3', p. 220, Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
4
 'This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January 21,
1987 provided: (a) you deliver actual possession of the property to her not later than January 15, 1987 for her
immediate occupancy; (b) you cause the release of title and mortgage from the Bank of P.I. and make the title
available and free from any liens and encumbrances; and (c) you execute an absolute deed of sale in her
favor free from any liens or encumbrances not later than January 21, 1987.' (Exhs. 'K', '4', p. 223, Record).
"On January 8, 1987, defendants sent plaintiffs a notarial notice of cancellation/rescission of the intended saleof the subject
property allegedly due to the latter's failure to comply with the terms and conditions of the Deed of Sale with Assumption of
Mortgage and the Undertaking (Exh. '5', pp. 225-226, Record)." ' 6
Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for specific performance, nullity of cancellation, writ of possession and
damages. This was docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and heard by then Judge Consuelo
Ynares-Santiago (now an associate justice of this Court), who dismissed the Complaint in a Decision dated November 14, 1990. 7 Thereafter, petitioners filed a
Motion for Reconsideration. 8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador S. A. Abad Santos was assigned to the sala she vacated. In an
Order dated May 15, 1991, 9 Judge Abad Santos granted petitioners' Motion for Reconsideration and directed the parties to proceed with the sale. He instructed
petitioners to pay the balance of P1.8 million to private respondents who, in turn, were ordered to execute a deed of absolute sale and to surrender possession of
the disputed property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeals
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's earlier Decision dismissing petitioners' Complaint. Upholding the
validity of the rescission made by private respondents, the CA explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the consideration of this sale, the VENDEE
(Velarde)' would assume to pay the mortgage obligation on the subject property in the amount of P1.8 million in favor of BPI in
the name of the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the downpayment of
P800,000.00 and the balance of P1.8 million, and the balance of P1.8 million cannot be paid in cash, Vendee Velarde, as part
of the consideration of the sale, had to assume the mortgage obligation on the subject property. In other words, the
assumption of the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde further
agreed 'to strictly and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage signed and
executed by the VENDOR in favor of BPI . . . as if the same were originally signed and executed by the Vendee.' (p. 2, thereof,
p. 12, Record). This was reiterated by Velarde in the document entitled 'Undertaking' wherein the latter agreed to continue
paying said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Raymundo.
Moreover, it was stipulated that in the event of violation by Velarde of any terms and conditions of said deed of real estate
mortgage, the downpayment of P800,000.00 plus all payments made with BPI or the mortgage loan would be forfeited and the
[D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be cancelled automatically and of no force and effect (pars. 2 &
3, thereof, pp. 13-14, Record).
"From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumption by Velarde of the
mortgage obligation of Raymundo in the amount of P1.8 million. This would mean that Velarde had to make payments to BPI
under the [D]eed of [R]eal [E]state [M]ortgage in the name of Raymundo. The application with BPI for the approval of the
assumption of mortgage would mean that, in case of approval, payment of the mortgage obligation will now be in the name of
Velarde. And in the event said application is disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph
5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15, 1997 (p. 47, t.s.n.,
September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being the case, the non-payment of the mortgage
obligation would result in a violation of the contract. And, upon Velarde's failure to pay the agreed price, the[n] Raymundo may
choose either of two (2) actions — (1) demand fulfillment of the contract, or (2) demand its rescission (Article 1191, Civil
Code).
"The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse for Velarde's non-
payment of the balance of the purchase price. As borne out by the evidence, Velarde had to pay in full in case of BPI's
disapproval of the application for assumption of mortgage. What Velarde should have done was to pay the balance of P1.8
million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was strongly given weight by the
lower court in reversing the decision rendered by then Judge Ynares-Santiago. In said letter, Velarde registered their
willingness to pay the balance in cash but enumerated 3 new conditions which, to the mind of this Court, would constitute a
new undertaking or new agreement which is subject to the consent or approval of Raymundo. These 3 conditions were not
among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at most, an attempt to novate. But
then again, there can be no novation because there was no agreement of all the parties to the new contract (Garcia, Jr. vs.
Court of Appeals, 191 SCRA 493).
"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with Assumption of Mortgage
would be deemed 'automatically cancelled and of no further force and effect, as if the same had never been executed or
entered into.' While it is true that even if the contract expressly provided for automatic rescission upon failure to pay the price,
the vendee may still pay, he may do so only for as long as no demand for rescission of the contract has been made upon him
either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde a notarial notice
dated January 8, 1987 of cancellation/rescission of the contract due to the latter's failure to comply with their obligation. The
rescission was justified in view of Velarde's failure to pay the price (balance) which is substantial and fundamental as to defeat
the object of the parties in making the agreement. As adverted to above, the agreement of the parties involved a reciprocal
obligation wherein the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of which
entitles the other party to rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to rescind the contract, or to criminal prosecution
(Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellees' failure, therefore, to pay the
balance, the contract was properly rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees Velarde having violated
the contract, they have lost their right to its enforcement and hence, cannot avail of the action for specific performance
(Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635)." 10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum, 12 interpose the following assignment of errors:
"I
The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in a breach of the contract.
"II
The Court of Appeals erred in holding that the rescission (resolution) of the contract by private respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new conditions' constituting mere
offers or an attempt to novate necessitating a new agreement between the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioners aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of contract, considering that their request to assume
the obligation had been disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it
devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase price. As admitted by both parties,
their agreement mandated that petitioners should pay the purchase price balance of P1.8 million to private respondents in case the request to assume the
mortgage would be disapproved. Thus, on December 15, 1986, when petitioners received notice of the bank's disapproval of their application to assume
respondents' mortgage, they should have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the fulfillment of certain conditions not originally
agreed upon in the contract of sale. Such conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a buyer under a
contract of sale.
In 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. 13
Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property to
petitioner through constructive delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to
delivery. 14
Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price in the manner agreed upon. Worse, they wanted private
respondents to perform obligations beyond those stipulated in the contract before fulfilling their own obligation to pay the full purchase price. IHcTDA
Second Issue
Validity of the Rescission
5
Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the former had signified their willingness to pay
the balance of the purchase price only a little over a month from the time they were notified of the disapproval of their application for assumption of mortgage.
Petitioners also aver that the breach of the contract was not substantial as would warrant a rescission. They cite several cases 15 in which this Court declared that
rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their obligation in good faith,
considering that they have already made the initial payment of P800,000 and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the mortgage obligations, as their nonperformance of their
reciprocal obligation to pay the purchase price under the contract of sale. Private respondents' right to rescind the contract finds basis in Article 1191 of the Civil
Code, which explicitly provides as follows:
"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 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 right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the
reciprocity between them. 16 The breach contemplated in the said provision is the obligor's failure to comply with an existing obligation. 17 When the obligor cannot
comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of compliance,
the court shall decree the rescission. 18
In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to
pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise
to private respondents' right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due; however, this was not equivalent to actual
payment as would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance by private
respondents of additional burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by petitioners was
merely slight or casual as would preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases 19 they cited, because the factual circumstances in those cases are not analogous to those in the present one.
In Song Fo there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyer's offer to pay was unconditional
and was accepted by the seller. InZepeda, the breach involved a mere one-week delay in paying the balance of P1,000, which was actually paid. In Tan, the
alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing the title to the property; there was no reference whatsoever
to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such breach would not normally defeat the intention
of the parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private respondents new obligations as
preconditions to the performance of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due and
demandable under the contract of sale. Hence, private respondents were left with the legal option of seeking rescission to protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the
mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions
shall govern and regulate the resolution of this controversy.
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 in the amounts of P27,225,
P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners 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. 20 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. 21
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue raised by petitioners. Suffice it to say that the three conditions
appearing on the January 7, 1987 letter of petitioners to private respondents were not part of the original contract. By that time, it was already incumbent upon the
former to pay the balance of the sale price. They had no right to demand preconditions to the fulfillment of their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private respondents are ordered to return to petitioners the amount of
P874,150, which the latter paid as a consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date of rescission. No
pronouncement as to costs.
SO ORDERED. SDHCac
Melo, Vitug and Sandoval-Gutierrez, JJ ., concur.
Gonzaga-Reyes, J ., is on leave
[G.R. No. L-39778. September 13, 1985.]
VIRGILIO SIY, petitioner, vs. COURT OF APPEALS, SERGIO VALDEZ, AND VIRGINIA VALDEZ,respondents.
Quintin C. Pardes for petitioner.
Romeo L. Mendoza & Assoc. Law Office for private respondent.
DECISION
GUTIERREZ, JR., J p:
This is a petition for review which seeks to annul and set aside the decision of the Court of Appeals, now Intermediate Appellate Court affirming the trial court's
decision, ordering, among others, the rescission of the contract of sale entered into between the petitioner and the private respondents. cdll
The private respondents, spouses Valdez are the owners of a parcel of land containing an area of 155 square meters, more or less, and the house constructed
thereon, situated at No. 333 Jefferson Street, Makati, and covered by Transfer Certificate of Title No. 32718 of the Registry of Deeds of Rizal. There is no dispute
that the petitioner and private respondents entered into a contract of sale regarding the said property. The controversy, however, stemmed from subsequent
agreements executed by the parties.
The first agreement entered into by the petitioner and private respondents was the Deed of Conditional Sale (Exh. A) whereby for and in consideration of
P22,000.00, the private respondents as vendors agreed to sell to the petitioner as vendee the lot covered by TCT No. 32718 with all the improvements thereon.
The sale was subject to the condition that immediately upon the approval of the petitioner's loan with the Social Security System (SSS) and its payment to the
respondents, the vendor shall execute the deed of absolute sale in favor of the vendee. The petitioner applied for a loan with the SSS, through the Home Financing
Commission (HFC). Since the property in question was mortgaged to the Government Service Insurance System (GSIS), the HFC requested both parties to
execute a Deed of Sale with Assumption of Mortgage (Exh. G) which they did, stating among others that the respondents sell, transfer, and convey to the petitioner
the property for and in consideration of the sum of P22,000.00, of which P6,400.00 (representing the amount allegedly incurred by the petitioners for improvements
on said property) had been paid and the balance of P15,600.00 payable upon approval of the petitioners loan with the SSS. In reality, however, the respondents
had not received a single centavo from the petitioner at the time. Subsequently, the parties executed three more contracts. The first contract (Exh. I) which was
executed more than one month after Exhibit A provided that the respondents agreed to sell the property to the petitioner at P14,000.00 while the latter must
negotiate a loan with the SSS in order to settle the amount within a period of thirty days from March 17, 1963. The contract also provided for the payment of rentals
by the petitioner at P50.00 a month from March 1, 1963 until the date of final settlement and damages at the rate of P30.00 a day for each day of delay. The next
day, another contract was executed by the parties which was essentially the same as Exh. "1". Respondent Virginia Valdez explained that she did not agree with
the granting of another thirty-day extension to the petitioner and so Exh. "1" was torn up. However, the respondents changed their minds after the mother of the
petitioner pleaded with them for another extension. Thus, Exh. "2" came into being. It provided that the full amount of P14,000.00 would be paid on or before the
30th day from the date of the execution of the contract and that failure of the petitioner to settle his obligation within that period shall make him liable for damages at
P30.00 for every day of delay. LibLex
The last agreement entered into by the parties, (Exh. 5), provided among others, that the respondents agreed to receive the partial amount of P12,000.00 on the
condition that the balance of P4,376.00 is completely paid forty-five days after the date fixed by them and that failure of the petitioner to pay the said balance on the
agreed time will entitle the respondents to damages at P20.00 for every day of delay until said balance shall have been fully paid.
Within the forty-five (45) days deadline, however, the petitioner failed to pay both the P12,000.00 which was supposed to be received by the respondents upon the
execution of the agreement, (Exh. 5) and the balance of P4,376.00. Thus, when the petitioner's loan with the SSS was finally ready for release, he requested the
respondents to sign the deed of absolute sale and other papers required by the SSS but the latter refused on the ground that the petitioner had already breached
their latest agreement (Exh. 5). The petitioner filed an action for specific performance with writ of preliminary mandatory injunction seeking to compel the
respondents to execute the deed of absolute sale of the property and other such documents required by the SSS for the immediate release of the approved loan.
In its first decision, the trial court rendered judgment in favor of the petitioner making the following findings:
xxx xxx xxx
6
 "Apparently, the defendants are of the impression that the provision in the agreement that `failure of the plaintiff to settle said
balance on or before the stipulated date will entitle the defendants to collect P20.00 for every day of delay until balance is fully
paid' and just because plaintiff so failed to comply with it this will release them from compliance with the condition mentioned in
Exhibits 'A' and 'G', The court agrees with the defendant that plaintiff committed a breach granting that plaintiff failed to comply
with the stated proviso but this is not the breach contemplated by law and cannot be considered a sufficient cause for them to
depart from their unfulfilled obligation to the plaintiff because as the provision clearly states, defendants' rights are adequately
protected and compensated in the form of damages recoverable from the plaintiff in case of noncompliance by the plaintiff.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING THE TRIAL COURT IN ORDERING THE RESCISSION OF THE AGREEMENT
(EXHIBIT 5) AND THE PAYMENT OF DAMAGES AND ATTORNEY'S FEES.
The petitioner maintains that the motions for reconsideration filed by the respondents are both pro forma because they presented issues which the trial court had
already considered and ruled upon and that the second motion for reconsideration merely asked the court to consider two documents which were already submitted
by respondents in evidence. The petitioner argues that the said motion did not interrupt the running of the period to appeal and thus, when the second decision was
rendered the trial court had already lost its jurisdiction over the case, making such decision null and void.

The above contentions are untenable.

"Under the law (Article 119, New Civil Code), in reciprocal obligations, 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. In the instant case, plaintiff seeks not rescission but fulfillment of the obligation. It is
In the first place, the very purpose of a motion for reconsideration is to point out the findings and conclusions of the decision which in the movant's view, are not
obvious when the parties herein agreed that the consideration mentioned in Exhibits 'A' & 'G' that will be paid upon the
supported by law or the evidence. The movant is, therefore, very often confined to the amplification or further discussion of the same issues already passed upon
approval of the loan, they mean approval and release of the loan. Weighing the evidence presented both by the plaintiff and
by the court. Otherwise, his remedy would not be a reconsideration of the decision but a new trial or some other remedy. In the case of Viña v. Court of
defendants, it is the opinion of the court that the defendants by virtue of their contracts Exhibits 'A' and 'G', the defendants can
Appeals (126 SCRA 381-382), we emphasized the nature of a motion for reconsideration. We ruled:
be compelled to fulfill the condition agreed thereon."

"Contrary to petitioner's contention, REPUBLIC's Motion for Reconsideration dated January 10, 1973 was not pro forma, even
In due time, the private respondents filed a motion for reconsideration stating, among others, that the decision of the lower court failed to consider the other
if we were to concede that it was a reiteration of its previous Motion for suspension of the proceedings.
contracts executed by the parties. Among them was the agreement marked as Exhibit "5" which would clearly show that there was a limited period within which the
petitioner was given time to secure a loan from the SSS and pay P14,000.00, the real consideration for the property agreed upon by the parties.
". . . Among the ends to which a motion for reconsideration is addressed, one is precisely to convince the court that its ruling is
erroneous and improper, contrary to the law or the evidence (Rule 37, Section 1, subsection [c]; and in doing so, the movant
The petitioner filed his opposition to the respondents' motion for reconsideration. The respondents in turn asked the lower court for five (5) days within which to
has to dwell of necessity upon the issues passed upon by the court. If a motion for reconsideration may not discuss these
submit a rejoinder. The extension was granted in open court. However, even before the end of the five-day period, the court already issued an order denying the
issues, the consequence would be that after a decision is rendered, the losing party would be confined to filing only motions
respondents' motion for reconsideration. Another motion to reconsider was, therefore, filed by the respondents praying that their rejoinder be taken into account
for reopening and new trial. We find in the Rules of Court no warrant for ruling to that effect, a ruling that would, in effect
since the same was filed within the five-day period granted by the court.
eliminate subsection (c) of Section 1 of Rule 37." (Guerra Enterprises Co., Inc. v. Court of First Instance of Lanao del Sur, 32
SCRA 317 [1970]).
Realizing its error, another decision was consequently rendered by the trial court, this time, in favor of the private respondents, stating the following:
Secondly, as far as the second motion of respondents is concerned, the same should not be strictly construed as a motion for reconsideration although captioned
"This Court observes that Exhibit '5' is an implementation or confirmation of the provisions of both Exhibits '1' and '2' which are as such because in reality, it is merely a supplementary pleading aimed to call the court's attention to the fact that it had given the respondents five days to file their
supplementary contracts providing for a definite period of payment of the agreed purchase price of the property involved rejoinder, with which they complied and, therefore, said rejoinder should have been considered before the court acted upon the respondents' first motion for
herein. This period of payment is not provided for in Exhibits 'A' and 'G' thereby modifying the later contracts in this regard. reconsideration. Supplemental pleadings are meant to supply deficiencies in aid of original pleadings, not to entirely substitute the latter (See Pasay City
Government v. CFI of Manila, 132 SCRA 169), and neither should they be considered independently nor separately from such original pleadings. Cdpr
Article 1374 of the new Civil Code of the Philippines, the Court believes, is also applicable to the instant case wherein it is
provided that the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken together. Exhibits 'A', 'G', '1', '2' and '5' being complementary contracts, they should be
We, therefore, hold that the appellate court did not commit grave abuse of discretion in upholding the trial court's jurisdiction when it rendered the second decision.
construed to correctly arrive at the true intention of the parties."

In the second assignment of error, the petitioner contends that the Court of Appeals committed a reversible error in affirming the rescission of the contract when the
xxx xxx xxx
respondents did not pray for rescission and in ordering the payment of damages and attorney's fees notwithstanding the fact that the complaint for specific
performance was not instituted in bad faith.
"The wordings of Exhibit '5' when it states that the defendants-spouses agreed to receive the partial amount of P12,000.00
only show that when Exhibit '5' was executed, defendants did not yet receive said amount. It is still to be received, and
It is noteworthy to mention that in their answer to the petitioner's complaint, the respondents prayed for the annulment of both the Deed of Conditional Sale (Exh.
evidence of the plaintiff is wanting to show that he paid this amount of P12,000.00. Neither is there any showing that the
'A') and the Deed of Sale with Assumption of Mortgage (Exh. 'G') which are the very bases of the supplemental agreements (Exhs. '1', '2' and '5') executed between
balance of P4,763.00 agreed upon in Exhibit '5' had been paid by the plaintiff within forty-five days from July 9, 1963. This
the petitioner and the respondent. The technical argument that the respondents never prayed for the rescission of the contracts and that the trial court and the
clearly constitutes a breach of their last agreement Exhibit '5'. Article 1191 of the New Civil Code provides that the power to
appellate court should never have rescinded the same has no merit Furthermore, by failing to pay the amount of P12,000.00 and the balance of P4,376.00 as
rescind obligations is implied in reciprocal ones in case one of the obligors should not comply with what is incumbent upon
stipulated in the contract within the forty-five (45) days period, the petitioner clearly committed a breach of contract which sufficiently and justly entitled the
him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in
respondents to ask for the rescission of the contracts. In the case of Nagarmull v. Binalbagan-Isabel Sugar Co., Inc. (33 SCRA 52), we ruled that ". . . The Breach
either case. There is no dispute that all the contracts entered into by the parties herein are reciprocal ones. There is, likewise,
of contract committed by appellee gave appellant, under the law and even under general principles of fairness, the right to rescind the contract or to ask for its
no question that the plaintiff is guilty of delay and the defendants-spouses are entitled to damages occasioned by it in the light
specific performance, in either case with right to demand damages . . .". It is evident, in the case at bar, that the respondents chose to rescind the contracts after
of the provisions of Article 1170 of the New Civil Code providing that those who, in the performance of their obligations, are
the petitioner repeatedly failed to pay not only the balance but the initial amount as downpayment in consideration of which the contracts or agreements were
guilty of delay and those who, in any manner, contravene the tenor thereof, are liable for damages. The defendants-spouses
executed. As a matter of fact, the petitioner later asked the SSS to cancel his loan application. He thereby abandoned his own claim for specific performance.
elected rescission of their agreement of purchase and sale with damages."
Therefore, the appellate court correctly affirmed the rescission of the above-mentioned contracts. It also correctly affirmed the payment of attorney's fees. While the
petitioner may not have acted in bad faith in filing his complaint, still the payment of attorney's fees is warranted in this case because of the environmental
circumstances which compelled the respondents to litigate for the protection of their interests. (See Bert Osmeña & Associates v. Court of Appeals, 120 SCRA 401
and Article 2208 (2) New Civil Code).

The petitioner filed a motion for reconsideration which the trial court denied. On appeal, the Court of Appeals affirmed the decision in toto. Hence, this petition.
We, however, find the award of damages in the amount of P4,376.00 unwarranted. In their motion for reconsideration, the respondents explained how they arrived
at this amount —
The issues raised are:

"Plaintiff obliged himself to pay P30.00 for everyday of delay after the lapse of thirty days from the execution of the document
I of March 17, 1963 (Exh. 1-Defendants). Thirty days from March 17, 1963 would be April 18, which will mark the beginning of
the counting of the days of delays. From April 18, 1963 to July 9, 1963, the number of days of delay was 82 days. Plaintiff
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE FIRST DECISION OF THE TRIAL COURT WAS NOT FINAL WHEN requested that this be reduced to 70 days and defendants agreed. At P30.00 per day of delay the amount in 70 days will be
THE SAME WAS SET ASIDE AND SUPERSEDED BY THE SECOND DECISION AND THUS, THE TRIAL COURT HAD NO MORE JURISDICTION TO P2,100.00. The rental as provided for in the same exhibit 1 for defendants was P50.00 per month. From March 1, 1963 to
RENDER SAID SECOND DECISION, AND. June 20, 1963, 4 months elapsed. At P50.00 per month the rental would be P200.00. Plaintiff got or utilized adobe stones
belonging to defendant which he found in the premises when he and his parents transferred to the lot in question in March,
II

