Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-29900 June 28, 1974
IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased, GEORGE PAY, petitioner-appellant, vs. SEGUNDINA CHUA VDA. DE
PALANCA, oppositor-appellee. Florentino B. del Rosario for petitioner-appellant. Manuel V. San Jose for oppositor-appellee.

FERNANDO, J.:p

There is no difficulty attending the disposition of this appeal by petitioner on questions of law. While several points were raised, the decisive issue is
whether a creditor is barred by prescription in his attempt to collect on a promissory note executed more than fifteen years earlier with the debtor
sued promising to pay either upon receipt by him of his share from a certain estate or upon demand, the basis for the action being the latter
alternative. The lower court held that the ten-year period of limitation of actions did apply, the note being immediately due and demandable, the
creditor admitting expressly that he was relying on the wording "upon demand." On the above facts as found, and with the law being as it is, it
cannot be said that its decision is infected with error. We affirm.

From the appealed decision, the following appears: "The parties in this case agreed to submit the matter for resolution on the basis of their
pleadings and annexes and their respective memoranda submitted. Petitioner George Pay is a creditor of the Late Justo Palanca who died in Manila
on July 3, 1963. The claim of the petitioner is based on a promissory note dated January 30, 1952, whereby the late Justo Palanca and Rosa
Gonzales Vda. de Carlos Palanca promised to pay George Pay the amount of P26,900.00, with interest thereon at the rate of 12% per annum.
George Pay is now before this Court, asking that Segundina Chua vda. de Palanca, surviving spouse of the late Justo Palanca, he appointed as
administratrix of a certain piece of property which is a residential dwelling located at 2656 Taft Avenue, Manila, covered by Tax Declaration No. 3114
in the name of Justo Palanca, assessed at P41,800.00. The idea is that once said property is brought under administration, George Pay, as creditor,
can file his claim against the administratrix."1 It then stated that the petition could not prosper as there was a refusal on the part of Segundina Chua
Vda. de Palanca to be appointed as administratrix; that the property sought to be administered no longer belonged to the debtor, the late Justo
Palanca; and that the rights of petitioner-creditor had already prescribed. The promissory note, dated January 30, 1962, is worded thus: " `For value
received from time to time since 1947, we [jointly and severally promise to] pay to Mr. [George Pay] at his office at the China Banking Corporation
the sum of [Twenty Six Thousand Nine Hundred Pesos] (P26,900.00), with interest thereon at the rate of 12% per annum upon receipt by either of
the undersigned of cash payment from the Estate of the late Don Carlos Palanca or upon demand'. . . . As stated, this promissory note is signed by
Rosa Gonzales Vda. de Carlos Palanca and Justo Palanca." 2 Then came this paragraph: "The Court has inquired whether any cash payment has been
received by either of the signers of this promissory note from the Estate of the late Carlos Palanca. Petitioner informed that he does not insist on
this provision but that petitioner is only claiming on his right under the promissory note ." 3 After which, came the ruling that the wording of the
promissory note being "upon demand," the obligation was immediately due. Since it was dated January 30, 1952, it was clear that more "than ten
(10) years has already transpired from that time until to date. The action, therefore, of the creditor has definitely prescribed." 4 The result, as above
noted, was the dismissal of the petition.

In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner did assail the correctness of the rulings of the lower court as to the
effect of the refusal of the surviving spouse of the late Justo Palanca to be appointed as administratrix, as to the property sought to be administered
no longer belonging to the debtor, the late Justo Palanca, and as to the rights of petitioner-creditor having already prescribed. As noted at the
outset, only the question of prescription need detain us in the disposition of this appeal. Likewise, as intimated, the decision must be affirmed,
considering the clear tenor of the promissory note.

From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that the satisfaction of his credit could
he realized either through the debtor sued receiving cash payment from the estate of the late Carlos Palanca presumptively as one of the heirs, or,
as expressed therein, "upon demand." There is nothing in the record that would indicate whether or not the first alternative was fulfilled. What is
undeniable is that on August 26, 1967, more than fifteen years after the execution of the promissory note on January 30, 1952, this petition was
filed. The defense interposed was prescription. Its merit is rather obvious. Article 1179 of the Civil Code provides: "Every obligation whose
performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once." This used to
be Article 1113 of the Spanish Civil Code of 1889. As far back as Floriano v. Delgado,5 a 1908 decision, it has been applied according to its express
language. The well-known Spanish commentator, Manresa, on this point, states: "Dejando con acierto, el caracter mas teorico y grafico del acto, o
sea la perfeccion de este, se fija, para determinar el concepto de la obligacion pura, en el distinctive de esta, y que es consecuencia de aquel:
la exigibilidad immediata."6

