You are on page 1of 13

PACULDO VS.

REGALADO
FACTS:On December 27, 1990, petitioner Nereo Paculdo and respondent Bonifacio Regalado entered into a
contract of lease over a parcel of land with a wet market building, located at Fairview Park, Quezon City. The
contract was for twenty five (25) years, commencing on January 1, 1991 and ending on December 27, 2015.
For the first five (5) years of the contract beginning December 27, 1990, Nereo would pay a monthly rental of
P450,000, payable within the first five (5) days of each month with a 2% penalty for every month of late
payment.
Aside from the above lease, petitioner leased eleven (11) other property from the respondent, ten (10) of which
were located within the Fairview compound, while the eleventh was located along Quirino Highway Quezon
City. Petitioner also purchased from respondent eight (8) units of heavy equipment and vehicles in the
aggregate amount of Php 1, 020,000.
On account of petitioners failure to pay P361, 895.55 in rental for the month of May, 1992, and the monthly
rental of P450, 000.00 for the months of June and July 1992, the respondent sent two demand letters to
petitioner demanding payment of the back rentals, and if no payment was made within fifteen (15) days from
the receipt of the letter, it would cause the cancellation of the lease contract.
Without the knowledge of petitioner, on August 3, 1992, respondent mortgaged the land subject of the lease
contract, including the improvements which petitioner introduced into the land amounting to P35, 000,000.00,
to Monte de Piedad Savings Bank, as a security for a loan.
On August 12, 1992, and the subsequent dates thereafter, respondent refused to accept petitioners daily
rental payments.
Subsequently, petitioner filed an action for injunction and damages seeking to enjoin respondents from
disturbing his possession of the property subject of the lease contract. On the same day, respondent also filed
a complaint for ejectment against petitioner.
The lower court rendered a decision in favor of the respondent, which was affirmed in toto by the Court of
Appeals.
ISSUE: Whether or not the petitioner was truly in arrears in the payment of rentals on the subject property at
the time of the filing of the complaint for ejectment.
RULING: NO, the petitioner was not in arrears in the payment of rentals on the subject property at the time of
the filing of the complaint for ejectment.
As found by the lower court there was a letter sent by respondent to herein petitioner, dated November 19,
1991, which states that petitioners security deposit for the Quirino lot, be applied as partial payment for his
account under the subject lot as well as to the real estate taxes on the Quirino lot. Petitioner interposed no
objection, as evidenced by his signature signifying his conformity thereto.
Meanwhile, in an earlier letter, dated July 15, 1991, respondent informed petitioner that the payment was to be
applied not only to petitioners accounts under the subject land and the Quirino lot but also to heavy equipment
bought by the latter from respondent. Unlike in the November letter, the July letter did not contain the signature
of petitioner.
Petitioner submits that his silence is not consent but is in fact a rejection.
As provided in Article 1252 of the Civil Code, the right to specify which among his various obligations to the
same creditor is to be satisfied first rest with the debtor.
In the case at bar, at the time petitioner made the payment, he made it clear to respondent that they were to be

applied to his rental obligations on the Fairview wet market property. Though he entered into various contracts
and obligations with respondent, all the payments made, about P11,000,000.00 were to be applied to rental
and security deposit on the Fairview wet market property. However, respondent applied a big portion of the
amount paid by petitioner to the satisfaction of an obligation which was not yet due and demandable- the
payment of the eight heavy equipments.
Under the law, if the debtor did not declare at the time he made the payment to which of his debts with the
creditor the payment is to be applied, the law provided the guideline; i.e. no payment is to be applied to a debt
which is not yet due and the payment has to be applied first to the debt which is most onerous to the debtor.
The lease over the Fairview wet market is the most onerous to the petitioner in the case at bar.
Consequently, the petition is granted.
Inchausti vs. Yulo (novation)
Held:
The contract of May 12, 1911 does not constitute a novation of the former one of Aug.12, 1909, with respect to
the other debtors who executed this contract. First, in order that an obligation may be extinguished by another
which substitutes it, it is necessary that it should be so expressly declared or that the old and the new be
incompatible in all points(art. 1292). It is always necessary to state that it is the intentionof the contracting
parties to extinguish the former obligation by the new one. The obligation to pay a sum of money is not
novated in a new instrument wherein the old is ratified, by changing only the term of payment and adding other
obligations not incompatible with the old one.
The obligation being solidary, the remission of any part of the debt made by a creditor in favor of one or more
of the solidary debtors necessarily benefits the others, and therefore there can be no doubt that, in accordance
with the provision of Art. 1215, 1222, the defendant has the right to enjoy the benefits of the partial remission.
At present judgment can be rendered only as to P112,500.
Facts: This suit is brought for the recovery of a certain sum of money, the balance of a current account opened
by the firm of Inchausti & Company with Teodor Yulo and after his death continued by Gregorio Yulo as
principal representative of his children. On Aug.12, 1909, Gregorio Yulo, in representation of his 3 siblings,
executed a notarial instrument, ratifying all the contents of the prior document of Jan.26, 1908, severally and
joint acknowledged their indebtedness for P253,445.42, 10 % per annum, 5 installments. Plaintiff brought an
action againsta Gregorio for the payment of the said balance due. But on May 12, 1911, 3 siblings executed
another instrument in recognition of the debt, reduced to P225,000, interest reduced to 6% per annum,
installments increased to 8.
Millar vs. CA (novation)
Held: No substantial incompatibility between the mortgage obligation and the judgment liability of the
respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the
obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific
method for its extinguishment payment in two equal installments. The chattel mortgage simply gave the
respondent a method and more time to enable him to fully satisfy the judgment indebtedness. The chattel
mortgage agreement in no manner introduced any substantial modification or alteration of the judgment.
Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel
mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode and period for
compliance by the respondent.
The defense of implied novation requires clear and convincing proof of complete incompatibility between the
two obligations. The law requires no specific form for an effective novation by implication. The test is whether
the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates
the first. If they can stand together, no incompatibility results and novation does not take place.