7
 1963 the value of which was P76.00. Adding this to the P2,100.00 which is the amount to be paid for the delay in making
payments and the P200.00 for 4 months rental, the total will be P2,376.00. The agreed purchase price was P14,000.00 but
P12,000.00 was the amount of loan the Social Security System was then willing to give to plaintiff so that there will be a
shortage of P2,000.00 more to complete the payment of the purchase price. This shortage of P2,000.00 was added to the
P2,376.00 and the sum will be P4,376.00. Hence, in the agreement of July 9, 1963, this amount of P4,376.00 was to be paid
within 45 days from the date thereof and the P12,000.00 which was the loan then approved by the Social Security System was
to be paid to defendants on the day of the execution of the said agreement."
xxx xxx xxx
It is evident from the motion that the amount of P4,376.00 awarded by the appellate court as damages is mainly based on "P30.00 per day of delay" penalty clause
embodied in the agreement marked Exhibit "1". Enforcement of the clause on daily penalties now would result in excessive damages considering that the
agreement was entered into way back in 1963. Moreover, the P2,000.00 represents part of the purchase price of the sale which was already rescinded.
Under Article 1191 of the Civil Code, "the injured party may choose between the fulfillment and 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 law, however, does not authorize the
injured party to rescind the obligation and at the same time seek its partial fulfillment under the guise of recovering damages.
The appellate court, therefore, erred in including both the penalty clause and the part of the purchase price in the computation of damages. There is no question
that the petitioner must pay damages for the use of the house and lot until he vacates the premises. The petitioner and his family have lived in the respondents'
house all these years without paying either the price he obligated himself to pay or the monthly rentals he agreed to pay as early as 1963. At the very least, the
petitioner should pay P50.00 monthly rentals with legal interest from March, 1963. LibLex
WHEREFORE, the decision appealed from is MODIFIED in that the award of damages in the amount of P4,376.00 is set aside. The petitioner is ordered to vacate
the disputed property and to pay FIFTY PESOS (P50.00) as monthly rentals with interest at the legal rate from March, 1963 up to the time he and his successors-
in-interest vacate the property in question. In all other respects, the decision is AFFIRMED.
SO ORDERED.
Melencio-Herrera, Plana, Relova, De la Fuente and Patajo, JJ., concur.
Teehankee, J., reserves his vote.
[G.R. No. L-28602. September 29, 1970.]
UNIVERSITY OF THE PHILIPPINES, petitioner, vs. WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the
COURT OF FIRST INSTANCE IN QUEZON CITY, ET AL, respondents.
Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.
SYLLABUS
1.CIVIL LAW; CONTRACTS; BREACH OF CONTRACT; RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE. — Where UP and ALUMCO had expressly
stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" that, upon default by the debtor LUMCO, the creditor (UP) has "the right and the
power to consider the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit," respondent Alumco's contention that it is
only after a final court decree declaring the contract rescinded for violation of its terms that UP could disregard ALUMCO's rights under the contract and treat the
agreement as breached and of no force or effect is untenable. In connection with Article 1191 of the Civil Code, it is not always necessary for the injured party to
resort to court for rescission of the contract. (Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276)
2. ID..; ID.; ID.; ID.; EXPLANATION. — The act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party
must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper Court. If the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of
the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent
indemnity awarded to the party prejudiced.
3.ID.; ID.; ID.; ID.; WHEN JUDICIAL ACTION NECESSARY. — There is no conflict between the ruling that court action is not necessary to declare the contract
rescinded where there is agreement to such effect in case of violation of the terms thereof and the previous jurisprudence of this court invoked by respondent
declaring that judicial action is necessary for the resolution of a reciprocal obligation, since in every case where the extrajudicial resolution is contested, only the
final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be
necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by
acquiescence, estoppel or prescription.
4.ID.; ID.; ID.; ID.; PRACTICAL EFFECT OF UNILATERAL RESCISSION. — Fears have been expressed that a stipulation providing for a unilateral rescission in
case of breach of contract may render nugatory the general rule requiring judicial action v. Footnote, Padilla, Civil Law, Civil Code Anno. 1967, ed. Vol. IV, page
140) but, as already observed, in the case of abuse or error by the rescinder, the other party is not barred from questioning in court such abuse or error, the
practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder.
5.ID.; ID.; ID.; ID.; ID.; CONSTRUCTION BY SUPREME COURT OF SPAIN. — In fact, even without express provision conferring the power of cancellation upon
one contracting party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil Code is
practically a reproduction) has repeatedly held that a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully impugned
in court.
6.ID.; ID.; ID.; ID.; COURT TO RECEIVE EVIDENCE ON ISSUES; FAILURE THEREOF CONSTITUTES GRAVE ABUSE OF DISCRETION. — The acts of the
court a quo in enjoining petitioner's measures to protect its interest without first receiving evidence on the issues tendered by the parties and subsequently in
refusing to dissolve the injunction, were in grave abuse of discretion for the following reasons: l) Existence of a prima facie case of breach of contract and default in
payment by respondent ALUMCO; 2) The fact that respondent company had profited from its operations previous to agreement of December 2, 1964; 3) That the
excuses offered for non-payment were not sufficient, and 4) That whatever prejudice which may be suffered by ALUMCO is susceptible of compensation in
damages.
DECISION
REYES, J.B.L., J p:
Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are sought to be annulled in this petition for certiorari and
prohibition, filed by herein petitioner University of the Philippines (or UP) against the above-named respondent judge and the Associated Lumber Manufacturing
Company, Inc. (or ALUMCO). The first order, dated 25 February 1966, enjoined UP from awarding logging rights over its timber concession (or Land Grant),
situated at the Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967, adjudged UP in contempt of court, and directed
Sta. Clara Lumber Company, Inc. to refrain from exercising logging rights or conducting logging operations on the concession; and the third order, dated 12
December 1967, denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation of the three (3) questioned orders was issued by this Court,
per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an endowment to UP, an institution of higher learning, to be operated
and developed for the purpose of raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the latter was granted exclusive authority, for a period starting
from the date of the agreement to 31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect and remove timber from
the Land Grant, in consideration of payment to UP of royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it
had incurred an unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay; that after it had received notice that UP would rescind or
terminate the logging agreement, ALUMCO executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December
1964, which was approved by the president of UP, and which stipulated the following:
"3.In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to liquidate the foregoing
indebtedness of the DEBTOR in favor of the CREDITOR, the balance outstanding after the said payments have been applied
shall be paid by the DEBTOR in full no later than June 30, 1965;
"xxx xxx xxx
"5.In the event that the DEBTOR fails to comply with any of its promises or undertakings in this document, the DEBTOR
agrees without reservation that the CREDITOR shall have the right and the power to consider the Logging Agreement dated
8
 December 2, 1960 as rescinded without the necessity of any judicial suit, and the CREDITOR shall be entitled as a matter of
right to Fifty Thousand Pesos (P50,000.00) by way of and for liquidated damages;"
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 December 1964 to 15 July 1965, in the amount of
P61,133.74, in addition to the indebtedness that it had previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date, considered as rescinded and of no further legal effect the logging
agreement that they had entered in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as Civil Case No. 9435 of the
Court of First Instance of Rizal (Quezon City), for the collection or payment of the herein before stated sums of money and alleging the facts hereinbefore specified,
together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for preliminary attachment and preliminary injunction restraining
ALUMCO from continuing its logging operations in the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another concessionaire take over the logging operation, by advertising
an invitation to bid; that bidding was conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract was signed on 16
February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and preliminary injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting the bidding; on 27 November 1965, it filed a second petition for
preliminary injunction; and, on 25 February 1966, respondent judge issued the first of the questioned orders, enjoining UP from awarding logging rights over the
concession to any other party.
That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara Lumber Company, Inc., and said company had started logging
operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14 January 1967, declared petitioner UP in contempt of court and,
in the same order, directed Sta. Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging operations in the concession.
The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December 1967.
Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied in Act 3608 and, therefore, conclusively known, respondent
ALUMCO did not deny the foregoing allegations in the petition. In its answer, respondent corrected itself by stating that the period of the logging agreement is five
(5) years — not seven (7) years, as it had alleged in its second amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the
court below, which may be boiled down to: blaming its former general manager, Cesar Guy, in not turning over management of ALUMCO, thereby rendering it
unable to pay the sum of P219,382.94, that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and Proposed Manner of
Payments" because the logs that it had cut turned out to be rotten and could not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell"
with said firm, and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral rescission of
the logging contract, without a court order, was invalid, that petitioner's supervisor refused to allow respondent to cut new logs unless the logs previously cut during
the management of Cesar Guy be first sold; that respondent was permitted to cut logs in the middle of June, 1965 but petitioner's supervisor stopped all logging
operations on 15 July 1965; that it had made several offers to petitioner for respondent to resume logging operations but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may disregard the same before any judicial
pronouncement to that effect. Respondent ALUMCO contended, and the lower court, in issuing the injunction order of 25 February 1966. apparently sustained it
(although the order expresses no specific findings in this regard), that it is only after a final court decree declaring the contract rescinded for violation of its terms
that U.P. could disregard ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" that, upon default by the debtor
ALUMCO, the creditor (UP) has "the right and the power to consider the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any
judicial suit." As to such special stipulation, and in connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-
11897, 31 October 1964, 12 SCRA 276:
"there is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract
would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured
party to resort to court for rescission of the contract."
Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must
be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of
the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent
indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds
at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in
law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of
the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the
resolution of a reciprocal obligation, 1 since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction
can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will
remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring
judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder,
the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative
of instituting suit, instead of the rescinder.
In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme Court of Spain, in construing the effect of
Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil Code is practically a reproduction), has repeatedly held that a resolution of reciprocal
or synallagmatic contracts may be made extrajudicially unless successfully impugned in court.
"El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para el caso de que uno de los
obligados no cumpliese lo que le incumbe, facultad que, segun jurisprudencia de este Tribunal, surge
immediatamente despues que la otra parte incumplio su deber, sin necesidad de una declaracion previa de los Tribunales."
(Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897).
"Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucion como una `facultad' atribuida a la parte perjudicada
por el incumplimiento del contrato, la cual tiene derecho de opcion entre exigir el cumplimiento " la resolucion de lo
convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella, por declaracion del acreedor, a reserva, claro es, que
si la declaracion de resolucion hecha por una de las partes se impugna por la otra, queda aquella sometida el examen y
sancion de los Tribunales, que habran de declarar, en definitiva, bien hecha la resolucion o por el contrario, no ajustada a
Derecho." (Sent. TS of Spain, 16 November 1956; Jurisp. Aranzadi, 3, 447).
"La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de las partes de su respectiva
prestacion, puede tener lugar con eficacia: 1.° Por la declaracion de voluntad de la otra hecha extraprocesalmente, si no es
impugnada en juicio luego con exito; y 2.° Por la demanda de la perjudicada, cuando no opta por el cumplimiento con la
indemnizacion de daños y perjuicios realmente causados, siempre que se acredite, adem s, una actitud o conducta
persistente y rebelde de la adversa o la satisfaccion de lo pactado, a un hecho obstativo que de un modo absoluto, definitivo o
irreformable lo impida, segun el art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo
1955 y 16 nov. 1956, entre otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el
cual fragenti fidem, fides non est servanda. (Ss de 4 nov. 1958 y 22 jun. 1959.)" (Emphasis supplied)
In the light of the foregoing principles, and considering that the complaint of petitioner University made out a prima faciecase of breach of contract and defaults in
payment by respondent ALUMCO, to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging operations, and repeatedly
denied its motions to lift the injunction; that it is not denied that the respondent company had profited from its operations previous to the agreement of 5 December
1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second amended answer, such as the misconduct of its
former manager Cesar Guy, and the rotten condition of the logs in private respondent's pond, which said respondent was in a better position to know when it
executed the acknowledgment of indebtedness, do not constitute on their face sufficient excuse for non-payment; and considering that whatever prejudice may be
suffered by respondent ALUMCO is susceptible of compensation in damages, it becomes plain that the acts of the court a quo in enjoining petitioner's measures to
protect its interest without first receiving evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the injunction, were in grave
abuse of discretion, correctible by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be set aside.
For the reason that the order finding the petitioner UP in contempt of court has been appealed to the Court of Appeals, and the case is pending therein, this Court
abstains from making any pronouncement thereon.
9
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25 February 1966, granting the Associated Lumber Company's
petition for injunction, is hereby set aside. Let the records be remanded for further proceedings conformably to this opinion.
Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur.
Reyes, J.B.L., Actg. C.J., certifies that Mr. Chief Justice Concepcion is on official leave.
[G.R. No. L-56076. September 21, 1983.]
PALAY, INC. and ALBERT ONSTOTT, petitioner, vs. JACOBO C. CLAVE, Presidential Executive Assistant, NATIONAL HOUSING
AUTHORITY and NAZARIO DUMPIT, respondents.
Santos, Calcetas-Santos & Geronimo Law Office for petitioner.
Wilfredo E. Dizon for private respondent.
SYLLABUS
1.CIVIL LAW; CONTRACTS; WRITTEN NOTICE STILL REQUIRED THOUGH JUDICIAL ACTION NOT NECESSARY FOR RESCISSION. — Well settled is the
rule, as held in previous jurisprudence Torralba vs. de Los Angeles, 96 SCRA 69) that judicial action for the rescission of a contract is not necessary where the
contract provides that it may be revoked and canceled for violation of any of its terms and conditions. However, even in the cited case, there was at least a written
notice sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles, 33 SCRA 102 (1970) the act of a
party in treating a contract as cancelled should be made known to the other.
2.ID.; ID.; EXTRAJUDICIAL RESCISSION; EFFECTIVE IF NOT OPPOSED. — A stipulation entitling one party to take possession of the land and building if the
other party violates the contract does not ex proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and
determination (Nera vs. Vacante, 3 SCRA 505 (1961]). This was reiterated in Zulueta vs. Mariano (111 SCRA 206 [1982]) where we held that extrajudicial
rescission has legal effect where the other party does not oppose it (Tolentino, Civil Code of the Philippines, Vol. IV, 1962 ed., p. 168, citing Magdalena Estate vs.
Myrick, 71 Phil. 344). In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the
declaration, it shall be subject to judicial determination (UP vs. de los Angeles, supra).
3.ID.; ID.; ID.; WAIVER OF RIGHT TO BE NOTIFIED; VALID ONLY WHERE LIBERTY OF CHOICE FULLY ACCORDED. — The indispensability of notice of
cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment
Payments" which took effect on September 14, 1972. The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is
neither meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver
must be certain and unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully accorded (Chavez vs. Court of Appeals, 24
SCRA 663, 682-683(1968]). Moreover, it is a matter of public policy to protect buyers of real estate on installment payments against onerous and oppressive
conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments.
4.ID.; ID.; ID.; RIGHT ACCORDED DEFAULTER. — As a consequence of the resolution by petitioners, tights 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. (Vercelus vs. Edano, 46 Phil. 801 [1924]). 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.
5.CORPORATION LAW; CORPORATION; SEPARATE AND DISTINCT PERSONALITY; PIERCING OF CORPORATE FICTION. — It is basic that a corporation is
invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be
related (Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 SCRA 160 [1961]). As a general rule, a corporation may not be made to answer for acts or liabilities
of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used
as a shield to further an end subversive of justice (Emilio Cano Enterprises, Inc. vs. CIR, 13 SCRA 290 [1965]); or for purposes that could not have been intended
by the law that created it (McConnel vs. CA, 1 SCRA 722, 726 [1961]); or to defeat public convenience, justify wrong, protect fraud, or defend crime (Yutivo Sons
Hardware Co. vs. CTA, supra; McConnel vs. CA, supra); or to perpetuate fraud or confuse legitimate issues (R.F. Sugay & Co., Inc. vs. Reyes, 12 SCRA 700
[1964]) or to circumvent the law or perpetuate deception; (Gregorio Araneta, Inc. vs. De Paterno & Vidal, 91 Phil. 786 [1952]) or as an alter ego, adjunct or business
conduit for the sole benefit of the stockholders (McConnel vs. CA, supra; Commissioner of Internal Revenue vs. Norton Harrison Co., 120 Phil. 684 [1964]).
6.ID.; ID.; ID.; MERE OWNERSHIP OF ALL CAPITAL STOCK; NOT GROUND FOR DISREGARDING CORPORATE PERSONALITY. — In this case, petitioner
Onstott was made liable because he was then the President of the corporation and he appeared to be the controlling stockholder. No sufficient proof exists on
record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he "appears to be the
controlling stockholder." Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality (Liddel & Co. vs. Collector of Internal Revenue, 2 SCRA 632, 640 [1961]).
DECISION
MELENCIO-HERRERA, J p:
The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners Palay, Inc. and Alberto
Onstott, jointly and severally, to refund to private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as resolved by the National
Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration
of said Resolution of May 2, 1980, are being assailed in this petition. LLphil
On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott, executed in favor of private respondent, Nazario Dumpit, a Contract to Sell a parcel
of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, covered by TCT No. 90454, and owned
by said corporation. The sale price was P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42
until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90
days from the expiration of the grace period of one month, without need of notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last payment was made on December 5, 1967 for installments
up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all his overdue accounts with interest, and seeking its written
consent to the assignment of his rights to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the same request.
Replying, petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already
been resold.
Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an
alternative prayer for refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of either judicial or notarial
demand, ordered Palay, Inc. and Alberto Onstott, in his capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the
amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of said Resolution was
denied by the NHA in its Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law (O.P. Case No. 1459), respondent Presidential Executive
Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition
wherein the following issues are raised: LibLex
I. "Whether notice or demand is not mandatory under the circumstances and, therefore, may be dispensed with
by stipulation in a contract to sell.
II. Whether petitioners may be held liable for the refund of the installment payments made by respondent
Nazario M. Dumpit.
III. Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar.
IV. "Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the
decision of respondent NHA holding petitioners solidarily liable for the refund of the installment payments
made by respondent Nazario M. Dumpit thereby denying substantial justice to the petitioners, particularly
petitioner Onstott."
We issued a Temporary Restraining Order on February 11, 1981 enjoining the enforcement of the questioned Resolutions and of the Writ of Execution that had
been issued on December 2, 1980. On October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due course
to the petition on March 15, 1982.
On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior notice or demand upon respondent in view of paragraph 6
thereof which provides:
"6.That in case the BUYER fails to satisfy any monthly installment, or any other payments herein agreed upon, the BUYER
shall be granted a month of grace within which to make the payment of the account in arrears together with the one
corresponding to the said month of grace. It shall be understood, however, that should the month of grace herein granted to
the BUYER expire, without the payments corresponding to both months having been satisfied, an interest of ten (10%) per
cent per annum shall be charged on the amounts the BUYER should have paid; it is understood further, that should a period of
NINETY (90) DAYS elapse to begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER shall
not have paid all the amounts that the BUYER should have paid with the corresponding interest up to the date, the SELLER
10
 shall have the right to declare this contract cancelled and of no effect without notice, and as a consequence thereof, the
SELLER may dispose of the lot/lots covered by this Contract in favor of other persons, as if this contract had never been
entered into. In case of such cancellation of this Contract, all the amounts which may have been paid by the BUYER in
accordance with the agreement, together with all the improvements made on the premises, shall be considered as rents paid
for the use and occupation of the above mentioned premises and for liquidated damages suffered by virtue of the failure of the
BUYER to fulfill his part of this agreement: and the BUYER hereby renounces his right to demand or reclaim the return of the
same and further obligates himself peacefully to vacate the premises and deliver the same to the SELLER."
Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a contract is not necessary where the contract provides that it
may be revoked and cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the
defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract as
cancelled should be made known to the other. We quote the pertinent excerpt: LLpr
"Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved in account of infractions
by the other contracting party must be made known to the other and is always provisional being ever subject to scrutiny and
review by the proper court. If the other party denies that rescission is justified it is free to resort to judicial action in its own
behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was
not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and
the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require
that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps
to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that
he should exercise due diligence to minimize its own damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that
judicial action is necessary for the resolution of a reciprocal obligation (Ocejo, Perez & Co., vs. International Banking Corp., 37
Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) sincein every case where the extrajudicial resolution
is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was
proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation unless attack thereon should become barred by acquiescence, estoppel or
prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render
nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page
140) but, as already observed, in case of abuse or error by the rescinder, the other party is not barred from questioning in
court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of
instituting suit, instead of the rescinder." (Emphasis ours).
Of similar import is the ruling in Nera vs. Vacante 4 , reading:
"A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex
proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and
determination."
This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect where the other party does not oppose it. 6 Where it is
objected to, a judicial determination of the issue is still necessary. LLjur
In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall
be subject to judicial determination. 7
In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court to determine whether resolution of
the contract by petitioners was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution, as held in the U.P.
vs. Angeles case, supra.
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in court because from the moment the petitioner defaulted
in the timely payment of the installments, the contract between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case
notice in writing was made to the vendee of the cancellation and annulment of the contract although the contract entitled the seller to immediate repossessing of the
land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of
Real Estate on Installment Payments." which took effect on September 14, 1972, when it specifically provided:
"Sec. 3(b) . . . the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to
the buyer." (Emphasis supplied).
The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious because it was a contract of
adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently
made; such waiver follows only where liberty of choice has been fully accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on
installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on
installment payments.
Regarding the second issue on refund of the installment payments made by private respondent. Article 1385 of the Civil Code provides:
"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. 10 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. cdphil
We come now to the third and fourth issues regarding the personal liability of petitioner Onstott, who was made jointly and severally liable with petitioner corporation
for refund to private respondent of the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 11 As a general rule, a
corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However,
the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice 12 ; or for purposes that could not have been intended
by the law that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend crime 14 ; or to perpetuate fraud or confuse legitimate
issues; 15 or to circumvent the law or perpetuate deception; 16 or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. 17
We find no badges of fraud on petitioners part. They had literally relied, albeit mistakenly, on paragraph 6 (supra) of its contract with private respondent when it
rescinded the contract to sell extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the President of the corporation and he appeared to be the controlling stockholder. No
sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just
because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate personality. 18 In this respect then, a modification of the Resolution under review
is called for.
WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby modified. Petitioner Palay, Inc. is directed to refund to
respondent Nazario M. Dumpit the amount of P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the filing of the
Complaint. The temporary Restraining Order heretofore issued is hereby lifted.
No costs.
SO ORDERED.
11
Plana, Relova and Gutierrez, Jr., JJ., concur.
Teehankee, J., concurs in the result.
[G.R. No. L-17858-9. July 13, 1962.]
MANUEL S. CAMUS, petitioner, vs. PRICE, INC., respondent.
[G.R. No. L-17865-6. July 13, 1962.]
PRICE, INC., vs. HON. COURT OF APPEALS and MANUEL S. CAMUS, respondents.
SYLLABUS
1.CONTRACTS; LEASE; RECIPROCAL OBLIGATIONS; DEFAULT IN THE PERFORMANCE OF CORRESPONDING DUTIES. — Where, as in the present case,
both parties defaulted in the performance of their corresponding duties, but it could not be determined with definiteness who of them committed the first infraction of
the terms of the contract, the parties are in pari delicto and the contract is deemed extinguished, with the parties suffering their respective loses.
2.ID.; ID.; ID.; ID.; WHEN LESSEE MAY BE REQUIRED TO PAY FOR OCCUPANCY OF PROPERTY. — Considering that the lessee was in continuous
occupancy of the premises during the pendency of the case, conducting the pendency of the case, conducting the operating its business therein and profiting
thereby, whereas the lessor was not only deprived of the possession of his property but also of the rentals therefor, said lessee must be required to compensate the
lessor for such occupancy until it vacates the premises.
DECISION
BARRERA, J p:
On March 30, 1951, Manuel S. Camus and Price, Inc. entered into a contract of lease, the pertinent terms of which read:
"1.That said party of the first part/Lessor (Manuel S. Camus) hereby grants, demise and let the said party of the second
part/Lessee (Price, Inc.), for lawful business purposes, all that certain strong material building with the lot and parcel of land,
Nos. 15 and 16, Block No. 1, Tambobong Estate, Psd-11759 of with an area of 1,700 square meters, situated, lying, and being
at No. 60 C. Arellano Street, Malabon, Rizal, covered as Lots the Rural Progress Administration, to have and to hold the same
for the full term of ten (10) years from April 1, 1951 to March 31, 1960, inclusive, at the monthly of P300.00, Philippine
Currency, for the above-mentioned building, to be paid without the necessity of express demand therefor on the 1st. five (5)
days of each ensuing month at the residence of the first part/Lessor at Malabon, Rizal; and also at the monthly rental of One
Hundred Pesos (P100.00) Philippine Currency, for the use of the leased premises, payable beginning when the construction of
the factory is already finished, and likewise payable at the time and place aforementioned;
"2.That the party of the second part/Lessee, shall have or cause to erect, build or construct a Factory building and Warehouse
of strong materials appropriate to or in furtherance of the business of the party of the second part/Lessee, on the said lot, the
plan as to the form and size and other specifications thereof being subject to the joint approval of both parties concerned, at
the expense of the party of the second part/Lessee; and that the buildings thereon constructed shall be insured with a
competent Insurance Company by the party of the second part/Lessee, in an amount equal to the insurable interest of the
party of the first part/Lessor, in the sum of the least Fifty Thousand Pesos (P50,000.00) Philippine Currency, for himself, his
heirs and/or administrators as his beneficiary; and that the insured shall automatically become, without cost, the property of
the first part/Lessor, immediately upon the termination of this contract;
xxx xxx xxx"
"5.That the party of the first part/Lessor likewise covenants and agrees to cause or make the necessary filling, at his sole
expense, within a year from the signing of this contract, the vacant portion of the along the river with an area of about 500
square meters of increase its elevation and enable the party of the second part/Lessee, to facilitate or make use of the whole
lot; as well as to construct, building or cause to, erect the necessary concrete stone walls provided with barbed with barbed
wires on top thereof and all expenses incurred or to incurred incident to the filing as well as to the construction, building and
erection of the stone walls, one (1) meter high, with barbed wire to be borne solely by the party of the first part/Lessor;
xxx xxx xxx
"14.Provided, always, that in case of a breach of any of the covenants on the part of the party of the second part/Lessee,
herein contained, the party of the first part/Lessor, may, while default the shall continue, and nothwithstanding any waiver of
any prior breach of conditions, without notice or demand, enter upon the premises, and thereby terminate this lease and may
thereupon expel and remove the party of the second part/Lessee;
"15.That it is still furthermore agreed that, in case of court litigation by virtue of non-payment of the agreed rents or any other
breach of this contract on the part of the party of the second part/Lessee, the party of the first part/Lessor, shall be entitled to
collect P1,000.00 as liquidated damages and P500.00 as attorney's fee's, exclusive of cost legally taxable.". . . (Emphasis
supplied.)
On January 19, 1954, the lessee instituted Civil Case No. 2582 of the court of First Instance of Rizal against the lessor, for specific performance, damages and
extension of the period of the lease, allegedly due to the latter's failure to comply with the aforequoted provisions of paragraph 5 of the contract. These days later,
or on January 22, 1954, the Lessor, in turn, filed in the Justice of the Peace Court of Malabon an action for unlawful detainer (ejectment) against the Lessee (Civil
Case No. 1159), allegedly by reason of said defendant's non-payment of rentals since February 16, 1953.
On February 10, 1954, the justice of the Peace Court rendered a decision in the ejectment case, in favor of the lessor, ordering the Lessee to vacate the premises
and pay the plaintiff Lessor rentals in arrears amounting until it finally delivers possession of the property to the Lessor; liquidate damages in the sum of P1,000.00;
attorney's fees for P500.00 and costs.
The Lessee appealed to the Court of First Instance of Rizal, filing therein a cash bond to cover the amounts adjudged by the Justice of the Peace Court, as well as
the current rentals. The Lessor then filed a motion for execution of the decision appealed from, which was opposed by the Lessee. As the Court of First Instance
granted said motion for execution, the Lessee instituted certiorari proceedings in this Court (G.R. No. L-8253).
In issuing the writ of certiorari prayed for therein, 1 on the ground that the CFI Judge committed a grave abuse of discretion in issuing an order for the execution of
the decision of the Justice of the Peace Court despite the "strong equities in favor of Price (Lessee) and the dubious legality or propriety of the decision of the
justice of the peace court", this Court said:
"In their answer, respondents (Camus, et al.) admit some of the allegations of the petition and deny other allegations thereof.
Among other things, they, moreover, allege that the obligations of Camus, under the contract of lease, are independent of
those of Price: that the filling and construction provided in said contract, have 'already been totally' completed; and that the
order of July 24, 1954, and the writ of execution were duly issued, for Price had failed, either to pay, or to deposit, the amount
of the rentals for April, May and June, 1954.
"At the outset, it should be noted that the very pictures submitted by respondents, as Annexes 9 and 10 to their answer, dated
October 11, 1954, show that the stone wall constructed by Camus is of 'adobe', and has no barbed wire fence, whereas the
contract of lease provides for 'concrete stone walls . . . with barbed wire.' Furthermore, although the portion of the leased
property reproduced in Annex 9 appears to have been filed, there is evidence (which has not been contradicted) to the effect
that the elevation of said portion is lower by 40 centimeters than the average elevation of said property (see Annex L).
Moreover, the pictures Annexes M, N, and O, taken on February 16, 1954, reveal that said portion was then unfilled and even
under water. Anyhow, it is completed within the year, which expired on March 20, 1952, stipulated in the contract of lease. In
fact, the answer filed by respondents before this Court impliedly admits the failure of Camus to make the filling and
construction within said period. . .
"At any rate, there is prima facie, if not strong evidence that Camus had not complied with some of his obligations under the
contract dates back to March 20, 1952, or about eleven (11) months prior to the alleged default of Price in the payment of
rentals (or from February 16, 1953). . . .
It was then held that the obligations of the parties in the contract being reciprocal, the Lessee did not incur delay until the Lessor complies with what was incumbent
upon him applying Article 1169 of the Civil Code.
After the case was remanded to the lower court for further proceedings, the 2 cases — Civil Cases Nos. 2582 (for specific performance filed by Price, Inc.) and
2650 (for unlawful detainer by Camus) were tried jointly during the parties adduced evidence in support of their respective allegations. Later, the trial court rendered
judgment ordering (1) the cancellation and return of the bond to the Lessee (Price, Inc.); (2) said Lessee to insure the factory building and warehouse for
P50,000.00 within 1 month; and (3) the Lessor Camus to fill up the low portion of the leased premises and enclose the from compliance by the Lessor of his
aforementioned obligation.
Only the lessor, Manuel Camus, appealed to the Court of Appeals.
The Case. —
12
In its decision of September 14, 1960, the court of Appeals, passing upon the respective obligations of the parties under the contract stated:
". . ., it was proved that the lot along the Malabon River, obviously an accretion of lots Nos. 15 and 16, was declared for tax
purposes by Ricardo, now represented by his widow, Rosario Sevilla Vda. de Camus, on March 12, 1951 (Tax Declaration No.
10202), and he had been paying taxes therefor as follows: for 1948, 1949, 1950 and 1951 paid on March 15, 1951, for 1952,
on March 26, 1952, for 1953 on March 30, 1953, for 1954 on March 17,, 1954, and for 1955 on March 30, 1955 (Exh. 14-B).
This shows that prior to March 20, 1951, when the contract of lease was executed and prior to the filing of civil case No. 2582
by appellee (Price Inc.) against appellant (Camus), Ricardo had already been claiming the possession, if not the ownership, of
the lot bordering the river, which had accumulated by gradual accretion a total area of 1,425 square meters, the same having
been determined even prior to the execution of the contract of lease as shown in the tax declaration issued on March 12,
1951. . . .
". . . Nevertheless, we cannot sustain appellant's contention that the 500 square meters which he obligated himself to fill up
and construct a fence should be inside the boundaries of lots Nos. 15 and 16, irrespective of the vacant space therein,
because paragraph 5 of the contract of lease is clear that said portion of 500 square meters is along the Malabon River. This
portion is separate and distinct from the 1,700 (should be 1,761) square meters of land leased under paragraph 1 of said
contract. Still, it is unreasonable to conclude that appellant intended to include the entire area of 1,425 square meters along
the river, nor that he only miscalculated the exact area thereof, as the land he leased to appellee. Under the stated facts, we,
therefor, hold that appellant, with the apparent conformity of Sy Suan, referred in paragraph 5 of the contract of lease to only a
portion of 500 square of the entire area containing 1,425 square meters, and that he bound himself to fill up said portion at his
expense and to enclose with a one-meter high stone wall and barbed wire on top within a period of one year from March 20,
1951.
"To require appellant, as the lower court held, to finish filling up the entire area bordering the Malabon River and to surround it
with a concrete wall throughout the river bank, would seem unfair to said appellant and contrary to the true intention of the
parties in the contract of lease, the principal reason being that the entire area of the lot along the river is undisputedly 1,425
square meters, and not only 500 square meters as stipulated in paragraph 5 of the contract. Besides, it is illogical to allow
appellee to utilize more than 500 square meters. Neither would it be just to compel appellant to incur expenses in filling up and
building a fence for more than 500 square meters, even if appellee allegedly planned to build a 'hot room' and 'cool-room'.
However, in failing to fill up 500 square meters of the vacant lot along the Malabon River, appellant just the same violated the
contract.
". . . Although we subscribe to the view that reciprocal obligations are embodied in the contract of lease, yet we cannot see our
way clear that it was appellant who first committed the breach thereof. Undoubtedly, appellee did not insure the factory
building and warehouse. Sy Suan's testimony on this point that he tried to insure but the premiums charged were too high on
account of the absence of a stone wall along the river bank, is unmeritorious. When asked, he could not even mention the
name of the insurance company he approached, much less the amount of premiums allegedly charged.
"Moreover, upon failure of appellee to pay rentals, appellant wrote it a letter on January 4, 1954. The question of filling up the
vacant lot along the river in accordance with paragraph 5 of the contract of lease was brought up by appellee only in its letter
or reply dated January 11, 1954. As things stand, in so far as the third issue is concerned, we cannot really determine who
between the parties was actually the first who violated the contract. What we see, that the parties are in pari delicto. . ."
Based on the foregoing findings, the Court of Appeals declared the contract extinguished, but the parties were made to bear their own losses. (Art. 1192, Civil
Code). However, as the Lessee was found to be in continued possession of the parties and in operation of its business during the pendency of the case, it was
ordered to compensate the Lessor in the sum of P200.00 a month from February 16, 1953 until it vacated the premises. Furthermore, the lifetime of the contract,
having expired on March 31, 1960, the factory building and the warehouse were declared to have automatically become the properties of the Lessor.
From said decision, both parties appealed to this Court.
The Lessor, as appellant (in Nos. L-17858-59), contends that the Court of Appeals erred in not finding the Lessee Price, Inc. as the first violator of the contract, and
in requiring the latter to pay him only the amount of P200.00 a month for the use and occupation of the properties from February 16, 1953 until the same are finally
vacated.
In its appeal (Nos. L-17865-66), the Lessee, on the other hand, maintains that the Court of Appeals erred in not declaring the Lessor as the first to have committed
the breach of the agreement; in requiring said lessee to compensate Camus in the amount of P200.00 a month notwithstanding its finding that the parties are in pari
delicto, and must suffer their own damages; and holding the lease to have terminated as of March 31, 1960.
From the findings of the Court of Appeals heretofore quoted , which we are not here to review, it appears that the strip of land, with an area of 1,425 square meters,
was not originally part of lots 15 and 16 subject of the contract: that the Lessor actually started the filling in and fencing of a portion of 500 square meters thereof, as
undertaken by him, but did not completely comply therewith, the fence being only of adobe stones without barbed wires, and the filling being 40 centimeters lower
than the elevation of the lot under lease; that, on the other hand, notwithstanding the completion of the factory building and warehouse, the Lessee, in his turn,
failed to secure insurance therefor to secure insurance therefor as stipulated; that the Lessee, likewise, defaulted in the payment of the rentals as of February 16,
1953; and that the Lessor's failure to comply with its obligation could not be the cause of their Lessee's non-fulfillment of its commitments under the contract. With
these established facts, the conclusion reached by the Court of Appeals, that the parties were in pari delicto is not without foundation or justification.
Although in the incidental case G.R. No. L-8253, this Court in effect declared the Lessor Camusprima facie to be the first to commit a breach of the agreement, it
may be pointed out that in making such pronouncement, only the matter of the Lessee's default in the payment of rentals was considered. Upon the continuation of
the proceedings, however, it was established, as so found by the Court of Appeals, that the Lessee also failed to cover the buildings in September, 1951, with
insurance in violation of the specific terms of the contract. As a matter of fact, until the instant cases were filed, no such insurance was drawn on the aforesaid
factory building and warehouse.
Upon the other hand, while it may be true that the duty imposed on the Lessor under the contract, to increase the elevation of the low portion of the lot and erect
thereon a concrete stone wall topped with barbed wire was provided only to "facilitate or make use (by the Lessee) of the whole lot" — allegedly a subordinate and
collateral condition of the contract — it is not herein denied that such condition was not complied with by the Lessor. And this obligation matured in March, 1952.
Even assuming, therefore, that the Lessee's obligation to insure the building arose after the completion of the construction of the buildings in September, 1951, as
the Lessor also defaulted in the performance of his corresponding duty, it can not really be determined with definiteness who of the parties committed the first
infraction of the terms of the contract. Under the circumstances, the conclusion reached by the Court of Appeals, that the parties are actually in pari delicto, must be
sustained, and the contract deemed extinguished, with the parties suffering their respective losses.
Considering, however, that the Lessee was (and must still be) in continuous occupancy of the premises during the pendency of the case, conducting and operating
its business therein as usual and profiting thereby, whereas the Lessor was not only deprived of the possession of his property but also of the rentals therefor since
February 16, 953, said Lessee must be required to compensate the Lessor for such occupancy. The Lessor, on the other hand, as a result of the termination of the
lease, will acquire the buildings of the lessee which were constructed on the leased premises. Under the circumstances of the case, we find the decision of the
Court of Appeals directing the payment by Price, Inc. of the sum of P200.00 per month from February 16, 1953, until it vacates the premises, to be in accord with
justice.
Wherefore, the decision of the Court of Appeals appealed from is hereby affirmed in all respects without costs. So ordered.
Bengzon, C.J., Padilla, Labrador, Paredes, Dizon, Regal and Makalintal, JJ., concur.
[G.R. No. L-11827. July 31, 1961.]
FERNANDO A. GAITE, plaintiff-appellee, vs. ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING
CO., INC., SEGUNDINA VIVAS, FRANCISCO DANTE, PACIFICO ESCANDOR and FERNANDO TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia Antonio Barredo and Pedro Guevarra for defendants-appellants.
SYLLABUS
1.OBLIGATIONS AND CONTRACTS; CONDITIONAL OBLIGATIONS; EFFICACY SUBORDINATED TO THE HAPPENING OF A FUTURE AND UNCERTAIN
EVENT. — What characterizes a conditional obligation is the fact that its efficacy or obligatory force is subordinated to the happening of a future and uncertain
event; so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed.
2.SALES; COMMUTATIVE AND ONEROUS NATURE OF CONTRACT OF SALES; CONTINGENT CHARACTER OF OBLIGATION MUST CLEARLY APPEAR. —
A contract of sale is normally commutative and onerous: not only does each of the parties assume a correlative obligation, but each party anticipates performance
by the other from the very start. Although the obligation of one party can be lawfully subordinated to an uncertain event, so that the other understands that he
assumes the risk of receiving nothing for what he gives, it is not in the usual course of business to do so; hence, the contingent character of the obligation must
clearly appear.
3.ID.; ID.; HOW DOUBT IN THE INTENTION OF PARTIES IS RESOLVED. — Sale is essentially onerous, and if there is doubt whether the parties intended a
suspensive condition or a suspensive period for the payment of the agreed price, the doubt shall be settled in favor of the greatest reciprocity of interests, which will
obtain if the buyer's obligation is deemed to be actually existing, with only its maturity postponed or deferred.
13
 DECISION
REYES, J.B.L., J p:
This appeal comes to us directly from the Court of First Instance because the claims involved aggregate more than P200,000.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a representative capacity, of 11 iron lode mineral claims, known as the
Dawahan Group, situated in the municipality of Jose Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952 (Exhibit "3"), Fonacier constituted and appointed plaintiff-appellee Fernando A. Gaite as his true and lawful
attorney-in-fact to enter into a contract with any individual or juridical person for the exploration and development of the mining claims aforementioned on a royalty
basis of not less than P0.50 per ton of ore that might be extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record on Appeal,
pp. 17-19) conveying the development and exploitation of said mining claims unto the Larap Iron Mines, a single proprietorship owned solely by and belonging to
him, on the same royalty basis provided for in Exhibit "3". Thereafter Gaite embarked upon the development and exploitation of the mining claims in question,
opening and paving roads within and outside their boundaries, making other improvements and installing facilities therein for use in the development of the mines,