The obligation being due and demandable, it would appear that the filing of the suit after fifteen years was much too late. For again, according to
the Civil Code, which is based on Section 43 of Act No. 190, the prescriptive period for a written contract is that of ten years. 7 This is another
instance where this Court has consistently adhered to the express language of the applicable norm. 8 There is no necessity therefore of passing upon
the other legal questions as to whether or not it did suffice for the petition to fail just because the surviving spouse refuses to be made
administratrix, or just because the estate was left with no other property. The decision of the lower court cannot be overturned.

WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against George Pay.

Zaldivar (Chairman), Barredo, Antonio, Fernandez and Aquino, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC
G.R. No. 967 May 19, 1903
DARIO AND GAUDENCIO ELEIZEGUI, plaintiffs-appellees, vs. THE MANILA LAWN TENNIS CLUB, defendant-appellant. Pillsburry and
Sutro for appellant. Manuel Torres Vergara for appellee. ARELLANO, C. J.:

This suit concerns the lease of a piece of land for a fixed consideration and to endure at the will of the lessee. By the contract of lease
the lessee is expressly authorized to make improvements upon the land, by erecting buildings of both permanent and temporary
character, by making fills, laying pipes, and making such other improvements as might be considered desirable for the comfort and
amusement of the members.

With respect to the term of the lease the present question has arisen. In its decision three theories have been presented: One which
makes the duration depend upon the will of the lessor, who, upon one month's notice given to the lessee, may terminate the lease
so stipulated; another which, on the contrary, makes it dependent upon the will of the lessee, as stipulated; and the third, in
accordance with which the right is reversed to the courts to fix the duration of the term.

The first theory is that which has prevailed in the judgment below, as appears from the language in which the basis of the decision is
expressed: "The court is of the opinion that the contract of lease was terminated by the notice given by the plaintiff on August 28 of
last year . . . ." And such is the theory maintained by the plaintiffs, which expressly rests upon article 1581 of the Civil Code, the law
which was in force at the time the contract was entered into (January 25, 1890). The judge, in giving to this notice the effect of
terminating the lease, undoubtedly considers that it is governed by the article relied upon by the plaintiffs, which is of the following
tenor: "When the term has not been fixed for the lease, it is understood to be for years when an annual rental has been fixed, for
months when the rent is monthly. . . ." The second clause of the contract provides as follows: "The rent of the said land is fixed at 25
pesos per month." (P. 11, Bill of Exceptions.)

In accordance with such a theory, the plaintiffs might have terminated the lease the month following the making of the contract — at
any time after the first month, which, strictly speaking, would be the only month with respect to which they were expressly bound,
they not being bound for each successive month except by a tacit renewal (art. 1566) — an effect which they might prevent by giving
the required notice.

Although the relief asked for in the complaint, drawn in accordance with the new form of procedure established by the prevailing
Code, is the restitution of the land to the plaintiffs (a formula common to various actions), nevertheless the action which is
maintained can be no other than that of desahucio, in accordance with the substantive law governing the contract. The lessor — says
article 1569 of the Civil Code — may judicially dispossess the lessee upon the expiration of the conventional term or of the legal
term; the conventional term — that is, the one agreed upon by the parties; the legal term, in defect of the conventional, fixed for
leases by articles 1577 and 1581. We have already seen what this legal term is with respect to urban properties, in accordance with
article 1581.

Hence, it follows that the judge has only to determine whether there is or is not conventional term. If there be a conventional term,
he can not apply the legal term fixed in subsidium to cover a case in which the parties have made no agreement whatsoever with
respect to the duration of the lease. In this case the law interprets the presumptive intention of the parties, they having said nothing
in the contract with respect to its duration. "Obligations arising from contracts have the force of law between the contracting parties
and must be complied with according to the tenor of the contracts." (Art. 1091 of the Civil Code.)

The obligations which, with the force of law, the lessors assumed by the contract entered into, so far as pertaining to the issues, are
the following: "First. . . . They lease the above-described land to Mr. Williamson, who takes it on lease, . . . for all the time the
members of the said club may desire to use it . . . Third. . . . the owners of the land undertake to maintain the club as tenant as long
as the latter shall see fit, without altering in the slightest degree the conditions of this contract, even though the estate be sold."