Facts: Millar obtained a favorable condemning Antonio P. Gabriel to pay him the sum of P1,746.98 with interest
at 12% per annum from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the
costs of suit. The lower court issued the writ of execution on the basis of which the sheriff seized the
respondent's Willy's Ford jeep. The respondent, however, pleaded with the petitioner to release the jeep under
an arrangement whereby the respondent, to secure the payment of the judgment debt, agreed to mortgage the
vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties executed a chattel
mortgage on the jeep. Resolution of the controversy posed by the petition at bar hinges entirely on a
determination of whether or not the subsequent agreement of the parties as embodied in the deed of chattel
mortgage impliedly novated the judgment obligation.
OLIVERIO LAPERAL& FILIPINAS GOLF & COUNTRY CLUB INC. vs. SOLID HOMES, INC.
G.R. No. 130913. June 21, 2005
Facts: Filipinas Golf Sales and Development Corporation, predecessor-in-interest of Filipinas Golf and Country
Club, Inc., represented by its then President, Oliverio Laperal, entered into a Development and Management
Agreement with respondent Solid Homes, Inc., a registered subdivision developer, involving several parcels of
land owned by Laperal and FGSDC. Under the terms and conditions of the aforementioned Agreement and the
Supplement, respondent undertook to convert at its own expense the land subject of the agreement into a firstclass residential subdivision, in consideration of which respondent will get 45% of the lot titles of the saleable
area in the entire project. The aforementioned Agreement was cancelled by the parties, and, in lieu thereof,
two contracts identically denominated Revised Development and Management Agreement were entered into
by respondent with the two successors-in-interest of FGSDC. Unlike the original agreement, both Revised
Agreements omitted the obligation of petitioners Laperal and FGCCI to make available to respondent Solid
Homes, Inc. the owners duplicate copies of the titles covering the subject parcels of land. It appears, however,
that even as the Revised Agreements already provided for the non-surrender of the owners duplicate copies
of the titles, respondent persisted in its request for the delivery thereof .Then, petitioners served on respondent
notices of rescission of the Revised Agreements with a demand to vacate the subject properties and yield
possession thereof to them.
Issue: Whether the termination of the Revised Agreement and Addendum, because of the contractual breach
committed by respondent solid homes, carried with it the effect provided under Article 1385 of the New Civil
Code.
Held: Mutual restitution is required in cases involving rescission under Article 1191. Since Article 1385 of the
Civil Code expressly and clearly states that rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with its interest, the Court finds no
justification to sustain petitioners position that said Article 1385 does not apply to rescission under Article
1191.As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. Applying the clear language of the law
and the consistent jurisprudence on the matter, therefore, the Court rules that rescission under Article 1191 in
the present case, carries with it the corresponding obligation of restitution.
FILINVEST vs. CA
G.R. No. 115902. 27 Sept 1995.
Petition for certiorari to review the decision of the CA
Davide, Jr., J.:
Facts: On Aug 26, 1978 FILINVEST awarde to the defendant PACIFIC the development of the residential
subdivision consisting of two lands located in Payatas, QC. PACIFIC issued two surety bonds issued by
PHILAMGEN. PACIFIC failed to finish the contracted work, FILINVEST intends to take over the project and
hold defendant liable for damages.
On October 26, plaintiff submitted its claim against PHILAMGEN under its performance and guarantee bond
but PHILAMGEN refused to acknowledge its liability for the single reason that its principal, defendant pacific,
refused to acknowledge liability therefore. Defendant said that the failure to finish the contracted work was due