and in time extracted therefrom what he claimed and estimated to be approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to Gaite to exploit and develop the mining claims in question, and
Gaite assented thereto subject to certain conditions. As a result, a document entitled "Revocation of Power of Attorney and Contract" was executed on December 8,
1954 (Exhibit "A"), wherein Gaite transferred to Fonacier, for the consideration of P20,000, plus 10% of the royalties that Fonacier would receive from the mining
claims, all his rights and interests on all the roads, improvements, and facilities in or outside said claims, the right to use the business name "Larap Iron Mines" and
its goodwill, and all the records and documents relative to the mines. In the same document, Gaite transferred to Fonacier all his rights and interests over the
"24,000 tons of iron ore, more or less" that the former had already extracted from the mineral claims, in consideration of the sum of P75,000, P10,000, of which was
paid upon the signing of the agreement, and
"b.The balance of SIXTY-FIVE "THOUSAND PESOS (P65,000) will be paid from and out of the first letter of credit covering
the first shipment of iron ores and or the first amount derived from the local sale of iron ore made by the Larap Mines &
Smelting Co., Inc., its assigns, administrators, or successors in interests."
To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a surety bond; and pursuant to the promise,
Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its
stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified,
however, that when this bond was presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract", Exhibit "A", on
December 8, 1954, he refused to sign said Exhibit "A" unless another bond underwritten by a bonding company was put up by defendants to secure the
payment of the P65,000 balance of the price of the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated December 8, 1954
(Exhibit "B"), was executed by the same parties to the first bond Exhibit "A-I", with the Far Eastern Surety and Insurance Co. as additional surety, but it
provided that the liability of the surety company would attach only when there had been an actual sale of iron ore by the Larap Mines & Smelting Co. for an
amount of not less than P65,000, and that, furthermore, the liability of said surety company would automatically expire on December 8, 1955. Both bonds
were attached to the "Revocation of Power of Attorney and Contract", Exhibit "A" and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two executed and signed the "Revocation of Power of Attorney and
Contract", Exhibit "A", Fonacier entered into a "Contract of Mining Operation", ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the
right to develop, exploit, and explore the mining claims in question, together with the improvements therein and the use of the name "Larap Iron Mines" and its
goodwill, in consideration of certain royalties. Fonacier likewise transferred, in the same document, the complete title to the approximately 24,000 tons of iron ore
which he acquired from Gaite, to the Larap Mines & Smelting Co., in consideration for the signing by the company and its stockholders of the surety bonds
delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety and Insurance Company, no sale of the approximately 24,000
tons of iron ore had been made by the Larap Mines & Smelting Co., Inc., nor had the 65,000 balance of the price of said ore been paid to Gaite by Fonacier and his
sureties. Whereupon, Gaite demanded from Fonacier and his sureties payment of said amount, on the theory that they had lost every right to make use of the
period given them when their bond, Exhibit "B", automatically expired (Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to pay as demanded by
Gaite, the latter filed the present complaint against them in the Court of First Instance of Manila (Civil Case No. 29310) for the payment of the P65,000 balance of
the price of the ore, consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon by Gaite was subject to a condition that the amount of P65,000
would be payable out of the first letter of credit covering the first shipment of iron ore and/or the first amount derived from the local sale of the iron ore by the Larap
Mines & Smelting Co., Inc.; that up to the time of the filing of the complaint, no sale of the iron ore had been made, hence the condition had not yet been fulfilled;
and that consequently, the obligation was not yet due and demandable. Defendant Fonacier also contended that only 7,573 tons of the estimated 24,000 tons of
iron ore sold to him by Gaite was actually delivered, and counterclaimed for more than P200,000 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1)Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000 became due and demandable when the defendants failed to renew the surety
bond underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit "B") which expired on December 8, 1955, and
(2)Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were actually in existence in the mining claims when these parties
executed the "Revocation of Power of Attorney and Contract", Exhibit "A."
On the first question, the lower court held that the obligation of defendants to pay plaintiff the P65,000 balance of the price of the approximately 24,000 tons of iron
ore was one with a term: i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be effected within one year or before December 8,
1955; that the giving of security was a condition precedent to Gaite's giving of credit to defendants; and that as the latter failed to put up a good and sufficient
security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on December 8, 1955, the obligation became due and demandable under Article 1198 of
the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000 tons of the iron ore at the mining claims in question at the time of
the execution of the contract Exhibit "A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him, jointly and severally, P65,000 with interest at 6% per annum from
December 9, 1965 until full payment, plus costs. From this judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for resolution: a motion to declare the appellants Larap Mines & Smelting Co., Inc.
and George Krakower in contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as having become academic and a motion for new trial
and/or to take judicial notice of certain documents, filed by appellee Gaite. The motion for contempt is unmeritorious because the main allegation therein that the
appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in question, which allegedly is "property in litigation", has not been
substantiated; and, even if true, does not make these appellants guilty of contempt, because what is under litigation in this appeal is appellee Gaite's right to the
payment of the balance of the price of the ore, and not the iron ore itself. As for the several motions presented by appellee Gaite, it is unnecessary to resolve these
motions in view of the result that we have reached in this case, which we shall hereafter discuss.
The main issues presented by appellants in this appeal are:
(1)that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee Gaite the P65,000 (balance of the price of the iron ore in question) is
one with a period or term and not one with a suspensive condition, and that the term expired on December 8, 1955; and
(2)that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit "A":
"7.That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his rights and interests over the 24,000
tons of iron ore, more or less, above-referred to together with all his rights and interests to operate the mine in consideration of
the sum of SEVENTY-FIVE THOUSAND PESOS (P75,000) which the latter binds to pay as follows:
a.TEN THOUSAND PESOS (P10,000) will be paid upon the signing of this agreement.
b.The balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will be paid from and out of the first letter of credit covering first
shipment of iron ores and/or the first amount derived from the local sale of iron ore made by the Larap Mines & Smelting Co.,
Inc., its assigns, administrators, or successors in interest."
We find the court below to be legally correct in holding that the shipment or local sale of the iron ore is not a condition precedent (or suspensive) to the payment of
the balance of P65,000, but was only a suspensive period or term. What characterizes a conditional obligation is the fact that its efficacy or obligatory force
(as distinguished from its demandability) is subordinated to the happening of a future and uncertain event; so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed. That the parties to the contract Exhibit "A" did not intend any such state of things to prevail
is supported by several circumstances:
1)The words of the contract express no contingency in the buyer's obligation to pay: "The balance of Sixty-Five Thousand Pesos (P65,000) will be paid out of the
first letter of credit covering the first shipment of iron ore . . ." etc. There is no uncertainty that the payment will have to be made sooner or later; what is
undetermined is merely the exact date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay is recognized; only
its maturity or demandability is deferred.
14
2)A contract of sale is normally commutative and onerous: not only does each one of the parties assume a correlative obligation (the seller to deliver and transfer
ownership of the thing sold and the buyer to pay the price), but each party anticipates performance by the other from the very start. While in a sale the obligation of
one party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes the risk of receiving nothing for what he gives (as in
the case of a sale of hopes or expectations, emptio spei), it is not in the usual course of business to do so; hence, the contingent character of the obligation must
clearly appear. Nothing is found in the record to evidence that Gaite desired or assumed to run the risk of losing his rights over the ore without getting paid for it, or
that Fonacier understood that Gaite assumed any such risk. This is proved by the fact that Gaite insisted on a bond to guarantee payment of the P65,000, and not
only upon a bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, but also on one by a surety company; and the fact that appellants
did put up such bonds indicates that they admitted the definite existence of their obligation to pay the balance of P65,000.
3)To subordinate the obligation to pay the remaining P65,000 to the sale or shipment of the ore as a condition precedent, would be tantamount to leaving the
payment at the discretion of the debtor, for the sale or shipment could not be made unless the appellants took steps to sell the ore.
Appellants would thus be able to postpone payment indefinitely. The desirability of avoiding such a construction of the contract Exhibit "A" needs no
stressing.
4)Assuming that there could be doubt whether by the wording of the contract the parties intended a suspensive condition or a suspensive period (dies ad quem) for
the payment of the P65,000, the rules of interpretation would incline the scales in favor of "the greatest reciprocity of interests", since sale is essentially onerous.
The Civil Code of the Philippines, Article 1378, paragraph 1, in fine, provides:
"if the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests."
and there can be no question that greater reciprocity obtains if the buyer's obligation is deemed to be actually existing, with only its maturity (due date)
postponed or deferred, than if such obligation were viewed as non-existent or not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an aleatory contract where the transferor, Gaite, would
assume the risk of not being paid at all; and that the previous sale or shipment of the ore was not a suspensive condition for the payment of the balance of the
agreed price, but was intended merely to fix the future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have the right to insist that Gaite should wait for the sale or
shipment of the ore before receiving payment; or, in other words, whether or not they are entitled to take full advantage of the period granted them for making the
payment.
We agree with the court below that the appellants have forfeited the right to compel Gaite to wait for the sale of the ore before receiving payment of the balance of
P65,000, because of their failure to renew the bond of the Far Eastern Surety Company or else replace it with an equivalent guarantee. The expiration of the
bonding company's undertaking on December 8, 1955 substantially reduced the security of the vendor's rights as creditor for the unpaid P65,000, a security that
Gaite considered essential and upon which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The case squarely comes under
paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:
(1). . .
(2)When he does not furnish to the creditor the guaranties or securities which he has promised.
(3)When by his own acts he has impaired said guaranties or securities after their establishment, and when through fortuitous
event they disappear, unless he immediately gives new ones equally satisfactory."
Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the securities given to the creditor (appellee Gaite), unless
immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full knowledge that on its face it would automatically expire
within one year was a waiver of its renewal after the expiration date. No such waiver could have been intended, for Gaite stood to lose and had nothing to gain
thereby; and if there was any, it could be rationally explained only if the appellants had agreed to sell the ore and pay Gaite before the surety company's bond
expired on December 8, 1955. But in the latter case the defendants- appellants' obligation to pay became absolute after one year from the transfer of the ore to
Fonacier by virtue of the deed Exhibit "A."
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding payment and instituting this action one year from and after the
contract (Exhibit "A") was executed, either because the appellant debtors had impaired the securities originally given and thereby forfeited any further time within
which to pay; or because the term of payment was originally of no more than one year, and the balance of P65,000 became due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of iron ore in the stockpiles sold by appellee Gaite to appellant
Fonacier, and whether, if there had been a short-delivery as claimed by appellants, they are entitled to the payment of damages, we must, at the outset, stress two
things: first, that this is a case of a sale of a specific mass of fungible goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore, more or less",
stated in the contract Exhibit "A", being a mere estimate by the parties of the total tonnage weight of the mass; and second, that the evidence shows that neither of
the parties had actually measured or weighed the mass, so that they both tried to arrive at the total quantity by making an estimate of the volume thereof in cubic
meters and then multiplying it by the estimated weight per ton of each cubic meter.
The sale between the parties is a sale of a specific mass of iron ore because no provision was made in their contract for the measuring or weighing of the ore sold
in order to complete or perfect the sale, nor was the price of P75,000 agreed upon by the parties based upon any such measurement (see Art. 1480, second par.,
New Civil Code). The subject-matter of the sale is, therefore, a determinate object, the mass, and not the actual number of units or tons contained therein, so that
all that was required of the seller Gaite was to deliver in good faith to his buyer all of the ore found in the mass, notwithstanding that the quantity delivered is less
than the amount estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So. 872, applying art. 2459 of the Luisiana Civil
Code). There is no charge in this case that Gaite did not deliver to appellants all the ore found in the stockpiles in the mining claims in question; Gaite had,
therefore, complied with his promise to deliver, and appellants in turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite mass, but approximately 24,000 tons of ore, so that any
substantial difference in this quantity promised and the quantity delivered would entitle the buyers to recover damages for the short-delivery, was there really a
short- delivery in this case?
We think not. As already stated, neither of the parties had actually measured or weighed the whole mass of ore cubic meter by cubic meter, or ton by ton. Both
parties predicate their respective claims only upon an estimated number of cubic meters of ore multiplied by the average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that he sold to Fonacier, while appellants contend that by actual
measurement, their witness Cipriano Manlañgit found the total volume of ore in the stockpiles to be only 6,609 cubic meters. As to the average weight in tons per
cubic meter, the parties are again in disagreement, with appellants claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims
that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief
of the Mines and Metallurgical Division of the Bureau of Mines, a government pensionado to the States and a mining engineering graduate of the Universities of
Nevada and California, with almost 22 years of experience in the Bureau of Mines. This witness placed the tonnage factor of every cubic meter of iron ore at
between 3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds to the average tonnage factor of 3.3 adopted in his
corrected report (Exhibits "FF" and "FF- 1") by engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims involved at the request of
appellant Krakower, precisely to make an official estimate of the amount of iron ore in Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by appellants' witness Cipriano Manlañgit is correct, if we multiply it by
the average tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the estimate of 24,000 tons made by appellee Gaite,
considering that actual weighing of each unit of the mass was practically impossible, so that a reasonable percentage of error should be allowed anyone making an
estimate of the exact quantity in tons found in the mass. It must not be forgotten that the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more or
less. (cf. Pine River Logging & Improvement Co. vs. U. S., 186 U.S. 279, 46, L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the payment of damages, nor could Gaite have been guilty of any fraud in
making any misrepresentation to appellants as to the total quantity of ore in the stockpiles of the mining claims in question, as charged by appellants since Gaite's
estimate appears to be substantially correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs against appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.
[G.R. No. 80231. October 18, 1988.]
CELSO A. FERNANDEZ, petitioner, vs. THE HONORABLE COURT OF APPEALS and MIGUEL TANJANGCO, respondents.
Celso A. Fernandez for and in his own behalf.
15
Ricardo J. Lardizabal for private respondent.
SYLLABUS
1.CIVIL LAW; CONTRACTS; LEASE; WORDS "EXTENDIBLE" AND "RENEWABLE" EXPLAINED. — As a matter of dictionary meaning, "extendible" means
"capable of extension", and "renewable" means "capable of renewal"; both are oriented towards the future. It may be seen that both "extendible" and "renewable",
when considered in and of themselves, are non-committal: they do not purport to answer the intensely practical question of who is vested — lessor or lessee or
both acting together — with the option to extend or renew a lease. Again, neither term by itself pre-empts the question of what the specific terms and conditions of
the extended or renewed lease shall be: shall all terms and provisions of the old lease be carried forward into the future, or shall all or some of them be
renegotiated upon expiration of the old lease.
2.ID.; ID.; ID.; RULINGS IN KOH VS. ONGSIACO (36 PHIL. 185 [1917] AND CRUZ VS. ALBERTO (39 PHIL. 991 [1919]) OVERRULED. —
Both Koh and Cruz seem to impose an impossible burden upon single words. Put a little differently, both Mr. Justice Torres and Mr. Justice Street read too much
into a single word: they read "extendible" as ifit said "extendible at the option of the lessee alone, all other terms and conditions remaining unchanged". In
effect, Kohand Cruz treated "extendible" as a highly technical and cryptic term. We do not believe that the use of either "extendible" or "renewable" should be given
sacramental significance. The important task in contract interpretation is always the ascertainment of the intention of the contracting parties and that task is of
course to be discharged by looking to the words they used to project that intention in their contract, all the words not just a particular word or two, and words in
context not words standing alone. It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease must be deemed to have been
agreed upon for the benefit of both parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone. We are not
aware of any presumption in law that the term of a lease is designed for the benefit of the lessee alone. Koh and Cruz in effect rested upon such a presumption. But
that presumption cannot reasonably be indulged in casually in an era of rapid economic change, marked by, among other things, volatile costs of living and
fluctuations in the value of the domestic currency. The longer the period the more clearly unreasonable such a presumption would be. In an age like that we live in,
very specific language is necessary to show an intent to grant a unilateral faculty to extend or renew a contract of lease to the lessee alone, or to the lessor alone
for that matter. We hold that the above-quoted rulings in Koh v. Ongsiaco and Cruz v. Alberto should be and are overruled.
3.ID.; ID.; ID.; VERBAL ASSURANCE OF RENEWAL OF LEASE; INADMISSIBLE UNDER PAROLE EVIDENCE RULE. — An alleged verbal assurance of renewal
of a lease is inadmissible to qualify the terms of the written lease agreement under the parole evidence rule, and unenforceable under the Statute of Frauds.
4.ID.; ID.; ID.; INTERPRETATION OF PHRASE "RENEWABLE FOR ANOTHER TEN (10) YEARS AT THE OPTION OF BOTH PARTIES UNDER SUCH TERMS,
CONDITIONS AND RENTAL REASONABLE AT THAT TIME." — The only issue here relates to the interpretation of the phrase "renewable for another ten (10)
years at the option of both parties under such terms, conditions and rental reasonable at that time", set out in paragraph (2) of the lease contract in question. The
Court of Appeals read the above contract language as comprising, not technical terms or terms of legal art, but rather just plain and ordinary words. As such, the
Court of Appeals understood the above language as requiring — "that the parties should mutually agree on a new contract which may not be the same as the
original, under such terms, conditions and rental reasonable at that time. It follows therefore that the plaintiff [petitioner] cannot renew the lease by his unilateral act
of exercising his option. Simply stated, the option must be mutually and consen[s]ually exercised, and not unilaterally as was erroneously done by the plaintiff.
Applied to the lease contract under consideration, it appears that the lease has expressed in clear, unmistakable and unambiguous terms the intention of the
parties that if the lease contract was to be renewed, the option to renew should be made by both parties." We agree with the respondent appellate court's reading:
the intention of the parties to the lease agreement is clearly discernible in the words of that agreement. The assent of both lessor and lessee is essential for another
contract to spring into juridical existence upon expiration of the original one. The contract clause may be seen to consist of two (2) parts: first, the contract is
stipulated to be "renewable" for another ten years "at the option of both parties"; second, the contract is specified to be "renewable — under such terms, conditions
and rental reasonable at that time." The first part of the clause stresses that the option or faculty to renew was given, not to the lessee alone nor to the lessor by
himself, but to the two (2) simultaneously who hence must both exercise the option to renew if a new contract is to come about. The second portion of the contract
clause addresses the future and directs the parties to negotiate and reach mutual agreement on the terms and conditions of the new contract, including the new
rental rate, which terms and conditions must be reasonable under such situation as may be extent when the time for renewal arrives. The only term on which there
has been some pre-agreement is the period of the new contract: "another ten years." Clearly, the requirement offuture mutual agreement as to renewal, has here
been specified with adequate precision.
DECISION
FELICIANO, J p:
The controversy here revolves around the appropriate reading of a clause in a lease contract that was executed about fifteen years ago.
On 31 July 1973, respondent Miguel Tanjangco, as lessor, and petitioner Celso A. Fernandez, 1 as lessee, entered into a ten-year Contract of Lease 2 over a piece
of land situated along Kahilum Street, Pandacan, Manila, where petitioner would put up the then proposed New Zamora Market. The parties agreed that the lease,
which was scheduled to end on 1 July 1983, would be "renewable for another ten (10) years at the option of both parties under such terms, conditions and rental
reasonable at that time" and that, upon expiration of the lease, whatever improvements were then existing thereon should automatically belong to the lessor without
having to pay the lessee. prcd
Before the agreed term ended, or on 19 April 1983, respondent wrote petitioner about the former's intention not to extend further or renew the lease. Petitioner
replied, through a letter dated 6 June 1983, that he had opted to renew the contract for another ten (10) years so that he could recover all the expenses he had
incurred in the construction of the market.
In another letter to petitioner dated 1 June 1983, respondent, through his lawyer, advised that respondent could not accept petitioner's unilateral action to renew the
lease because, under the contract, any renewal or extension thereof was possible only "at the option of both parties."
On 23 June 1983, petitioner commenced an action against respondent before the Regional Trial Court of Quezon City, Branch 84, alleging that petitioner was
entitled to renew the lease contract, under paragraph 3 Section 2 thereof, for another ten (10) years, which paragraph in the contract should be construed in a
liberal manner and with justice. In his prayer, he sought to compel respondent to renew the lease agreement for another term, or asked the court to consider the
original contract as renewed for another ten (10) years or to fix another period for the renewal contract.
Respondent, in his answer, contended that a judicial interpretation of the contract involved was not necessary, the contract being simply worded and phrased in a
categorical and unequivocal manner that had expressed clearly the intention of the parties to it, in respect of their mutual prestations.
On 5 November 1984, the trial court rendered judgment in favor of petitioner. The dispositive portion of the decision reads:
"WHEREFORE, judgment is hereby rendered declaring the Contract of Lease executed between the plaintiff and the
defendant on July 30, 1973 (Exh. "A", "1") renewed for another ten (10) years from July 1, 1983 to June 30, 1993 with the
corresponding increase of rental from P750.00 to P1,500.00 a month from July 1, 1983 to June 30, 1988 and to P3,760.00 a
month from July 1, 1988 to June 30, 1993." 3 (Emphasis supplied)
Respondent immediately brought an appeal to the Court of Appeals, which court, on 9 June 1987, reversed the trial court's decision. A Motion for Reconsideration
was denied. Hence this Petition for Review on Certiorari.
By a Resolution dated 18 November 1987, respondent was required to file a Comment on the Petition, to which a Reply was filed by petitioner on 27 January 1988.
The only issue here relates to the interpretation of the phrase "renewable for another ten (10) years at the option of both parties under such terms, conditions and
rental reasonable at that time", set out in paragraph (2) of the lease contract in question.
The Court of Appeals read the above contract language as comprising, not technical terms or terms of legal art, but rather just plain and ordinary words. As such,
the Court of Appeals understood the above language as requiring —
"that the parties should mutually agree on a new contract which may not be the same as the original, under such terms,
conditions and rental reasonable at that time. It follows therefore that the plaintiff [petitioner] cannot renew the lease by his
unilateral act of exercising his option. Simply stated, the option must be mutually and consen[s]ually exercised, and not
unilaterally as was erroneously done by the plaintiff.
Applied to the lease contract under consideration, it appears that the lease has expressed in clear, unmistakable and
unambiguous terms the intention of the parties that if the lease contract was to be renewed, the option to renew should be
made by both parties." 4
We agree with the respondent appellate court's reading: the intention of the parties to the lease agreement is clearly discernible in the words of that agreement. The
assent of both lessor and lessee is essential for another contract to spring into juridical existence upon expiration of the original one. The contract clause may be
seen to consist of two (2) parts: first, the contract is stipulated to be "renewable" for another ten years "at the option of both parties"; second, the contract is
specified to be "renewable — under such terms, conditions and rental reasonable at that time." The first part of the clause stresses that the option or faculty to
renew was given, not to the lessee alone nor to the lessor by himself, but to the two (2) simultaneously who hence must both exercise the option to renew if a new
contract is to come about. The second portion of the contract clause addresses the future and directs the parties to negotiate and reach mutual agreement on the
terms and conditions of the new contract, including the new rental rate, which terms and conditions must be reasonable under such situation as may be extant
when the time for renewal arrives. The only term on which there has been some pre-agreement is the period of the new contract: "another ten years." Clearly, the
requirement of future mutual agreement as to renewal, has here been specified with adequate precision. LibLex
In Millare vs. Hernando, 5 the Court had before it a lease contract which provided that the contract "may be renewed after a period of five years under the terms
and conditions as will be mutually agreed upon by the parties at the time of renewal." The contract clause in the case at bar may be seen to be closely similar to the
contract stipulation in Millare,though the former is worded with a slightly lower degree of particularity. In Millare, the respondent Judge ordered, against the lessor's
objection, the renewal of the lease for another five years and fixed the monthly rentals at P700.00 a month payable in arrears. In setting aside the Judge's Order,
the Court said:
16
 "We are otherwise unable to comprehend how he arrived at the reading set forth above. Paragraph 13 of the Contract of
Lease can only mean that the lessor and lessee may agree to renew the contract upon their reaching agreement on the terms
and conditions to be embodied in such renewal contract. Failure to reach agreement on the terms and conditions of the
renewal contract will of course prevent the contract from being renewed at all. In the instant case, the lessor and the lessee
conspicuously failed to reach agreement both on the amount of the rental to be payable during the renewal term, and on the
term of the renewed contract." 6(Emphasis supplied).
Petitioner, however, invokes Koh vs. Ongsiaco 7 and Cruz vs. Alberto. 8 In Koh, the Court had to construe the following provision in a contract of lease: "The term of
the contract shall be that of one year, counting from the 1st of December of the present year (1913), which term shall be extendible at the will of both parties." After
finding as a matter of fact that the phrase "at the will of both parties" had been intercalated in the contract without the knowledge and consent of the lessee, the
Court held that the option to extend the term of the lease had in effect been vested in the lessee alone:
"The word 'extendible,' contained in the contract executed between the plaintiff and the defendant, means that the term of the
contract could be extended and is equivalent to a promise to extend made by the defendant to the plaintiff-lessee, and, as a
unilateral stipulation, obliges the promisor to fulfill his promise. Both the defendant Ongsiaco and the plaintiff Legarda Koh
testified that the contract was extendible at the expiration of its term, and the lessee, accepting the promise, acquired the right
to demand its fulfillment by virtue of the special and obligatory juridic relation established between them.
The plaintiff-lessee, after notifying the lessor that he wished to continue the contract, by virtue of the word 'extendible' acquired
the right to elect between continuing his occupancy of the properties in accordance with the lease, a promise for the extension
of the term of which was made him, and of giving them up by refraining from demanding the fulfillment of said promise.
Therefore, the right arising out of the grant of the extension of the term of the lease is understood as having been created in
favor of the lessee, who is entitled to require that the lessor fulfill his promise — a unilateral one contained in the contract and
accepted by the lessee. The consequence of that promise is that its fulfillment shall depend solely on the will of one of the
contracting parties, the one to whom the promise was made. Such a concession cannot be considered as anomalous and
opposed to the principles of law touching contracts, inasmuch as the lessor was entirely free to make or not to make the
promise, within the most ample liberty enjoyed by every citizen in the exercise of his rights; but once the promise was made
and the contract was made to read that the term of the latter should be extendible, the lessor cannot be permitted afterwards
to evade fulfillment of this obligation which he freely assumed, . . ." 9(Emphasis supplied)
In Cruz, the Court was faced with very similar language in another lease agreement written in Spanish:
"That the term of this contract of lease shall be six years counted from the date of execution, and extendible for another six
years agreed upon by both parties. (Que el termino de este contrato de arrendamiento, sera el de seis (6) años contados
desde la fecha de su otorgamiento, y prorrogable a otros seis (6) años convenidos por ambas partes.) 10 (Emphasis supplied)
The Court actually had before it at the same time another lease contract between the same parties and covering a different portion of the same property:
"Plus six years of extension agreed upon by both parties (mas seis (6) añosde prorroga convenida por ambas partes). "The Court read the above
stipulation in Spanish as importing that the parties had already previously agreed, at the time of execution of the contract, to give the lessee a unilateral
option to extend the period of the lease for another six years:
"It is contended on the part of the plaintiff-appellant that the expression 'agreed upon by both parties' was used to denote that,
while the parties were agreed upon a future extension of the lease, the same should not take place except by their mutual
consent to be expressed in the future, that is to say, upon the expiration of the original term. These words, so it is insisted, do
not refer to a past transaction but to some future agreement.
The trial judge held, on the contrary, that the phrase in question had the effect of conceding to the lessee a term of six full
years in addition to the original term, being in practical effect equivalent to twelve years, if the lessee should elect, as he did, to
have the term extended. In this connection his Honor noted that the words 'agreed upon are used adjectively in the contracts
as written in the original Spanish, to qualify 'years' and 'extension', respectively, and furthermore, that in the form of the perfect
participle those qualifying words speak of something past and already determined.
We are of the opinion that the trial judge was entirely correct in his interpretation of the contracts in question; and though it
must be admitted that this interpretation renders the words 'agreed upon by both parties' superfluous, yet this does not involve
any strain upon the meaning of the entire passage. If the interpretation which the appellant would have us adopt be true, the
entire clause relative to the extension of the term would be superfluous, for if the extension is only to be effective upon a new
agreement of the parties to be made at the expiration of the original term, why should anything at all be said about an
extension? Parties who are free to make one contract of lease are certainly free to make a new one when the old has expired
without being reminded of their faculty to do so by the insertion of a clause of this kind in the first lease. This would not only be
superfluous but nonsensical. The clause relative to the extension of the lease, should, if possible, be so interpreted as to give
it some force.
As we interpret the contracts before us, the parties meant to express the fact that they had already agreed that there might be
an extension of the lease and had agreed upon its duration, thus giving the defendant the right of election to take for a second
term or to quit upon the expiration of the original term. The clause in question has the same meaning as if the words 'agreed
upon by both parties' had been omitted and the passage had closed with a period after the word 'years' in the first contract and
after 'extension' in the third contract." 11(Emphasis supplied).
Petitioner urges that Koh and Cruz should be applied in the present case. We do not believe, however, that Koh and Cruzare controlling here. Upon the other hand,
we believe that the Koh and Cruz rulings need to be re-examined and we do that below.
On the purely linguistic level, we note that the important, operative word in the contract clause in both Koh and Cruzwas "extendible"; in the case at bar, the contract
used the term "renewable". In Koh, the Court has in effect looking at the word "extendible" standing alone: Mr. Justice Torres found that the phrase "at the will of
both parties" had been unilaterally inserted by a stranger to the contract — the lessor's caretaker of the property involved — without the consent of the lessee; the
phrase therefore could be disregarded. In Cruz, Mr. Justice Street felt compelled by what may well be too mechanical a rendering into English of the past participle
form in Spanish to read "convenidos por ambas partes" as referring to a previous agreement contemporaneous with execution of the contract to grant the lessee a
unilateral option to continue with the lease beyond the original term; 12 in any event Mr. Justice Street treated the phrase as a superfluity. 13 In the case at bar,
"renewable" does not stand alone: as noted earlier, it is qualified and amplified by two phrases, the one stressing that the option to renew was not unilateral
but mutual, and the other emphasizing the need for future agreement between lessor and lessee on the detailed terms and conditions of renewal.cdrep
As a matter of dictionary meaning, "extendible" means "capable of extension", and "renewable" means "capable ofrenewal"; both are oriented towards the future. It
may be seen that both "extendible" and "renewable", when considered in and of themselves, are non-committal: they do not purport to answer the intensely
practical question of who is vested — lessor or lessee or both acting together — with the option to extend or renew a lease. Again, neither term by itself pre-empts
the question of what the specific terms and conditions of the extended or renewed lease shall be: shall all terms and provisions of the old lease be carried forward
into the future, or shall all or some of them be renegotiated upon expiration of the old lease. 14 Thus, both Koh and Cruz seem to impose an impossible burden
upon single words. Put a little differently, both Mr. Justice Torres and Mr. Justice Street read too much into a single word: they read "extendible" as if it said
"extendible at the option of the lessee alone, all other terms and conditions remaining unchanged". In effect, Koh and Cruz treated "extendible" as a highly technical
and cryptic term.
We do not believe that the use of either "extendible" or "renewable" should be given sacramental significance. The important task in contract interpretation is always
the ascertainment of the intention of the contracting parties and that task is of course to be discharged by looking to the words they used to project that intention in
their contract, all the words not just a particular word or two, and words in context not words standing alone. In the case at bar, the intent of the parties is
observable with sufficient clarity and specificity in the language they used. cdrep
It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease must be deemed to have been agreed upon for the benefit
of both parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone. 15 We are not aware of any presumption in
law that the term of a lease is designed for the benefit of the lessee alone. Koh and Cruz in effect rested upon such a presumption. But that presumption cannot
reasonably be indulged in casually in an era of rapid economic change, marked by, among other things, volatile costs of living and fluctuations in the value of the
domestic currency. The longer the period the more clearly unreasonable such a presumption would be. In an age like that we live in, very specific language is
necessary to show an intent to grant a unilateral faculty to extend or renew a contract of lease to the lessee alone, or to the lessor alone for that matter. We hold
that the above-quoted rulings in Koh v. Ongsiaco and Cruz v. Alberto should be and are overruled. cdrep
Petitioner's contention that respondent had assured him over the telephone that the latter would willingly renew the lease for another ten (10) years upon expiration
of the original term, does not persuade. Neither does his claim that he would not have agreed to retain the clause providing for ownership of improvements made by
the lessee vesting upon the lessor at the expiration of the lease, had respondent not given him such assurance. The Court of Appeals noted that petitioner is a
lawyer and was, at the time of entering into the contract, aware of the fact that private respondent might exercise the option not to renew and that the option to
renew was not his alone. Notwithstanding this awareness, petitioner entered into the lease agreement, probably convinced that he would not only recover the costs
of all the improvements he proposed to introduce into the leased lot but also make profits in the process. In any event, an alleged verbal assurance of renewal of a
lease is inadmissible to qualify the terms of the written lease agreement under the parole evidence rule, 16 and unenforceable under the Statute of Frauds. 17
WHEREFORE, the Petition for Review is DENIED and the Decision of the Court of Appeals dated 9 June 1987 is hereby AFFIRMED. Costs against petitioner.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Griño-Aquino, Medialdea and Regalado,
JJ., concur.
[G.R. No. L-18916. November 28, 1969.]
17
 JOSE ABESAMIS, plaintiff-appellee, vs. WOODCRAFT WORKS, LTD., defendant-appellant.
Ramon O. de Veyra for plaintiff-appellee.
Zosimo Rivas for defendant-appellant.
SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; OBLIGATION OF APPELLANT IN INSTANT CASE TO FURNISH VESSEL; CIRCUMSTANCES SHOWING
SUCH FACT. — The following circumstances show that it was appellant who was obligated to furnish the vessel to receive the shipment of logs from appellee: (1)
the provisions in the contract, particularly with respect to wharfage dues, demurrage and condition of the weather and of the ship's machinery, would have been of
little concern to appellant and would not have been imposed by it if appellee were the one to furnish the vessel; (2)in the two shipments of logs in March and April of
1961, the vessels were furnished by appellant; (3) in several telegraphic communications between the parties, it was invariably appellee who requested information
as to the arrival of the vessels and it was appellant who gave the information accordingly; and (4) during the trial, it was appellant's witness who explained at length
the failure of appellant to furnish the necessary vessels.
2.ID.; ID.; RECIPROCAL AND WITH A TERM OBLIGATION; EACH PARTY TO BEAR LOSS IF FORTUITOUS EVENT STRUCK BEFORE END OF TERM. —
Where the obligation is reciprocal and with a term, neither party could demand performance nor incur in delay before the expiration of the term. In case of fortuitous
event before the expiration of the term, each party in such reciprocal obligation bears his own loss.
3.ID.; ID.; ID.; PARTY WHO WAIVES THE BENEFIT OF THE TERM AND FAILS TO PERFORM HIS PART OF THE OBLIGATION BEARS LOSS. — Where
appellant waived the benefit of the period by assuring appellee that it would take delivery of the logs on June 25, 1951, and appellee, on said date, was ready to
comply with his part of the obligation but appellant failed in its commitment, without any satisfactory explanation for such failure, appellant should bear the
corresponding loss amounting to P7,685.26, representing the value of appellee's logs lost while waiting for appellant's vessel, the cost of rafting and other incidental
expenses.
4.ID.; DAMAGES; ACTUAL AND COMPENSATORY DAMAGES NOT CLEARLY ESTABLISHED IN INSTANT CASE. — Where the decision of the trial court
sentencing the appellant to pay P50,000 representing appellee's loss of credit is not based upon clear evidence, such award should not be allowed. Actual or
compensatory damages must be established by clear evidence.
DECISION
MAKALINTAL, J p:
The plaintiff, doing business under the name "East Samar Lumber Mills," was the owner of a timber concession and sawmill located at
Dolores, Samar. On November 8, 1950 the defendant Woodcraft Works, Ltd., entered into an agreement with the plaintiff to purchase from the latter
300,000 board feet of Philippine round logs at P60.00 per thousand board feet. Due to bad weather conditions and the failure of the defendant to send the
necessary vessels to Dolores, Samar, only 13,068 board feet of logs were delivered.
On January 22, 1951 the parties entered into a new contract. The previous one was cancelled, with the plaintiff waiving all his claims thereunder. Certain advances
which had been given by the defendant to the plaintiff, in the aggregate amount of P9,000.00, were transferred to and considered as advances on the new contract.
It was stipulated that the defendant would purchase from the plaintiff 1,700,000 board feet of logs of the specifications stated in the contract — 1,300,000 board feet
at P78.00 per thousand and the rest at P70.00. It was also agreed that the shipment was to be "before the end of July, but will not commence earlier than April with
the option to make partial shipment depending on the availability of logs and vessels."
Of the quantity of logs agreed upon, only two shipments were made, one in March and the other in April, 1951, amounting to 333,832 board feet and 128,825 board
feet, respectively, or a total of 462,657 board feet. On September 13, 1951 the plaintiff filed in the Court of First Instance of Leyte an action for rescission of the
contract of January 22, 1951 and for recovery of damages in the sum of P55,000.00 by reason of the defendant's failure to comply with its obligations. The
defendant filed an answer and later an amended answer, denying the material allegations of the complaint, with special defenses and counterclaims.
After due trial the lower court rendered judgment as follows:
"WHEREFORE and on the strength of all the foregoing, the Court renders judgment: declaring the aforementioned contract of
January 22, 1951, rescinded; ordering the defendant to pay to the plaintiff for actual damages suffered by the latter in the
amount of P145,623.03, plus the amount of P50,000.00 representing the plaintiff's actual loss of credit in the operation of his
business, and, another sum of P5,000.00 as attorney's fees. The defendant is likewise ordered to pay the costs."
The defendant appealed to this Court and now avers that the lower court erred: "(1) in stating that Woodcraft Works, Ltd. was obligated to send the boat to receive
the shipment of logs of the East Samar Lumber Mills at Dolores, Samar, before the end of July 1951; (2) in deciding that (appellee) had sufficient stock of logs to
cover the contract on July 31, 1951; (3) in stating that appellant failed to comply with the terms and conditions of the contract; (4) in granting damages to appellee;
and (5) in not granting damages and recovery of money in favor of herein appellant."
The main issue before us is whether or not appellant Woodcraft Works, Ltd. failed to comply with its obligations under the contract, or more specifically, whether or
not it was obligated to furnish the vessel to receive the shipment of logs from appellee. Appellant contends that it was not.
The contract (Exh. A) does not expressly provide as to which of the parties should furnish the vessel. But it does contain provisions which show clearly, albeit only
by implication, that the obligation to do so devolved upon appellant, thus:
Fees & Charges:Bureau of Forestry inspection charges and Philippine Government wharfage fees are for account of
Woodcraft Works, Ltd.
Dispatch of Ship:Immediately upon arrival of the vessel at Dolores, Samar, you will commence loading at the rate of 200,000
bd. ft. per working day per four hatches. Should the weather be unfavorable, be
sure to have a certificate signed by the captain confirming time idle due to this
fact. Furthermore, in the event the ship's gears are not functioning well, kindly do
likewise and get a statement from the captain.
Demurrage:Failure to load 200,000 bd. ft. per working day, you agree to pay us the sum of P800.00 per day pro-rata.
The contract was in the form of a letter addressed by appellant to appellee, and the terms set forth in the portions aforequoted, particularly with respect to wharfage
dues, demurrage and condition of the weather and of the ship's machinery, would have been of little concern to appellant and would not have been imposed by it if
appellee were the one to furnish the vessel. Besides, the contemporaneous and subsequent acts of the parties, which under the law may be taken into
consideration to determine their intention (Art. 1371, Civil Code), point unequivocally to the same conclusion. In the two shipments of logs in March and April of
1961 the vessels "SS AEULUS" and "SS DON JOSE" were furnished by appellant. In several telegraphic communications exchanged between the parties it was
invariably appellee who requested information as to the arrival of the vessels and appellant who gave the information accordingly.
Finally it was appellant, through its witness Irza Toeg, who had to explain at length during the trial its failure to furnish the necessary vessels, as follows:
"A.Well, when the shipping firms in Manila learned about the failures of the vessels which we sent to Dolores, Samar to load,
and news travels fast from one shipping company to the other, the other shipping companies were very hesitant when we
asked for a vessel to call at the port of Dolores, Samar. They asked us whether any vessel has already gone there to load and
what is the loading rate for that particular vessel. So the facts of loading rates that the East Samar Lumber Mills was able to
effect on the Bunyo Maru had a very bad effect in obtaining additional vessels. Other shipping companies instructed their
vessels not to go to Dolores, Samar because shipping companies as a rule do not want to gamble and sent vessels to a
loading port when they know of the place and they know that the people operating there would not be able to handle the
loading of the vessels judging from their past performances.
". . . You will recall that the first vessel that loaded in this contract was a foreign vessel which was the Bunyo Maru. Out of the
expected quantity of 400,000 bd. ft. of logs only 13,000 approximately was loaded. Therefore, that had a very bad effect on the
other foreign vessels. The second and third vessels however were of Philippine Registry, and it was only thru our good
connection with the shipping company that they even permitted their vessels to call at Dolores, Samar. So, after the three sad
experiences, each one with considerable delay in the loading time with incomplete quantities that should have been loaded, it
was difficult for us to obtain vessels to call at that port." (T.S.N. pp. 28-30, Deposition)
In the light of all these circumstances, appellant's claim that it was not obligated to furnish the vessel cannot prevail.
It is next contended that appellee was not in a position to comply with his own obligation to ship the quantities of logs called for under the contract. This was sought
to be proven by means of a certificate issued by the Bureau of Forestry (Exhs. 11 & 11-A), which is the official record of timber cut under appellee's permit, showing
that appellee's production from January to July, 1951, amounted only to 1,926.64 cubic meters or 816,795 board feet of logs, which was short by 833,205 board
feet of the quantity called for in the contract.
18
There is indeed a discrepancy between the certificate of production issued by the Bureau of Forestry and the testimony of Francisco Abesamis regarding the GREGORIO ARANETA, INC., petitioner, vs. THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.
quantity of the timber cut under appellee's permit, but this was satisfactorily explained by him at the trial in this wise:

"A.Because my export grade logs is a big quantity, and if we immediately report those export grade logs to the Bureau of Araneta, & Araneta for petitioner.
Forestry before shipment is made, we will be paying forest charges for the logs for which we have not received payment yet.
So we make it a practice to report only the logs that are actually shipped. The forest charges amount to so much money that
we could hardly afford to pay this in advance. This was more or less a convenience given to us by the lumber grader. And Rosauro Alvarez and Ernani Cruz Paño for respondent.
besides that, we prepare a big quantity of logs but the lumber grader usually is instructed by the buyer to grade only a certain
portion of it because of the limitation of cargo space in buyer's vessel. For example, we have there prepared 1,000,000 board
feet but Mr. Selga is instructed to inspect only 400,000 board feet which is the capacity of incoming vessel. So the balance of
600,000 board feet could not be graded as this quantity could not be loaded." SYLLABUS

Abesamis categorically stated on the witness stand that by the end of July 1951 he had 1,300,000 board feet of logs available — 800,000 at hand and ready for
loading and the rest deposited at various stations; and that he advised appellant of that fact in a telegram dated July 31, 1951 (Exh. S), at the same time requesting
that a grader and a vessel be dispatched to Dolores immediately as the logs were in danger of deteriorating.
Nicanor Selga, lumber inspector of the Bureau of Forestry, reported to appellant that as of July 3, 1951 he had graded appellee's logs amounting to 488,015 board
feet (Exh. aa). Of this quantity appellant, in its reply telegram of July 13, 1951 (Exh. BB) said that it could accept 239,547 board feet, made up of logs at least 13
feet in length and 20 inches in diameter. However, Selga likewise testified that appellee had other logs — some 600,000 board feet in all — in the two barrios of
Aroganga and Genolaso. After July 3, 1951, which was the last day Selga made his inspection, there is evidence that appellee continued its logging operations,
such that there was enough to cover the quantity called for in the contract by due date, that is, on July 31, 1951.
Appellee divides his claim for damages into three categories, each based on a separate breach of contract by appellant.
1.ACTION TO COMPEL PERFORMANCE UNDER CONTRACT; COURT HAS NO AUTHORITY TO FIX PERIOD WHERE CONTRACT ESTABLISHES
"REASONABLE TIME". — If the contract provided a "reasonable time", then there was a period fixed, and all that the court should have done was to determine if
that reasonable time had already elapsed when suit was filed. If it had passed, then the court should declare that petitioner had breached the contract, as averred in
the complaint, and fix the resulting damages. On the other hand, if reasonable time had not yet elapsed, the court perforce was bound to dismiss the action for
being premature. But in no case can it be logically held that under the facts above quoted the intervention of the court to fix the period for performance was
warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the parties.
2.PLEADING AND PRACTICE; ABSENCE OF PRAYER IN COMPLAINT FOR COURT TO FIX PERIOD; EFFECT. — The complaint not having sought that the
Court should set a period the court could not proceed to do so unless the complaint was first amended; for the original decision is clear that the complaint
proceeded on the theory that the period for performance had already elapsed, that the contract had been breached and defendant was already answerable in
damages.

3.ACTION TO COMPEL PERFORMANCE; POWER OF COURT TO FIX DATE ART. 1197, CONSTRUED. — Granting, however, that it lay within the Court's
First, appellee maintains that due to the failure of appellant to send a vessel to Dolores, Samar, the storm on May 5, 1951 swept away almost all the logs then
power to fix the period of performance, still the amended decision is defective in that no basis is stated to support the conclusion that the period should be set at
awaiting shipment, amounting to 410,000 board feet, valued at P73,537.77. On this point it should be noted that under the contract shipment was to be made
two years after finality of the judgment. The last paragraph of Article 1197 is clear that the period cannot be set arbitrarily. All the trial court's amended decision
before the end of July 1951, but not to commence earlier than April of the same year. The obligation between the parties was a reciprocal one, appellant to furnish
(Rec. on Appeal, p. 124) says in this respect is that "the proven facts precisely warrant the fixing of such a period", a statement manifestly insufficient to explain how
the vessel and appellee to furnish the logs. It was also an obligation with a term, which obviously was intended for the benefit of both parties, the period having
the two-year period given herein was derived at.
been agreed upon in order to avoid the stormy weather in Dolores, Samar, during the months of January to March. The obligation being reciprocal and with a
period, neither party could demand performance nor incur in delay before the expiration of the period. Consequently, when the typhoon struck on May 5, 1951 there
was yet no delay on the part of appellant, and the corresponding loss must be shouldered by appellee.

As regards the second breach it has been established that after the storm of May 5, 1951 appellee continued its logging operations. Appellant was advised of the DECISION
quantity of logs ready for shipment and was urged to send a vessel to take delivery. It thereupon gave assurance that a vessel, the "SS ALBAY," with a capacity of
450,000 board feet, was coming to Dolores, Samar, to load on June 25, 1951, Appellee readied the necessary quantity of logs but the vessel did not arrive. As a
result, 60,000 board feet of logs which had been rafted broke loose and were lost. Appellee's loss on this account amounted to a total of P7,685.26, representing
the value of the logs lost, the cost of rafting and other incidental expenses. It may be observed in this respect that although the obligation would not become due
until July 31, 1951 appellant waived the benefit of the period by assuring appellee that it would take delivery of the logs on June 25, 1951. On that date appellee REYES, J.B.L., J p:
was ready to comply, but appellant failed on his commitment, without any satisfactory explanation for such failure. Therefore, appellant should bear the
corresponding loss.
Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G. R. No. 28249-R, affirming with modification, an amendatory decision of the Court of
First Instance of Manila, in its Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J. M. Tuason & Co., Inc. and
Third and finally, as heretofore pointed out, by the end of July 1951 appellee had sufficient logs ready for shipment in accordance with the contract. But appellant, in Gregorio Araneta, Inc. defendants".
spite of the representations made by the former, failed to send a vessel on the aforesaid date. There is no evidence that such failure was due to circumstances
beyond appellant's control. As a result logs totalling 800,000 board feet were destroyed by marine borers, causing a loss of P62,000.00, for which appellant should
be held liable. As found by the Court of Appeals, the facts of this case are:

The trial court sentenced appellant to pay P50,000.00 representing appellee's loss of credit in the operation of his business. The decision does not say upon what
evidence the award is based. Nor is there any attempt in appellee's brief to justify the amount awarded. Actual or compensatory damages must be established by
clear evidence. In this case, other than a few letters of demand for payment of money accounts received by appellee from its creditors and presented as exhibits,
there is nothing to go upon, and the mere fact that such demands were made does not necessarily prove loss of credit. This item must therefore be eliminated.
J. M. Tuason & Co., Inc. is the owner of a big tract of land situated in Quezon City, otherwise known as the Sta. Mesa Heights Subdivision, and covered by a
Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of 43,034.4 square meters, more or
less, for the sum of P430,514.00, to Philippine Sugar Estates Development Co., Ltd. The parties stipulated, among others, in the contract of purchase and sale with
mortgage, that the buyer will —

IN VIEW OF THE FOREGOING, the judgment appealed from is affirmed, with the modification that appellant Woodcraft Works, Ltd. is sentenced to pay appellee
the aggregate sum of P69,685.26 by way of damages, plus P5,000 as attorney's fees, without costs in this instance.
Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Castro, Teehankee and Barredo, JJ., concur.
"Build on the parcel of land the Sto. Domingo church and convent;" while the seller for its part will —
"Construct streets on the NE and NW and SW sides of the land herein sold so that the latter will be a block surrounded by
streets on all four sides; and the street on the NE side shall be named 'Sto. Domingo Avenue';"

The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo Church and Convent, but the seller, Gregorio Araneta, Inc.,
which began constructing the streets, is unable to finish the construction of the street in the Northeast side (named Sto. Domingo Avenue) because a certain third
party, by the name of Manuel Abundo, who has been physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine
[G.R. No. L-22558. May 31, 1967.] Sugar Estates Development Co., Ltd., filed its complaint against J. M. Tuason & Co., Inc., and Gregorio Araneta, Inc. in the above Court of First Instance, seeking
to compel the latter to comply with their obligation, as stipulated in the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused to
perform said obligation.