It is necessary, therefore, to answer the first question: Was there, or was there not, a conventional term, a duration, agreed upon in
the contract in question? If there was an agreed duration, a conventional term, then the legal term — the term fixed in article 1581
— has no application; the contract is the supreme law of the contracting parties. Over and above the general law is the special law,
expressly imposed upon themselves by the contracting parties. Without these clauses 1 and 3, the contract would contain no
stipulation with respect to the duration of the lease, and then article 1581, in connection with article 1569, would necessarily be
applicable. In view of these clauses, however, it can not be said that there is no stipulation with respect to the duration of the lease,
or that, notwithstanding these clauses, article 1581, in connection with article 1569, can be applied. If this were so, it would be
necessary to hold that the lessors spoke in vain — that their words are to be disregarded — a claim which can not be advanced by
the plaintiffs nor upheld by any court without citing the law which detracts all legal force from such words or despoils them of their
literal sense.

It having been demonstrated that the legal term can not be applied, there being a conventional term, this destroys the assumption
that the contract of lease was wholly terminated by the notice given by the plaintiffs, this notice being necessary only when it
becomes necessary to have recourse to the legal term. Nor had the plaintiffs, under the contract, any right to give such notice. It is
evident that they had no intention of stipulating that they reserved the right to give such notice. Clause 3 begins as follows: "Mr.
Williamson, or whoever may succeed him as secretary of said club, may terminate this lease whenever desired without other
formality than that of giving a month's notice. The owners of the land undertake to maintain the club as tenant as long as the latter
shall see fit." The right of the one and the obligation of the others being thus placed in antithesis, there is something more, much
more, than the inclusio unius, exclusio alterius. It is evident that the lessors did not intend to reserve to themselves the right to
rescind that which they expressly conferred upon the lessee by establishing it exclusively in favor of the latter.

It would be the greatest absurdity to conclude that in a contract by which the lessor has left the termination of the lease to the will of
the lessee, such a lease can or should be terminated at the will of the lessor.

It would appear to follow, from the foregoing, that, if such is the force of the agreement, there can be no other mode of terminating
the lease than by the will of the lessee, as stipulated in this case. Such is the conclusion maintained by the defendant in the
demonstration of the first error of law in the judgment, as alleged by him. He goes so far, under this theory, as to maintain the
possibility of a perpetual lease, either as such lease, if the name can be applied, or else as an innominate contract, or under any
other denomination, in accordance with the agreement of the parties, which is, in fine, the law of the contract, superior to all other
law, provided that there be no agreement against any prohibitive statute, morals, or public policy.

It is unnecessary here to enter into a discussion of a perpetual lease in accordance with the law and doctrine prior to the Civil Code
now in force, and which has been operative since 1889. Hence the judgment of the supreme court of Spain of January 2, 1891, with
respect to a lease made in 1887, cited by the defendant, and a decision stated by him to have been rendered by the Audiencia of
Pamplona in 1885 (it appears to be rather a decision by the head office of land registration of July 1, 1885), and any other decision
which might be cited based upon the constitutions of Cataluna, according to which a lease of more than ten years is understood to
create a life tenancy, or even a perpetual tenancy, are entirely out of point in this case, in which the subject-matter is a lease entered
into under the provisions of the present Civil Code, in accordance with the principles of which alone can this doctrine be examined.

It is not to be understood that we admit that the lease entered into was stipulated as a life tenancy, and still less as a perpetual lease.
The terms of the contract express nothing to this effect. They do, whatever, imply this idea. If the lease could last during such time as
the lessee might see fit, because it has been so stipulated by the lessor, it would last, first, as long as the will of the lessee — that is,
all his life; second, during all the time that he may have succession, inasmuch as he who contracts does so for himself and his heirs.
(Art. 1257 of the Civil Code.) The lease in question does not fall within any of the cases in which the rights and obligations arising
from a contract can not be transmitted to heirs, either by its nature, by agreement, or by provision of law. Furthermore, the lessee is
an English association.

