Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 158361

April 10, 2013

INTERNATIONAL HOTEL CORPORATION, Petitioner,

vs.
FRANCISCO B. JOAQUIN, JR. and RAFAEL SUAREZ, Respondents.
DECISION
BERSAMIN, J.:
To avoid unjust enrichment to a party from resulting out of a substantially performed contract, the
principle of quantum meruit may be used to determine his compensation in the absence of a written
agreement for that purpose. The principle of quantum meruit justifies the payment of the reasonable
value of the services rendered by him.
The Case
Under review is the decision the Court of Appeals (CA) promulgated on November 8,
2002,1 disposing:
WHEREFORE, premises considered, the decision dated August 26, 1993 of the Regional Trial
Court, Branch 13, Manila in Civil Case No. R-82-2434 is AFFIRMED with Modification as to the
amounts awarded as follows: defendant-appellant IHC is ordered to pay plaintiff-appellant
Joaquin P700,000.00 and plaintiff-appellant SuarezP200,000.00, both to be paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a proposal to the Board of
Directors of the International Hotel Corporation (IHC) for him to render technical assistance in
securing a foreign loan for the construction of a hotel, to be guaranteed by the Development Bank of
the Philippines (DBP).2 The proposal encompassed nine phases, namely: (1) the preparation of a
new project study; (2) the settlement of the unregistered mortgage prior to the submission of the
application for guaranty for processing by DBP; (3) the preparation of papers necessary to the
application for guaranty; (4) the securing of a foreign financier for the project; (5) the securing of the
approval of the DBP Board of Governors; (6) the actual follow up of the application with DBP 3; (7) the
overall coordination in implementing the projections of the project study; (8) the preparation of the
staff for actual hotel operations; and (9) the actual hotel operations.4

The IHC Board of Directors approved phase one to phase six of the proposal during the special
board meeting on February 11, 1969, and earmarked P2,000,000.00 for the project.5 Anent the
financing, IHC applied with DBP for a foreign loan guaranty. DBP processed the application, 6 and
approved it on October 24, 1969 subject to several conditions. 7
On July 11, 1969, shortly after submitting the application to DBP, Joaquin wrote to IHC to request the
payment of his fees in the amount of P500,000.00 for the services that he had provided and would
be providing to IHC in relation to the hotel project that were outside the scope of the technical
proposal. Joaquin intimated his amenability to receive shares of stock instead of cash in view of
IHCs financial situation.8
On July 11, 1969, the stockholders of IHC met and granted Joaquins request, allowing the payment
for both Joaquin and Rafael Suarez for their services in implementing the proposal. 9
On June 20, 1970, Joaquin presented to the IHC Board of Directors the results of his negotiations
with potential foreign financiers. He narrowed the financiers to Roger Dunn & Company and
Materials Handling Corporation. He recommended that the Board of Directors consider Materials
Handling Corporation based on the more beneficial terms it had offered. His recommendation was
accepted.10
Negotiations with Materials Handling Corporation and, later on, with its principal, Barnes
International (Barnes), ensued. While the negotiations with Barnes were ongoing, Joaquin and Jose
Valero, the Executive Director of IHC, met with another financier, the Weston International
Corporation (Weston), to explore possible financing. 11When Barnes failed to deliver the needed loan,
IHC informed DBP that it would submit Weston for DBPs consideration. 12 As a result, DBP cancelled
its previous guaranty through a letter dated December 6, 1971. 13
On December 13, 1971, IHC entered into an agreement with Weston, and communicated this
development to DBP on June 26, 1972. However, DBP denied the application for guaranty for failure
to comply with the conditions contained in its November 12, 1971 letter.14
Due to Joaquins failure to secure the needed loan, IHC, through its President Bautista, canceled the
17,000 shares of stock previously issued to Joaquin and Suarez as payment for their services. The
latter requested a reconsideration of the cancellation, but their request was rejected.
Consequently, Joaquin and Suarez commenced this action for specific performance, annulment,
damages and injunction by a complaint dated December 6, 1973 in the Regional Trial Court in
Manila (RTC), impleading IHC and the members of its Board of Directors, namely, Felix Angelo
Bautista, Sergio O. Rustia, Ephraim G. Gochangco, Mario B. Julian, Benjamin J. Bautista, Basilio L.
Lirag, Danilo R. Lacerna and Hermenegildo R. Reyes. 15 The complaint alleged that the cancellation
of the shares had been illegal, and had deprived them of their right to participate in the meetings and
elections held by IHC; that Barnes had been recommended by IHC President Bautista, not by
Joaquin; that they had failed to meet their obligation because President Bautista and his son had
intervened and negotiated with Barnes instead of Weston; that DBP had canceled the guaranty
because Barnes had failed to release the loan; and that IHC had agreed to compensate their
services with 17,000 shares of the common stock plus cash of P1,000,000.00.16

IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B. Julian and Benjamin J. Bautista,
filed an answer claiming that the shares issued to Joaquin and Suarez as compensation for their
"past and future services" had been issued in violation of Section 16 of the Corporation Code; that
Joaquin and Suarez had not provided a foreign financier acceptable to DBP; and that they had
already received P96,350.00 as payment for their services.17
On their part, Lirag and Lacerna denied any knowledge of or participation in the cancellation of the
shares.18
Similarly, Gochangco and Reyes denied any knowledge of or participation in the cancellation of the
shares, and clarified that they were not directors of IHC.19 In the course of the proceedings, Reyes
died and was substituted by Consorcia P. Reyes, the administratrix of his estate. 20
Ruling of the RTC
Under its decision rendered on August 26, 1993, the RTC held IHC liable pursuant to the second
paragraph of Article 1284 of the Civil Code, disposing thusly:
WHEREFORE, in the light of the above facts, law and jurisprudence, the Court hereby orders the
defendant International Hotel Corporation to pay plaintiff Francisco B. Joaquin, the amount of Two
Hundred Thousand Pesos (P200,000.00) and to pay plaintiff Rafael Suarez the amount of Fifty
Thousand Pesos (P50,000.00); that the said defendant IHC likewise pay the co-plaintiffs, attorneys
fees of P20,000.00, and costs of suit.
IT IS SO ORDERED.21
The RTC found that Joaquin and Suarez had failed to meet their obligations when IHC had chosen
to negotiate with Barnes rather than with Weston, the financier that Joaquin had recommended; and
that the cancellation of the shares of stock had been proper under Section 68 of the Corporation
Code, which allowed such transfer of shares to compensate only past services, not future ones.
Ruling of the CA
Both parties appealed.22
Joaquin and Suarez assigned the following errors, to wit:
DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT PLAINTIFFS-APPELLANTS FULLY
PERFORMED ALL THAT WAS INCUMBENT UPON THEM, THE HONORABLE JUDGE ERRED IN
NOT ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING THE SHARES OF STOCK
PREVIOUSLY ISSUED TO PLAINTIFFS-APPELLANTS; AND

B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO MILLION SEVEN HUNDRED

PESOS (sic) (P2,700,000.00), INCLUDING INTEREST THEREON FROM 1973,
REPRESENTING THE TOTAL OBLIGATION DUE PLAINTIFFS-APPELLANTS. 23
On the other hand, IHC attributed errors to the RTC, as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS HAVE NOTBEEN
COMPLETELY PAID FOR THEIR SERVICES, AND IN ORDERING THE DEFENDANT-APPELLANT
TO PAY TWO HUNDRED THOUSAND PESOS (P200,000.00) AND FIFTY THOUSAND PESOS
(P50,000.00) TO PLAINTIFFS-APPELLANTS FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ,
RESPECTIVELY.
II.
THE LOWER COURT ERRED IN AWARDING PLAINTIFFS-APPELLANTS ATTORNEYS FEES
AND COSTS OF SUIT.24
In its questioned decision promulgated on November 8, 2002, the CA concurred with the RTC,
upholding IHCs liability under Article 1186 of the Civil Code. It ruled that in the context of Article
1234 of the Civil Code, Joaquin had substantially performed his obligations and had become entitled
to be paid for his services; and that the issuance of the shares of stock was ultra vires for having
been issued as consideration for future services.
Anent how much was due to Joaquin and Suarez, the CA explained thusly:
This Court does not subscribe to plaintiffs-appellants view that defendant-appellant IHC agreed to
pay themP2,000,000.00. Plaintiff-appellant Joaquins letter to defendant-appellee F.A. Bautista,
quoting defendant-appellant IHCs board resolutions which supposedly authorized the payment of
such amount cannot be sustained. The resolutions are quite clear and when taken together show
that said amount was only the "estimated maximum expenses" which defendant-appellant IHC
expected to incur in accomplishing phases 1 to 6, not exclusively to plaintiffs-appellants
compensation.This conclusion finds support in an unnumbered board resolution of defendantappellant IHC dated July 11, 1969:
"Incidentally, it was also taken up the necessity of giving the Technical Group a portion of the
compensation that was authorized by this corporation in its Resolution of February 11, 1969
considering that the assistance so far given the corporation by said Technical Group in continuing
our project with the DBP and its request for guaranty for a foreign loan is 70% completed leaving
only some details which are now being processed. It is estimated thatP400,000.00 worth of Common
Stock would be reasonable for the present accomplishments and to this effect, the President is
authorized to issue the same in the name of the Technical Group, as follows:

P200,000.00 in common stock to Rafael Suarez, as associate in the Technical Group,

and P200,000.00 in common stock to Francisco G. Joaquin, Jr., also a member of the Technical
Group.
It is apparent that not all of the P2,000,000.00 was allocated exclusively to compensate plaintiffsappellants. Rather, it was intended to fund the whole undertaking including their compensation. On
the same date, defendant-appellant IHC also authorized its president to pay-appellant
Joaquin P500,000.00 either in cash or in stock or both.
The amount awarded by the lower court was therefore less than what defendant-appellant IHC
agreed to pay plaintiffs-appellants. While this Court cannot decree that the cancelled shares be
restored, for they are without a doubt null and void, still and all, defendant-appellant IHC cannot now
put up its own ultra vires act as an excuse to escape obligation to plaintiffs-appellants. Instead of
shares of stock, defendant-appellant IHC is ordered to pay plaintiff-appellant Joaquin a total
of P700,000.00 and plaintiff-appellant Suarez P200,000.00, both to be paid in cash.
Although the lower court failed to explain why it was granting the attorneys fees, this Court
nonetheless finds its award proper given defendant-appellant IHCs actions. 25
Issues
In this appeal, the IHC raises as issues for our consideration and resolution the following:
I
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING COMPENSATION
AND EVEN MODIFYING THE PAYMENT TO HEREIN RESPONDENTS DESPITE NONFULFILLMENT OF THEIR OBLIGATION TO HEREIN PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING ATTORNEYS FEES
TO RESPONDENTS26
IHC maintains that Article 1186 of the Civil Code was erroneously applied; that it had no intention of
preventing Joaquin from complying with his obligations when it adopted his recommendation to
negotiate with Barnes; that Article 1234 of the Civil Code applied only if there was a merely slight
deviation from the obligation, and the omission or defect was technical and unimportant; that
substantial compliance was unacceptable because the foreign loan was material and was, in fact,
the ultimate goal of its contract with Joaquin and Suarez; that because the obligation was indivisible
and subject to a suspensive condition, Article 1181 of the Civil Code27 applied, under which a partial
performance was equivalent to non-performance; and that the award of attorneys fees should be
deleted for lack of legal and factual bases.

On the part of respondents, only Joaquin filed a comment, 28 arguing that the petition was fatally
defective for raising questions of fact; that the obligation was divisible and capable of partial
performance; and that the suspensive condition was deemed fulfilled through IHCs own actions. 29
Ruling
We deny the petition for review on certiorari subject to the ensuing disquisitions.
1.
IHC raises questions of law
We first consider and resolve whether IHCs petition improperly raised questions of fact.
A question of law exists when there is doubt as to what the law is on a certain state of facts, but, in
contrast, a question of fact exists when the doubt arises as to the truth or falsity of the facts alleged.
A question of law does not involve an examination of the probative value of the evidence presented
by the litigants or by any of them; the resolution of the issue must rest solely on what the law
provides on the given set of circumstances.30 When there is no dispute as to the facts, the question
of whether or not the conclusion drawn from the facts is correct is a question of law.31
Considering that what IHC seeks to review is the CAs application of the law on the facts presented
therein, there is no doubt that IHC raises questions of law. The basic issue posed here is whether
the conclusions drawn by the CA were correct under the pertinent laws.
2.
Article 1186 and Article 1234 of the Civil Code cannot be the source of IHCs obligation to pay
respondents IHC argues that it should not be held liable because: (a) it was Joaquin who had
recommended Barnes; and (b) IHCs negotiation with Barnes had been neither intentional nor
willfully intended to prevent Joaquin from complying with his obligations.
IHCs argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.
This provision refers to the constructive fulfillment of a suspensive condition, 32 whose application
calls for two requisites, namely: (a) the intent of the obligor to prevent the fulfillment of the condition,
and (b) the actual prevention of the fulfillment. Mere intention of the debtor to prevent the happening
of the condition, or to place ineffective obstacles to its compliance, without actually preventing the
fulfillment, is insufficient.33

The error lies in the CAs failure to determine IHCs intent to pre-empt Joaquin from meeting his
obligations. The June 20, 1970 minutes of IHCs special board meeting discloses that Joaquin
impressed upon the members of the Board that Materials Handling was offering more favorable
terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of Directors of the International Hotel Corporation were
present with the exception of Directors Benjamin J. Bautista and Sergio O. Rustia who asked to be
excused because of previous engagements. In that meeting, the President called on Mr. Francisco
G. Joaquin, Jr. to explain the different negotiations he had conducted relative to obtaining the
needed financing for the hotel project in keeping with the authority given to him in a resolution
approved by the Board of Directors.
Mr. Joaquin presently explained that he contacted several local and foreign financiers through
different brokers and after examining the different offers he narrowed down his choice to two (2), to
wit: the foreign financier recommended by George Wright of the Roger Dunn & Company and the
offer made by the Materials Handling Corporation.
After explaining the advantages and disadvantages to our corporation of the two (2) offers
specifically with regard to the terms and repayment of the loan and the rate of interest requested by
them, he concluded that the offer made by the Materials Handling Corporation is much more
advantageous because the terms and conditions of payment as well as the rate of interest are much
more reasonable and would be much less onerous to our corporation. However, he explained that
the corporation accepted, in principle, the offer of Roger Dunn, per the corporations telegrams to Mr.
Rudolph Meir of the Private Bank of Zurich, Switzerland, and until such time as the corporations
negotiations with Roger Dunn is terminated, we are committed, on one way or the other, to their
financing.
It was decided by the Directors that, should the negotiations with Roger Dunn materialize, at the
same time as the offer of Materials Handling Corporation, that the funds committed by Roger Dunn
may be diverted to other borrowers of the Development Bank of the Philippines. With this condition,
Director Joaquin showed the advantages of the offer of Materials Handling Corporation. Mr. Joaquin
also informed the corporation that, as of this date, the bank confirmation of Roger Dunn & Company
has not been received. In view of the fact that the corporation is racing against time in securing its
financing, he recommended that the corporation entertain other offers.
After a brief exchange of views on the part of the Directors present and after hearing the clarification
and explanation made by Mr. C. M. Javier who was present and who represented the Materials
Handling Corporation, the Directors present approved unanimously the recommendation of Mr.
Joaquin to entertain the offer of Materials Handling Corporation.34
Evidently, IHC only relied on the opinion of its consultant in deciding to transact with Materials
Handling and, later on, with Barnes. In negotiating with Barnes, IHC had no intention, willful or
otherwise, to prevent Joaquin and Suarez from meeting their undertaking. Such absence of any
intention negated the basis for the CAs reliance on Article 1186 of the Civil Code.

Nor do we agree with the CAs upholding of IHCs liability by virtue of Joaquin and Suarezs
substantial performance. In so ruling, the CA applied Article 1234 of the Civil Code, which states:
Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover
as though there had been a strict and complete fulfillment, less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits breaching the contract 35 after
honestly and faithfully performing all the material elements thereof except for some technical aspects
that cause no serious harm to the obligee.36 IHC correctly submits that the provision refers to an
omission or deviation that is slight, or technical and unimportant, and does not affect the real
purpose of the contract.
Tolentino explains the character of the obligors breach under Article 1234 in the following manner, to
wit:
In order that there may be substantial performance of an obligation, there must have been an
attempt in good faith to perform, without any willful or intentional departure therefrom. The deviation
from the obligation must be slight, and the omission or defect must be technical and unimportant,
and must not pervade the whole or be so material that the object which the parties intended to
accomplish in a particular manner is not attained. The non-performance of a material part of a
contract will prevent the performance from amounting to a substantial compliance.
The party claiming substantial performance must show that he has attempted in good faith to
perform his contract, but has through oversight, misunderstanding or any excusable neglect failed to
completely perform in certain negligible respects, for which the other party may be adequately
indemnified by an allowance and deduction from the contract price or by an award of damages. But
a party who knowingly and wilfully fails to perform his contract in any respect, or omits to perform a
material part of it, cannot be permitted, under the protection of this rule, to compel the other party,
and the trend of the more recent decisions is to hold that the percentage of omitted or irregular
performance may in and of itself be sufficient to show that there had not been a substantial
performance.37
By reason of the inconsequential nature of the breach or omission, the law deems the performance
as substantial, making it the obligees duty to pay.38 The compulsion of payment is predicated on the
substantial benefit derived by the obligee from the partial performance. Although compelled to pay,
the obligee is nonetheless entitled to an allowance for the sum required to remedy omissions or
defects and to complete the work agreed upon. 39
Conversely, the principle of substantial performance is inappropriate when the incomplete
performance constitutes a material breach of the contract. A contractual breach is material if it will
adversely affect the nature of the obligation that the obligor promised to deliver, the benefits that the
obligee expects to receive after full compliance, and the extent that the non-performance defeated
the purposes of the contract.40 Accordingly, for the principle embodied in Article 1234 to apply, the
failure of Joaquin and Suarez to comply with their commitment should not defeat the ultimate
purpose of the contract.

The primary objective of the parties in entering into the services agreement was to obtain a foreign
loan to finance the construction of IHCs hotel project. This objective could be inferred from IHCs
approval of phase 1 to phase 6 of the proposal. Phase 1 and phase 2, respectively the preparation
of a new project study and the settlement of the unregistered mortgage, would pave the way for
Joaquin and Suarez to render assistance to IHC in applying for the DBP guaranty and thereafter to
look for an able and willing foreign financial institution acceptable to DBP. All the steps that Joaquin
and Suarez undertook to accomplish had a single objective to secure a loan to fund the
construction and eventual operations of the hotel of IHC. In that regard, Joaquin himself admitted
that his assistance was specifically sought to seek financing for IHCs hotel project. 41
Needless to say, finding the foreign financier that DBP would guarantee was the essence of the
parties contract, so that the failure to completely satisfy such obligation could not be characterized
as slight and unimportant as to have resulted in Joaquin and Suarezs substantial performance that
consequentially benefitted IHC. Whatever benefits IHC gained from their services could only be
minimal, and were even probably outweighed by whatever losses IHC suffered from the delayed
construction of its hotel. Consequently, Article 1234 did not apply.
3.
IHC is nonetheless liable to pay under the rule on constructive fulfillment of a mixed
conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the Civil Code, IHC was liable
based on the nature of the obligation.
Considering that the agreement between the parties was not circumscribed by a definite period, its
termination was subject to a condition the happening of a future and uncertain event. 42 The
prevailing rule in conditional obligations is that the acquisition of rights, as well as the extinguishment
or loss of those already acquired, shall depend upon the happening of the event that constitutes the
condition.43
To recall, both the RTC and the CA held that Joaquin and Suarezs obligation was subject to the
suspensive condition of successfully securing a foreign loan guaranteed by DBP. IHC agrees with
both lower courts, and even argues that the obligation with a suspensive condition did not arise
when the event or occurrence did not happen. In that instance, partial performance of the contract
subject to the suspensive condition was tantamount to no performance at all. As such, the
respondents were not entitled to any compensation.
We have to disagree with IHCs argument.
To secure a DBP-guaranteed foreign loan did not solely depend on the diligence or the sole will of
the respondents because it required the action and discretion of third persons an able and willing
foreign financial institution to provide the needed funds, and the DBP Board of Governors to
guarantee the loan. Such third persons could not be legally compelled to act in a manner favorable
to IHC. There is no question that when the fulfillment of a condition is dependent partly on the will of
one of the contracting parties,44 or of the obligor, and partly on chance, hazard or the will of a third

person, the obligation is mixed.45 The existing rule in a mixed conditional obligation is that when the
condition was not fulfilled but the obligor did all in his power to comply with the obligation, the
condition should be deemed satisfied.46
Considering that the respondents were able to secure an agreement with Weston, and subsequently
tried to reverse the prior cancellation of the guaranty by DBP, we rule that they thereby constructively
fulfilled their obligation.
4.
Quantum meruit should apply in the absence of an express agreement on the fees
The next issue to resolve is the amount of the fees that IHC should pay to Joaquin and Suarez.
Joaquin claimed that aside from the approved P2,000,000.00 fee to implement phase 1 to phase 6,
the IHC Board of Directors had approved an additional P500,000.00 as payment for his services.
The RTC declared that he and Suarez were entitled to P200,000.00 each, but the CA revised the
amounts to P700,000.00 for Joaquin and P200,000.00 for Suarez.
Anent the P2,000,000.00, the CA rightly concluded that the full amount of P2,000,000.00 could not
be awarded to respondents because such amount was not allocated exclusively to compensate
respondents, but was intended to be the estimated maximum to fund the expenses in undertaking
phase 6 of the scope of services. Its conclusion was unquestionably borne out by the minutes of the
February 11, 1969 meeting, viz:
xxxx
II
The preparation of the necessary papers for the DBP including the preparation of the application, the
presentation of the mechanics of financing, the actual follow up with the different departments of the
DBP which includes the explanation of the feasibility studies up to the approval of the loan,
conditioned on the DBPs acceptance of the project as feasible. The estimated expenses for this
particular phase would be contingent, i.e. upon DBPs approval of the plan now being studied and
prepared, is somewhere around P2,000,000.00.
After a brief discussion on the matter, the Board on motion duly made and seconded, unanimously
adopted a resolution of the following tenor:
RESOLUTION NO. ______
(Series of 1969)
"RESOLVED, as it is hereby RESOLVED, that if the Reparations allocation and the plan being
negotiated with the DBP is realized the estimated maximum expenses of P2,000,000.00 for this
phase is hereby authorized subject to the sound discretion of the committee composed of Justice
Felix Angelo Bautista, Jose N. Valero and Ephraim G. Gochangco." 47 (Emphasis supplied)

Joaquins claim for the additional sum of P500,000.00 was similarly without factual and legal bases.
He had requested the payment of that amount to cover services rendered and still to be rendered to
IHC separately from those covered by the first six phases of the scope of work. However, there is no
reason to hold IHC liable for that amount due to his failure to present sufficient proof of the services
rendered towards that end. Furthermore, his July 11, 1969 letter revealed that the additional services
that he had supposedly rendered were identical to those enumerated in the technical proposal, thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista
President & Chairman of the Board
Gentlemen:
I have the honor to request this Body for its deliberation and action on the fees for my services
rendered and to be rendered to the hotel project and to the corporation. These fees are separate
from the fees you have approved in your previous Board Resolution, since my fees are separate. I
realize the position of the corporation at present, in that it is not in a financial position to pay my
services in cash, therefore, I am requesting this Body to consider payment of my fees even in the
form of shares of stock, as you have done to the other technical men and for other services rendered
to the corporation by other people.
Inasmuch as my fees are contingent on the successful implementation of this project, I request that
my fees be based on a percentage of the total project cost. The fees which I consider reasonable for
the services that I have rendered to the project up to the completion of its construction
isP500,000.00. I believe said amount is reasonable since this is approximately only of 1% of the
total project cost.
So far, I have accomplished Phases 1-5 of my report dated February 1, 1969 and which you
authorized us to do under Board Resolution of February 11, 1969. It is only Phase 6 which now
remains to be implemented. For my appointment as Consultant dated May 12, 1969 and the Board
Resolution dated June 23, 1969 wherein I was appointed to the Technical Committee, it now follows
that I have been also authorized to implement part of Phases 7 & 8.
A brief summary of my accomplished work has been as follows:
1. I have revised and made the new Project Study of your hotel project, making it bankable
and feasible.
2. I have reduced the total cost of your project by approximately P24,735,000.00.
3. I have seen to it that a registered mortgage with the Reparations Commission did not
affect the application with the IBP for approval to processing.

