JOSE PONCE DE LEON, plaintiff-appellant,

vs.
SANTIAGO SYJUCO, INC., defendant-appellant,
PHILIPPINE NATIONAL BANK, defendant-appellee.
Jose D. Cortes and Claro M. Recto for plaintiff and appellant.
Ramon Diokno and Jose Diokno for defendant and appellant.
Hilarion U. Jarencio for defendant and appellee.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Manila absolving defendant Santiago
Syjuco, Inc. of the complaint and condemning the plaintiff to pay to said defendant the sum of P18,000 as
principal and the further sum of P5,130 as interest thereon from August 6, 1944, to May 5, 1949, or a total
of P23,130, Philippine currency, with interest thereon at the rate of 6% per annum from May 6, 1949, until
said amount is paid in full, with costs against the plaintiff.
The facts of this case as reflected in the pleadings and the evidence, stripped of unnecessary details, are
well narrated in the brief submitted by counsel for the Philippine National Bank, and which for purposes of
this decision are hereunder reproduced:
The appellee, Philippine National Bank, hereinafter to be referred to as the Bank, was the owner
of two (2) parcels of land known as Lots 871 and 872 of the Murcia Cadastre, Negros Occidental,
more particularly described in Transfer Certificates of Titles Nos. 17176 and 17175, respectively.
On March 9, 1936 the Bank executed a contract to sell the said properties to the plaintiff, Jose
Ponce de Leon, hereinafter to be referred to as Ponce de Leon, the total price of P26,300,
payable as follows: (a) P2,630 upon the execution of the said deed; and (b) the balance P23,670
in ten (10) annual amortizations, the first amortization to fall due one year after the execution of
the said contract (See annex "A" Syjuco's Segunda Contestacion Enmendada).
On May 5, 1944, Ponce de Leon obtained a loan from Santiago Syjuco, Inc., hereinafter to be
referred to a s Syjuco, in the amount of P200,000 in Japanese Military Notes, payable within one
(1) year from May 5, 1948. It was also provided in said promissory note that the promisor (Ponce
de Leon) could not pay, and the payee (Syjuco) could not demand, the payment of said note
except within the aforementioned period. To secure the payment of said obligation, Ponce de
Leon mortgaged in favor of Syjuco the parcels of land which he agreed to purchase from the
Bank (See Annex "B", Syjuco's Segunda Contestacion Enmendada).
On May 6, 1944, Ponce de Leon paid the Bank of the balance of the purchase price amounting to
P23,670 in Japanese Military notes and, on the same date, the Bank executed in favor of Ponce
de Leon, a deed of absolute sale of the aforementioned parcels of land (See Annex "F", Syjuco's
Segunda Contectacion Enmendada).
The deed of sale executed by the Bank in favor of Ponce de Leon and the deed of mortgage
executed by Ponce de Leon in favor of Syjuco were registered in the Office of the Register of
Deeds of Negros Occidental and, as a consequence of such registration, Transfer Certificate of
Title Nos. 17175 and 17176 in the name of the Bank were cancelled and Transfer Certificate of
Title No. 398 (P.R.) and No. 399 (P.R.), respectively, were issued in the name of Ponce de Leon.
The mortgage in favor of Syjuco was annotated on the back of said certificates.
On July 31, 1944, Ponce de Leon obtained an additional loan from Syjuco in the amount of
P16,000 in Japanese Military notes and executed in the latter's favor of promissory note of the
same tenor as the one had previously executed (R. on Appeal, pp. 23-24)

On several occasions in October, 1944, Ponce de Leon tendered to Syjuco the amount of
P254,880 in Japanese military notes in full payment of his indebtedness to Syjuco. The amount
tendered included not only the interest up to the time of the tender, but also all the interest up to
May 5, 1948. Ponce de Leon also wrote to Syjuco a letter tendering the payment of his
indebtedness, including interests up to May 5, 1948, Syjuco, however, refused to accept such
repeated tenders. During the trial, Ponce de Leon explained that he wanted to settle his
obligations because as a member of the guerilla forces he was being hunted by the Japanese
and he was afraid of getting caught and killed (t.s.n. pp. 14-15).
In view of Syjuco's refusal to accept the payment tendered by Ponce de Leon, the latter deposited
with the Clerk of Court, of First Instance of Manila the amount of P254,880 and, on November 4,
1944, he filed a complaint consigning the amount so deposited to Syjuco. To this complaint
Syjuco filed his answer. The records of this case were destroyed as a result of the war and after
the liberation the same were reconstituted (R. on A., pp. 1-17)
On May 15, 1946, Ponce de Leon filed a petition in the Court of First Instance of Negros
Occidental for the reconstitution of transfer Certificates of Titles Nos. 17175 and 17176 in the
name of the Bank and, in an order dated June 4, 1946, the Court ordered the reconstitution of
said titles. In compliance with said order, the Register of Deeds of Negros Occidental issued
Certificates of Title Nos. 1297-R and 1298-R in the names of the Bank. Ponce de Leon then filed
with the Register of Deeds a copy of the deed of sale of the properties covered by the said
certificates of title issued by the Bank in his (Ponce de Leon's) favor and the Register of Deeds
cancelled the said Certificates of Title Nos. 1297-R and 1298-R and issued in favor of Ponce de
Leon Transfer Certificates of Title Nos. 526-N and 527-N (R. on A., pp. 48-50).
On August 16, 1946, Ponce de Leon obtained an overdraft account from the Bank in an amount
not exceeding P135,000 and, on the same date, he executed a mortgage of the two parcels of
land covered by the reconstituted Transfer Certificates of Title Nos. 526-N and 527-N in favor of
the said Bank to secure the payment of any amount which he may obtain from the Bank under
aforementioned overdraft account. The overdraft account was granted by the Bank to Ponce de
Leon in good faith, said Bank not being aware of the mortgage which Ponce de Leon had
executed in favor of Syjuco during the Japanese occupation, and said Bank believing that the
said properties had no lien or encumbrance appeared annotated on the reconstituted certificates
of Title Nos. 526-N and 527-N in the name of Ponce de Leon (See Testimony of Atty. Endriga).
On September 28, 1946, Syjuco filed a second amended answer to Ponce de Leon's complaint
and, in its "Tercera Reconvention", it claimed that Ponce de Leon, by reconstituting the titles in
the name of the Bank, by causing the Register of Deeds to have the said titles transferred in his
(Ponce de Leon's name, and by subsequently mortgaging the said properties to the Bank as a
guaranty for his overdraft account, had violated the conditions of the morgage which Ponce de
Leon has executed in its favor during the Japanese occupation. Syjuco then prayed that the
mortgage executed by Ponce de Leon in favor of the Bank be declared null and void. (R. on A.,
pp. 32-53).
Ponce de Leon objected to the inclusion of the Bank as a cross-defendant. (R on A. pp. 55-58).
Notwithstanding said objection, however, the lower court ordered the inclusion of the Bank as a
cross-defendant (R. on A., pp. 59-60).
On June 28, 1947, the Bank filed a motion to drop on the ground that it had been misjoined and
to dismiss on the ground that the venue was improperly laid and there is another action pending
between the same parties for the same cause (R. on A., pp. 65-75). The said motion was denied
by the lower court in its order dated October 7, 1947 (R. on A., pp. 95-100). In view of such
denial, the Bank filed its answer on October 29, 1947 (R. on A., pp. 101-106).

On June 24, 1949, the lower court rendered a decision absolving Syjuco from Ponce de Leon's
complaint and condemning Ponce de Leon to pay Syjuco the total amount of P23,130 with
interest at the legal rate from May 6, 1949, until fully paid (R. on A., pp. 107-135). Both Ponce de
Leon and Syjuco file their appeal from this decision.
The principal questions to be determined in this appeal are: (1) Did the lower court err in not giving validity
to the consignation made by the plaintiff of the principal and interest of his two promissory notes with the
clerk of court?; (2) did the lower court err in reducing the principal and interest of said promissory notes to
their just proportions using as a pattern the Ballantyne schedule in effecting the reduction?; (3) did the
lower court err in disregarding the defense of moratorium set up by the plaintiff against the counterclaim
of defendant Syjuco?; and (4) did the lower court err in not passing on the question of priority between the
mortgage claim of defendant Syjuco and that of the Philippine National Bank on the same set of
properties on the ground that they are situated in a province different from that in which this action was
brought? We will discuss these issues in the order in which they are propounded.
1. It appears that plaintiff obtained from defendant Syjuco two loans in 944. One is for P200,000 obtained
on May 5, 1944, and another for P16,000 obtained on July 31, 1944. These two loans appear in two
promissory notes signed by the plaintiff which were couched in practically the same terms and conditions
and were secured by two deeds of mortgage covering the same parcels of land. In said promissory notes
it was expressly agreed upon that plaintiff shall pay the loans "within one year from May 5, 1948, . . . peso
for peso in the coin or currency of the Government of the Philippines that, at the time of payment above
fixed it is the legal tender for public and private debts, with interests at the rate of 6% per annum, payable
in advance for the first year, and semi-annually in advance during the succeeding years", and that, the
period above set forth having been established for the mutual benefit of the debtor and creditor, the
former binds himself to pay, and the latter not to demand the payment of, the loans except within the
period above mentioned. And as corollary to have the above stipulations, it was likewise agreed upon in
the two deeds of mortgage that "if either party should attempt to annul or alter any of the stipulations of
this deed or of the note which it secures, or do anything which has for its purpose or effect an alteration or
annulment of any of said stipulations, he binds himself to indemnify the other for the losses and damages,
which the parties hereby liquidate and fix at the amount of P200,000".
The facts show that, on November 15, 1944, or thereabouts, contrary to the stipulation above mentioned,
plaintiff offered to pay to the defendant not only the principal sum due on the two promissory notes but
also all the interests which said principal sum may earn up to the dates of maturity of the two notes, and
as the defendant refused to accept the payment so tendered, plaintiff deposited the money with the clerk
of court and brought this action to compel the defendant to accept it to relieve himself of further liability.
The question now to be determined is, is the consignation made by the plaintiff valid in the light of the law
and the stipulations agreed upon in the two promissory notes signed by the plaintiff? Our answer is in the
negative.
In order that cogsignation may be effective, the debtor must first comply with certain requirements
prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the
obligation had been made bacause the creditor to whom tender of payment was made refused to accept
it, or because he was absent for incapacitated, or because several persons claimed to be entitled to
receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation have been
given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the
amount due was placed at the disposal of the court (Art 1178, Civil Code); and (5) that after the
consignation had been made the person interested was notified thereof (Art. 1178, Civil Code). In the
instant case, while it is admitted a debt existed, that the consignation was made because of the refusal of
the creditor to accept it, and the filing of the complaint to compel its acceptance on the part of the creditor
can be considered sufficient notice of the consignation to the creditor, nevertheless, it appears that at
least two of the above requirements have not been complied with. Thus, it appears that plaintiff, before
making the consignation with the clerk of the court, failed to give previous notice thereof to the person
interested in the performance of the obligation. It also appears that the obligation was not yet due and

demandable when the money was consigned, because, as already stated, by the very express provisions
of the document evidencing the same, the obligation was to be paid within one year after May 5, 1948,
and the consignation was made before this period matured. The failure of these two requirements is
enough ground to render the consignation ineffective. And it cannot be contended that plaintiff is justified
in accelerating the payment of the obligation because he was willing to pay the interests due up to the
date of its maturity, because, under the law, in a monetary obligation contracted with a period, the
presumption is that the same is deemed constituted in favor of both the creditor and the debtor unless
from its tenor or from other circumstances it appears that the period has been established for the benefit
of either one of them (Art. 1127, Civil Code). Here no such exception or circumstance exists.
It may be argued that the creditor has nothing to lose but everything to gain by the acceleration of
payment of the obligation because the debtor has offered to pay all the interests up to the date it would
become due, but this argument loses force if we consider that the payment of interests is not the only
reason why a creditor cannot be forced to accept payment contrary to the stipulation. There are other
reasons why this cannot be done. One of them is that the creditor may want to keep his money invested
safely instead of having it in his hands (Moore vs. Cord 14 Wis. 231). Another reason is that the creditor
by fixing a period protects himself against sudden decline in the purchasing power of the currency loaned
specially at a time when there are many factors that influence the fluctuation of the currency (Kemmerer
on Money, pp. 9-10). And all available authorities on the matter are agreed that, unless the creditor
consents, the debtor has no right to accelerate the time of payment even if the premature tender
"included an offer to pay principal and interest in full" (17 A.L.R. 866-867; 23 L.R.A. (N.S.) 403; see ruling
of this Court in the recent case of Ilusorio vs. Busuego, 84 Phil., 630).
Tested by the law and authorities we have cited above, the conclusion is inescapable that the
consignation made by the plaintiff is invalid and, therefore, did not have the effect of relieving him of his
obligation.
2. The next question to be determined is whether the lower court erred in reducing the amount of the
loans by applying the Ballantyne schedule.
This is not the first time that this question has been raised. On two previous occasions this Court had
been called upon to rule on a similar question and has decided that when the creditor and the debtor have
agreed on a term within which payment of the obligation should be paid and on the currency in which
payment should be made, that stipulation should be given force and effect unless it appears contrary to
law, moral or public order. Thus, in one case this Court said: "One who borrowed P4,000 in Japanese
military notes on October 5, 1944, to be paid one year after, in currency then prevailing, was ordered by
the Supreme Court to pay said sum after October 5, 1945, that is, after liberation, in Philippine currency
(Roo vs. Gomez et al., 83 Phil., 890). In another case, wherein the parties executed a deed of sale
with pacto de retro of a parcel of land for the sum of P5,000 in Japanese military notes agreeing that
within 30 days after the expiration of one year from June 24, 1944, the aforementioned land may be
redeemed sa ganito ding halaga (at the same price), the Court held that the "phrase sa ganito ding
halaga meant the same price of P5,000 in Japanese war notes". The Court further said, "The parties
herein gambled and speculated on the date of the termination of the war and the liberation of the
Philippines by America. This can be gleaned from the stipulation about redemption, particularly that
portion to the effect that redemption could be effected not before the expiration of one year from June 24,
1844. This kind of agreement is permitted by law. We find nothing immoral or unlawful in it" (Gomez vs.
Tabia Off. Gaz., 641; 84 Phil., 269).
In this particular case, the terms agreed upon are clearer and more conclusive than the ones cited
because the plaintiff agreed not only to pay the obligation within one year from May 5, 1948, but also to
pay peso for peso in the coin or currency of the Government that at the time of payment it is the legal
tender for public and private debts. This stipulation is permitted by law because there is nothing immoral
or improper in it. And it is not oppressive because it appears that plaintiff used a great portion of that
money to pay his obligations during the Japanese occupation as shown by the fact that he settled his
account with the Philippine National Bank and other accounts to the tune of P100,000. It would seem

therefore clear that plaintiff has no other alternative than to pay the defendant his obligation peso for peso
in the present currency as expressly agreed upon in the two promissory notes in question. The decision of
the lower court on this point should, therefore, be modified.
As regards the penal clause contained in the two deeds of mortgage herein involved, we agree to the
following finding of the court a quo: "The attempt made by the plaintiff to pay the obligation before the
arrival of the term fixed for the purpose may be wrong; but it may be attributed to an honest belief that the
term was not binding and not to a desire to modify the contract". This penal clause should be strictly
construed.
3. As regards the third question, we find that the lower court erred in disregarding the defense of
moratorium set up by the plaintiff against the counterclaim of the defendant on the sole ground that this
defense was not raised by the plaintiff in his pleadings. An examination of the record shows that the
plaintiff raised this question in his pleadings. This must have been overlooked by the court.
The lower court, therefore, should have passed upon this defense in the light of Executive Order No. 32,
which suspended payment of all obligations contracted before March 10, 1945. We note, however, that
said moratorium orders have already been modified by Republic Act No. 342 in the sense of limiting the
ban on obligations contracted before the outbreak of the war to creditors who have filed claims for
reparations with the Philippine War Damage Commission, leaving them open to obligations contracted
during the Japanese occupation (Uy vs. Kalaw Katigbak, G.R. No. L-1830, December 1, 1949). As the
obligation in question has been contracted during enemy occupation the same is still covered by the
moratorium orders. The claim of counsel for the defendant that the moratorium orders cannot be invoked
because they are unconstitutional cannot now be determined it appearing that it has been raised for the
first time in this instance. This defense of moratorium was raised by plaintiff in his reply to the amended
answer of the defendant dated August 1, 1946, and in his motion to dismiss the counterclaim dated
October 29, 1946, but the defendant did not traverse that allegation nor raise the constitutionality of the
moratorium orders in any of its pleadings filed in the lower court. It is a well known rule that this Court can
only considera question of constitutionality when it has been raised by any of the parties in the lower court
(Laperal vs. City of Manila, 62 Phil., 352; Macondray and Co. vs. Benito and Ocampo, 62 Phil., 137).
4. The facts relative to the execution of the deed of mortgage in favor of the Philippine National Bank on
the two lots in question are as follows: On March 9, 1936, the Philippine National Bank was the owner of
the lots Nos. 872 and 871 of the Murcia Cadastre, Negros Occidental, covered by Certificates of Titles
Nos. 17175 and 17176 respectively. On the same date, the Bank sold the two lots to the plaintiff and as a
result Transfer Certificates of Titles Nos. 398 and 399 were issued in the name of the plaintiff. On May 5,
1944, plaintiff mortgaged these two lots to defendant Syjuco to guarantee the payment of two loans, one
for P200,000 and another for P16,000. The mortgage was registered in accordance with the law. Then
liberation came. Plaintiff taking advantage of the destruction of the records of the office of the Register of
Deeds of Negros Occidental, obtained from the Court of First Instance of said province the 33
reconstitution of Transfer Certificate of Titles Nos. 17175 and 17176 and by virtue thereof, the register of
deeds issued transfer certificates of titles Nos. 1297-R and 1298-R in the name of the Philippine National
Bank. Then he secured the cancellation of the titles last named and the issuance of Transfer Certificates
of Titles Nos. 526-N and 527-N in his name without informing the court of the encumbrance existing in
favor of defendant Syjuco. After securing the new titles in his name, plaintiff obtained a loan from the
Philippine National Bank for the sum of P135,000 on the security of the property covered by said
reconstituted titles. On said titles no encumbrance appears annotated, but it was noted thereon that they
would be subject to whatever claim may be filed by virtue of documents or instruments previously
registered but which, for some reason, do not appear annotated thereon, as required by a circular of the
Department of Justice.
From the foregoing facts, it clearly appears that the mortgage executed in favor of the defendant Syjuco is
prior in point of time and in point of registration to that executed in favor of the Philippine National Bank,
let alone the fact that when the later mortgage was executed, the Bank must have known, as it was its
duty to find out, that there was a warning appearing in reconstituted titles that the same were subject to

whatever encumbrance may exist which for one reason or another does not appear in said titles. With
such warning, the Bank should have taken the necessary precaution to inquire into the existence of any
hidden transaction or encumbrance that might affect the property that was being offered in security such
as the one existing in favor of the defendant, and when the Bank accepted as security the titles offered by
the plaintiff without any further inquiry, it assumed the risk and the consequences resulting therefrom.
Moreover, it also appears that this same question of priority has already been threshed out and
determined by the Court of First Instance of Negros Occidental in the cadastral proceedings covered the
two lots in question wherein the court ordered the cancellation of the reconstituted titles issued in the
name of the plaintiff and the reconstitution of the former titles copies of which were in the possession of
defendant Syjuco, subject only to the requirement that the mortgage in favor of the Philippine National
Bank be annotated on said new titles. In other words, the court declared valid the titles originally issued in
the name of the plaintiff wherein the encumbrance in favor of the defendant Syjuco appears and declared
invalid the reconstituted titles secured by plaintiff through fraud and misinterpretation. This order is now
final because no appeal has been taken therefrom by any interested party.
We have, therefore, no other alternative than to declare that the mortgage claim of the defendant Syjuco
is entitled to priority over that of the Philippine National Bank. This question can be threshed out here
regardless of venue because the counterclaim is but ancillary to the main case (1 Moran, Comments on
the Rules of Court, 2nd ed., 201).
In view of the foregoing, the decision appealed from should be modified in the sense of ordering the
plaintiff to pay the defendant Syjuco the sum of P216,000, Philippine currency, value of two promissory
notes, with interest thereon at the rate of 6% per annum from May 6, 1949, until said amount is paid in
full. It is further ordered that should said amount, together with the corresponding interests, be not paid
within 90 days from the date this judgment in accordance with law, with costs against the plaintiff.
However, this judgment shall be held in abeyance, or no order for the execution thereof shall be issued,
until after the moratorium orders shall have been lifted.
Feria, Bengzon, Tuason, Reyes, and Jugo, JJ., concur.

Separate Opinions
PARAS, C.J., dissenting:
The plaintiff obtained from defendant Syjuco on May 5, 1944, a loan of P200,000 and on July 31, 1944,
another loan of P16,000, payable within one year from May 5, 1948." On November 15, 1944, the plaintiff
offered to pay the entire indebtedness plus all the interest up to the date of maturity. Upon Syjuco's
refusal to accept the tendered payment, the plaintiff deposited the amount with the clerk of the Court of
First Instance of Manila and instituted the present action to compel Syjuco to accept payment. The
records of the case were destroyed during the war, but they were duly reconstituted after the liberation.
The trial court sentenced the plaintiff to pay Syjuco the total sum of P23,130, representing the whole
indebtedness plus all the interest from August 6, 1944, to May 5, 1949, computed according to the
Ballantyne scale of values. From this judgment Syjuco has appealed, claiming his right to be paid the sum
of P216,000, actual Philippine currency, plus P200,000, as penalty agreed upon in the contract. The
majority of this Court sustains Syjuco's claim for P216,000.
As the same question has been resolved in Ilusorio vs. Busuego, G.R. No. L-822, September 30, 1949 1,
Roo vs. Gomez, May 31, 19492, 46 Off. Gaz., Supp. to No. 11, p. 339, and Gomez vs. Tabia, August 5,
19493, 47 Off. Gaz., 644, in which I dissented, I have to disagree with the majority in the case at bar.

On the question whether a debtor can pay an indebtedness before the date of maturity provided
corresponding interest is paid, I said the following in Ilusorio vs. Busuego:
In other words, I hold that the mortgagor has the right to pay the indebtedness at any time within
three years provided that, as in this case, he pays the interest for the whole term of the mortgage.
In the ordinary course of things, a loan is granted in consideration of interest, and if by the early
payment of the obligation, the creditor would not lose any part of the stipulated interest, both
paragraphs 3 and 4 would practically be enforced. It cannot be alleged that the creditor herein, in
addition to interest, wanted to have his money in the safekeeping of the debtor because the
contract is one of the loan and not of deposit. It is to be remembered, moreover, that the debt was
being paid in the same currency loaned (Japanese money). The effect of inflation is one of the
risks naturally incident to the money-lending business, and the lender should protect himself
against it by plain covenants.
On the matter of requiring a loan obtained in Japanese war notes to be paid after the liberation in
equivalent Philippine currency, I am hereinbelow reproducing at length what I stated in Roo vs, Gomez
which should have greater application and force, because while in the Roo case the amount of the loan
is only P4,000, in the case at bar the debtor is being ordered to pay the large sum of P216,000:
The principal defense set up by Roo in that the note is contrary to law, morals or public order.
This defense was flatly overruled in the court of origin, seconded by the Court of Appeals. The
judgment of the latter court is now before us upon appeal by certiorari of Cristobal Roo.
The situation in which a borrower of P4,000 in Japanese war notes is made to pay the same
amount in currency of the present Philippine Republic. In other words, the borrower of P4,000
during the latter part of the Japanese Military occupation which, in ordinary practical terms, could
hardly purchase a cavan of rice, is now compelled to pay P4,000 in actual Philippine currency
which, in the same ordinary practical terms, may be held equivalent to at least 100 cavanes of
rice. Said borrower is compelled to do so, merely because in his promissory note he agreed to
pay after one year in pesos of the Philippine Currency, and expressly waived any postwar
arraignment devaluating the amount borrowed in October, 1944.
The Court of Appeals held that the commitment of Cristobal Roo settle his indebtedness in the
legal tender at the time of payment is not against the law, morals or public order. We readily
acquiesce in the proposition that the contract is not contrary to law or public order, for we are
aware of no statute or public policy which prohibits a person from bringing about or causing his
own financial reverses. But we are of the opinion that, if enforced to the letter, it is against morals.
If the contract was entered into in times of peace, its obligations should have the force of law
between the parties and must be performed in accordance with their stipulations (Art. 1091, Civil
Code). But when as in the case at bar, the borrower had to obtain a loan during war time, when
living conditions were abnormal and oppressive, everything was uncertain, and everybody was
fighting for his survival, our conscience and common sense demand that his acts be judged by
compatible standards.
The Court of Appeals found that everybody was aware of the developments of the war outside of
official propaganda and that, in so far as knowledge of war events is concerned, Roo was on
more or less on an equal footing with Gomez. This means that all knew the bombings by the
american air forces of various parts of the islands in September, 1944, and of the decisive defeats
of the Axis powers in Europe, and that the mighty forces of the Allies would soon, as in fact they
did, concentrate on and crush Japan, with the result that the Japanese war notes would
accordingly become worthless. It may of course be opposed that Roo knowingly bound himself
to his pact. But this is true merely in theory. Although, as found also by the Court of Appeals,
Roo was not entirely an ignorant man because he is a mechanic and knows English, the fact
nevertheless remains that the lender, Jose L. Gomez, was a lawyer, and the exaggerated way the
promissory word is worded plainly shows that the latter must have thoroughly studied the

transaction with Roo imposed the conditions evidenced therein to his one-sided advantage. It is
needless to say that borrowers are always at the mercy of unscrupulous money lenders.
"Neccesitous men are not, truly speaking, free men; but, to answer a present emergency, will
submit to any terms that the crafty may impose upon them." (Marquez et al. vs. Valencia, 44 Off.
Gaz., pp. 895, 897*, quoting Villa vs. Santiago, 38 Phil., 157, 164). We cannot believe, as
intimated in the testimony of Sinforosa A. de Gomez (wife of Jose L. Gomez), that Roo informed
them that he would use the money to purchase a jitney, for the simple reason that, in view of the
inflated value of the Japanese war notes on October, 1944, the amount of P4,000 could not
possibly purchase a jitney. At any rate, even accepting the conjecture that said amount was
invested by Roo in his business, the circumstance still makes him a necessitous man that had to
submit to the terms of his lender. That a contract like the one in question is shocking to the
conscience and therefore immoral becomes patent when we resort to the example of a borrower
of P2,000 just before the liberation, when a kilo of sugar already cost P2,000, being compelled to
pay the same in Philippine currency now when a kilo of sugar hardly costs P0.50. Where is the
conscience of anyone who will collect P2,000 for a loan of virtually fifty centavos?
The Court of Appeals argued that the parties took equal risks, since it was impossible to predict
the exact time at which the Philippines would be liberated and that, supposing that the liberation
had been delayed for more than one year, Gomez might have been the loser and Roo the
winner, for the Japanese currency might have further diminished in value. To this we would
answer that Gomez would then be paid in the same currency that was borrowed and during the
same war time when the loan was extended. This would not be unusual, as the parties are still
under the very environments that surrounded the execution of the contract.
I may add the following observations contained in my dissenting opinion in Gomez vs, Tabia:
The majority also hold that the contract here in question is aleatory. This is open to doubt.
Aleatory contracts, or those depending on chance, are covered by Title XII, Book IV, of the Civil
Code. It is to be noted that, under article 1790, an aleatory contract involves the occurrence of an
event which is uncertain or will happen at an indeterminate time. Moreover, the contracts
contemplated by the Code as being aleatory, are grouped under insurance, contracts, gambling
and betting, and life annuities. It follows that the contract now under consideration, which is one
of loan does not fall under any of those groups of aleatory contracts. At any rate, the contract of
loan herein involved is clearly not dependent upon any uncertain event. The loan was granted on
a definite date and has to be paid on a definite date. Both dates are certain. The payment of the
loan has to be effected regardless of the result of the war.
As the contract in question contemplated that the payment is to be made in the same currency
that was loaned, and the parties are presumed never to have intended that said payment would
be made in what has become valueless money, justice demands that the indebtedness be paid in
actual Philippine currency at an equivalent amount determined in the Ballantyne schedule, in the
absence of evidence as to such value. The exceptions mentioned in the Ballantyne schedule
refers to contracts in which the obligation is payable by something other than legal tender.
Indeed, the majority in Hilado vs. De la Costa et al.,** G.R. No. L-150, decided on April 30, 1949,
held that "what the debtor should pay is the value of the Japanese war notes in relation the peso
of Philippine currency obtaining on the date when at the place where the obligation was
incurred, unless the parties had agreed otherwise." This underscored clause undoubtedly
contemplates an agreement to pay in a consideration other than legal tender of the Philippines,
such as gold dollars, pounds sterling, Spanish pesetas, or the like. It cannot be otherwise, since if
the intention is merely to pay in legal tenders, no express stipulation is necessary, because under
section 1612 of the Revised Administrative Code, the Philippine currency is the legal tender for all
debts.
In reiteration of my stand in the case of Roo vs. Gomez, supra, I wish to emphasize that to
require the herein respondent to pay the sum of P5,000 actual Philippine currency, in return for an

indebtedness obtained in Japanese military notes equivalent in actual Philippine currency

according to the Ballantyne schedule, to only P790.26 as found by the Court of Appeals, is
unconscionable.
In my considered opinion, the appealed judgment should at most be affirmed.
Pablo, J., concurs:

PADILLA, J., dissenting:

I dissent. A loan of a sum of money is usually made for the purpose of earning interest. The creditor
should not be allowed to exact and impose unfair terms and conditions, such as that of barring the debtor
from paying the principal of the loan before the time agreed upon. By the payment of the principal of the
loan together with the stipulated interests accrued and to accrue up to the time agreed upon for the
payment of the principal, the purpose or aim of the loan is attained all to the advantage and benefit of
the creditor. The stipulated sum to be paid by the debtor as penalty or liquidated damages equal to the
principal of the loan if payment thereof be made before the time agreed upon, even if the debtor pays at
the same time the stipulated interests accrued and to accrue up to the time agreed upon for the payment
of the principal, is contra bonos mores, against public policy, and should be disregarded and deemed as
not written in the contract.
A loan of P200,000 in Japanese war notes was made on 5 May 1944, payable within one year from 5 May
1948. An additional loan of P16,000 in Japanese war notes was made on 31 July 1944, payable within the
same period of time as the previous one. On different occasions in October 1944, the debtor tendered the
sum of P254,880 in full payment of the principal of the loan and the stipulated interests up to 5 May 1948,
a tender refused by the creditor. In view of this refusal, the debtor deposited the sum and filed a complaint
in the competent court to compel the creditor to accept the sum thus tendered and deposited.
To compel the debtor after the moratorium shall have been removed to pay in the present currency the
principal of the loan made in Japanese war notes which at the time of the loan had very little value or
purchasing power, and the stipulated interests up to the date of payment thereof, is so shocking to the
conscience of a fair-minded person that it will constitute a blot on the administration of justice in this
Republic. To that I cannot give my assent.
The requirement that previous notice of consignation be made to the creditor was practically complied
with by the deposit in court of the sum of money tendered and the filing of the complaint by the debtor
against the creditor to compel the latter to accept the payment of the sum of money thus tendered and
deposited. The notice of consignation is superflous where a complaint is filed and the sum of money
tendered for the payment of the principal of the loan and stipulated interests is deposited in court,
because to avoid litigation the creditor or any party interested in the fulfillment of the obligation may still
accept the payment of the sum of money deposited after he receives the summons. It does not appear in
the case that any party other than the creditor was interested in the fulfillment of the obligation at the time
the consignation was made.
The cross-claim of the creditor should have been dismissed. The consignation made by the debtor should
have been upheld, or if the provisions as to consignation were not adhered to or complied with, then the
creditor should be entitled at most to the sum awarded by the trial court.
EXCERPTS FROM THE MINUTES OF MARCH 27, 1952

xxx

xxx

xxx

This concerns the motions for reconsideration filed both by plaintiff and defendant in G.R. No. L3316, Jose Ponce de Leon vs. Santiago Syjuco, Inc.
Plaintiff predicates his motion for reconsideration on the following grounds: (1) the difference of
P192,870 between the value of the promissory notes in litigation calculated on the basis of the
Ballantyne schedule and their value on the basis of one Japanese military peso constitutes an
unjust enrichment (enriquecimiento torticero) unsupported by any true consideration, and cannot
be sanctioned by this Court; (2) the limitation on the right to pay the loans as stipulated in the
promissory notes was contrary to law and public order at the time the notes were executed; and
(3) the aforesaid difference of P192,870 constitutes defendant's winnings in gambling, and cannot
be recovered.
Defendant seeks the reconsideration of the decision on the following grounds: (1) the moratorium
law has been erroneously applied in this case; (2) the decision has erroneously condoned the
interest stipulated from August 6, 1944, to May 5, 1949; and (3) the Court has erroneously
absolved the plaintiff from his obligation under the penal clause.
We will first take up the grounds of the motion for reconsideration of the plaintiff.
Claiming that the real value of the loan made by defendant to plaintiff in 1944, measured in terms
of genuine currency, is P34,130, including interests, and if plaintiff is made to pay to defendant
P216,000, with interests, in genuine currency, the difference between the actual value of the loan
received by plaintiff and the value set in the decision is P192,870, which represents the value
actually transferred from plaintiff to defendant. It is claimed that this is an unjust enrichment which
cannot be sanctioned in equity.
The fundamental doctrine of unjust enrichment is the transfer of value without just cause or
consideration. The transfer is usually made in accordance with law, but the determining factor is
the lack of cause or consideration. The elements of this doctrine are: enrichment on the part of
the defendant; impoverishment on the part of the plaintiff; and lack of cause. The main objective
is to prevent that one may enrich himself at the expense of another. If this situation is obtained,
equity steps in to protect the one prejudiced.
This doctrine is sound. It is based upon equity, and though not expressly recognized on our old
Civil Code, it is reflected in some of its provisions. Example: payments received though not
owing, indebiti solutio, wherein an obligation to restore the thing received arises (Art. 1895). This
relation is considered by treatisers as a kind of quasi-contract. (Castan, Derecho Civil Espaol,
tomo 3, pag. 424).
But we doubt the application of this doctrine to the present case, if we view it in the light of its
fundamental purpose, which is lack of cause or consideration. Here we find that the money given
to the plaintiff in May and July, 1944, was invested by him not only to pay his pre-war obligations
but also those contracted by him during the Japanese occupation. According to his own
admission, these accounts reached a total of P105,000. The rest he used to promote his guerilla
activities. He, therefore, made use of the money in the light of his most pressing needs and made
use of it for his personal enrichment. This being so, it is fallacious now to claim that to make
plaintiff return the money he made use of to advantage in the manner he stipulated constitutes an
unjust enrichment on the part of the giver. Nor is it fair and logical to conclude, after plaintiff had
made use of the money to suit his purpose, that the transaction should be voided simply because
the advantage has gone the other way. This is a venture in which both have speculated. It may
work one way of the other and as such both must abide by it.

The claim that the speculation which limits the right to pay the loans within a certain period of time
was contrary to the law and public order at the time the notes were executed is untenable. We
find nothing in the law or in the orders issued by the military authorities in force at the time the
notes in controversy were executed that could prevent anyone from stipulating as to the time
within which certain obligation is to be paid. The military orders regarding the use and circulation
of military notes do not contain any prohibition of this nature. They merely contain an injunction
that those notes should be accepted as legal tender in making payments of all kinds, under pain
of severe punishment for those who may infringe it. The stipulation in question does run counter
to this injunction for it merely limits the time of payment of the obligation. We find nothing in this
stipulation which may be said to be contrary to the law or public order prevailing at the time.
Whether the stipulation in question involves a gambling transaction or not, and as a
consequence, the winnings resulting therefrom should be prescribed, as the law requires, is a
closed matter. In Roo vs. Gomez, May 31, 1949, 46 Off. Gaz., Supp. (Nov. 1950), 333 this Court
said: "Our legislation has a word for these contracts: aleatory. The civil code recognizes their
validity (See article 1790 and Manresa's comment thereon) on a par with insurance policies and
annuities". And in Gomez vs, Tabia, Aug. 5, 1949, 47 Off. Gaz., (Feb. 1951) 641, this Court also
said: "This kind of agreement is permitted by law. We find nothing immoral or unlawful in it. It may
be viewed in the same light as insurance contracts, or sales of grain, sugar or other commodities
to be delivered at some future date, whose price is subject to fluctuation, and may, at the time of
delivery, be way above or below the sales price." It should be stated here with a sense of finality
that contracts of this nature are valid and are not contrary to law, moral, or public order.
Let us come to the motion for reconsideration of defendant.
It is claimed that the Court has erroneously applied the moratorium law because of the pretense
that the plaintiff has failed to invoke it in his favor in the lower court, and that while it is true that
plaintiff has invoked the moratorium law he did so only in connection with his obligation to pay the
interests and damages, and not in connection with the principal.
It should be noted that one of the errors assigned by plaintiff in his brief that the lower court erred
in finding that he did not invoke the benefits of said moratorium law in his pleadings, and the
defendant, in meeting this imputation, never claimed that plaintiff did not invoke the moratorium
law, but merely limited his argument to the contention that plaintiff cannot invoke it because he
failed to prove that he is a war victim, and that said law is unconstitutional. It is only now that the
defendant makes the claim that plaintiff limited his objection to interests and damages.
Surprisingly, defendants makes this claim for the first time in its motion for reconsideration.
We are of the opinion that the defense of moratorium set up by the plaintiff in the lower court
applies both to the principal obligation as well as to the interests and damages, as it was so
understood by the defendant. And this being so, defendant is now estopped from claiming
otherwise, especially if it is considered that, to apply moratorium to interests without at the same
time applying it to the principal is incongrous. This claim, therefore, has no merit.
There is merit in the claim that the interests the plaintiff should pay on the obligation should be
counted from the date plaintiff has ceased to pay said interests, or from August 6, 1944. This
should be corrected.
We find no reason to disturb the finding of this Court in so far as the penal clause is concerned.
All things considered, this finding should be maintained.
Wherefore, the motion for reconsideration filed by the plaintiff is denied.

The motion for reconsideration filed by the defendant is also denied. However, the dispositive part
of the decision rendered in this case should be modified as follows:
In view of the foregoing, the decision appealed from should be modified in the sense of ordering
the plaintiff to pay the defendant Syjuco the sum of P216,000, Philippine currency, value of two
promissory notes, with interest thereon at the rate of 6 per cent per annum from August 6, 1944,
up to May 5, 1949, and with similar interest from May 6, 1949 until said amount is paid in full. It is
further ordered that should the amount of this judgment principal and interests, be not paid
within ninety (90) days from the date this judgment becomes final, the properties mortgaged
should be sold at public auction, and the proceeds applied to the payment of this judgment in
accordance with law, with costs against the plaintiff.
However, this judgment shall be held in abeyance, or no order for the execution thereof shall be
issued, until after the moratorium orders shall have been lifted.
The Chief Justice and Justices Pablo and Padilla dissented and voted also to let the case be set for
hearing.

ANITA C. BUCE, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, SPS. BERNARDO C. TIONGCO and ARACELI
TIONGCO, SPS. DIONISIO TIONGCO and LUCILA TIONGCO, and JOSE M.
TIONGCO, respondents.

DAVIDE, JR., C.J.:

The basic issue in this petition is whether the parties intended an automatic renewal of the lease
contract1 when they agreed that the lease shall be for a period of fifteen years "subject to renewal for
another ten (10) years."
Petitioner leased a 56-square meter parcel of land located at 2068 Quirino Avenue, Pandacan,
Manila. The lease contract was for a period of fifteen years to commence on 1 June 1979 and to end
on 1 June 1994 "subject to renewal for another ten (10) years, under the same terms and
conditions." Petitioner then constructed a building and paid the required monthly rental of P200.
Private respondents, through their administrator Jose Tiongco, later demanded a gradual increase in
the rental until it reached P400 in 1985. For July and August 1991, petitioner paid private
respondents P1,000 as monthly rental.2
On 6 December 1991, private respondents' counsel wrote petitioner informing her of the increase in
the rent to P1,576.58 effective January 1992 pursuant to the provisions of the Rent Control
Law.3 Petitioner, however, tendered checks dated 5 October 1991,4 5 November 1991,5 5 December
1991, 6 5 January 1992,7 31 May 1992,8 and 2 January 1993 9 for only P400 each, payable to Jose
Tiongco as administrator. As might be expected, private respondents refused to accept the same.
On 9 August 1993, petitioner filed with the Regional Trial Court of Manila a complaint for specific
performance with prayer for consignation, which was docketed as Civil Case No. 93-67135. She
prayed that private respondents be ordered to accept the rentals in accordance with the lease
contract and to respect the lease of fifteen years, which was renewable for another ten years, at the
rate of P200 a month.
In their Answer, private respondents countered that petitioner had already paid the monthly rent of
P1,000 for July and August 1991. Under Republic Act No. 877, as amended, rental payments should
already be P1,576.58 10 per month; hence, they were justified in refusing the checks for P400 that
petitioner tendered. Moreover, the phrase in the lease contract authorizing renewal for another ten
years does not mean automatic renewal; rather, it contemplates a mutual agreement between the
parties.
During the pendency of the controversy, counsel for private respondents wrote petitioner reminding
her that the contract expired on 1 June 1994 and demanding that she pay the rentals in arrears,
which then amounted to P33,000.

On 29 August 1995, the RTC declared the lease contract automatically renewed for ten years and
considered as evidence thereof (a) the stipulations in the contract giving the lessee the right to
construct buildings and improvements and (b) the filing by petitioner of the complaint almost one
year before the expiration of the initial term of fifteen years. It then fixed the monthly rent at P400
from 1 June 1990 to 1 June 1994; P1,000 from 1 June 1994 until 1 June 1999; and P1,500 for the
rest of the period or from 1 June 2000 to 1 June 2004, reasoning that the continuous increase of rent
from P200 to P250 then P300, P400 and finally P1,000 caused "an inevitable novation of their
contract." 11
On appeal, the Court of Appeals reversed the decision of the RTC, and ordered petitioner to
immediately vacate the leased premises on the ground that the contract expired on 1 June 1994
without being renewed and to pay the rental arrearages at the rate of P1,000 monthly. 12
According to the Court of Appeals, the phrase in the contract "this lease shall be for a period of
fifteen (15) years effective June 1, 1979, subject to renewal for another ten (10) years, under the
same terms and conditions" is unclear as to who may exercise the option to renew. The stipulation
allowing the construction of a building and other improvements and the fact that the complaint was
filed a year before the expiration of the contract are not indicative of automatic renewal. It applied the
ruling in Fernandez v. Court of Appeals 1 that without a stipulation that the option to renew the lease
is solely for the benefit of one party any renewal of a lease contract must be upon the agreement of
the parties. Since private respondents were not agreeable to an extension, the original term of the
lease ended on 1 June 1994. Private respondents' refusal to accept petitioner's checks for P400 was
justified because although the original contract specified a monthly rental of P200, the tender and
acceptance of the increased rental of P1,000 novated the contract of lease; thus, petitioner was
estopped from claiming that the monthly rental is otherwise.
The Court of Appeals denied petitioner's motion for reconsideration. Hence this petition.
Petitioner contends that by ordering her to vacate the premises, the Appellate Court went beyond the
bounds of its authority because the case she filed before the RTC was for "Specific Performance"
not unlawful detainer. The power to order the lessee to vacate the leased premises is lodged in
another forum. Additionally, private respondents did not pray for the ejectment of petitioners from the
leased premises in their Answer with Counterclaim; well-settled is the rule that a court cannot award
relief not prayed for in the complaint or compulsory counterclaim.
Petitioner further maintains that the phrase "renewable for another ten years at the option of both
parties" in the Fernandez case clearly indicated the intention of the parties to renew the contract only
upon mutual agreement. Whereas in this case the contract states, "[T]his lease shall be for a period
of fifteen (15) years effective June 1, 1979, subject to renewal for another ten (10) years, under the
same terms and conditions," making this stipulation subject to interpretation with due regard to the
contemporaneous and subsequent acts of the parties. The stipulation in the contract allowing the
lessee to construct buildings and improvements; her filing of the complaint a year before the
expiration of the initial 15-year term; and private respondents' acceptance of the increased rental are
contemporaneous and subsequent acts that signify the intention of the parties to renew the contract.

On the other hand, private respondents aver that even if the original petition filed before the RTC
was not for unlawful detainer, the order of the Court of Appeals requiring petitioner to vacate the
premises is but a logical consequence of its finding that the lease contract had expired. To require
another litigation would constitute multiplicity of suits; besides, petitioner has no other reason to stay
in the premises. There is no basis why Fernandez should not be applied to the case at bar. Absent
contrary stipulation in reciprocal contracts, the period of lease is deemed to be for the benefit of both
parties.
Private respondents argue that the alleged contemporaneous and subsequent acts do not determine
the real intention of the parties as regards renewal of the lease contract. Had they intended an
automatic renewal of the lease contract they would have agreed on a 25-year period instead.
Correlatively, private respondents' letter reminding petitioner of the expiration of the contract on 1
June 1994 and demanding payment of the rentals in arrears signifies that they are no longer
interested in renewing the contract. Also petitioner's refusal to pay the increased rental of P1,000 as
early as 1991 and private respondents' refusal to accept the P400 tendered constituted a
disagreement on the rate of rental; hence, any renewal is out of the question.
The basic issue, as agreed upon by the parties, is the correct interpretation of the contract provision
"this lease shall be for a period of fifteen (15) years effective June 1, 1979, subject to renewal for
another ten (10) years, under the same terms and conditions."
The literal meaning of the stipulations shall control if the terms of the contract are clear and leave no
doubt upon the intention of the contracting parties. 14 However, if the terms of the agreement are
ambiguous resort is made to contract interpretation which is the determination of the meaning
attached to written or spoken words that make the contract. 15 Also, to ascertain the true intention of
the parties, their actions, subsequent or contemporaneous, must be principally considered. 16
The phrase "subject to renewal for another ten (10) years" is unclear on whether the parties
contemplated an automatic renewal or extension of the term, or just an option to renew the contract;
and if what exists is the latter, who may exercise the same or for whose benefit it was stipulated.
In this jurisdiction, a fine delineation exists between renewal of the contract and extension of its
period. Generally, the renewal of a contract connotes the death of the old contract and the birth or
emergence of a new one. A clause in a lease providing for an extension operates of its own force to
create an additional term, but a clause providing for a renewal merely creates an obligation to
execute a new lease contract for the additional term. As renewal of the contract contemplates the
cessation of the old contract, then it is necessary that a new one be executed between the parties. 17
There is nothing in the stipulations in the contract and the parties' actuation that shows that the
parties intended an automatic renewal or extension of the term of the contract. Even the RTC
conceded that the issue of automatic renewal is debatable. The fact that the lessee was allowed to
introduce improvements on the property is not indicative of the intention of the lessors to
automatically extend the contract. Considering the original 15-year duration of the contract,
structures would have necessarily been constructed, added, or built on the property, which in its
previous state was an idle 56-square meter lot in the heart of Manila. Petitioner leased the property
for the purpose of turning it into a commercial establishment and to which it has been transformed as

Anita's Grocery and Store. Neither the filing of the complaint a year before the expiration of the 15year term nor private respondents' acceptance of the increased rentals has any bearing on the
intention of the parties regarding renewal. It must be recalled that the filing of the complaint was
even spawned by private respondents' refusal to accept the payment of monthly rental in the amount
of only P400.
Now on the applicability of Fernandez v. Court of Appeals to the case at bar. Although the factual
scenario in that case with regard to the renewal option is slightly off-tangent to the case under
consideration because the intention of the parties therein for future mutual agreement was clearly
discernible in their contract, we cannot completely disregard the pronouncement of this Court in that
case; thus:
[I]n a reciprocal contract like a lease, the period must be deemed to have
been agreed upon for the benefit of both parties, absent language showing
that the term was deliberately set for the benefit of the lessee or lessor
alone. 18 We are not aware of any presumption in law that the term was
deliberately set for the benefit of the lessee alone. Koh and Cruz in effect
rested upon such a presumption. But that presumption cannot reasonably be
indulged in casually in an era of rapid economic change, marked by, among
other things, volatile costs of living and fluctuations in the value of domestic
currency. The longer the period the more clearly unreasonable such a
presumption would be. In an age like that we live in, very specific language is
necessary to show an intent to grant a unilateral faculty to extend or renew a
contract of lease to the lessee alone or to the lessor alone for that matter. 19
In the case at bar, it was not specifically indicated who may exercise the option to renew, neither was
it stated that the option was given for the benefit of herein petitioner. Thus, pursuant to the
Fernandez ruling and Article 1196 of the Civil Code, the period of the lease contract is deemed to
have been set for the benefit of both parties. Renewal of the contract may be had only upon their
mutual agreement or at the will of both of them. Since the private respondents were not amenable to
a renewal, they cannot be compelled to execute a new contract when the old contract terminated on
1 June 1994. It is the owner-lessor's prerogative to terminate the lease at its expiration. 20 The
continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively
upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals
or not, completely depriving the owner of any say in the matter. Mutuality does not obtain in such a
contract of lease and no equality exists between the lessor and the lessee since the life of the
contract would be dictated solely by the lessee. 21
After the lease terminated on 1 June 1994 without any agreement for renewal being reached,
petitioner became subject to ejectment from the premises. 22 It must be noted, however, that private
respondents did not include in their Answer with Counterclaim a prayer for the restoration of
possession of the leased premises. Neither did they file with the proper Metropolitan Trial Court an
unlawful detainer suit 2 against petitioner after the expiration of the lease contact. Moreover, the
issues agreed upon by the parties to be resolved during the pre-trial were the correct interpretation
of the contract and the validity of private respondents' refusal to accept petitioner's payment of P400
as monthly rental. 24 They later limited the issue to the first, i.e., the correct interpretation of the

contract. 25 The issue of possession of the leased premises was not among the issues agreed upon
by the parties or threshed out before the court a quo. Neither was it raised by private respondents on
appeal.
Accordingly, as correctly contended by the petitioner, the Court of Appeals went beyond the bounds
of its authority 26 when after interpreting the questioned provision of the lease contract in favor of the
private respondents it proceeded to order petitioner to vacate the subject premises.
WHEREFORE, the instant petition is partly GRANTED. The assailed decision of the Court of
Appeals is REVERSED insofar as it ordered the petitioner to immediately vacate the leased
premises, without prejudice, however, to the filing by the private respondents of an action for the
recovery of possession of the subject property.
No costs.
SO ORDERED.

G.R. No. L-22558

May 31, 1967

GREGORIO ARANETA, INC., petitioner,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.
Araneta and Araneta for petitioner.
Rosauro Alvarez and Ernani Cruz Pao for respondent.
REYES, J.B.L., J.:
Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-R,
affirming with modification, an amendatory decision of the Court of First Instance of Manila, in its
Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J.
M. Tuason & Co., Inc. and Gregorio Araneta, Inc., defendants."
As found by the Court of Appeals, the facts of this case are:
J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as
the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On July 28, 1950,
through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of 43,034.4
square meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates Development
Co., Ltd. The parties stipulated, among in the contract of purchase and sale with mortgage, that the
buyer will
Build on the said parcel land the Sto. Domingo Church and Convent
while the seller for its part will
Construct streets on the NE and NW and SW sides of the land herein sold so that the latter
will be a block surrounded by streets on all four sides; and the street on the NE side shall be
named "Sto. Domingo Avenue;"
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto.
Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing the
streets, is unable to finish the construction of the street in the Northeast side named (Sto. Domingo
Avenue) because a certain third-party, by the name of Manuel Abundo, who has been physically
occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine
Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and
instance, seeking to compel the latter to comply with their obligation, as stipulated in the abovementioned deed of sale, and/or to pay damages in the event they failed or refused to perform said
obligation.
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter
particularly setting up the principal defense that the action was premature since its obligation to

construct the streets in question was without a definite period which needs to he fixed first by the
court in a proper suit for that purpose before a complaint for specific performance will prosper.
The issues having been joined, the lower court proceeded with the trial, and upon its termination, it
dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses
interposed by defendant Gregorio Araneta, Inc.
1wph1.t

Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within
which defendants will comply with their obligation to construct the streets in question.
Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not
expressly or impliedly allege and pray for the fixing of a period to comply with its obligation and that
the evidence presented at the trial was insufficient to warrant the fixing of such a period.
On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of
such a period," issued an order granting plaintiff's motion for reconsideration and amending the
dispositive portion of the decision of May 31, 1960, to read as follows:
WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a
period of two (2) years from notice hereof, within which to comply with its obligation under
the contract, Annex "A".
Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which
motion, plaintiff opposed.
On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the latter
perfected its appeal Court of Appeals.
In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief
granted, i.e., fixing of a period, under the amendatory decision of July 16, 1960, was not justified by
the pleadings and not supported by the facts submitted at the trial of the case in the court below and
that the relief granted in effect allowed a change of theory after the submission of the case for
decision.
Ruling on the above contention, the appellate court declared that the fixing of a period was within the
pleadings and that there was no true change of theory after the submission of the case for decision
since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by alleging in
paragraph 7 of the affirmative defenses contained in its answer which reads
7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a
reasonable time within which to comply with its obligations to construct and complete the
streets on the NE, NW and SW sides of the lot in question; that under the circumstances,
said reasonable time has not elapsed;

Disposing of the other issues raised by appellant which were ruled as not meritorious and which are
not decisive in the resolution of the legal issues posed in the instant appeal before us, said appellate
court rendered its decision dated December 27, 1963, the dispositive part of which reads
IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given
two (2) years from the date of finality of this decision to comply with the obligation to
construct streets on the NE, NW and SW sides of the land sold to plaintiff so that the same
would be a block surrounded by streets on all four sides.
Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta, Inc.
resorted to a petition for review by certiorari to this Court. We gave it due course.
We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of
First Instance is legally untenable. The fixing of a period by the courts under Article 1197 of the Civil
Code of the Philippines is sought to be justified on the basis that petitioner (defendant below) placed
the absence of a period in issue by pleading in its answer that the contract with respondent
Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable
time within which to comply with its obligation to construct and complete the streets." Neither of the
courts below seems to have noticed that, on the hypothesis stated, what the answer put in issue was
not whether the court should fix the time of performance, but whether or not the parties agreed that
the petitioner should have reasonable time to perform its part of the bargain. If the contract so
provided, then there was a period fixed, a "reasonable time;" and all that the court should have done
was to determine if that reasonable time had already elapsed when suit was filed if it had passed,
then the court should declare that petitioner had breached the contract, as averred in the complaint,
and fix the resulting damages. On the other hand, if the reasonable time had not yet elapsed, the
court perforce was bound to dismiss the action for being premature. But in no case can it be logically
held that under the plea above quoted, the intervention of the court to fix the period for performance
was warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the
parties.
Even on the assumption that the court should have found that no reasonable time or no period at all
had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the
complaint not having sought that the Court should set a period, the court could not proceed to do so
unless the complaint in as first amended; for the original decision is clear that the complaint
proceeded on the theory that the period for performance had already elapsed, that the contract had
been breached and defendant was already answerable in damages.
Granting, however, that it lay within the Court's power to fix the period of performance, still the
amended decision is defective in that no basis is stated to support the conclusion that the period
should be set at two years after finality of the judgment. The list paragraph of Article 1197 is clear
that the period can not be set arbitrarily. The law expressly prescribes that
the Court shall determine such period as may under the circumstances been probably
contemplated by the parties.