to the weather, and the grant of extension of the work is a waiver to claim any damages. PHILAMGEN
contends that the various amendments made on the principal contract and the deviation in the implementation
thereof which were resorted to by plaintiff and PACIFIC w/o its consent have automatically released the latter
from any liability. The tc dismissed the complaint, basing on the commissioner report. CA affirmed.
Issue: WON the liquidated damages agrees upon by the parties should be reduced.
Held: Decision of CA AFFIRMED.
Ratio: Art. 1226 in obligations with a penal clause, the penalty of shall substitute the indemnity for damages
and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
As a general rule, courts are not at liberty to ignore the freedom of the parties to agree on such terms and
conditions as they see fit, as long as they are not contrary to law. But the courts may equitably reduce the
penalty in two instances, first,if the principal obligation has been irregularly complied with and second, when it
is iniquitous or unconscionable.
Case of Heirs of Luis Bacus vs Court of Appeals, Spouses Faustino Duray and Victoriana Duray
G.R.No. 127695 03December2001
FACTS OF THE CASE:
On 1984 Luis Bacus leased to Faustino Duray a parcel of agricultural land with total land area of 3,002 of
square meters, in Cebu. The lease was for six years ending in 1990, the contract contained an option to buy
clause. Under the said option, the lessee had the exclusive and irrevocable right to buy 2,000 square meters 5
years from a year after the effectivity of the contract, at P200 per square meter. That rate shall be
proportionately adjusted depending on the peso rate against the US dollar, which at the time of the execution
of the contract was 14 pesos.
Close to the expiration of the contract Luis Bacus died on 1989, after Duray informed the heirs of Bacus that
they are willing and ready to purchase the property under the option to buy clause. The heirs refused to sell,
thus Duray filed a complaint for specific performance against the heirs of Bacus. He showed that he is ready
and able to meet his obligations under the contract with Bacus. The RTC ruled in favor of the Durays and the
CA later affirmed the decision.
ISSUES OF THE CASE:
Can the heirs of Luis Bacus be compelled to sell the portion of the lot under the option to buy clause?
- Yes, Obligations under an option to buy are reciprocal obligations. The performance of one obligation is
conditioned on the simultaneous fulfillment of the other obligation. In other words, in an option to buy, the
payment of the purchase price by the creditor is contingent upon the execution and delivery of the
deed of sale by the debtor.
- When the Durays exercised their option to buy the property their obligation was to advise the Bacus of their
decision and readiness to pay the price, they were not yet obliged to make the payment. Only upon the Bacus
actual execution and delivery of the deed of sale were they required to pay.
- The Durays did not incur in delay when they did not yet deliver the payment nor make a consignation before
the expiration of the contract. In reciprocal obligations, neither party incurs in delay if the other party
does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only
from the moment one of the parties fulfills his obligation, does delay by the other begin.
HELD:
The petition is DENIED nad the decision of the Court of Appeals is AFFIRMED.

Obligations and Contracts Terms:


Reciprocal Obligations- Those which arise from the same cause, and in which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to
be performed simultaneously such that the performance of one is conditioned upon the simultaneous
fulfillment of the other
JEANETTE D. MOLINO, petitioner, vs. SECURITY DINERS INTERNATIONAL CORPORATION,
respondent.
The Security Diners International Corporation (SDIC) operates a credit card system under the name of
Diners Club through which it extends credit accommodation to its cardholders for the purchase of goods and
payment of services from its member establishments to be reimbursed later on by the cardholder upon proper
billing. There are two types of credit cards issued: one, the Regular (Local) Card which entitles the
cardholder to purchase goods and pay services from member establishments in an amount not exceeding
P10,000.00; and two, the Diamond (Edition) Card which entitles the cardholder to purchase goods and pay
services from member establishments in unlimited amounts. One of the requirements for the issuance of
either of these cards is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular (Local) Card with SDIC. He got as his surety his own
sister-in-law Jeanette Molino Alto. Thus, Danilo signed the printed application form (Exhibit A) and Jeanette
signed the Surety Undertaking (Exhibit A-5). Attached to the Application Form was an Agreement (Use of
Diners Club Card), paragraph 16 of which reads:
16. SURETY. The cardholder shall furnish an adequate surety or sureties acceptable to Security Diners who
shall be jointly and severally liable with the cardholder to pay Security Diners all the obligations and charges
incurred and credit extended on the basis of the card. In the event the surety/sureties furnished the cardholder
are discharged the cardholder must furnish a new surety or sureties acceptable to Security Diners within thirty
(30) days. Otherwise the cardholders privileges shall be automatically terminated in accordance with Section
11 hereof.
On the basis of the completed and signed Application Form and Surety Undertaking, the SDIC issued to Danilo
Diners Card No. 36510293216-0006. The latter used this card and initially paid his obligations to SDIC. On
February 8, 1988, Danilo wrote SDIC a letter requesting it to upgrade his Regular (Local) Diners Club Card to
a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from Jeanette her approval.
Danilos request was granted and he was issued a Diamond (Edition) Diners Club Card. He used this card
and made purchases from member establishments. On October 1, 1988 Danilo had incurred credit charged
plus appropriate interest and service charges in the aggregate amount of P166,408.31. He defaulted in the
payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on November 9, 1988,
SDIC filed an action to collect said indebtedness against Danilo and Jeanette
Defendant Danilo Alto failed to file an Answer, and during the pre-trial conference respondent moved to have
the complaint dismissed against him, without prejudice to a subsequent re-filing. Petitioner was left as the lone
defendant, sued in her capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed with the RTC, petitioner claimed that her liability
under the Surety Undertaking was limited to P10,000.00 and that she did not expressly and categorically agree
to act as surety for Danilo in an amount higher than P10,000.00.[3] By way of counterclaim, she asked for
moral and exemplary damages.
On August 19, 1991, the trial court rendered a decision dismissing the complaint for failure of respondent to
prove its case by a preponderance of the evidence. It found that while petitioner clearly bound herself as
surety under the terms of Danilo Altos Regular Diners Club Card, there was no evidence that after the card
had been upgraded to Diamond (Edition) petitioner consented or agreed to act as surety for Danilo. Exhibit
C or Exhibit 1, inter alia, which was a note bearing petitioners signature certifying to her approval of
Danilos request to have his card upgraded should be read simply as a statement of no objection to his