4. I have prepared the application papers acceptable to the DBP by means of an advance
analysis and the presentation of the financial mechanics, which was accepted by the DBP.
5. I have presented the financial mechanics of the loan wherein the requirement of the DBP
for an additional P19,000,000.00 in equity from the corporation became unnecessary.
6. The explanation of the financial mechanics and the justification of this project was
instrumental in changing the original recommendation of the Investment Banking Department
of the DBP, which recommended disapproval of this application, to the present
recommendation of the Real Estate Department which is for the approval of this project for
proceeding.
7. I have submitted to you several offers already of foreign financiers which are in your files.
We are presently arranging the said financiers to confirm their funds to the DBP for our
project,
8. We have secured the approval of the DBP to process the loan application of this
corporation as per its letter July 2, 1969.
9. We have performed other services for the corporation which led to the cooperation and
understanding of the different factions of this corporation.
I have rendered services to your corporation for the past 6 months with no clear understanding as to
the compensation of my services. All I have drawn from the corporation is the amount of P500.00
dated May 12, 1969 and personal payment advanced by Justice Felix Angelo Bautista in the amount
of P1,000.00.
I am, therefore, requesting this Body for their approval of my fees. I have shown my good faith and
willingness to render services to your corporation which is evidenced by my continued services in
the past 6 months as well as the accomplishments above mentioned. I believe that the final
completion of this hotel, at least for the processing of the DBP up to the completion of the
construction, will take approximately another 2 years. In view of the above, I again reiterate my
request for your approval of my fees. When the corporation is in a better financial position, I will
request for a withdrawal of a monthly allowance, said amount to be determined by this Body.
Very truly yours,
(Sgd.)
Francisco G., Joaquin, Jr.48
(Emphasis supplied)
Joaquin could not even rest his claim on the approval by IHCs Board of Directors. The approval
apparently arose from the confusion between the supposedly separate services that Joaquin had
rendered and those to be done under the technical proposal. The minutes of the July 11, 1969 board
meeting (when the Board of Directors allowed the payment for Joaquins past services and for the
70% project completion by the technical group) showed as follows:

III
The Third order of business is the compensation of Mr. Francisco G. Joaquin, Jr. for his services in
the corporation.
After a brief discussion that ensued, upon motion duly made and seconded, the stockholders
unanimously approved a resolution of the following tenor:
RESOLUTION NO. ___
(Series of 1969)
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a compensation in the amount of Five
Hundred Thousand (P500,000.00) Pesos for his past services and services still to be rendered in the
future to the corporation up to the completion of the Project. The President is given full discretion to
discuss with Mr. Joaquin the manner of payment of said compensation, authorizing him to pay part in
stock and part in cash."
1wphi1

Incidentally, it was also taken up the necessity of giving the Technical Group a portion of the
compensation that was authorized by this corporation in its Resolution of February 11, 1969
considering that the assistance so far given the corporation by said Technical Group in continuing
our project with the DBP and its request for guaranty for a foreign loan is 70% completed leaving
only some details which are now being processed. It is estimated thatP400,000.00 worth of Common
Stock would be reasonable for the present accomplishments and to this effect, the President is
authorized to issue the same in the name of the Technical Group, as follows:
P200,000.00 in Common Stock to Rafael Suarez, an associate in the Technical Group,
and P200,000.00 in Common stock to Francisco G. Joaquin, Jr., also a member of the Technical
Group.49
Lastly, the amount purportedly included services still to be rendered that supposedly extended until
the completion of the construction of the hotel. It is basic, however, that in obligations to do, there
can be no payment unless the obligation has been completely rendered. 50
It is notable that the confusion on the amounts of compensation arose from the parties inability to
agree on the fees that respondents should receive. Considering the absence of an agreement, and
in view of respondents constructive fulfillment of their obligation, the Court has to apply the principle
of quantum meruit in determining how much was still due and owing to respondents. Under the
principle of quantum meruit, a contractor is allowed to recover the reasonable value of the services
rendered despite the lack of a written contract.51 The measure of recovery under the principle should
relate to the reasonable value of the services performed. 52 The principle prevents undue enrichment
based on the equitable postulate that it is unjust for a person to retain any benefit without paying for
it. Being predicated on equity, the principle should only be applied if no express contract was entered
into, and no specific statutory provision was applicable.53
Under the established circumstances, we deem the total amount of P200,000.00 to be reasonable
compensation for respondents services under the principle of quantum meruit.

Finally, we sustain IHCs position that the grant of attorneys fees lacked factual or legal basis.
Attorneys fees are not awarded every time a party prevails in a suit because of the policy that no
premium should be placed on the right to litigate. There should be factual or legal support in the
records before the award of such fees is sustained. It is not enough justification for the award simply
because respondents were compelled to protect their rights.54
ACCORDINGLY, the Court DENIES the petition for review on certiorari; and AFFIRMS the decision
of the Court of Appeals promulgated on November 8, 2002 in C.A.-G.R. No. 47094 subject to the
MODIFICATIONS that: (a) International Hotel Corporation is ordered to. pay Francisco G. Joaquin,
Jr. and Rafael Suarez P100,000.00 each as compensation for their services, and (b) the award
of P20,000.00 as attorney's fees is deleted.
No costs of suit.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION

MANILA INTERNATIONAL AIRPORT

AUTHORITY,
Petitioner,

G.R. No. 180168

Present:
VELASCO, JR., J., Chairperson,
PERALTA,
ABAD,

versus

MENDOZA, and
PERLAS-BERNABE, JJ.
Promulgated:

AVIA FILIPINAS INTERNATIONAL,

INC.,

February 27, 2012

Respondent.
x-----------------------------------------------------------------------------------------x

DECISION

PERALTA, J.

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court, seeking the reversal and setting aside of the June 19, 2007 Decision and the
October 11, 2007 Resolution of the Court of Appeals (CA) in CA-G.R. CV No.
79325. The assailed CA Decision affirmed with modification the Decision dated
March 21, 2003 of the Regional Trial Court (RTC) of Quezon City, Branch 224, in
Civil Case No. Q-98-34395, while the CA Resolution denied petitioner's Motion for
Reconsideration.
1

The factual and procedural antecedents are as follows:

In September 1990, herein petitioner Manila International Airport Authority (MIAA)

entered into a contract of lease with herein respondent Avia Filipinas International
Corporation (AFIC), wherein MIAA allowed AFIC to use specific portions of land as
well as facilities within the Ninoy Aquino International Airport exclusively for the
latter's aircraft repair station and chartering operations. The contract was for one (1)
year, beginning September 1, 1990 until August 31, 1991, with a monthly rental
of P6,580.00.

In December 1990, MIAA issued Administrative Order No. 1, Series of 1990, which
revised the rates of dues, charges, fees or assessments for the use of its properties,
facilities and services within the airport complex. The Administrative Order was made
effective on December 1, 1990. As a consequence, the monthly rentals due from AFIC
was increased toP15,996.50. Nonetheless, MIAA did not require AFIC to pay the new
rental fee. Thus, it continued to pay the original fee of P6,580.00.

After the expiration of the contract, AFIC continued to use and occupy the leased
premises giving rise to an implied lease contract on a monthly basis. AFIC kept on
paying the original rental fee without protest on the part of MIAA.

Three years after the expiration of the original contract of lease, MIAA informed
AFIC, through a billing statement dated October 6, 1994, that the monthly rental over
the subject premises was increased to P15,966.50 beginning September 1, 1991,
which is the date immediately following the expiration of the original contract of
lease. MIAA sought recovery of the difference between the increased rental rate and
the original rental fee amounting to a total of P347,300.50 covering thirty-seven (37)
months between September 1, 1991 and September 31, 1994. Beginning October
1994, AFIC paid the increased rental fee. However, it refused to pay the lump sum
of P347,300.50 sought to be recovered by MIAA. For the continued refusal of AFIC
to pay the said lump sum, its employees were denied access to the leased premises
from July 1, 1997 until March 11, 1998. This, notwithstanding, AFIC continued

paying its rentals. Subsequently, AFIC was granted temporary access to the leased
premises.

AFIC then filed with the RTC of Quezon City a Complaint for damages with
injunction against MIAA and its General Manager seeking uninterrupted access to the
leased premises, recovery of actual and exemplary damages, refund of its monthly
rentals with interest at the time that it was denied access to the area being rented as
well as attorney's fees.

In its Answer with Counterclaim, MIAA contended that under its lease contract with
AFIC, MIAA is allowed to either increase or decrease the monthly rental; AFIC has
rental arrears in the amount of P347,300.50; AFIC was wrong in claiming that MIAA
took the law into its own hands in denying AFIC and its employees access to the
leased premises, because under the lease contract, in case of failure on the part of
AFIC to pay rentals for at least two (2) months, the contract shall become
automatically terminated and canceled without need of judicial action or process and
it shall be lawful for MIAA or any person or persons duly authorized on its behalf to
take possession of the property either by padlocking the premises or posting its guards
to prevent the entry of any person. MIAA prayed for the award of exemplary damages
as well as attorney's fees and litigation expenses.

On March 21, 2003, the RTC rendered its Decision, the dispositive portion of which
reads as follows:

WHEREFORE, in view of the foregoing, judgment is hereby

rendered in favor of the plaintiff [AFIC] and as against the defendants
[MIAA] ordering the latter to pay plaintiff the following:
a) the amount of P2,000,000.00 as actual damages;
b) the amount of P200,000.00 as exemplary damages;

c) to refund the monthly rental payments beginning July 1,

1997 up [to] March 11, 1998 with interest at twelve
(12%) percent;
d) the amount of P100,000.00 as attorney's fees;
e) cost of suit.
IT IS SO ORDERED.

MIAA filed an appeal with the CA contending that the RTC erred in: (1) finding that
MIAA is not entitled to apply the increase in rentals as against AFIC; (2) finding that
MIAA is not entitled to padlock the leased premises or post guards to prevent entry of
AFIC therein; and (3) awarding actual and exemplary damages and attorney's fees.

On June 19, 2007, the CA rendered its assailed Decision, the dispositive portion of
which reads, thus:

WHEREFORE, premises considered, the decision of the Regional Trial

Court of Quezon City in Civil Case No. Q-98-34395 is hereby
AFFIRMED with MODIFICATION. The awards of actual/compensatory
damages and exemplary damages are deleted. The refund of monthly
rental payments from July 1, 1997 to March 11, 1998 shall earn interest
of six percent (6%) per annum from the date of the filing of the
complaint until the finality of this decision. An interest of twelve percent
(12%) per annum shall be imposed upon any unpaid balance from such
finality until the judgment amount is fully satisfied.
The award of attorney's fees stands.
SO ORDERED.

MIAA filed a Motion for Reconsideration, but the CA denied it via its Resolution
dated October 11, 2007.

Hence, the present petition for review on certiorari raising the following issues:

WHETHER THE HONORABLE COURT OF APPEALS CORRECTLY

INTERPRETED THE PROVISIONS OF THE LEASE CONTRACT IN
LINE WITH THE PROVISIONS OF THE CIVIL CODE AND
EXISTING JURISPRUDENCE ON CONTRACTS.

WHETHER THE PRINCIPLE OF UNJUST ENRICHMENT IS

APPLICABLE TO THE INSTANT CASE.

WHETHER RESPONDENT IS ENTITLED TO ATTORNEY'S FEES.

Petitioner MIAA contends that, as an administrative agency possessed of quasilegislative and quasi-judicial powers as provided for in its charter, it is empowered to
make rules and regulations and to levy fees and charges; that its issuance of
Administrative Order No. 1, Series of 1990 is pursuant to the exercise of the
abovementioned powers; that by signing the lease contract, respondent AFIC already
agreed and gave its consent to any further increase in rental rates; as such, the
provisions of the lease contract being cited by the CA which provides that any
amendment, alteration or modification [of the lease contract] shall not be valid and
binding, unless and until made in writing and signed by the parties thereto is deemed
complied with because respondent already consented to having any subsequent
amendments to Administrative Order No. 1 automatically incorporated in the lease
contract; that the above-quoted provisions should not also be interpreted as having the
effect of limiting the authority of MIAA to impose new rental rates in accordance with
its authority under its charter.

Petitioner also argues that it is not guilty of unjust enrichment when it denied
respondent access to the leased premises, because there is nothing unlawful in its act
of imposing sanctions against respondent for the latter's failure to pay the increased
rental.
Lastly, petitioner avers that respondent is not entitled to attorney's fees, considering
that it was not compelled to litigate and incur expenses to protect its interest by reason
of any unjustified act on the part of petitioner. Petitioner reiterates that it was merely
exercising its right as the owner and administrator of the leased property and, as such,
its acts may not be deemed unwarranted.

The petition lacks merit.

Article 1306 of the Civil Code provides that [t]he contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public
policy.

Moreover, Article 1374 of the Civil Code clearly provides that [t]he various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly. Indeed, in construing a
contract, the provisions thereof should not be read in isolation, but in relation to each
other and in their entirety so as to render them effective, having in mind the intention
of the parties and the purpose to be achieved. In other words, the stipulations in a
contract and other contract documents should be interpreted together with the end in
view of giving effect to all.
7

In the present case, the Court finds nothing repugnant to law with respect to the
questioned provisions of the contract of lease between petitioner and respondent. It is
true that Article II, Paragraph 2.04 of the Contract of Lease states that
[a]ny subsequent amendment to Administrative Order No. 4, Series of 1982, which
will effect a decrease or escalation of the monthly rental or impose new and additional
fees and charges, including but not limited to government/MIAA circulars, rules and
regulation to this effect, shall be deemed incorporated herein and shall automatically
amend this Contract insofar as the monthly rental is concerned. However, the Court
agrees with the CA that the abovequoted provision of the lease contract should not be
read in isolation. Rather, it should be read together with the provisions of Article VIII,
Paragraph 8.13, which provide that [a]ny amendment, alteration or modification
of th[e] Contract shall not be valid and binding, unless and until made in writing and
signed by the parties thereto. It is clear from the foregoing that the intention of the
parties is to subject such amendment to the conformity of both petitioner and
respondent. In the instant case, there is no showing that respondent gave his
acquiescence to the said amendment or modification of the contract.
9

10

The situation is different with respect to the payments of the increased rental fee made
by respondent beginning October 1994 because by then the amendment to the contract
was made in writing through a bill sent by petitioner to respondent. The fact that
respondent subsequently settled the said bill proves that he acceded to the increase in
rental fee. The same may not be said with respect to the questioned rental fees sought
to be recovered by petitioner between September 1991 and September 1994 because
no bill was made and forwarded to respondent on the basis of which it could have
given or withheld its conformity thereto.
11

It may not be amiss to point out that during the abovementioned period, respondent
continued to pay and petitioner kept on receiving the original rental fee
of P6,580.00 without any reservations or protests from the latter. Neither did
petitioner indicate in the official receipts it issued that the payments made by
respondent constitute only partial fulfillment of the latter's obligations. Article 1235 of
the Civil Code clearly states that [w]hen the obligee accepts the performance knowing
12

its incompleteness or irregularity, and without expressing any protest or objection, the
obligation is deemed fully complied with. For failing to make any protest or objection,
petitioner is already estopped from seeking recovery of the amount claimed.

Anent the second issue, since it has been established that petitioner has no legal basis
in requiring respondent to pay additional rental fees from September 1, 1991 to
September 30, 1994, it, thus, follows that petitioner's act of denying respondent and its
employees access to the leased premises from July 1, 1997 until March 11, 1998, by
reason of respondent's non-payment of the said additional fees, is likewise unjustified.

Under Paragraph 3, Article 1654 of the Civil Code, the lessor is obliged [t]o maintain
the lessee in the peaceful and adequate enjoyment of the lease for the entire duration
of the contract.

Moreover, Article 1658 of the same Code provides that [t]he lessee may suspend the
payment of the rent in case the lessor fails to make the necessary repairs or to
maintain the lessee in peaceful and adequate enjoyment of the property leased.

Furthermore, as correctly cited by the RTC, Article 19 of the Civil Code provides that
[e]very person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith.

Article 22 of the same Code also states that [e]very person who through an act of
performance by another, or any other means, acquires or comes into possession of
something at the expense of the latter without just or legal ground, shall return the
same to him. In accordance with jurisprudence, there is unjust enrichment when a
person unjustly retains a benefit to the loss of another, or when a person retains money
or property of another against the fundamental principles of justice, equity and good

conscience. The principle of unjust enrichment essentially contemplates payment

when there is no duty to pay, and the person who receives the payment has no right to
receive it.
13

14

In the instant case, it is clear that petitioner failed to maintain respondent in the
peaceful and adequate enjoyment of the leased premises by unjustifiably preventing
the latter access thereto. Consequently, in accordance with Article 1658 of the Civil
Code, respondent had no duty to make rent payments. Despite that, respondent still
continued to pay the rental fees agreed upon in the original contract. Thus, it would be
the height of inequity and injustice as well as unjust enrichment on the part of
petitioner if the rental fees paid by respondent during the time that it was denied
access to and prevented from using the leased premises be not returned to it.

With respect to attorney's fees, the Court finds no error on the part of the CA in
sustaining such award on the ground that petitioner's act of denying respondent and
its employees access to the leased premises has compelled respondent to litigate and
incur expenses to protect its interest. The Court likewise agrees with the CA that,
under the circumstances prevailing in the present case, attorney's fees may be granted
on grounds of justice and equity.
15

16

Finally, the Court deems it proper to reiterate the provisions of Supreme Court
Administrative Circular No. 10-2000 which enjoins all judges of lower courts to
observe utmost caution, prudence and judiciousness in the issuance of writs of
execution to satisfy money judgments against government agencies and local
government units.