Usufruct is a right of superior degree to that which arises from a lease. It is a real right and includes all the jus utendi and jus fruendi.
Nevertheless, the utmost period for which a usufruct can endure, if constituted in favor a natural person, is the lifetime of the
usufructuary (art. 513, sec. 1); and if in favor of juridical person, it can not be created for more than thirty years. (Art. 515.) If the
lease might be perpetual, in what would it be distinguished from an emphyteusis? Why should the lessee have a greater right than
the usufructuary, as great as that of an emphyteuta, with respect to the duration of the enjoyment of the property of another? Why
did they not contract for a usufruct or an emphyteusis? It was repeatedly stated in the document that it was a lease, and nothing but
a lease, which was agreed upon: "Being in the full enjoyment of the necessary legal capacity to enter into this contract of lease . . .
they have agreed upon the lease of said estate . . . They lease to Mr. Williamson, who receives it as such. . . . The rental is fixed at 25
pesos a month. . . . The owners bind themselves to maintain the club as tenant. . . . Upon the foregoing conditions they make the
present contract of lease. . . ." (Pp. 9, 11, and 12, bill of exceptions.) If it is a lease, then it must be for a determinate period. (Art.
1543.) By its very nature it must be temporary, just as by reason of its nature an emphyteusis must be perpetual, or for an unlimited
period. (Art. 1608.)

On the other hand, it can not be concluded that the termination of the contract is to be left completely at the will of the lessee,
because it has been stipulated that its duration is to be left to his will.

The Civil Code has made provision for such a case in all kinds of obligations. In speaking in general of obligations with a term it has
supplied the deficiency of the former law with respect to the "duration of the term when it has been left to the will of the debtor,"
and provides that in this case the term shall be fixed by the courts. (Art. 1128, sec. 2.) In every contract, as laid down by the
authorities, there is always a creditor who is entitled to demand the performance, and a debtor upon whom rests the obligation to
perform the undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in this contract of
lease, the lessee is the creditor with respect to the rights enumerated in article 1554, and is the debtor with respect to the
obligations imposed by articles 1555 and 1561. The term within which performance of the latter obligation is due is what has been
left to the will of the debtor. This term it is which must be fixed by the courts.

The only action which can be maintained under the terms of the contract is that by which it is sought to obtain from the judge the
determination of this period, and not the unlawful detainer action which has been brought — an action which presupposes the
expiration of the term and makes it the duty of the judge to simply decree an eviction. To maintain the latter action it is sufficient to
show the expiration of the term of the contract, whether conventional or legal; in order to decree the relief to be granted in the
former action it is necessary for the judge to look into the character and conditions of the mutual undertakings with a view to
supplying the lacking element of a time at which the lease is to expire. In the case of a loan of money or a commodatum of furniture,
the payment or return to be made when the borrower "can conveniently do so" does not mean that he is to be allowed to enjoy the
money or to make use of the thing indefinitely or perpetually. The courts will fix in each case, according to the circumstances, the
time for the payment or return. This is the theory also maintained by the defendant in his demonstration of the fifth assignment of
error. "Under article 1128 of the Civil Code," thus his proposition concludes, "contracts whose term is left to the will of one of the
contracting parties must be fixed by the courts, . . . the conditions as to the term of this lease has a direct legislative sanction," and
he cites articles 1128. "In place of the ruthless method of annihilating a solemn obligation, which the plaintiffs in this case have
sought to pursue, the Code has provided a legitimate and easily available remedy. . . . The Code has provided for the proper
disposition of those covenants, and a case can hardly arise more clearly demonstrating the usefulness of that provision than the case
at bar." (Pp. 52 and 53 of appellant's brief.)

The plaintiffs, with respect to this conclusion on the part of their opponents, only say that article 1128 "expressly refers to obligations
in contracts in general, and that it is well known that a lease is included among special contracts." But they do not observe that if
contracts, simply because special rules are provided for them, could be excepted from the provisions of the articles of the Code
relative to obligations and contracts in general, such general provisions would be wholly without application. The system of the Code
is that of establishing general rules applicable to all obligations and contracts, and then special provisions peculiar to each species of
contract. In no part of Title VI of Book IV, which treats of the contract of lease, are there any special rules concerning pure of
conditional obligations which may be stipulated in a lease, because, with respect to these matters, the provisions of section 1,
chapter 3, Title I, on the subject of obligations are wholly sufficient. With equal reason should we refer to section 2, which deals with
obligations with a term, in the same chapter and title, if a question concerning the term arises out of a contract of lease, as in the
present case, and within this section we find article 1128, which decides the question.

The judgment was entered below upon the theory of the expiration of a legal term which does not exist, as the case requires that a
term be fixed by the courts under the provisions of article 1128 with respect to obligations which, as is the present, are terminable at
the will of the obligee. It follows, therefore, that the judgment below is erroneous.

The judgment is reversed and the case will be remanded to the court below with directions to enter a judgment of dismissal of the
action in favor of the defendant, the Manila Lawn Tennis Club, without special allowance as to the recovery of costs. So ordered.

Mapa and Ladd, JJ., concur.

Torres, J., disqualified.