request for upgrading, and not as an assumption of liability for the debts that Danilo may later owe through the
said card.[4] The trial court also took note of the testimony of Alfredo Vicente, an officer of respondent, who
opined that the consent to be bound as surety to an upgraded card should be categorical[5] and not in a
simple no objection form.
The trial court went on further to state that petitioner was not liable for any amount, not even for P10,000.00
which is the maximum credit limit for Regular Diners Club Cards, since at the time of the upgrading Danilo had
no outstanding credit card debts.[6] This is evident from the fact that Danilos request for upgrading was
approved, since one of the requirements for the approval of a request for the upgrading of a credit card from
Regular to Diamond is that the applicant must have paid all his billings for the last three months prior to his
request.
Hence, the trial court disposed of the case with these pronouncements:
WHEREFORE, judgment is rendered dismissing the complaint against defendant Jeanette D. Molino-Alto for
failure of the plaintiff to prove its case by a clear preponderance of evidence.
The Court of Appeals found contrary to the lower court, and declared that the Surety Undertaking signed by
petitioner when Danilo Alto first applied for a Regular Diners Club Card clearly applied to the unpaid purchases
of Danilo Alto under the Diamond card. In holding thus, the Court of Appeals referred to the terms of the said
Surety Undertaking, which stated that any change or novation in the agreement on the use of the Diners Club
card does not release the surety from his obligations, it being understood that the undertaking is a continuing
one which subsists until all obligations and charges under the subject credit card are paid and satisfied. It also
cited Pacific Banking Corporation vs. Intermediate Appellate Court,[8] a 1991 decision which held the surety
liable to the extent of the credit cardholders indebtedness, under the clear terms of the Guarantors
Undertaking that the surety signed with the credit card company.
The Court of Appeals further declared that it was erroneous of the trial court to conclude that petitioner was
completely relieved of liability under Danilo Altos credit card since the Surety Undertaking she signed
remained valid and enforceable even after the upgrading of the said card; besides, petitioner herself admitted
that she was liable to the extent of P10,000.00.
Additionally, the Court of Appeals reduced the attorneys fees (stipulated in the Agreement for the Use of
Diners Club Card) from 25% to 10% of the amount due, judging this to be a more reasonable rate under the
circumstances.
Petitioners motion for reconsideration of the above decision was denied for lack of merit on December 1,
1998.
Petitioner posits that she did not expressly give her consent to be bound as surety under the upgraded card.
She points out that the note she signed, marked as Exhibit C, registering her approval of the request of
Danilo Alto to upgrade his card, renders the Surety Undertaking she signed under the terms of the previous
card without probative value, immaterial and irrelevant as it covers only the liability of the surety in the use of
the regular credit card by the principal debtor. She argues further that because the principal debtor, Danilo Alto,
was not held liable, having been dropped as a defendant, she could not be said to have incurred liability as
surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under the Diamond card revolves around the effect of
the upgrading by Danilo Alto of his card. Was the upgrading a novation of the original agreement governing
the use of Danilo Altos first credit card, as to extinguish that obligation and the Surety Undertaking which was
simply accessory to it?
Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by
material incompatibility (implied novation). As we stated in Fortune Motors vs. Court of Appeals, supra:
xxx The test of incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
Novation must be established either by the express terms of the new agreement or by the acts of the
parties clearly demonstrating the intent to dissolve the old obligation as a consideration for the emergence