WHEREFORE, the petition is DENIED. The June 19, 2007 Decision and
October 11, 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 79325
are AFFIRMED. The Regional Trial Court of Quezon City, Branch 224
is ORDERED to comply with the directives of Supreme Court Administrative
Circular No. 10-2000.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
ALLIED BANKING G.R. No. 133179
CORPORATION,
Petitioner, Present:
QUISUMBING, J., Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
CHICO-NAZARIO, JJ.
LIM SIO WAN, METROPOLITAN
BANK AND TRUST CO., and Promulgated:
PRODUCERS BANK,
Respondents. March 27, 2008
x-----------------------------------------------------------------------------------------x

DECISION
VELASCO, JR., J.:
To ingratiate themselves to their valued depositors, some banks at times
bend over backwards that they unwittingly expose themselves to great risks.
The Case
This Petition for Review on Certiorari under Rule 45 seeks to reverse the
Court of Appeals (CAs) Decision promulgated on March 18, 1998[1] in CA-G.R.
CV No. 46290 entitled Lim Sio Wan v. Allied Banking Corporation, et al. The CA
Decision modified the Decision dated November 15, 1993[2] of the Regional Trial
Court (RTC), Branch 63 inMakati City rendered in Civil Case No. 6757.
The Facts
The facts as found by the RTC and affirmed by the CA are as follows:
On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied
Banking Corporation (Allied) at its Quintin Paredes Branch in Manila a money
market placement of PhP 1,152,597.35 for a term of 31 days to mature
on December 15, 1983,[3] as evidenced by Provisional Receipt No. 1356
dated November 14, 1983.[4]
On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So,
an officer of Allied, and instructed the latter to pre-terminate Lim Sio Wans money
market placement, to issue a managers check representing the proceeds of the
placement, and to give the check to one Deborah Dee Santos who would pick up
the check.[5] Lim Sio Wan described the appearance of Santos so that So could
easily identify her.[6]
Later, Santos arrived at the bank and signed the application form for a managers
check to be issued.[7] The bank issued Managers Check No. 035669 for PhP
1,158,648.49, representing the proceeds of Lim Sio Wans money market placement
in the name of Lim Sio Wan, as payee. [8] The check was cross-checked For Payees
Account Only and given to Santos.[9]

Thereafter, the managers check was deposited in the account of Filipinas Cement
Corporation (FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank),
[10]
with the forged signature of Lim Sio Wan as indorser.[11]
Earlier, on September 21, 1983, FCC had deposited a money market placement for
PhP 2 million with respondent Producers Bank. Santos was the money market
trader assigned to handle FCCs account.[12] Such deposit is evidenced by Official
Receipt No. 317568[13] and a Letter dated September 21, 1983 of Santos addressed
to Angie Lazo of FCC, acknowledging receipt of the placement. [14] The placement
matured on October 25, 1983 and was rolled-over until December 5, 1983 as
evidenced by a Letter dated October 25, 1983.[15] When the placement matured,
FCC demanded the payment of the proceeds of the placement. [16] On December 5,
1983, the same date that So received the phone call instructing her to pre-terminate
Lim Sio Wans placement, the managers check in the name of Lim Sio Wan was
deposited in the account of FCC, purportedly representing the proceeds of FCCs
money market placement with Producers Bank.[17] In other words, the Allied check
was deposited with Metrobank in the account of FCC as Producers Banks payment
of its obligation to FCC.
To clear the check and in compliance with the requirements of the Philippine
Clearing House Corporation (PCHC) Rules and Regulations, Metrobank stamped a
guaranty on the check, which reads: All prior endorsements and/or lack of
endorsement guaranteed.[18]
The check was sent to Allied through the PCHC. Upon the presentment of the
check, Allied funded the check even without checking the authenticity of Lim Sio
Wans purported indorsement. Thus, the amount on the face of the check was
credited to the account of FCC.[19]
On December 9, 1983, Lim Sio Wan deposited with Allied a second money market
placement to mature on January 9, 1984.[20]
On December 14, 1983, upon the maturity date of the first money market
placement, Lim Sio Wan went to Allied to withdraw it. [21] She was then informed
that the placement had been pre-terminated upon her instructions. She denied
giving any instructions and receiving the proceeds thereof. She desisted from

further complaints when she was assured by the banks manager that her money
would be recovered.[22]
When Lim Sio Wans second placement matured on January 9, 1984, So called Lim
Sio Wan to ask for the latters instructions on the second placement. Lim Sio Wan
instructed So to roll-over the placement for another 30 days. [23] On January 24,
1984, Lim Sio Wan, realizing that the promise that her money would be recovered
would not materialize, sent a demand letter to Allied asking for the payment of the
first placement.[24] Allied refused to pay Lim Sio Wan, claiming that the latter had
authorized the pre-termination of the placement and its subsequent release
to Santos.[25]
Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13,
1984[26] docketed as Civil Case No. 6757 against Allied to recover the proceeds of
her first money market placement. Sometime in February 1984, she withdrew her
second placement from Allied.
Allied filed a third party complaint [27] against Metrobank and Santos. In turn,
Metrobank filed a fourth party complaint[28] against FCC. FCC for its part filed a
fifth party complaint[29] against Producers Bank. Summonses were duly served
upon all the parties except for Santos, who was no longer connected with
Producers Bank.[30]
On May 15, 1984, or more than six (6) months after funding the check, Allied
informed Metrobank that the signature on the check was forged. [31] Thus,
Metrobank withheld the amount represented by the check from FCC. Later on,
Metrobank agreed to release the amount to FCC after the latter executed an
Undertaking, promising to indemnify Metrobank in case it was made to reimburse
the amount.[32]
Lim Sio Wan thereafter filed an amended complaint to include Metrobank as
a party-defendant, along with Allied.[33] The RTC admitted the amended complaint
despite the opposition of Metrobank.[34] Consequently, Allieds third party complaint
against Metrobank was converted into a cross-claim and the latters fourth party
complaint against FCC was converted into a third party complaint.[35]

After trial, the RTC issued its Decision, holding as follows:

WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendant Allied Banking Corporation to pay plaintiff the
amount of P1,158,648.49 plus 12% interest per annum from March 16,
1984 until fully paid;
2. Ordering defendant Allied Bank to pay plaintiff the amount of
P100,000.00 by way of moral damages;
3. Ordering defendant Allied Bank to pay plaintiff the amount of
P173,792.20 by way of attorneys fees; and,
4. Ordering defendant Allied Bank to pay the costs of suit.
Defendant Allied Banks cross-claim against defendant Metrobank is
DISMISSED.
Likewise defendant Metrobanks third-party complaint as against
Filipinas Cement Corporation is DISMISSED.
Filipinas Cement Corporations fourth-party complaint against Producers
Bank is also DISMISSED.
SO ORDERED.[36]

The Decision of the Court of Appeals

Allied appealed to the CA, which in turn issued the assailed Decision on March 18,
1998, modifying the RTC Decision, as follows:
WHEREFORE, premises considered, the decision appealed from is
MODIFIED. Judgment is rendered ordering and sentencing defendantappellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%)
of the amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages, attorneys fees and
costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank

and Trust Company in the same proportion of 60-40. Except as thus

modified, the decision appealed from is AFFIRMED.
SO ORDERED.[37]

Hence, Allied filed the instant petition.

The Issues
Allied raises the following issues for our consideration:
The Honorable Court of Appeals erred in holding that Lim Sio
Wan did not authorize [Allied] to pre-terminate the initial placement and
to deliver the check to Deborah Santos.
The Honorable Court of Appeals erred in absolving Producers
Bank of any liability for the reimbursement of amount adjudged
demandable.
The Honorable Court of Appeals erred in holding [Allied] liable to
the extent of 60% of amount adjudged demandable in clear disregard to
the ultimate liability of Metrobank as guarantor of all endorsement on
the check, it being the collecting bank. [38]

The petition is partly meritorious.

A Question of Fact
Allied questions the finding of both the trial and appellate courts that Allied was
not authorized to release the proceeds of Lim Sio Wans money market placement
to Santos. Allied clearly raises a question of fact. When the CA affirms the findings
of fact of the RTC, the factual findings of both courts are binding on this Court.[39]
We also agree with the CA when it said that it could not disturb the trial courts
findings on the credibility of witness So inasmuch as it was the trial court that
heard the witness and had the opportunity to observe closely her deportment and

manner of testifying. Unless the trial court had plainly overlooked facts of
substance or value, which, if considered, might affect the result of the case, [40] we
find it best to defer to the trial court on matters pertaining to credibility of
witnesses.
Additionally, this Court has held that the matter of negligence is also a factual
question.[41] Thus, the finding of the RTC, affirmed by the CA, that the respective
parties were negligent in the exercise of their obligations is also conclusive upon
this Court.
The Liability of the Parties
As to the liability of the parties, we find that Allied is liable to Lim Sio
Wan. Fundamental and familiar is the doctrine that the relationship between a bank
and a client is one of debtor-creditor.
Articles 1953 and 1980 of the Civil Code provide:
Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.
Art. 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning
simple loan.

Thus, we have ruled in a line of cases that a bank deposit is in the nature of a
simple loan or mutuum.[42] More succinctly, in Citibank, N.A. (Formerly First
National City Bank) v. Sabeniano, this Court ruled that a money market placement
is a simple loan or mutuum. [43] Further, we defined a money market in Cebu
International Finance Corporation v. Court of Appeals, as follows:
[A] 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 open market.
In a money market transaction, the investor is a lender who loans his money to a
borrower through a middleman or dealer.

In the case at bar, the money market transaction between the petitioner and
the private respondent is in the nature of a loan.[44]

Lim Sio Wan, as creditor of the bank for her money market placement, is
entitled to payment upon her request, or upon maturity of the placement, or until
the bank is released from its obligation as debtor. Until any such event, the
obligation of Allied to Lim Sio Wan remains unextinguished.
Art. 1231 of the Civil Code enumerates the instances when obligations are
considered extinguished, thus:
Art. 1231. Obligations are extinguished:
(1)
(2)
(3)
(4)
(5)
(6)

By payment or performance;
By the loss of the thing due;
By the condonation or remission of the debt;
By the confusion or merger of the rights of creditor and debtor;
By compensation;
By novation.

Other causes of extinguishment of obligations, such as annulment,

rescission, fulfillment of a resolutory condition, and prescription, are governed
elsewhere in this Code. (Emphasis supplied.)

From the factual findings of the trial and appellate courts that Lim Sio Wan
did not authorize the release of her money market placement to Santos and the
bank had been negligent in so doing, there is no question that the obligation of
Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of the Code states
that payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it. As
commented by Arturo Tolentino:
Payment made by the debtor to a wrong party does not extinguish the
obligation as to the creditor, if there is no fault or negligence which can be
imputed to the latter. Even when the debtor acted in utmost good faith and by
mistake as to the person of his creditor, or through error induced by the fraud of a
third person, the payment to one who is not in fact his creditor, or authorized to
receive such payment, is void, except as provided in Article 1241. Such payment
does not prejudice the creditor, and accrual of interest is not suspended by it.
[45]
(Emphasis supplied.)

Since there was no effective payment of Lim Sio Wans money market placement,
the bank still has an obligation to pay her at six percent (6%) interest from March
16, 1984 until the payment thereof.
We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.
Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wans
money. It points out that Metrobank guaranteed all prior indorsements inscribed on
the managers check, and without Metrobanks guarantee, the present controversy
would never have occurred. According to Allied:
Failure on the part of the collecting bank to ensure that the proceeds of
the check is paid to the proper party is, aside from being an efficient
intervening cause, also the last negligent act, x x x contributory to the
injury caused in the present case, which thereby leads to the conclusion
that it is the collecting bank, Metrobank that is the proximate cause of
the alleged loss of the plaintiff in the instant case. [46]

We are not persuaded.

Proximate cause is that cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury and without
which the result would not have occurred.[47] Thus, there is an efficient supervening
event if the event breaks the sequence leading from the cause to the ultimate
result. To determine the proximate cause of a controversy, the question that needs
to be asked is: If the event did not happen, would the injury have resulted? If the
answer is NO, then the event is the proximate cause.

In the instant case, Allied avers that even if it had not issued the check payment,
the money represented by the check would still be lost because of Metrobanks
negligence in indorsing the check without verifying the genuineness of the
indorsement thereon.
Section 66 in relation to Sec. 65 of the Negotiable Instruments Law
provides:

Section 66. Liability of general indorser.Every indorser who indorses

without qualification, warrants to all subsequent holders in due course;
a) The matters and things mentioned in subdivisions (a),
(b) and (c) of the next preceding section; and
b) That the instrument is at the time of his indorsement valid
and subsisting;
And in addition, he engages that on due presentment, it shall be
accepted or paid, or both, as the case may be according to its tenor, and
that if it be dishonored, and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.
Section 65. Warranty where negotiation by delivery, so
forth.Every person negotiating an instrument by delivery or by a
qualified indorsement, warrants:
a) That the instrument is genuine and in all respects what
it purports to be;
b) That he has a good title of it;
c) That all prior parties had capacity to contract;
d) That he has no knowledge of any fact which would impair
the validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends
in favor of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to
persons negotiating public or corporation securities, other than bills and
notes. (Emphasis supplied.)

The warranty that the instrument is genuine and in all respects what it purports to
be covers all the defects in the instrument affecting the validity thereof, including a
forged indorsement. Thus, the last indorser will be liable for the amount indicated
in the negotiable instrument even if a previous indorsement was forged. We held in
a line of cases that a collecting bank which indorses a check bearing a forged

indorsement and presents it to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately should be held liable
therefor.[48]
However, this general rule is subject to exceptions. One such exception is when the
issuance of the check itself was attended with negligence. Thus, in the cases cited
above where the collecting bank is generally held liable, in two of the cases where
the checks were negligently issued, this Court held the institution issuing the check
just as liable as or more liable than the collecting bank.
In isolated cases where the checks were deposited in an account other than that of
the payees on the strength of forged indorsements, we held the collecting bank
solely liable for the whole amount of the checks involved for having indorsed the
same. In Republic Bank v. Ebrada,[49] the check was properly issued by the Bureau
of Treasury. While in Banco de Oro Savings and Mortgage Bank (Banco de Oro) v.
Equitable Banking Corporation,[50] Banco de Oro admittedly issued the checks in
the name of the correct payees. And inTraders Royal Bank v. Radio Philippines
Network, Inc.,[51] the checks were issued at the request of Radio Philippines
Network, Inc. from Traders Royal Bank.
However, in Bank of the Philippine Islands v. Court of Appeals, we said that the
drawee bank is liable for 60% of the amount on the face of the negotiable
instrument and the collecting bank is liable for 40%. We also noted the relative
negligence exhibited by two banks, to wit:
Both banks were negligent in the selection and supervision of their
employees resulting in the encashment of the forged checks by an impostor. Both
banks were not able to overcome the presumption of negligence in the selection
and supervision of their employees. It was the gross negligence of the employees
of both banks which resulted in the fraud and the subsequent loss. While it is true
that petitioner BPIs negligence may have been the proximate cause of the loss,
respondent CBCs negligence contributed equally to the success of the impostor in
encashing the proceeds of the forged checks. Under these circumstances, we apply
Article 2179 of the Civil Code to the effect that while respondent CBC may
recover its losses, such losses are subject to mitigation by the courts. (See Phoenix
Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]).
Considering the comparative negligence of the two (2) banks, we rule that
the demands of substantial justice are satisfied by allocating the loss of

P2,413,215.16 and the costs of the arbitration proceeding in the amount of

P7,250.00 and the cost of litigation on a 60-40 ratio.[52]

Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing

institution and the collecting bank should equally share the liability for the loss of
amount represented by the checks concerned due to the negligence of both parties:
The Court finds as reasonable, the proportionate sharing of fifty percent-fifty
percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing
the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired
hospital cashier to receive the checks for the payee hospital for a period close to
three years and in not properly ascertaining why the retired hospital cashier was
collecting checks for the payee hospital in addition to the hospitals real cashier,
respondent Province contributed to the loss amounting to P203,300.00 and shall
be liable to the PNB for fifty (50%) percent thereof. In effect,
the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from
PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is liable on its warranties as indorser of the
checks which were deposited by Fausto Pangilinan, having guaranteed the
genuineness of all prior indorsements, including that of the chief of the payee
hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to
ascertain the genuineness of the payees indorsement.[53]

A reading of the facts of the two immediately preceding cases would reveal that the
reason why the bank or institution which issued the check was held partially liable
for the amount of the check was because of the negligence of these parties which
resulted in the issuance of the checks.
In the instant case, the trial court correctly found Allied negligent in issuing the
managers check and in transmitting it to Santos without even a written
authorization.[54] In fact, Allied did not even ask for the certificate evidencing the
money market placement or call up Lim Sio Wan at her residence or office to
confirm her instructions. Both actions could have prevented the whole fraudulent
transaction from unfolding. Allieds negligence must be considered as the
proximate cause of the resulting loss.
To reiterate, had Allied exercised the diligence due from a financial institution, the
check would not have been issued and no loss of funds would have resulted. In

fact, there would have been no issuance of indorsement had there been no check in
the first place.
The liability of Allied, however, is concurrent with that of Metrobank as the last
indorser of the check. When Metrobank indorsed the check in compliance with the
PCHC Rules and Regulations[55] without verifying the authenticity of Lim Sio
Wans indorsement and when it accepted the check despite the fact that it was crosschecked payable to payees account only,[56] its negligent and cavalier indorsement
contributed to the easier release of Lim Sio Wans money and perpetuation of the
fraud. Given the relative participation of Allied and Metrobank to the instant case,
both banks cannot be adjudged as equally liable. Hence, the 60:40 ratio of the
liabilities of Allied and Metrobank, as ruled by the CA, must be upheld.
FCC, having no participation in the negotiation of the check and in the forgery of
Lim Sio Wans indorsement, can raise the real defense of forgery as against both
banks.[57]
As to Producers Bank, Allied Banks argument that Producers Bank must be
held liable as employer of Santos under Art. 2180 of the Civil Code is erroneous.
Art. 2180 pertains to the vicarious liability of an employer for quasi-delicts that an
employee has committed. Such provision of law does not apply to civil liability
arising from delict.
One also cannot apply the principle of subsidiary liability in Art. 103 of the
Revised Penal Code in the instant case. Such liability on the part of the employer
for the civil aspect of the criminal act of the employee is based on the conviction of
the employee for a crime. Here, there has been no conviction for any crime.
As to the claim that there was unjust enrichment on the part of Producers
Bank, the same is correct. Allied correctly claims in its petition that Producers
Bank should reimburse Allied for whatever judgment that may be rendered against
it pursuant to Art. 22 of the Civil Code, which provides: Every person who through
an act of performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just cause or legal
ground, shall return the same to him.

The above provision of law was clarified in Reyes v. Lim, where we ruled
that [t]here is unjust enrichment when a person unjustly retains a benefit to the loss
of another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience.[58]
In Tamio v. Ticson, we further clarified the principle of unjust
enrichment, thus: Under Article 22 of the Civil Code, there is unjust enrichment
when (1) a person is unjustly benefited, and (2) such benefit is derived at the
expense of or with damages to another.[59]
In the instant case, Lim Sio Wans money market placement in Allied Bank
was pre-terminated and withdrawn without her consent. Moreover, the proceeds of
the placement were deposited in Producers Banks account in Metrobank without
any justification. In other words, there is no reason that the proceeds of Lim Sio
Wans placement should be deposited in FCCs account purportedly as payment for
FCCs money market placement and interest in Producers Bank. With such
payment, Producers Banks indebtedness to FCC was extinguished, thereby
benefitting the former. Clearly, Producers Bank was unjustly enriched at the
expense of Lim Sio Wan. Based on the facts and circumstances of the case,
Producers Bank should reimburse Allied and Metrobank for the amounts the two
latter banks are ordered to pay Lim Sio Wan.
It cannot be validly claimed that FCC, and not Producers Bank, should be
considered as having been unjustly enriched. It must be remembered that FCCs
money market placement with Producers Bank was already due and demandable;
thus, Producers Banks payment thereof was justified. FCC was entitled to such
payment. As earlier stated, the fact that the indorsement on the check was forged
cannot be raised against FCC which was not a part in any stage of the negotiation of
the check. FCC was not unjustly enriched.
From the facts of the instant case, we see that Santos could be the architect
of the entire controversy. Unfortunately, since summons had not been served
on Santos, the courts have not acquired jurisdiction over her.[60] We, therefore,
cannot ascribe to her liability in the instant case.

Clearly, Producers Bank must be held liable to Allied and Metrobank for the
amount of the check plus 12% interest per annum, moral damages, attorneys fees,
and costs of suit which Allied and Metrobank are adjudged to pay Lim Sio Wan
based on a proportion of 60:40.
WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998
CA Decision in CA-G.R. CV No. 46290 and the November 15, 1993 RTC
Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION.
Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as
follows:
WHEREFORE, premises considered, the decision appealed from is
MODIFIED. Judgment is rendered ordering and sentencing defendantappellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%)
of the amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages, attorneys fees and
costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank
and Trust Company in the same proportion of 60-40. Except as thus
modified, the decision appealed from is AFFIRMED.
SO ORDERED.