Separate Opinions
WILLARD, J., concurring:
I concur in the foregoing opinion so far as it holds that article 1581 has no application to the case and that the action can not be
maintained. But as to the application of article 1128 I do not concur. That article is as follows:

Should the obligation not fix a period, but it can be inferred from its nature and circumstances that there was an intention to
grant it to the debtor, the courts shall fix the duration of the same.

The court shall also fix the duration of the period when it may have been left to the will of the debtor.

The court has applied the last paragraph of the article to the case of a lease. But, applying the first paragraph to leases, we have a
direct conflict between this article and article 1581. Let us suppose the lease of a house for 50 pesos a month. Nothing is said about
the number of months during which the lessee shall occupy it. If article 1581 is applicable to this case, the law fixes the duration of
the term and the courts have no power to change it. If article 1128 is applied to it, the courts fix the duration of the lease without
reference to article 1581. It will, I think, be agreed by everyone that article 1581 is the law applicable to the case, and that article
1128 has nothing to do with it.

It seems clear that both parts of the article must refer to the same kind of obligations. The first paragraph relates to obligations in
which the parties have named no period, the second to the same kind of obligations in which the period is left to the will of the
debtor. If the first paragraph is not applicable to leases, the second is not.

The whole article was, I think, intended to apply generally to unilateral contracts — to those in which the creditor had parted with
something of value, leaving it to the debtor to say when it should be returned. In such cases the debtor might never return it, and the
creditor might thus be deprived of his property and entirely defeated in his rights. It was to prevent such a wrong that the article was
adopted. But it has no application to this case. The plaintiffs are not deprived of their rights. They get every month the value which
they themselves put upon the use of the property. The time of the payment of this rent has not been left by the contract to the will
of the debtor. It is expressly provided in the contract that it shall be paid "within the first five days after the expiration of each
month."

Article 1255 of the Civil Code is as follows:

The contracting parties may make the agreement and establish the clauses and conditions which they may deem advisable,
provided they are not in contravention of law, morals, or public order.

That the parties to this contract distinctly agreed that the defendant should have this property so long as he was willing to pay 25
pesos a month for it, is undisputed.

I find nothing in the Code to show that when a natural person is the tenant such an agreement would be contrary to law, morality, or
public policy. In such a case the contract would terminate at the death of the tenant. Such is the doctrine of the French Cour de
Cassation. (Houet vs. Lamarge, July 20, 1840.)

The tenant is the only person who has been given the right to say how long the contract shall continue. That right is personal to him,
and is not property in such a sense as to pass to his heirs.

In this case the question is made more difficult by the fact that the tenant is said to be juridical person, and it is said that the lease is
therefore a perpetual one. Just what kind of a partnership or association the defendant is does not appear, and without knowing
what kind of an entity it is we can not say that this contract is a perpetual lease. Even if the defendant has perpetual succession, the
lease would not necessarily last forever. A breach of any one of the obligations imposed upon the lessee by article 1555 of the Civil
Code would give the landlord the right to terminate it.

THIRD DIVISION
G.R. No. 206806, June 25, 2014
ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS, Petitioners, v. DAN T. LIM, DOING BUSINESS UNDER THE NAME AND STYLE OF
QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES, Respondent.
 DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied only if the old and
new contracts are incompatible on every point.

Before us is a petition for review on certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed from a
complaint3 filed in the Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and Plastic Products,
Enterprises, to factories engaged in the paper mill business. 4From February 2007 to March 2007, he delivered scrap papers worth P7,220,968.31 to
Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President, Candida A. Santos. 5 The parties allegedly
agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent
value.6cralawred

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated April 18, 2007 7 in the amount of
P1,487,766.68 as partial payment, with the assurance that the check would not bounce. 8 When he deposited the check on April 18, 2007, it was
dishonored for being drawn against a closed account.9cralawred

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement 10where Arco Pulp and Paper bound themselves
to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw
materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products. The memorandum of agreement reads as
follows:chanRoblesvirtualLawlibrary
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600
tons Test Liner 150/175 GSM, full width 76 inches at the price of P18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of
deliveries are as follows:

It has been agreed further that the Local OCC materials to be used for the production of the above Test Liners will be supplied by Quality Paper &
Plastic Products Ent., total of 600 Metric Tons at P6.50 per kg. (price subject to change per advance notice). Quantity of Local OCC delivery will be
based on the quantity of Test Liner delivered to Megapack Container Corp. based on the above production schedule. 11

On May 5, 2007, Dan T. Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of ?7,220,968.31, but no payment was made
to him.13cralawred