All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the
proven facts precisely warrant the fixing of such a period," a statement manifestly insufficient to
explain how the two period given to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must
first determine that "the obligation does not fix a period" (or that the period is made to depend upon
the will of the debtor)," but from the nature and the circumstances it can be inferred that a period was
intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to
the second step, and decide what period was "probably contemplated by the parties" (Do., par. 3).
So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be
reasonable, but must set the time that the parties are shown to have intended. As the record stands,
the trial Court appears to have pulled the two-year period set in its decision out of thin air, since no
circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that the parties were fully aware
that the land described therein was occupied by squatters, because the fact is expressly mentioned
therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). As the parties must have known that
they could not take the law into their own hands, but must resort to legal processes in evicting the
squatters, they must have realized that the duration of the suits to be brought would not be under
their control nor could the same be determined in advance. The conclusion is thus forced that the
parties must have intended to defer the performance of the obligations under the contract until the
squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that it would render the date of performance
indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is
what explains why the agreement did not specify any exact periods or dates of performance.
It follows that there is no justification in law for the setting the date of performance at any other time
than that of the eviction of the squatters occupying the land in question; and in not so holding, both
the trial Court and the Court of Appeals committed reversible error. It is not denied that the case
against one of the squatters, Abundo, was still pending in the Court of Appeals when its decision in
this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the performance of
the obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on
affected areas are finally evicted therefrom.
Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.
Concepcion, C.J., Dizon, Regala, Makalintal, Bengzon, J.P., Sanchez and Castro, JJ., concur.

G.R. No. 112127 July 17, 1995

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

BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the
Court of Appeals which reversed that of the Regional Trial Court of Iloilo City directing petitioner to
reconvey to private respondents the property donated to it by their predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of
Trustees of the Central Philippine College (now Central Philippine University [CPU]), executed a
deed of donation in favor of the latter of a parcel of land identified as Lot No. 3174-B-1 of the
subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer Certificate of Title
No. T-3910-A was issued in the name of the donee CPU with the following annotations copied from
the deed of donation
1. The land described shall be utilized by the CPU exclusively for the establishment
and use of a medical college with all its buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third party nor in any way
encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college
shall be under obligation to erect a cornerstone bearing that name. Any net income
from the land or any of its parks shall be put in a fund to be known as the "RAMON
LOPEZ CAMPUS FUND" to be used for improvements of said campus and erection
of a building thereon. 1
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action
for annulment of donation, reconveyance and damages against CPU alleging that since 1939 up to
the time the action was filed the latter had not complied with the conditions of the donation. Private
respondents also argued that petitioner had in fact negotiated with the National Housing Authority
(NHA) to exchange the donated property with another land owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the action had prescribed;
that it did not violate any of the conditions in the deed of donation because it never used the donated
property for any other purpose than that for which it was intended; and, that it did not sell, transfer or
convey it to any third party.

On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the
donation and declared it null and void. The court a quo further directed petitioner to execute a deed
of the reconveyance of the property in favor of the heirs of the donor, namely, private respondents
herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the annotations at the
back of petitioner's certificate of title were resolutory conditions breach of which should terminate the
rights of the donee thus making the donation revocable.
The appellate court also found that while the first condition mandated petitioner to utilize the donated
property for the establishment of a medical school, the donor did not fix a period within which the
condition must be fulfilled, hence, until a period was fixed for the fulfillment of the condition,
petitioner could not be considered as having failed to comply with its part of the bargain. Thus, the
appellate court rendered its decision reversing the appealed decision and remanding the case to the
court of origin for the determination of the time within which petitioner should comply with the first
condition annotated in the certificate of title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted annotations in
the certificate of title of petitioner are onerous obligations and resolutory conditions of the donation
which must be fulfilled non-compliance of which would render the donation revocable; (b) in holding
that the issue of prescription does not deserve "disquisition;" and, (c) in remanding the case to the
trial court for the fixing of the period within which petitioner would establish a medical college. 2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of
donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his
donation was onerous, one executed for a valuable consideration which is considered the equivalent
of the donation itself, e.g., when a donation imposes a burden equivalent to the value of the
donation. A gift of land to the City of Manila requiring the latter to erect schools, construct a children's
playground and open streets on the land was considered an onerous donation. 3 Similarly, where Don
Ramon Lopez donated the subject parcel of land to petitioner but imposed an obligation upon the latter to
establish a medical college thereon, the donation must be for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition. Thus, when a person donates land to another on the condition that
the latter would build upon the land a school, the condition imposed was not a condition precedent or
a suspensive condition but a resolutory one. 4 It is not correct to say that the schoolhouse had to be
constructed before the donation became effective, that is, before the donee could become the owner of
the land, otherwise, it would be invading the property rights of the donor. The donation had to be valid
before the fulfillment of the condition. 5 If there was no fulfillment or compliance with the condition, such as
what obtains in the instant case, the donation may now be revoked and all rights which the donee may
have acquired under it shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private respondents is unavailing.
The condition imposed by the donor, i.e., the building of a medical school upon the land
donated, depended upon the exclusive will of the donee as to when this condition shall be

fulfilled. When petitioner accepted the donation, it bound itself to comply with the condition
thereof. Since the time within which the condition should be fulfilled depended upon the
exclusive will of the petitioner, it has been held that its absolute acceptance and the
acknowledgment of its obligation provided in the deed of donation were sufficient to prevent
the statute of limitations from barring the action of private respondents upon the original
contract which was the deed of donation. 6
Moreover, the time from which the cause of action accrued for the revocation of the donation and
recovery of the property donated cannot be specifically determined in the instant case. A cause of
action arises when that which should have been done is not done, or that which should not have
been done is done. 7 In cases where there is no special provision for such computation, recourse must
be had to the rule that the period must be counted from the day on which the corresponding action could
have been instituted. It is the legal possibility of bringing the action which determines the starting point for
the computation of the period. In this case, the starting point begins with the expiration of a reasonable
period and opportunity for petitioner to fulfill what has been charged upon it by the donor.
The period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of the
presence of several factors and circumstances involved in the erection of an educational institution,
such as government laws and regulations pertaining to education, building requirements and
property restrictions which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and circumstances it can be
inferred that a period was intended, the general rule provided in Art. 1197 of the Civil Code applies,
which provides that the courts may fix the duration thereof because the fulfillment of the obligation
itself cannot be demanded until after the court has fixed the period for compliance therewith and
such period has arrived. 8
This general rule however cannot be applied considering the different set of circumstances existing
in the instant case. More than a reasonable period of fifty (50) years has already been allowed
petitioner to avail of the opportunity to comply with the condition even if it be burdensome, to make
the donation in its favor forever valid. But, unfortunately, it failed to do so. Hence, there is no more
need to fix the duration of a term of the obligation when such procedure would be a mere technicality
and formality and would serve no purpose than to delay or lead to an unnecessary and expensive
multiplication of suits. 9 Moreover, under Art. 1191 of the Civil Code, when one of the obligors cannot
comply with what is incumbent upon him, the obligee may seek rescission and the court shall decree the
same unless there is just cause authorizing the fixing of a period. In the absence of any just cause for the
court to determine the period of the compliance, there is no more obstacle for the court to decree the
rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring
to incidental circumstances of a gratuitous contract should be resolved in favor of the least
transmission of rights and interests. 10 Records are clear and facts are undisputed that since the
execution of the deed of donation up to the time of filing of the instant action, petitioner has failed to
comply with its obligation as donee. Petitioner has slept on its obligation for an unreasonable length of
time. Hence, it is only just and equitable now to declare the subject donation already ineffective and, for

all purposes, revoked so that petitioner as donee should now return the donated property to the heirs of
the donor, private respondents herein, by means of reconveyance.

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

Separate Opinions

DAVIDE, JR., J., dissenting:

I agree with the view in the majority opinion that the donation in question is onerous considering the
conditions imposed by the donor on the donee which created reciprocal obligations upon both
parties. Beyond that, I beg to disagree.
First of all, may I point out an inconsistency in the majority opinion's description of the donation in
question. In one part, it says that the donation in question is onerous. Thus, on page 4 it states:
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in
the deed of donation executed by Don Ramon Lopez, Sr., give us no alternative but
to conclude that his donation was onerous, one executed for a valuable
consideration which is considered the equivalent of the donation itself, e.g., when a
donation imposes a burden equivalent to the value of the donation . . . . (emphasis
supplied)
Yet, in the last paragraph of page 8 it states that the donation is basically a gratuitous one.
The pertinent portion thereof reads:

Finally, since the questioned deed of donation herein is basically a gratuitous one,
doubts referring to incidental circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and interest . . . (emphasis
supplied)
Second, the discussion on conditional obligations is unnecessary. There is no conditional obligation
to speak of in this case. It seems that the "conditions" imposed by the donor and as the word is used
in the law of donations is confused with "conditions" as used in the law of obligations. In his
annotation of Article 764 of the Civil Code on Donations, Arturo M. Tolentino, citing the well-known
civilists such as Castan, Perez Gonzalez and Alguer, and Colin & Capitant, states clearly the context
within which the term "conditions" is used in the law of donations, to wit:
The word "conditions" in this article does not refer to uncertain events on which the
birth or extinguishment of a juridical relation depends, but is used in the vulgar sense
of obligations or charges imposed by the donor on the donee. It is used, not in its
technical or strict legal sense, but in its broadest sense. 1 (emphasis supplied)
Clearly then, when the law and the deed of donation speaks of "conditions" of a donation, what are
referred to are actually the obligations, charges or burdens imposed by the donor upon the donee
and which would characterize the donation as onerous. In the present case, the donation is, quite
obviously, onerous, but it is more properly called a "modal donation." A modal donation is one in
which the donor imposes a prestation upon the donee. The establishment of the medical college as
the condition of the donation in the present case is one such prestation.
The conditions imposed by the donor Don Ramon Lopez determines neither the existence nor the
extinguishment of the obligations of the donor and the donee with respect to the donation. In fact,
the conditions imposed by Don Ramon Lopez upon the donee are the very obligations of the
donation to build the medical college and use the property for the purposes specified in the deed
of donation. It is very clear that those obligations are unconditional, the fulfillment, performance,
existence or extinguishment of which is not dependent on any future or uncertain event or past and
unknown event, as the Civil Code would define a conditional obligation. 2
Reliance on the case of Parks vs. Province of Tarlac 3 as cited on page 5 of the majority opinion is
erroneous in so far as the latter stated that the condition in Parks is a resolutory one and applied this to
the present case. A more careful reading of this Court's decision would reveal that nowhere did we say,
whether explicitly or impliedly, that the donation in that case, which also has a condition imposed to build
a school and a public park upon the property donated, is a resolutory condition. 4 It is incorrect to say that
the "conditions" of the donation there or in the present case are resolutory conditions because, applying
Article 1181 of the Civil Code, that would mean that upon fulfillment of the conditions, the rights already
acquired will be extinguished. Obviously, that could not have been the intention of the parties.
What the majority opinion probably had in mind was that the conditions are resolutory because if
they are not complied with, the rights of the donee as such will be extinguished and the donation will
be revoked. To my mind, though, it is more accurate to state that the conditions here are not
resolutory conditions but, for the reasons stated above, are the obligations imposed by the donor.

Third, I cannot subscribe to the view that the provisions of Article 1197 cannot be applied here. The
conditions/obligations imposed by the donor herein are subject to a period. I draw this conclusion
based on our previous ruling which, although made almost 90 years ago, still finds application in the
present case. In Barretto vs. City of Manila, 5 we said that when the contract of donation, as the one
involved therein, has no fixed period in which the condition should be fulfilled, the provisions of what is
now Article 1197 (then Article 1128) are applicable and it is the duty of the court to fix a suitable time for its
fulfillment. Indeed, from the nature and circumstances of the conditions/obligations of the present
donation, it can be inferred that a period was contemplated by the donor. Don Ramon Lopez could not
have intended his property to remain idle for a long period of time when in fact, he specifically burdened
the donee with the obligation to set up a medical college therein and thus put his property to good use.
There is a need to fix the duration of the time within which the conditions imposed are to be fulfilled.
It is also important to fix the duration or period for the performance of the conditions/obligations in
the donation in resolving the petitioner's claim that prescription has already barred the present
action. I disagree once more with the ruling of the majority that the action of the petitioners is not
barred by the statute of limitations. There is misplaced reliance again on a previous decision of this
Court in Osmea vs. Rama. 6 That case does not speak of a deed of donation as erroneously quoted
and cited by the majority opinion. It speaks of a contract for a sum of money where the debtor herself
imposed a condition which will determine when she will fulfill her obligation to pay the creditor, thus,
making the fulfillment of her obligation dependent upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the donee has not imposed any conditions on the
fulfillment of its obligations. Although it is admitted that the fulfillment of the conditions/obligations of the
present donation may be dependent on the will of the donee as to when it will comply therewith, this did
not arise out of a condition which the donee itself imposed. It is believed that the donee was not meant to
and does not have absolute control over the time within which it will perform its obligations. It must still do
so within a reasonable time. What that reasonable time is, under the circumstances, for the courts to
determine. Thus, the mere fact that there is no time fixed as to when the conditions of the donation are to
be fulfilled does not ipso facto mean that the statute of limitations will not apply anymore and the action to
revoke the donation becomes imprescriptible.
Admittedly, the donation now in question is an onerous donation and is governed by the law on
contracts (Article 733) and the case of Osmea, being one involving a contract, may apply. But we
must not lose sight of the fact that it is still a donation for which this Court itself applied the pertinent
law to resolve situations such as this. That the action to revoke the donation can still prescribe has
been the pronouncement of this Court as early as 1926 in the case of Parks which, on this point,
finds relevance in this case. There, this Court said,
[that] this action [for the revocation of the donation] is prescriptible, there is no doubt.
There is no legal provision which excludes this class of action from the statute of
limitations. And not only this, the law itself recognizes the prescriptibility of the action
for the revocation of a donation, providing a special period of [four] years for the
revocation by the subsequent birth of children [Art. 646, now Art. 763], and . . . by
reason of ingratitude. If no special period is provided for the prescription of the action
for revocation for noncompliance of the conditions of the donation [Art. 647, now Art.
764], it is because in this respect the donation is considered onerous and is
governed by the law of contracts and the general rules of prescription. 7

More recently, in De Luna v. Abrigo, 8 this Court reiterated the ruling in Parks and said that:
It is true that under Article 764 of the New Civil Code, actions for the revocation of a
donation must be brought within four (4) years from the non-compliance of the
conditions of the donation. However, it is Our opinion that said article does not apply
to onerous donations in view of the specific provision of Article 733 providing that
onerous donations are governed by the rules on contracts.
In the light of the above, the rules on contracts and the general rules on prescription
and not the rules on donations are applicable in the case at bar.
The law applied in both cases is Article 1144(1). It refers to the prescription of an action upon a
written contract, which is what the deed of an onerous donation is. The prescriptive period is ten
years from the time the cause of action accrues, and that is, from the expiration of the time within
which the donee must comply with the conditions/obligations of the donation. As to when this exactly
is remains to be determined, and that is for the courts to do as reposed upon them by Article 1197.
For the reasons expressed above, I register my dissent. Accordingly, the decision of the Court of
Appeals must be upheld, except its ruling that the conditions of the donation are resolutory.
Padilla, J., dissents

Separate Opinions
DAVIDE, JR., J., dissenting:
I agree with the view in the majority opinion that the donation in question is onerous considering the
conditions imposed by the donor on the donee which created reciprocal obligations upon both
parties. Beyond that, I beg to disagree.
First of all, may I point out an inconsistency in the majority opinion's description of the donation in
question. In one part, it says that the donation in question is onerous. Thus, on page 4 it states:
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in
the deed of donation executed by Don Ramon Lopez, Sr., give us no alternative but
to conclude that his donation was onerous, one executed for a valuable
consideration which is considered the equivalent of the donation itself, e.g., when a
donation imposes a burden equivalent to the value of the donation . . . . (emphasis
supplied)
Yet, in the last paragraph of page 8 it states that the donation is basically a gratuitous one.
The pertinent portion thereof reads:

Finally, since the questioned deed of donation herein is basically a gratuitous one,
doubts referring to incidental circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and interest . . . (emphasis
supplied)
Second, the discussion on conditional obligations is unnecessary. There is no conditional obligation
to speak of in this case. It seems that the "conditions" imposed by the donor and as the word is used
in the law of donations is confused with "conditions" as used in the law of obligations. In his
annotation of Article 764 of the Civil Code on Donations, Arturo M. Tolentino, citing the well-known
civilists such as Castan, Perez Gonzalez and Alguer, and Colin & Capitant, states clearly the context
within which the term "conditions" is used in the law of donations, to wit:
The word "conditions" in this article does not refer to uncertain events on which the
birth or extinguishment of a juridical relation depends, but is used in the vulgar sense
of obligations or charges imposed by the donor on the donee. It is used, not in its
technical or strict legal sense, but in its broadest sense. 1 (emphasis supplied)
Clearly then, when the law and the deed of donation speaks of "conditions" of a donation, what are
referred to are actually the obligations, charges or burdens imposed by the donor upon the donee
and which would characterize the donation as onerous. In the present case, the donation is, quite
obviously, onerous, but it is more properly called a "modal donation." A modal donation is one in
which the donor imposes a prestation upon the donee. The establishment of the medical college as
the condition of the donation in the present case is one such prestation.
The conditions imposed by the donor Don Ramon Lopez determines neither the existence nor the
extinguishment of the obligations of the donor and the donee with respect to the donation. In fact,
the conditions imposed by Don Ramon Lopez upon the donee are the very obligations of the
donation to build the medical college and use the property for the purposes specified in the deed
of donation. It is very clear that those obligations are unconditional, the fulfillment, performance,
existence or extinguishment of which is not dependent on any future or uncertain event or past and
unknown event, as the Civil Code would define a conditional obligation. 2
Reliance on the case of Parks vs. Province of Tarlac 3 as cited on page 5 of the majority opinion is
erroneous in so far as the latter stated that the condition in Parks is a resolutory one and applied this to
the present case. A more careful reading of this Court's decision would reveal that nowhere did we say,
whether explicitly or impliedly, that the donation in that case, which also has a condition imposed to build
a school and a public park upon the property donated, is a resolutory condition. 4 It is incorrect to say that
the "conditions" of the donation there or in the present case are resolutory conditions because, applying
Article 1181 of the Civil Code, that would mean that upon fulfillment of the conditions, the rights already
acquired will be extinguished. Obviously, that could not have been the intention of the parties.
What the majority opinion probably had in mind was that the conditions are resolutory because if
they are not complied with, the rights of the donee as such will be extinguished and the donation will
be revoked. To my mind, though, it is more accurate to state that the conditions here are not
resolutory conditions but, for the reasons stated above, are the obligations imposed by the donor.

Third, I cannot subscribe to the view that the provisions of Article 1197 cannot be applied here. The
conditions/obligations imposed by the donor herein are subject to a period. I draw this conclusion
based on our previous ruling which, although made almost 90 years ago, still finds application in the
present case. In Barretto vs. City of Manila, 5 we said that when the contract of donation, as the one
involved therein, has no fixed period in which the condition should be fulfilled, the provisions of what is
now Article 1197 (then Article 1128) are applicable and it is the duty of the court to fix a suitable time for its
fulfillment. Indeed, from the nature and circumstances of the conditions/obligations of the present
donation, it can be inferred that a period was contemplated by the donor. Don Ramon Lopez could not
have intended his property to remain idle for a long period of time when in fact, he specifically burdened
the donee with the obligation to set up a medical college therein and thus put his property to good use.
There is a need to fix the duration of the time within which the conditions imposed are to be fulfilled.
It is also important to fix the duration or period for the performance of the conditions/obligations in
the donation in resolving the petitioner's claim that prescription has already barred the present
action. I disagree once more with the ruling of the majority that the action of the petitioners is not
barred by the statute of limitations. There is misplaced reliance again on a previous decision of this
Court in Osmea vs. Rama. 6 That case does not speak of a deed of donation as erroneously quoted
and cited by the majority opinion. It speaks of a contract for a sum of money where the debtor herself
imposed a condition which will determine when she will fulfill her obligation to pay the creditor, thus,
making the fulfillment of her obligation dependent upon her will. What we have here, however, is not a
contract for a sum of money but a donation where the donee has not imposed any conditions on the
fulfillment of its obligations. Although it is admitted that the fulfillment of the conditions/obligations of the
present donation may be dependent on the will of the donee as to when it will comply therewith, this did
not arise out of a condition which the donee itself imposed. It is believed that the donee was not meant to
and does not have absolute control over the time within which it will perform its obligations. It must still do
so within a reasonable time. What that reasonable time is, under the circumstances, for the courts to
determine. Thus, the mere fact that there is no time fixed as to when the conditions of the donation are to
be fulfilled does not ipso facto mean that the statute of limitations will not apply anymore and the action to
revoke the donation becomes imprescriptible.
Admittedly, the donation now in question is an onerous donation and is governed by the law on
contracts (Article 733) and the case of Osmea, being one involving a contract, may apply. But we
must not lose sight of the fact that it is still a donation for which this Court itself applied the pertinent
law to resolve situations such as this. That the action to revoke the donation can still prescribe has
been the pronouncement of this Court as early as 1926 in the case of Parks which, on this point,
finds relevance in this case. There, this Court said,
[that] this action [for the revocation of the donation] is prescriptible, there is no doubt.
There is no legal provision which excludes this class of action from the statute of
limitations. And not only this, the law itself recognizes the prescriptibility of the action
for the revocation of a donation, providing a special period of [four] years for the
revocation by the subsequent birth of children [Art. 646, now Art. 763], and . . . by
reason of ingratitude. If no special period is provided for the prescription of the action
for revocation for noncompliance of the conditions of the donation [Art. 647, now Art.
764], it is because in this respect the donation is considered onerous and is
governed by the law of contracts and the general rules of prescription. 7

More recently, in De Luna v. Abrigo, 8 this Court reiterated the ruling in Parks and said that:
It is true that under Article 764 of the New Civil Code, actions for the revocation of a
donation must be brought within four (4) years from the non-compliance of the
conditions of the donation. However, it is Our opinion that said article does not apply
to onerous donations in view of the specific provision of Article 733 providing that
onerous donations are governed by the rules on contracts.
In the light of the above, the rules on contracts and the general rules on prescription
and not the rules on donations are applicable in the case at bar.
The law applied in both cases is Article 1144(1). It refers to the prescription of an action upon a
written contract, which is what the deed of an onerous donation is. The prescriptive period is ten
years from the time the cause of action accrues, and that is, from the expiration of the time within
which the donee must comply with the conditions/obligations of the donation. As to when this exactly
is remains to be determined, and that is for the courts to do as reposed upon them by Article 1197.
For the reasons expressed above, I register my dissent. Accordingly, the decision of the Court of
Appeals must be upheld, except its ruling that the conditions of the donation are resolutory.
Padilla, J., dissents

G.R. No. L-13768

May 30, 1961

FLORENCIO DEUDOR, ET AL., plaintiffs-appellants,

vs.
J. M. TUASON & CO., INC., ET AL., defendants-appellees.
Laurel Law Office for plaintiffs-appellants.
Claro M. Recto for defendant J. M. Tuason and Co., Inc.
Araneta and Araneta for defendant-appellee Gregorio Araneta, Inc.
CONCEPCION, J.:
Appeal by plaintiffs Florencio, Pedro, Aniana and Maria Deudor, hereinafter referred to as appellants,
from certain orders of the Court of First Instance of Rizal dated February 28, 1958 and January 10,
1958.
Prior to March 16, 1953, J. M. Tuason & Co., Inc., and Gregorio Araneta &Co., Inc., as alleged
owners and attorneys-in-fact of Santa Mesa Heights Subdivision, were involved in Civil Cases Nos.
Q-135, Q-139, Q-174, Q-177 and Q-187 of the Court of First Instance of Rizal. In Case No. Q-135,
entitled "Florencio Deudor, et al. vs. J. M. Tuason & Co., Inc., et al.", plaintiffs, therein, invoking title
under an alleged "informacion posesoria", claimed a parcel of land of about 50 "quiones", or 225
hectares, located in Tatalon, Quezon City, over which J. M. Tuason & Co., Inc., asserted ownership
under the Land Registration Act, by virtue of an original certificate of title, covering a bigger tract and
land, issued way back in 1914. The title of J. M. Tuason & Co., Inc. over portions of said 50
"quiones" was, also, contested in said Civil Cases Nos. Q-139, entitled "J. M. Tuason & Co., Inc.
vs. Agustin de Torres", Q-174, entitled "Apolonio Misericordia vs. J. M. Tuason & Co., Inc.", Q-177,
entitled "Agripino Pascual vs. J. M. Tuason & Co., Inc.", and Q-186, entitled "Macaria Fulgenio vs. J.
M. Tuason & Co., Inc.". On March 16, 1953, these five (5) cases were designated in said agreement,
and will hereinafter be referred to collectively, as the Deudors.
It appears that prior to the institution of said cases, the Deudors had caused the aforementioned
land of about 50 "quiones" to be subdivided into lots and that some of these lots, aggregating
approximately 30 "quiones", were sold to several persons, whose names are set forth in two lists
attached, as Annexes B and C, to said compromise agreement. The Deudors, including appellants
herein, acknowledge edged therein the title, in fee simple, of, J. M. Tuason & Co., Inc. who is
referred to in the agreement as Owners in and to said land of 50 "quiones", and reannounced,
ceded and quitclaimed in its favor whatever right, title or interest they (the Deudors) had over said
property, and, in consideration thereof, J. M. Tuason & Co., Inc. undertook to pay them P1,201,063,
from which the aggregate sum of P486,137.26 would be deducted for certain purposes stated in the
agreement, thereby leaving a balance of P714,295.74, to be paid in the manner and under the
conditions set forth in clause 8, section d, of the Compromise Agreement, as follows:
1. The first payment shall be P100,000.00 and shall be made within sixty (60) days from the date the
decision rendered in the foregoing cases approving this compromise agreement becomes final;
Provided, that within said period the DEUDORS shall have effected the delivery to the OWNERS of
at least 20 quiones, the possessory rights over which have not been sold by the DEUDORS to third
persons, out of the total area of 50 quiones involved herein in such manner that the OWNERS, may
without interruption, proceed with the subdivision and sale of said 20 quiones and likewise deliver
the portions so sold to the buyers thereof, and provided further, that if the DEUDORS FAIL TO
DELIVER said 20 quiones as above specified, then the first payment of P100,000.00 mentioned in
this paragraph shall not be made until after the delivery is effected;

2. If the DEUDORS, within a period of 60 days from the date of decision rendered in the foregoing
cases, should be able to deliver the peaceful and complete possession of the portion of the property
occupied and possessed by the persons listed in Annex 'C' and who are not willing to continue with
their contracts of purchase and such other persons who may later join the ones listed in said Annex
'C', the payments subsequent to that specified in the paragraph immediately preceding shall be
made as follows:

2nd payment
1955 ...............................................