of the new one. The will to novate, whether totally or partially, must appear by express agreement of the
parties, or by their acts which are too clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the original agreement covering the first credit card
issued to Danilo Alto, basically since it was committed with the intent of cancelling and replacing the said card.
However, the novation did not serve to release petitioner from her surety obligations because in the Surety
Undertaking she expressly waived discharge in case of change or novation in the agreement governing the
use of the first credit card.
The Surety Undertaking expressly provides that petitioners liability is solidary. A surety is considered in law as
being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and
their liabilities are interwoven as to be inseparable.[14] Although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he
becomes liable for the debt and duty of another although he possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom.[15] There being no question that Danilo Alto incurred
debts of P166,408.31 in credit card advances, an obligation shared solidarily by petitioner, respondent was
certainly within its rights to proceed singly against petitioner, as surety and solidary debtor, without prejudice to
any action it may later file against Danilo Alto, until the obligation is fully satisfied. This is so provided under
Article 1216 of the Civil Code:
The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may be subsequently directed
against the others, so long as the debt has not been fully collected.
Petitioner is a graduate of business administration, and possesses considerable work experience in several
banks. She knew the full import and consequence of the Surety Undertaking that she executed. She had the
option to withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases,
but instead she approved the upgrading. While we commiserate in the financial predicament she now faces, it
is also evident that the liability she incurred is only the legitimate consequence of an undertaking that she
freely and intelligently obliged to. Prospective sureties to credit card applicants would be well-advised to study
carefully the terms of the agreements prepared by the credit card companies before giving their consent, and
pay heed to stipulations that could lead to onerous effects, like in the present case where the credit applied for
was limitless. At the same time, it bears articulating that although courts in appropriate cases may equitably
reduce the award for penalty as provided under such suretyship agreements if the same is iniquitous or
unconscionable,[16] we are unable to give relief to petitioner by way of reducing the amount of the principal
liability as surety under the circumstances of this case.
WHEREFORE, the petition is dismissed for lack of merit. The decision of the Court of Appeals is AFFIRMED
in all respects.
SO ORDERED.
UNION REFINERY CORPORATION, Petitioners, vs.REYNALDO C. TOLENTINO, SR., LUCIA BUSOG
TOLENTINO, ROLAND B. TOLENTINO, REX B. TOLENTINO, REYNALDO B. TOLENTINO, JR., AND
MARYLOU B. TOLENTINO, Respondent.
Petitioner Union Refinery Corporation is the owner of brand name "Unioil" and is engaged in the refining and
manufacturing of lube oil and other petroleum products. On March 3, 1987, petitioner and respondent Roland
B. Tolentino executed a Memorandum of Agreement (MOA) where the former appointed the latter as its
authorized dealer of Unioil products for Quezon province and the Bicol region. Respondent Roland bound
himself to either post a bond or execute a mortgage as security for his accountabilities under the contract.
Pursuant to the MOA, the brothers of respondent Roland, respondents Rex and Reynaldo, Jr., executed deeds
of chattel mortgage over four (4) vehicles in favor of petitioner. Accordingly, respondent Roland was granted by
petitioner a credit line of P600,000.00 P400,000.00 for fuels and P200,000.00 for lubes.
Respondent Roland, through his father respondent Reynaldo, Sr., whom the former authorized to manage and
handle the dealership in a Special Power of Attorney executed for the purpose, was able to secure Unioil
products and made regular payments to petitioner. But by June 1987, respondent Roland had allegedly
overdrawn his credit line. Petitioner restructured respondent Rolands credit line after he issued UCPB Check
No. 184124 to pay off his May 1987 purchases. Thus, his dealership of Unioil products continued but he

started getting his supplies through ACOBI Resources Corporation (ACOBI), a subsidiary and marketing arm
of the petitioner.
Respondent Rolands UCPB Check No. 184124 bounced for insufficiency of funds. Petitioner filed a complaint
for violation of Batas Pambansa Blg. 22 or the Bouncing Checks Law, but respondent Roland was acquitted.3
Respondent Rolands unpaid debt allegedly ballooned to P2,555,362.34, hence, petitioner terminated the
dealership contract on August 24, 1987. When its formal demand for payment was unheeded, petitioner
instituted an action for collection of sum of money with preliminary attachment against respondent Roland. His
parents, respondents Reynaldo C. Tolentino, Sr. and Lucia B. Tolentino, and siblings, respondents Reynaldo,
Jr. and Rex, were impleaded as co-defendants. The respondents-spouses Reynaldo, Sr. and Lucia were
impleaded in the suit allegedly because they were the ones who actually secured the dealership contract with
petitioner. Respondents Reynaldo, Jr. and Rex were sued for the chattel mortgage of their vehicles executed
as security for their brothers obligation with petitioner.
On October 19, 1987, the trial court granted the prayer of petitioner for the issuance of a writ of preliminary
attachment against the properties of respondents, sufficient to cover the obligation. On March 9, 1988, it
likewise granted petitioners application for replevin of the vehicles subject to the chattel mortgage executed by
respondent Roland in representation of his brothers Rex and Reynaldo, Jr.
On February 9, 1988, petitioner amended its complaint to include respondent Rolands sister, Marylou B.
Tolentino, for allegedly hiding the mortgaged vehicles.
On July 11, 1994, the trial court ruled for respondents.
Petitioner elevated the case to the Court of Appeals, which ruled that:5
IN VIEW OF ALL THE FOREGOING, save for the awards of P25,000.00 each in favor of appellees Lucia B.
Tolentino and Marylou Tolentino which are hereby Affirmed, the rest of the appealed decision is REVERSED
and SET ASIDE, and a new one entered ordering appellee Roland B. Tolentino to pay the balance of his debt
to appellant in the sum of P1,541,211.51 with interest at the rate of 6% per annum from the date of this
decision until fully paid. No cost.
On December 4, 2002, instead of filing a Motion for Reconsideration like respondents, petitioner went to this
Court on a petition for review on certiorari under Rule 45 of the Rules of Court. Meanwhile, the Motion for
Reconsideration filed by respondents was denied by the Court of Appeals on August 20, 2003.6
At a glance, it is obvious that the petition submits factual matters for determination of the Court. It disputes
mainly the finding of the Court of Appeals on the amount owed by respondent Roland B. Tolentino to petitioner.
The rule is well-settled that this Courts jurisdiction in cases brought before it from the Court of Appeals via
Rule 45 of the Rules of Court is limited to reviewing errors of law. Generally, findings of fact of the Court of
Appeals are conclusive.7 However, the rule admits of some exceptions, which include: (1) when the findings
are grounded entirely on speculation, surmises, or conjectures; (2) when the inference made is manifestly
mistaken, absurd, or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based
on a misapprehension of facts; (5) when the findings of fact are conflicting; (6) when in making its findings the
Court of Appeals went beyond the issues of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings are contrary to those of the trial court; (8) when the
findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; and
(10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the
evidence on record.8
The case at bar clearly falls within one of the enumerated exceptions as the factual findings and conclusions of
the trial court and Court of Appeals are conflicting. Thus, we have to re-examine and review the factual
findings of the Court of Appeals.
I.
The basic civil law principle of relativity of contracts9 demands that contracts only bind the parties (their heirs
and assigns) who entered into it. It cannot favor or prejudice third persons. Thus, the appellate court was