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

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

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

On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the judgment dated September 19, 2008 and ordering
Arco Pulp and Paper to jointly and severally pay Dan T. Lim the amount of P7,220,968.31 with interest at 12% per annum from the time of demand;
P50,000.00 moral damages; P50,000.00 exemplary damages; and P50,000.00 attorney’s fees. 22cralawred

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

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

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

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no proper novation in this case. He argues
that the Court of Appeals was correct in ordering the payment of ?7,220,968.31 with damages since the debt of petitioners remains unpaid. 28 He
also argues that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner Candida A. Santos was “the prime mover for
such outstanding corporate liability.”29cralawred

In their reply, petitioners reiterate that novation took place since there was nothing in the memorandum of agreement showing that the obligation
was alternative. They also argue that when respondent allowed them to deliver the finished products to Eric Sy, the original obligation was
novated.30cralawred

A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC dated November 21, 2000. 31cralawred

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

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

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

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

The petition is denied.

The obligation between the

parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:chanRoblesvirtualLawlibrary
Article 1199. A person alternatively bound by different prestations shall completely perform one of them.

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

“In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined by the choice of the debtor who
generally has the right of election.”32 The right of election is extinguished when the party who may exercise that option categorically and
unequivocally makes his or her choice known. 33 The choice of the debtor must also be communicated to the creditor who must receive notice of it
since:chanRoblesvirtualLawlibrary
The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the election made by the debtor, and only after
said notice shall the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a competent
court.34

According to the factual findings of the trial court and the appellate court, the original contract between the parties was for respondent to deliver
scrap papers worth P7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s
obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price or (2) deliver the finished
products of equivalent value to respondent.35cralawred

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

When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap papers, they exercised their option to pay the
price. Respondent’s receipt of the check and his subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to
pay.

This choice was also shown by the terms of the memorandum of agreement, which was executed on the same day. The memorandum declared in
clear terms that the delivery of petitioner Arco Pulp and Paper’s finished products would be to a third person, thereby extinguishing the option to
deliver the finished products of equivalent value to respondent.

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

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

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

Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

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

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

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

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

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights of the creditor. Article 1293 of the Civil Code defines novation as follows:

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

In general, there are two modes of substituting the person of the debtor: (1) expromisionand (2) delegacion. In expromision, the initiative for the
change does not come from — and may even be made without the knowledge of — the debtor, since it consists of a third person’s assumption of
the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the creditor.

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

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

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

Because novation requires that it be clear and unequivocal, it is never presumed, thus:chanRoblesvirtualLawlibrary
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law jurisprudence, the principle —
novatio non praesumitur — that novation is never presumed. At bottom, for novation to be a jural reality, its animus must be ever
present, debitum pro debito — basically extinguishing the old obligation for the new one. 39 (Emphasis supplied)

There is nothing in the memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and Paper to
respondent would be extinguished. It also does not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It
merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be valid:chanRoblesvirtualLawlibrary
Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of any express
disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old agreement. 40 (Emphasis supplied)

In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need not be secured. This is clear
from the first line of the memorandum, which states:chanRoblesvirtualLawlibrary
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . . 41

If the memorandum of agreement was intended to novate the original agreement between the parties, respondent must have first agreed to the
substitution of Eric Sy as his new debtor. The memorandum of agreement must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their alleged intent to pass on their obligation to
Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his new debtor. These acts, when taken together, clearly show that novation did not take place.

Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full amount of P7,220,968.31.

Petitioners are liable for damages

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

Moral damages are not awarded as a matter of right but only after the party claiming it proved that the breach was due to fraud or bad faith. As this
court stated:chanRoblesvirtualLawlibrary
Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party from whom it is claimed
acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad
faith, and oppressive or abusive.42

Further, the following requisites must be proven for the recovery of moral damages:chanRoblesvirtualLawlibrary
An award of moral damages would require certain conditions to be met, to wit: (1) first, there must be an injury, whether physical, mental or
psychological, clearly sustained by the claimant; (2) second, there must be culpable act or omission factually established; (3)third, the wrongful act
or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the award of damages is predicated on
any of the cases stated in Article 2219 of the Civil Code. 43

Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has remained unpaid since 2007. This injury
undoubtedly was caused by petitioner Arco Pulp and Paper’s act of refusing to pay its obligations.

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

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in the following
instances:chanRoblesvirtualLawlibrary
Article 2219. Moral damages may be recovered in the following and analogous cases:ChanRoblesVirtualawlibrary
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party breaches a contract, he or she goes
against Article 19 of the Civil Code, which states:chanRoblesvirtualLawlibrary
Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith.