P99,408.79

3rd payment 1956 to be made 1 year

after the date of the 2nd
payment ...........................................

99,408.79

4th payment 1957 to be made 1 year

after the date of the 3rd
payment ...........................................

69,510.50

5th payment 1958 to be made 1 year

after the date of the 4th
payment ............................................

69,510.50

6th payment 1959 to be made 1 year

after the date of the 5th
payment ...........................................

69,510.50

7th payment 1960 to be made 1 year

after the date of the 6th
payment ...........................................

69,510.50

8th payment 1961 to be made 1 year

after the date of the 7th
payment ...........................................

69,510.50

9th payment 1962 to be made 1 year

after the date of the 8th
payment ...........................................

68,555.66

Tota
l ............................................................

P614,925.74

However, in the event that the DEUDORS fail to comply with the conditions set forth in
clause 8, section d, subsection 2, the following shall be the form of payments to be made to
the DEUDORS by the OWNERS, if they make delivery as herinafter set forth; .
If delivery is made after the 60-day period provided for above but before the expiration of one
year from the date of the first payment, the DEUDORS shall receive as second payment the
amount of P99,400.79 two years after the date of the first payment. If delivery is made after
one year from the date of the first payment, the DEUDORS shall receive as second
payment, the amount of P99,408.79 one year after the date of such delivery.
In either case, the succeeding payments as hereinafter provided shall become due one year
from the date of the payment immediately preceding, as follows; .

3rd payment

P 99,408.79

4th payment

69,510.50

5th payment

69,510.50

6th payment

69,510.50

7th payment

69,510.50

8th payment

69,510.50

9th payment

68,555.66

P515,516.95

It was further stipulated in the agreement that "it shall be the joint and solidary obligation of the
Deudors to make the buyers of the lots purportedly sold by them to recognize the title of the
OWNERS over the property purportedly bought by them and to make them sign, when ever possible

new contracts of purchase for said property at the current prices and terms specified by the
OWNERS in their sales of lots known as 'Sta. Mesa Heights Subdivision'"; that "the possession of
the land in question shall be turned over by the Deudors to the owners as herein provided and the
former shall guarantee that during the pendency of the sale of said property, no squatters or
unauthorized persons shall settle or take possession or continue in possession of any portion of said
property"; and that in the event of failure of the Deudors to comply with any of the obligations and
conditions of the agreement, the OWNERS shall have the right to suspend the payments
aforementioned.
This compromise agreement was submitted for approval to the Court, which, after assuring itself that
the parties understood the contents thereof, caused the agreement to be signed in Court, and then
rendered on April 10, 1953, a decision the last two (2) paragraphs of which read:
The parties and their respective attorneys have petitioned this Court that after rendition of
judgment in the above entitled cases, steps be taken, under the supervision of this Court, to
implement said 'Compromise Agreement',and in the interest of justice the Court grants this
last mentioned petition. It should be understood, however, that the implementation to be
taken under the supervision of the Court will not and should not be construed and interpreted
by the parties that it shall be in any way affect this decision on the merits rendered by the
Court.
IN VIEW OF ALL THE FOREGOING, decision is hereby rendered declaring, as it is hereby
declared, that J.M. Tuason & Co., Inc. is the absolute owner of the land involved in these
cases, having in its name a transfer certificate of title issued in accordance with the
provisions of the Land Registration Act, said title being binding and conclusive against the
whole world. It is further ordered that the 'Compromise Agreement' be, as it is hereby
approved in its entirety and all the parties to the same are hereby enjoined to abide and
comply faithfully and strictly with the terms and conditions set forth the said 'Compromise
Agreement'. No pronouncement as costs
The portion of 20 "quiones", mentioned in clause 8, section d, subsection (1), was not delivered by
the Deudors until January 14, 1956, and this was made possible only because the appellees had
agreed to and did advance certain in sums to defray the expenses necessary therefor. On April
6,1956, the Deudors filed a motion praying that the appellees be required to pay them the balance of
the agreed first installment after deducting said advance -- or the sum of P79,800.00. On or about
April 13, 1957,the appellees deposited this amount in Court and at the same filed a "motion and
counter-manifestation" inviting attention to the constructions existing on the undelivered portion of 30
"quiones" and praying that the Deudors be ordered to remove such constructions regardless of
whether the same existed on March 16, 1953, when the compromise Agreement was entered into, or
were made after said date within fifteen (15) days, as well as "to comply strictly with their
obligation to maintain the status quo, with respect to said undelivered portion of 30 'quiones' and to
hold them liable for such damages as may result from their having granted permission to make
additional constructions therein after March 16, 1953".
Soon later, or on April 27, 1956, the appellees filed supplemental motion and "manifestation" praying
that payment of said sum of P79,800.00 to the Deudors "be withheld until after the additional 129
illegal constructions the 30 'quiones' area shall have been removed".
Subsequently, J. M. Tuason & Co., Inc. filed another motion and "manifestation", dated August 8,
1956, to the effect that the number of illegal transactions on said area had increased to 165, that,
meanwhile, several alleged purchasers from the Deudors, not mentioned in the annexes attached to
the Compromise Agreement, had instituted Civil Cases Nos. Q-1889 and Q-1890 of the Court of

First Instance Quezon City, against the Deudors and the appellees, had that, in consequence of
such cases, the amounts payable to the Deudors from the appellees may not be sufficient to satisfy
the claims of the plaintiffs in said cases, and praying, therefore, that appellees' aforementioned
"motion and counter-manifestation" and "supplemental motion and manifestation" of April 13 and 27,
1956, be resolved and that the sum of P79,800.00 be retained to answer for the claims of the
alleged purchasers not mentioned in Annexes B and C of the Compromise Agreement.
Accordingly, on February 28, 1957, the Court issued an order, pertinent parts of which we quote:
The attention of this Court has been called by the J.M. Tuason & Co., Inc. and Gregorio
Araneta, Inc. to the fact that the illegal constructions on the 30 quiones, which constructions
were made from and after the date of the Compromise Agreement are growing in number,
and that as of January 8, 1957 these constructions totalled 215. Whether these constructions
were made with the Deudors' permission as claimed by the J. M. Tuason & Co., Inc. and
Gregorio Araneta, Inc. or without the Deudors' consent as claimed by Atty. Laurel is of no
moment. What is material and pertinent now is that these houses and the continued
constructions of houses appear completely unabated and unless this is stopped by those
who are supposed to be in possession of the land, these very houses within the 30 quiones
will afford very formidable stumbling blocks against further implementation of the
Compromise Agreement. Under the Compromise Agreement, and subject to its other terms
and conditions, these referred to collectively as the Deudors' are obligated, and they have so
bound themselves, to deliver the clear and peaceful possession of the entire 50 quiones to
the OWNERS, J. M. Tuason & Co., Inc. and/or to ATTORNEYS-ON-FACT FOR SANTA
MESA HEIGHTS SUBDIVISION, Gregorio Araneta, Inc.
Under paragraph 3 of the Compromise Agreement, those referred to collectively as, the
'Deudors' claimed to have been in possession of the land, and pursuant to par. 9 of the same
Compromise Agreement, the 'Deudors' bound themselves to deliver possession of the land
in question over to the Owners. It is, therefore, clear to this Court that unless the construction
of houses is abated in some way, the implementation of the Compromise Agreement can
never be effected. The J.M. Tuason & Co., Inc. and Gregorio Araneta, Inc. have asked this
Court to set a period of 15 days within which the 'Deudors' would deliver the possession of
the remaining 30 quiones unto the said companies. The impatience of the J.M. Tuason &
Co., Inc. and Gregorio Araneta, Inc. is understandable, considering that it is almost four
years since the decision became final and yet the 'Deudors' have utterly failed to deliver the
30 quiones. The Compromise Agreement does not state any specified period within which
the 'Deudors' have to definitely comply with their obligations, but in accordance with Article
1197 of the new Civil Code this Court is authorized and empowered to set a period within
which they shall fulfill and comply with all their obligation petitions. This Court is of the
opinion that a period of four (4) months from date hereof is more than ample time within
which the 'Deudors' may comply with their obligations under the Compromise Agreement,
having in mind that more than 42 months have elapsed before the 20 quiones were in fact
delivered, and mostly through the effort of the J.M. Tuason & Co., Inc, and Gregorio Araneta,
Inc. The Court has also in mind that the Compromise Agreement contemplated 60 days from
date thereof for compliance therewith by the parties, and certainly the 60-day period so set
could not reasonably be extended to four years. The Court would like to call the attention of
the parties to the fact that in its decision dated April 10, 1953 the parties were enjoined to
abide by and comply faithfully and strictly with the terms and conditions set forth in the
Compromise Agreement'. Up to the present time, there does not appear to be any sincere or
effective steps taken by any of those referred to collectively as the 'Deudors' in implementing
the Compromise Agreement. The Court, therefore, hereby sets a period of four (4) months
within which the 'Deudors' shall deliver possession of the entire 30 quiones to the J.M.
Tuason & Co., Inc. and Gregorio Araneta, Inc. Failure of the 'Deudors' to so deliver will have

the effect of freeing the J.M. Tuason & Co., Inc. and the Gregorio Araneta, Inc. from all its
obligations under the Compromise Agreement and judgment, and the latter shall thereafter
be entitled to possession of the 30 quiones thru this Court's process.
Counsel for the J.M. Tuason & Co., Inc. and Gregorio Araneta, Inc. have also called the
attention of this Court to the effect that there seem to be other persons who have allegedly
bought lands from the 'Deudors' and who have submitted the corresponding Deeds of Sale
to this Court but whose names have not been included in the lists submitted by the 'Deudors'
to the attorneys of the J.M. Tuason & Co., Inc. and attached to the Compromise Agreement
as Annexes 'B' and 'C'. The Court likewise takes cognizance of the fact that there are
presently pending cases wherein persons have filed complaints praying that the difference in
the price fixed by the Gregorio Araneta, Inc. for the same land should be charged against or
deducted from whatever amount the 'Deudors' would receive from the J.M. Tuason & Co.,
Inc. and Gregorio Araneta, Inc.
This Court believes that it cannot decide the question now, but shall do so in cases properly
brought up before it. It likewise takes cognizance of Civil Cases Nos. Q-1732, Q-1733, Q1746, Q-1799, and Q-1932 filed against the Deudors and J.M. Tuason & Co., Inc. and
Gregorio Araneta, Inc., and other related cases. As to those persons but whose names have
not been included in the lists, Annexes 'B' and 'C' to the Compromise Agreement, the Court
cannot at the present time issue an order without a proper motion from the proper party.
IN VIEW OF ALL THE FOREGOING, . . .,
Those referred to collectively as the 'Deudors' in the Compromise Agreement, namely,
Florencio Deudor, Maria Deudor, Pedro Deudor, Aniana Deudor, Jesus Gamitan Cirilo del
Rosario, Tomas de la Cruz, Rufina Guerrero, Ana Pascual, Alberta Martinez, Ambrosio
Andaya, Donato Fajardo, Eustaquio Alquiros, Agripino Pascual, Macaria Fulgencio, Carlos
Javier, Aurea Misericordia and Feliciano Misericordia, are hereby ordered to clear and
deliver the peaceful possession of the 30 quiones to the J.M. Tuason & Co., Inc. and
Gregorio Araneta, Inc. within a period of four (4) months from date hereof, except such
constructions by those persons who are mentioned in the Compromise Agreement as willing
to continue in the purchase of the parcel of land which they may be occupying and who are
willing to pay the price set by the Gregorio Araneta, Inc. Failure on the part of the persons
named in this paragraph to comply with said order, the Court shall issue such writs, orders
and processes as may be necessary to place the J.M. Tuason & Co., Inc. and Gregorio
Araneta, Inc. in possession of the said 30 quiones.
On April 4, 1957, the Deudors filed a motion for reconsideration, stating that their failure to make
delivery of the 30 "quiones" was not due to their fault; that the period of four (4) months given them
in the order of February 28, 1957, for the delivery of said portion, is too short; that the pendency of
the other cases mentioned in appellees' motion and manifestation dated August 8, 1956, rendered
the aforementioned order premature; and that the Deudors are themselves entitled to an order
directed to the Sheriff for the delivery to the appellees of the litigated property, and praying that said
order of February 28, 1957, be so modified as to delete therefrom all references to the four-month
period for the delivery of the 30 "quiones" and to appellees' discharge from their obligation petitions
under the compromise agreement, and that the Sheriff be ordered "to clear the premises of said 30
'quiones' of all persons unlawfully squatting on or occupying the same or portions thereof."
Gregorio Araneta, Inc. in turn, filed a motion, dated August 16, 1957, alleging, inter alia, that the
Deudors had not delivered the aforementioned portion of 30 "Quiones", despite the expiration of
the period of four (4) months, fixed in the order of February 28, 1957, and that, owing to the failure of

the Deudors to make said delivery, the construction of houses by squatters within said area had
continued so unabated that, as of August 12, 1957, there were 341 constructions therein, and
praying that an order be issued directing the Sheriff of Quezon City to place the appellees "in
possession of the 30 'quiones' subject to these cases, now in the possession" of the Deudors, who
were named individually in said motion.
On January 9, 1958, appellants herein filed a manifestation in which they offered to deliver to the
appellees those portions of the 30 "quiones" on which there are no actual occupants or squatters,
as well as to cooperate with the appellees in pin-pointing the unoccupied and clear areas which they
are ready to deliver and to join the appellees in the filing of appropriate suits for the ejectment of all
persons unlawfully occupying portions of the remaining thirty (30) "quiones" and/or handling
negotiations directed to the same end.
By an order, dated January 10, 1958, the lower court denied the motion for reconsideration of the
Deudors and granted said motion of Gregorio Araneta, Inc. dated August 16, 1957. This order was
amended by another one, dated January 21, 1958, which suspended the resolution of said motion to
Gregorio Araneta, Inc., in compliance with a writ of preliminary injunction issued by the Court of
Appeals.
Appellants maintain that the orders of February 28, 1957 and January 10, 1958, are erroneous, upon
the ground that: (1) the lower court had no authority, either to fix a period of four (4) months for the
delivery of the thirty (30) "quiones" in question, or to declare that the appellees would be free from
their obligations under the Compromise Agreement, should the Deudors fail to make delivery within
said period; (2) the lower court's lack of authority to decide in this case the issues raised in cases Q1732, Q-1733, Q-1746, Q-1799 and Q-1932 thereof, as stated in its order of February 28, 1957,
shows that the same was premature, insofar as it fixed the aforementioned period and stated the
effect of the failure to make delivery within the same; (3) neither did the lower court had authority,
after the expiration of said period, to set aside the Compromise Agreement, to the extent that it
remained unimplemented or executory, and to release the appellees from further obligations under
said agreement and (4) although the lower court held the appellees entitled to a process for the
delivery of the 30 "quiones" to them, it denied appellants' petition for such process in favor of the
same appellees.
With respect to the period fixed by the lower court for the delivery of said 30 "quiones" and the
effect of the failure to deliver the same within said period, it is urged that the order of February 28,
1957, amounted to an amendment of the Compromise Agreement, without the consent of the parties
therein, and of the decision of April 10, 1953, long after the same had become final and executory.
There is no merit in this pretense. Appellants admit that the Compromise Agreement "failed to prove
for a specific period within which the Deudors should deliver possession" of said 30 "quiones".
Upon the other hand, it is clear from the nature of said agreement and the circumstances
surrounding the same that a period was intended by the parties thereto. Indeed, considering that the
appellees had a Torrens title, they had no reason to agree on paying P614,925.74 to the Deudors,
except upon the expectation of delivery of said area without unreasonable delay. Accordingly, said
agreement is subject to the principle set forth in Article 1197 of the Civil Code of the Philippines,
reading:
If the obligation does not fix a period, but from its nature and the circumstances it can be
inferred that a period was intended the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the
debtor.

In every case, the Courts shall determine such period as may under the circumstances have
been probably contemplated by the parties. Once fixed by the courts, the period cannot be
changed by them.
When the authority granted by this provision is exercised by courts, the same do not amend or
modify the obligation concerned. Article 1197 is part and parcel of all obligations contemplated
therein. Hence, whenever a period is fixed pursuant to said Article, the court merely enforces or
carries out an implied stipulation in the contract in question. In fact, insofar as contracts not fixing a
period are concerned, said legal provision applies only if, from the nature and circumstances
surrounding the contract involved, "it can be inferred that a period was intended" by the
parties thereto. For this reason, the last paragraph of Article 1197, ordains that "in every case, the
courts shall determine such period as may under the circumstances have been
probably contemplated by the parties." In other words, in fixing said period, the Court
merely ascertains the will of the parties and gives effect thereto.
Neither does the order of February 28, 1957, amount to an amendment of the decision of April 10,
1953, for the same approved the Compromise Agreement in toto and enjoined the parties "to abide
and comply faithfully with the terms and conditions" thereof. Thus, the agreement became, for all
intents and purposes, incorporated in the decision, and acquired the same force and effect as the
latter. And this is why appellants contend that the order of February 28, 1957 constitutes an
amendment of the decision of April 10, 1953. However, this conclusion of the appellants is legally
untenable, for, as pointed out above, Article 1197 of our Civil Code is part of the Compromise
Agreement, and, consequently, of said decision, so that the application of said Article involved
merely the enforcement of an implied stipulation of the parties to said agreement, and, accordingly,
of an implied provision of the decision itself. As a matter of fact, said decision explicitly declares that
"the parties and their respective attorneys have petitioned this Court that after rendition of judgment .
. . steps be taken . . . to implement the 'Compromise Agreement'" and that "in the interest of justice
the Court grants this petition."
The Deudors insist that, as stated by the lower court in its order of February 28, 1957, it could not
decide in this case the issues raised by a number of claimants, not named in Annexes B and C of
the Compromise Agreement, who had instituted, against the herein appellees and appellants, civil
actions other than those settled by said agreement and that being thus aware that appellants cannot
deliver the 30 "quiones" in question on account of said new civil actions, the lower court still
required them to make said delivery under penalty of forfeiting the right to collect P614,925.74. Thus
appellants would seem to imply that the lower court had imposed upon them an obligation which is
impossible of compliance because of "legal obstacles" to its performance.
The obligation to deliver said 30 "quiones" arose, however, from the fact that appellees were
owners thereof and from the promise made by the Deudors in the Compromise Agreement, not from
the order of February 28, 1957. Moreover, the period within which delivery was to be made it sprang
from the same agreement, as implemented by the court, pursuant to said Article 1197, which,
impliedly, is part of the agreement. Again, appellants represented therein that they were in
possession of the land and in a position to make delivery thereof. Indeed otherwise, appellees would
not have undertaken to pay P614,925.14 to the Deudors. Appellees' right to said delivery was not
conditioned upon appellants' actual ability to make such delivery. Hence, the existence of other
parties who, by instituting judicial proceedings, had put legal obstacles to said delivery, did not affect
appellants' obligation to make it under the Compromise Agreement. In fact, in clause 9 thereof, they
guaranteed "that during the pendency of the sale" of the property in question, "no squatters or
unauthorized persons shall settle or take possession of any portion of said property . . .". In other
words, appellants had assumed the risks concomitant with possible incursions by squatters or other
unauthorized persons, into the aforementioned property.

It is next urged, that in case of appellants' failure to comply with any of their obligations under the
Compromise Agreement, the appellees, pursuant to clause 14 there of, had only the right to suspend
the stipulated payments. It should be noted, however, that appellees would have the obligation to
pay P614,925.74 only "if the Deudors . . . should be able to deliver the peaceful and complete
possession" of the 30 "quiones" in question. Until delivery thereof, appellants had no right,
therefore, to said sum, and, accordingly, appellees had no obligation to pay it. Since, admittedly, said
30 "quiones" have not been delivered, it follows that there is no occasion for the suspension of
appellees' obligation to pay, for they had no such obligation as yet. The stipulation about suspension
of payments referred to non-compliance by appellants of their obligations under the
agreement other than the delivery of the 30 "quiones", for such delivery was a suspensive condition
upon the fulfillment of which the acquisition of the right of the Deudors to said P614,925.74, and the
effectiveness of the obligation of the appellees to pay it, depended.
Because, the order of January 10, 1958, says:
It will be noted that under the agreement, the 'Deudors' are supposed to make delivery of the
areas unconditionally. In fact in several of the conferences preceding the execution on he
final compromise agreement, the registered owners of the and made it clear that they were
agreeing to the settlement only because they wanted to obtain early possession of the whole
property and the 'Deudors' through their counsels warranted hat such possession would be
with J.M. Tuason & Co., Inc. and Gregorio Araneta, Inc. in a matter of months or, at most, in
a year. There is no excuse, therefore, for the failure of the 'Deudors' to deliver the remaining
30 quiones 4 years and 8 months after the execution and approval of the compromise
agreement. The equitable, if not the legal, solution of the problem is the setting aside of the
compromise agreement of March 6, 1953 so far as it still remains unimplemented or
executory. The failure to deliver and the continued mushrooming of houses in the area,
despite the compromise, justify the release of J.M. Tuason & Co., Inc. and Gregorio Araneta,
Inc. from further obligation under the agreement of March 16, 1953.
appellants assert that it was improper for the lower court, in the proceedings for the enforcement of
its decision of April 10, 1953, to set aside the Compromise Agreement, insofar as it still remained
unimplemented or executory, rid to release the appellees from further obligations under said
agreement. The above-quoted paragraph of said order of January 10, 1958, was, however, a mere
exposition of some of the reasons why the lower court granted appellees motion of August 16, 1957,
and denied the motion for reconsideration filed by appellants on April 4, 1957. In any event, said
paragraph is but a faithful statement of the law pertinent to the subject, inasmuch as the period of
four (4) months, given to the Deudors, in said decision for the delivery of the land of 30 "quiones"
to which their rightto collect P614,925.74 was subject as a suspensive condition constituted a
resolutory period. When the same expired with said suspensive condition still unfulfilled, appellants'
right to comply with it was extinguised and the conditional obligation of the appellees to pay said
sum was terminated (Article 1193, Civil Code of the Philippines).
With respect to appellants' claim to the effect that they offered to deliver "portions" of the land of 30
"quiones" on which there are no actual occupants or squatters at present", suffice it to note that,
under clause 8, section d, subsection 2 of the Compromise Agreement, the appellees are bound to
pay P614,925.74 only "if the Deudors ... should be able to deliver the peaceful
and complete possession" of said land of 30 "quiones". In short, delivery of a portion thereof would
not suffice for the acquisition appellants of the right to collect said sum or any part by thereof. The
parties clearly contemplated a full, not partial fulfillment of said condition.
Lastly, appellants say that they have as much right as appellees herein to the execution of the
decision herein, and yet the lower court granted the letter's motion for a writ of execution thereof and

denied a motion of the former to the same effect. It is not true, however, that the two (2) motions
were identical. Appellees prayed that an order be issued directing the Sheriff of Quezon City "to
place them in possession of the 30 'quiones' subject to these cases, now in the possession of"
appellants, whereas appellants' motion was to the effect that an order be issued "commanding the
Sheriff to clear the premises of the, 30 'quiones' from all persons unlawfully squatting on or
occupying the same or portions thereof." It was proper for the lower court to grant appellees' motion,
because the therein sought was directed against appellants who process are bound by the decision
of April 10, 1953. It would have been improper for the lower court to grant appellants' squatters, who
are neither parties in this proceeding nor bound by the aforementioned decision, and, hence, are
beyond the jurisdiction of the court in this case.
WHEREFORE, the orders appealed from are hereby affirmed, with costs against herein appellants,
Florencio, Maria, Aniana and Pedro, all surnamed Deudor. It is so ordered.

[G.R. No. L-3784. October 17, 1952.]

ERNEST BERG, Plaintiff-Appellee, v. MAGDALENA ESTATE, INC., Defendant-Appellant.
Claro M. Recto and Eusebio C. Encarnacion for Appellant.
Alva Hill, Taada, Pelaez & Teehankee for Appellee.
SYLLABUS
1. PARTITION; CONTRACTS AND OBLIGATIONS; STATUTE OF FRAUDS; CONDITIONAL OBLIGATIONS. The
complaint avers that plaintiff and defendant are co-owners of the property known as the Crystal Arcade, the
former being the owner of one-third interest and the latter of the remaining two-thirds. The division is asked
because plaintiff and defendant are unable to agree upon the management of the property and upon the
partition thereof. On the other hand, defendant claims that in 1943 it sold to plaintiff one-third of the
property in litigation subject to the express condition that should either vendor or vendee decide to sell or its
undivided share, the party selling would grant to the other party first an irrevocable option to purchase the
same at the sellers price; that in 1946, plaintiff fixed the sum of P200,000 as the price of said share and
offered to sell it to defendant, which offer was accepted, and for the payment of said price plaintiff gave
defendant a period of time which would expire in May 1947; and that, in spite of its acceptance of the offer,
plaintiff refused to accept the payment of the price, and for this refusal defendant suffered damages in the
amount of P100,000. For these reasons, defendant asks for specific performance. Held: Judgment appealed
from granting the relief prayed for in the complaint is affirmed, although the court is evenly divided as to the
grounds of affirmance.