correct
in
holding
that
the
MOA
between
petitioner
and
respondent
Roland
binds only them, and that any obligation arising therefrom may only be invoked against each or both of them.
IN VIEW WHEREOF, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that respondent ROLAND B. TOLENTINO is ORDERED to pay petitioner UNION REFINERY
CORPORATION the amount of P1,905,675.90 with liquidated interest at 25% and special liquidated interest at
10%.
SO ORDERED.
ABELARDO B. LICAROS, petitioner, vs. ANTONIO P. GATMAITAN, respondent.
The facts of the case, as stated in the Decision of the Court of Appeals dated February 10, 2000, are as
follows:
The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for brevity), is a private bank registered and
organized to do business under the laws of the Republic of Vanuatu but not in the Philippines. Its business
consists primarily in receiving fund placements by way of deposits from institutions and individual investors
from different parts of the world and thereafter investing such deposits in money market placements and
potentially profitable capital ventures in Hongkong, Europe and the United States for the purpose of
maximizing the returns on those investments.
Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo Licaros, a Filipino
businessman, decided to make a fund placement with said bank sometime in the 1980s. As it turned out, the
grim outcome of Licaros foray in overseas fund investment was not exactly what he envisioned it to be. More
particularly, Licaros, after having invested in Anglo-Asean, encountered tremendous and unexplained
difficulties in retrieving, not only the interest or profits, but even the very investments he had put in AngloAsean.
Confronted with the dire prospect of not getting back any of his investments, Licaros then decided to seek the
counsel of Antonio P. Gatmaitan, a reputable banker and investment manager who had been extending
managerial, financial and investment consultancy services to various firms and corporations both here and
abroad. To Licaros relief, Gatmaitan was only too willing enough to help. Gatmaitan voluntarily offered to
assume the payment of Anglo-Aseans indebtedness to Licaros subject to certain terms and conditions. In
order to effectuate and formalize the parties respective commitments, the two executed a notarized
MEMORANDUM OF AGREEMENT on July 29, 1988 (Exh. B; also Exhibit 1)
Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement earlier executed by him and
Licaros for the purpose of collecting the latters placement thereat of U.S.$150,000.00. Albeit the officers of
Anglo-Asean allegedly committed themselves to look into [this matter], no formal response was ever made by
said bank to either Licaros or Gatmaitan. To date, Anglo-Asean has not acted on Gatmaitans monetary
claims.
Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not bother anymore to make
good his promise to pay Licaros the amount stated in his promissory note (Exh. A; also Exh. 2). Licaros,
however, thought differently. He felt that he had a right to collect on the basis of the promissory note
regardless of the outcome of Gatmaitan's recovery efforts. Thus, in July 1996, Licaros, thru counsel,
addressed successive demand letters to Gatmaitan (Exhs. C and D), demanding payment of the latters
obligations under the promissory note. Gatmaitan, however, did not accede to these demands.
Hence, on August 1, 1996, in the Regional Trial Court at Makati, Licaros filed the complaint in this case.
After trial on the merits, the court a quo rendered judgment in favor of petitioner Licaros and found respondent
Gatmaitan liable under the Memorandum of Agreement and Promissory Note for P3,150,000.00 plus 12%
interest per annum from July 16, 1993 until the amount is fully paid. Respondent was likewise ordered to pay
attorneys fees of P200,000.00.[5]
Respondent Gatmaitan appealed the trial courts decision to the Court of Appeals. In a decision promulgated