Persons who have the right to enter into contractual relations must exercise that right with honesty and good faith. Failure to do so results in an
abuse of that right, which may become the basis of an action for damages. Article 19, however, cannot be its sole basis:chanRoblesvirtualLawlibrary
Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of an actionable tort. Article 19 describes the
degree of care required so that an actionable tort may arise when it is alleged together with Article 20 or Article 21. 44

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

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

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

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts that are contrary to morals, good customs,
and public policy:chanRoblesvirtualLawlibrary
Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have been willful or negligent. Willful may refer
to the intention to do the act and the desire to achieve the outcome which is considered by the plaintiff in tort action as injurious. Negligence may
refer to a situation where the act was consciously done but without intending the result which the plaintiff considers as injurious.

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

When parties act in bad faith and do not faithfully comply with their obligations under contract, they run the risk of violating Article 1159 of the Civil
Code:chanRoblesvirtualLawlibrary
Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

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

Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires that the breach be done fraudulently or in
bad faith. In Adriano v. Lasala:46cralawred
To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless and malicious, in bad faith, oppressive,
or abusive. Hence, the person claiming bad faith must prove its existence by clear and convincing evidence for the law always presumes good faith.

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

Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it was presumably with the knowledge that
it was being drawn against a closed account. Worse, it attempted to shift their obligations to a third person without the consent of respondent.

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

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the following
circumstances:chanRoblesvirtualLawlibrary
Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.

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

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

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

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

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

(1) they may be imposed by way of example in addition to compensatory damages, and only after the claimant's right to them has been
established;
(2) that they cannot be recovered as a matter of right, their determination depending upon the amount of compensatory damages that may be
awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent manner. 51
Business owners must always be forthright in their dealings. They cannot be allowed to renege on their obligations, considering that these
obligations were freely entered into by them. Exemplary damages may also be awarded in this case to serve as a deterrent to those who use
fraudulent means to evade their liabilities.

Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be recovered. Article 2208 of the Civil Code
states:chanRoblesvirtualLawlibrary
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos

is solidarily liable with petitioner
corporation

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

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

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

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

While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of the veil of corporate fiction is
a question of fact which cannot be the subject of a petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if
the findings of the lower court are not supported by the evidence on record or are based on a misapprehension of facts. 53 (Emphasis supplied)

As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations incurred by the corporation.
However, this veil of corporate fiction may be pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad
faith, and (2) such negligence or bad faith was clearly and convincingly proven.

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

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55cralawred
Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed
or used for non-legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out
similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals
composing it and the two corporations will be treated as identical.56 (Emphasis supplied)

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper, stating
that:chanRoblesvirtualLawlibrary
In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to honor their undertaking in favor of the
[respondent]. After the check in the amount of P1,487,766.68 issued by [petitioner] Santos was dishonored for being drawn against a closed
account, [petitioner] corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies provided by
law in order to protect his rights.57

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

The rate of interest due on

the obligation must be reduced
in view of Nacar v. Gallery
Frames58cralawred

In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v. Gallery Frames,59 the rate of interest due on
the obligation must be modified from 12% per annum to 6% per annum from the time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we have laid down the following guidelines with
regard to the rate of legal interest:chanRoblesvirtualLawlibrary
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-
MB Circular No. 799, as follows:

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

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

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

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

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

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

According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be at 6% per annum, computed from May 5, 2007,
when respondent sent his letter of demand to petitioners. This interest shall continue to be due from the finality of this decision until its full
satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay respondent Dan T. Lim the amount of
P7,220,968.31 with interest of 6% per annum at the time of demand until finality of judgment and its full satisfaction, with moral damages in the
amount of P50,000.00, exemplary damages in the amount of P50,000.00, and attorney’s fees in the amount of P50,000.00.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-28046 May 16, 1983
PHILIPPINE NATIONAL BANK, plaintiff-appellant,
vs.
INDEPENDENT PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN FAJARDO, CEFERINO VALENCIA, MOISES
CARANDANG, LUCIANO CASTILLO, AURELIO VALENCIA, LAURO LEVISTE, GAVINO GONZALES, LOPE GEVANA and BONIFACIO
LAUREANA, defendants-appellees.
Basa, Ilao, del Rosario Diaz for plaintiff-appellant.
Laurel Law Office for Dimayuga.
Tomas Yumol for Fajardo, defendant-appellee.