DECISION

BAUTISTA ANGELO, J.:

This is an action for partition of the property known as Crystal Arcade situated in the City of Manila.
The complaint avers that plaintiff and defendant are co-owners of said property, the former being the owner
of one-third interest and the latter of the remaining two-thirds. The division is asked because plaintiff and
defendant are unable to agree upon the management of the property and upon the partition thereof.
Defendant answered setting up a special defense and a counterclaim. As a special defense, defendant claims
that on September 22, 1943, it sold to plaintiff one-third of the property in litigation subject to the express
condition that should either vendor or vendee decide to sell his or its undivided share, the party selling
would grant to the other party first an irrevocable option to purchase the same at the sellers price. It avers
that in January 1946, plaintiff fixed the sum of P200,000 as the price of said share and offered to sell it to
defendant, which offer was accepted, and for the payment of said price plaintiff gave defendant a period of
time which, including the extensions granted, would expire on May 31, 1947. Defendant claims that, in spite
of its acceptance of the offer, plaintiff refused to accept the payment of the price, and for this refusal
defendant suffered damages in the amount of P100,000. For these reasons, defendant asks for specific
performance.
Plaintiff filed a reply setting forth therein that the transaction referred to by defendant in its special defense
relative to the property in litigation is not supported by any note or memorandum subscribed by the parties,
as in fact no such note or memorandum has been made evidencing the transaction, for which reason,
plaintiff claims, this transaction falls under the statute of frauds and cannot form the basis of the special
defense invoked by defendant.
After trial, at which the parties presented testimonial and documentary evidence, the lower court found for
the plaintiff holding that no agreement has been reached between the parties relative to the purchase and
sale of the property in question, and, recognizing the right of plaintiff to demand partition under the
provisions of Rule 71 of the Rules of Court, it granted the relief prayed for in the complaint. Hence this
appeal.

The pivotal issue to be determined is whether an agreement to sell has actually been reached between
plaintiff and defendant of the share of the former in the property in litigation for the sum of P200,000, as
claimed by defendant, or whether there have been merely negotiations between them which never ripened
into an agreement, as claimed by plaintiff. And in the determination of this issue, the preliminary question to
be threshed out is the point raised by plaintiff touching on the evidence submitted by defendant in the light
of the principle underlying the statute of frauds.
It is an undisputed fact that since September 22, 1943, plaintiff and defendant were co-owners pro indiviso
of the property known as Crystal Arcade in the proportion of one-third interest belonging to the former and
two-thirds to the latter. In the deed of sale executed by the parties on said date, they stipulated that, should
either of them decide to sell his or its undivided share, the other party will have an irrevocable option to
purchase it at the sellers price. Then a disagreement ensued between the parties as to what really occurred
concerning the deal.
Thus, while Berg claims that his negotiations with Hemady ended with an offer by the latter to the former to
buy his interest for the sum of P350,000, Hemady on the other hand claims that Berg offered to sell it to
him for P200,000 subject to the condition that the necessary permit be obtained from the United States
Treasury Department.
It should be stated that, aside from the testimony of Berg and Hemady, no document has been presented
evidencing that alleged agreement to sell, and so when defendant made attempts to prove, through the
testimony of Hemady, that plaintiff made an offer to sell his interest to defendant for the sum of P200,000,
the attempt met the vigorous opposition of plaintiff invoking the rule that such agreement can only be
established by a contract in writing, or by a note or memorandum subscribed by the party sought to be
charged, as prescribed by the statute of frauds. It was then that defendant submitted in evidence exhibits
"3" and "4", contending that these documents, read in connection with the option to sell embodied in exhibit
"1", constitute a written proof contemplated by said statute. The crux of this case, therefore, lies in the
determination of whether said exhibits partake of the nature of a note or memorandum within the purview
of said statute as contended by defendant.
It appears that right after the liberation of the Philippines, both Ernest Berg and K. H. Hemady were accused
of collaboration for which reason the Treasury Department of the United States ordered the freezing of their
properties under the law known as Trading with the Enemy Act. Under the provisions of this Act, both Berg
and Hemady could not sell or dispose of their properties without first securing the permit required by it, and
so to comply with this requirement, both Berg and Hemady filed separately an application with said
Department for the purchase and sale of the property in litigation. These applications are the ones marked
as exhibits "3" and "4." In the application exhibit "3", Ernest Berg stated that he desires a license in order to
sell his interest in the Crystal Arcade, Escolta, Manila, for P200,000 in cash to Magdalena Estate, Inc., asking
at the same time for permission to place the amount in an account in his name or in the name of the
company he represents and to apply the same from time to time to the payment of the obligations of Red
Star Store, Inc. In the application exhibit "4", defendant in turn stated, through its president K. H. Hemady,
that it desires a license in order "to use a portion of the P400,000 requested as a loan from the National City
Bank of New York, Manila, or from any other local bank in Manila, together with funds to be collected from
old and new sales of his real estate properties, for the purchase of the one-third (1/3) of the Crystal Arcade
property in the Escolta, Manila, belonging to Mr. Ernest Berg."
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It is now defendants position that if the option granted in exhibit "1" (deed of sale containing the irrevocable
option) is considered in relation to Bergs application exhibit "3" and defendants application exhibit "4",
these documents constitute a sufficient note or memorandum of the parties alleged contract of purchase
and sale within the purview of the statute of frauds. This claim is disputed by Ernest Berg, appellee herein.
Which of these contentions is correct?
Before we proceed, it is important to state at this juncture some principles governing the meaning, extent
and scope of the rule underlying the statute of frauds relative to the note or memorandum that may serve
as proof to determine the existence of an oral contract or agreement contemplated by it, and for our
purpose, it suffices for us to quote the following authorities:
jgc:chanroble s.com.ph

"No particular form of language or instrument is necessary to constitute a memorandum or note in writing
under the statute of frauds; any document or writing, formal or informal, written either for the purpose of
furnishing evidence of the contract or for another purpose, which satisfies all the requirements of the statute
as to contents and signature, as discussed respectively infra secs. 178-200, and infra secs. 201-215, is a
sufficient memorandum or note. A memorandum may be written as well with lead pencil as with pen and

ink. It may also be filled in on a printed form." (37 C.J.S., 653- 654.)
"The note or memorandum required by the statute of fraud need not be contained in a single document, nor,
when contained in two or more papers, need each paper be sufficient as to contents and signature to satisfy
the statute. Two or more writings properly connected may be considered together, matters missing or
uncertain in one may be supplied or rendered certain by another, and their sufficiency will depend on
whether, taken together, they meet the requirements of the statute as to contents and the requirements of
the statute as to signature, as considered respectively infra secs. 179-200 and secs. 201-215.
"Papers connected. The rule is frequently applied to two or more, or a series of, letters or telegrams, or
letters and telegrams sufficiently connected to allow their consideration together; but the rule is not confined
in its application to letters and telegrams; any other documents can be read together when one refers to the
other. Thus, the rule has been applied so as to allow the consideration together, when properly connected, of
a letter and an order of court, a letter and order for goods, a letter and a deposition, letters or telegrams
and undelivered deeds, wills, correspondence and related papers, a check and a letter, a receipt and a
check, deeds and a map, a memorandum of agreement and a deed, a memorandum of sale and an abstract
of title, a memorandum of sale and a will, a memorandum of sale and a receipt, and a contract, deed, and
instructions to a depository in escrow. The number of papers connected to make out a memorandum is
immaterial." (37 C.J.S. 656-659).
Bearing in mind the foregoing rules, we are of the opinion that the applications marked exhibits "3" and "4",
whether considered separately or jointly, satisfy all the requirements of the statute as to contents and
signature and, as such, they constitute sufficient proof to evidence the agreement in question. And we say
so because in both applications all the requirements of a contract are present, namely, the parties, the price
or consideration, and the subject- matter. In the application exhibit "3", Ernest Berg appears as the seller
and the Magdalena Estate Inc., as the purchaser, the formers interest in the Crystal Arcade as the subjectmatter, and the sum of P200,000 as the consideration. And the application appears signed by Ernest Berg,
the party sought to be charged by the obligation. In other words, it can clearly be implied that between
Ernest Berg and the Magdalena Estate Inc. there has been a clear agreement to sell said property for
P200,000. From the language of the application no other logical conclusion can be drawn for if there has not
been any previous agreement between the parties it is foolhardy to suppose that Ernest Berg would take the
trouble of filing an application with the Treasury Department of the United States to secure a license to sell
the property. The claim of Ernest Berg that the negotiations he had with Hemady ended with an offer on his
part to buy his interest for P350,000 cannot be sustained, for if such is the case it is indeed hard to
comprehend why he should state in his application that he was selling the property for P200,000. The fact
that in the same application Berg also asked for license to place the money in an account in his name, or in
the name of the Company he represents, and to apply the same to the payment of the obligations of said
company is of no consequence, nor does it argue against the purpose of the application, for that request
only means that, should the sale be carried out, he would deposit the money in the name of the company
and later would apply it to the payment of its obligations.
We do not agree with the claim that the application Exhibit "4" submitted by the Magdalena Estate Inc., does
not harmonize with the terms appearing in the application Exhibit "3", for, contrary to the claim, those two
applications, considered together, harmonize and complement each other. And we say so because the
application Exhibit "4" states specifically that a portion of the sum of P400,000 which is desired to be raised
as a loan will be used for the purchase of the one-third interest of Ernest Berg, which portion undoubtedly
refers to the sum of P200,000 mentioned in the application Exhibit "3." This can be plainly seen by
harmonizing together the two applications. As the rule well points out, the sufficiency of the two documents
will depend on whether, taken together, they meet the requirements of the statute as to contents and as to
signature, and here both requirements are met because the two documents should be considered as a
whole. Whether, therefore, we consider the two applications jointly or separately, it is safe to state that they
meet the requirements of the principle underlying the statutes of frauds.
Let us now take up the terms of the agreement to sell, considering that this has been properly established,
to see if defendant has complied with them and can ask now for specific performance. We have already seen
that plaintiff agreed to sell to defendant his undivided one-third interest in the property for the sum of
P200,000. The next question is: within what period shall this consideration be paid? Here there are two
possible theories: one under application Exhibit "3" and the other application Exhibit "4." If we follow the
application Exhibit "3", it is clear that payment is to be made in cash, or as soon as the license has been
granted to effect the transaction. This means that it shall be effected immediately upon obtaining the
license, or within a reasonable time thereafter. It is not disputed that this license was granted, but we find
that defendant failed to make good its offer within a reasonable time for lack of money, it being a fact that

defendant was only able to raise funds for that purpose when it succeeded in selling a portion of its real
estate to a foreign corporation one year thereafter, or on March 14, 1947. It is true that, in its answer,
defendant claims that plaintiff granted to defendant an extension of time up to May 31, 1947, within which
to realize the transaction, but this claim is not supported by any proof. In the opinion of the Court, this delay
has the effect of relieving plaintiff of his obligation under the law (Articles 1124 and 1451, of the old Civil
Code).
Supposing that the term of payment is, as contended by defendant, until defendant has obtained the loan of
P400,000 from the National City Bank of New York, or after it has obtained funds from other sources
(considering the terms of application Exhibit "4"), what is the legal effect of this alternative clause? Can it be
considered a term within the meaning of our old Civil Code? Let us analyze it. Under article 1125 of said
code, obligations, for the fulfilment of which a day certain has been fixed, shall be demandable only when
the day arrives. A day certain is understood to be that which must necessarily arrive, even though it is not
known when. In order that an obligation may be with a term, it is, therefore, necessary that it should arrive,
sooner or later; otherwise, if its arrival is uncertain, the obligation is conditional. To constitute a term the
period must end on a day certain.
Viewing in this light the clause on which defendant relies for the enforcement of its right to buy the property,
it would seem that it is not a term, but a condition. Considering the first alternative, that is, until defendant
shall have obtained a loan from the National City Bank of New York, it is clear that the granting of such loan
is not definite and cannot be held to come within the terms "day certain" provided for in the Civil Code, for it
may or it may not happen. As a matter of fact, the loan did not materialize. And if we consider that the
period given was until such time as defendant could raise money from other sources, we also find it to be
indefinite and contingent, and so it is also a condition and not a term within the meaning of the law. In any
event, it is apparent that the fulfilment of the condition contained in this second alternative is made to
depend upon defendants exclusive will, and viewed in this light, we are of the opinion that plaintiffs
obligation to sell did not arise, for, under article 1115 of the old Civil Code, "when the fulfilment of the
condition depends upon the exclusive will of the debtor the conditional obligation shall be void."
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Having reached the foregoing conclusion, we find no legal way by which plaintiff could be compelled to carry
out the terms of his agreement to sell considering the circumstances surrounding the transaction. To our
mind, it is clear that there was an agreement to sell between the parties under the terms appearing in the
applications Exhibits "3" and "4." But it also appears that plaintiff has decided to agree to sell his interest
because of his need of money at the time. He needed it not only for his immediate needs but to pay the
obligations of his own company, the Red Star Stores, Inc. At that time the values of real estate were fast
moving. They were going up in a rapid fashion. Time element was then of the essence of every transaction,
and the parties knew it. When, therefore, more than a year had transpired since the negotiations started
and defendant failed to come across, plaintiff changed his mind. The interest of defendant to purchase the
share of plaintiff in the property is understandable, not only because of the advisability to consolidate its
ownership in said property, but because it was a handsome transaction with a brighter prospect in the
future. But it is to be regretted that both Berg and Hemady who were both experienced businessmen did not
put the terms of their agreement clearly in writing. Had they done so perhaps this case would have been
avoided.
Finding no error in the decision appealed from, the same is hereby affirmed, with costs against Appellant.
Pablo, Padilla and Montemayor, JJ., concur.
Separate Opinions
BENGZON, J.:

I concur in the result. I believe no agreement has been duly proved.

LABRADOR, J., concurring:

chanrob1es virtual 1aw library

I concur. There might be some objection to considering Exhibit 3 (application of Ernest Berg with the United
States Treasury Department to sell his interest in the Crystal Arcade Building for P200,000 cash) and Exhibit
4 (application of the Magdalena Estate, Inc., with the United States Treasury Department for a portion of the
P200,000 requested as loan from the National City Bank of New York to purchase one-third of the Crystal

Arcade Building belonging to Ernest Berg) as notes or memoranda of the contract entered into between the
parties for the sale of the property, within the meaning of the statute of frauds. In some jurisdictions it is
held that in order to comply with the requirements of the statute of frauds a letter must be sent to the
contracting parties or his agent (27 C. J. S., sec. 386, p. 302). Such a rule is the one adopted in the State of
New Jersey. But in the Code of Civil Procedure of the State of California (sections 1973-1974), from which
our original statute of frauds was taken (section 335 of Act No. 190), the rule is that a letter or telegram of
the party sought to be charged to a third person may be considered as a sufficient memorandum within the
meaning of the statute. Ibid.; Moss v. Atkinson, 44 Cal. 3). This doctrine is also followed in Kansas, Missouri,
New York, Iowa, North Carolina, New England, and Ontario. (See footnotes to 27 C.J.S. 302.) In a case
decided in Kansas it was expressly held:
chanrob1es virtual 1aw library

Nor is it necessary, in the case of a memorandum in the form of a letter, that it should be addressed to the
vendee. Letters to a third person are sufficient memoranda. Browne, St. Frauds (5th Ed.) Sec. 354a. "The
principle upon which these decisions are based we understand to be that the statute was not intended to
apply to written contracts, out to the information of oral contracts when properly evidenced, as by the
admission in writing of the party to be charged. If the party sought to be charged has in writing admitted
the contract, this is sufficient, as we understand, to take the case out of the statute, no matter to whom the
writing may have been addressed." Warfield v. Cranberry Co., 33 Iowa, 312, 19 N.W. 224. (Miller v. Kansas
City, Ft. S. & M. R. Co., Et Al., 58 Kan. 189, 48 P. 853, 854).
As section 21 of Rule 123, Rules of Court, our statute of frauds when the communications to the United
States Treasury Department were sent by the parties to this case, is a rule of evidence (as to the character
of the new provision [article 1403] of the New Civil Code, quaere), and the written memorandum is not the
contract itself, but merely evidence thereof, it is not necessary for the admission as evidence of any note or
memorandum signed by a party thereto, that it be signed by, or addressed to, the other also.
Defendant-appellants counterclaim to compel plaintiff-appellee to sell the property must, however, be
denied, for the reason that the conditions under which the contract to sell were to be carried out did not
materialize within a reasonable time after it was entered into, and both parties, upon failure of the
contingencies relied upon, impliedly withdrew therefrom. The agreement was that the sale shall be carried
out when the vendor will get the necessary permit to sell from the United States Treasury Department, and
the Magdalena Estate, Inc., will get the loan from the National City Bank of New York with which to pay the
price. These conditions are suspensive. The sale was to be carried out only if these should materialize.
En el segundo parrafo del articulo 1.113 y en el 1.114 inicia el Codigo la clasificacion mas importante de las
condiciones en suspensivas y resolutorias, desenvolviendola luego en los articulos 1.122 y siguientes, al
determinar los efectos, consecuencia del complimiento de unas y otras. Su diferencia es bien clara; unas y
otras influyen en la existencia de la obligacion, pero por modos diametralmente opuestos: si la condicion
suspensiva se cumple, la obligacion surge; si se cumple la resolutoria, la obligacion se extingue; si la una no
se realiza, el vinculo de derecho no llega a aparecer; si la otra no se verifica, la relacion de derecho se
consolida; mientras dura la duda, la obligacion, en el primer caso, no aparece, pero su existencia es una
esperanza; y en el segundo, surte sus efectos, pero pesa sobre ella una amenaza de caducidad. (8 Manresa,
122.)
That they were suspensive conditions may be inferred from their conduct. The defendant-appellants
manager did not demand that the sale be carried out until after the filing of the complaint in the month of
April, 1947, or fully one year after the contract to sell had been agreed upon. Berg, the vendor, also raised
the funds he needed for his business by selling a property of his in Quezon City to the vendee itself.
(Deposition of Ernest Berg, Exhibit A, p. 4.) During all the time that they were in continuous correspondence
regarding the administration of the property, never was a word said about carrying out the sale. All these
show that they actually desisted from carrying out the terms of the contract to sell.
Paras, C.J. and Jugo, J., concur.

FIRST DIVISION
[G.R. No. L-3019. February 9, 1907. ]
LA COMPAIA GENERAL DE TABACOS DE FILIPINA, Plaintiff-Appellee, v. VICENTE
ARAZA, Defendant-Appellant.
T. L. McGirr, for Appellant.
Domingo Franco, for Appellee.
SYLLABUS
1. CONTRACT; DEBT; ACTION. Where a debt is payable in installments, recovery can be had only for
those installments due and payable when the action was commended, in the absence of any stipulation to
the contrary in the contract.
2. ID.; ID.; INTEREST; DEMAND. Where the contract, not being a mercantile loan, does not provide for
interest nor expressly say that failure to pay when due constitutes a default, no interest can be recovered
until a demand for payment is made.

DECISION

WILLARD, J. :

The plaintiff brought this action in the court below to foreclose a mortgage for 8,000 pesos upon certain land
in the Province of Leyte. A demurrer to the complaint was overruled, but to the order overruling it the
defendant did not except. The defendant answered, alleging that the document, the basis of the plaintiffs
claim, was executed through error on his part and through fraud on the part of the plaintiff. A trial was had
and judgment was entered for the plaintiff as prayed for in its complaint. The defendant moved for a new
trial on the ground that the decision was not justified by the evidence, this motion was denied, to its denial
the defendant excepted, and he has brought the case here for review.
Upon the questions of fact raised by the answer, the findings of the court below are sustained by the
evidence, in no event they can be said to be plainly and manifestly against the weight of the evidence.
Those findings include a finding that there was no fraud on the part of the plaintiff, no mistake on the part of
the defendant, and that there was a sufficient consideration for the contract, As has been said, there was in
the case to support all of these conclusions.
Upon one point, however, we think that the judgment was erroneous. The contract send upon was executed
on the 11th day of June, 1901. By terms thereof the defendant promised to pay the plaintiff 8,000 pesos as
follows: 500 pesos on the 30th of June, 1901, and the remainder at the rate of 100 pesos a month, payable
on the 30th day of each month, until the entire 8,000 pesos was paid. The defendant paid 400 pesos and no
more.
This suit was commenced on the 12th day of June, 1903. There was no provision in the contract by which,
upon failure to pay one installment of the debt, the whole debt should thereupon become at once payable.
We are of the opinion that the obligation can be enforced in this action for only the amount due and payable
on the 12th day of June, 1903.
The court below gave no credit for the payment of 400 pesos admitted by the complaint to have been
received by the plaintiff. It is allowed interest upon the entire debt from the 1st day of July, 1901. The
contract does not provide for the payment of any interest. There is no provision in it declaring expressly that
the failure to pay when due should put the debtor in default. There was therefore no default which would
make him liable for interest until a demand was made. (Civil Code, art. 1100; Manresa, Com. on Civil Code,
vol 8, p. 56.) The transaction did not constitute a mercantile loan and article 316 of the Code of Commerce
is not applicable. There was no evidence any demand prior to the presentation of the complaint. The plaintiff
is therefore entitled to interest only from the commencement of the action.

The judgment is set aside and the case is remanded to the court below with directions to determine the
amount due in accordance with the views hereinbefore expressed and to enter judgment for such amount.
No costs will be allowed to either party in this court. So ordered.

G.R. No. 142378

March 7, 2002

LL AND COMPANY DEVELOPMENT AND AGRO-INDUSTRIAL CORPORATION, petitioner,

vs.
HUANG CHAO CHUN AND YANG TUNG FA, respondents.
PANGANIBAN, J.:
A stipulation in a lease contract stating that its five-year term is subject to "an option to renew" shall
be interpreted to be reciprocal in character. Unless the language shows an intent to allow the lessee
to exercise it unilaterally, such option shall be deemed to benefit both the lessor and the lessee who
must both consent to the extension or renewal, as well as to its specific terms and conditions.
Statement of the Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the October 29,
1999 Decision1and the March 9, 2000 Resolution2 of the Court of Appeals3 (CA) in CA-GR SP No.
50618. The decretal portion of the Decision reads as follows:
"WHEREFORE, the petition for review is hereby DISMISSED for lack of merit." 4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The CA sustained the Decision of the Regional Trial Court (RTC) of Quezon City (Branch 217),
which had disposed as follows:
"WHEREFORE, premises considered, the Decision appealed from is AFFIRMED insofar as it
dismissed the complaint and it extended the lease contract up to September 16, 2001; and is
MODIFIED such that, defendants-appellees are ordered to pay plaintiff-appellant the amount
of P444,800.00 less 5% as withholding tax, as their rentals on subject premises from July 16,
1994 to November 13, 1994.
"Costs against the plaintiff-appellant."5
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
"[The present case] originated from an unlawful detainer case filed by petitioner before the
Metropolitan Trial Court of Quezon City on October 9, 1996 which was docketed as Civil
Case No. 16349.
"In its Complaint, petitioner alleged that respondents Huang Chao Chun and Yang Tung Fa
violated their amended lease contract over a 1,112 square meter lot it owns, designated as
Lot No. 1-A-1, when they did not pay the monthly rentals thereon in the total amount
of P4,322,900.00. It also alleged that the amended lease contract already expired on

September 16, 1996 but respondents refused to surrender possession thereof plus the
improvements made thereon, and pay the rental arrearages despite repeated demands.
"The amended lease contract was entered into by the parties sometime in August, 1991.
[Exact day is not mentioned in amended contract]. The same amended the lease contract
previously entered into by the parties on August 8, 1991. The amended contract contains the
following provisions:
'1. That the LESSOR agrees as by the[se] presents hereby agreed to change the lot
from LOT 1-A-2 with an area of 1,091 sq. meters, to LOT 1-A-1 with an area of 1,112
sq. meters, covered by the same TCT No. 219417 and located at the same address
at No. 2 Scout Chuatuco Street, Quezon City, Metro Manila.
'2. The monthly rental shall be the same at P100.00 per square meters
and/or P111,200.00 per month, Philippine Currency. All other terms and conditions
are the same for strict compliance thereof'.
"The terms and conditions referred to in paragraph 2 above are the following:
'1. x x x It is expressly agreed and understood that the payment of the rental herein
stipulated shall be made without the necessity of express demand and without delay
on any ground whatsoever.
'2. The term of this lease is FIVE (5) YEARS from the effectivity of said lease, and
with the option to renew, specifically shall commence from September 15, 1991 and
shall expire on September 16, 1996, and maybe adjusted depending upon the
ejectment of tenants.
'3. The LESSEES shall have the option to reconstruct and/or renovate the
improvement found thereon at the expense of the LESSEES, and whatever
improvement introduced therein by the LESSEES in the premises the ownership of it
shall become the property of the LESSOR without extra compensation of the same.
'4. Upon signing of this Contract of Lease, the LESSEES shall make a one (1) year
deposit to be paid unto the LESSOR us follows:
'50% percent upon signing of this Contract of Lease;
'50% percent as payment in full of the one (1) year deposit. Payment of which
shall be made unto the LESSOR on the day of the effectivity date of the
Contract of Lease, said deposit shall be refundable 30 days prior to the
termination of the same.
'5. The monthly rental is subject to increase, said increase shall be based upon the
imposition of Real Estate Tax for every two (2) years upon presentation of the

increased real estate tax to the Le[ssees], but said increase shall not be less than
25% percent.
"x x x

xxx

xxx

'9. The parties agree as by these presents have agreed to strictly observe the terms
and conditions of the Contract of Lease. Violation by the Lessees of any of the terms
and condition of said contract is equivalent to forfeitures of the deposit in favor of the
Lessor, furthermore the Lessees agreed to vacate the lease[d] premises for any
violation of the terms and condition of said contract, without going to court.'
"Respondent were joined by the Tsai Chun International Resources Inc. in their answer to
the Complaint, wherein they alleged that the actual lessee over Lot No. 1-A-1 is the
corporation.
"Respondents and the corporation denied petitioner's allegations, claiming instead that:
"1. The amended lease contract did not reflect the true intention of the parties because it did
not contemplate an obsolete building that can no longer be renovated, such that petitioner
did not become the owner of the new P24,000,000.00 two-storey building they introduced on
Lot No. 1-A-1 when their contract expired.
"2. Their failure to pay the monthly rentals on the property was due to petitioner's fault when
it attempted to increase the amount of rent in violation of their contract; and
"3. They are entitled to a renewal of their contract in view of the provision therein providing
for automatic renewal, and also in view of the P24,000,000.00 worth of improvements they
introduced on the leased premises.
"After the parties were accorded their respective rights to due process of law, Branch 32 of
the MTC rendered decision on June 23, 1998, the decretal portion of which reads:
'WHEREFORE, premises considered, the Court hereby orders the dismissal of this
case, without pronouncement as to costs.
'SO ORDERED.'
"The aforequoted decision was premised on the resolution of two issues:
'(a) 'Whether or not the Contract of Lease dated August 8, 1991 had expired;' and
'(b) 'Did defendants and/or the corporation incur rental arrearages.'
"The MTC ruled that the contract entered into by the parties may be extended by the lessees
for reasons of justice and equity, citing as its legal bases the case of 'Legarda Koh v.
Ongsi[a]co' (36 Phil. [185]) and 'Cruz v. Alberto' (39 Phil. 991). It also ruled that the

corporation's failure to pay the monthly rentals as they fell due was justified by the fact that
petitioner 'refused to honor the basis of the rental increase as stated in their Lease
Agreement."6 (Citations omitted)
Ruling of the Trial Court
The RTC affirmed the Decision of the Metropolitan Trial Court (MeTC) dismissing the unlawful
detainer case. The RTC likewise agreed that the Contract of Lease entered into by the parties could
be extended unilaterally by the lessees for another five years or until September 16, 2001, on the
basis of justice and equity.
It also held that the parties had a reciprocal obligation: unless and until petitioner presented "the
increased realty tax," private respondents were not under any obligation to pay the increased
monthly rental.7
In addition, the RTC ruled that petitioner was not entitled to legal interest, and that the 25 percent
increase provided in the Contract of Lease should be based on the imposed real estate tax, not on
the monthly rental.
Ruling of the Court of Appeals
The Court of Appeals affirmed in toto the RTC's dismissal of the unlawful detainer case and
extension of the lease period for another five years, holding that the errors raised had already been
fully taken into account by the two courts below.
It also reasoned that "[t]he elliptical construction of paragraph 5 of the Lease Contract made it
awkward to the point of being ambiguous." There being no agreement on the "proven rent," an
ejectment suit based on "the non-payment of rents that were not agreed upon x x x will not lie."
Hence, this Petition.8
Issues
In its Memorandum, petitioner raises the following issues for the Court's consideration:
I
"Whether the court could still extend the term of the lease, after its expiration. Is expiration of
the lease a proper ground in [a] case of unlawful detainer[?]
II
"Whether non-payment of rentals is a ground to eject, in an unlawful detainer. Is refusal of
the lessor to accept or collect rentals a valid reason for non-payment of rentals[?]
III