19
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter particularly setting up the principal defense that the action was amended; for the original decision is clear that the complaint proceeded on the theory that the period for performance had elapsed already, that the contract had
premature since its obligation to construct the streets in question was without a definite period which needs to be fixed first by the court in a proper suit for that been breached and defendant was already answerable in damages.
purpose before a complaint for specific performance will prosper.

The issues having been joined, the lower court proceeded with the trial, and upon its termination, it dismissed plaintiff's complaint (in a decision dated May 31,
1960), upholding the defenses interposed by defendant Gregorio Araneta, Inc.
Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in that no basis is stated to support
the conclusion that the period should be set at two years after finality of the judgment. The last paragraph of Article 1197 is clear that the period can not be set
Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within which defendants will comply with their obligation to construct arbitrarily. The law expressly prescribes that —
the streets in question.

Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not expressly or impliedly allege and pray for the fixing of a period
to comply with its obligation and that the evidence presented at the trial was insufficient to warrant the fixing of such a period.
On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of such a period", issued an order granting plaintiff's motion for
reconsideration and amending the dispositive portion of the decision of May 31, 1960, to read as follows:
"WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a period of Two (2) Years from notice
hereof, within which to comply with its obligation under the contract, Annex A"
Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which motion, plaintiff opposed.
"the courts shall determine such period as may under the circumstance have been probably contemplated by the parties."
All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the proven facts precisely warrant the fixing of such a period", a
statement manifestly insufficient to explain how the two-year period given to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that "the obligation does not fix a period" (or that
the period is made to depend upon the will of the debtor), "but from the nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars.
1 and 2). This preliminary point settled, the Court must then proceed to the second step, and decide what period was "probably contemplated by the parties" (Do.,
par. 3). So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown
to have intended. As the record stands, the trial Court appears to have pulled the two-year period set in its decision out of thin air, since no circumstances are
mentioned to support it. Plainly, this is not warranted by the Civil Code.

On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc.'s motion; and the latter perfected its appeal to the Court of Appeals.
In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief granted, i.e. fixing of a period, under the amendatory decision of
July 16, 1960, was not justified by the pleadings and not supported by the facts submitted at the trial of the case in the court below and that the relief granted in
effect allowed a change of theory after the submission of the case for decision.
Ruling on the above contention, the appellate court declared that the fixing of a period was within the pleadings and that there was no true change of theory after
the submission of the case for decision since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by alleging in paragraph 7 of the
affirmative defenses contained in its answer which reads —
"7.Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a reasonable time within which to comply
with its obligations to construct and complete the streets on the NE, NW and SW sides of the lot in question; that under the
circumstances, said reasonable time has not elapsed;
In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land described therein was occupied by squatters,
because the fact is expressly mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12- 13). As the parties must have known that they could not take the
law into their own hands, but must resort to legal processes in evicting the squatters, they must have realized that the duration of the suits to be brought would not
be under their control nor could the same be determined in advance. The conclusion is thus forced that the parties must have intended to defer the performance of
the obligations under the contract until the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances admit no other reasonable view;
and this very indefiniteness is what explains why the agreement did not specify any exact periods or dates of performance.
It follows that there is no justification in law for the setting of the date of performance at any other time than that of the eviction of the squatters occupying the land in
question; and in not so holding, both the trial Court and the Court of Appeals committed reversible error. It is not denied that the case against one of the squatters,
Abundo, was still pending in the Court of Appeals when its decision in this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the obligations of petitioner Gregorio Araneta, Inc. is hereby
fixed at the date that all the squatters on affected areas are finally evicted therefrom.

Disposing of the other issues raised by appellant which were ruled as not meritorious and which are not decisive in the resolution of the legal issues posed in the
instant appeal before us, said appellate court rendered its decision dated December 27, 1963, the dispositive part of which reads — Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.

"IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given Two (2) years from the date of Concepcion, C.J., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
finality of this decision to comply with the obligation to construct streets on the NE, NW and SW sides of the land sold to
plaintiff so that the same would be a block surrounded by streets on all four sides."
[G.R. No. 138739. July 6, 2000.]

Unsuccessful in having the above decision reconsidered defendant- appellant Gregorio Araneta, Inc. resorted to a petition for review by certiorari to this Court. We
gave it due course.
RADIOWEALTH FINANCE COMPANY, petitioner, vs. Spouses VICENTE and MA. SUMILANG DEL
ROSARIO, respondents.
We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of First Instance is legally untenable. The fixing of a period by the
courts under Article 1197 of the Civil Code of the Philippines is sought to be justified on the basis that petitioner (defendant below) placed the absence of a period in
issue by pleading in its answer that the contract with respondent Philippine Sugar Estates Development Co., Ltd., gave petitioner Gregorio Araneta, Inc.
"reasonable time within which to comply with its obligation to construct and complete the streets." Neither of the courts below seems to have noticed that, on the Singson Valdez & Associates for petitioner.
hypothesis stated, what the answer put in issue was not whether the court should fix the time of performance, but whether or not the parties agreed that the
petitioner should have reasonable time to perform its part of the bargain. If the contract so provided, then there was a period fixed, a "reasonable time"; and all that
Romeo R. Bringas & Associates for respondents.
the court should have done was to determine if that reasonable time had already elapsed when suit was filed. If it had passed, then the court should declare that
petitioner had breached the contract, as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had not yet elapsed, the
court perforce was bound to dismiss the action for being premature. But in no case can it be logically held that under the plea above quoted, the intervention of the
court to fix the period for performance was warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the parties. SYNOPSIS

Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial court's amended decision nowhere
declared any such fact) still, the complaint not having sought that the Court should set a period, the court could not proceed to do so unless the complaint was first On March 2, 1991, herein respondents-spouses jointly and severally executed, signed and delivered in favor of herein petitioner a promissory note for P138,948.
Unfortunately, respondents defaulted on the monthly installments. Despite repeated demands, they failed to pay their obligations under their promissory note. On

20
June 7, 1993 petitioner filed a complaint for collection of sum of money. After the petitioner offered its evidence and rested its case, respondents filed a demurrer to
evidence for alleged lack of cause of action. On November 4, 1994, the trial court dismissed the complaint for failure of petitioner to substantiate its claims, the
evidence it had presented being merely hearsay. On appeal, the Court of Appeals (CA) reversed the trial court and remanded the case for further proceedings.
Aggrieved, Radiowealth filed a petition for review on certiorari questioning the decision rendered by the appellate court.
The Supreme Court found the petition meritorious. While the CA correctly reversed the trial court, it erred in remanding the case for further proceedings. As
provided by Rule 33, Section 1 of the 1997 Rules of Court, the CA should have rendered judgment on the basis of the evidence submitted by the petitioner. The
Court agreed with petitioner that the CA had sufficient evidence on record to decide the collection suit. A remand is not only frowned upon by the Rules, it is also
logically unnecessary on the basis of the facts on record. The petition was granted and the appealed decision was modified in that the remand was set aside and
respondents were ordered to pay P138,948.00 plus 2.5 penalty charge per month beginning April 2, 1991 until fully paid and 10% of the amount due as attorney's
fees.
SYLLABUS
1.REMEDIAL LAW; CIVIL PROCEDURE; DEMURRER TO EVIDENCE; CONSEQUENCE OF REVERSAL ON APPEAL. — Explaining the consequence of a
demurrer to evidence, the Court in Villanueva Transit v. Javellana pronounced: "The rationale behind the rule and doctrine is simple and logical. The defendant is
permitted, without waiving his right to offer evidence in the event that his motion is not granted, to move for a dismissal (i.e., demur to the plaintiff's evidence) on the
ground that upon the facts as thus established and the applicable law, the plaintiff has shown no right to relief. If the trial court denies the dismissal motion, i.e.,
finds that plaintiff's evidence is sufficient for an award of judgment in the absence of contrary evidence, the case still remains before the trial court which should
then proceed to hear and receive the defendant's evidence so that all the facts and evidence of the contending parties may be properly placed before it for
adjudication as well as before the appellate courts, in case of appeal. Nothing is lost. The doctrine is but in line with the established procedural precepts in the
conduct of trials that the trial court liberally receive all proffered evidence at the trial to enable it to render its decision with all possibly relevant proofs in the record,
thus assuring that the appellate courts upon appeal have all the material before them necessary to make a correct judgment, and avoiding the need of remanding
the case for retrial or reception of improperly excluded evidence, with the possibility thereafter of still another appeal, with all the concomitant delays. The rule,
however, imposes the condition by the same token that if his demurrer is granted by the trial court, and the order of dismissal is reversed on appeal, the movant
loses his right to present evidence in his behalf and he shall have been deemed to have elected to stand on the insufficiency of plaintiff's case and evidence. In
such event, the appellate court which reverses the order of dismissal shall proceed to render judgment on the merits on the basis of plaintiff's evidence." In other
words, defendants who present a demurrer to the plaintiff's evidence retain the right to present their own evidence, if the trial court disagrees with them; if the trial
court agreeswith them, but on appeal, the appellate court disagrees with both of them and reverses the dismissal order, the defendants lose the right to present
their own evidence. The appellate court shall, in addition, resolve the case and render judgment on the merits, inasmuch as a demurrer aims to discourage
prolonged litigations.
2.CIVIL LAW; CONTRACTS; INTENT OF THE CONTRACTING PARTIES CAN BE DETERMINED BY THEIR CONTEMPORANEOUS AND SUBSEQUENT ACTS;
CASE AT BAR. — The contemporaneous and subsequent acts of the parties manifest their intention and knowledge that the monthly installments would be due
and demandable each month. In this case, the conclusion that the installments had already became due and demandable is bolstered by the fact that respondents
started paying installments on the Promissory Note, even if the checks were dishonored by their drawee bank. We are convinced neither by their avowals that the
obligation had not yet matured nor by their claim that a period for payment should be fixed by a court. Convincingly, petitioner has established not only a cause of
action against the respondents, but also a due and demandable obligation. The obligation of the respondents had matured and they clearly defaulted when their
checks bounced. Per the acceleration clause, the whole debt became due one month (April 2, 1991) after the date of the Note because the check representing their
first installment bounced.
3.REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; A PARTY WHO DID NOT APPEAL CANNOT OBTAIN AFFIRMATIVE RELIEF OTHER THAN THAT
GRANTED IN THE APPEALED DECISION. — As for the disputed documents submitted by the petitioner, the CA ruling in favor of their admissibility, which was not
challenged by the respondents, stands. A party who did not appeal cannot obtain affirmative relief other than that granted in the appealed decision.
4.CIVIL LAW; CONTRACTS; INTEREST; NOT GRANTED BECAUSE IT WAS NOT EXPRESSLY STIPULATED IN THE NOTE; CASE AT BAR. — Petitioner, in its
Complaint, prayed for "14% interest per annum from May 6, 1993 until fully paid." We disagree. The Note already stipulated a late payment penalty of 2.5 percent
monthly to be added to each unpaid installment until fully paid. Payment of interest was not expressly stipulated in the Note. Thus, it should be deemed included in
such penalty.
DECISION
PANGANIBAN, J p:
When a demurrer to evidence granted by a trial court is reversed on appeal, the reviewing court cannot remand the case for further proceedings. Rather, it should
render judgment on the basis of the evidence proffered by the plaintiff. Inasmuch as defendants in the present case admitted the due execution of the Promissory
Note both in their Answer and during the pretrial, the appellate court should have rendered judgment on the bases of that Note and on the other pieces of evidence
adduced during the trial. LLjur
The Case
Before us is a Petition for Review on Certiorari of the December 9, 1997 Decision 1 and the May 3, 1999 Resolution 2 of the Court of Appeals in CA-GR CV No.
47737. The assailed Decision disposed as follows:
"WHEREFORE, premises considered, the appealed order (dated November 4, 1994) of the Regional Trial Court (Branch XIV)
in the City of Manila in Civil Case No. 93-66507 is hereby REVERSED and SET ASIDE. Let the records of this case be
remanded to the court a quo for further proceedings. No pronouncement as to costs." 3
The assailed Resolution denied the petitioner's Partial Motion for Reconsideration. 4
The Facts
The facts of this case are undisputed. On March 2, 1991, Spouses Vicente and Maria Sumilang del Rosario (herein respondents), jointly and severally executed,
signed and delivered in favor of Radiowealth Finance Company (herein petitioner), a Promissory Note 5 for P138,948. Pertinent provisions of the Promissory Note
read:
"FOR VALUE RECEIVED, on or before the date listed below, I/We promise to pay jointly and severallyRadiowealth Finance
Co. or order the sum of ONE HUNDRED THIRTY EIGHT THOUSAND NINE HUNDRED FORTY EIGHT Pesos (P138,948.00)
without need of notice or demand, in installments as follows:
P11,579.00 payable for 12 consecutive months starting on ___________19__ until the amount
ofP11,579.00 is fully paid. Each installment shall be due every ____ day of each month. A late payment
penalty charge of two and a half (2.5%) percent per month shall be added to each unpaid installment from
due date thereof until fully paid.
xxx xxx xxx
It is hereby agreed that if default be made in the payment of any of the installments or late payment charges thereon as and
when the same becomes due and payable as specified above, the total principal sum then remaining unpaid, together with the
agreed late payment charges thereon, shall at once become due and payable without need of notice or demand.
xxx xxx xxx
If any amount due on this Note is not paid at its maturity and this Note is placed in the hands of an attorney or collection
agency for collection, I/We jointly and severally agree to pay, in addition to the aggregate of the principal amount and interest
due, a sum equivalent to ten (10%) per cent thereof as attorney's and/or collection fees, in case no legal action is filed,
otherwise, the sum will be equivalent to twenty-five (25%) percent of the amount due which shall not in any case be less than
FIVE HUNDRED PESOS (P500.00) plus the cost of suit and other litigation expenses and, in addition, a further sum of ten per
cent (10%) of said amount which in no case shall be less than FIVE HUNDRED PESOS (P500.00), as and for liquidated
damages." 6
Thereafter, respondents defaulted on the monthly installments. Despite repeated demands, they failed to pay their obligations under their Promissory Note.
On June 7, 1993, petitioner filed a Complaint 7 for the collection of a sum of money before the Regional Trial Court of Manila, Branch 14. 8 During the trial, Jasmer
Famatico, the credit and collection officer of petitioner, presented in evidence the respondents' check payments, the demand letter dated July 12, 1991, the
customer's ledger card for the respondents, another demand letter and Metropolitan Bank dishonor slips. Famatico admitted that he did not have personal
knowledge of the transaction or the execution of any of these pieces of documentary evidence, which had merely been endorsed to him.
On July 4, 1994, the trial court issued an Order terminating the presentation of evidence for the petitioner. 9 Thus, the latter formally offered its evidence and
exhibits and rested its case on July 5, 1994.
Respondents filed on July 29, 1994 a Demurrer to Evidence 10 for alleged lack of cause of action. On November 4, 1994, the trial court dismissed 11 the complaint
for failure of petitioner to substantiate its claims, the evidence it had presented being merely hearsay.
On appeal, the Court of Appeals (CA) reversed the trial court and remanded the case for further proceedings.
Hence, this recourse. 12
Ruling of the Court of Appeals
21
According to the appellate court, the judicial admissions of respondents established their indebtedness to the petitioner, on the grounds that they admitted the due
execution of the Promissory Note, and that their only defense was the absence of an agreement on when the installment payments were to begin. Indeed, during
the pretrial, they admitted the genuineness not only of the Promissory Note, but also of the demand letter dated July 12, 1991. Even if the petitioner's witness had
no personal knowledge of these documents, they would still be admissible "if the purpose for which [they are] produced is merely to establish the fact that the
statement or document was in fact made or to show its tenor[,] and such fact or tenor is of independent relevance."
Besides, Articles 19 and 22 of the Civil Code require that every person must — in the exercise of rights and in the performance of duties — act with justice, give all
else their due, and observe honesty and good faith. Further, the rules on evidence are to be liberally construed in order to promote their objective and to assist the
parties in obtaining just, speedy and inexpensive determination of an action.
Issue
The petitioner raises this lone issue:
"The Honorable Court of Appeals patently erred in ordering the remand of this case to the trial court instead of rendering
judgment on the basis of petitioner's evidence." 13
For an orderly discussion, we shall divide the issue into two parts: (a) legal effect of the Demurrer to Evidence, and (b) the date when the obligation became due
and demandable.
The Court's Ruling
The Petition has merit. While the CA correctly reversed the trial court, it erred in remanding the case "for further proceedings."
Consequences of a Reversal, on Appeal,
of a Demurrer to Evidence
Petitioner contends that if a demurrer to evidence is reversed on appeal, the defendant should be deemed to have waived the right to present evidence, and the
appellate court should render judgment on the basis of the evidence submitted by the plaintiff. A remand to the trial court "for further proceedings" would be an
outright defiance of Rule 33, Section 1 of the 1997 Rules of Court. LLpr
On the other hand, respondents argue that the petitioner was not necessarily entitled to its claim, simply on the ground that they lost their right to present evidence
in support of their defense when the Demurrer to Evidence was reversed on appeal. They stress that the CA merely found them indebted to petitioner, but was
silent on when their obligation became due and demandable.
The old Rule 35 of the Rules of Court was reworded under Rule 33 of the 1997 Rules, but the consequence on appeal of a demurrer to evidence was not changed.
As amended, the pertinent provision of Rule 33 reads as follows:
"SECTION 1.Demurrer to evidence. — After the plaintiff has completed the presentation of his evidence, the defendant may
move for dismissal on the ground that upon the facts and the law the plaintiff has shown no right to relief. If his motion is
denied, he shall have the right to present evidence. If the motion is granted but on appeal the order of dismissal is reversed he
shall be deemed to have waived the right to present evidence."14
Explaining the consequence of a demurrer to evidence, the Court in Villanueva Transit v. Javellana, 15 pronounced:
"The rationale behind the rule and doctrine is simple and logical. The defendant is permitted, without waiving his right to offer
evidence in the event that his motion is not granted, to move for a dismissal (i.e., demur to the plaintiff's evidence) on the
ground that upon the facts as thus established and the applicable law, the plaintiff has shown no right to relief. If the trial
court denies the dismissal motion, i.e., finds that plaintiff's evidence is sufficient for an award of judgment in the absence of
contrary evidence, the case still remains before the trial court which should then proceed to hear and receive the defendant's
evidence so that all the facts and evidence of the contending parties may be properly placed before it for adjudication as well
as before the appellate courts, in case of appeal. Nothing is lost. The doctrine is but in line with the established procedural
precepts in the conduct of trials that the trial court liberally receive all proffered evidence at the trial to enable it to render its
decision with all possibly relevant proofs in the record, thus assuring that the appellate courts upon appeal have all the
material before them necessary to make a correct judgment, and avoiding the need of remanding the case for retrial or
reception of improperly excluded evidence, with the possibility thereafter of still another appeal, with all the concomitant
delays. The rule, however, imposes the condition by the same token that if his demurrer is granted by the trial court, and the
order of dismissal is reversed on appeal, the movant losses his right to present evidence in his behalf and he shall have been
deemed to have elected to stand on the insufficiency of plaintiff's case and evidence. In such event, the appellate court which
reverses the order of dismissal shall proceed to render judgment on the merits on the basis of plaintiff's evidence." (Italics
supplied)
In other words, defendants who present a demurrer to the plaintiff's evidence retain the right to present their own evidence, if the trial court disagrees with them; if
the court agrees with them, but on appeal, the appellate court disagrees with both of them and reverses the dismissal order, the defendants lose the right to present
their own evidence. 16 The appellate court shall, in addition, resolve the case and render judgment on the merits, inasmuch as a demurrer aims to discourage
prolonged litigations. 17
In the case at bar, the trial court, acting on respondents' demurrer to evidence, dismissed the Complaint on the ground that the plaintiff had adduced mere hearsay
evidence. However, on appeal, the appellate court reversed the trial court because the genuineness and the due execution of the disputed pieces of evidence had
in fact been admitted by defendants.
Applying Rule 33, Section 1 of the 1997 Rules of Court, the CA should have rendered judgment on the basis of the evidence submitted by the petitioner. While the
appellate court correctly ruled that "the documentary evidence submitted by the [petitioner] should have been allowed and appreciated . . .," and that "the petitioner
presented quite a number of documentary exhibits . . . enumerated in the appealed order," 18 we agree with petitioner that the CA had sufficient evidence on record
to decide the collection suit. A remand is not only frowned upon by the Rules, it is also logically unnecessary on the basis of the facts on record.
Due and Demandable Obligation
Petitioner claims that respondents are liable for the whole amount of their debt and the interest thereon, after they defaulted on the monthly installments.
Respondents, on the other hand, counter that the installments were not yet due and demandable. Petitioner had allegedly allowed them to apply their promotion
services for its financing business as payment of the Promissory Note. This was supposedly evidenced by the blank space left for the date on which the
installments should have commenced.19 In other words, respondents theorize that the action for immediate enforcement of their obligation is premature because its
fulfillment is dependent on the sole will of the debtor. Hence, they consider that the proper court should first fix a period for payment, pursuant to Articles 1180 and
1197 of the Civil Code.
This contention is untenable. The act of leaving blank the due date of the first installment did not necessarily mean that the debtors were allowed to pay as and
when they could. If this was the intention of the parties, they should have so indicated in the Promissory Note. However, it did not reflect any such intention. prLL
On the contrary, the Note expressly stipulated that the debt should be amortized monthly in installments of P11,579 for twelve consecutive months. While the
specific date on which each installment would be due was left blank, the Note clearly provided that each installment should be payable each month.
Furthermore, it also provided for an acceleration clause and a late payment penalty, both of which showed the intention of the parties that the installments should
be paid at a definite date. Had they intended that the debtors could pay as and when they could, there would have been no need for these two clauses.
Verily, the contemporaneous and subsequent acts of the parties manifest their intention and knowledge that the monthly installments would be due and
demandable each month. 20 In this case, the conclusion that the installments had already became due and demandable is bolstered by the fact that respondents
started paying installments on the Promissory Note, even if the checks were dishonored by their drawee bank. We are convinced neither by their avowals that the
obligation had not yet matured nor by their claim that a period for payment should be fixed by a court.
Convincingly, petitioner has established not only a cause of action against the respondents, but also a due and demandable obligation. The obligation of the
respondents had matured and they clearly defaulted when their checks bounced. Per the acceleration clause, the whole debt became due one month (April 2,
1991) after the date of the Note because the check representing their first installment bounced.
As for the disputed documents submitted by the petitioner, the CA ruling in favor of their admissibility, which was not challenged by the respondents, stands. A party
who did not appeal cannot obtain affirmative relief other than that granted in the appealed decision. 21
It should be stressed that respondents do not contest the amount of the principal obligation. Their liability as expressly stated in the Promissory Note and found by
the CA is "P13[8],948.00 22 which is payable in twelve (12) installments at P11,579.00 a month for twelve (12) consecutive months." As correctly found by the CA,
the "ambiguity" in the Promissory Note is clearly attributable to human error. 23
Petitioner, in its Complaint, prayed for "14% interest per annum from May 6, 1993 until fully paid." We disagree. The Note already stipulated a late payment penalty
of 2.5 percent monthly to be added to each unpaid installment until fully paid. Payment of interest was not expressly stipulated in the Note. Thus, it should be
deemed included in such penalty.
In addition, the Note also provided that the debtors would be liable for attorney's fees equivalent to 25 percent of the amount due in case a legal action was
instituted and 10 percent of the same amount as liquidated damages. Liquidated damages, however, should no longer be imposed for being
22
unconscionable. 24 Such damages should also be deemed included in the 2.5 percent monthly penalty. Furthermore, we hold that petitioner is entitled to attorney's
fees, but only in a sum equal to 10 percent of the amount due which we deem reasonable under the proven facts. 25
The Court deems it improper to discuss respondents' claim for moral and other damages. Not having appealed the CA Decision, they are not entitled to affirmative
relief, as already explained earlier. 26
WHEREFORE, the Petition is GRANTED. The appealed Decision is MODIFIED in that the remand is SET ASIDE and respondents are ordered TO PAY P138,948,
plus 2.5 percent penalty charge per month beginning April 2, 1991 until fully paid, and 10 percent of the amount due as attorney's fees. No costs. cdrep
SO ORDERED.
Melo, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.
[G.R. No. 11433. December 20, 1916.]
ARTHUR F. ALLEN, plaintiff-appellant, vs. THE PROVINCE OF ALBAY and THE PROVINCE OF AMBOS
CAMARINES, defendants-appellees.
Lawrence, Ross & Block for appellant.
Attorney-General Avanceña for appellees.
SYLLABUS
1.CONTRACTS; LIQUIDATED DAMAGE CLAUSE; WAIVER OF TIME LIMIT. — Where a contract for the construction of a reenforce
concrete bridge fixes a certain sum as liquidated damages for each day's delay in completing the work within the time agreed, and it appears that the
owners failed to promptly deliver the steel and changed the plans, and the Government imposed a strict quarantine on all draft animals, thereby causing a
substantial delay, the time limit was waived and the contractor was bound only to finish the construction within a reasonable time.
2.ID.; ID.; DELAY; APPORTIONMENT OF TIME. — Where a strict performance of a contract by the contractor has been prevented or
waived by the owners and the contractor failed to complete the work within a reasonable time, such time cannot be apportioned by the courts, the only
remedy left to the owners being a right of action for the actual damages suffered.
DECISION
TRENT, J p:
On February 25,1913, the Director of Public Works, acting for the Provinces of Albay and Ambos Camarines, advertised for sealed
proposals, to be opened March 15, 1913, for the construction of a reenforced concrete bridge over the Argos River on the Albay-Ambos Camarines
boundary. At the request of the plaintiff, the opening of the bids was postponed until March 20, on which date plaintiff submitted his bid to construct the
proposed bridge for the sum of P30,690. On April 25, 1913, the Director of Public Works asked the provincial boards passed the necessary resolutions of
May 6 and the plaintiff was notified of their action on June 13. The formal contract was duly executed on June 26, 1913. The bridge was completed and
accepted by the defendant provinces on April 1, 1914. The plaintiff was paid the contract price less P1,301.45, P925 being retained as liquidated damages
at the rate of P25 per day from February 15, 1914, to March 31, 1914; P175.03 for expenses of inspection from November 1, 1913, to February 15, 1914;
and P201.42 for the operation and maintenance of a ferry across the Argos River during the last mentioned period. This action was instituted for the
purpose of recovering the amount of P1,301.45, P200 overcharges on steel not delivered, P2,000 for damages caused by the defendants' delay, and P878
for extra work and material furnished on the bridge at defendants' request. From a judgment in favor of the defendants dismissing the complaint on the
merits, with costs, the plaintiff appealed and now urges that the trial court erred (1) in finding that the delay in completing the work under the contract in
question was due to the fault and negligence of the plaintiff and not to that of the defendants; (2) in holding that the defendants were entitled to deduct from
the contract price for the construction of the bridge (a) the sum of P925 as a penalty or liquidated damages, (b) the amount of P201.42 for the operation
and maintenance of a ferry, and (c) the amount of P175.03 for expenses of inspection; and (3) in rendering judgment in favor of the defendants, dismissing
the plaintiff's complaint and not rendering judgment for the plaintiff for the amounts prayed for. The first and second alleged errors will be considered
together.
The contract which was, as we have said, duly executed on June 26, 1913, provided in paragraph 4 for the completion of the bridge on or
before the 1st day of September, 1913. And in paragraph 5 it was agreed that in the event that the necessary steel should be furnished by the provinces at
ship side in Legaspi, a deduction from the contract price should be made of 11 centavos per kilo of steel thus delivered. The advertisement, instructions to
bidders, general conditions, specifications, proposal, and plans were made a part of the contract.
The plaintiff in his proposal stated:
"All work contemplated by this contract is to be completed on or before four months after contractor furnishes
sand and gravel."
The provincial board of Albay in its resolution of May 6 stated that it had received a communication from the Director of Public Works to the
effect that "Mr. Allen's bid was the only one received for this work which the contractor agrees to finish in four months." The time for the commencement of
the work is not stated. The provincial board of Ambos Camarines in its resolution of May 6 stated, "All work to be completed on or before November 1,
1913." In "Information to bidders," which was made a part of the contract, it was provided that "the contractor will be required to complete the bridge and
have same ready for traffic on or before September 1, 1913." The Province of Ambos Camarines in its resolution of January 6, 1914, stated that the time for
the completion of the bridge was intended to be November 1, 1913, and the Province of Albay in its resolution of May 5, 1914, stated that, "granting the
contention of the provincial board of Ambos Camarines, it was the intention of the parties to fix the original date for the termination of the work on
November 1, 1913, although the original contract fixed September 1, 1913, . . ." On December 1, 1913, F. T. James, acting on behalf of the plaintiff,
addressed the following letter to the provincial board of the Province of Albay:
"December 1, 1913.
"GENTLEMEN: I have the honor to request that an extension of time be granted me for the construction of the
Argos River Bridge.
"Immediately upon entering into contract with the Province of Albay on June 26, 1913, I ordered cement for
the work, but due to the shortage in the Manila market at that time did not receive delivery until the middle of July, when same
was shipped to Legaspi where it arrived four days latter.
"I had made previous arrangements to have this cement hauled to the bridge site by automobile truck, but
when an attempt was made to do so in July, the recent rains so softened the road beyond Polangui that it was impossible to
send a loaded truck over it with any assurance of safe arrival of the cargo of cement at Argos River in good condition.
Therefore I was obliged to haul by truck to Ligao only and from there to Argos by carabao carts.
"The contractor in Ligao then began to haul cement and also the steel for the bridge. Shortly a quarantine on
animals was put into effect in the town of Polangui, and the hauling had to stop, when I had delivered at the bridge site only a
few barrels of cement and a very small number of bars of steel for the piles. It was not until early in October, therefore, that
sufficient steel and cement were delivered at the Argos River to warrant beginning work casting the piles. This work began
however immediately this condition obtained and the sixty concrete piles were completed November 22.
"Due to the fact that the material in the Argos River, into which the piles must be driven, is exceptionally hard
and of a very compact nature it is almost imperative that the piles have considerably more than the usual thirty days for
ripening before driving, and of necessity I must wait at least until December 15 before handling even the first piles cast. My
pile driver is being shipped to Nueva Caceres at present writing. I am obliged to send all my plant and balance of materials in
by that port due to the fact that nobody in Albay is willing to attempt hauling heavy machinery over the road beyond Polangui
for reasons best known to the honorable board, and it is only a question of hauling same from Nueva Caceres to Argos River
as to the actual date of beginning driving.
"As was unforeseen, at the time of entering into contract for this bridge, I have been obliged to use two plants
on my work in the Province of Bulacan where it was anticipated that one would be enough, due to the unusual conditions and
delays from floods and typhoons, so I have not been able to ship my engine and driver so as to have it at Argos River on the
date expected. Therefore, for these above-named reasons, I have the honor to request that I be granted an extension of time
until February 15, 1914, to complete the Argos Bridge.
"Very respectfully.
"ARTHUR F. ALLEN, Contractor,
(Sgd.) "Per F. T. JAMES."
On May 5, 1914, the provincial board of the Province of Albay passed resolution No. 227, the pertinent parts of which are as follows:
xxx xxx xxx
"Whereas there exists pending a petition of the contractor for the extension of the termination of the work of
the cited bridge until the 15th day of February, 1914;
xxx xxx xxx
"Resolved, That this board proposes an amicable settlement for the final settlement of this matter based upon
the following conditions:
"Grant extension to February 15, 1914, providing the contractor will pay to the province the sum of P1,725.78,
being the amount for extra cost for inspection expense, interest on loan, cost of ferry operation to February 15, and 37 days
liquidated damages at P25 per day for the time between February 15 and April 1, 1914.
xxx xxx xxx
23
 "Resolved further, That all previous resolutions of this board in regard to this matter which are in conflict
hereof are hereby repealed.
"Resolved lastly, That copies of this resolution be furnished the district engineer, Albay, contractor Allen,
provincial treasure and provincial board of Ambos Camarines."
On June 17, 1914, the provincial board of Albay passed resolution No. 383 which, after stating the reasons for the resolution, reads:
"Resolved, That the final payment to A. F. Allen for the construction of the Argos River Bridge be, and hereby
is, authorized according to the contract, deducting the amount of P1,301.45, same to cover inspection charges from November
1, 1913, to February 15, 1914, operation and maintenance of ferry from November 1, 1913, to February 15 to March 31, 1914,
inclusive, Sundays and holidays excepted, at P25 per day."
xxx xxx xxx
Copies of the above resolution were furnished the provincial treasurer and district engineer of Albay, the provincial board of Ambos
Camarines, and the plaintiff.
The provincial board of Ambos Camarines, in its resolution No. 669 passed June 24, 1914, concurred in resolution No. 383 of the Province
of Albay.
The provincial board of Ambos Camarines passed on January 6, 1914, resolution No. 50, the pertinent parts of which read as follows:
"The recorder presented copy of resolution No. 1114 of the provincial board of Albay, series of 1913, with
accompanying papers, being the application of Mr. A. F. Allen for an extension of the contract time in which he is to complete
the Argos Bridge. (on the provincial boundary) and the recommendation of the Director of Public Works and the district
engineer of Albay.
"Being informed of the contents of said resolution and accompanying papers,
"On motion,
"The board resolved as follows:
xxx xxx xxx
"(b)As to any further extension, the facts alleged by contractor which must be basis of same, obstacles
impeding the transport of his supplies, occurring within the Province of Albay, this board proposes to be guided by the
recommendations of the board of Albay in the matter. However, as it does appear that the contractor acquiesces and accepted
the extension and conditions embodied in the resolution of the board of Albay, but on the contrary, Mr. James, representing
the contractor being present, informs the board of Camarines that the contractor is not satisfied with the extension and
conditions embodied in the before-mentioned resolution of Albay, therefore this board abstains from concurring in resolution
No. 1114 of Albay and suggests that, if the Albay board finds cause for extending the contract time past November 1, 1913,
that the contractor's concurrence and acceptance of such further extension be procured before forwarding for the concurrence
of this board. Further this board believes that any arbitrary extensions (contractor not concurring or accepting conditions) or
extensions 'by grace' could better and more properly be had upon completion of the bridge as a final adjustment of the matter.
"Approved unanimously."
Resolution No. 1114 of the provincial board of Albay, series 1913, referred to in resolution No. 50 of the provincial board of Ambos
Camarines, was not presented during the trial in the court below and forms no part of the record of this case.
The provinces, exercising their right under the contract, furnished all the steel at shipside in Legaspi. The steel was received by the
contractor on the following dates: 27,056 kilos on July 26, 1913; 3,636 kilos on August 4, 1913; and 7,890 kilos on September 1, 1913. The bridge 1913; is
51.7 kilometers from Legaspi.
The first question to be determined is that relating to the time agreed upon for the completion of the bridge. Did the contracting parties fix
September 1, 1913, as the date? On the one hand we have an explicit statement in the information to bidders that "the contractor shall commence the work
herein contracted to be done in ample time to complete the contract within the time specified." In the contract it was expressly stipulated that the contractor
must complete the work on or before the 1st day of September, 1913, or pay P25 a day as liquidated damages for every day thereafter. And James in his
letter of December 1, after referring to the fact that the contract was signed on June 26, requested an extension of time for the completion of the work until
February 15, 1914. While on the other hand, we have the statement of the plaintiff's proposal to the effect that the work contemplated should be completed
on or before four months after the contractor furnished gravel and sand; the statement of the provincial board of Albay that the contractor agreed to finish
the bridge in four months; the same board's later statement referring to the contention of the board of Ambos Camarines that it was the intention of the
parties to fix the time on November 1, the two statements of the provincial board of Ambos Camarines to the effect that it understood that November 1 was
the date agreed on; and the fact that the provinces deducted inspection expenses and expenses for the operation of the ferry from November 1.
It will thus be seen that the provinces did intent that the date for the completion of the work should be November 1 and not September 1.
Such were the instructions to the Director of Public Works in consummating the contract, but the Director did not comply with these instructions to the
Director of Public Works in consummating the contract, but the Director did not comply with these instructions as to the date for the termination of the work.
He and the contractor agreed that the date should be September 1. Although this was not in accordance with the intention of the provinces, yet they (the
provinces) subsequently ratified the contract by their own acts — furnishing the steel and making payments. The result is that the provinces obligated
themselves through the Director of Public Works to furnish all the steel at ship side in Legaspi early enough to permit the contractor to complete the bridge
by September 1. This the provinces did not do, as quite a large shipment of steel arrived in Legaspi on the very day agreed upon for the completion of the
bridge. It may be true that the contractor could not have completed the bridge by September 1, if all of the steel had arrived in Legaspi immediately after the
signing of the contract.
Even admitting that the true date for the completion of the bridge was November 1, yet the contractor could not have completed the work
on or before that date on account of the quarantine established and enforced by the authorities. James, in his letter of December 1 asking for the extension
of time, said, "The contractor in Ligao then began to haul the cement and also the steel for the bridge. Shortly a quarantine on animals was put into effect in
the town of Polangui, and the hauling had to stop when I had delivered at the bridge site only a few barrels of cement and a very small number of bars of
steel for the piles." And James in his testimony says, "Jaucian was unable to promptly deliver these materials at the Argos bridge site, due to a rinderpest
quarantine placed, I think, by the Bureau of Agriculture on carabao and cattle passing on the interprovincial road between Ambos Camarines, Albay, and in
all of the towns north of Ligao." Jaucian in his deposition testified that he encountered difficulties in hauling materials for the bridge from Ligao to the Argos
River; that the first difficulty was the quarantine placed upon animals in Polangui; that he had been delivering the materials for a week when the quarantine
was ordered; that the quarantine, as he remembered, commenced in July and was removed in October or November; that the quarantine was uninterrupted
during this time; and that it consisted in a definite or absolute prohibition against the passage of animals from kilometer 30 to kilometer 40. So it is
conclusively established that the only way that the contractor had of moving the materials from Ligao to the bridge site was by means of animals and that
this could not be done from sometime in July until October or November on account of the quarantine.
Marshall, the district engineer who represented the provinces during the construction of the bridge, testified that the plans called for the
piles of the bridge to be 11 meters long; that the contract was signed on this basis; that after the contract had been signed Von Schmelling, the former
district engineer, was down there and in a verbal conversation it was decided that instead of casting the piles 11 meters long they should be cast 9 meters
long, thereby saving something like 13 cubic meters of concrete; that on October 11 or 12 there came a flood and the water rose about 15 centimeters
higher than the extreme high water shown in the original plans; that it was thereafter agreed to raise the caps on the piles 42 centimeters higher; and that
the raising of the bridge was outside of the original specifications. The testimony of this witness is corroborated on this point by both the plaintiff and James.
The plaintiff, through his agent, requested an extension of time until February 15, 1914, within which to complete the bridge, but the parties
did not agree upon the extension. From the resolution of the provincial board of Ambos Camarines, dated January 6, 1914, it appears that Albay imposed
certain conditions in consideration for the extension, which were rejected by the plaintiff.
We must, therefore, conclude that the provinces waived the contract time, whether it were September 1 or November 1, by their failure to
deliver the steel promptly, by reason of having placed the strict quarantine on animals and on account of the change in the plan subsequent to October 12,
and that the waver operated to eliminate the definite date from which to assess liquidated damages; and though the plaintiff, in continuing the work, was
obligated to complete the same within a reasonable time, the liquidated damage clause was not thereby restored and made applicable to an unreasonable
time. Where strict performance on the part of the contractor is prevented or waived by the other party, a claim by such party of fines and penalties for delay
or failure cannot be sustained. (District of Columbia vs. Camden Iron Works, 181 U.S.. 453.) The same rule applies in cases containing liquidated damage
clauses. (United Engineering and Contracting Co. vs. U.S., 47 Ct. Cls., 489 [1912].) If it be true that the plaintiff contractor was responsible for a large
number of days of delay and the provinces for only a few of the days thereof, yet, under such circumstances, we cannot "apportion" such delay between the
contracting parties and hold the contractor liable in liquidated damages for the number of days delayed by him in completing the bridge. (Jefferson Hotel
Co. vs. Brumbaugh, 168 Fed. Rep., 867 and cases cited therein; Willis vs. Webster, 37 N.Y. Sup., 354; Mosler Safe Co. vs. Maiden Lane Safe Dep. Co.,
199 N. Y., 479; 37 L. R. A. (N.S.) 363, decided in 1910.) The result is that the provinces are limited to such damages which they may have suffered on
account of an unreasonable delay on the part of the plaintiff in completing the bridge, if there were, in fact, an unreasonable delay. It would seem, however,
that as the plaintiff asked for an extension on December 1, sometime after the quarantine had been raised and also after the change in the plans had been
made, until February 15, 1914, he should have finished the work on or before the latter dated and all time thereafter would constitute an unreasonable
delay. However this may be, the provinces have proven no actual damages resulting after February 15. It is true that they deducted P175.03 for inspection
charges, but this was done for such inspection prior to February 15, and the same is true of the item of P201.42 for the maintenance of a ferry. Certainly
there was no unreasonable delay prior to February 15. Consequently, the provinces had no right to withhold the P1,301.45.
The plaintiff sought to recover, in addition to the amount withheld, P200 overcharges on steel, P2,000 for damages caused by the
defendants' delay, and P878 for extra work and material furnished at defendants' request. While it is true that the question whether the plaintiff is entitled to
recover these amounts is raised by the third assignment of error, yet no specific reference is made in the plaintiff's brief to said amounts, counsel saying
nothing more than, "It is respectfully submitted that appellant is entitled to a reversal of the decision of the Court of First Instance, and to an order for
judgment in accordance with the prayer of his complaint." We have examined the record, however, and find that the evidence is not sufficient to warrant an
affirmative holding that the plaintiff is entitled to recover these items or either of them.
For the foregoing reasons the judgment appealed from is reversed and judgment will be entered in favor of the plaintiff and against the
defendants for the sum of P1,301.45, with legal interest from April 1, 1914. No costs will be allowed in this instance. So ordered.
Torres, Johnson, and Carson, JJ., concur.
Araullo, J., concurs in the result.
ONG GUAN CAN, ET AL. vs. CENTURY INS. CO., LTD.
SECOND DIVISION
[G.R. No. L-22738. December 2, 1924.]
ONG GUAN CAN and THE BANK OF THE PHILIPPINE ISLANDS, plaintiffs-appellees, vs. THE CENTURY INSURANCE CO., LTD., defendant-appellant.
24