on February 10, 2000, the appellate court reversed the decision of the trial court and held that respondent
Gatmaitan did not at any point become obligated to pay to petitioner Licaros the amount stated in the
promissory note. In a Resolution dated April 7, 2000, the Court of Appeals denied petitioners Motion for
Reconsideration of its February 10, 2000 Decision.
Hence this petition for review on certiorari where petitioner prays for the reversal of the February 10, 2000
Decision of the Court of Appeals and the reinstatement of the November 11, 1997 decision of the Regional
Trial Court.
The threshold issue for the determination of this Court is whether the Memorandum of Agreement between
petitioner and respondent is one of assignment of credit or one of conventional subrogation. This matter is
determinative of whether or not respondent became liable to petitioner under the promissory note considering
that its efficacy is dependent on the Memorandum of Agreement, the note being merely an annex to the said
memorandum.
An assignment of credit has been defined as the process of transferring the right of the assignor to the
assignee who would then have the right to proceed against the debtor. The assignment may be done
gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale.[7]
On the other hand, subrogation has been defined as the transfer of all the rights of the creditor to a third
person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that
which takes place without agreement but by operation of law because of certain acts. Conventional
subrogation is that which takes place by agreement of parties.[8]
The general tenor of the foregoing definitions of the terms subrogation and assignment of credit may make
it seem that they are one and the same which they are not. A noted expert in civil law notes their distinctions
thus:
Under our Code, however, conventional subrogation is not identical to assignment of credit. In the former, the
debtors consent is necessary; in the latter it is not required. Subrogation extinguishes the obligation and gives
rise to a new one; assignment refers to the same right which passes from one person to another. The nullity of
an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity
of an obligation is not remedied by the assignment of the creditors right to another.[9]
For our purposes, the crucial distinction deals with the necessity of the consent of the debtor in the original
transaction. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment
may fully produce legal effects.[10] What the law requires in an assignment of credit is not the consent of the
debtor but merely notice to him as the assignment takes effect only from the time he has knowledge thereof.
[11] A creditor may, therefore, validly assign his credit and its accessories without the debtors consent.[12] On
the other hand, conventional subrogation requires an agreement among the three parties concerned the
original creditor, the debtor, and the new creditor. It is a new contractual relation based on the mutual
agreement among all the necessary parties. Thus, Article 1301 of the Civil Code explicitly states that
(C)onventional subrogation of a third person requires the consent of the original parties and of the third
person.
The trial court, in finding for the petitioner, ruled that the Memorandum of Agreement was in the nature of an
assignment of credit. As such, the court a quo held respondent liable for the amount stated in the said
agreement even if the parties thereto failed to obtain the consent of Anglo-Asean Bank. On the other hand,
the appellate court held that the agreement was one of conventional subrogation which necessarily requires
the agreement of all the parties concerned. The Court of Appeals thus ruled that the Memorandum of
Agreement never came into effect due to the failure of the parties to get the consent of Anglo-Asean Bank to
the agreement and, as such, respondent never became liable for the amount stipulated.
We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated July 29, 1988
was in the nature of a conventional subrogation which requires the consent of the debtor, Anglo-Asean Bank,
for its validity. We note with approval the following pronouncement of the Court of Appeals:
Immediately discernible from above is the common feature of contracts involving conventional subrogation,
namely, the approval of the debtor to the subrogation of a third person in place of the creditor. That Gatmaitan
and Licaros had intended to treat their agreement as one of conventional subrogation is plainly borne by a

stipulation in their Memorandum of Agreement, to wit:


WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual
prestations which they now record herein with the express conformity of the third parties concerned
(emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a mere assignee of appellees credit, there
is simply no sense for them to have stipulated in their agreement that the same is conditioned on the express
conformity thereto of Anglo-Asean Bank. That they did so only accentuates their intention to treat the
agreement as one of conventional subrogation. And it is basic in the interpretation of contracts that the
intention of the parties must be the one pursued (Rule 130, Section 12, Rules of Court).
Given our finding that the Memorandum of Agreement (Exh. B; also Exh. 1), is not one of assignment of
credit but is actually a conventional subrogation, the next question that comes to mind is whether such
agreement was ever perfected at all. Needless to state, the perfection or non-perfection of the subject
agreement is of utmost relevance at this point. For, if the same Memorandum of Agreement was actually
perfected, then it cannot be denied that Gatmaitan still has a subsisting commitment to pay Licaros on the
basis of his promissory note. If not, Licaros suit for collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of Agreement expressly requires the consent of AngloAsean to the subrogation. Upon whom the task of securing such consent devolves, be it on Licaros or
Gatmaitan, is of no significance. What counts most is the hard reality that there has been an abject failure to
get Anglo-Aseans nod of approval over Gatmaitans being subrogated in the place of Licaros. Doubtless, the
absence of such conformity on the part of Anglo-Asean, which is thereby made a party to the same
Memorandum of Agreement, prevented the agreement from becoming effective, much less from being a
source of any cause of action for the signatories thereto.[13]
Aside for the whereas clause cited by the appellate court in its decision, we likewise note that on the
signature page, right under the place reserved for the signatures of petitioner and respondent, there is,
typewritten, the words WITH OUR CONFORME. Under this notation, the words ANGLO-ASEAN BANK AND
TRUST were written by hand.[14] To our mind, this provision which contemplates the signed conformity of
Anglo-Asean Bank, taken together with the aforementioned preambulatory clause leads to the conclusion that
both parties intended that Anglo-Asean Bank should signify its agreement and conformity to the contractual
arrangement between petitioner and respondent. The fact that Anglo-Asean Bank did not give such consent
rendered the agreement inoperative considering that, as previously discussed, the consent of the debtor is
needed in the subrogation of a third person to the rights of a creditor.
In this petition, petitioner assails the ruling of the Court of Appeals that what was entered into by the parties
was a conventional subrogation of petitioners rights as creditor of the Anglo-Asean Bank which necessarily
requires the consent of the latter. In support, petitioner alleges that: (1) the Memorandum of Agreement did
not create a new obligation and, as such, the same cannot be a conventional subrogation; (2) the consent of
Anglo-Asean Bank was not necessary for the validity of the Memorandum of Agreement; (3) assuming that
such consent was necessary, respondent failed to secure the same as was incumbent upon him; and (4)
respondent himself admitted that the transaction was one of assignment of credit.
Petitioner argues that the parties to the Memorandum of Agreement could not have intended the same to be a
conventional subrogation considering that no new obligation was created. According to petitioner, the
obligation of Anglo-Asean Bank to pay under Contract No. 00193 was not extinguished and in fact, it was the
basic intention of the parties to the Memorandum of Agreement to enforce the same obligation of Anglo-Asean
Bank under its contract with petitioner. Considering that the old obligation of Anglo-Asean Bank under
Contract No. 00193 was never extinguished under the Memorandum of Agreement, it is contended that the
same could not be considered as a conventional subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of extinguishing the old obligation and giving rise to a
new one. However, the extinguishment of the old obligation is the effect of the establishment of a contract for
conventional subrogation. It is not a requisite without which a contract for conventional subrogation may not