Additionally and by way of MODIFICATION, Producers Bank is hereby

ordered to pay Allied and Metrobank the aforementioned amounts. The liabilities
of the parties are concurrent and independent of each other.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 166704

December 20, 2006

AGRIFINA AQUINTEY, petitioner,

vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review under Rule 45 of the Revised Rules on Civil Procedure of the
Decision1 of the Court of Appeals in CA-G.R. CV No. 78075, which affirmed with modification the
Decision2 of the Regional Trial Court (RTC), Branch 61, Baguio City, and the Resolution3 of the
appellate court denying reconsideration thereof.
The Antecedents
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a complaint for sum
of money and damages against the respondents, spouses Felicidad and Rico Tibong. Agrifina
alleged that Felicidad had secured loans from her on several occasions, at monthly interest rates of
6% to 7%. Despite demands, the spouses Tibong failed to pay their outstanding loan, amounting
to P773,000.00 exclusive of interests. The complaint contained the following prayer:
WHEREFORE, premises considered, it is most respectfully prayed of this Honorable Court,
after due notice and hearing, to render judgment ordering defendants to pay plaintiff the
following:
a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00)
representing the principal obligation of the defendants with the stipulated interests of
six (6%) percent per month from May 11, 1999 to date and or those that are
stipulated on the contracts as mentioned from paragraph two (2) of the complaint.
b). FIFTEEN PERCENT (15%) of the total accumulated obligations as attorney's
fees.
c). Actual expenses representing the filing fee and other charges and expenses to be
incurred during the prosecution of this case.
Further prays for such other relief and remedies just and equitable under the premises. 4

Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in I.S. No. 93-334, as well
as copies of the promissory notes and acknowledgment receipts executed by Felicidad covering the
loaned amounts.5
In their Answer with Counterclaim,6 spouses Tibong admitted that they had secured loans from
Agrifina. The proceeds of the loan were then re-lent to other borrowers at higher interest rates. They,
likewise, alleged that they had executed deeds of assignment in favor of Agrifina, and that their
debtors had executed promissory notes in Agrifina's favor. According to the spouses Tibong, this
resulted in a novation of the original obligation to Agrifina. They insisted that by virtue of these
documents, Agrifina became the new collector of their debtors; and the obligation to pay the balance
of their loans had been extinguished.
The spouses Tibong specifically denied the material averments in paragraphs 2 and 2.1 of the
complaint. While they did not state the total amount of their loans, they declared that they did not
receive anything from Agrifina without any written receipt. 7 They prayed for that the complaint be
dismissed.
In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained any loan from
Agrifina without the benefit of a written document.8
On August 17, 2000, the trial court issued a Pre-Trial Order where the following issues of the case
were defined:
Whether or not plaintiff is entitled to her claim of P773,000.00;
Whether or not plaintiff is entitled to stipulated interests in the promissory notes; and
Whether or not the parties are entitled to their claim for damages.9
The Case for Petitioner
Agrifina and Felicidad were classmates at the University of Pangasinan. Felicidad's husband, Rico,
also happened to be a distant relative of Agrifina. Upon Felicidad's prodding, Agrifina agreed to lend
money to Felicidad. According to Felicidad, Agrifina would be earning interests higher than those
given by the bank for her money. Felicidad told Agrifina that since she (Felicidad) was engaged in
the sale of dry goods at the GP Shopping Arcade, she would use the money to buy bonnels and
thread.10 Thus, Agrifina lent a total sum ofP773,000.00 to Felicidad, and each loan transaction was
covered by either a promissory note or an acknowledgment receipt. 11 Agrifina stated that she had
lost the receipts signed by Felicidad for the following amounts: P100,000.00, P34,000.00
and P2,000.00.12 The particulars of the transactions are as follows:

Amount

Date Obtained

Interest Per
Mo.

Due Date

P 100,000.00

May 11, 1989

6%

August 11, 1989

4,000.00

June 8, 1989

50,000.00

June 13, 1989

6%

On demand

60,000.00

Aug. 16, 1989

7%

January 1990

205,000.00

Oct. 13, 1989

7%

January 1990

128,000.00

Oct. 19, 1989

7%

January 1990

2,000.00

Nov. 12, 1989

6%

April 28, 1990

10,000.00

June 13, 1990

80,000.00

Jan. 4, 1990

34,000.00

6%

October 19, 1989

100,000.00

July 14, 1989

5%

October 198913

According to Agrifina, Felicidad was able to pay only her loans amounting to P122,600.00.14
In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804 dated August 25, 1990 in
the amount of P50,000.00 as partial payment.15 However, the check was dishonored for having been
drawn against insufficient funds.16 Agrifina then filed a criminal case against Felicidad in the Office of
the City Prosecutor. An Information for violation of Batas Pambansa Bilang 22 was filed against
Felicidad, docketed as Criminal Case No. 11181-R. After trial, the court ordered Felicidad to
pay P50,000.00. Felicidad complied and paid the face value of the check.17
In the meantime, Agrifina learned that Felicidad had re-loaned the amounts to other
borrowers.18 Agrifina sought the assistance of Atty. Torres G. A-ayo who advised her to require
Felicidad to execute deeds of assignment over Felicidad's debtors. The lawyer also suggested that
Felicidad's debtors execute promissory notes in Agrifina's favor, to "turn over" their loans from
Felicidad. This arrangement would facilitate collection of Felicidad's account. Agrifina agreed to the

proposal.19 Agrifina, Felicidad, and the latter's debtors had a conference20 where Atty. A-ayo
explained that Agrifina could apply her collections as payments of Felicidad's account. 21
From August 7, 1990 to October, 1990, Felicidad executed deeds of assignment of credits
(obligations)22 duly notarized by Atty. A-ayo, in which Felicidad transferred and assigned to Agrifina
the total amount of P546,459.00 due from her debtors.23 In the said deeds, Felicidad confirmed that
her debtors were no longer indebted to her for their respective loans. For her part, Agrifina
conformed to the deeds of assignment relative to the loans of Virginia Morada and Corazon
Dalisay.24 She was furnished copies of the deeds as well as the promissory notes. 25
The following debtors of Felicidad executed promissory notes where they obliged themselves to pay
directly to Agrifina:

Debtors

Juliet & Tommy Tibong

Account

Date of Instrument

P50,000.00 August 7, 1990

Date Payable

November 4, 1990 and February

4, 1991

Corazon Dalisay

8,000.00 August 7, 1990

No date

Rita Chomacog

4,480.00 August 8, 1990

September 23, 1990

Antoinette Manuel

12,000.00 October 19, 1990

Rosemarie Bandas

8,000.00 August 8, 1990

March 30, 1991

February 3, 1991

Fely Cirilo

63,600.00 September 13, 1990

No date

Virginia Morada

62,379.00 August 9, 1990

February 9, 1991

Carmelita Casuga

59,000.00 August 28, 1990

February 28, 1991

Merlinda Gelacio

17,200.00 August 29, 1990

November 29, 199026

Total

P284,659.00

Agrifina narrated that Felicidad showed to her the way to the debtors' houses to enable her to collect
from them. One of the debtors, Helen Cabang, did not execute any promissory note but conformed
to the Deed of Assignment of Credit which Felicidad executed in favor of Agrifina. 27 Eliza Abance
conformed to the deed of assignment for and in behalf of her sister, Fely Cirilo. 28 Edna Papat-iw was
not able to affix her signature on the deed of assignment nor sign the promissory note because she
was in Taipei, Taiwan.29
Following the execution of the deeds of assignment and promissory notes, Agrifina was able to
collect the total amount of P301,000.00 from Felicidad's debtors.30 In April 1990, she tried to collect
the balance of Felicidad's account, but the latter told her to wait until her debtors had money.31 When
Felicidad reneged on her promise, Agrifina filed a complaint in the Office of the Barangay Captain for
the collection of P773,000.00. However, no settlement was arrived at.32
The Case for Respondents
Felicidad testified that she and her friend Agrifina had been engaged in the money-lending
business.33 Agrifina would lend her money with monthly interest, 34 and she, in turn, would re-lend the
money to borrowers at a higher interest rate. Their business relationship turned sour when Agrifina
started complaining that she (Felicidad) was actually earning more than Agrifina. 35 Before the
respective maturity dates of her debtors' loans, Agrifina asked her to pay her account since Agrifina
needed money to buy a house and lot in Manila. However, she told Agrifina that she could not pay
yet, as her debtors' loan payments were not yet due. 36 Agrifina then came to her store every
afternoon to collect from her, and persuaded her to go to Atty. Torres G. A-ayo for legal advice. 37 The
lawyer suggested that she indorse the accounts of her debtors to Agrifina so that the latter would be
the one to collect from her debtors and she would no longer have any obligation to Agrifina. 38 She
then executed deeds of assignment in favor of Agrifina covering the sums of money due from her
debtors. She signed the deeds prepared by Atty. A-ayo in the presence of Agrifina. 39 Some of the
debtors signed the promissory notes which were likewise prepared by the lawyer. Thereafter,
Agrifina personally collected from Felicidad's debtors.40 Felicidad further narrated that she
received P250,000.00 from one of her debtors, Rey Rivera, and remitted the payment to Agrifina. 41
Agrifina testified, on rebuttal, that she did not enter into a re-lending business with Felicidad. When
she asked Felicidad to consolidate her loans in one document, the latter told her to seek the
assistance of Atty. A-ayo.42The lawyer suggested that Felicidad assign her credits in order to help her
collect her loans.43 She agreed to the deeds of assignment to help Felicidad collect from the
debtors.44
On January 20, 2003, the trial court rendered its Decision45 in favor of Agrifina. The fallo of the
decision reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants
ordering the latter to pay the plaintiffs (sic) the following amounts:
1. P472,000 as actual obligation with the stipulated interest of 6% per month from May 11,
1999 until the said obligation is fully paid. However, the amount of P50,000 shall be
deducted from the total accumulated interest for the same was already paid by the defendant
as admitted by the plaintiff in her complaint,
2. P25,000 as attorney's fees,
3. [T]o pay the costs.

SO ORDERED.46
The trial court ruled that Felicidad's obligation had not been novated by the deeds of assignment and
the promissory notes executed by Felicidad's borrowers. It explained that the documents did not
contain any express agreement to novate and extinguish Felicidad's obligation. It declared that the
deeds and notes were separate contracts which could stand alone from the original indebtedness of
Felicidad. Considering, however, Agrifina's admission that she was able to collect from Felicidad's
debtors the total amount of P301,000.00, this should be deducted from the latter's
accountability.47 Hence, the balance, exclusive of interests, amounted to P472,000.00.
On appeal, the CA affirmed with modification the decision of the RTC and stated that, based on the
promissory notes and acknowledgment receipts signed by Felicidad, the appellants secured loans
from the appellee in the total principal amount of only P637,000.00, not P773,000.00 as declared by
the trial court. The CA found that, other than Agrifina's bare testimony that she had lost the
promissory notes and acknowledgment receipts, she failed to present competent documentary
evidence to substantiate her claim that Felicidad had, likewise, borrowed the amounts
of P100,000.00, P34,000.00, and P2,000.00. Of the P637,000.00 total account,P585,659.00 was
covered by the deeds of assignment and promissory notes; hence, the balance of Felicidad's
account amounted to only P51,341.00. The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the decision dated January 20, 2003 of the RTC,
Baguio City, Branch 61 in Civil Case No. 4370-R is hereby MODIFIED. Defendantsappellants are hereby ordered to pay the balance of the total indebtedness in the amount
of P51,341.00 plus the stipulated interest of 6% per month from May 11, 1999 until the
finality of this decision.
SO ORDERED.48
The appellate court sustained the trial court's ruling that Felicidad's obligation to Agrifina had not
been novated by the deeds of assignment and promissory notes executed in the latter's favor.
Although Agrifina was subrogated as a new creditor in lieu of Felicidad, Felicidad's obligation to
Agrifina under the loan transaction remained; there was no intention on their part to novate the
original obligation. Nonetheless, the appellate court held that the legal effects of the deeds of
assignment could not be totally disregarded. The assignments of credits were onerous, hence, had
the effect of payment, pro tanto, of the outstanding obligation. The fact that Agrifina never repudiated
or rescinded such assignments only shows that she had accepted and conformed to it.
Consequently, she cannot collect both from Felicidad and her individual debtors without running
afoul to the principle of unjust enrichment. Agrifina's primary recourse then is against Felicidad's
individual debtors on the basis of the deeds of assignment and promissory notes.
The CA further declared that the deeds of assignment executed by Felicidad had the effect of
payment of her outstanding obligation to Agrifina in the amount of P585,659.00. It ruled that, since
an assignment of credit is in the nature of a sale, the assignors remained liable for the warranties as
they are responsible for the existence and legality of the credit at the time of the assignment.
Both parties moved to have the decision reconsidered,49 but the appellate court denied both motions
on December 21, 2004.50
Agrifina, now petitioner, filed the instant petition, contending that
1. The Honorable Court of Appeals erred in ruling that the deeds of assignment in favor of
petitioner has the effect of payment of the original obligation even as it ruled out that the

original obligation and the assigned credit are distinct and separate and can stand
independently from each other;
2. The Honorable Court of Appeals erred in passing upon issues raised for the first time on
appeal; and
3. The Honorable Court of Appeals erred in resolving fact not in issue.51
Petitioner avers that the appellate court erred in ruling that respondents' original obligation amounted
to onlyP637,000.00 (instead of P773,000.00) simply because she lost the promissory notes/receipts
which evidenced the loans executed by respondent Felicidad Tibong. She insists that the issue of
whether Felicidad owed her less than P773,000.00 was not raised by respondents during pre-trial
and in their appellate brief; the appellate court was thus proscribed from taking cognizance of the
issue.
Petitioner avers that respondents failed to deny, in their verified answer, that they had secured
the P773,000.00 loan; hence, respondents are deemed to have admitted the allegation in the
complaint that the loans secured by respondent from her amounted to P773,000.00. As gleaned
from the trial court's pre-trial order, the main issue is whether or not she should be made to pay this
amount.
Petitioner further maintains that the CA erred in deducting the total amount of P585,659.00 covered
by the deeds of assignment executed by Felicidad and the promissory notes executed by the latter's
debtors, and that the balance of respondents' account was only P51,341.00. Moreover, the appellate
court's ruling that there was no novation runs counter to its holding that the primary recourse was
against Felicidad's debtors. Petitioner avers that of the 11 deeds of assignment and promissory
notes, only two bore her signature.52 She insists that she is not bound by the deeds which she did
not sign. By assigning the obligation to pay petitioner their loan accounts, Felicidad's debtors merely
assumed the latter's obligation and became co-debtors to petitioner. Respondents were not released
from their obligation under their loan transactions, and she had the option to demand payment from
them or their debtors. Citing the ruling of this Court in Magdalena Estates, Inc. v.
Rodriguez,53 petitioner insists that the first debtor is not released from responsibility upon reaching
an agreement with the creditor. The payment by a third person of the first debtor's obligation does
not constitute novation, and the creditor can still enforce the obligation against the original debtor.
Petitioner also cites the ruling of this Court in Guerrero v. Court of Appeals.54
In their Comment on the petition, respondents aver that by virtue of respondent Felicidad's execution
of the deeds of assignment, and the original debtors' execution of the promissory notes (along with
their conformity to the deeds of assignment with petitioner's consent), their loan accounts with
petitioner amounting to P585,659.00 had been effectively extinguished. Respondents point out that
this is in accordance with Article 1291, paragraph 2, of the Civil Code. Thus, the original debtors of
respondents had been substituted as petitioner's new debtors.
Respondents counter that petitioner had been subrogated to their right to collect the loan accounts
of their debtors. In fact, petitioner, as the new creditor of respondents' former debtors had been able
to collect the latter's loan accounts which amounted to P301,000.00. The sums received by
respondents' debtors were the same loans which they obliged to pay to petitioner under the
promissory notes executed in petitioner's favor.
Respondents aver that their obligation to petitioner cannot stand or exist separately from the original
debtors' obligation to petitioner as the new creditor. If allowed to collect from them as well as from
their original debtors, petitioner would be enriching herself at the expense of respondents. Thus,

despite the fact that petitioner had collected P172,600.00 from respondents and P301,000.00 from
the original debtors, petitioner still sought to collect P773,000.00 from them in the RTC. Under the
deeds of assignment executed by Felicidad and the original debtors' promissory notes, the original
debtors' accounts were assigned to petitioner who would be the new creditor. In fine, respondents
are no longer liable to petitioner for the balance of their loan account inclusive of interests.
Respondents also insist that petitioner failed to prove that she (petitioner) was merely authorized to
collect the accounts of the original debtors so as to to facilitate the payment of respondents' loan
obligation.
The Issues
The threshold issues are: (1) whether respondent Felicidad Tibong borrowed P773,000.00 from
petitioner; and (2) whether the obligation of respondents to pay the balance of their loans, including
interest, was partially extinguished by the execution of the deeds of assignment in favor of petitioner,
relative to the loans of Edna Papat-iw, Helen Cabang, Antoinette Manuel, and Fely Cirilo in the total
amount of P371,000.00.
The Ruling of the Court
We have carefully reviewed the brief of respondents as appellants in the CA, and find that, indeed,
they had raised the issue of whether they received P773,000.00 by way of loans from petitioner.
They averred that, as gleaned from the documentary evidence of petitioner in the RTC, the total
amount they borrowed was onlyP673,000.00. They asserted that petitioner failed to adduce concrete
evidence that they received P773,000.00 from her.55
We agree, however, with petitioner that the appellate court erred in reversing the finding of the RTC
simply because petitioner failed to present any document or receipt signed by Felicidad.
Section 10, Rule 8 of the Rules of Civil Procedure requires a defendant to "specify each material
allegation of fact the truth of which he does not admit and, whenever practicable, x x x set forth the
substance of the matters upon which he relies to support his denial. 56
Section 11, Rule 8 of the same Rules provides that allegations of the complaint not specifically
denied are deemed admitted.57
The purpose of requiring the defendant to make a specific denial is to make him disclose the matters
alleged in the complaint which he succinctly intends to disprove at the trial, together with the matter
which he relied upon to support the denial. The parties are compelled to lay their cards on the table. 58
A denial is not made specific simply because it is so qualified by the defendant. A general denial
does not become specific by the use of the word "specifically." When matters of whether the
defendant alleges having no knowledge or information sufficient to form a belief are plainly and
necessarily within the defendant's knowledge, an alleged "ignorance or lack of information" will not
be considered as a specific denial. Section 11, Rule 8 of the Rules also provides that material
averments in the complaint other than those as to the amount of unliquidated damages shall be
deemed admitted when not specifically denied.59 Thus, the answer should be so definite and certain
in its allegations that the pleader's adversary should not be left in doubt as to what is admitted, what
is denied, and what is covered by denials of knowledge as sufficient to form a belief. 60
In the present case, petitioner alleged the following in her complaint:

2. That defendants are indebted to the plaintiff in the principal amount of SEVEN HUNDRED
SEVENTY-THREE THOUSAND PESOS (P773,000.00) Philippine Currency with a stipulated
interest which are broken down as follows. The said principal amounts was admitted by the
defendants in their counter-affidavit submitted before the court. Such affidavit is hereby
attached as Annex "A;"61
xxxx
H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with interest at six (6%)
per cent per month and payable on October 19, 1989, however[,] the receipt for the
meantime cannot be recovered as it was misplaced by the plaintiff but the letter of defendant
FELICIDAD TIBONG is hereby attached as Annex "H" for the appreciation of the Honorable
court;
I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with interest at five (5%)
percent per month, obtained on July 14, 1989 and payable on October 14, 1989. Such
receipt was lost but admitted by the defendants in their counter-affidavit as attached [to] this
complaint and marked as Annex "A" mentioned in paragraph one (1); x x x62
In their Answer, respondents admitted that they had secured loans from petitioner. While the
allegations in paragraph 2 of the complaint were specifically denied, respondents merely averred
that petitioner and respondent Felicidad entered into an agreement for the lending of money to
interested borrowers at a higher interest rate. Respondents failed to declare the exact amount of the
loans they had secured from petitioner. They also failed to deny the allegation in paragraph 2 of the
complaint that respondent Felicidad signed and submitted a counter-affidavit in I.S. No. 93-334
where she admitted having secured loans from petitioner in the amount ofP773,000.00.
Respondents, likewise, failed to deny the allegation in paragraph 2(h) of the complaint that
respondents had secured a P34,000.00 loan payable on October 19, 1989, evidenced by a receipt
which petitioner had misplaced. Although respondents specifically denied in paragraph 2.11 of their
Answer the allegations in paragraph 2(I) of the complaint, they merely alleged that "they have not
received sums of money from the plaintiff without any receipt therefor."
Respondents, likewise, failed to specifically deny another allegation in the complaint that they had
secured aP100,000.00 loan from petitioner on July 14, 1989; that the loan was payable on October
14, 1989; and evidenced by a receipt which petitioner claimed to have lost. Neither did respondents
deny the allegation that respondents admitted their loan of P100,000.00 in the counter-affidavit of
respondent Felicidad, which was appended to the complaint as Annex "A." In fine, respondents had
admitted the existence of their P773,000.00 loan from petitioner.
We agree with the finding of the CA that petitioner had no right to collect from respondents the total
amount ofP301,000.00, which includes more than P178,980.00 which respondent Felicidad collected
from Tibong, Dalisay, Morada, Chomacog, Cabang, Casuga, Gelacio, and Manuel. Petitioner cannot
again collect the same amount from respondents; otherwise, she would be enriching herself at their
expense. Neither can petitioner collect from respondents more than P103,500.00 which she had
already collected from Nimo, Cantas, Rivera, Donguis, Fernandez and Ramirez.
There is no longer a need for the Court to still resolve the issue of whether respondents' obligation to
pay the balance of their loan account to petitioner was partially extinguished by the promissory notes
executed by Juliet Tibong, Corazon Dalisay, Rita Chomacog, Carmelita Casuga, Merlinda Gelacio
and Antoinette Manuel because, as admitted by petitioner, she was able to collect the amounts
under the notes from said debtors and applied them to respondents' accounts.

Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways by which
obligations are extinguished. Obligations may be modified by changing their object or principal
creditor or by substituting the person of the debtor.63 The burden to prove the defense that an
obligation has been extinguished by novation falls on the debtor.64 The nature of novation was
extensively explained in Iloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr.,65 as follows:
Novation may either be extinctive or modificatory, much being dependent on the nature of
the change and the intention of the parties. Extinctive novation is never presumed; there
must be an express intention to novate; in cases where it is implied, the acts of the parties
must clearly demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation necessitates that the
incompatibility between the old and new obligation be total on every point such that the old
obligation is completely superseded by the new one. The test of incompatibility is whether
they can stand together, each one having an independent existence; if they cannot and are
irreconciliable, the subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing an existing
obligation and, second, creating a new one in its stead. This kind of novation presupposes a
confluence of four essential requisites: (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the
birth of a valid new obligation. Novation is merely modificatory where the change brought
about by any subsequent agreement is merely incidental to the main obligation (e.g., a
change in interest rates or an extension of time to pay); in this instance, the new agreement
will not have the effect of extinguishing the first but would merely supplement it or supplant
some but not all of its provisions.66 (Citations Omitted)
Novation which consists in substituting a new debtor (delegado) in the place of the original one
(delegante) may be made even without the knowledge or against the will of the latter but not without
the consent of the creditor. Substitution of the person of the debtor may be effected by delegacion,
meaning, the debtor offers, and the creditor (delegatario), accepts a third person who consents to
the substitution and assumes the obligation. Thus, the consent of those three persons is
necessary.67 In this kind of novation, it is not enough to extend the juridical relation to a third person;
it is necessary that the old debtor be released from the obligation, and the third person or new debtor
take his place in the relation.68 Without such release, there is no novation; the third person who has
assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no
agreement as to solidarity, the first and the new debtor are considered obligated jointly.69
In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration necessary to
support a contract of novation, the rule is the same as in other contracts. The consideration need not
be pecuniary or even beneficial to the person promising. It is sufficient if it be a loss of an
inconvenience, such as the relinquishment of a right or the discharge of a debt, the postponement of
a remedy, the discontinuance of a suit, or forbearance to sue.
In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of Appeals ruled that the theory of
novation is that the new debtor contracts with the old debtor that he will pay the debt, and
also to the same effect with the creditor, while the latter agrees to accept the new debtor for
the old. A novation is not made by showing that the substituted debtor agreed to pay the debt; it
must appear that he agreed with the creditor to do so. Moreover, the agreement must be based
on the consideration of the creditor's agreement to look to the new debtor instead of the old.
It is not essential that acceptance of the terms of the novation and release of the debtor be shown by
express agreement. Facts and circumstances surrounding the transaction and the subsequent
conduct of the parties may show acceptance as clearly as an express agreement, albeit implied. 72

We find in this case that the CA correctly found that respondents' obligation to pay the balance of
their account with petitioner was extinguished, pro tanto, by the deeds of assignment of credit
executed by respondent Felicidad in favor of petitioner.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same extent as the assignor could enforce it against the
debtor.73 It may be in the form of sale, but at times it may constitute a dation in payment, such as
when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has
against a third person.74
In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago is the delivery and
transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. It is a special mode of payment where the debtor offers another thing
to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking
really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the debtor's obligation. As such,
the essential elements of a contract of sale, namely, consent, object certain, and cause or
consideration must be present. In its modern concept, what actually takes place in dacion en pago is
an objective novation of the obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object of the contract of sale, while the debt is
considered as the purchase price. In any case, common consent is an essential prerequisite, be it
sale or novation, to have the effect of totally extinguishing the debt or obligation. 76
The requisites for dacion en pago are: (1) there must be a performance of the prestation in lieu of
payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a
credit against the third person; (2) there must be some difference between the prestation due and
that which is given in substitution (aliud pro alio); and (3) there must be an agreement between the
creditor and debtor that the obligation is immediately extinguished by reason of the performance of a
prestation different from that due.77
All the requisites for a valid dation in payment are present in this case. As gleaned from the deeds,
respondent Felicidad assigned to petitioner her credits "to make good" the balance of her obligation.
Felicidad testified that she executed the deeds to enable her to make partial payments of her
account, since she could not comply with petitioner's frenetic demands to pay the account in cash.
Petitioner and respondent Felicidad agreed to relieve the latter of her obligation to pay the balance
of her account, and for petitioner to collect the same from respondent's debtors.
Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix their conformity
to the deeds. In an assignment of credit, however, the consent of the debtor is not essential for its
perfection; the knowledge thereof or lack of it affecting only the efficaciousness or inefficaciousness
of any payment that might have been made. The assignment binds the debtor upon acquiring
knowledge of the assignment but he is entitled, even then, to raise against the assignee the same
defenses he could set up against the assignor78 necessary in order that assignment may fully
produce legal effects. Thus, the duty to pay does not depend on the consent of the debtor. The
purpose of the notice is only to inform that debtor from the date of the assignment. Payment should
be made to the assignee and not to the original creditor.
The transfer of rights takes place upon perfection of the contract, and ownership of the right,
including all appurtenant accessory rights, is acquired by the assignee79 who steps into the shoes of
the original creditor as subrogee of the latter80 from that amount, the ownership of the right is

acquired by the assignee. The law does not require any formal notice to bind the debtor to the
assignee, all that the law requires is knowledge of the assignment. Even if the debtor had not been
notified, but came to know of the assignment by whatever means, the debtor is bound by it. If the
document of assignment is public, it is evidence even against a third person of the facts which gave
rise to its execution and of the date of the latter. The transfer of the credit must therefore be held
valid and effective from the moment it is made to appear in such instrument, and third persons must
recognize it as such, in view of the authenticity of the document, which precludes all suspicion of
fraud with respect to the date of the transfer or assignment of the credit. 81
As gleaned from the deeds executed by respondent Felicidad relative to the accounts of her other
debtors, petitioner was authorized to collect the amounts of P6,000.00 from Cabang,
and P63,600.00 from Cirilo. They obliged themselves to pay petitioner. Respondent Felicidad,
likewise, unequivocably declared that Cabang and Cirilo no longer had any obligation to her.
Equally significant is the fact that, since 1990, when respondent Felicidad executed the deeds,
petitioner no longer attempted to collect from respondents the balance of their accounts. It was only
in 1999, or after nine (9) years had elapsed that petitioner attempted to collect from respondents. In
the meantime, petitioner had collected from respondents' debtors the amount of P301,000.00.
While it is true that respondent Felicidad likewise authorized petitioner in the deeds to collect the
debtors' accounts, and for the latter to pay the same directly, it cannot thereby be considered that
respondent merely authorized petitioner to collect the accounts of respondents' debtors and for her
to apply her collections in partial payments of their accounts. It bears stressing that petitioner, as
assignee, acquired all the rights and remedies passed by Felicidad, as assignee, at the time of the
assignment.82 Such rights and remedies include the right to collect her debtors' obligations to her.
Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case, the Court ruled
that the mere fact that novation does not follow as a matter of course when the creditor receives a
guaranty or accepts payments from a third person who has agreed to assume the obligation when
there is no agreement that the first debtor would be released from responsibility. Thus, the creditor
can still enforce the obligation against the original debtor.
In the present case, petitioner and respondent Felicidad agreed that the amounts due from
respondents' debtors were intended to "make good in part" the account of respondents. Case law is
that, an assignment will, ordinarily, be interpreted or construed in accordance with the rules of
construction governing contracts generally, the primary object being always to ascertain and carry
out the intention of the parties. This intention is to be derived from a consideration of the whole
instrument, all parts of which should be given effect, and is to be sought in the words and language
employed.83
Indeed, the Court must not go beyond the rational scope of the words used in construing an
assignment, words should be construed according to their ordinary meaning, unless something in
the assignment indicates that they are being used in a special sense. So, if the words are free from
ambiguity and expressed plainly the purpose of the instrument, there is no occasion for
interpretation; but where necessary, words must be interpreted in the light of the particular subject
matter.84 And surrounding circumstances may be considered in order to understand more perfectly
the intention of the parties. Thus, the object to be accomplished through the assignment, and the
relations and conduct of the parties may be considered in construing the document.
Although it has been said that an ambiguous or uncertain assignment should be construed most
strictly against the assignor, the general rule is that any ambiguity or uncertainty in the meaning of
an assignment will be resolved against the party who prepared it; hence, if the assignment was

prepared by the assignee, it will be construed most strictly against him or her.85 One who chooses
the words by which a right is given ought to be held to the strict interpretation of them, rather than
the other who only accepts them.86
Considering all the foregoing, we find that respondents still have a balance on their account to
petitioner in the principal amount of P33,841.00, the difference between their loan of P773,000.00
less P585,659.00, the payment of respondents' other debtors amounting to P103,500.00, and
the P50,000.00 payment made by respondents.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision and Resolution of the
Court of Appeals are AFFIRMED with MODIFICATION in that the balance of the principal account of
the respondents to the petitioner is P33,841.00. No costs.
SO ORDERED.

FIRST DIVISION
[G.R. No. 149420. October 8, 2003]

SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL.,

INC., respondent.
DECISION
YNARES-SANTIAGO, J.:

Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation

engaged in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing
business under the name and style Sans Enterprises, is a building
contractor. On February 22, 1990, petitioner ordered scaffolding equipments
from respondent worth P540,425.80. He paid a downpayment in the amount
of P150,000.00. The balance was made payable in ten monthly installments.
[1]

Respondent delivered the scaffoldings to petitioner. Petitioner was able to

pay the first two monthly installments. His business, however, encountered
financial difficulties and he was unable to settle his obligation to respondent
despite oral and written demands made against him.
[2]

[3]

On October 11, 1990, petitioner and respondent executed a Deed of

Assignment, whereby petitioner assigned to respondent his receivables in the
amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions of
the Deed provide:
[4]

WHEREAS, the ASSIGNOR is the contractor for the construction of a residential

house located at Greenmeadow Avenue, Quezon City owned by Jomero Realty
Corporation;
WHEREAS, in the construction of the aforementioned residential house, the
ASSIGNOR purchased on account scaffolding equipments from the ASSIGNEE
payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for
the purchase of the aforementioned scaffoldings now in the amount of Three Hundred
Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty
Five Thousand Four Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine
Currency which represents part of the ASSIGNORs collectible from Jomero Realty
Corp., said ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE
all collectibles amounting to the said amount of P335, 462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns,
the full power and authority to demand, collect, receive, compound, compromise and
give acquittance for the same or any part thereof, and in the name and stead of the said
ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its
successors and assigns that said debt is justly owing and due to the ASSIGNOR for
Jomero Realty Corporation and that said ASSIGNOR has not done and will not cause
anything to be done to diminish or discharge said debt, or delay or to prevent the
ASSIGNEE, its successors or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at times
hereafter, at the request of said ASSIGNEE, its successors or assigns, at his cost and
expense, execute and do all such further acts and deeds as shall be reasonably

necessary to effectually enable said ASSIGNEE to recover whatever collectibles said

ASSIGNOR has in accordance with the true intent and meaning of these presents.
xxx (Italics supplied)
[5]

However, when respondent tried to collect the said credit from Jomero
Realty Corporation, the latter refused to honor the Deed of Assignment
because it claimed that petitioner was also indebted to it. On November 26,
1990, respondent sent a letter to petitioner demanding payment of his
obligation, but petitioner refused to pay claiming that his obligation had been
extinguished when they executed the Deed of Assignment.
[6]

[7]

Consequently, on January 10, 1991, respondent filed an action for

recovery of a sum of money against the petitioner before the Regional Trial
Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074.
[8]

During the trial, petitioner argued that his obligation was extinguished with
the execution of the Deed of Assignment of credit. Respondent, for its part,
presented the testimony of its employee,Almeda Baaga, who testified
that Jomero Realty refused to honor the assignment of credit because it
claimed that petitioner had an outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision dismissing the
complaint on the ground that the assignment of credit extinguished the
obligation. The decretal portion thereof provides:
[9]

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor
of the defendant and against the plaintiff, dismissing the complaint and ordering the
plaintiff to pay the defendant attorneys fees in the amount of P25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19,
2001, the appellate court rendered a decision, the dispositive portion of
which reads:
[10]

WHEREFORE, finding merit in this appeal, the court REVERSES the appealed
Decision and enters judgment ordering defendant-appellee Sonny Lo to pay the
plaintiff-appellant KJS ECO-FORMWORK SYSTEM PHILIPPINES, INC. Three
Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100 (P335,462.14)

with legal interest of 6% per annum from January 10, 1991 (filing of the Complaint)
until fully paid and attorneys fees equivalent to 10% of the amount due and costs of
the suit.
SO ORDERED.

[11]

In finding that the Deed of Assignment did not extinguish the obligation of
the petitioner to the respondent, the Court of Appeals held that (1) petitioner
failed to comply with his warranty under the Deed; (2) the object of the Deed
did not exist at the time of the transaction, rendering it void pursuant to Article
1409 of the Civil Code; and (3) petitioner violated the terms of the Deed of
Assignment when he failed to execute and do all acts and deeds as shall be
necessary to effectually enable the respondent to recover the collectibles.
[12]

Petitioner filed a motion for reconsideration of the said decision, which was
denied by the Court of Appeals.
[13]

In this petition for review, petitioner assigns the following errors:

I

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR

IN DECLARING THE DEED OF ASSIGNMENT (EXH. 4) AS NULL AND
VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY
CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF
ASSIGNMENT (EXH. 4) DID NOT EXTINGUISH PETITIONERS OBLIGATION ON THE
WRONG NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS WARRANTY
THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION
OF THE TRIAL COURT AND IN ORDERING PAYMENT OF INTERESTS AND
ATTORNEYS FEES.[14]

The petition is without merit.

An assignment of credit is an agreement by virtue of which the owner of a

credit, known as the assignor, by a legal cause, such as sale, dacion en pago,
exchange or donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee, who acquires
the power to enforce it to the same extent as the assignor could enforce it
against the debtor.
[15]

Corollary thereto, in dacion en pago, as a special mode of payment, the

debtor offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt. In order that there be a valid dation in
payment, the following are the requisites: (1) There must be the performance
of the prestation in lieu of payment (animo solvendi) which may consist in the
delivery of a corporeal thing or a real right or a credit against the third person;
(2) There must be some difference between the prestation due and that which
is given in substitution (aliud pro alio); (3) There must be an agreement
between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that
due. The undertaking really partakes in one sense of the nature of sale, that
is, the creditor is really buying the thing or property of the debtor, payment for
which is to be charged against the debtors debt. As such, the vendor in good
faith shall be responsible, for the existence and legality of the credit at the
time of the sale but not for the solvency of the debtor, in specified
circumstances.
[16]

[17]

[18]

Hence, it may well be that the assignment of credit, which is in the nature
of a sale of personal property, produced the effects of a dation in payment
which may extinguish the obligation. However, as in any other contract of
sale, the vendor or assignor is bound by certain warranties. More specifically,
the first paragraph of Article 1628 of the Civil Code provides:
[19]

[20]

The vendor in good faith shall be responsible for the existence and legality of the
credit at the time of the sale, unless it should have been sold as doubtful; but not for
the solvency of the debtor, unless it has been so expressly stipulated or unless the
insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to
warrant the existence and legality of the credit at the time of the sale or

assignment. When Jomero claimed that it was no longer indebted to petitioner

since the latter also had an unpaid obligation to it, it essentially meant that its
obligation to petitioner has been extinguished by compensation. In other
words, respondent alleged the non-existence of the credit and asserted its
claim to petitioners warranty under the assignment. Therefore, it behooved on
petitioner to make good its warranty and paid the obligation.
[21]

Furthermore, we find that petitioner breached his obligation under the

Deed of Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at times
hereafter, at the request of said ASSIGNEE, its successors or assigns, at his cost and
expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said
ASSIGNOR has in accordance with the true intent and meaning of these presents.
(underscoring ours)
[22]

Indeed, by warranting the existence of the credit, petitioner should be

deemed to have ensured the performance thereof in case the same is later
found to be inexistent. He should be held liable to pay to respondent the
amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to
pay respondent the sum of P335,462.14 with legal interest thereon. However,
we find that the award by the Court of Appeals of attorneys fees is without
factual basis. No evidence or testimony was presented to substantiate this
claim. Attorneys fees, being in the nature of actual damages, must be duly
substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of
Appeals dated April 19, 2001 in CA-G.R. CV No. 47713, ordering petitioner to
pay respondent the sum of P335,462.14 with legal interest of 6% per annum
from January
10,
1991 until
fully
paid
is AFFIRMED
with
MODIFICATION. Upon finality of this Decision, the rate of legal interest shall
be 12% per annum, inasmuch as the obligation shall thereafter become

equivalent to a forbearance of credit. The award of attorneys fees is

DELETED for lack of evidentiary basis.
[23]

SO ORDERED.

FIRST DIVISION
FORT BONIFACIO
DEVELOPMENT CORPORATION,
Petitioner,

- versus -

G.R. No. 158997

Present:
PUNO, C.J., Chairperson,
CARPIO,
AZCUNA,
REYES,* and
LEONARDO-DE CASTRO, JJ.

YLLAS LENDING CORPORATION

and JOSE S. LAURAYA, in his
Promulgated:
official capacity as President,
Respondents.
October 6, 2008
x--------------------------------------------------x

DECISION
CARPIO, J.:
The Case

This is a petition for review on certiorari [1] of the Orders issued on 7 March
2003[2] and 3
July
2003[3] by
Branch
59
of
the Regional Trial Court of Makati City (trial court) in Civil Case No. 011452. The trial courts orders dismissed Fort Bonifacio Development Corporations
(FBDC) third party claim and denied FBDCs Motion to Intervene and Admit
Complaint in Intervention.
The Facts
On 24 April 1998, FBDC executed a lease contract in favor of Tirreno, Inc.
(Tirreno)
over
a
unit
at
the Entertainment Center Phase
1
of
the Bonifacio Global City in Taguig, Metro Manila. The parties had the lease
contract notarized on the day of its execution. Tirreno used the leased premises
for Savoia Ristorante and La Strega Bar.
Two provisions in the lease contract are pertinent to the present case: Section 20,
which is about the consequences in case of default of the lessee, and Section 22,
which is about the lien on the properties of the lease. The pertinent portion of
Section 20 reads:
Section 20. Default of the Lessee
20.1 The LESSEE shall be deemed to be in default within the meaning
of this Contract in case:
(i) The LESSEE fails to fully pay on time any rental, utility and
service charge or other financial obligation of the LESSEE
under this Contract;
xxx
20.2 Without prejudice to any of the rights of the LESSOR under this
Contract, in case of default of the LESSEE, the lessor shall have the
right to:
(i) Terminate this Contract immediately upon written notice to
the LESSEE, without need of any judicial action or declaration;

xxx

Section 22, on the other hand, reads:

Section 22. Lien on the Properties of the Lessee
Upon the termination of this Contract or the expiration of the Lease
Period without the rentals, charges and/or damages, if any, being fully
paid or settled, the LESSOR shall have the right to retain possession of
the properties of the LESSEE used or situated in the Leased Premises
and the LESSEE hereby authorizes the LESSOR to offset the prevailing
value thereof as appraised by the LESSOR against any unpaid rentals,
charges and/or damages. If the LESSOR does not want to use said
properties, it may instead sell the same to third parties and apply the
proceeds thereof against any unpaid rentals, charges and/or damages.

Tirreno began to default in its lease payments in 1999. By July 2000, Tirreno was
already in arrears by P5,027,337.91. FBDC and Tirreno entered into a settlement
agreement on 8 August 2000. Despite the execution of the settlement agreement,
FBDC found need to send Tirreno a written notice of termination dated 19
September 2000 due to Tirrenos alleged failure to settle its outstanding
obligations. On 29 September 2000, FBDC entered and occupied the leased
premises. FBDC also appropriated the equipment and properties left
byTirreno pursuant to Section 22 of their Contract of Lease as partial payment
for Tirrenos outstanding obligations. Tirreno filed an action for forcible entry
against FBDC before the Municipal Trial Court of Taguig. Tirreno also filed a
complaint for specific performance with a prayer for the issuance of a temporary
restraining order and/or a writ of preliminary injunction against FBDC before the
Regional Trial Court (RTC) of Pasig City. The RTC of Pasig City
dismissed Tirrenos complaint for forum-shopping.
On 4 March 2002, Yllas Lending Corporation and Jose S. Lauraya, in his official
capacity as President, (respondents) caused the sheriff of Branch 59 of the trial
court to serve an alias writ of seizure against FBDC. On the same day, FBDC
served on the sheriff an affidavit of title and third party claim. FBDC found out
that on 27 September 2001, respondents filed a complaint for Foreclosure of

Chattel Mortgage with Replevin, docketed as Civil Case No. 01-1452,

against Tirreno, Eloisa Poblete Todaro (Eloisa), and Antonio D. Todaro(Antonio),
in their personal and individual capacities, and in Eloisas official capacity as
President. In their complaint, respondents alleged that they lent a total of P1.5
million toTirreno, Eloisa, and Antonio. On 9 November 2000, Tirreno, Eloisa and
Antonio
executed
a
Deed
of
Chattel
Mortgage
in
favor
of respondents as security for the loan. The following properties are covered by the
Chattel Mortgage:
a. Furniture, Fixtures and Equipment of Savoia Ristorante and
La Strega Bar, a restaurant owned and managed by [Tirreno], inclusive
of the leasehold right of [Tirreno] over its rented building where [the]
same is presently located.
b. Goodwill over the aforesaid restaurant, including its business name,
business sign, logo, and any and all interest therein.
c. Eighteen (18) items of paintings made by Florentine Master, Gino Tili,
which are fixtures in the above-named restaurant.
The details and descriptions of the above items are specified in Annex A
which is hereto attached and forms as an integral part of this Chattel
Mortgage instrument.[4]

In the Deed of Chattel Mortgage, Tirreno, Eloisa, and Antonio made the following
warranties to respondents:
1. WARRANTIES: The MORTGAGOR hereby declares and warrants
that:
a. The MORTGAGOR is the absolute owner of the above named
properties subject of this mortgage, free from all liens and
encumbrances.
b. There exist no transaction or documents affecting the same previously
presented for, and/or pending transaction.[5]

Despite FBDCs service upon him of an affidavit of title and third party claim, the
sheriff proceeded with the seizure of certain items from FBDCs premises. The
sheriffs partial return indicated the seizure of the following items from FBDC:
A. FIXTURES
(2) Smaller Murano Chandeliers
(1) Main Murano Chandelier
B. EQUIPMENT
(13) Uni-Air Split Type 2HP Air Cond.
(2) Uni-Air Split Type 1HP Air Cond.
(3) Uni-Air Window Type 2HP Air Cond.
(56) Chairs
(1) Table
(2) boxes Kitchen equipments [sic][6]

The sheriff delivered the seized properties to respondents. FBDC questioned the
propriety of the seizure and delivery of the properties to respondents without an
indemnity bond before the trial court. FBDC argued that when respondents
and Tirreno entered into the chattel mortgage agreement on 9 November
2000, Tirreno no longer owned the mortgaged properties as FBDC already
enforced its lien on 29 September 2000.
In ruling on FBDCs motion for leave to intervene and to admit complaint in
intervention, the trial court stated the facts as follows:
Before this Court are two pending incidents, to wit: 1) [FBDCs] ThirdParty Claim over the properties of [Tirreno] which were seized and
delivered by the sheriff of this Court to [respondents]; and
2) FBDCsMotion to Intervene and to Admit Complaint in Intervention.
Third party claimant, FBDC, anchors its claim over the subject
properties on Sections 20.2(i) and 22 of the Contract of Lease executed
by [FBDC] with Tirreno. Pursuant to said Contract of Lease, FBDC took
possession of the leased premises and proceeded to sell to third parties
the properties found therein and appropriated the proceeds thereof to pay
the unpaid lease rentals of [Tirreno].