Eiguren & Razon for appellant. Aurelio Montinola and Jose M. Hontiveros for appellees.
SYLLABUS
1. ALTERNATIVE OBLIGATIONS; CLAUSE OF INSURANCE POLICY. — The policy in question contains the following clause: "The Company may at its option
reinstate or replace the property damaged or destroyed, or any part thereof, instead of paying the amount of the loss or damage, or may join with any other
Company or insurers in so doing, but the Company shall not be bound to reinstate exactly or completely, but only as circumstances permit and in reasonable
sufficient manner, and in no case shall the Company be bound to expend more in reinstatement that it would have cost to reinstate such property as it was at the
time of the occurrence of such loss or damage, nor more than the sum insured by the Company thereon." Held: That if this clause of the policy is valid, it operates
to make the obligation of the insurance company an alternative one that is to say, that it may either pay the amount in which the house was insured, or rebuilt it.
2. NOTICE OF ELECTION OF ALTERNATIVE PRESTATIONS. — The debtor must notify the creditor of his election, stating which prestation he is disposed to
fulfill, in accordance with article 1133 of the Civil Code. 3. EFFECT OF NOTICE. — The effect of the notice is to give the creditor, that is, the plaintiff in the instant
case, opportunity to express his consent, or to impugn the election take legal effect when consented by the creditor, or if impugned by the latter, when declared
improper by a competent court.
DECISION
VILLAMOR, J p:
On April 19, 1924, the Court of the First Instance of Iloilo rendered a judgment in favor of the plaintiff, sentencing the defendant company to pay him the sum of
P45,000, the value of certain policies of fire insurance, with legal interest thereon from February 28, 1923, until payment, with the costs. The defendant company
appealed from this judgment, and now insists that the same must be modified and that it must be permitted to rebuild the house burnt, subject to the alignment of
the street where the building was erected, and that the appellant be relieved from the payment of the sum in which said building was insured.
A building of the plaintiff was insured against fire by the defendant in the sum of P30,000, as well as the goods and merchandise therein contained in the sum of
P15,000. The house and merchandise insured were burnt early in the morning of February 28, 1923, while the policies issued by the defendant in favor of the
plaintiff were in force. The appellant contends that under clause 14 of the conditions of the policies, it may rebuilt the house burnt, and although the house may be
smaller, yet it would be sufficient indemnity to the insured for the actual loss suffered by him. The clause cited by the appellant is as follows: "The Company may at
its option reinstate or replace the property damaged or destroyed, or any part thereof, instead of paying the amount of the loss or damage, or may join with any
other Company or insurers in so doing, but the Company shall not be bound to reinstate exactly or completely, but only as circumstances permit and in reasonable
sufficient manner, and in no case shall the Company be bound to expend more in reinstatement than it would have cost to reinstate such property as it was at the
time of the occurrence of such loss or damage, nor more than the sum insured by the Company thereon." If this clause of the policies is valid, its effect is to make
the obligation of the insurance company an alternative one, that is to say, that it may either pay the insured value of the house, or rebuild it. It must be noted that in
alternative obligations, the debtor, the insurance company in this case, must notify the creditor of his election, stating which of the two presentations he is disposed
to fulfill, in accordance with article 1133 of the Civil Code. The object of this notice is to give the creditor, that is, the plaintiff in the instant case, 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. In the instant case, the record shows that the appellant company did not give a formal notice of
its election to rebuild, and while the witnesses, Cedrun and Cacho, speak of the proposed reconstruction of the house destroyed, yet the plaintiff did not give his
assent to the proposition, for the reason that the new house would be smaller and of materials of lower kind than those employed in the construction of the house
destroyed. Upon this point the trial judge very aptly says in his decision: "It would be an imposition unequitable, as well as unjust, to compel the plaintiff to accept
the rebuilding of a smaller house than the one burnt, with a lower kind of materials that those of said house, without offering him an additional indemnity for the
difference in size between the two houses, which circumstances were taken into account when the insurance applied for by the plaintiff was accepted by the
defendant." And we may add: Without tendering either the insured value of the merchandise contained in the house destroyed, which amounts to the sum of
P15,000. We find in the record nothing to justify the reversal of the finding of the trial judge, holding that the election alleged by the appellant to rebuild the house
burnt instead of paying the value of the insurance is improper. To our mind, the judgment appealed from is in accordance with the merits of the case and the law,
and must be, as is hereby, affirmed with the costs against the appellant. So ordered. Johnson, Street, Malcolm, Avanceña, Ostrand, Johns, and Romualdez, JJ.,
concur
[G.R. No. 89252. May 24, 1993.]
RAUL SESBREÑO, petitioner, vs. HON. COURT OF APPEALS, DELTA MOTORS CORPORATION and PILIPINAS
BANK, respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
SYLLABUS
1.MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; NEGOTIATION ASSIGNMENT AND TRANSFER, DIFFERENTIATED. — The negotiation of a
negotiable instrument must be distinguished from the assignment or transferof an instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where
the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal
consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not
be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument.
2.ID.; ID.; PROMISSORY NOTE; NON-NEGOTIABILITY THEREOF DOES NOT PROHIBIT ITS TRANSFERABILITY AND ASSIGNABILITY; CASE AT BAR. —
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferrable" or "non-assignable." It contained no stipulation which
prohibited Philfinance from assigning or transferring, in whole or in part, that Note.
3.ID.; ID.; ID.; PARTIAL ASSIGNMENT OF A PROMISSORY NOTE IS LEGALLY BINDING AND ENFORCEABLE. — Delta adduced the "Letter of Agreement"
which it had entered into with Philfinance. We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance
assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set
forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on
this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of promissory notes was this: Delta invested, by making a money
market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e.,
P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with
not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.
4.ID.; ID.; ID.; ID.; CONSENT OF INVESTOR NOT NECESSARY FOR VALIDITY AND ENFORCEABILITY OF ASSIGNMENT. — Delta's complaint that the partial
assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and
enforceability of the assignment in favor of petitioner.
5.CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONVENTIONAL SUBROGATION MUST BE CLEARLY ESTABLISHED. — Conventional subrogation, which in
the first place is never lightly inferred, must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new
and old obligations on every point. Nothing of the sort is present in the instant case.
6.MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; MONEY MARKET; CONSTRUED. — The money market is an 'impersonal market', free from personal
considerations.' The market mechanism is intended to provide quick mobility of money and securities.' The impersonal character of the money market device
overlooks the individual or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expeditiously
transacted and transferred to any investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial
paper of the sale or transfer to the investor. . . . There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial
scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential Decree No. 678, the
investing public must be given adequate and effective protection in availing of the credit of a borrower in the commercial paper market." (Perez v. Court of Appeals,
127 SCRA 636 [1984]).
7.CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONDENSATION; EFFECTS THEREOF NOT AFFECTED BY SUBSEQUENT ASSIGNMENT OF CREDIT;
CASE AT BAR. — We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is
important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken
place and indeed none could have taken place. The essential requirements of compensation are listed in the Civil Code. On 9 February 1981, neither DMC PN No.
2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta
acknowledged that the relevant promissory notes were "to be off settled (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity." The record shows,
however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, that is, after the maturity not only of the money market placement
made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after
compensation had taken place by operation of law because the offsetting instruments had both reached maturity. At the time that Delta was first put to notice of the
assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. It bears some emphasis that petitioner could
have notified Delta of the assignment in his favor as soon as that assignment or sale was effected on 9 February 1981. He could have also notified Delta as soon
as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and
discharge DMC PN No. 2731. Again, petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time
before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified
Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance
remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.
8.ID.; ID.; ASSIGNMENT; VALID WHEN MADE BEFORE COMPENSATION TAKES PLACE; CASE AT BAR. — As noted, the assignment to petitioner was made
on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the
25
assignment to petitioner would have prevented compensation from taking place between Philfinance and Delta, to the extent of P304,533.33, because upon DECISION
execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to the extent
of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.

9.ID.; ID.; ID.; RIGHTS OF THE ASSIGNEE, NOT GREATER THAN THE RIGHTS OF THE ASSIGNOR. — It is a firmly settled doctrine that the rights of an FELICIANO, J p:
assignee are not any greater than the rights of the assignor, since the assignee is merely substituted in the place of the assignor and that the assignee acquires his
rights subject to the equities — i.e., the defenses — which the debtor could have set up against the original assignor before notice of the assignment was given to
the debtor. (Article 1285 of the Civil Code) On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance
Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981. Philfinance, also on 9 February 1981,
issued the following documents to petitioner:
10.ID.; ID.; SOLIDARY OBLIGATIONS; EXPRESS ASSUMPTION OF SOLIDARY LIABILITY, REQUIRED; ABSENCE OF EVIDENCE TO SUPPORT
ALLEGATION IN CASE AT BAR. — We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33
nor any assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We find nothing written in printers ink on the DCR which could (a)the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note
reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or at any other ("DMC PN") No. 2731 for a term of 32 days at 17.0 % per annum;
time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to effect
physical delivery to him of DMC PN No. 2731. Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by the
portion of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled against him. The solidary liability that (b)the Certificate of Securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the
petitioner seeks to impute to Pilipinas cannot, however, be lightly inferred. Under Article 1207 of the Civil Code, "there is a solidary liability only when the obligation notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No.
expressly so states, or when the law or the nature of the obligation requires solidarity." The record here exhibits no express assumption of solidary liability vis-a-vis 10805 dated 9 February 1981; and
petitioner, on the part of Pilipinas. Petitioner has not pointed us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature
of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas.
Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731. (c)post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee,
Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the post-dated checks issued by Philfinance. However, the checks were dishonored for having been drawn against
insufficient funds.
11.ID.; ID.; DEPOSIT; ACT OF DESIGNATING PILIPINAS AS CUSTODIAN OR DEPOSITORY BANK; CASE AT BAR. — We believe and so hold that a contract of
deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obligation of
the depositary was owed, however, to petitioner Sesbreño as beneficiary of the custodianship or depositary agreement. We do not consider that this is a simple On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It read as follows:
case of a stipulation pour autrui. The custodianship or depositary agreement was established as an integral part of the money market transaction entered into by
petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing
sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent to constructive "PILIPINAS BANK
delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate Makati Stock Exchange Bldg.,
transactions in the money market by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively Ayala Avenue, Makati,
taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should Metro Manila
they have need of them.
February 9, 1981
———————
VALUE DATE
12.ID.; ID.; ID.; ID.; DEPOSITARY OBLIGED TO RETURN THE SECURITY OR THING DEPOSITED UPON DEMAND OF DEPOSITOR; RATIONALE. — The
depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the present case, of the beneficiary)
of the contract, even though a term for such return may have been established in the said contract. Accordingly, any stipulation in the contract of deposit or
TO Raul Sesbreño
custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary,
cannot be enforced as against such beneficiary-placer. We believe that the position taken above is supported by considerations of public policy. If there is any party
that needs the equalizing protection of the law in money market transactions, it is the members of the general public who place their savings in such market for the
April 6, 1981
purpose of generating interest revenues. The custodian bank, if it is not related either in terms of equity ownership or management control to the borrower of the
—————————
funds, or the commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have
MATURITY DATE.
every incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from the
impact of stipulations privately made between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has erupted. NO. 10805
DENOMINATED CUSTODIAN RECEIPT
13.ID.; ID.; ID.; ID.; ID.; DEPOSITARY LIABLE FOR DAMAGES FOR BREACH OF DUTY; CASE AT BAR. — In the case at bar, the custodian-depositary bank —————————————————
Pilipinas refused to deliver the security deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this
connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet
taken place. Instead of complying with the demand of petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of 'This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITERS FINANCE
its undertaking under the DCR to effect physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreño. The ostensible term written into CORPORATION, we have in our custody the following securities to you [sic] the extent herein indicated.
the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a defense against petitioner's demand for physical
surrender of the Note on at least three grounds: firstly, such term was never brought to the attention of petitioner Sesbreño at the time the money market placement
with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money —————————————————————————————————————
market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to SERIALMAT.FACEISSUEDREGISTEREDAMOUNT
demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from NUMBERDATEVALUEBYHOLDER PAYEE
Philfinance. We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by him arising out of its breach of duty. By —————————————————————————————————————
failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note
deposited with it. Whether or not Pilipinas itself benefited from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present 27314-6-812,300,833.34DMCPHIL.307,933.33
purposes.' Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by UNDERWRITERS
reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum counting from 14 March 1981. FINANCE CORP.
—————————————————————————————————————

14. MERCANTILE LAW; CORPORATION LAW; PIERCING OF CORPORATE ENTITIES; ABSENCE OF EVIDENCE TO JUSTIFY DISREGARD OF SEPARATE
CORPORATE PERSONALITIES; CASE AT BAR. — It is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as We further certify that these securities may be inspected by you or your duly authorized representative at any time during
separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director — Mr. regular banking hours.
Ricardo Silverio, Sr., sitting on the Boards of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3)
concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the
benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of Delta and Pilipinas and to hold them Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should this
liable for any assumed or undetermined liability of Philfinance to petitioner. Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity.'