"May the court allow the introduction of issues other than the elements of a case for
ejectment[?]"9
This Court's Ruling
The Petition is meritorious.
First Issue:
Extension of Lease Period
Petitioner contends that because the Contract, as amended, had already expired, the MTC had no
power to extend the lease period. We are convinced.
In general, the power of the courts to fix a longer term for a lease is discretionary. Such power is to
be exercised only in accordance with the particular circumstances of a case: a longer term to be
granted where equities demanding extension come into play; to be denied where none appear -always with due deference to the parties' freedom to contract. 10 Thus, courts are not bound to extend
the lease.11
Article 1675 of the Civil Code excludes cases falling under Article 1673 from those under Article
1687. Article 1673 provides among others, that the lessor may judicially eject the lessee upon the
expiration of "the period agreed upon or that which is fixed for the duration of the leases." Where no
period has been fixed by the parties,12 the courts, pursuant to Article 1687, have the potestative
authority to set a longer period of lease.13
In the case before us, the Contract of Lease provided for a fixed period of five (5) years -"specifically" from September 16, 1991 to September 15, 1996. Because the lease period was for a
determinate time, it ceased, by express provision of Article 1669 of the Civil Code, "on the day fixed,
without need of a demand."14 Here, the five-year period expired on September 15, 1996, whereas the
Complaint for ejectment was filed on October 6, 1996. Because there was no longer any lease that
could be extended, the MeTC, in effect, made a new contract for the parties, a power it did not
have.15 Early on, in Bacolod-Murcia Milling v. Banco Nacional Filipino,16 we said that a court could not
supply material stipulations to a contract, as follows:
"It is not the province of the court to alter a contract by construction or to make a new
contract for the parties; its duty is confined to the interpretation of the one which they have
made for themselves, without regard to its wisdom or folly, as the court cannot supply
material stipulations or read into contract words which it does not contain."
Furthermore, the extension of a lease contract must be made before the term of the agreement
expires, not after.17 Upon the lapse of the stipulated period, courts cannot belatedly extend or make a
new lease for the parties,18 even on the basis of equity.19 Because the Lease Contract ended on
September 15, 1996, without the parties reaching any agreement for renewal, respondents can be
ejected from the premises.20

On the other hand, respondents and the lower courts argue that the Contract of Lease provided for
an automatic renewal of the lease period. We are not persuaded.
Citing Koh v. Ongsiaco21 and Cruz v. Alberto,22 the MeTC -- upheld by the RTC and the CA -- ruled
that the stipulation in the Contract of Lease providing an option to renew should be construed in
favor of and for the benefit of the lessee.23 This ruling has however, been expressly reversed
in Fernandez v. CA, from which we quote:24
"It is also important to bear in mind that in a reciprocal contract like a lease, the period of the
lease must be deemed to have been agreed upon for the benefit of both parties, absent
language showing that the term was deliberately set for the benefit of the lessee or lessor
alone. We are not aware of any presumption in law that the term of a lease is designed for
the benefit of the lessee alone. Koh and Cruz in effect rested upon such a presumption. But
that presumption cannot reasonably be indulged in casually in an era of rapid economic
change, marked by, among other things, volatile costs of living and fluctuations in the value
of the domestic currency. The longer the period the more clearly unreasonable such a
presumption would be. In an age like that we live in, very specific language is necessary to
show an intent to grant a unilateral faculty to extend or renew a contract of lease to the
lessee alone, or to the lessor alone for that matter. We hold that the above-quoted rulings
in Koh v. Ongsiaco and Cruz v. Alberto should be and are overruled."25
The foregoing doctrine was recently reiterated in Heirs of Amando Dalisay v. Court of
Appeals.26 Thus, pursuant to Fernandez, Dalisay and Article 119627 of the Civil Code, the period of
the lease contract is deemed to have been set for the benefit of both parties. Its renewal may be
authorized only upon their mutual agreement or at their joint will. 28 Its continuance, effectivity or
fulfillment cannot be made to depend exclusively upon the free and uncontrolled choice of just one
party. While the lessee has the option to continue or to stop paying the rentals, the lessor cannot be
completely deprived of any say on the matter.29 Absent any contrary stipulation in a reciprocal
contract, the period of lease is deemed to be for the benefit of both parties. 30
In the instant case, there was nothing in the aforesaid stipulation or in the actuation of the parties
that showed that they intended an automatic renewal or extension of the term of the
contract.31 First, demonstrating petitioner's disinterest in renewing the contract was its letter 32 dated
August 23, 1996, demanding that respondents vacate the premises for failure to pay rentals since
1993. As a rule, the owner-lessor has the prerogative to terminate the lease upon its
expiration.33 Second, in the present case, the disagreement of the parties over the increased rental
rate and private respondents' failure to pay it precluded the possibility of a mutual renewal. Third, the
fact that the lessor allowed the lessee to introduce improvements on the property was indicative, not
of the former's intention to extend the contract automatically,34 but merely of its obedience to its
express terms allowing the improvements. After all, at the expiration of the lease, those
improvements were to "become its property."
As to the contention that it is not fair to eject respondents from the premises after only five years,
considering the value of the improvements they introduced therein, suffice it to say that they did so
with the knowledge of the risk -- the contract had plainly provided for a five-year lease period.

Parties are free to enter into any contractual stipulation, provided it is not illegal or contrary to public
morals. When such agreement, freely and voluntarily entered into, turns out to be disadvantageous
to a party, the courts cannot rescue it without crossing the constitutional right to contract. They are
not authorized to extricate parties from the necessary consequences of their acts, and the fact that
the contractual stipulations may turn out to be financially disadvantageous will not relieve the latter of
their obligations.35
Second Issue:
Non-Payment of Rentals
Petitioner further argues that respondents should be ejected for nonpayment of the new rental rates.
On the other hand, the latter counter that they did not agree to these new rates. True, mere failure to
pay rentals does not make possession unlawful, but when a valid demand to vacate the premises is
made by the lessor, the lessee's continued withholding of possession becomes unlawful. 36 Wellsettled is the rule that the failure of the owners/lessors to collect or their refusal to accept the rentals
is not a valid defense.37
Respondents justify their nonpayment of rentals on the ground that petitioners refused to accept
their payments. Article 1256 of the Civil Code, however, provides that "if the creditor to whom tender
of payment has been made refuses without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum." This provision is more explicit under the Rent
Control Law,38 the pertinent portions of which are similar to the prevailing law -- the Rental Reform
Act of 200239 -- which we reproduce hereunder:
"Section 7. Grounds for Judicial Ejectment.-Ejectment shall be allowed on the following
grounds:
"(a) Assignment of lease or subleasing of residential units in whole or in part, including the
acceptance of boarders or bedspacers, without the written consent of the owner/lessor.
"(b) Arrears in payment of rent for a total of three (3) months: Provided, That in the case of
refusal by the lessor to accept payment of the rental agreed upon, the lessee may either
deposit, by way of consignation, the amount in court, or with the city or municipal treasurer,
as the case may be, or in a bank in the name of and with notice to the lessor, within one
month after the refusal of the lessor to accept payment.
"The lessee shall thereafter deposit the rental within ten days of every current month. Failure
to deposit the rentals for three (3) months shall constitute a ground for ejectment. If an
ejectment case is already pending, the court upon proper motion may order the lessee or
any person or persons claiming under him to immediately vacate the leased premises
without prejudice to the continuation of the ejectment proceedings. At any time, the lessor
may, upon authority of the court, withdraw the rentals deposited.

"The lessor, upon authority of the court in case of consignation or upon joint affidavit by him
and the lessee to be submitted to the city or municipal treasurer and to the bank where
deposit was made, shall be allowed to withdraw the deposits.
xxx

xxx

xxx

"(e) Expiration of the period of the lease contract."40

On the other hand, the Civil Code provides as follows:
"Art. 1673. The lessor may judicially eject the lessee for any of the following causes:
"(1) When the period agreed upon, or that which is fixed for the duration of lease under
Articles 1682 and 1687, has expired;
"(2) Lack of payment of the price stipulated;
"(3) Violation of any of the conditions agreed upon in the contract;
"(4) When the lessee devotes the thing leased to any use or service not stipulated which
causes the deterioration thereof; or if he does not observe the requirement in No. 2 of Article
1657, as regards the use thereof.
"The ejectment of tenants of agricultural lands is governed by special laws."
Based on the foregoing, respondents should have deposited in a bank or with judicial authorities the
rent based on the previous rate.41 In the instant case, respondents failed to pay the rent from
October 1993 to March 1998 or for four (4) years and three (3) months. They should remember that
Article 1658 of the Civil Code provides only two instances in which the lessee may suspend payment
of rent; namely, in case the lessor fails to make the necessary repairs or to maintain the lessee in
peaceful and adequate enjoyment of the property leased.42 None of these is present in the case at
bar.
Moreover, the mere subsequent payment of rentals by the lessee and the receipt thereof by the
lessor does not, absent any other circumstance that may dictate a contrary conclusion, legitimize the
unlawful character of the possession. The lessor may still pursue the demand for ejectment. 43
Having said that, we cannot, on the other hand, authorize a unilateral increase in the rental rate,
considering that (1) the option to renew is reciprocal and, thus, the terms and conditions thereof -including the rental rate -- must likewise be reciprocal; and (2) the contracted clause authorizing an
increase -- "upon presentation of the increased real estate tax to lessees" -- has not been complied
with by petitioner.
Third Issue:
Issues on Ejectment

Petitioner proceeds to argue that the MeTC should not have allowed the intervention of the Tsai
Chun International Resources, Inc., allegedly the real lessor of the leased premises. In view of our
foregoing discussion, there is no more need to rule on this issue.
WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. Respondents and
all persons claiming rights under them are hereby ORDERED TO VACATE the subject premises and
to restore peaceful possession thereof to petitioner. They are also DIRECTED TO PAY the accrued
rentals (based on the stipulated rent) from October 1993 until such time that they vacate the subject
property, with interest thereon at the legal rate. No pronouncement as to costs.
SO ORDERED.
Melo, Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.

EN BANC
[G.R. No. L-13768. May 30, 1961.]
FLORENCIO DEUDOR, ET AL., Plaintiffs-Appellants, v. J.M. TUASON & CO., INC., ET
AL., Defendants-Appellees.
Laurel Law Office, for Plaintiffs-Appellants.
Claro M. Recto for defendant J. M. Tuason & Co., Inc.
Araneta & Araneta for defendant-appellee Gregorio Araneta, Inc.

SYLLABUS

1. OBLIGATIONS AND CONTRACTS; OBLIGATIONS WITHOUT A PERIOD; WHEN COURTS MAY FIX A PERIOD.
Article 1197 of the Civil Code is part and parcel of all obligations contemplated therein. Hence, whenever
a period is fixed pursuant thereto, the court does not amend or modify the obligation concerned, but merely
enforces or carries out an implied stipulation in the contract. In fact, insofar as contracts not fixing a period
are concerned, said legal provision applies only if, from the nature and circumstances surrounding the
contract involved, "it can be inferred that a period was intended" by the parties thereto. For this reason, the
last paragraph of Article 1197 ordains that "in every case, the courts shall determine such period as may
under the circumstances have been probably contemplated by the parties." In other words, in fixing said
period, the court merely ascertains the will of the parties and gives effect thereto.
2. ID.; ID.; ID.; COMPROMISE AGREEMENT HAS THE SAME FORCE AND EFFECT AS THE DECISION. A
compromise agreement approved by the court and incorporated in its decision, acquires the same force and
effect as the latter. If the said agreement does not fix a period, and it can be interred that a period was
intended by the parties, Article 1197 of the Civil Code should be applied. Its application involves merely the
enforcement of an implied stipulation of the parties to said agreement, and, accordingly, of an implied
provision in the decision itself.

DECISION

CONCEPCION, J.:

Appeal by plaintiffs Florencio, Pedro, Aniana and Maria Deudor, hereinafter referred to as appellants, from
certain orders of the Court of First Instance of Rizal dated February 28, 1957 and January 10, 1958.
Prior to March 16, 1953, J. M. Tuason & Co., Inc., and Gregorio Araneta & Co., Inc., as alleged owners and
attorneys-in-fact of Santa Mesa Heights Subdivision, were involved in Civil Cases Nos. Q-135, Q- 139, Q174, Q-177 and Q-187 of the Court of First Instance of Rizal. In Case No. Q-135, entitled "Florencio Deudor,
Et. Al. v. J. M. Tuason & Co., Inc., Et. Al.", plaintiffs therein, invoking title under an alleged "informacion
posesoria", claimed a parcel of land of about 50 "quiones", or 225 hectares, located in Tatalon, Quezon
City, over which J. M. Tuason Co., Inc. asserted ownership under the Land Registration Act, by virtue of an
original certificate of title, covering a bigger tract of land, issued way back in 1914. The title of J. M. Tuazon
& Co., Inc. over portions of said 50 "quiones" was, also contested in said Civil Cases Nos. Q-139, entitled
"J. M. Tuazon & Co., Inc. v. Agustin de Torres", Q-174, entitled" Apolonio Misericordia v. J. M. Tuason & Co.,"
Inc., Q-177, entitled" Agripino Pascual v. J. M. Tuason & Co., Inc.," and Q-186, entitled" Macaria Fulgencio v.
J. M. Tuason & Co., Inc." On March 16, 1953, these five (5) cases were settled by a compromise agreement
between J. M. Tuason & Co., Inc. and Gregorio Araneta & Co., Inc., on the one hand, hereinafter referred to
as the appellees, and all of the other parties in said cases, who were designated in said agreement, and will
hereinafter be referred to collectively as the Deudors.
It appears that prior to the institution of said cases, the Deudors had caused the aforementioned land of
about 50 "quiones" to be subdivided into lots and that some of these lots, aggregating approximately 30

"quiones", were sold to several persons, whose names are set forth in two lists attached, as Annexes B and
C, to said compromise agreement. The Deudors, including appellants herein, acknowledged therein the title,
in fee simple, of J. M. Tuazon & Co., Inc., who is referred to in the agreement as Owners in and to said
land of 50 "quiones", and renounced, ceded and quit-claimed in its favor whatever right, title or interest
they (the Deudors) had over said property, and, in consideration thereof, J. M. Tuason & Co., Inc. undertook
to pay them P1,201,063, from which the aggregate sum of P486,137,26 would be deducted for certain
purposes stated in the agreement, thereby leaving a balance of P714,295.74, to be paid in the manner and
under the conditions set forth in clause 8, section d, of the Compromise Agreement, as follows:
jgc:chanrobles.com .ph

"1. The first payment shall be P100,000.00 and shall be made within sixty (60) days from the date the
decision rendered in the foregoing cases approving this compromise agreement becomes final; Provided,
that within said period the DEUDORS shall have effected the delivery to the OWNERS of at least 20
quiones, the possessory rights over which have not been sold by the DEUDORS to third persons, out of the
total area of 50 quiones involved herein in such manner that the OWNERS, may without interruption,
proceed with the subdivision end sale of said 20 quiones and likewise deliver the portions so sold to the
buyers thereof, and provided further, that if the DEUDORS FAIL TO DELIVER said 20 quiones as above
specified, then the first payment of P100,000.00 mentioned in this paragraph shall not be made until after
the delivery is effected;
"2. If the DEUDORS, within a period of 60 days from the date of decision rendered in the foregoing cases,
should be able to deliver the peaceful and complete possession of the portion of the property occupied and
possessed by the persons listed in Annex C and who are not willing to continue with their contracts of
purchase and such other persons who may later join the ones listed in said Annex C, the payments
subsequent to that specified in the paragraph immediately preceding shall be made as follows:
chanrob1es virtual 1aw library

2nd payment 1955 P99,408.79

3rd payment 1956 to be made 1 year after
the date of the 2nd payment 99,408.79
4th payment 1957 to be made 1 year after
the date of the 3rd payment 69,510.50
5th payment 1958 to be made 1 year after
the date of the 4th payment 69,510.50
6th payment 1959 to be made 1 year after
the date of the 5th payment 69,510.50
7th payment 1960 to be made 1 year after
the date of the 6th payment 69,510.50
8th payment 1961 to be made 1 year after
the date of the 7th payment 69,510.50
9th payment 1962 to be made 1 year after
the date of the 8th payment 68,555.66

TOTAL P614,925.74
"However, in the event that the DEUDORS fail to comply with the conditions set forth in clause 8, section d,
subsection 2, the following shall be the form of payments to be made to the DEUDORS by the OWNERS, if
they made delivery as hereinafter set forth:
jgc:chanroble s.com.ph

"If delivery is made after the 60-day period provided for above but before the expiration of one year from
the date of the first payment, the DEUDORS shall receive as second payment the amount of P99,400.79 two
years after the date of the first payment. If delivery is made after one year from the date of the first
payment, the DEUDORS shall receive as second payment, the amount of P99,408.79 one year after the date
of such delivery.
"In either case, the succeeding payments as hereinafter provided shall become due one year from the date
of the payment immediately preceding, as follows:
chanrob1es virtual 1aw library

3rd payment P99,408.79

4th payment 69,510.50
5th payment 69,510.50
6th payment 69,510.50
7th payment 69,510.50
8th payment 69,510.50
9th payment 68,555.66

P515,516.95"
It was further stipulated in the agreement that "it shall be the joint and solidary obligation of the Deudors to
make the buyers of the lots purportedly sold by them to recognize the title of the OWNERS over the property
purportedly bought by them and to make them sign, whenever possible new contracts of purchase for said
property at the current prices and terms specified by the OWNERS in their sales of lots known as Sta. Mesa
Heights Subdivision" ; that "the possession of the land in question shall be turned over by the Deudors to
the owners as herein provided and the former shall guarantee that during the pendency of the sale of said
property, no squatters or unauthorized persons shall settle or take possession or continue in possession of
any portion of said property" ; and that in the event of failure of the Deudors to comply with any of the
obligations and conditions of the agreement, the OWNERS shall have the right to suspend the payments
aforementioned.
This compromise agreement was submitted for approval to the Court, which, after assuring itself that the
parties understood the contents thereof, caused the agreement to be signed in Court, and then rendered on
April 10, 1953, a decision the last two (2) paragraphs of which read:
jgc:chanrobles.com .ph

"The parties and their respective attorneys have petitioned this Court that after rendition of judgment in the
above-entitled cases, steps be taken, under the supervision of this Court, to implement said Compromise
Agreement, and in the interest of justice the Court grants this last mentioned petition. It should be
understood, however, that the implementation to be taken under the supervision of the Court will not and
should not be construed and interpreted by the parties that it shall in any way affect this decision on the
merits rendered by the Court.
"IN VIEW OF ALL THE FOREGOING, decision is hereby rendered declaring, as it hereby is declared, that J. M.
Tuason & Co., Inc. is the absolute owner of the land involved in these cases, having in its name a transfer
certificate of title issued in accordance with the provisions of the Land Registration Act, said title being
binding and conclusive against the whole world. It is further ordered that the Compromise Agreement be,
as it hereby is, approved in its entirety and all the parties to the same are hereby enjoined to abide and
comply faithfully and strictly with the terms and conditions set forth in the said Compromise Agreement. No
pronouncement as to costs."
The portion of 20 "quiones", mentioned in clause 8, section d, subsection (1), was not delivered by the
Deudors until January 14, 1956, and this was made possible only because the appellees had agreed to and
did advance certain sums to defray the expenses necessary therefor. On April 6, 1956, the Deudors filed a
motion praying that the appellees be required to pay them the balance of the agreed first installment

after deducting said advance or the sum of P79,800.00. On or about April 13, 1956, the appellees
deposited this amount in Court and at the same time filed a "motion and counter-manifestation" inviting
attention to the constructions existing on the undelivered portion of 30 "quiones" and praying that the
Deudors be ordered to remove such constructions regardless of whether the same existed on March 16,
1953, when the Compromise Agreement was entered into, or were made after said date within fifteen
(15) days, as well as "to comply strictly with their obligation to maintain the status quo, with respect to said
undelivered portion of 30 quiones and to hold the reliable for such damage as may result from their
having granted permission to make additional constructions herein after March 16, 1953."
Soon later, or on April 27, 1956, the appellees filed a supplemental motion and "manifestation" praying that
payment of said sum of P79,800.00 to the Deudors "be withheld until after the additional 129 illegal
constructions in the 30 quiones area shall have been removed."
Subsequently, J. M. Tuason & Co., Inc. filed another motion and "manifestation", dated August 8, 1956, to
the effect that the number of illegal constructions on said area had increased to 165, that, meanwhile,
several alleged purchasers from the Deudors, not mentioned in the annexes attached to the Compromise
Agreement, had instituted Civil Cases Nos. Q-1889 and Q-1890 of the Court of First Instance of Quezon City,
against the Deudors and the appellees, and that, in consequence of such cases, the amounts payable to the
Deudors from the appellees may not be sufficient to satisfy the claims of the plaintiffs in said cases, and
praying, therefore, that appellees aforementioned "motion and counter-manifestation" and "supplemental
motion and manifestation" of April 13 and 27, 1956, be resolved and that the sum of P79,800.00 be retained
to answer for the claims of the alleged purchasers not yet mentioned in Annexes B and C of the Compromise
Agreement.
Accordingly, on February 28, 1957, the Court issued an order, pertinent parts of which we quote:

jgc:chanrobles.com .ph

"The attention of this Court has been called by the J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc. to the
fact that the illegal constructions on the 30 quiones, which constructions were made from and after the
date of the Compromise Agreement, are growing in number, and that as of January 8, 1957 these
constructions totalled 215. Whether these constructions were made with the Deudors permission as claimed
by the J. M. Tuason & Co. Inc. and Gregorio Araneta, Inc. or without the Deudors consent as claimed by
Atty. Laurel is of no moment. What is material and pertinent now is that these houses and the continued
constructions of houses appear completely unabated, and unless this is stopped by those who are supposed
to be in possession of the land, these very houses within the 30 quiones will afford very formidable
stumbling blocks against further implementation of the Compromise Agreement. Under the Compromise
Agreement, and subject to its other terms and conditions, these referred to collectively as the Deudors are
obligated, and they have so bound themselves, to deliver the clear and peaceful possession of the entire 50
quiones to the OWNERS, J. M. Tuason & Co., Inc. and/or their ATTORNEYS-IN-FACT FOR SANTA MESA
HEIGHTS SUBDIVISION, Gregorio Araneta, Inc.
"Under paragraph 3 of the Compromise Agreement, those referred to collectively as the Deudors claimed to
have been in possession of the land, and pursuant to par. 9 of the same Compromise Agreement, the
Deudors bound themselves to deliver possession of the land in question over the Owners. It is, therefore,
clear to this Court that unless the construction of houses is abated in some way, the implementation of the
Compromise Agreement can never be effected. The J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc. have
asked this Court to set a period of 15 days within which the Deudors would deliver the possession of the
remaining 30 quiones unto said companies. The impatience of the J. M. Tuason & Co., Inc. and Gregorio
Araneta, Inc. is understandable, considering that it is almost four years since the decision became final and
yet the Deudors have utterly failed to deliver the 30 quiones. The Compromise Agreement does not state
any specified period within which the Deudors have to definitely comply with their obligations, but in
accordance with Article 1197 of the new Civil Code this Court is authorized and empowered to set a period
within which they shall fulfill and comply with all their obligations. This Court is of the opinion that a period
of four (4) months from date hereof is more than ample time within which the Deudors may comply with
their obligations under the Compromise Agreement, having in mind that more than 42 months have elapsed
before the 20 quiones were in fact delivered, and mostly through the effort of the J. M. Tuason & Co., Inc.
and Gregorio Araneta, Inc. The Court has also in mind that the Compromise Agreement contemplated 60
days from date thereof for compliance therewith by the parties, and certainly the 60-day period so set could
not reasonably be extended to four years. The Court would like to call the attention of the parties to the fact
that in its decision dated April 10, 1953 the parties were enjoined to abide by and comply faithfully and
strictly with the terms and conditions set forth in the Compromise Agreement. Up to the present time, there
does not appear to by any sincere or effective steps taken by any of those referred to collectively as the
Deudors in implementing the Compromise Agreement. The Court, therefore, hereby sets a period of four