FBDC, likewise filed a Motion to Admit its Complaint-in-Intervention.

In Opposition to the third-party claim and the motion to intervene,
[respondents] posit that the basis of [FBDCs] third party claim being
anchored on the aforesaid Contract [of] Lease is baseless.[Respondents]
contend that the stipulation of the contract of lease partakes of a pledge
which is void under Article 2088 of the Civil Code for
being pactum commissorium.
xxx
By reason of the failure of [Tirreno] to pay its lease rental and fees
due in the amount of P5,027,337.91, after having notified [Tirreno] of
the termination of the lease, x x x FBDC took possession of [Tirreno.s]
properties found in the premises and sold those which were not of use to
it. Meanwhile, [respondents], as mortgagee of said properties, filed an
action for foreclosure of the chattel mortgage with replevin and caused
the seizure of the same properties which [FBDC] took and appropriated
in payment of [Tirrenos] unpaid lease rentals. [7]

The Ruling of the Trial Court

In its order dated 7 March 2003, the trial court stated that the present case raises
the questions of who has a better right over the properties of Tirreno and whether
FBDC has a right to intervene in respondents complaint for foreclosure of chattel
mortgage.
In deciding against FBDC, the trial court declared that Section 22 of the lease
contract between FBDC and Tirreno is void under Article 2088 of the Civil Code.
[8]
The trial court stated that Section 22 of the lease contract pledges the properties
found in the leased premises as security for the payment of the unpaid
rentals. Moreover, Section 22 provides for the automatic appropriation of the
properties owned by Tirreno in the event of its default in the payment of monthly
rentals to FBDC. Since Section 22 is void, it cannot vest title of ownership over the
seized properties. Therefore, FBDC cannot assert that its right is superior to
respondents, who are the mortgagees of the disputed properties.
The trial court quoted from Bayer Phils. v. Agana[9] to justify its ruling that FBDC
should have filed a separate complaint against respondents instead of filing a
motion to intervene.The trial court quoted from Bayer as follows:

In other words, construing Section 17 of Rule 39 of the Revised Rules of

Court (now Section 16 of the 1997 Rules on Civil Procedure), the rights
of third-party claimants over certain properties levied upon by the sheriff
to satisfy the judgment may not be taken up in the case where such
claims are presented but in a separate and independent action instituted
by the claimants.[10]

The dispositive portion of the trial courts decision reads:

WHEREFORE, premises considered, [FBDCs] Third Party Claim is
hereby DISMISSED. Likewise, the Motion to Intervene and Admit
Complaint in Intervention is DENIED.[11]

FBDC filed a motion for reconsideration on 9 May 2003. The trial court
denied FBDCs motion for reconsideration in an order dated 3 July 2003. FBDC
filed the present petition before this Court to review pure questions of law.
The Issues
FBDC alleges that the trial court erred in the following:
1. Dismissing FBDCs third party claim upon the trial courts
erroneous interpretation that FBDC has no right of ownership
over the subject properties because Section 22 of the contract of
lease is void for being a pledge and a pactum commissorium;
2. Denying FBDC intervention on the ground that its proper remedy
as third party claimant over the subject properties is to file a
separate action; and

3. Depriving FBDC of its properties without due process of law

when the trial court erroneously dismissed FBDCs third party
claim, denied FBDCs intervention, and did not require the posting
of an indemnity bond for FBDCs protection.[12]
The Ruling of the Court

The petition has merit.

Taking of Lessees Properties
without Judicial Intervention
We reproduce Section 22 of the Lease Contract below for easy reference:
Section 22. Lien on the Properties of the Lessee
Upon the termination of this Contract or the expiration of the Lease
Period without the rentals, charges and/or damages, if any, being fully
paid or settled, the LESSOR shall have the right to retain possession of
the properties of the LESSEE used or situated in the Leased Premises
and the LESSEE hereby authorizes the LESSOR to offset the prevailing
value thereof as appraised by the LESSOR against any unpaid rentals,
charges and/or damages. If the LESSOR does not want to use said
properties, it may instead sell the same to third parties and apply the
proceeds thereof against any unpaid rentals, charges and/or damages.

Respondents, as well as the trial court, contend that Section 22 constitutes

a pactum commissorium, a void stipulation in a pledge contract. FBDC, on the
other hand, states that Section 22 is merely a dacion en pago.
Articles 2085 and 2093 of the Civil Code enumerate the requisites essential to a
contract of pledge: (1) the pledge is constituted to secure the fulfillment of a
principal obligation; (2) the pledgor is the absolute owner of the thing pledged; (3)
the persons constituting the pledge have the free disposal of their property or have
legal authorization for the purpose; and(4) the thing pledged is placed in the
possession of the creditor, or of a third person by common agreement. Article 2088
of the Civil Code prohibits the creditor from appropriating or disposing the things
pledged, and any contrary stipulation is void.
On the other hand, Article 1245 of the Civil Code defines dacion en pago,
or dation in payment, as the alienation of property to the creditor in satisfaction of
a debt in money.Dacion en pago is governed by the law on sales. Philippine
National Bank v. Pineda[13] held that dation in payment requires delivery and
transmission of ownership of a thing owned by the debtor to the creditor as an

accepted equivalent of the performance of the obligation. There is no dation in

payment when there is no transfer of ownership in the creditors favor, as when the
possession of the thing is merely given to the creditor by way of security.
Section 22, as worded, gives FBDC a means to collect payment from Tirreno in
case of termination of the lease contract or the expiration of the lease period and
there are unpaid rentals, charges, or damages. The existence of a contract of
pledge, however, does not arise just because FBDC has means of collecting past
due rent from Tirreno other than direct payment. The trial court concluded that
Section 22 constitutes a pledge because of the presence of the first three requisites
of a pledge: Tirrenos properties in the leased premises secure Tirrenos lease
payments; Tirreno is the absolute owner of the said properties; and the persons
representing Tirreno have legal authority to constitute the pledge. However, the
fourth requisite, that the thing pledged is placed in the possession of the
creditor, is absent. There is non-compliance with the fourth requisite even
if Tirrenos personal properties are found in FBDCs real property. Tirrenos personal
properties are in FBDCs real property because of the Contract of Lease, which
gives Tirreno possession of the personal properties. Since Section 22 is not a
contract of pledge, there is no pactum commissorium.
FBDC admits that it took Tirrenos properties from the leased premises without
judicial intervention after terminating the Contract of Lease in accordance with
Section 20.2. FBDC further justifies its action by stating that Section 22 is a
forfeiture clause in the Contract of Lease and that Section 22 gives FBDC a
remedy against Tirrenos failure to comply with its obligations. FBDC claims that
Section 22 authorizes FBDC to take whatever properties that Tirreno left to pay
off Tirrenos obligations.
We agree with FBDC.
A
lease
contract
may
be
terminated
without
judicial
intervention. Consing v. Jamandre upheld the validity of a contractually-stipulated
termination clause:
This stipulation is in the nature of a resolutory condition, for upon the
exercise by the [lessor] of his right to take possession of the leased

property, the contract is deemed terminated. This kind of contractual

stipulation is not illegal, there being nothing in the law proscribing such
kind of agreement.
xxx

Judicial permission to cancel the agreement was not, therefore necessary

because of the express stipulation in the contract of [lease] that the
[lessor], in case of failure of the [lessee] to comply with the terms and
conditions thereof, can take-over the possession of the leased premises,
thereby cancelling the contract of sub-lease. Resort to judicial action is
necessary only in the absence of a special provision granting the power
of cancellation.[14]

A lease contract may contain a forfeiture clause. Country Bankers Insurance Corp.
v. Court of Appeals upheld the validity of a forfeiture clause as follows:
A provision which calls for the forfeiture of the remaining deposit still in
the possession of the lessor, without prejudice to any other obligation
still owing, in the event of the termination or cancellation of the
agreement by reason of the lessees violation of any of the terms and
conditions of the agreement is a penal clause that may be validly entered
into. A penal clause is an accessory obligation which the parties attach to
a principal obligation for the purpose of insuring the performance thereof
by imposing on the debtor a special prestation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or
is irregularly or inadequately fulfilled. [15]

In Country Bankers, we allowed the forfeiture of the lessees advance deposit of

lease payment. Such a deposit may also be construed as a guarantee of payment,
and thus answerable for any unpaid rent or charges still outstanding at any
termination of the lease.
In the same manner, we allow FBDCs forfeiture of Tirrenos properties in the leased
premises. By agreement between FBDC and Tirreno, the properties are answerable
for any unpaid rent or charges at any termination of the lease. Such agreement is

not contrary to law, morals, good customs, or public policy. Forfeiture of the
properties is the only security that FBDC may apply in case of Tirrenos default in
its obligations.
Intervention versus Separate Action
Respondents posit that the right to intervene, although permissible, is not an
absolute right. Respondents agree with the trial courts ruling that FBDCs proper
remedy is not intervention but the filing of a separate action. Moreover,
respondents allege that FBDC was accorded by the trial court of the opportunity to
defend its claim of ownership in court through pleadings and hearings set for the
purpose. FBDC, on the other hand, insists that a third party claimant may vindicate
his rights over properties taken in an action for replevinby intervening in
the replevin action itself.
We agree with FBDC.
Both the trial court and respondents relied on our ruling in Bayer Phils.
v. Agana[16] to justify their opposition to FBDCs intervention and to insist
on FBDCs filing of a separate action. In Bayer, we declared that the rights of third
party claimants over certain properties levied upon by the sheriff to satisfy the
judgment may not be taken up in the case where such claims are presented, but in a
separate and independent action instituted by the claimants. However, both
respondents and the trial court overlooked the circumstances behind the ruling
in Bayer, which makes the Bayer ruling inapplicable to the present case. The third
party in Bayer filed his claim during execution; in the present case, FBDC filed for
intervention during the trial.
The timing of the filing of the third party claim is important because the timing
determines the remedies that a third party is allowed to file. A third party claimant
under Section 16 of Rule 39 (Execution, Satisfaction and Effect of Judgments)
[17]
of the 1997 Rules of Civil Procedure may vindicate his claim to the property in
a separate action, because intervention is no longer allowed as judgment has
already been rendered. A third party claimant under Section 14 of Rule 57
(Preliminary Attachment)[18] of the 1997 Rules of Civil Procedure, on the other
hand, may vindicate his claim to the property by intervention because he has a
legal interest in the matter in litigation.[19]

We allow FBDCs intervention in the present case because FBDC satisfied the
requirements of Section 1, Rule 19 (Intervention) of the 1997 Rules of Civil
Procedure, which reads as follows:
Section 1. Who may intervene. A person who has a legal interest in the
matter in litigation, or in the success of either of the parties, or an interest
against both, or is so situated as to be adversely affected by a distribution
or other disposition of property in the custody of the court or of an
officer thereof may, with leave of court, be allowed to intervene in the
action. The court shall consider whether or not the intervention will
unduly delay or prejudice the adjudication of the rights of the original
parties, and whether or not the intervenors rights may be fully protected
in a separate proceeding.

Although intervention is not mandatory, nothing in the Rules proscribes

intervention. The trial courts objection against FBDCs intervention has been set
aside by our ruling that Section 22 of the lease contract is
not pactum commissorium.
Indeed, contrary to respondents contentions, we ruled in BA Finance Corporation
v. Court of Appeals that where the mortgagees right to the possession of the
specific property is evident, the action need only be maintained against the
possessor of the property. However, where the mortgagees right to possession is
put to great doubt, as when a contending party might contest the legal bases for
mortgagees cause of action or an adverse and independent claim of ownership or
right of possession is raised by the contending party, it could become essential to
have other persons involved and accordingly impleaded for a complete
determination and resolution of the controversy. Thus:
A chattel mortgagee, unlike a pledgee, need not be in, nor entitled to, the
possession of the property, unless and until the mortgagor defaults and
the mortgagee thereupon seeks to foreclose thereon. Since the
mortgagees right of possession is conditioned upon the actual default
which itself may be controverted, the inclusion of other parties, like the
debtor or the mortgagor himself, may be required in order to allow a full
and conclusive determination of the case. When the mortgagee seeks
a replevin in order to effect the eventual foreclosure of the mortgage, it is

not only the existence of, but also the mortgagors default on, the chattel
mortgage that, among other things, can properly uphold the right
to replevy the property. The burden to establish a valid justification for
that action lies with the plaintiff [-mortgagee]. An adverse possessor,
who is not the mortgagor, cannot just be deprived of his possession,
let alone be bound by the terms of the chattel mortgage contract,
simply because the mortgagee brings up an action for replevin.
[20]
(Emphasis added)

FBDC exercised its lien to Tirrenos properties even before respondents

and Tirreno executed their Deed of Chattel Mortgage. FBDC is adversely affected
by
the
disposition
of
the
properties
seized
by
the
sheriff. Moreover, FBDCs intervention in the present case will result in a complete
adjudication of the issues brought about by Tirrenos creation of multiple liens on
the same properties and subsequent default in its obligations.
Sheriffs Indemnity Bond
FBDC laments the failure of the trial court to require respondents to file an
indemnity bond for FBDCs protection. The trial court, on the other hand, did not
mention the indemnity bond in its Orders dated 7 March 2003 and 3 July 2003.
Pursuant to Section 14 of Rule 57, the sheriff is not obligated to turn over to
respondents the properties subject of this case in view of respondents failure to file
a bond. The bond in Section 14 of Rule 57 (proceedings where property is claimed
by third person) is different from the bond in Section 3 of the same rule (affidavit
and bond). Under Section 14 of Rule 57, the purpose of the bond is to indemnify
the sheriff against any claim by the intervenor to the property seized or for
damages arising from such seizure, which the sheriff was making and for which the
sheriff was directly responsible to the third party. Section 3, Rule 57, on the other
hand, refers to the attachment bond to assure the return of defendants personal
property or the payment of damages to the defendant if the plaintiffs action to
recover possession of the same property fails, in order to protect the plaintiffs right
of possession of said property, or prevent the defendant from destroying the same
during the pendency of the suit.

Because of the absence of the indemnity bond in the present case, FBDC may also
hold the sheriff for damages for the taking or keeping of the properties seized from
FBDC.
WHEREFORE, we GRANT the petition. We SET ASIDE the Orders dated 7
March 2003 and 3 July 2003 of Branch 59 of the Regional Trial Court
of Makati City in Civil Case No. 01-1452 dismissing Fort Bonifacio Development
Corporations Third Party Claim and denying Fort Bonifacio Development
Corporations
Motion
to
Intervene
and
Admit
Complaint
in
Intervention. We REINSTATE Fort Bonifacio Development Corporations Third
Party Claim and GRANT its Motion to Intervene and Admit Complaint in
Intervention. Fort Bonifacio Development Corporation may hold the Sheriff liable
for the seizure and delivery of the properties subject of this case because of the
lack of an indemnity bond.
SO ORDERED.

FIRST DIVISION
EQUITABLE PCI BANK,* G.R. No. 171545
AIMEE YU and BEJAN
LIONEL APAS,
Petitioners, Present:
PUNO, C.J., Chairperson,
- v e r s u s - SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
**
NG SHEUNG NGOR doing
business under the name
and style KEN MARKETING, Promulgated:
KEN APPLIANCE DIVISION,
INC. and BENJAMIN E. GO,
Respondents. December 19, 2007

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - x
DECISION
CORONA, J.:
This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court
of Appeals (CA) in CA-G.R. SP No. 83112 and its resolution [3] denying
reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance
Division, Inc. and Benjamin E. Go filed an action for annulment and/or
reformation of documents and contracts[5] against petitioner Equitable PCI Bank
(Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional
Trial Court (RTC), Branch 16 of Cebu City.[6]They claimed that Equitable induced
them to avail of its peso and dollar credit facilities by offering low interest
rates[7] so they accepted Equitable's proposal and signed the bank's pre-printed
promissory notes on various dates beginning 1996. They, however, were unaware
that the documents contained identical escalation clauses granting Equitable
authority to increase interest rates without their consent.[8]
Equitable, in its answer, asserted that respondents knowingly accepted all the terms
and conditions contained in the promissory notes.[9] In fact, they continuously
availed of and benefited from Equitable's credit facilities for five years.[10]
After trial, the RTC upheld the validity of the promissory notes. It found that, in
2001 alone, Equitable restructured respondents' loans amounting to US$228,200
and P1,000,000.[11]The trial court, however, invalidated the escalation clause
contained therein because it violated the principle of mutuality of contracts.

[12]

Nevertheless, it took judicial notice of the steep depreciation of the peso during

the intervening period[13] and declared the existence of extraordinary deflation.

[14]

Consequently, the RTC ordered the use of the 1996 dollar exchange rate in

computing respondents' dollar-denominated loans.[15] Lastly, because the business

reputation of respondents was (allegedly) severely damaged when Equitable froze
their accounts,[16] the trial court awarded moral and exemplary damages to them.[17]
The dispositive portion of the February 5, 2004 RTC decision[18] provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of
[respondents'] deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12
[m]illion [p]esos as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of P10
[m]illion [p]esos as exemplary damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay
[respondents], jointly and severally, the sum of [t]wo [m]illion
[p]esos as moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly
and severally, to pay [respondents'] attorney's fees in the sum
of P300,000; litigation expenses in the sum of P50,000 and the
cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay
[Equitable] the unpaid principal obligation for the peso loan as
well as the unpaid obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay
[Equitable] interest as follows:
1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment
of the dollar obligation is the conversion rate of P26.50 per
dollar availed of at the time of incurring of the obligation in
accordance with Article 1250 of the Civil Code of the
Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the
aforestated unpaid principal loan obligations and interest.
SO ORDERED.[19]

Equitable and respondents filed their respective notices of appeal.[20]

In the March 1, 2004 order of the RTC, both notices were denied due course
because Equitable and respondents failed to submit proof that they paid their
respective appeal fees.[21]
WHEREFORE, premises considered, the appeal interposed by
defendants from the Decision in the above-entitled case is DENIED due
course. As of February 27, 2004, the Decision dated February 5,
2004, is considered final and executory in so far as [Equitable, Aimee
Yu and Bejan Lionel Apas] are concerned.[22] (emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the
RTC[23] on the ground that it did in fact pay the appeal fees. Respondents, on the
other hand, prayed for the issuance of a writ of execution.[24]
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion
for reconsideration for lack of merit[25] and ordered the issuance of a writ of
execution

in

favor

of

respondents.[26] According

to

the

RTC,

because

respondents did not move for the reconsideration of the previous order (denying
due course to the parties notices of appeal), [27] the February 5, 2004 decision

became final and executory as to both parties and a writ of execution against
Equitable was in order.[28]
A writ of execution was thereafter issued [29] and three real properties of Equitable
were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March
1, 2004 order.[31] It, however, withdrew that petition on March 30, 2004 [32] and
instead filed a petition for certiorari with an application for an injunction in the CA
to enjoin the implementation and execution of the March 24, 2004 omnibus order.
[33]

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of
preliminary injunction was correspondingly issued.[34]
Notwithstanding the writ of injunction, the properties of Equitable previously
levied upon were sold in a public auction on July 1, 2004. Respondents were the
highest bidders and certificates of sale were issued to them.[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to
cite the sheriffs who conducted the sale in contempt for proceeding with the
auction despite the injunction order of the CA.[36]
On October 28, 2005, the CA dismissed the petition for certiorari. [37] It found
Equitable guilty of forum shopping because the bank filed its petition for certiorari
in the CA several hours before withdrawing its petition for relief in the RTC.
[38]

Moreover, Equitable failed to disclose, both in the statement of material dates

and certificate of non-forum shopping (attached to its petition for certiorari in the
CA), that it had a pending petition for relief in the RTC.[39]
Equitable moved for reconsideration[40] but it was denied.[41] Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for
relief was withdrawn on the same day the petition for certiorari was filed.[42] It
likewise avers that its petition for certiorari was meritorious because the RTC
committed grave abuse of discretion in issuing the March 24, 2004 omnibus order
which was based on an erroneous assumption. The March 1, 2004 order denying its
notice of appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees.[43] Thus, the RTC, by issuing its March 24, 2004
omnibus order, effectively prevented Equitable from appealing the patently
wrong February 5, 2004 decision.[44]
This petition is meritorious.