be created. As such, it is not determinative of whether or not a contract of conventional subrogation was
constituted.
Moreover, it is of no moment that the subject of the Memorandum of Agreement was the collection of the
obligation of Anglo-Asean Bank to petitioner Licaros under Contract No. 00193. Precisely, if conventional
subrogation had taken place with the consent of Anglo-Asean Bank to effect a change in the person of its
creditor, there is necessarily created a new obligation whereby Anglo-Asean Bank must now give payment to
its new creditor, herein respondent.
Petitioner next argues that the consent or conformity of Anglo-Asean Bank is not necessary to the validity of
the Memorandum of Agreement as the evidence on record allegedly shows that it was never the intention of
the parties thereto to treat the same as one of conventional subrogation. He claims that the preambulatory
clause requiring the express conformity of third parties, which admittedly was Anglo-Asean Bank, is a mere
surplusage which is not necessary to the validity of the agreement.
As previously discussed, the intention of the parties to treat the Memorandum of Agreement as embodying a
conventional subrogation is shown not only by the whereas clause but also by the signature space captioned
WITH OUR CONFORME reserved for the signature of a representative of Anglo-Asean Bank. These
provisions in the aforementioned Memorandum of Agreement may not simply be disregarded or dismissed as
superfluous.
It is a basic rule in the interpretation of contracts 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.[15] Moreover, under our Rules of Court, it is mandated that (i)n the construction of an instrument
where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give
effect to all.[16] Further, jurisprudence has laid down the rule that contracts should be so construed as to
harmonize and give effect to the different provisions thereof.[17]
In the case at bench, the Memorandum of Agreement embodies certain provisions that are consistent with
either a conventional subrogation or assignment of credit. It has not been shown that any clause or provision
in the Memorandum of Agreement is inconsistent or incompatible with a conventional subrogation. On the
other hand, the two cited provisions requiring consent of the debtor to the memorandum is inconsistent with a
contract of assignment of credit. Thus, if we were to interpret the same as one of assignment of credit, then the
aforementioned stipulations regarding the consent of Anglo-Asean Bank would be rendered inutile and useless
considering that, as previously discussed, the consent of the debtor is not necessary in an assignment of
credit.
Petitioner next argues that assuming that the conformity of Anglo-Asean was necessary to the validity of the
Memorandum of Agreement, respondent only had himself to blame for the failure to secure such conformity as
was, allegedly, incumbent upon him under the memorandum.
As to this argument regarding the party responsible for securing the conformity of Anglo-Asean Bank, we fail to
see how this question would have any relevance on the outcome of this case. Having ruled that the consent of
Anglo-Asean was necessary for the validity of the Memorandum of Agreement, the determinative fact is that
such consent was not secured by either petitioner or respondent which consequently resulted in the invalidity
of the said memorandum.
With respect to the argument of petitioner that respondent himself allegedly admitted in open court that an
assignment of credit was intended, it is enough to say that respondent apparently used the word assignment
in his testimony in the general sense. Respondent is not a lawyer and as such, he is not so well versed in law
that he would be able to distinguish between the concepts of conventional subrogation and of assignment of
credit. Moreover, even assuming that there was an admission on his part, such admission is not conclusive on
this court as the nature and interpretation of the Memorandum of Agreement is a question of law which may
not be the subject of stipulations and admissions.[18]
Considering the foregoing, it cannot then be said that the consent of the debtor Anglo-Asean Bank is not
necessary to the validity of the Memorandum of Agreement. As above stated, the Memorandum of Agreement
embodies a contract for conventional subrogation and in such a case, the consent of the original parties and
the third person is required.[19] The absence of such conformity by Anglo-Asean Bank prevented the
Memorandum of Agreement from becoming valid and effective. Accordingly, the Court of Appeals did not err

when it ruled that the Memorandum of Agreement was never perfected.


Having arrived at the above conclusion, the Court finds no need to discuss the other issues raised by
petitioner.
WHEREFORE, the instant petition is DENIED and the Decision of the Court of Appeals dated February 10,
2000 and its Resolution dated April 7, 2000 are hereby AFFIRMED.
Melo, (Chairman), Vitug, and Panganiban, JJ., concur.

You might also like