(4) months within which the Deudors shall deliver possession of the entire 30 quiones to the J.M. Tuason
& Co., Inc. and Gregorio Araneta, Inc. Failure of the Deudors to so deliver will have the effect of freeing the
J. M. Tuason & Co., Inc. and the Gregorio Araneta, Inc. from all its obligations under the Compromise
Agreement and judgment, and the latter shall thereafter he entitled to possession of the 30 quiones thru
this Courts process.
"Counsel for the J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc. have also called the attention of this
Court to the effect that there seem to be other persons who have allegedly bought lands from the Deudors
and who have submitted the corresponding Deeds of Sale to this Court but whose names have not been
included in the lists submitted by the Deudors to the attorneys of the J. M. Tuason & Co., Inc. and attached
to the Compromise Agreement as Annexes B and C. The Court likewise takes cognizance of the fact that
there are presently pending cases wherein persons have filed complaint praying that the difference in the
price fixed by the Gregorio Araneta, Inc. for the same land should be charged against or deducted from
whatever amount the Deudors would receive from the J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc.
"This Court believes that it cannot decide the question now, but shall do so in cases properly brought up
before it. It likewise takes cognizance of Civil Cases Nos. Q-1732, Q-1733, Q-1746, Q-1799, and Q- 1932
filed against the Deudors and J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc., and other related cases.
As to those persons who had allegedly bought land from the Deudors but whose names have not been
included in the lists, Annexes B and C to the Compromise Agreement, the Court cannot at the present
time issue an order without a proper motion from the proper party.
"IN VIEW OF ALL THE FOREGOING, . . .,
"Those referred to collectively as the Deudors in the Compromise Agreement, namely, Florencio Deudor,
Maria Deudor, Pedro Deudor, Aniana Deudor, Jesus Gamitan, Cirilo del Rosario, Tomas de la Cruz, Rufina
Guerrero, Ana Pascual, Alberta Martinez, Ambrosio Andaya, Donato Fajardo, Eustaquio Alquiros, Agripino
Pascual, Macaria Fulgencio, Carlos Javier, Aurea Misericordia and Feliciano Misericordia, are hereby ordered
to clear and deliver the peaceful possession of the 30 quiones to the J. M. Tuason & Co., Inc. and Gregorio
Araneta, Inc., within a period of four (4) months from date hereof, except such constructions by those
person who are mentioned in the Compromise Agreement as willing to continue in the purchase of the parcel
of land which they may be occupying and who are willing to pay the price set by the Gregorio Araneta, Inc.
Failure on the part of the persons named in this paragraph to comply with said order, the Court shall issue
such writs, orders and processes as may be necessary to place the J. M. Tuason & Co., Inc. and Gregorio
Araneta, Inc. in possession of said 30 quiones."
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On April 4, 1957, the Deudors filed a motion for reconsideration, stating that their failure to make delivery of
the 30 "quiones" was not due to their fault; that the period of four (4) months given them in the order of
February 28, 1957, for the delivery of said portion, is too short; that the pendency of the other cases
mentioned in appellees motion and manifestation dated August 8, 1956, rendered the aforementioned order
premature; and that the Deudors are themselves entitled to an order directed to the Sheriff for the delivery
to the appellees of the litigated property, and praying that said order of February 28, 1957, be so modified
as to delete therefrom all references to the four-month period for the delivery of the 30 "quiones" and to
appellees discharge from their obligations under the compromise agreement, and that the Sheriff be
ordered "to clear the premises of said 30 quiones of all persons unlawfully squatting on or occupying the
same or portions thereof."
Gregorio Araneta, Inc. in turn, filed a motion, dated August 16, 1957, alleging, inter alia, that the Deudors
had not delivered the aforementioned portion of 30 "QUIONES", despite the expiration of the period of four
(4) months, fixed in the order of February 28, 1957, and that, owing to the failure of the Deudors to make
said delivery, the construction of houses by squatters within said area had continued so unabated that, as of
August 12, 1957, there were 341 constructions therein, and praying that an order be issued directing the
Sheriff of Quezon City to place the appellees "in possession of the 30 quiones subject to these cases now
in the possession" of the Deudors, who were named individually in said motion.
On January 9, 1958, appellants herein filed a "manifestation" in which they offered to deliver to the
appellees those portions of the 30 "quiones" on which there are no actual occupants or squatters, as well
as to cooperate with the appellees in pin-pointing the unoccupied and clear areas which they are ready to
deliver and to join the appellees in the filing of appropriate suits for the ejectment of all persons unlawfully
occupying portions of the remaining thirty (30) "quiones" and/or handling negotiations directed to the
same end.

By an order, dated January 10, 1958, the lower court denied the motion for reconsideration of the Deudors
and granted said motion of Gregorio Araneta, Inc. dated August 16, 1957. This order was amended by
another one, dated January 21, 1958, which suspended the resolution of said motion of Gregorio Araneta,
Inc., in compliance with a writ of preliminary injunction issued by the Court of Appeals.
Appellants maintain that the orders of February 28, 1957 and January 10, 1958, are erroneous, upon the
ground that: (1) the lower court had no authority, either to fix a period of four (4) months for the delivery of
the thirty (30) "quiones" in question, or to declare that the appellees would be free from their obligations
under the Compromise Agreement, should the Deudors fail to make delivery within said period; (2) the
lower courts lack of authority to decide in this case the issues raised in cases Q-1732, Q-1733, Q-1746, Q1799 and Q- 1932 thereof, as stated in its order of February 28,1957, shows that the same was premature,
insofar as it fixed the aforementioned period and stated the effect of the failure to make delivery within the
same; (3) neither did the lower court had authority, after the expiration of said period, to set aside the
Compromise Agreement, to the extent that it remained unimplemented or executory, and to release the
appellees from further obligations under said agreement; and (4) although the lower court held the
appellees entitled to a process for the delivery of the 30 "quiones" to them, it denied appellants petition for
such process in favor of the same appellees.
With respect to the period fixed by the lower court for the delivery of said 30 "quiones" and the effect of
the failure to deliver the same within said period, it is urged that the order of February 28, 1957, amounted
to an amendment of the Compromise Agreement, without the consent of the parties therein, and of the
decision of April 10, 1953, long after the same had become final and executory. There is no merit in this
pretense. Appellants admit that the Compromise Agreement "failed to prove for a specific period within
which the Deudors should deliver possession" of said 30 "quiones." Upon the other hand, it is clear from
the nature of said agreement and the circumstances surrounding the same that a period was intended by
the parties thereto. Indeed, considering that the appellees had a Torrens title, they had no reason to agree
on paying P614,925.74 to the Deudors, except upon the expectation of delivery of said area without
unreasonably delay. Accordingly, said agreement is subject to the principle set forth in Article 1197 of the
Civil Code of the Philippines, reading:
jgc:chanrobles.com .ph

"If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof.
"The courts shall also fix the duration of the period when it depends upon the will of the debtor.
"In very case, the courts shall determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them."
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When the authority granted by this provision is exercised by courts, the same do not amend or modify the
obligation concerned. Article 1197 in part and parcel of all obligations contemplated therein. Hence,
whenever a period in fixed pursuant to said Article, she court merely enforces or carries out an implied
stipulation in the contract in question. In fact, insofar as contracts not fixing a period are concerned, said
legal provision applies only if, from the nature and circumstances surrounding the contract involved, "it can
be inferred that a period was intended" by the parties thereto. For this reason, the last paragraph of Article
1197, ordains that "in every case, the courts shall determine such period as may under the circumstances
have been probably contemplated by the parties. In other words, in fixing said period, the court merely
ascertains the will of the parties and gives effect thereto.
Neither does the order of February 28, 1957, amount to an amendment of the decision of April 10, 1953, for
the same approved the Compromise Agreement in toto and enjoined the parties "to abide and comply
faithfully with the terms and conditions" thereof. Thus, the agreement became, for all intents and purposes,
incorporated in the decision, and acquired the same force and effect as the latter. And this is why appellants
contend that the order of February 28, 1957 constitutes an amendment of the decision of April 10, 1953.
However, this conclusion of the appellants is legally untenable, for, as pointed out above, Article 1197 of our
Civil Code is part of the Compromise Agreement, and consequently, of said decision, so that the application
of said Article involved merely the enforcement of an implied stipulation of the parties to said agreement,
and, accordingly, of an implied provision of the decision itself. As a matter of fact, said decision explicitly
declares that "the parties and their respective attorneys have petitioned this Court that after rendition of
judgment . . . steps be taken . . . to implement the Compromise Agreement" and that "in the interest of
justice the Court grants this petition."
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The Deudors insist that, as stated by the lower court in its order of February 28, 1957, it could not decide in

this case the issues raised by a number of claimants, not named in Annexes B and C of the Compromise
Agreement, who had instituted, against the herein appellees and appellants, civil actions other than those
settled by said agreement, and that being thus aware that appellants cannot deliver the 30 "quiones" in
question on account of said new civil actions, the lower court still required them to make said delivery under
penalty of forfeiting the right to collect P614,925.74. Thus appellants would seem to imply that the lower
court had imposed upon them an obligation which is impossible of compliance because of "legal obstacles" to
its performance.
The obligation to deliver said 30 "quiones" arose, however, from the fact that appellees were owners
thereof and from the promise made by the Deudors in the Compromise Agreement, not from the order of
February 28, 1957. Moreover, the period within which delivery was to be made, sprang from the same
agreement, as implemented by the court, pursuant to said Article 1197, which, impliedly, is part of the
agreement. Again, appellants represented therein that they were in possession of the land and in a position
to make delivery thereof. Indeed, otherwise, appellees would not have undertaken to pay P614,925.74 to
the Deudors. Appellees right to said delivery was not conditioned upon appellants actual ability to make
such delivery. Hence, the existence of other parties who, by instituting judicial proceedings, had put legal
obstacles to said delivery, did not affect appellants obligation to make it under the Compromise Agreement.
In fact, in clause 9 thereof, they guaranteed "that during the pendency of the sale" of the property in
question, "no squatters or unauthorized persons shall settle or take possession of any portion of said
property . . . In other words, appellants had assumed the risk concomitant with possible incursions, by
squatters or other unauthorized persons, into the aforementioned property.
It is next urged, that in case of appellants failure to comply with any of their obligations under the
Compromise Agreement, the appellees, pursuant to clause 14 thereof, had only the right to suspend the
stipulated payments. It should be noted, however that appellees would have the obligation to pay
P614,925.74 only "if the Deudors . . . should be able to deliver the peaceful and complete possession" of the
30 "quiones" in question. Until delivery thereof, appellants had no right, therefore, to said sum, and
accordingly, appellees had no obligation to pay it. Since, admittedly, said 30 "quiones" have not been
delivered, it follows that there is no occasion for the suspension of appellees obligation to pay, for they had
no such obligation as yet. The stipulation about suspension of payments referred to non-compliance by
appellants of their obligations under the agreement other than the delivery of the 30 "quiones", for such
delivery was a suspensive condition upon the fulfillment of which the acquisition of the right of the Deudors
to said P614,925.74, and the effectiveness of the obligation of the appellees to pay it, depended.
Because, the order of January 10, 1958, says:

jgc:chanroble s.com.ph

"It will be noted that under the agreement, the Deudors are supposed to make delivery of the area
unconditionally. In fact, in several of the conferences preceding the execution on the final compromise
agreement, the registered owners of the land made it clear that they were agreeing to the settlement only
because they wanted to obtain early possession of the whole property and the Deudors through their
counsels warranted that such possession would be with J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc.
in a matter of months or, at most, in a year. There is no excuse, therefore, for the failure of the Deudors to
deliver the remaining 30 quiones 4 years and 8 months after the execution and approval of the
compromise agreement. The equitable, if not the legal, solution of the problem is the setting aside of the
compromise agreement of March 16, 1953 so far as it still remains unimplemented or executory. The failure
to deliver and the continued mushrooming of houses in the area, despite the compromise, justly the release
of J. M. Tuason & Co., Inc., and Gregorio Araneta, Inc. from further obligations under the agreement of
March 16, 1953."
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appellants assert that it was improper for the lower court, in the proceedings for the enforcement of its
decision of April 10, 1953, to set aside the Compromise Agreement, insofar as it still remained
unimplemented or executory, and to release the appellees from further obligations under said agreement.
The above-quoted paragraph of said order of January 10, 1958, was, however, a mere exposition of some of
the reasons why the lower court granted appellees motion of August 16, 1957, and denied the motion for
reconsideration filed by appellants on April 4, 1957. In any event, said paragraph is but a faithful statement
of the law pertinent to the subject, inasmuch as the period of four (4) months, given to the Deudors, in said
decision, for the delivery of the land of 30 "quiones" to which their right to collect P614,925.74 was
subject as a suspensive condition constituted a resolutory period. When the same expired with said
suspensive condition still unfulfilled, appellants right to comply with it was extinguished, and the conditional
obligation of the appellees to pay said sum was terminated (Article 1193, Civil Code of the Philippines).
With respect to appellants claim to the effect that they offered to deliver "portions" of the land of 30

"quiones" "on which there are no actual occupants or squatters at present," suffice it to note that under
clause 8, section d, subsection 2 of the Compromise Agreement, the appellees are bound to pay
P614,925.74 only "if the Deudors . . . should be able to deliver the peaceful and complete possession" of
said land of 30 "quiones." In short, delivery of a portion thereof would not suffice for the acquisition by
appellants of the right to collect said sum or any part thereof. The parties clearly contemplated a full, not
partial, fulfillment of said condition.
Lastly, appellants say that they have as much right as appellees herein to the execution of the decision
herein, and yet the lower court granted the latters motion for a writ of execution thereof and denied a
motion of the former to the same effect. It is not true, however, that the two (2) motions were identical.
Appellees prayed that an order be issued directing the Sheriff of Quezon City "to place them in possession of
the 30 quiones subject to these cases, now in the possession of" appellants, whereas, appellants motion
was to the effect that an order be issued "commanding the Sheriff to clear the premises of the 30 quiones
from all persons unlawfully squatting on or occupying the same or portions thereof." It was proper for the
lower court to grant appellees motion, because the process therein sought was directed against appellants
who are bound by the decision of April 10, 1953. It would have been improper for the lower court to grant
appellants aforementioned motion, since the same sought to affect squatters, who are neither parties in this
proceeding nor bound by the aforementioned decision, and, hence, are beyond the jurisdiction of the court
in this case.
WHEREFORE, the orders appealed from are hereby affirmed, with costs against herein appellants, Florencio,
Maria, Aniana and Pedro, all surnamed Deudor. It is so ordered.

G.R. No. L-13246

March 30, 1960

FEDERICO CALERO, plaintiff-appellant,

vs.
EMILIA CARRION Y SANTA MARINA, ET AL., defendants-appellees.
Ramirez and Ortigas for appellant.
Carlos, Laurea and Associates for appellees.
BARRERA, J.:
From the order of the Court of First Instance of Manila (in Civil Case No. 31409) dismissing his
complaint, on the ground of prescription, plaintiff Federico Calero interposed this appeal directly to
this Court on questions purely of law.
On December 20, 1956, plaintiff filed with the abovementioned court a complaint which, in part,
reads:
xxx

xxx

xxx

3. Que a principios del ao de l937, el demandante propuso a don Enrique Carrion, padre de
las demandadas, el siguiente negocio: adquirir entre los dos una finca en la Plaza Santa
Cruz, por al precio de P250,000.00, de los cuales se pagarian P25,000.00 al contado y el
resto a plazos, en diez aos; en el bien entendido de que para pagar la suma de
P25,000.00, don Enrique Carrion aportaria P15,000.00 y el demandante aportaria los
P10,000.00 restantes.
4. Que despues de examinar la finca, don Enrique Carrion acepto la proposicion del
demandante, y le autoriza cerrar la transaccion, a nombre de sus hijas, es decir, de las dos
(2) demandadas principales en este asunto.
5. Que en el entretanto, don Enrique Carrion se ausento de Filipinas, continuando las
negociaciones su apoderado y administrador, don Santiago Carrion quien tambien era el
apoderado y administrador de las demandadas.
6. Que cuarido se fue a preparar la escritura de compra, don Santiago Carrion, como
apoderado de las demandadas, explico al demandante que era muy complicado constituir
una communidad de bienes en esa finca, pues habria necesidad de rendir cuentas
mensuales, y consultarse en caso de reparaciones, mejoras, etc.
7. Que para evitar estas dificultades, don Santiago Carrion propuso comprar la finca a
nombre exclusive de las demandadas, con la obligacion de pagar al demandante el veinte
por ciento (20%) de los beneficios, cuando se vendiera la finca.

8. Que el demandante acepto esa proposicion, en el bien enteridido de que la finca seria
vendida tan pronto como se encontrara un comprador por una cantidad no menor de
P300,000.00.
9. Que debido a la confianza que existia entre las partes, el demandante acepto esa
proposicion, como ya se ha dicho, y las partes otorgaron el dia 28 de mayo de 1937, un
contrato formal, en el cual se hizo constar el ultimo convenio celebrado por las partes, es
decir, quea a la venta de la finca situada en la Plaza Santa Cruz, las demandadas pagarian
al demandante,
una cantidad equivalente un VEINTE POR CIENTO (20%) de cualquier cantidad que se
obtenga de la venta de los mencionados edificios y terrenos, despues de descontar el
importe total pagado por dichas demandadas.
12. Que la verdadera intension de las partes al otorgar el contrato exhibito "A" era dar al
demandante una participacion del veinte por ciento (20%), en todos los beneficios, rentas y
utilidades de la finca descrita en ese contrato.
13. Que desde el ao 1937 el demandante ha hecho varias ofertas a las demandadas
CARRION, para vender esa finca al precio ofrecido por los compradores.
14. Que ahora el demandante tiene un comprador de dicha finca por la suma de
P1,455,900.00, pero las demandadas CARRION Continuan negandose a vender dicha linea
por ese precio, a pesar de la enorme ganancia que representa esa transaccion.
15. Que durante todo el tiempo transcurrido desde el ao 1937 hasta la fecha, las
demandadas CARRION se han lucrado con las rentas de esa finca, sin dar ninguna
participacion al demandante, quien hasta la fecha no ha recibido un centime de dicha finca
por ningun concepto.
16. Que debido a los actos de las demandadas CARRION, el demandante ha sufrido y sigue
sufriendo daos y perjuicios en una cantidad inestimable con certeza, pero que. por lo
menos, debe ser el veinte por ciento (20%) de los beneficios liquidos obtenidos de es finca
por las demandadas CARRION.
17. Que el demandante ha requerido a las demandadas CARRION a rendir cuentas de la
Administracion de esa finca, a lo cual tambien se han negado.
18. Que si vende esa finca ahora en la cantidad de P1,455,900.00, las demandadas
CARRION tendrian un beneficio liquido de P1,205,900.00, o sea, la diferencia entre el precio
de venta antes mencionado y los P250,000.00 pagados por dicha finca; y por consiguiente,
el demandante tenria derecho a percibir la suma de P241,180.00, o sea, el veinte por ciento
(20%) de los beneficios obtenidos, de conformalidad exhibito "A" de esta demanda.

19. Que las demandadas CARRION se han negado a rendir cuentas de los beneficios
obtenidos de disha finca y a pagar la participacion del demandante, a pesar de los repetidos
requeriment de dicho demandante.
xxx

xxx

xxx

POR TANTO, el demandante ruega al Hon. Juzgado se sirva dictar sentencia:

(A) Ordenando a las demandadas CARRION que rindan cuenta completa y detallada de los
ingresos y gastas de la finca mencionada en el exhibit "A" desde el dia 28 de mayo de 1937
hasta fecha de la venta, entregando al demandante un veinte por ciento (20%) del producto
liquido de dichas cuentas, en pago de los daos y perjuicios ya sufridos hasta la fecha;
(B) Ordenando a las demandadas que vendan esa finca descrita en el exhibito "A"', por un
precio no menor de P1,455,900.00 en el plazo de tres (3) meses, o de lo contrario paguen al
demandante la cantidad de P241,180.00, que representa el veinte por ciento (20%) de los
beneficios obtenidos, con sus intereses legales desde esta fecha hasta su completo pago.
On February 2, 1957, defendants Emilia Carrion, Maria Carrion, Jose Falco, and Manuel Perez
Guzman (the last two as husbands, respectively, of the first two), filed a motion to dismiss, on the
grounds that (1) the complaint states no cause of action, and (2) the plaintiff's cause of action, if any,
is barred by the Statute of Limitations (Sec. 1[e], Rule 8, Rules of Court). To this motion, plaintiff filed
an opposition on March 16, 1957. On June 1, 1957, the court required plaintiff to amend his
complaint, in an order which, in part, reads:
. . . inasmuch as plaintiff concedes in his answer (opposition) to the motion to dismiss that ". .
. por tratarse de una obligaicion sin plazo fijo, este debe ser determinado por el Hon.
Juzgado", it is plaintiff's duty to amend his complaint to this effect, because there is nothing
either in its allegations or in its prayer asking that this Court fix a reasonable period for the
sale of the said property with a view to having defendants comply with their obligations under
the parties' aforesaid agreement.
. . . defendants' obligation has not even become demandable in view of the suspensive
condition found in the parties' agreement.
WHEREFORE, it is ordered that plaintiff amend his complaint within twenty (20) days from
notice hereof, failing which the same will be dismissed.
Complying with the above order of the court, plaintiff, on June 15, 1957, filed an amended complaint
which is identical to the original complaint, except that it contained the following new Paragraph 15
and a new prayer, to wit:
15. Que el contrato exhibito "A" no establece un plazo determinado para la venta de la finca
descrita en el mismo contrato, aunque la intencion de que hubiera un plazo es evidente de
la naturaleza, circunstancias y condiciones del mismo contrato; y el Hon. Juzgado debe
sealar dicho plazo, de acuerdo con el articulo 1197 del nuevo Codigo Civil.

POR TANTO, el demandante ruega al Hon. Juzgado se sirva dictar sentencia:

(A) Sealando un plazo de tres (3) meses para que las demandadas CARRION vendan la
finca decrita en el exhibito "A" al precio mas alto en el mercado, pero no menos de la oferta
actual de P1,455,99.00;
(B) Ordenando a las demandadas CARRION que paguen al demandante el viente por ciento
(20%) de los beneficios obtenidos en la venta de dicha finca; . . . .
On July 18,1957, defendant renewed their motion to dismiss, on the grounds that (1) the amended
complaint states no cause of action (2) the plaintiff's cause of action, if any, is barred by the Statute
of Limitations (Sec. 1[e], Rule 8, Rule of Court), and (3) the plaintiff's original complaint being without
cause of action, it cannot be amended and/or cured by said amended complaint which changes
plaintiff's theory of the case. In connection with the second ground mentioned, defendants stated:
Plaintiff's right of action accrued in the year 1937 when the first of plaintiffs alleged various
offers to defendants to sell the property at price offered by buyers was refused by defendants
(Pars. 13 and 14 of Complaint). It is patent, therefore, that is, ten (10) years from the year
1937. Considering that plaintiff's complaint was filed on December 21, 1956, plaintiff's cause
of action if any, is obviously unenforceable and barred by the Statue of Limitations.
To this motion, plaintiff filed his opposition on August 2, 1957, to which defendants filed a rejoinder
on August 8, 1957. To this rejoinder, plaintiff filed a counter-reply on August 12, 1957.
On August 21, 1957, the court issued an order denying defendant's motion to dismiss. From this
order, defendants filed a motion for reconsideration on August 27, 1957, which was duly opposed by
plaintiff on September 7, 1957. On September 16, 1957, defendants filed a rejoinder to said
opposition.
On October 1, 1957, the court issued an order dismissing plaintiff's complaint on the ground of
prescription, as follows:
ORDER
This Court has before it (1) defendants's MOTION FOR RECONSIDERATION of the order of
this Court dated August 21, 1957, (2) CONTESTACION DEL DEMANDANTE A LA MOCION
DE RECONSIDERACION, and (3) defendants' REJOINDER TO COTESTACION DEL
DEMANDANTE A LA MOCION DE RECONSIDERACION.
It is true that heretofore this Court did not entertain defendants' motion to dismiss plaintiff's
original complaint; that on June 1, 1957, plaintiff was given twenty (20) days to amend his
complaint; that on June 15, 1957, the amended complaint was filed; that on July 22, 1957,
defendants again put in a motion to dismiss the said amended complaint, and that on August
21, 1957, this Court also denied this latter motion to dismiss. Defendants, however, have
filed a motion for reconsideration of the order just mentioned of the ground that plaintiff's

action under his amended complaint has already prescribed, and this Court has to pass
upon the said motion for reconsideration.
Concretely, defendants now contend that plaintiff's action asking this Court to fix the period
for the fulfillment of defendants' obligation, which is the subject matter of his amended
complaint, has already prescribed under the law and the applicable authorities. While this
Court in conscience believes that defendants have such obligation to plaintiff under the
express terms and conditions of the parties' agreement Exhibit A, nevertheless it cannot
ignore defendants' aforesaid contention that plaintiff's action asking this Court to fix a period
for the fulfillment of the said obligation has in fact already prescribed. For one thing, this
action which may be brought under Article 1197 of the New Civil Code cannot be said to be
imprescriptible. For another, as pointed out by defendants, in the case of Gonzales vs. Jose,
66 Phil., 369, among others, it was pertinently held that "The action to ask the court to fix the
period has already prescribed in accordance with section 43(1) of the Code of Civil
Procedure. This period of prescription is ten years, which has already elapsed from the
execution of the promissory notes until the filing of the action on June 1, 1934." Inasmuch as
in the instance case, the parties agreement Exhibit A was executed on May 28, 1937,
plaintiff's action to fix the period for the fulfillment of defendants' obligation thereunder should
have been filed within ten (10) years from the date just mentioned, following the said
decision based on Section 43 (1) of the Code of Civil Procedure, in relation to Article 1116 of
the New Civil Code. It is plain to see therefore that plaintiff's present action commenced only
on December 21, 1956, is already long barred by prescription.
At page 2 of plaintiff's CONTESTACION DEL DEMANDANTE A LA MOCION DE
RECONSIDERACION, the position is taken that En este asunto el plazo de prescripcion
comienza cuando nace el derecho de accion. Plaintiff's cause of action in the present case is
to have this Court fix the period which the parties had left to conjecture in their agreement
Exhibit A, and the said cause of action arose right after the execution of said agreement on
May 28, 1937, and lapsed ten (10) years after said date. Plaintiff further state that "ademas,
en nuestro asunto actual este Hon. Juzgado ya ha resuelto que el derecho de accion ni
siquiera habla comenzado". What this Court really said on this point in its order of June 1,
1957 is the following: "As just intimated, defendants' obligation has not even become
demandable in view of the suspensive condition found in the parties' agreement". Reference
therefore is clearly made to defendants' obligation to plaintiff under Exhibit A, and not to
plaintiff's right to ask for the fixing of the period contemplated by the parties in the said
agreement. Plaintiff finally submits that "para que se acepte una mocion de sobreseimiento,
el fundaments debe ser indubitable, (Seccion 3, Regla 8 del Reglamento de los Tribunates.)"
and that "El hecho de que este Hon. Juzgado haya denegado ya dos mociones de
sobresiemientos, es la mejor prueba de que su fundamento es por lo menos muy
dudoso". It may be gathered from the record of this case that this Court has all along been
inclined to try it on the merits with a view to getting at the truth and rendering judgment
accordingly. However, it now finds itself faced with a defense, namely, prescription, so clear
and unanswerable that, to overlook the same, would be to disregard legal as well judical
precepts.