EQUITABLE
WAS
NOT
GUILTY
OF
FORUM
SHOPPING

Forum shopping exists when two or more actions involving the same transactions,
essential facts and circumstances are filed and those actions raise identical issues,
subject matter and causes of action.[45] The test is whether, in two or more pending
cases, there is identity of parties, rights or causes of actions and reliefs.[46]
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did
not have identical causes of action. The petition for relief from the denial of its

notice of appeal was based on the RTCs judgment or final order preventing it from
taking an appeal by fraud, accident, mistake or excusable negligence. [47] On the
other hand, its petition for certiorari in the CA, a special civil action, sought to
correct the grave abuse of discretion amounting to lack of jurisdiction committed
by the RTC.[48]
In a petition for relief, the judgment or final order is rendered by a court with
competent jurisdiction. In a petition for certiorari, the order is rendered by a court
without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping
when it moved to withdraw its petition for relief in the RTC on the same day (in
fact just four hours and forty minutes after) it filed the petition for certiorari in the
CA. Even if Equitable failed to disclose that it had a pending petition for relief in
the RTC, it rectified what was doubtlessly a careless oversight by withdrawing the
petition for relief just a few hours after it filed its petition for certiorari in the CA
a clear indication that it had no intention of maintaining the two actions at the
same time.
THE
TRIAL
COURT
COMMITTED GRAVE ABUSE
OF DISCRETION IN ISSUING
ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS

Section 1, Rule 65 of the Rules of Court provides:

Section 1. Petition for Certiorari. When any tribunal, board or officer
exercising judicial or quasi-judicial function has acted without or in
excess of its or his jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal,

nor any plain, speedy or adequate remedy in the ordinary course of

law, a person aggrieved thereby may file a verified petition in the proper
court, alleging the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings of such tribunal, board
or officer, and granting such incidental reliefs as law and justice may
require.
The petition shall be accompanied by a certified true copy of the
judgment, order or resolution subject thereof, copies of all pleadings and
documents relevant and pertinent thereto, and a sworn certificate of nonforum shopping as provided in the third paragraph of Section 3, Rule 46.

There are two substantial requirements in a petition for certiorari. These are:
1. that the tribunal, board or officer exercising judicial or quasijudicial functions acted without or in excess of his or its
jurisdiction or with grave abuse of discretion amounting to lack
or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate remedy
in the ordinary course of law.

For a petition for certiorari premised on grave abuse of discretion to prosper,

petitioner must show that the public respondent patently and grossly abused his
discretion and that abuse amounted to an evasion of positive duty or a virtual
refusal to perform a duty enjoined by law or to act at all in contemplation of law, as
where the power was exercised in an arbitrary and despotic manner by reason of
passion or hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal of both
Equitable and respondents. However, it declared that the February 5, 2004 decision
was final and executory only with respect to Equitable.[50] As expected, the
March 24, 2004 omnibus order denied Equitable's motion for reconsideration and
granted respondents' motion for the issuance of a writ of execution.[51]

The March 1, 2004 and March 24, 2004 orders of the RTC were obviously
intended to prevent Equitable, et al. from appealing the February 5, 2004
decision. Not only that. The execution of the decision was undertaken with
indecent haste, effectively obviating or defeating Equitable's right to avail of
possible legal remedies. No matter how we look at it, the RTC committed grave
abuse of discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the
ordinary course of law, we hold that there was none. The RTC denied due course to
its notice of appeal in the March 1, 2004 order. It affirmed that denial in the March
24, 2004 omnibus order. Hence, there was no way Equitable could have possibly
appealed the February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004 order, that
petition was not a plain, speedy and adequate remedy in the ordinary course of law.
[53]

A petition for relief under Rule 38 is an equitable remedy allowed only in

exceptional circumstances or where there is no other available or adequate remedy.

[54]

Thus, we grant Equitable's petition for certiorari and consequently give due course
to its appeal.

EQUITABLE RAISED PURE

QUESTIONS OF LAW IN ITS
PETITION FOR REVIEW

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.

[55]

There is a question of law when the doubt or controversy concerns the correct

application of law or jurisprudence to a certain set of facts; or when the issue does
not call for the probative value of the evidence presented, the truth or falsehood of
facts being admitted.[56]
Equitable does not assail the factual findings of the trial court. Its arguments
essentially focus on the nullity of the RTCs February 5, 2004 decision. Equitable
points out that that decision was patently erroneous, specially the exorbitant
award of damages, as it was inconsistent with existing law and jurisprudence.[57]
THE PROMISSORY NOTES
WERE VALID

The RTC upheld the validity of the promissory notes despite respondents
assertion that those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted
by one party.[58] The participation of the other party is limited to affixing his
signature or his adhesion to the contract.[59] For this reason, contracts of adhesion
are strictly construed against the party who drafted it.[60]
It is erroneous, however, to conclude that contracts of adhesion are invalid per
se. They are, on the contrary, as binding as ordinary contracts. A party is in reality
free to accept or reject it. A contract of adhesion becomes void only when the
dominant party takes advantage of the weakness of the other party, completely
depriving the latter of the opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have
walked out and negotiated with another bank at the first available instance. But

they did not. Instead, they continuously availed of Equitable's credit facilities for
five long years.
While the RTC categorically found that respondents had outstanding dollar- and
peso-denominated loans with Equitable, it, however, failed to ascertain the total
amount due (principal, interest and penalties, if any) as of July 9, 2001. The trial
court did not explain how it arrived at the amounts of US$228,200 and P1,000,000.
[62]

In Metro Manila Transit Corporation v. D.M. Consunji, [63] we reiterated that this

Court is not a trier of facts and it shall pass upon them only for compelling reasons
which unfortunately are not present in this case. [64] Hence, we ordered the partial
remand of the case for the sole purpose of determining the amount of actual
damages.[65]

ESCALATION
CLAUSE
VIOLATED THE PRINCIPLE
OF
MUTUALITY OF CONTRACTS

Escalation clauses are not void per se. However, one which grants the creditor an
unbridled right to adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important modification in the
agreement is void. Clauses of that nature violate the principle of mutuality of
contracts.[66] Article 1308[67] of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of
them.[68]

For this reason, we have consistently held that a valid escalation clause provides:
1.

that the rate of interest will only be increased if the applicable

maximum rate of interest is increased by law or by the Monetary
Board; and

2.

that the stipulated rate of interest will be reduced if the applicable

maximum rate of interest is reduced by law or by the Monetary
Board (de-escalation clause).[69]

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the bank. [70]

Equitable dictated the interest rates if the term (or period for repayment) of
the loan was extended. Respondents had no choice but to accept them. This was a
violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation
clause did not contain the necessary provisions for validity, that is, it neither
provided that the rate of interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these reasons, the escalation
clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v.
Philippine National Bank[71] we held that, because the escalation clause was
annulled, the principal amount of the loan was subject to the original or stipulated
rate of interest. Upon maturity, the amount due was subject to legal interest at the
rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a.
for their dollar-denominated loans and 20% p.a. for their peso-denominated loans

from January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal
interest of 12% p.a. on all amounts due.
THERE
WAS
NO
EXTRAORDINARY DEFLATIO
N

Extraordinary inflation exists when there is an unusual decrease in the purchasing

power of currency (that is, beyond the common fluctuation in the value of
currency) and such decrease could not be reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the obligation. Extraordinary
deflation, on the other hand, involves an inverse situation.[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the
currency stipulated should intervene, the value of the currency at the
time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the

following requisites must be proven:
1. that there was an official declaration of extraordinary inflation or
deflation from the Bangko Sentral ng Pilipinas (BSP); [74]
2. that the obligation was contractual in nature; [75] and
3. that the parties expressly agreed to consider the effects of the
extraordinary inflation or deflation.[76]

Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose out
of a contract, the parties did not agree to recognize the effects of extraordinary
inflation (or deflation).[77] The RTC never mentioned that there was a such
stipulation either in the promissory note or loan agreement. Therefore, respondents
should pay their dollar-denominated loans at the exchange rate fixed by the BSP on
the date of maturity.[78]
THE AWARD OF MORAL AND
EXEMPLARY
DAMAGES
LACKED BASIS

Moral damages are in the category of an award designed to compensate the

claimant for actual injury suffered, not to impose a penalty to the wrongdoer. [79] To
be entitled to moral damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or physical,
mental or psychological suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of
the damages the claimant sustained;
4. The case is predicated on any of the instances expressed or
envisioned by Article 2219[80] and 2220[81]. [82]

In culpa contractual or breach of contract, moral damages are recoverable

only if the defendant acted fraudulently or in bad faith or in wanton disregard of

his contractual obligations.[83] The breach must be wanton, reckless, malicious or in

bad faith, and oppressive or abusive.[84]
The RTC found that respondents did not pay Equitable the interest due on February
9, 2001 (or any month thereafter prior to the maturity of the loan) [85] or the amount
due (principal plus interest) due on July 9, 2001.[86] Consequently, Equitable
applied respondents' deposits to their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor.
[87]

For this reason, a bank has the right to set-off the deposits in its hands for the

payment of a depositor's indebtedness.[88]

Respondents indeed defaulted on their obligation. For this reason, Equitable had
the option to exercise its legal right to set-off or compensation. However, the RTC
mistakenly (or, as it now appears, deliberately) concluded that Equitable acted
fraudulently or in bad faith or in wanton disregard of its contractual obligations
despite the absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure to pay their
loans. There was therefore absolutely no basis for the award of moral damages to
them.
Neither was there reason to award exemplary damages. Since respondents were not
entitled to moral damages, neither should they be awarded exemplary damages.
[89]

And if respondents were not entitled to moral and exemplary damages, neither

could they be awarded attorney's fees and litigation expenses.[90]

ACCORDINGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the Court of
Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu
City in Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with
grave abuse of discretion amounting to lack or excess of jurisdiction. All
proceedings undertaken pursuant thereto are likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in
Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners
Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is therefore given due
course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City
in Civil Case No. CEB-26983 is accordingly SET ASIDE. New judgment is
hereby entered:
1.

ordering respondents Ng Sheung Ngor, doing business under the

name and style of Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank the principal
amount of their dollar- and peso-denominated loans;

2.

ordering respondents Ng Sheung Ngor, doing business under the

name and style of Ken Marketing, Ken Appliance Division, Inc. and
Benjamin E. Go to pay petitioner Equitable PCI Bank interest at:
a)

12.66% p.a. with respect to their dollar-denominated loans

from January 10, 2001 to July 9, 2001;

b)

20% p.a. with respect to their peso-denominated loans from

January 10, 2001 to July 9, 2001;[91]

c)

pursuant to our ruling in Eastern Shipping Lines v. Court of

Appeals,[92] the total amount due on July 9, 2001 shall earn legal
interest at 12% p.a. from the time petitioner Equitable PCI
Bank demanded payment, whether judicially or extra-judicially;
and

d)

after this Decision becomes final and executory, the applicable

rate shall be 12% p.a. until full satisfaction;

3.

all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall
compute the exact amounts due on the respective dollar-denominated and pesodenominated loans, as of July 9, 2001, of respondents Ng Sheung Ngor, doing
business under the name and style of Ken Marketing, Ken Appliance Division and
Benjamin E. Go.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila
THIRD DIVISION
EUFEMIA ALMEDA and

G.R. No. 150806

ROMEL ALMEDA,
Petitioners,

Present:

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus -

CORONA,*
NACHURA, and
REYES, JJ.

BATHALA MARKETING
INDUSTRIES, INC.,
Respondent.

Promulgated:

January 28, 2008

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

DECISION
NACHURA, J.:

This is a Petition for Review on Certiorari under Rule 45 of

the Rules of Court, of the Decision [1] of the Court of Appeals (CA),
dated September 3, 2001, in CA-G.R. CV No. 67784, and its

Resolution[2] dated November 19, 2001. The assailed Decision

affirmed with modification the Decision[3] of the Regional Trial
Court (RTC), Makati City, Branch 136, dated May 9, 2000 in Civil
Case No. 98-411.
Sometime in May 1997, respondent Bathala Marketing Industries,
Inc., as lessee, represented by its president Ramon H. Garcia,
renewed its Contract of Lease[4] with Ponciano L. Almeda
(Ponciano), as lessor, husband of petitioner Eufemia and father
of petitioner Romel Almeda. Under the said contract, Ponciano
agreed to lease a portion of the Almeda Compound, located at
2208 Pasong Tamo Street, Makati City, consisting of 7,348.25
square meters, for a monthly rental of P1,107,348.69, for a term
of four (4) years from May 1, 1997 unless sooner terminated as
provided in the contract. [5] The contract of lease contained the
following pertinent provisions which gave rise to the instant case:

SIXTH It is expressly understood by the parties hereto

that the rental rate stipulated is based on the present rate
of assessment on the property, and that in case the
assessment should hereafter be increased or any new
tax, charge or burden be imposed by authorities on the
lot and building where the leased premises are located,
LESSEE shall pay, when the rental herein provided
becomes due, the additional rental or charge
corresponding to the portion hereby leased; provided,
however, that in the event that the present assessment or
tax on said property should be reduced, LESSEE shall be
entitled to reduction in the stipulated rental, likewise in
proportion to the portion leased by him;

SEVENTH In case an extraordinary inflation or devaluation

of Philippine Currency should supervene, the value of

Philippine peso at the time of the establishment of the

obligation shall be the basis of payment;[6]

During
the
effectivity
of
the
contract,
Ponciano
died. Thereafter, respondent dealt with petitioners. In a
letter[7] dated December 29, 1997, petitioners advised respondent
that the former shall assess and collect Value Added Tax (VAT) on
its monthly rentals. In response, respondent contended that VAT
may not be imposed as the rentals fixed in the contract of lease
were supposed to include the VAT therein, considering that their
contract was executed on May 1, 1997 when the VAT law had long
been in effect.[8]

On January 26, 1998, respondent received another letter

from petitioners informing the former that its monthly rental
should be increased by 73% pursuant to condition No. 7 of the
contract and Article 1250 of the Civil Code. Respondent opposed
petitioners demand and insisted that there was no extraordinary
inflation to warrant the application of Article 1250 in light of the
pronouncement of this Court in various cases. [9]

Respondent refused to pay the VAT and adjusted rentals as

demanded by petitioners but continued to pay the stipulated
amount set forth in their contract.

On February 18, 1998, respondent instituted an action for

declaratory relief for purposes of determining the correct
interpretation of condition Nos. 6 and 7 of the lease contract to
prevent damage and prejudice.[10] The case was docketed as Civil
Case No. 98-411 before the RTC of Makati.

On March 10, 1998, petitioners in turn filed an action for

ejectment, rescission and damages against respondent for failure
of the latter to vacate the premises after the demand made by
the former.[11] Before respondent could file an answer, petitioners
filed a Notice of Dismissal. [12] They subsequently refiled the
complaint before the Metropolitan Trial Court of Makati; the case
was raffled to Branch 139 and was docketed as Civil Case No.
53596.

Petitioners later moved for the dismissal of the declaratory

relief case for being an improper remedy considering that
respondent was already in breach of the obligation and that the
case would not end the litigation and settle the rights of the
parties. The trial court, however, was not persuaded, and
consequently, denied the motion.

After trial on the merits, on May 9, 2000, the RTC ruled in

favor of respondent and against petitioners. The pertinent portion
of the decision reads:

WHEREFORE, premises considered,

renders judgment on the case as follows:

this

Court

1) declaring that plaintiff is not liable for the

payment of Value-Added Tax (VAT) of 10% of the rent for
[the] use of the leased premises;

2) declaring that plaintiff is not liable for the

payment of any rental adjustment, there being no
[extraordinary] inflation or devaluation, as provided in the

Seventh Condition of the lease contract, to justify the

same;

3) holding defendants liable to plaintiff for the total

amount of P1,119,102.19, said amount representing
payments erroneously made by plaintiff as VAT charges
and rental adjustment for the months of January,
February and March, 1999; and

4) holding defendants liable to plaintiff for the

amount of P1,107,348.69, said amount representing the
balance of plaintiffs rental deposit still with defendants.

SO ORDERED.[13]

The trial court denied petitioners their right to pass on to

respondent the burden of paying the VAT since it was not a new
tax that would call for the application of the sixth clause of the
contract. The court, likewise, denied their right to collect the
demanded increase in rental, there being no extraordinary
inflation or devaluation as provided for in the seventh clause of
the contract. Because of the payment made by respondent of the
rental adjustment demanded by petitioners, the court ordered the
restitution by the latter to the former of the amounts paid,
notwithstanding the well-established rule that in an action for
declaratory relief, other than a declaration of rights and
obligations, affirmative reliefs are not sought by or awarded to the
parties.
Petitioners elevated the aforesaid case to the Court of Appeals
which affirmed with modification the RTC decision. The fallo reads:

WHEREFORE, premises considered, the present appeal is

DISMISSED and the appealed decision in Civil Case No.
98-411 is hereby AFFIRMED with MODIFICATION in that
the order for the return of the balance of the rental
deposits and of the amounts representing the 10% VAT
and rental adjustment, is hereby DELETED.

No pronouncement as to costs.

SO ORDERED.[14]

The appellate court agreed with the conclusions of law and the
application of the decisional rules on the matter made by the
RTC. However, it found that the trial court exceeded its jurisdiction
in granting affirmative relief to the respondent, particularly the
restitution of its excess payment.

Petitioners now come before this Court raising the following

issues:

I.
WHETHER OR NOT ARTICLE 1250 OF THE NEW CIVIL
CODE IS APPLICABLE TO THE CASE AT BAR.

II.
WHETHER OR NOT THE DOCTRINE ENUNCIATED IN
FILIPINO PIPE AND FOUNDRY CORP. VS. NAWASA CASE,

161 SCRA 32 AND COMPANION

APPLICABLE IN THE CASE AT BAR.

CASES

ARE

(sic)

III.
WHETHER OR NOT IN NOT APPLYING THE DOCTRINE IN
THE CASE OF DEL ROSARIO VS. THE SHELL COMPANY OF
THE PHILIPPINES, 164 SCRA 562, THE HONORABLE COURT
OF APPEALS SERIOUSLY ERRED ON A QUESTION OF LAW.

IV.
WHETHER OR NOT THE FINDING OF THE HONORABLE
COURT OF APPEALS THAT RESPONDENT IS NOT LIABLE TO
PAY THE 10% VALUE ADDED TAX IS IN ACCORDANCE WITH
THE MANDATE OF RA 7716.

V.
WHETHER OR NOT DECLARATORY RELIEF IS PROPER
SINCE PLAINTIFF-APPELLEE WAS IN BREACH WHEN THE
PETITION FOR DECLARATORY RELIEF WAS FILED BEFORE
THE TRIAL COURT.

In fine, the issues for our resolution are as follows: 1)

whether the action for declaratory relief is proper; 2) whether
respondent is liable to pay 10% VAT pursuant to Republic Act (RA)
7716; and 3) whether the amount of rentals due the petitioners
should be adjusted by reason of extraordinary inflation or
devaluation.

Declaratory relief is defined as an action by any person

interested in a deed, will, contract or other written instrument,
executive order or resolution, to determine any question of
construction or validity arising from the instrument, executive
order or regulation, or statute, and for a declaration of his rights
and duties thereunder. The only issue that may be raised in such a
petition is the question of construction or validity of provisions in
an instrument or statute. Corollary is the general rule that such an
action must be justified, as no other adequate relief or remedy is
available under the circumstances. [15]

Decisional law enumerates the requisites of an action for

declaratory relief, as follows: 1) the subject matter of the
controversy must be a deed, will, contract or other written
instrument, statute, executive order or regulation, or ordinance; 2)
the terms of said documents and the validity thereof are doubtful
and require judicial construction; 3) there must have been no

breach of the documents in question; 4) there must be an actual

justiciable controversy or the ripening seeds of one between
persons whose interests are adverse; 5) the issue must be ripe for
judicial determination; and 6) adequate relief is not available
through other means or other forms of action or proceeding. [16]
It is beyond cavil that the foregoing requisites are present in
the instant case, except that petitioners insist that respondent
was already in breach of the contract when the petition was filed.

We do not agree.
After petitioners demanded payment of adjusted rentals and in
the months that followed, respondent complied with the terms
and conditions set forth in their contract of lease by paying the
rentals stipulated therein. Respondent religiously fulfilled its
obligations to petitioners even during the pendency of the present
suit. There is no showing that respondent committed an act
constituting a breach of the subject contract of lease. Thus,
respondent is not barred from instituting before the trial court the
petition for declaratory relief.

Petitioners claim that the instant petition is not proper because a

separate action for rescission, ejectment and damages had been
commenced before another court; thus, the construction of the
subject contractual provisions should be ventilated in the same
forum.

We are not convinced.

It is true that in Panganiban v. Pilipinas Shell Petroleum

Corporation[17] we held that the petition for declaratory relief

should be dismissed in view of the pendency of a separate action

for unlawful detainer. However, we cannot apply the same ruling
to the instant case. In Panganiban, the unlawful detainer case had
already been resolved by the trial court before the dismissal of the
declaratory relief case; and it was petitioner in that case who
insisted that the action for declaratory relief be preferred over the
action for unlawful detainer.Conversely, in the case at bench, the
trial court had not yet resolved the rescission/ejectment case
during the pendency of the declaratory relief petition. In fact, the
trial court, where the rescission case was on appeal, itself initiated
the suspension of the proceedings pending the resolution of the
action for declaratory relief.

We are not unmindful of the doctrine enunciated in Teodoro, Jr. v.

Mirasol[18] where the declaratory relief action was dismissed
because the issue therein could be threshed out in the unlawful
detainer suit. Yet, again, in that case, there was already a breach
of contract at the time of the filing of the declaratory relief
petition. This dissimilar factual milieu proscribes the Court from
applying Teodoro to the instant case.

Given all these attendant circumstances, the Court is disposed to

entertain the instant declaratory relief action instead of dismissing
it, notwithstanding the pendency of the ejectment/rescission case
before the trial court. The resolution of the present petition would
write finis to the parties dispute, as it would settle once and for all
the question of the proper interpretation of the two contractual
stipulations subject of this controversy.

Now, on the substantive law issues.