PLANA, J.:

Appeal by the Philippine National Bank (PNB) from the Order of the defunct Court of First Instance of Manila (Branch XX) in its Civil
Case No. 46741 dismissing PNB's complaint against several solidary debtors for the collection of a sum of money on the ground that
one of the defendants (Ceferino Valencia) died during the pendency of the case (i.e., after the plaintiff had presented its evidence)
and therefore the complaint, being a money claim based on contract, should be prosecuted in the testate or intestate proceeding for
the settlement of the estate of the deceased defendant pursuant to Section 6 of Rule 86 of the Rules of Court which reads:

SEC. 6. Solidary obligation of decedent.— the obligation of the decedent is solidary with another debtor, the claim
shall be filed against the decedent as if he were the only debtor, without prejudice to the right of the estate to
recover contribution from the other debtor. In a joint obligation of the decedent, the claim shall be confined to the
portion belonging to him.

The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of its solidary debtors under Article
1216 of the Civil Code —

ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.
The demand made against one of them shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected.

The sole issue thus raised is whether in an action for collection of a sum of money based on contract against all the solidary debtors,
the death of one defendant deprives the court of jurisdiction to proceed with the case against the surviving defendants.

It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek satisfaction of his credit from one,
some or all of his solidary debtors, as he deems fit or convenient for the protection of his interests; and if, after instituting a
collection suit based on contract against some or all of them and, during its pendency, one of the defendants dies, the court retains
jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants. Thus in Manila Surety & Fidelity
Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897, this Court ruled:

Construing Section 698 of the Code of Civil Procedure from whence the aforequoted provision (Sec. 6, Rule 86) was
taken, this Court held that where two persons are bound in solidum for the same debt and one of them dies, the
whole indebtedness can be proved against the estate of the latter, the decedent's liability being absolute and
primary; and if the claim is not presented within the time provided by the rules, the same will be barred as against
the estate. It is evident from the foregoing that Section 6 of Rule 87 (now Rule 86) provides the procedure should
the creditor desire to go against the deceased debtor, but there is certainly nothing in the said provision making
compliance with such procedure a condition precedent before an ordinary action against the surviving solidary
debtors, should the creditor choose to demand payment from the latter, could be entertained to the extent that
failure to observe the same would deprive the court jurisdiction to take cognizance of the action against the
surviving debtors. Upon the other hand, the Civil Code expressly allows the creditor to proceed against any one of
the solidary debtors or some or all of them simultaneously. There is, therefore, nothing improper in the creditor's
filing of an action against the surviving solidary debtors alone, instead of instituting a proceeding for the settlement
of the estate of the deceased debtor wherein his claim could be filed.

Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice Makasiar, reiterated the doctrine.

A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing therein
prevents a creditor from proceeding against the surviving solidary debtors. Said provision merely
 sets up the procedure in enforcing collection in case a creditor chooses to pursue his claim against
the estate of the deceased solidary, debtor.

It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this matter.
Said provision gives the creditor the right to 'proceed against anyone of the solidary debtors or
some or all of them simultaneously.' The choice is undoubtedly left to the solidary, creditor to
determine against whom he will enforce collection. In case of the death of one of the solidary
debtors, he (the creditor) may, if he so chooses, proceed against the surviving solidary debtors
without necessity of filing a claim in the estate of the deceased debtors. It is not mandatory for
him to have the case dismissed against the surviving debtors and file its claim in the estate of the
deceased solidary debtor . . .

As correctly argued by petitioner, if Section 6, Rule 86 of the Revised Rules of Court were applied
literally, Article 1216 of the New Civil Code would, in effect, be repealed since under the Rules of
Court, petitioner has no choice but to proceed against the estate of Manuel Barredo only.
Obviously, this provision diminishes the Bank's right under the New Civil, Code to proceed against
any one, some or all of the solidary debtors. Such a construction is not sanctioned by the
principle, which is too well settled to require citation, that a substantive law cannot be amended
by a procedural rule. Otherwise stared, Section 6, Rule 86 of the Revised Rules of Court cannot be
made to prevail over Article 1216 of the New Civil Code, the former being merely procedural,
while the latter, substantive.

WHEREFORE the appealed order of dismissal of the court a quo in its Civil Case No. 46741 is hereby set aside in respect of the
surviving defendants; and the case is remanded to the corresponding Regional Trial Court for proceedings. proceedings. No costs.

SO ORDERED.
Teehankee (Acta. C.J.), Escolin ** Vasquez and Gutierrez, Jr., JJ., concur.
Melencio-Herrera and Relova, JJ., is on leave.