26
 PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)" 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed to her a demand letter informing the bank
that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the
physical delivery of the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the security had been issued on
10 April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with Philfinance as "payee" and private respondent Delta Motors
Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON-NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate
of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent Pilipinas for physical delivery of the original
of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as had been supposedly agreed upon in a
"Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance never did provide the appropriate instructions; Pilipinas never released DMC
PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining that
Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory note,
and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A
issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and Exchange Commission ("SEC") and the Central
Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the Regional Trial Court ("RTC") of
Cebu City, Branch 21, against private respondents Delta and Pilipinas.5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and
counterclaims for lack of merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of Appeals denied the appeal and
held; 6
"Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiff-appellant, it is
Philfinance. As correctly observed by the trial court:
'This act of Philfinance in accepting the investment of plaintiff and charging it against DMC
P.N. No. 2731 when its entire face value was already obligated or earmarked for set-off or compensation is
difficult to comprehend and may have been motivated with bad faith. Philfinance, therefore, is solely and
legally obligated to return the investment of plaintiff, together with its earnings, and to answer all the damages
plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the
defendants in this case at bar; hence, this Court is without jurisdiction to pronounce judgment against it. (p.
11, Decision).'
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost against plaintiff-appellant."
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the petition and required the parties to
file their respective memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent Court of Appeals gravely erred: (i) in concluding
that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on
the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor of petitioner; and (iii) in refusing to pierce the veil of corporate entity
between Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies" under the
leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner
in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since
Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is,
consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and
second relationships.
I
We consider first the relationship between petitioner and Delta.
The Court of Appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance
sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:
"Nor could plaintiff-appellant have acquired any right over DMC P.N. No. 2731 as the same is `non-negotiable' as stamped on
its face (Exhibit `6'), negotiation being defined as the transfer of an instrument from one person to another so as to constitute
the transferee the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the
instrument in his own name and cannot demand or receive payment (Section 51, id.)." 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that that Note had been validly transferred, in part, to him by assignment and
that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the payee
Philfinance. LLjur
Delta, however, disputes petitioner's contention and argues:
(1)that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the
word "non-negotiable" stamp across the face of the Note 10 and because maker Delta and payee Philfinance intended that
this Note would be offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to
Delta as payee;
(2)that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions; and
(3)assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took that Note subject to the
defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from theassignment or transfer of an instrument whether
that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement
thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being
negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or
transfer written in the face of the instrument:
"The words 'not negotiable,' stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by
assignment; the assignee taking subject to the equities between the original parties." 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferrable" or "non-assignable." It contained no stipulation which
prohibited Philfinance from assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:
"
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated April 10,
1980, to mature on April 6, 1981.
27
 As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10,
1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice
President" 13
We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of DMC PN
No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon
Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and without
notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what
Philfinance and Delta were doing by their exchange of promissory notes was this: Delta invested, by making a money market placement with Philfinance,
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2)
promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only
P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such
consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of
part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which
in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the
new and old obligations on every point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and
selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 1 7 the Court, speaking through
Mme. Justice Herrera, made the following important statement: Cdpr
"There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence Smith
`the money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders
and borrowers do not deal directly with each other but through a middle man or dealer in the open market.' It involves
'commercial papers' which are instruments 'evidencing indebtedness of any person or entity . . ., which are issued, endorsed,
sold or transferred or in any manner conveyed to another person or entity, with or without recourse'. The fundamental function
of the money market device in its operation is to match and bring together in a most impersonal manner both the 'fund users'
and the 'fund suppliers.' The money market is an 'impersonal market', free from personal considerations.' The market
mechanism is intended to provide quick mobility of money and securities.'
The impersonal character of the money market device overlooks the individual or entities concerned. The issuer of a
commercial paper in the money market necessarily knows in advance that it would be expeditiously transacted and transferred
to any investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of
commercial paper of the sale or transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It
has been intended to facilitate the flow and acquisition of capital on an impersonal basis.And as specifically required by
Presidential Decree No. 678, the investing public must be given adequate and effective protection in availing of the credit of a
borrower in the commercial paper market." 18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note
that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed
none could have taken place. The essential requirements of compensation are listed in the Civil Code as follows:
"Art. 1279.In order that compensation may be proper, it is necessary:
(1)That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2)That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the
same qualify if the latter has been stated;
(3)That the two debts are due;
(4)That they be liquidated and demandable;
(5)That over neither of them there be any retention or controversy, commenced by third persons and communicated in due
time to the debtor." (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter
of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-
A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say, before any
compensation had taken place. Further, the assignment to petitioner would have prevented compensation from taking place between Philfinance and Delta, to the
extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of
each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in
favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19that is, after the maturity not only of the
money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights
as assignee after compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that
the rights of an assignee are not any greater than the rights of the assignor, since the assignee is merely substituted in the place of the assignor 20 and that the
assignee acquires his rights subject to the equities — i.e., the defenses — which the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor. Article 1285 of the Civil Code provides that:
"ART. 1285.The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set
up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified
by the debtor at the time he gave his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation
of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same
and also later ones until he had knowledge of the assignment." (Emphasis supplied). llcd
Article 1626 of the same Code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the
obligation." In Sison v. Yap-Tico, 21 the Court explained that:
"[n]o man is bound to remain a debtor; he may pay to him with whom he contracted to pay; and if he pay before notice that his
debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title
by transfer to demand payment of the debt, to give his debtor notice."22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment in his favor as soon as that assignment or sale was effected on 9 February 1981.
He could have also notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that
time, compensation had yet to set in and discharge DMC PN No. 2731. Again, petitioner could have notified Delta on 26 March 1981 when petitioner received from
Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have
notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that
Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent
Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.
II
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became solidarily liable with Philfinance and
Delta when Pilipinas issued DCR No. 10805 with the following words:
"Upon your written instructions, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to you —
" 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any
assumption of liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:
28
 (1)it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6 April The third principal contention of petitioner — that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity — need not
1981 and payable to the order of Philfinance; detain us for long. LLphil

(2)Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981),holding that Note on In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of appeals.
behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee Philfinance; 24 Petitioner similarly did not seek to implead Philfinance in the Petition before us.

(3)petitioner may inspect the Note either "personally or by authorized representative", at any time during regular bank hours;
and
(4)upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to
the extent of P307,933.33) "should this Denominated Custodianship Receipt remain outstanding in [petitioner's] favor thirty
(30) days after its maturity."
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to
pierce their separate corporate entities, but has been able only to cite the presence of a common Director — Mr. Ricardo Silverio, Sr., sitting on the Boards of
Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the other two
(2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence
of record to justify disregarding the separate corporate personalities of Delta and Pilipinas and to hold them liable for any assumed or undetermined liability of
Philfinance to petitioner. 28

Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN No.
2731 assigned to petitioner, either upon maturity thereof or at any other time. We note that both in his complaint and in his testimony before the trial court, petitioner
referred merely to the obligation of private respondent Pilipinas to effect physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's theory that
Pilipinas had assumed a solidary obligation to pay the amount represented by the portion of the Note assigned to him by Philfinance, appears to be a new theory
constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute to Pilipinas cannot, however, be lightly inferred.
Under Article 1207 of the Civil Code, "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 record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed us to
any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with
Philfinance and private respondent Delta under DMC PN No. 2731.
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 March 1989 and 17 July 1989,
respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank.
Private respondent Pilipinas Bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of
six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ ., concur.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the DCR. To the contrary, we find, EN BANC
after prolonged analysis and deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño. llcd
[G.R. No. L-24765. August 29, 1969.]

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. MAXIMO STA. MARIA, ET AL., defendants, VALERIANA, EMETERIA, TEOFILO, QUINTIN, ROSARIO, and
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The depositor
was initially Philfinance; the obligation of the depositary was owed, however, to petitioner Sesbreño as beneficiary of the custodianship or depositary agreement. LEONILA, all surnamed STA. MARIA, defendants-appellants.
We do not consider that this is a simple case of a stipulation pour autrui. The custodianship or depositary agreement was established as an integral part of the
Tomas Besa and Jose B. Galang for plaintiff-appellee.
money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited
that Note with Pilipinas in order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship
G. P. Nuguid Jr. for defendants-appellants.
agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that
custodianship agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or placers that
the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will SYLLABUS
be there available to the placers of funds should they have need of them. The depositary in a contract of deposit is obliged to return the security or the thing
deposited upon demand of the depositor (or, in the present case, of the beneficiary) of the contract, even though a term for such return may have been established 1.CIVIL LAW; AGENCY; SPECIAL POWER OF ATTORNEY TO MORTGAGE REAL PROPERTY IS LIMITED TO SUCH AUTHORITY. — A special power of
attorney to mortgage real estate is limited to such authority to mortgage and does not bind the grantor personally to other obligations contracted by the grantee, in
in the said contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or
the absence of any ratification or other similar act that would estop the grantor from questioning or disowning such other obligations contracted by the grantee.
which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.
2.ID.; ID.; ID.; INSTANT CASE. — The authority granted by defendants-appellants (except Valeriana) unto their brother, Maximo, was merely to mortgage the
property jointly owned by them. They did not grant Maximo any authority to contract for any loans in their names and behalf. Maximo alone, with Valeriana who
We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing protection of the law in
authorized him to borrow money, must answer for said loans and the other defendants-appellants' only liability is that the real estate authorized by them to be
money market transactions, it is the members of the general public who place their savings in such market for the purpose of generating interest revenues. 27 The
mortgaged would be subject to foreclosure and sale to respond for the obligations contracted by Maximo. But they cannot be held personally liable for the payment
custodian bank, if it is not related either in terms of equity ownership or management control to the borrower of the funds, or the commercial paper dealer, is
of such obligations, as erroneously held by the trial court.
normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have every incentive to protect the interest of its
client the borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made
3.ID.; ID.; ID.; LOANS INCURRED IN CONNECTION WITH SAID MORTGAGE CANNOT BE CHARGED AGAINST OWNERS OF THE PROPERTY
between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has erupted.
MORTGAGED. — The fact that Maximo presented to the plaintiff bank Valeriana's additional special power of attorney expressly authorizing him to borrow money,
Exh. E-1, aside from the authority to mortgage executed by Valeriana together with the other defendants-appellants also in Maximo's favor, lends support to our
view that the bank was not satisfied with the authority to mortgage alone. For otherwise, such authority to borrow would have been deemed unnecessary and a
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first demanded physical delivery thereof
surplusage.
on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting
against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the demand of petitioner, Pilipinas purported to require and await the
4.ID.; ID.; ID.; ID.; CO-OWNERS NOT IN ESTOPPEL IN INSTANT CASE. — Where there was no express ratification by defendants-appellants of the loans
instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery of the Note upon receipt of "written
incurred by Maximo from plaintiff bank, secured by the real property owned by them and for which his only special power of attorney was to mortgage, nor had they
instructions" from petitioner Sesbreño. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its
benefited from said loans, no estoppel can be claimed by plaintiff bank as against defendants.
maturity") was not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such term was never brought to the
attention of petitioner Sesbreño at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose of the
5.ID.; ID.; ID.; LIABILITY OF CO-OWNER WHO AUTHORIZED GRANTEE TO INCUR LOANS. — Where as in this case, Valeriana, one of the co-owners of the
custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil
property involved, granted Maximino not only the authority to mortgage said property but also the special power of attorney to borrow money in connection
Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market
therewith, her liability is not only on the mortgage of her share in the property, but also for the said loans which Maximo had obtained from plaintiff bank, and is joint
placement matured on 13 March 1981 without payment from Philfinance.
pursuant to the provisions of Article 1204 of the Civil Code. It should be noted that in the additional power of attorney, Exh. E-1, executed by Valeriana, she did not
grant Maximo the authority to bind her solidarity with him on any loans he might secure thereunder.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by him arising out of its breach of duty. By failing to
6.ID.; ATTORNEY'S FEES; BASIS OF AWARD IN INSTANT CASE. — As to the 10% award of attorney's fees, this Court believes that considering the resources of
deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it.
plaintiff bank and the fact that the principal debtor, Maximo Sta. Maria, had not contested the suit, an award of five (5%) per cent of the balance due on the
Whether or not Pilipinas itself benefited from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes.' Prima facie,
principal, exclusive of interests, i.e. a balance of P6,100.00 on the first cause of action and a balance of P9,346.44 on the second cause of action, per the bank's
the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of
statements of August 20, 1963 should be sufficient.
the Note by compensation, plus legal interest of six percent (6%) per annum counting from 14 March 1981.
DECISION
The conclusion we have here reached is, of course, without prejudice to such right of reimbursement as Pilipinas may have vis-a-vis Philfinance. TEEHANKEE, J p:

III

29
In this appeal certified to this Court by the Court of Appeals as involving purely legal issues, we hold that a special power of attorney to mortgage real estate is
limited to such authority to mortgage and does not bind the grantor personally to other obligations contracted by the grantee, in the absence of any ratification or
other similar act that would estop the grantor from questioning or disowning such other obligations contracted by the grantee.
Plaintiff bank filed this action on February 10, 1961 against defendant Maximo Sta. Maria and his six brothers and sisters, defendants-appellants, Valeriana,
Emeteria, Teofilo, Quintin, Rosario and Leonila, all surnamed Sta. Maria, and the Associated Insurance & Surety Co., Inc. as surety, for the collection of certain
amounts representing unpaid balances on two agricultural sugar crop loans due allegedly from defendants. 1
The said sugar crop loans were obtained by defendant Maximo Sta. Maria from plaintiff bank under a special power of attorney, executed in his favor by his six
brothers and sisters, defendants- appellants herein, to mortgage a 16-odd hectare parcel of land, jointly owned by all of them, the pertinent portion of which reads
as follows:
"That we, VALERIANA, EMETERIA, TEOFILO, QUINTIN, ROSARIO and LEONILA all surnamed STA. MARIA, sole heirs of our deceased parents CANDIDO STA.
MARIA and FRANCISCA DE LOS REYES, all of legal age, Filipinos, and residents of Dinalupihan, Bataan, do hereby name, constitute and appoint Dr. MAXIMO
STA. MARIA, of legal age, married, and residing at Dinalupihan, Bataan to be our true and lawful attorney of and in our place, name and stead to mortgage, or
convey as security to any bank, company or to any natural or juridical person, our undivided shares over a certain parcel of land together with the improvements
thereon which parcel of land is more particularly described as follows to wit:
"Situated in the barrio of Pinulot, municipality of Dinalupihan, Bataan, containing an area of 16,7249 hectares and bounded as follows to wit: North by property of
Alejandro Benito; on the Northeast, by public land and property of Tomas Tulop on the southeast, by property of Ramindo Agustin; on the southwest, by properties
of Jose V. Reyes and Emilio Reyes; and on the northwest, by excluded portion claimed by Emilio Reyes.
of which parcel of land aforementioned we are together with our said attorney who is our brother, the owners in equal undivided shares as evidenced by Transfer
Certificate of Title No. T-2785 of the Registry of Deeds of Bataan dated Feb. 26th 1951." (Exh. E) 2
In addition, Valeriana Sta. Maria alone also executed in favor of her brother, Maximo, a special power of attorney to borrow money and mortgage any real estate
owned by her, granting him the following authority:
"For me and in my name to borrow money and make, execute, sign and deliver mortgages of real estate now owned by me standing in my name and to make,
execute, sign and deliver any and all promissory notes necessary in the premises."(EXH. E-1) 3
By virtue of the two above powers, Maximo Sta. Maria applied for two separate crop loans, for the 1952-1953 and 1953-1954 crop years, with plaintiff bank, one in
the amount of P15,000.00, of which only the sum of P13,216.11 was actually extended by plaintiff, and the other in the amount of P23,000.00, of which only the
sum of P12,427.57 was actually extended by plaintiff. As security for the two loans, Maximo Sta. Maria executed in his own name in favor of plaintiff bank two
chattel mortgages on the standing crops, guaranteed by surety bonds for the full authorized amounts of the loans executed by the Associated Insurance & Surety
Co., Inc. as surety with Maximo Sta. Maria as principal. The records of the crop loan application further disclose that among the securities given by Maximo for the
loans were a "2nd mortgage on 25,3023 Has. of sugarland, including sugar quota rights therein" including the parcel of land jointly owned by Maximo and his six
brothers and sisters herein for the 1952-1953 crop loan, with the notation that the bank already held a first mortgage on the same properties for the 1951-1952 crop
loan of Maximo 4 and a 3rd mortgage on the same properties for the 1953-1954 crop loan. 5
The trial court rendered judgment in favor of plaintiff and against defendants thus:
"WHEREFORE, premises considered, judgment is hereby rendered condemning the defendant Maximo R. Sta. Maria and his co- defendants Valeriana, Quintin,
Rosario, Emeteria, Teofilo, and Leonila all surnamed Sta. Maria and the Associated Insurance and Surety Company, Inc., jointly and severally, to pay the plaintiff,
the Philippine National Bank, Del Carmen Branch, as follows:
"1.On the first cause of action, the sum of P8,500.72 with a daily interest of P0.83 on P6,100.00 at 6% per annum beginning August 21, 1963, until fully paid;
"2.On the second cause of action, the sum of P14,299.79 with a daily interest of P1.53 on P9,346.44 at 6% per annum, until fully paid; and
"3.On both causes of action the further sum equivalent to 10% of the total amount due as attorney's fee as of the date of execution of this decision, and the costs."
6
Defendant Maximo Sta. Maria and his surety, defendant Associate Insurance & Surety Co., Inc. who did not resist the action, did not appeal the judgment. This
appeal has been taken by his six brothers and sisters, defendants-appellants who reiterate in their brief their main contention in their Answer to the complaint that
under the special power of attorney, Exh. E, they had not given their brother, Maximo, the authority to borrow money but only to mortgage the real estate jointly
owned by them; and that if they are liable at all, their liability should not go beyond the value of the property which they had authorized to be given as security for
the loans obtained by Maximo. In their answer, defendants-appellants had further contended that they did not benefit whatsoever from the loans, and that the
plaintiff bank's only recourse against them is to foreclose on the property which they had authorized Maximo to mortgage
We find the appeal of defendants-appellants, except for defendant Valeriana Sta. Maria who had executed another special power of attorney, Exh. E-l, expressly
authorizing Maximo to borrow money on her behalf, to be well taken.
1.Plaintiff bank has not made out a cause of action against defendants-appellants (except Valeriana), so as to hold them liable for the unpaid balances of the loans
obtained by Maximo under the chattel mortgages executed by him in his own name alone. In the early case of Bank of P. I. vs. de Coster, this Court, in holding that
the broad power of attorney given by the wife to the husband to look after and protect the wife's interests and to transact her business did not authorize him to make
her liable as a surety for the payment of the pre-existing debt of a third person, cited the fundamental construction rule that "where in an instrument powers and
duties are specified and defined, that all of such powers and duties are limited and confined to those which are specified and defined, and that all other powers and
duties are excluded." 7 This is but in accord with the disinclination of courts to enlarge an authority granted beyond the powers expressly given and those which
incidentally flow or derive therefrom as being usual or reasonably necessary and proper for the performance of such express powers. Even before the filing of the
present action this Court in the similar case of De Villa vs. Fabricantes 8 had already ruled that where the power of attorney given to the husband by the wife was
limited to a grant of authority to mortgage a parcel of land titled in the wife's name, the wife may not be held liable for the payment of the mortgage debt contracted
by the husband, as the authority to mortgage does not carry with it the authority to contract obligation. This Court thus held in the said case:
"Appellant claims that the trial court erred in holding that only Cesario A. Fabricante is liable to pay the mortgage debt and not his wife who is exempt from liability.
The trial court said: 'Only the defendant. Cesario A. Fabricante is liable for the payment of this amount because it does not appear that the other defendant Maria G.
de Fabricante had authorized Cesario A. Fabricante to contract the debt also in her name. The power of attorney was not presented and it is to be presumed that
the power (of attorney) was limited to a grant of authority to Cesario A. Fabricante to mortgage the parcel of land covered by Transfer Certificate of Title in the name
of Maria G. de Fabricante.'
"We went over the contents of the deed of mortgage executed by Cesario Fabricante in favor of Appellant on April 18, 1944, and there is really nothing therein from
which we may infer that Cesario was authorized by his wife to contract the obligation in her name. The deed shows that the authority was limited to the execution of
the mortgage insofar as the property of the wife is concerned. There is a difference between authority to mortgage and authority to contract obligation. Since the
power of attorney was not presented as evidence, the trial court was correct in presuming that power was merely limited to a grant of authority to mortgage unless
the contrary is shown. " 9
2.The authority granted by defendants-appellants (except Valeriana) unto their brother, Maximo, was merely to mortgage the property jointly owned by them. They
did not grant Maximo any authority to contract for any loans in their names and behalf. Maximo alone, with Valeriana who authorized him-to borrow money, must
answer for said loans and the other defendants- appellants' only liability is that the real estate authorized by them to be mortgaged would be subject to foreclosure
and sale to respond for the obligations contracted by Maximo. But they cannot be held personally liable for the payment of such obligations, as erroneously held by
the trial court.
3.The fact that Maximo presented to the plaintiff bank Valeriana's additional special power of attorney expressly authorizing him to borrow money, Exh. E-l, aside
from the authority to mortgage executed by Valeriana together with the other defendants-appellants also in Maximo's favor, lends support to our view that the bank
was not satisfied with the authority to mortgage alone. For otherwise, such authority to borrow would have been deemed unnecessary and a surplusage. And
having failed to require that Maximo submit a similar authority to borrow, from the other defendants-appellants, plaintiff, which apparently was satisfied with the
surety bond for repayment put up by Maximo, cannot now seek to hold said defendants- appellants similarly liable for the unpaid loans. Plaintiff's argument that "a
mortgage is simply an accessory contract, and that to effect the mortgage, a loan has to be secured" 10 falls far short of the mark. Maximo had indeed secured the
loan on his own account, and the defendants-appellants had authorized him to mortgage their respective undivided shares of the real property jointly owned by
them as security for the loan. But that was the extent of their authority and consequent liability, to have the real property answer for the loan in case of non-
payment. It is not unusual in family and business circles that one would allow his property or an undivided share in real estate to be mortgaged by another as
security, either as an accommodation or for valuable consideration, but the grant of such authority does not extend to assuming personal liability, much less
solidary liability, for any loan secured by the grantee in the absence of express authority so given by the grantor.
4.The outcome might be different if there had been an express ratification of the loans by defendants-appellants or if it had been shown that they had been
benefited by the crop loans so as to put them in estoppel. but the burden of establishing such ratification or estoppel falls squarely upon plaintiff bank. It has not
only failed to discharge this burden, but the record stands undisputed that defendant-appellant Quintin Sta. Maria testified that he and his co-defendants executed
the authority to mortgage 'Sto accommodate (my) brother Dr. Maximo Sta. Maria . . . and because he is my brother, I signed it to accommodate him as security for
whatever he may apply as loan. Only for that land, we gave hire as security" and that "we brothers did not receive any centavo as benefit." 11 The record further
shows plaintiff bank itself admitted during the trial that defendants-appellants "did not profit from the loan" and that they "did not receive any money (the loan
proceeds) from (Maximo)" 12 No estoppel therefore can be claimed by plaintiff as against defendants — appellants.
5.Now, as to the extent of defendant Valeriana Sta. Maria's liability to plaintiff. As already state above, Valeriana stands liable not merely on the mortgage of her
share in the property, but also for the loans which Maximo had obtained from plaintiff bank, since she had expressly granted Maximo the authority to incur such
loans. (Exh. E-1). Although The question has not been raised in appellants' brief, we hold that Valeriana's liability for the loans secured by Maximo is not joint and
several or solidary as adjudged by the trial court, but only joint, pursuant to the provisions of Article 1207 of the Civil Code that "(T)he concurrence . . . of two or
more debtors in one and the same obligation does not imply that . . . each one of the (debtors) 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." It should be noted that in the
additional special power of attorney, Exh. E-1, executed by Valeriana, she did not grant Maximo the authority to bind her solidarity with him on any loans he might
secure thereunder.
6.Finally, as to the 10% award of attorney's fees, this Court believes that considering the resources of plaintiff bank and the fact that the principal debtor, Maximo
Sta. Maria, had not contested the suit, an award of five (5%) per cent of the balance due on the principal, exclusive of interests, i.e. a balance of P6,100.00 on the
first cause of action and a balance of P9,346.44 on the second cause of action, per the bank's statements of August 20, 1963, (Exhs. Q-1 and BB-I, respectively)
should be sufficient.
WHEREFORE, the judgment of the trial court-against defendants-appellants EMETERIA, TEOFILQ, QUINTIN, ROSARIO and LEONILA, all surnamed STA. MARIA
is hereby reversed and set aside, with costs in both instances against plaintiff. The judgment against defendant-appellant VALERIANA STA. MARIA is modified in
that her liability is held to be joint and not solidary, and the award of attorney's fees is reduced as set forth in the preceding paragraph, without costs in this instance.
FIRST DIVISION
[G.R. No. 72275. November 13, 1991.]
PACIFIC BANKING CORPORATION, petitioner, vs. HON. INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents.
Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private respondent.
SYLLABUS
1.CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; DISTINGUISHED FROM GUARANTY. — A contract of surety as distinguished from a contract of guaranty
where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship,
the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines).
2.ID.; ID.; ID.; LIABILITY OF SURETY; CASE AT BAR. — As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific
Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation." It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind
himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. It is likewise not disputed by the
parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its
effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety
of his wife, expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change or
novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing
one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking' Roberto signed.
Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms and conditions governing the
issuance of the credit card to his wife and that notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and
future debts of the principal debtor the amount of which is not yet known ( Article 2053, Civil Code of the Philippines).
3.ID.; ID.; ID.; ID.; DETERMINED BY THE CLAUSES IN THE CONTRACT OF SURETYSHIP. — A guarantor or surety does not incur liability unless the principal
debtor is held liable. It is in this sense that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that
30
the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the
clauses in the contract of suretyship (PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24).
DECISION
MEDIALDEA, J p:
This is a petition for review on certiorari of the decision (pp. 21-31, Rollo) of the Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No. 02753, 1
which modified the decision of the trial court against herein private respondent Roberto Regala, Jr., one of the defendants in the case for sum of money filed by
Pacific Banking Corporation.
The facts of the case as adopted by the respondent appellate court from herein petitioner's brief before said court are as follows:
"On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala for brevity), applied for and obtained from the plaintiff the issuance
and use of Pacificard credit card (Exhs. 'A', 'A-1'), under the "Terms and Conditions Governing the Issuance and Use of Pacificard (Exh. 'B' and hereinafter referred
to as Terms and Conditions), a copy of which was issued to and received by the said defendant on the date of the application and expressly agreed that the use of
the Pacificard is governed by said Terms and Conditions. On the same date, the defendant-appellant Robert Regala, Jr., spouse of defendant Celia Regala,
executed a 'Guarantor's Undertaking' (Exh. 'A-1-a') in favor of the appellee Bank, whereby the latter agreed 'jointly and severally of Celia Aurora Syjuco Regala, to
pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco Regala
with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking Corporation'. It was also agreed that 'any changes of or novation in the
terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any
manner release me/us from responsibility hereunder, it being understood that I fully agree to such charges, novation or extension, and that this understanding is a
continuing one and shall subsist and bind me until the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid.'
"Plaintiff-appellee Pacific Banking Corporation has contracted with accredited business establishments to honor purchases of goods and or services by Pacificard
holders and the cost thereof to be advanced by the plaintiff-appellee for the account of the defendant cardholder, and the latter undertook to pay any statements of
account rendered by the plaintiff-appellee for the advances thus made within thirty (30) days from the date of the statement, provided that any overdue account
shall earn interest at the rate of 14% per annum from date of default.
"The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit (Exh. 'C', 'C-1' to 'C-112') under her Pacificard, for which
the plaintiff advanced the cost amounting to P92,803.98 at the time of the filing of the complaint.
'In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use of the Pacificard, a written demand (Exh. 'D') was sent to the
latter and also to the defendant Roberto Regala, Jr. ('Exh.' ') under his 'Guarantor's Undertaking.'
"A complaint was subsequently filed in Court for defendant's (sic) repeated failure to settle their obligation. Defendant Celia Regala was declared in default for her
failure to file her answer within the reglementary period. Defendant-appellant Roberto Regala, Jr., on the other hand, filed his Answer with Counterclaim admitting
his execution of the 'Guarantor's Understanding, but with the understanding that his liability would be limited to P2,000.00 per month.'
"In view of the solidary nature of the liability of the parties, the presentation of evidence ex-parte as against the defendant Celia Regala was jointly held with the trial
of the case as against the defendant Roberto Regala.
"After the presentation of plaintiff's testimonial and documentary evidence, fire struck the City Hall of Manila, including the court where the instant case was
pending, as well as all its records.
"Upon plaintiff-appellee's petition for reconstitution, the records of the instant case were duly reconstituted. Thereafter, the case was set for pre-trial conference with
respect to the defendant-appellant Roberto Regala on plaintiff-appellee's motion, after furnishing the latter a copy of the same. No opposition thereto having been
interposed by defendant-appellant, the trial court set the case for pre-trial conference. Neither did said defendant-appellant nor his counsel appear on the date
scheduled by the trial court for said conference despite due notice. Consequently, plaintiff-appellee moved that the defendant-appellant Roberto Regala be
declared as in default and that it be allowed to present its evidence ex-parte, which motion was granted. On July 21, 1983, plaintiff-appellee presented its evidence
ex-parte. (pp. 23-26, Rollo).
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of which reads:
"WHEREFORE, the Court renders judgment for the plaintiff and against the defendants condemning the latter, jointly and severally, to pay said plaintiff the amount
of P92,803.98, with interest thereon at 14% per annum, compounded annually, from the time of demand on November 17, 1978 until said principal amount is fully
paid; plus 15% of the principal obligation as and for attorney's fees and expense of suit, and the costs.
"The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of merit.
"SO ORDERED." (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered judgment modifying the decision of the trial court. Private respondent Roberto Regala, Jr. was made
liable only to the extent of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the advances made during the one year period of
the card's effectivity counted from October 29, 1975 up to October 29, 1976. The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated December 5, 1983 is modified only as to appellant Roberto Regala, Jr., so as to make him liable only for the
purchases made by defendant Celia Aurora Syjuco Regala with the use of the Pacificard from October 29, 1975 up to October 29, 1976 up to the amount of
P2,000.00 per month only, with interest from the filing of the complaint up to the payment at the rate of 14% per annum without pronouncement as to costs." (p. 32,
Rollo). Cdpr
A motion for reconsideration was filed by Pacific Banking Corporation which the respondent appellate court denied for lack of merit on September 19, 1985 (p. 33,
Rollo).
On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the appellate court correctly recognized Celia Regala's obligation to Pacific
Banking Corp. for the purchases of goods and services with the use of a Pacificard credit card in the total amount of P92,803.98 with 14% interest per annum, it
erred in limiting private respondent Roberto Regala, Jr.'s liability only for purchases made by Celia Regala with the use of the card from October 29, 1975 up to
October 29, 1976 up to the amount of P2,000.00 per month with 14% interest from the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking' which private respondent Roberto Regala, Jr. signed in favor of Pacific Banking Corporation provides:
"I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco Regala to pay the Pacific Banking Corporation upon demand any and all
indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of the Pacificard or renewals thereof issued in his favor
by the Pacific Banking Corporation. Any changes of or Novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any
extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the
undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid." ( p. 12,
Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in substance a contract of surety. As distinguished from a
contract of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a
contract of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines).
We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation." This undertaking was also
provided as a condition in the issuance of the Pacificard to Celia Regala, thus:
"5.A Pacificard is issued to a Pacificard-holder against the joint and several signature of a third party and as such, the Pacificard holder and the guarantor assume
joint and several liabilities for any and all amount arising out of the use of the Pacificard." (p 14, Rollo).
The respondent appellate court held that "all the other rights of the guarantor are not thereby lost by the guarantor becoming liable solidarily and therefore a surety."
It further ruled that although the surety's liability is like that of a joint and several debtor, it does not make him the debtor but still the guarantor (or the surety),
relying on the case of Government of the Philippines v. Tizon, G.R. No. L-22108, August 30, 1967, 20 SCRA 1182. Consequently, Article 2054 of the Civil Code
providing for a limited liability on the part of the guarantor or debtor still applies. LexLib
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount
and the onerous nature of the conditions. 2 It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that
Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should
be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor's (Celia) indebtedness
likewise expressly waiving any "discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit
card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these
were clear under the "Guarantor's Undertaking' Roberto signed, thus:
" . . . . Any changes of or novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing
one and shall subsist and bind me/us until all the liabilities of of the said Celia Syjuco Regala have been fully satisfied or paid." (p. 12, supra; emphasis supplied).
Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms and conditions governing the
issuance of the credit card to his wife and that notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and
future debts of the principal debtor the amount of which is not yet known (see Article 2053, supra).
The application by respondent court of the ruling in Government v. Tizon, supra is misplaced. It was held in that case that:
" . . . , although the defendants bound themselves in solidum, the liability of the Surety under its bond would arise only if its co-defendants, the principal obligor,
should fail to comply with the contract. To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is 'consequent upon the
liability' of Tizon, or 'so dependent on that of the principal debtor' that the Surety 'is considered in law as being the same party as the debtor in relation to whatever
is adjudged, touching the obligation of the latter'; or the liabilities of the two defendants herein 'are so interwoven and dependent as to be inseparable.' Changing
the expression, if the defendants are held liable, their liability to pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that it does not
incur liability unless and until the principal debtor is held liable."
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although solidarily liable with the principal
debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The nature and
extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship (see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA
24). prcd
ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate court is SET ASIDE and the decision of the trial court is
REINSTATED.
SO ORDERED.
[G.R. No. L-55138. September 28, 1984.]
ERNESTO V. RONQUILLO, petitioner, vs. HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents.
Gloria A. Fortun for petitioner.
Roselino Reyes Isler for respondents.
SYLLABUS
1.REMEDIAL LAW; CIVIL PROCEDURE; SPECIAL CIVIL ACTION; MOTION FOR RECONSIDERATION; PROPRIETY OF FILING OF PETITION FOR
CERTIORARI DURING PENDENCY OF MOTION FOR RECONSIDERATION. — Anent the first issue raised, suffice it to state that while as a general rule, a
motion for reconsideration should precede recourse to certiorari in order to give the trial court an opportunity to correct the error that it may have committed, the
said rule is not absolute, (Vda. de Sayman vs. Court of Appeals, 1-21 SCRA 650) and may be dispensed with in instances where filing of a motion for
reconsideration would serve no useful purpose, such as when the motion for reconsideration would raise the same point stated in the motion, (Fortich-Celdran, et al
vs. Celdran, et al, 19 SCRA. 502) or where the error is patent for the order is void, (Iligan Electric Light Co. vs. Public Service Commission, 10 SCRA 46; Matute vs.
Court of Appeals, 26 SCRA 768; Locsin vs. Limaco, 26 SCRA 816) or where the relief is extremely urgent, as in cases where execution had already been ordered,
(Suco vs. Vda. de Leary, 12 SCRA 326) where the issue raised is one purely of law (Central Bank of the Philippines vs. Cloribel, 44 SCRA 307) In the case at bar,
31
the records show that not only was a writ of execution issued but petitioner's properties were already scheduled to be sold at public auction on April 2, 1980 at
10:00 a.m. The records likewise show that petitioner's motion for reconsideration of the questioned Order of Execution was filed on March 17, 1980 and was set for
hearing on March 25, 1980 at 8:30 a.m., but upon motion of private respondent the hearing was reset to April 2, 1980 at 8:30 a.m., the very same day when
petitioner's properties were to be sold at public auction. Needless to state that under the circumstances, petitioner was faced with imminent danger of his properties
being immediately sold the moment his motion for reconsideration is denied. Plainly, urgency prompted recourse to the Court of Appeals and the adequate and
speedy remedy for petitioner under the situation was to file a petition for certiorari with prayer for restraining order to stop the sale. For him to wait until after the
hearing of the motion for reconsideration on April 2, 1980 before taking recourse to the appellate court may already be too late since without a restraining order, the
public sale can proceed at 10:00 that morning.
2.CIVIL LAW; OBLIGATIONS AND CONTRACT; NATURE OF LIABILITY; MEANING OF INDIVIDUALLY AND JOINTLY." — Clearly then, by the express term of
the compromise agreement and the decision based upon it, the defendants obligated themselves to pay their obligation "individually and jointly." The term
"individually" has the same meaning as collectively, " "separately," "distinctively," respectively or "severally." An agreement to be "individually liable" undoubtedly
creates a several obligation, (21 Words & Phrases,. Permanent Ed., p. 194) and a "several obligation" is one by which one individual binds himself to perform the
whole obligation (39 Words & Phrases, Permanent Ed., p. 72). In the case of Parot vs. Gemora, (7 Phil. 94, 97), We therein., ruled that "the phrase juntos or
separadamente used in the promissory note is an express statement making each of the persons who signed it individually liable for the payment of the full amount
of the obligation contained therein." Likewise in Un Pak Leung vs. Negorra, (9 Phil. 381), We held that "in the absence of a finding of facts that the defendants made
themselves individually liable for the debt incurred they are each liable only for one-half of said amount". The obligation in the case at bar being described as
"individually and jointly", the same is therefore enforceable against one of the numerous obligors.
DECISION
CUEVAS, J p:
This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals (now the Intermediate Appellate Court) in CA-G.R. No. SP-10573,
entitled "Ernesto V. Ronquillo versus the Hon. Florellana Castro-Bartolome, etc." and the Order of said court dated August 20, 1980, denying petitioner's motion for
reconsideration of the above resolution.
Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the then Court of First Instance of Rizal (now the Regional Trial Court),
Branch XV filed by private respondent Antonio P. So, on July 23, 1979, for the collection of the sum of P117,498.98 plus attorney's fees and costs. The other
defendants were Offshore Catertrade, Inc., Johnny Tan and Pilar Tan. The amount of P117,498.98 sought to be collected represents the value of the checks issued
by said defendants in payment for foodstuffs delivered to and received by them. The said checks were dishonored by the drawee bank.
On December 13, 1979, the lower court rendered its Decision 1 based on the compromise agreement submitted by the parties, the pertinent portion of which reads
as follows:
"1.Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants agree to acknowledge the validity of such claim and further bind
themselves to initially pay out of the total indebtedness of P110,000.00 the amount of P55,000.00 on or before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of six months from January 1980, or before June 30, 1980; (Emphasis supplied)
xxx xxx xxx
4.That both parties agree that failure on the part of either party to comply with the foregoing terms and conditions, the innocent party will be entitled to an execution
of the decision based on this compromise agreement and the defaulting party agrees and hold themselves to reimburse the innocent party for attorney's fees,
execution fees and other fees related with the execution.
xxx xxx xxx"
On December 26, 1979, herein private respondent (then plaintiff) filed a Motion for Execution on the ground that defendants failed to make the initial payment of
P55,000.00 on or before December 24, 1979 as provided in the Decision. Said motion for execution was opposed by herein petitioner (as one of the defendants)
contending that his inability to make the payment was due to private respondent's own act of making himself scarce and inaccessible on December 24, 1979.
Petitioner then prayed that private respondent be ordered to accept his payment in the amount of P13,750.00. 2
During the hearing of the Motion for Execution and the Opposition thereto on January 16, 1980, petitioner, as one of the four defendants, tendered the amount of
P13,750.00, as his pro rata share in the P55,000.00 initial payment. Another defendant, Pilar P. Tan, offered to pay the same amount. Because private respondent
refused to accept their payments, demanding from them the full initial installment of P55,000.00, petitioner and Pilar Tan instead deposited the said amount with the
Clerk of Court. The amount deposited was subsequently withdrawn by private respondent. 3
On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution for the balance of the initial amount payable, against the other two
defendants, Offshore Catertrade, Inc. and Johnny Tan, 4 who did not pay their shares.
On January 22, 1980, private respondent moved for the reconsideration and/or modification of the aforesaid Order of execution and prayed instead for the
"execution of the decision in its entirety against all defendants, jointly and severally." 5 Petitioner opposed the said motion arguing that under the decision of the
lower court being executed which has already become final, the liability of the four (4) defendants was not expressly declared to be solidary, consequently each
defendant is obliged to pay only his own pro-rata or 1/4 of the amount due and payable.
On March 17, 1980, the lower court issued an Order reading as follows:
"O R D E R
Regardless of whatever the compromise agreement has intended the payment whether jointly or individually, or jointly and severally, the fact is that only
P27,500.00 has been paid. There appears to be a non-payment in accordance with the compromise agreement of the amount of P27,500.00 on or before
December 24, 1979. The parties are reminded that the payment is condition sine qua non to the lifting of the preliminary attachment and the execution of an
affidavit of desistance.
WHEREFORE, let writ of execution issue as prayed for."
On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same was set for hearing on March 25, 1980.
Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the satisfaction of the sum of P82,500.00 as against the properties of the
defendants (including petitioner), "singly or jointly liable." 6
On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's sale, for the sale of certain furnitures and appliances found in
petitioner's residence to satisfy the sum of P82,500.00. The public sale was scheduled for April 2, 1980 at 10:00 a.m. 7
Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which was set for hearing on March 25, 1980, was upon motion of private
respondent reset to April 2, 1980 at 8:30 a.m. Realizing the actual threat to his property rights poised by the re-setting of the hearing of his motion for
reconsideration for April 2, 1980 at 8:30 a.m. such that if his motion for reconsideration would be denied he would have no more time to obtain a writ from the
appellate court to stop the scheduled public sale of his personal properties at 10:00 a.m. of the same day, April 2, 1980, petitioner filed on March 26, 1980 a petition
for certiorari and prohibition with the then Court of Appeals (CA-G.R. No. SP-10573), praying at the same time for the issuance of a restraining order to stop the
public sale. He raised the question of the validity of the order of execution, the writ of execution and the notice of public sale of his properties to satisfy fully the
entire unpaid obligation payable by all of the four (4) defendants, when the lower court's decision based on the compromise agreement did not specifically state the
liability of the four (4) defendants to be solidary.
On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the scheduled public sale in that same day did not proceed in view of the
pendency of a certiorari proceeding before the then Court of Appeals.
On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as follows:
"This Court, however, finds the present petition to have been filed prematurely. The rule is that before a petition for certiorari can be brought against an order of a
lower court, all remedies available in that court must first be exhausted. In the case at bar, herein petitioner filed a petition without waiting for a resolution of the
Court on the motion for reconsideration, which could have been favorable to the petitioner. The fact that the hearing of the motion for reconsideration had been
reset on the same day the public sale was to take place is of no moment since the motion for reconsideration of the Order of March 17, 1980 having been
seasonably filed, the scheduled public sale should be suspended. Moreover, when the defendants, including herein petitioner, defaulted in their obligation based on
the compromise agreement, private respondent had become entitled to move for an execution of the decision based on the said agreement.
WHEREFORE, the instant petition for certiorari and prohibition with preliminary injunction is hereby denied due course. The restraining order issued in our
resolution dated April 9, 1980 is hereby lifted without pronouncement as to costs.
SO ORDERED."
Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the lower court had already denied the motion referred to and consequently,
the legal issues being raised in the petition were already "ripe" for determination. 8 The said motion was however denied by the Court of Appeals in its Resolution
dated August 20, 1980.
Hence, this petition for review, petitioner contending that the Court of Appeals erred in —
(a)declaring as premature, and in denying due course to the petition to restrain implementation of a writ of execution issued at variance with the final decision of the
lower court filed barely four (4) days before the scheduled public sale of the attached movable properties;
(b)denying reconsideration of the Resolution of June 30, 1980, which declared as premature the filing of the petition, although there is proof on record that as of
April 2, 1980, the motion referred to was already denied by the lower court and there was no more motion pending therein;
(c)failing to resolve the legal issues raised in the petition and in not declaring the liabilities of the defendants, under the final decision of the lower court, to be only
joint;
(d)not holding the lower court's order of execution dated March 17, 1980, the writ of execution and the notice of sheriff's sale, executing the lower court's decision
against "all defendants, singly and jointly", to be at variance with the lower court's final decision which did not provide for solidary obligation; and
(e)not declaring as invalid and unlawful the threatened execution, as against the properties of petitioner who had paid his pro-rata share of the adjudged obligation,
of the total unpaid amount payable by his joint co-defendants.
The foregoing assigned errors maybe synthesized into the more important issues of —
1.Was the filing of a petition for certiorari before the then Court of Appeals against the Order of Execution issued by the lower court, dated March 17, 1980, proper,
despite the pendency of a motion for reconsideration of the same questioned Order?
2.What is the nature of the liability of the defendants (including petitioner), was it merely joint, or was it several or solidary?
Anent the first issue raised, suffice it to state that while as a general rule, a motion for reconsideration should precede recourse to certiorari in order to give the trial
court an opportunity to correct the error that it may have committed, the said rule is not absolute 9 and may be dispensed with in instances where the filing of a
motion for reconsideration would serve no useful purpose, such as when the motion for reconsideration would raise the same point stated in the motion 10 or where
the error is patent for the order is void 11 or where the relief is extremely urgent, as in cases where execution had already been ordered 12 where the issue raised
is one purely of law. 13
In the case at bar, the records show that not only was a writ of execution issued but petitioner's properties were already scheduled to be sold at public auction on
April 2, 1980 at 10:00 a.m. The records likewise show that petitioner's motion for reconsideration of the questioned Order of Execution was filed on March 17, 1980
and was set for hearing on March 25, 1980 at 8:30 a.m., but upon motion of private respondent, the hearing was reset to April 2, 1980 at 8:30 a.m., the very same
day when petitioner's properties were to be sold at public auction. Needless to state that under the circumstances, petitioner was faced with imminent danger of his
properties being immediately sold the moment his motion for reconsideration is denied. Plainly, urgency prompted recourse to the Court of Appeals and the
adequate and speedy remedy for petitioner under the situation was to file a petition for certiorari with prayer for restraining order to stop the sale. For him to wait
until after the hearing of the motion for reconsideration on April 2, 1980 before taking recourse to the appellate court may already be too late since without a
restraining order, the public sale can proceed at 10:00 that morning. In fact, the said motion was already denied by the lower court in its order dated April 2, 1980
and were it not for the pendency of the petition with the Court of Appeals and the restraining order issued thereafter, the public sale scheduled that very same
morning could have proceeded.
The other issue raised refers to the nature of the liability of petitioner, as one of the defendants in Civil Case No. 33958, that is whether or not he is liable jointly or
solidarily. prLL
In this regard, Article 1207 and 1208 of the Civil Code provides —
32
"Art. 1207.The concurrence 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.
Art. 1208.If from the law, or the nature or the wording of the obligation to which the preceding article refers the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors and debtors, the credits or debts being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits."
The decision of the lower court based on the parties' compromise agreement, provides:
"1.Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants agree to acknowledge the validity of such claim and further bind
themselves to initially pay out of the total indebtedness of P110,000.00, the amount of P55,000.00 on or before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of six months from January 1980 or before June 30, 1980." (Emphasis supplied)
Clearly then, by the express term of the compromise agreement and the decision based upon it, the defendants obligated themselves to pay their obligation
"individually and jointly"
The term "individually" has the same meaning as "collectively", "separately", "distinctively", respectively or "severally". An agreement to be "individually liable"
undoubtedly creates a several obligation, 14 and a "several obligation" is one by which one individual binds himself to perform the whole obligation. 15
In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or separadamente used in the promissory note is an express statement making each of
the persons who signed it individually liable for the payment of the full amount of the obligation contained therein." Likewise in Un Pak Leung vs. Negorra 17 We
held that "in the absence of a finding of facts that the defendants made themselves individually liable for the debt incurred they are each liable only for one-half of
said amount."
The obligation in the case at bar being described as "individually and jointly", the same is therefore enforceable against one of the numerous obligors.
IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby DISMISSED. Cost against petitioner.
SO ORDERED.
[G.R. No. 93010. August 30, 1990.]
NICENCIO TAN QUIOMBING, petitioner, vs. COURT OF APPEALS, and Sps. FRANCISCO and MANUELITA A. SALIGO, respondents.
M.B. Tomacruz Law Office for petitioner.
Jose J. Francisco for private respondents.
DECISION
CRUZ, J p:
May one of the two solidary creditors sue by himself alone for the recovery of amounts due to both of them without joining the other creditor as a co-plaintiff? In
such a case, is the defendant entitled to the dismissal of the complaint on the ground of non-joinder of the second creditor as an indispensable party? More to the
point, is the second solidary creditor an indispensable party?
These questions were raised in the case at bar, with both the trial and respondent courts ruling in favor of the defendants. The petitioner is now before us, claiming
that the said courts committed reversible error and misread the applicable laws in dismissing his complaint.
This case stemmed from a "Construction and Service Agreement" 1 concluded on August 30, 1983, whereby Nicencio Tan Quiombing and Dante Biscocho, as the
First Party, jointly and severally bound themselves to construct a house for private respondents Francisco and Manuelita Saligo, as the Second Party, for the
contract price of P137,940.00, which the latter agreed to pay.
On October 10, 1984, Quiombing and Manuelita Saligo entered into a second written agreement 2 under which the latter acknowledged the completion of the
house and undertook to pay the balance of the contract price in the manner prescribed in the said second agreement.
On November 19, 1984, Manuelita Saligo signed a promissory note for P125,363.50 representing the amount still due from her and her husband, payable on or
before December 31, 1984, to Nicencio Tan Quiombing. 3
On October 9, 1986, Quiombing filed a complaint for recovery of the said amount, plus charges and interests, which the private respondents had acknowledged and
promised to pay — but had not, despite repeated demands — as the balance of the contract price for the construction of their house. 4
Instead of filing an answer, the defendants moved to dismiss the complaint on February 4, 1987, contending that Biscocho was an indispensable party and
therefore should have been included as a co-plaintiff. The motion was initially denied but was subsequently reconsidered and granted by the trial court. The
complaint was dismissed, but without prejudice to the filing of an amended complaint to include the other solidary creditor as a co-plaintiff. 5
Rather than file the amended complaint, Quiombing chose to appeal the order of dismissal to the respondent court, where he argued that as a solidary creditor he
could act by himself alone in the enforcement of his claim against the private respondents. Moreover, the amounts due were payable only to him under the second
agreement, where Biscocho was not mentioned at all. LexLib
The respondent court sustained the trial court and held that it was not correct at that point to assume that Quiombing and Biscocho were solidary obligees only. It
noted that as they had also assumed the reciprocal obligation of constructing the house, they should also be considered obligors of the private respondents under
the contract. If, as was possible, the answer should allege a breach of the agreement, "the trial court cannot decide the dispute without the involvement of Biscocho
whose rights will necessarily be affected since he is a part of the First Party."
Refuting the petitioner's second contention, the respondent court declared that the "second agreement referred to the Construction and Service Agreement as its
basis and specifically stated that it (was) merely a `part of the original agreement.'" 6
The concept of the solidary obligation requires a brief restatement.
Distinguishing it from the joint obligation, Tolentino makes the following observations in his distinguished work on the Civil Code:
A joint obligation is one in which each of the debtors is liable only for a proportionate part of the debt, and each creditor is entitled only to a proportionate part of the
credit. A solidary obligation is one in which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation. Hence, in the
former, each creditor can recover only his share of the obligation, and each debtor can be made to pay only his part; whereas, in the latter, each creditor may
enforce the entire obligation, and each debtor may be obliged to pay it in full. 7
The same work describes the concept of active solidarity thus:
The essence of active solidarity consists in the authority of each creditor to claim and enforce the rights of all, with the resulting obligation of paying every one what
belongs to him; there is no merger, much less a renunciation of rights, but only mutual representation. 8
It would follow from these observations that the question of who should sue the private respondents was a personal issue between Quiombing and Biscocho in
which the spouses Saligo had no right to interfere. It did not matter who as between them filed the complaint because the private respondents were liable to either
of the two as a solidary creditor for the full amount of the debt. Full satisfaction of a judgment obtained against them by Quiombing would discharge their obligation
to Biscocho, and vice versa; hence, it was not necessary for both Quiombing and Biscocho to file the complaint. Inclusion of Biscocho as a co-plaintiff, when
Quiombing was competent to sue by himself alone, would be a useless formality. LibLex
Article 1212 of the Civil Code provides:
Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudice to the latter.
Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by himself alone.
Parenthetically, it must be observed that the complaint having been filed by the petitioner, whatever amount is awarded against the debtor must be paid exclusively
to him, pursuant to Article 1214. This provision states that "the debtor may pay any of the solidary creditors; but if any demand, judicial or extrajudicial, has been
made by any one of them, payment should be made to him."
If Quiombing eventually collects the amount due from the solidary debtors, Biscocho may later claim his share thereof, but that decision is for him alone to make. It
will affect only the petitioner as the other solidary creditor and not the private respondents, who have absolutely nothing to do with this matter. As far as they are
concerned, payment of the judgment debt to the complainant will be considered payment to the other solidary creditor even if the latter was not a party to the suit.
Regarding the possibility that the private respondents might plead breach of contract in their answer, we agree with the petitioner that it is premature to consider
this conjecture — for such it is — at this stage. The possibility may seem remote, indeed, since they have actually acknowledged the completion of the house in the
second agreement, where they also agreed to pay the balance of the contract price. At any rate, the allegation, if made and proved, could still be enforceable
against the petitioner alone as one of the solidary debtors, subject to his right of recourse against Biscocho.
The respondent court was correct in ruling that the second agreement, which was concluded alone by the petitioner with the private respondents, was based on the
original Construction and Service Agreement. So too in fact was the promissory note later signed by Manuelita Saligo since it was for the amount owing on the
construction cost. However, this matter is not really that important now in view of our conclusion that the complaint could have been filed alone by the petitioner.
The rest of the pieces should easily fall into place.
Section 7, Rule 3 of the Rules of Court mandates the inclusion of indispensable parties as follows:
Sec. 7.Compulsory joinder of indispensable parties. — Parties in interest without whom no final determination can be had of an action shall be joined either as
plaintiffs or defendants.
Indispensable parties are those with such an interest in the controversy that a final decree would necessarily affect their rights, so that the court cannot proceed
without their presence. Necessary parties are those whose presence is necessary to adjudicate the whole controversy, but whose interests are so far separable that
a final decree can be made in their absence without affecting them. 9 (Necessary parties are now called proper parties under the 1964 amendments of the Rules of
Court.) 10
According to Justice Jose Y. Feria, "where the obligation of the parties is solidary, either one of the parties is indispensable, and the other is not even necessary
(now proper) because complete relief may be obtained from either." 11
We hold that, although he signed the original Construction and Service Agreement, Biscocho need not be included as a co-plaintiff in the complaint filed by the
petitioner against the private respondents. Quiombing as solidary creditor can by himself alone enforce payment of the construction costs by the private
respondents and as a solidary debtor may by himself alone be held liable for any possible breach of contract that may be proved by the private respondents. In
either case, the participation of Biscocho is not at all necessary, much less indispensable.
WHEREFORE, the petition is GRANTED. The decision of the respondent court dated March 27, 1990, is SET ASIDE, and the Regional Trial Court of Antipolo,
Rizal, is directed to REINSTATE Civil Case No. 913-A. Costs against the private respondents.
SO ORDERED.
[G.R. No. 96405. June 26, 1996.]
BALDOMERO INCIONG, JR., petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
Emilio G. Abrogena for petitioner.
Teogenes X. Velez for private respondent.
SYLLABUS
1.REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; DOES NOT SPECIFY THAT THE WRITTEN AGREEMENT BE A PUBLIC INSTRUMENT. — 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" [FRANCISCO, THE RULES OF COURT OF THE PHILIPPINES, Vol. VII, Part I, 1990 ed., p. 179] Thus, for the
33
parol evidence rule to apply, a written contract need not be in any particular form, or be signed by both parties. As a general rule, bills, notes and other instruments
of a similar nature are not subject to be varied or contracted by parol or extrinsic evidence.
2.CIVIL LAW; OBLIGATIONS; SOLIDARY OR JOINT AND SEVERAL OBLIGATION, DEFINED. — 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. [TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV,
1991 ed., p. 217] 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 the 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.
[Sesbreño v. Court of Appeals, G.R. No. 89252, May 24, 1993, 222 SCRA 466, 481.]
3.ID.; GUARANTY; GUARANTOR AS DISTINGUISHED FROM SOLIDARY DEBTOR. — 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." [TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. V, 1992 ed., p. 502]
DECISION
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 P5,000.00.
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 "P50,000-" 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 motion 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, at 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 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." 11 Thus, for the 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. 16 Petitioner'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 later, 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 fianza;
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.
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