Petitioners repeatedly made a demand on respondent for the

payment of VAT and for rental adjustment allegedly brought about
by extraordinary inflation or devaluation. Both the trial court and
the appellate court found no merit in petitioners claim. We see no
reason to depart from such findings.

As to the liability of respondent for the payment of VAT, we cite

with approval the ratiocination of the appellate court, viz.:

Clearly, the person primarily liable for the payment of VAT

is the lessor who may choose to pass it on to the lessee
or absorb the same. Beginning January 1, 1996, the lease
of real property in the ordinary course of business,
whether for commercial or residential use, when the gross
annual receipts exceed P500,000.00, is subject to 10%
VAT. Notwithstanding the mandatory payment of the 10%
VAT by the lessor, the actual shifting of the said tax
burden upon the lessee is clearly optional on the part of
the lessor, under the terms of the statute. The word may
in the statute, generally speaking, denotes that it is
directory in nature. It is generally permissive only and
operates to confer discretion. In this case, despite the
applicability of the rule under Sec. 99 of the NIRC, as
amended by R.A. 7716, granting the lessor the option to
pass on to the lessee the 10% VAT, to existing contracts
of lease as of January 1, 1996, the original lessor,
Ponciano L. Almeda did not charge the lessee-appellee
the 10% VAT nor provided for its additional imposition
when they renewed the contract of lease in May
1997. More significantly, said lessor did not actually
collect a 10% VAT on the monthly rental due from the
lessee-appellee after the execution of the May 1997
contract of lease. The inevitable implication is that the

lessor intended not to avail of the option granted him by

law to shift the 10% VAT upon the lessee-appellee. x x x.
[19]

In short, petitioners are estopped from shifting to respondent the

burden of paying the VAT.

Petitioners reliance on the sixth condition of the contract is,

likewise, unavailing. This provision clearly states that respondent
can only be held liable for new taxes imposed after the effectivity
of the contract of lease, that is, after May 1997, and only if they
pertain to the lot and the building where the leased premises are
located. Considering that RA 7716 took effect in 1994, the VAT
cannot be considered as a new tax in May 1997, as to fall within
the coverage of the sixth stipulation.

Neither can petitioners legitimately demand rental adjustment

because of extraordinary inflation or devaluation.

Petitioners contend that Article 1250 of the Civil Code does

not apply to this case because the contract stipulation speaks of
extraordinary inflation or devaluation while the Code speaks of
extraordinary inflation or deflation. They insist that the doctrine
pronounced
in Del
Rosario
v.
The
Shell
Company,
[20]
Phils. Limited
should apply.

Essential to contract construction is the ascertainment of the

intention of the contracting parties, and such determination must
take into account the contemporaneous and subsequent acts of

the parties. This intention, once ascertained, is deemed an

integral part of the contract.[21]

While, indeed, condition No. 7 of the contract speaks of

extraordinary inflation or devaluation as compared to Article
1250s extraordinary inflation or deflation, we find that when the
parties used the term devaluation, they really did not intend to
depart from Article 1250 of the Civil Code. Condition No. 7 of the
contract should, thus, be read in harmony with the Civil Code
provision.

That this is the intention of the parties is evident from petitioners

letter[22] dated January 26, 1998, where, in demanding rental
adjustment ostensibly based on condition No. 7, petitioners made
explicit reference to Article 1250 of the Civil Code, even quoting
the law verbatim. Thus, the application of Del Rosario is not
warranted. Rather, jurisprudential rules on the application of
Article 1250 should be considered.

Article 1250 of the Civil Code states:

In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an
agreement to the contrary.

Inflation has been defined as the sharp increase of money or

credit, or both, without a corresponding increase in business
transaction. There is inflation when there is an increase in the

volume of money and credit relative to available goods, resulting

in a substantial and continuing rise in the general price level. [23] In
a number of cases, this Court had provided a discourse on what
constitutes extraordinary inflation, thus:

[E]xtraordinary inflation exists when there is a decrease or

increase in the purchasing power of the Philippine
currency which is unusual or beyond the common
fluctuation in the value of said currency, and such
increase or decrease could not have been reasonably
foreseen or was manifestly beyond the contemplation of
the parties at the time of the establishment of the
obligation.[24]

The factual circumstances obtaining in the present case do not

make out a case of extraordinary inflation or devaluation as would
justify the application of Article 1250 of the Civil Code. We would
like to stress that the erosion of the value of the Philippine peso in
the past three or four decades, starting in the mid-sixties, is
characteristic of most currencies. And while the Court may take
judicial notice of the decline in the purchasing power of the
Philippine currency in that span of time, such downward trend of
the peso cannot be considered as the extraordinary phenomenon
contemplated by Article 1250 of the Civil Code. Furthermore,
absent an official pronouncement or declaration by competent
authorities of the existence of extraordinary inflation during a
given period, the effects of extraordinary inflation are not to be
applied. [25]

WHEREFORE, premises considered, the petition is DENIED. The

Decision of the Court of Appeals in CA-G.R. CV No.

67784, dated September

3,
2001,
and
dated November 19, 2001, are AFFIRMED.

its

Resolution

SO ORDERED.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 132284

February 28, 2006

TELENGTAN BROTHERS & SONS, INC., Petitioner,

vs.
UNITED STATES LINES, INC. and the COURT OF APPEALS, Respondents.
DECISION
GARCIA, J.:
Thru this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Telengtan
Brothers & Sons, Inc. (Telengtan) seeks the reversal and setting aside of the decision 1 dated
January 8, 1998 of the Court of Appeals (CA) in CA-G.R. CV No. 18349 which affirmed in toto the
decision dated January 10, 19852 of the Regional Trial Court of Manila, Branch 38, finding petitioner
liable to respondent United States Lines, Inc. (U.S. Lines) for demurrage and damages.
Petitioner Telengtan is a domestic corporation doing business under the name and style La Suerte
Cigar & Cigarette Factory, while respondent U.S. Lines is a foreign corporation engaged in the
business of overseas shipping. During the period material, the provisions of the Far East
Conference Tariff No. 12 were specifically made applicable to Philippine containerized cargo from
the U.S. and Gulf Ports, effective with vessels arriving at Philippine ports on and after December 15,
1978. After that date, consignees who fail to take delivery of their containerized cargo within the 10day free period are liable to pay demurrage charges.
As recited in the decision under review, the factual antecedents may be summarized as follows:
On June 22, 1981, respondent U.S. Lines filed a suit against petitioner Telengtan seeking payment
of demurrage charges plus interest and damages. Docketed as Civil Case No. R-81-1196 of the
Regional Trial Court of Manila and raffled to Branch 38 thereof, the complaint alleged that between
the years 1979 and 1980, goods belonging to petitioner loaded on containers aboard its
(respondents) vessels arrived in Manila from U.S. ports. After the 10-day free period, petitioner still
failed to withdraw its goods from the containers wherein the goods had been shipped. Continuing,
respondent U.S. Lines alleged that petitioner incurred on all those shipments a demurrage in the
total amount of P94,000.00 which the latter refused to pay despite repeated demands.

In its amended answer with compulsory counterclaim, petitioner Telengtan, as defendant a

quo, disclaims liability for the demanded demurrage, alleging that it has never entered into a contract
nor signed an agreement to be bound by any rule on demurrage. It likewise maintains that, absent
an obligation to pay respondent who made no proper or legal demands in the first place, there is
justifiable reason to refuse payment of the latters unwarranted claims. By way of counterclaim,
petitioner states that, upon arrival of the conveying vessels, it presented the Bills of Lading (B/Ls)
and all other pertinent documents covering seven (7) shipments and demanded from respondent
delivery of all the goods covered by the aforesaid B/Ls, only to be informed that respondent had
already unloaded the goods from the container vans, stripped them of their contents which contents
were then stored in warehouses. Petitioner further states that respondent had refused to deliver the
goods covered by the B/Ls and required petitioner to pay the amount of P123,738.04 before the
goods can be released. It thus prays that respondent be ordered to pay the aforestated amount with
interest.
After due proceedings, the trial court found for respondent U.S. Lines, as plaintiff therein, and
accordingly rendered judgment, as follows:
WHEREFORE, in view of all the foregoing, the Court finds [petitioner] liable to [respondent] for
demurrage incurred in the amount of P99,408.00 which sum will bear interest at the legal rate from
the date of the filing of the complaint till full payment thereof plus attorneys fees in the amount of
20% of the total sum due, all of which shall be recomputed as of the date of payment in accordance
with the provisions of Article 1250 of the Civil Code. Exemplary damages in the amount of
P80,000.00 are also granted. The counterclaim is dismissed. Costs against [petitioner]. (Words in
bracket ours)3
Party explains the trial court in its decision:4
In other words, contrary to [petitioners] contentions, both the provisions of the contract between the
parties, in this case the bill of lading, and the interpretation given by the higher courts to these
provisions are to the effect that demurrage may be lawfully collected. As a matter of fact,
[respondent U.S. Lines] has submitted official receipts showing that on many other and previous
occasions, [petitioner] paid demurrage to [respondent] (Exhibits "F", "F-1" to "F-4", "G", "G-1" to "G4", "H", "H-1" to "H-4", and "I", "I-1" to "I-3"). [Petitioner] is, therefore, in estoppel to claim that it did
not know of demurrage being charged by [respondent] and that it had not agreed to it since these
exhibits show that [petitioner] knew of this demurrage and by paying for the same, it in effect, agreed
to the collection of demurrage.
xxxxxxxxx
On the other hand, [petitioner] claims that [respondent] company owes them the far larger sum of
P123,738.04 by way of damages allegedly suffered by their goods when [respondent] company
removed these goods from its cargo vans and deposited them in bonded warehouses without its
consent. It is not disputed that [respondent] company did not [sic] in fact remove these goods
belonging to [petitioner] from its vans and deposited them in warehouses. However, this was done
by authority of the Bureau of Customs and for that purpose, [respondent] addressed a letter-request

to the Collector of Customs, for permission to remove the goods of defendant from its vans (Exhibit
"L"). xxx.
xxxxxxxxx
The Court finds that the charges for warehousing were necessary expenses covered by the terms of
the bill of lading which the consignee was responsible for. There is therefore now no necessity of
discussing whether or not the counterclaim of [petitioner] had prescribed or not. Neither is there any
question of bad faith on the part of [respondent]. When it requested for authority to remove
[petitioners] consigned goods from its vans and deposited them in warehouses, [respondent] had
already given consignee sufficient time to take delivery of the shipment. This, [petitioner] chose not
to do. Instead, it sat pat by the telephone calling without making any positive effort to check up on
the shipment or arrange for its delivery to its factory. Once arrived at the port, the shipment was
available to consignee for its proper delivery and receipt and the carrier discharged of its
responsibility therefor. Rather, by its inaction, [petitioner] was guilty of bad faith. Once it had received
the notice of arrival of the carrier in port, it was incumbent on consignee to put wheels in motion in
order that the shipment could be delivered to it. The inaction of [petitioner] would only indicate that it
had no intention of taking delivery except at its own convenience thus preventing carrier from taking
on other shipments and from leaving port. Such unexplained and unbusiness-like delay smacks
highly of bad faith on the part of [petitioner] rather than of the [respondent]. (Words in bracket,
added).
Appealing to the CA, whereat its recourse was docketed as CA-G.R. CV No. 18349, petitioner
contended that the trial court erred in (1) holding it liable for demurrage, (2) dismissing its
counterclaim, and (3) awarding exemplary damages and attorneys fees to respondent.
As stated at the outset, however, the CA, in its assailed Decision dated January 8,
1998,5 affirmed in toto the judgment of the trial court.
Undaunted, petitioner is now with this Court via the present recourse, imputing to the CA the
following errors:
A. xxx in concluding that it [petitioner] was the one at fault in not withdrawing its cargo from the
container vans in which the goods were originally shipped despite documentary evidence and written
admissions of private respondent to the contrary.
B. xxx in affirming the trial courts order for the recomputation of the judgment award in accordance
with Article 1250 of the Civil Code contrary to existing jurisprudence and without any evidence at all
to support it.6
The petition is partly meritorious.

1avvphil.net

It is undisputed that the goods subject of petitioners counterclaim and covered by seven (7) B/Ls
with Shippers Reference Nos. S-16844, S-16846, S-16848, S-17748, S-17750, S-17749 and S177517 were loaded for shipment to Manila on respondents vessels in container vans on a
"House/House Containers-Shippers Load, Stowage and Count" basis. This shipping arrangement

means that the shipping companys container vans are to be brought to the shipper for loading of its
goods; that from the shippers warehouse, the goods in container vans are brought to the shipping
company for shipment; that the shipping company, upon arrival of its ship at the port of destination,
is to deliver the container vans to the consignees compound or warehouse; and that the shipper
(consignee) is supposed to load, stow and count the goods from the container van. 8 Likewise
undisputed is the fact that the container vans containing the goods covered by three (3) of the
aforesaid B/Ls, particularly those with Shippers Reference Nos. S-17748, S-17750 and S17751,9 were delivered to a warehouse, stripped of their contents and the contents deposited
thereat.10
On the argument that the respondent, upon the foregoing undisputed facts, violated its contractual
obligation to deliver when, instead of delivering the goods to the petitioner as consignee thereof, it
deposited the same in bonded warehouse/s, petitioner would now score the CA for finding it at fault
for non-withdrawal of its cargo from the container vans within the 10-day free demurrage period.
Pressing the point, petitioner argues that, since the CA drew an erroneous conclusion from an
undisputed set of facts, petitioner now asserts that the matter of who is at fault - its first assigned
error - could be treated as a legal issue and not a question of fact.
After careful consideration, the Court sustain the CAs stance faulting the petitioner for not taking
delivery of its cargo from the container vans within the 10-day free period, an inaction which led
respondent to deposit the same in warehouse/s.
It may be that, when the relevant facts are undisputed, the question of whether or not the conclusion
deduced therefrom by the CA is correct is a question of law properly cognizable by this
Court.11 However, it has also been held that all doubts as to the correctness of such conclusions will
be resolved in favor of the disposing court.12So it must be in this case.
At any rate, the Court finds that petitioners first contention raises a question of fact rather than of
law. And settled is the rule that factual findings of the CA, particularly those confirmatory of that of
the trial court, as here, are binding on this Court, 13 save for the most compelling of reasons, like
when they are reached arbitrarily.14
As it were, however, the conclusion of the CA on who contextually is the erring party was not exactly
drawn from a vacuum, supported as such conclusion is by the records of the case. What the CA
wrote with some measure of logic commends itself for concurrence:
However, ... We find that [petitioner] was the one at fault in not withdrawing its cargo from the
containers wherein the goods were shipped within the ten (10)-day free period. Had it done so, then
there would not have been any need of depositing the cargo in a warehouse.
It is incumbent upon the carrier to immediately advise the consignee of the arrival of the goods for if
it does not, it continues to be liable for the same until the consignee has had reasonable opportunity
to remove them.
Sound business practice dictates that the consignee, upon notification of the arrival of the goods,
should immediately get the cargo from the carrier especially since it has need of it. xxx.

Appellant tries to shift the blame on the [respondent] by stating that it was not informed beforehand
of the latters intention to deliver the goods to a warehouse. It likewise alleges that it does not know
where to contact [respondent] for it argues that the person manning the latters office would only hold
office for a few hours, if not always out. But had it taken the necessary steps of inquiring for the
address of [respondent] from the proper government offices, then it would have succeeded in finding
the latters address.
Judging from the [petitioners] way of conducting business in the past, We come to the conclusion
that it is used to paying demurrage charges. Exhibits "H" and "I" are certainly proofs of appellants
practice of not getting its cargo from the carrier immediately upon notification of the goods
arrival. 15 (Words in bracket added.)
It cannot be over-emphasized that the container vans were stripped of their cargo with the prior
authorization of the Bureau of Customs. The trial court said as much, thus:
It is not disputed that [respondent] company did not [sic] in fact remove these goods belonging to
[petitioner] from its vans and deposited them in warehouses. However, this was done by authority of
the Bureau of Customs and for that purpose, [respondent] addressed a letter-request to the Collector
of Customs, for permission to remove the goods of [petitioner] from its vans (Exhibit "L"). The
corresponding authority was granted by the Bureau of Customs to do so as evidenced by a van
permit (Exhibit "M"). In other words, while [respondent] admits that it removed the goods of
[petitioner] from its vans and deposited them in various warehouses, there is no question that this
was done by authority of the Bureau of Customs which is the proper agency of the government
charged with the supervision and regulation of maritime commerce.
Verily, the authority secured from the Bureau of Customs is indicative of the bona fides of
respondents intention. And as held below, the authority thus acquired relieved respondent of its
obligations under the B/Ls when it caused the containers to be stripped and the goods stored in
bonded warehouses.
Not lost on this Court is the fact that the B/Ls under which petitioner anchors its counterclaim allow
the goods carried to be delivered to bonded warehouses for the shippers and/or consignees
account if it does not take possession or delivery thereof as soon as they are at its disposal for
removal. Section 17 of the Regular Long Form Inward B/L of the respondent 16 which is incorporated
by reference to the Short Form of B/L17 provides:
17. The carrier shall not be required to give any notification whatsoever of arrival, discharge or any
disposition of or action taken with respect to the goods, even though the goods are consigned to
order with provision for notice to a named person.
The carrier or master may appoint a stevedore or any other persons to unload and take delivery of
the goods and such delivery from ship's tackle shall be considered complete and all responsibility of
the carrier shall then terminate.
It is agreed that when possession of the goods is received or taken by the customs or other
authorities or by any operator of any lighter, craft, or other facilities whether selected by the carrier

or master, shipper of consignee, whether public or private, such authority or person shall be
considered as having received possession and delivery of the goods solely as agent of and on
behalf of the shipper and consignee, . Also if the consignee does not take possession or
delivery of the goods as soon as the goods are at the disposal of the consignee for removal,
the goods shall be at their own risk and expense, delivery shall be considered complete and
the carrier may, subject to carrier's liens, send the goods to store, warehouse, put them on
lighters or other craft, put them in possession of authorities, dump, permit to lie where
landed or otherwise dispose of them, always at the risk and expense of the goods, and the
shipper and consignee shall pay and indemnify the carrier for any loss, damage, fine, charge or
expense whatsoever suffered or incurred in so dealing with or disposing of the goods, or by reason
of the consignee's failure or delay in taking possession and delivery as provided herein. (Emphasis
Ours)
On the second issue raised, the Court finds as erroneous the trial courts decision, as affirmed by the
CA, for the recomputation of the judgment award as of the date of payment in accordance with
Article 1250 of the Civil Code.
In calling for the application of the aforementioned provision, respondent urged that judicial notice be
taken of the succeeding devaluations of the peso vis--vis the US dollar since the time the
proceedings began in 1981. According to respondent, the computation of the amount thus due from
the petitioner should factor in such peso devaluations.18
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value
of the currency at the time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary.
Extraordinary inflation or deflation, as the case may be, exists when there is an unusual increase or
decrease in the purchasing power of the Philippine peso which is beyond the common fluctuation in
the value of said currency, and such increase or decrease could not have been reasonably foreseen
or was manifestly beyond the contemplation of the parties at the time of the establishment of the
obligation.19 Extraordinary inflation can never be assumed; he who alleges the existence of such
phenomenon must prove the same.20
The Court holds that there has been no extraordinary inflation within the meaning of Article 1250 of
the Civil Code. Accordingly, there is no plausible reason for ordering the payment of an obligation in
an amount different from what has been agreed upon because of the purported supervention of
extraordinary inflation.
As it were, respondent was unable to prove the occurrence of extraordinary inflation since it filed its
complaint in 1981. Indeed, the record is bereft of any evidence, documentary or testimonial, that
inflation, nay, an extraordinary one, existed. Even if the price index of goods and services may have
risen during the intervening period,21 this increase, without more, cannot be considered as resulting
to "extraordinary inflation" as to justify the application of Article 1250. The erosion of the value of the
Philippine peso in the past three or four decades, starting in the mid-sixties, is, as the Court

observed in Singson vs. Caltex (Phil), Inc., 22 characteristics of most currencies. And while the Court
may take judicial notice of the decline in the purchasing power of the Philippine currency in that span
of time, such downward trend of the peso cannot be considered as the extraordinary phenomenon
contemplated by Article 1250 of the Civil Code. Furthermore, absent an official pronouncement or
declaration by competent authorities of the existence of extraordinary inflation during a given period,
as here, the effects of extraordinary inflation, if that be the case, are not to be applied.
Lest it be overlooked, Article 1250 of the Code, as couched, clearly provides that the value of the
peso at the time of the establishment of the obligation shall control and be the basis of payment of
the contractual obligation, unless there is "agreement to the contrary." It is only when there is a
contrary agreement that extraordinary inflation will make the value of the currency at the time of
payment, not at the time of the establishment of obligation, the basis for payment. 23 The Court,
in Mobil Oil Philippines, Inc. vs. Court of Appeals and Fernando A. Pedrosa,[24 formulated the same
rule in the following wise:
In other words, an agreement is needed for the effects of an extraordinary inflation to be taken into
account to alter the value of the currency at the time of the establishment of the obligation which, as
a rule, is always the determinative element, to be varied by agreement that would find reason only in
the supervention of extraordinary inflation or deflation.
To be sure, neither the trial court, the CA nor respondent has pointed to any provision of the covering
B/Ls whence respondent sourced its contractual right under the premises where the defining
"agreement to the contrary" is set forth. Needless to stress, the Court sees no need to speculate as
to the existence of such agreement, the burden of proof on this regard being on respondent.
WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED with
the MODIFICATION that the order for recomputation as of the date of payment in accordance with
the provisions of Article 1250 of the Civil Code is deleted.
Costs against petitioner.
SO ORDERED.