Finding defendants' MOTION FOR RECONSIDERATION of the order of this Court dated
August 21, 1957 to be meritorious, the said reconsideration is hereby granted, and plaintiff's
amended complaint is hereby dismissed, with costs against him.
SO ORDERED.
From the above-quoted order, plaintiff filed a motion for reconsideration on October 3, 1957, which
was duly opposed by defendants on October 18, 1957. On October 23, 1957, the court denied said
motion. Hence, this appeal.
Plaintiff claims that the lower court erred in dismissing his complaint, contending that (a) the
agreement Exhibit A attached to the amended complaint and made an integral part thereof, created
"un fideicomiso implicito" or an implied trust, which is not subject to prescription, and (b) that even
admitting the obligation is subject to a suspensive undetermined period (not condition), the action to
have such period fixed by the court has not yet prescribed. In support of his submission that the
agreement created an implied trust, plaintiff-appellant cites the provisions of Articles 1452 and 1453
of the new Civil Code which read as follows:
ART. 1452. If two or more persons agree to purchase property and by common consent the
legal title is taken in the name of one of them for the benefit of all, a trust is created by force
of law in favor of the others in proportion to the interest of each.
ART. 1453. When property is conveyed to a person in reliance upon his declared intention to
hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the
person whose benefit is contemplated.
The contention is without merit, Article 1452 abovequoted is inapplicable to this case for the reason
that there is absolutely no stipulation in the contract, Exhibit A, that there would be a joint purchase
of the property and that the legal title thereto was to be placed in the name of the defendants for the
benefit of themselves and herein plaintiff. The recitals in the contracts preceding the paragraph
containing the obligation assumed by the defendants, merely refer to the services rendered by the
plaintiff as broker who negotiated the sale of the property to the defendants and which the
defendants agreed to compensate. Nothing contained therein would indicate that the property was
being purchased for the benefit of the plaintiff and the defendants. The obligation assumed by the
defendants is clear and unequivocal in that:
por y en consideracion, a los trabajos, sugestiones, concejos y ayuda hasta ahora prestados por
Don Federico Calero en relacion con la compra de los bienes vedidos a las Sras. EMILIA CARRION
Y STA. MARINA Y MARIA DE LAS MERCEDES CARRION Y SANTA MARINA los trabajos y
concejos que dicho seorpromete seguir dando a los apoderados de las mismas en relacion con la
venta, arriendo, administracion y mejoramiente de los mencionados bienes, por lapresente, libre y
volunta riamente, Don Santiago Carrion, en su capacidad de apoderado de las mencionadas Da.
EMILIA CARRION Y STA. MARINA y Da. MARIA DE LAS MERCEDES CARRION Y SANTA
MARINA y de la manera mas solemne como sea necessario y eficaz en derecho, promete pagar a
don Federico Calero sus sucesores y cesionarios, una cantidad equivalente a UN VEINTE POR
CIENTO (20%) de cualquer cantidad que se obtenga de la venta de los mencionados edificios y

terrenos, despues de degcontar el importe total pagado por Ias Sras. EMILIA CARRION Y STA.
MARINA Y MARIA DE LAS MERCEDES CARRION Y SANTA MARINA a la due a de los mismos El
Hogar Filipino, entendiendose ademas que este veinte por ciento sera tomado de la ganancia
liquida que les represents a las nuevas dueas ta venta de los bienes mencionmados ya sea por
mediacion del Sr. Calero o sin ella. (par. 5 of Exh. A). (Emphasis supplied.).
The terms of the contract admit no doubt that the 20% to be paid the plaintiff is of any amount which
may be obtained by the sale of the property after deducting the purchase price thereof, which shall
be taken from the liquidated benefit obtained by the owners out of the sale of the said property.
Neither is Article 1453 applicable, because there is absolutely nothing in the agreement which even
remotely indicates that the property was conveyed to the defendants in reliance upon their declared
intention to hold it for, or transfer it to, another or the grantor.
Even the very allegations of plaintiff's complaint clearly reflect the true nature of the agreement. It
appears therefrom that although the original parties to purchase the property tribute P10,000.00 and
the defendants to put up P15,000.00 on account of the down payment of P25,000.00), the same was
abandoned and the parties subsequently agreed that the defendants would buy the property
exclusively in their name and for their own account because "era muy complicado constituir una
comunidad de bienes en esa finca, pues abria necesidad de rendir cuentas mensuales, y
consultares en caso de reparaciones, mejoras, etc." and that the plaintiff "acepto esa proposicion, en
el bien entendido de que la finca seria vendida tan pronto como se encontrara un comprador por
una cantidad no menor de P300,000.00" "con la obligacion (on the part of the defendants) de pagar
al demandante el veinte por ciento (20%) de los beneficios, cuando se vendiera la finca", and that,
lastly, "el demandado acepto esa proposicion, como ya se ha dicho, y las partes otorgaron el dia 28
de marzo de 1937, un contrato formal en el cual se hizo constar el ultimo convenio celebrado por las
partes, es decir, que a la venta de la finca situada en la Plaza Santa Cruz, las demandadas pagarian
al demandante,
una cantidad equivalente a un Veinte Por Ciento (20%) de cualquier cantidad que se
obtenga de la venta de los mencionados edificios y terrenos, despues de descontar el
importe total pagado por dichas demandadas. (See paragraphs 3, 6, 7, 8 and 9 of the
amended complaint.)
Plaintiff-appellant next contends that the lower court also erred in dismissing his complaint on the
finding that plaintiff's right of action to have the period fixed for the sale of the property had already
prescribed. It is urged that the time for enforcing their right of action to have the period judicially
determined did not begin to run until the defendants had been formally demanded and they refused
to sell the property. It was only then, it is argued, that the period of prescription started to run. This
seems to be illogical. Before the period is fixed, the defendants' obligation to sell is suspended and
they, therefore, cannot be compelled to act. For this reason, a complaint to enforce immediately the
principal obligation subject to the suspensive period before this is fixed, will not prosper. But this is
not to say that the plaintiff has no cause of action. His cause of action under the agreement is to
have the court fix the period and after the expiration of that period, to compel the performance of the
principal obligation to sell. And this right to have the period judicially fixed is born from the date of the
agreement itself which contains the undetermined period. Extrajudicial demand is not essential for

the creation of this cause of action to have the period fixed.1 It exists by operation of law from the
moment such an agreement subject to an undetermined period is entered into, whether the period
depends upon the will of the debtor alone, or of the parties themselves, or where from the nature
and the circumstances of the obligation it can be inferred that a period was intended.
This is the clear intendment of Article 1197 of the New Civil Code as well as Article 1128 of the
Spanish Civil Code and the applicable doctrine laid down by this Court. 2 And since the agreement
was executed on May 28, 1937 and the complaint to have the period fixed was filed on December
21, 1956 or after almost 20 years, plaintiff's action is clearly and indisputably barred under the
Statute of Limitations.
Wherefore, finding no reversible error in the order appealed from, the same is hereby affirmed, with
costs against the plaintiff-appellant. So ordered.

G.R. No. L-45656 May 5, 1989

PACIFIC BANKING CORPORATION and CHESTER G. BABST, petitioners,
vs.
THE COURT OF APPEALS, JOSEPH C. HART and ELEANOR HART, respondents.
Flores, Ocampo, Dizon & Domingo for petitioners.
Quasha, Asperilla, Ancheta, Pena, Marcos & Nolasco for private respondents.

GUTIERREZ, JR., J.:

This is a petition for review of the decision of the Court of Appeals in CA-G.R. Nos. 52573 and 52574
directing petitioners to pay to respondent Hart ONE HUNDRED THOUSAND (P 100,000.00) PESOS
with legal interest from February 19, 1958 until fully paid, plus FIFTEEN THOUSAND (P 15,000.00)
PESOS attorneys fees, but subject to the right of reimbursement of petitioner Pacific Banking
Corporation (PBC) from petitioner Babst, whatever amounts PBC should pay on account of the
judgment.
Briefly, the facts of the case are as follows:
On April 15, 1955, herein private respondents Joseph and Eleanor Hart discovered an area
consisting of 480 hectares of tidewater land in Tambac Gulf of Lingayen which had great potential for
the cultivation of fish and saltmaking. They organized Insular Farms Inc., applied for and, after
eleven months, obtained a lease from the Department of Agriculture for a period of 25 years,
renewable for another 25 years.
Subsequently Joseph Hart approached businessman John Clarkin, then President of Pepsi-Cola
Bottling Co. in Manila, for financial assistance.
On July 15, 1956, Joseph Hart and Clarkin signed a Memorandum of Agreement pursuant to which:
a) of 1,000 shares out-standing, Clarkin was issued 500 shares in his and his wife's name, one
share to J. Lapid, Clarkin's secretary, and nine shares in the name of the Harts were indorsed in
blank and held by Clarkin so that he had 510 shares as against the Harts' 490; b) Hart was
appointed President and General Manager as a result of which he resigned as Acting Manager of
the First National City Bank at the Port Area, giving up salary of P 1,125.00 a month and related
fringe benefits.
Due to financial difficulties, Insular Farms Inc. borrowed P 250,000.00 from Pacific Banking
Corporation sometime in July of 1956.
On July 31, 1956 Insular Farms Inc. executed a Promissory Note of P 250,000.00 to the bank
payable in five equal annual installments, the first installment payable on or before July 1957. Said

note provided that upon default in the payment of any installment when due, all other installments
shall become due and payable.
This loan was effected and the money released without any security except for the Continuing
Guaranty executed on July 18, 1956, of John Clarkin, who owned seven and half percent of the
capital stock of the bank, and his wife Helen.
Unfortunately, the business floundered and while attempts were made to take in other partners,
these proved unsuccessful. Nevertheless, petitioner Pacific Banking Corporation and its then
Executive Vice President, petitioner Chester Babst, did not demand payment for the initial July 1957
installment nor of the entire obligation, but instead opted for more collateral in addition to the
guaranty of Clarkin.
As the business further deteriorated and the situation became desperate, Hart agreed to Clarkin's
proposal that all Insular Farms shares of stocks be pledged to petitioner bank in lieu of additional
collateral and to insure an extension of the period to pay the July 1957 installment. Said pledge was
executed on February 19, 1958.
Less than a month later, on March 3,1958, Pacific Farms Inc, was organized to engage in the same
business as Insular Farms Inc. The next day, or on March 4, 1958, Pacific Banking Corporation,
through petitioner Chester Babst wrote Insular Farms Inc. giving the latter 48 hours to pay its entire
obligation.
On March 7, 1958, Hart received notice that the pledged shares of stocks of Insular Farms Inc.
would be sold at public auction on March 10, 1958 at 8:00 A.M. to satisfy Insular Farms' obligation.
On March 8, 1958, the private respondents commenced the case below by filing a complaint for
reconveyance and damages with prayer for writ of preliminary injunction before the Court of First
Instance of Manila docketed as Civil Case No. 35524. On the same date the Court granted the
prayer for a writ of pre- preliminary injunction.
However, on March 19, 1958, the trial court, acting on the urgent petitions for dissolution of
preliminary injunction filed by petitioners PBC and Babst on March 11 and March 14,1958,
respectively, lifted the writ of preliminary injunction.
The next day, or on March 20, 1958 respondents Hart received a notice from PBC signed by Babst
that the shares of stocks of Insular Farms will be sold at public auction on March 21,1958 at 8:00
A.M.
In the morning of March 21, 1958, PBC through its lawyer notary public sold the 1,000 shares of
stocks of Insular Farms to Pacific Farms for P 285,126.99. The latter then sold its shares of stocks to
its own stockholders, who constituted themselves as stockholders of Insular Farms and then resold
back to Pacific Farms Inc. all of Insular Farms assets except for a certificate of public convenience to
operate an iceplant.

On September 28, 1959 Joseph Hart filed another case for I recovery of sum of money comprising
his investments and earnings against Insular Farms, Inc. before the Court of First Instance of Manila,
docketed as Civil Case No. 41557.
The two cases below having been heard jointly, the court of origin through then Judge Serafin R.
Cuevas rendered a decision on August 3, 1972, the pertinent portions of which are as follows:
xxx xxx xxx
It is plaintiffs' contention that the sale by Pacific Banking Corporation of the shares of
stock of plaintiffs to the Pacific Farms on March 21, 1958 is void on the ground that
when said shares were pledged to the bank it was done to cause an indefinite
extension of time to pay their obligation under the promissory note marked Exh. E.
Plaintiffs observed that under said promissory note marked Exh. E, no demand was
made whatsoever by the bank for its payment. The bank merely asked for more
collateral in addition to Clarkin's continuing guarantee In other words, it is the view of
the plaintiffs that the pledge of said shares of stock upersed the terms and conditions
of the promissory note marked Exh. E and that the same was only to insure an
indefinite extension on the part of the plaintiffs to pay their obligation under said
promissory note.
Plaintiffs accuse defendants of conspiracy or a unity of purpose in divesting said
plaintiffs of their shares of stock and relieving Clarkin of his guarantee and obligation
to Hart as well as to enable the bank to recover its loan with a big profit and Pacific
Farms, of which Papa was President, to take over Insular Farms.
Plaintiffs contend that the purchase by Pacific Farms of the shares of stock of Insular
Farms is void, the former having been organized like the latter for the purpose of
engaging in agriculture (Section 190-1/7 of the Corporation Law); and that the
transfer of all the substantial assets of Insular Farms to Pacific Farms for the nominal
cost of P10,000.00 is in violation of the Bulk Sales Law, plaintiffs and other creditors
of Insular Farms not having been notified of said sale and that said sale was not
registered in accordance with said law (Bulk Sales Law) which in effect is in fraud of
creditors.
As a result of defendant's acts, plaintiffs contend that they lost their 490 shares, the
return of their 10 shares from Clarkin and their exclusive and irrevocable right to
preference in the purchase of Clarkin's 50% in Insular Farms not to mention the
mental anguish, pain, suffering and embarrassment on their part for which they are
entitled to at least P 100,000.00 moral damages. They also claim that they have
been deprived of their expected profits to be realized from the operations and
development of Insular Farms; the sum of P 112,500.00 representing salary and
pecuniary benefits of Joseph C. Hart from the First National City Bank of New York
when he was required to resign by Clarkin, and finally, Joseph C. Hart and his wife
being the beneficial owners of 499 shares in Insular Farms that were pledged to the
Pacific Banking Corporation which was sold for P 142,176.37 to satisfy the obligation

of Insular Farms, the latter became indebted to plaintiffs for said amount with interest
from March 21, 1958, the date of the auction sale.
On the other hand, defendant Pacific Banking Corporation contends that it merely
exercised its legal right under the law when it caused the foreclosure of the pledged
(sic) executed by plaintiffs, together with defendant John P. Clarkin to secure a loan
of P 250,000.00, said loan having become overdue. True the payment of a note my
be extended by an oral agreement, but that agreement to extend the time of payment
in order to be valid must be for a definite time (Philippine Engineering Co. vs. Green,
48 Phil. 466,468). Such being the case, it is the opinion of the Court that plaintiffs
contention that there was an indefinite extension of time with respect to the payment
of the loan in question appears to be untenable. It cannot be admitted that the terms
and conditions of the pledged (sic) superseded the terms and conditions of the
promissory note.
With respect to the charge of conspiracy or unity of purpose on the part of all
defendants to divest plaintiffs of the latter's shares of stock, relieving Clarkin of his
guaranty and obligation to Hart, to enable the bank to recover its loan and to enable
Pacific Farms to take over Insular Farms, suffice it to state that the charge of
conspiracy has not been sufficiently established.
Considering plaintiffs' contention that the purchase by Pacific Farms of the shares of
stock of Insular Farms and the transfer of all of the substantial assets of Insular
Farms to Pacific Farms are in violation of the Provisions of the Bulk Sales Law, the
Court cannot see its way in crediting plaintiffs' contention considering the prevailing
jurisprudence on the mater (People vs. Wong Szu Tung, 50 OG, pp. 48-57, 58-69,
March 26,1954).
With respect, however, to the claim of plaintiff Joseph C. Hart for payment of salary
as Director and General Manager of Insular Farms for a period of almost one year at
the rate of P 2,000.00 a month, the Court believes that said plaintiff is entitled to said
amount. On the basis of equity and there appearing sufficient proof that said plaintiff
has served the corporation not only as Director but as General Manager, the Court
believes that he should be paid by the Insular Farms, Inc. the sum of P 25,333.30,
representing his salaries for the period March 1, 1957 to March 20,1958.
Again, with respect to the advances in the form of loans to the corporation made by
plaintiff Joseph C. Hart, the Court is of the opinion that he should be reimbursed and
paid therefor, together with interest thereon from March 21, 1958, or the sum of P
86,366.91. This is so because said loans were ratified by the Board of Directors of
Insular Farms, Inc. in a special meeting held on July 22, 1957. There is no showing
that the aforesaid special meeting was irregularly or improperly held.
The Court having maintained that the auction sale conducted by the Bank's Notary
Public which resulted in the purchase by Pacific Farms of the 1,000 shares of stock
of Insular Farms, 490 of which were owned by plaintiffs, to be valid, the Court cannot

approve the claim of plaintiffs for the reconveyance to them of said 490 shares of
stock of Insular Farms. If there is anybody to answer for the pledging of said shares
of stock to the bank, there is no one except the defendant John Clarkin who induced
plaintiff to do so. Again, it is noteworthy to note that Clarkin owned and controlled 501
shares of said outstanding shares of stock and have not made any claim for the
reconveyance of the same.
In view of the foregoing, judgment is hereby rendered in favor of plaintiffs and against
defendant Insular Farms, Inc., sentencing the latter to pay the former the sum of P
25,333.30, representing unpaid salaries to plaintiff Joseph C. Hart; the further sum of
P 86,366.91 representing loans made by plaintiffs to Insular Farms, Inc. and
attorney's fees equivalent to 10% of the amount due plaintiffs.
With respect to the other claims of plaintiffs, the same are hereby denied in the same
manner that all counter-claims filed against said Plaintiff are dismissed. Likewise,
Francisco T. Papa's cross-claim against defendant Pacific Farms, Inc. is, as it is
hereby, ordered dismissed for insufficiency of evidence. (pp. 462-467 of the Record
on Appeal [p. 83, Rollo])
Dissatisfied with the foregoing decision, private respondents appealed the two consolidated cases to
the Court of Appeals contending that:
I
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS' CONTENTION TO
THE EFFECT THAT THERE WAS AN INDEFINITE EXTENSION OF TIME WITH
RESPECT TO THE PAYMENT OF THE LOAN IN QUESTION "APPEARS TO BE
UNTENABLE
II
THE LOWER COURT ERRED IN HOLDING THAT THE SALE BY THE PACIFIC
BANKING CORPORATION OF THE SHARES OF STOCKS OF PLAINTIFFS WITH
THE PACIFIC FARMS, INC. ON MARCH 21, 1958 IS VALID.
III
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS' CHARGE OF
CONSPIRACY AGAINST THE DEFENDANTS HAS NOT BEEN SUFFICIENTLY
ESTABLISHED."
IV
THE LOWER COURT ERRED IN NOT HOLDING DEFENDANTS LIABLE FOR
DAMAGES CAUSED TO THE PLAINTIFFS BY THEIR INDIVIDUAL AND

COLLECTIVE ACTS WHICH ARE CONTRARY TO THE PROVISIONS OF THE

CIVIL CODE ON HUMAN RELATIONS.
V
THE LOWER COURT WAS CORRECT IN HOLDING THAT "IF THERE IS
ANYBODY TO ANSWER FOR THE PLEDGE OF SAID SHARES OF STOCK TO
THE BANK, THERE IS NO ONE EXCEPT DEFENDANT JOHN P. CLARKIN WHO
INDUCED PLAINTIFFS TO DO SO", BUT ERRED IN NOT FINDING DEFENDANT
JOHN P. CLARKIN LIABLE AS PRAYED FOR IN PLAINTIFFS' COMPLAINT." (pp. 910, Rollo)
On December 9, 1986, the Court of Appeals rendered its assailed decision, the dispositive portion of
which follows:
IN VIEW WHEREOF, judgment modified, such that defendant Babst and defendant
Pacific Banking are both condemned in their primary capacity to pay unto Hart the
sum of P l00,000.00 with legal interest from the date of the foreclosure sale on 19
February 1958 until fully paid, plus P 15,000.00 as attorney's fees, also to earn legal
interest from the date of the filing of Civil Case Nos. 35524, until fully paid, plus the
costs, but subject to reimbursement of Pacific Banking from Babst whatever Pacific
Banking should pay unto Hart on account of this judgment, the other defendants are
absolved with no more pronouncement as to costs with respect to them. (pp. 62-63,
Rollo)
Hence this petition with petitioners contending that:
a. Respondent Court of Appeals committed a grave error in not applying in favor of
the herein petitioner the clear unequivocal ruling of this Honorable Court in the case
of Philippine Engineering vs. Green, 48 Phil. 466, that "an agreement to extend the
time of payment in order to be valid must be for a definite time," which was relied
upon by the trial court in overruling the private respondents' claim that petitioners had
granted them orally an indefinite extension of time to pay the loan.
b. Respondent Court of Appeals committed a grave error in finding that petitioner
bank agreed to an indefinite extension of time to pay the loan on the basis of the
testimony of private respondent Hart contained in his deposition which was admitted
in evidence over the petitioners' objection; and that said finding is clearly violative of
parol evidence rule.
c. Respondent Court of Appeals committed a grave error in ignoring the legal
presumption of good faith established by Article 527 of the New Civil Code when it
imputed bad faith to petitioner in foreclosing the pledge and in not considering the
issue to have been finally disposed of by the trial court in its resolution, dated March
19, 1958 dissolving the writ of preliminary injunction and expressly allowing the
foreclosure sale.

d. Respondent Court of Appeals committed a grave error in condemning petitioners

to pay damages to private respondents notwithstanding that petitioner bank merely
exercised a right under the law in foreclosing the pledge.
e. Respondent Court of Appeals committed a grave error in holding petitioner
Chester G. Babst personally liable to private respondents under Articles 2180 and
2181 of the New civil Code.
f. Respondent Court of Appeals committed a grave error in sentencing petitioner
Chester G. Babst to reimburse his co-petitioner bank, whatever amounts the latter
may be required to pay the private respondents on account of the judgment,
notwithstanding that said bank had not filed a cross-claim against him and there was
absolutely no litigation between them. (pp. 14-15, Rollo)
We find for the respondents on the following grounds:
First, petitioners allege that the Court of Appeals erred in deviating from the principle and rule of
stare decisis by not applying in favor of petitioners the ruling in the case of Philippine Engineering v.
Green (48 Phil. 466) that "an agreement to extend the time of payment in order to be valid must be
for a definite time" which was relied upon by the trial court in overruling the private respondents'
claim that the petitioners had granted them orally an indefinite extension of time to pay the loan.
A reading of the Philippine Engineering Co. case shows that the authority quoted from (i.e. 8 Corpus
Juris 425-429) was not the ground used by the Court in not giving credit to therein defendant's
statement as to the purported agreement for an indefinite extension of time for the payment of the
note. The principle relied upon in that case was the dead man's statute. The Court stated that the
reason for not believing the purported agreement for extension of time to pay the note was that there
was no sufficient proof of the purported agreement because:
Here we have only the defendant's statement as to the purported agreement for an
indefinite period of grace, with one now dead. Such proof falls far short of satisfying
the rules of evidence. (Phil. Engineering v. Green, 48 Phil. p. 468)
In the case at bar, the parties to the purported agreement, Hart and Babst, were still alive, and both
testified in the trial court regarding the purported extension. Their testimonies are in fact, quoted in
the decision of the respondent Court of Appeals (pp. 49-54, Rollo).
We also note, that the rule which states that there can be no valid extension of time by oral
agreement unless the extension is for a definite time, is not absolute but admits of qualifications and
exceptions.
The general rule is that an agreement to extend the time of payment, in order to be
valid, must be for a definite time, although it seems that no precise date be fixed, it
being sufficient that the time can be readily determined. (8 C.J. 425)

In case the period of extension is not precise, the provisions of Article 1197 of the Civil Code should
apply. In this case, there was an agreement to extend the payment of the loan, including the first
installment thereon which was due on or before July 1957. As the Court of Appeals stated:
...-and here, this court is rather well convinced that Hart had been given the
assurance by the conduct of Babst, Executive Vice President of Pacific Bank, that
payment would not as yet be pressed, and under 1197 New Civil Code, the meaning
must be that there having been intended a period to pay modifying the fixed period in
original promissory note, really, the cause of action of Pacific Bank would have been
to ask the Courts for the fixing of the term; (pp. 59-60, Rollo)
The pledge executed as collateral security on February 9, 1958 no longer contained the provision on
an installment of P 50,000.00 due on or before July 1957. This can mean no other thing than that the
time of payment of the said installment of P 50,000.00 was extended.
It is settled that bills and notes may be varied by subsequent agreement. Thus, conditions may be
introduced and arrangements made changing the terms of payment (10 CJS 758). The agreement
for extension of the parties is clearly indicated and may be inferred from the acts and declarations of
the parties, as testified to in court (pp. 49-52, Rollo).
The pledge constituted on February 19, 1958 on the shares of stocks of Insular Farms, Inc. was
sufficient consideration for the extension, considering that this pledge was the additional collateral
required by Pacific Banking in addition to the continuing guarantee of Clarkin.
Petitioners contend that the admission of Joseph Hart's testimony regarding the extension of time to
pay, over the petitioners' objections, was violative of the parol evidence rule. This argument is
untenable in view of the fact that Hart's testimony regarding the oral agreement for extension of time
to pay was admitted in evidence without objection from petitioner Babst when the same was first
offered as evidence before the trial court. Without need therefore of a lengthy discussion of the
background facts on this issue, and even granting that said testimony violated the parol evidence
rule, it was nevertheless properly admitted for failure of petitioner to timely object to the same. Well
settled is the rule that failure to object to parol evidence constitutes a waiver to the admissibility of
said parol evidence (see Talosig v. Vda. de Niebe, 43 SCRA 472).
Petitioners likewise argue that the Court of Appeals erred in ignoring the presumption of good faith
provided in Art. 527 of the Civil Code when it imputed bad faith to petitioners in foreclosing the
pledge, They argue in support thereof that the extrajudicial foreclosure was held only after it was
sanctioned by the trial court; and that the main ground alleged by the private respondents against
the foreclosure was the alleged grant by Pacific Banking Corporation of an indefinite extension of
time to pay the obligation; that private respondents did not adduce any evidence to prove the grant
of extension, for which reason the trial court did not believe that there was such a grant, that in view
thereof, the foreclosure which even the Court of Appeals considered as valid, cannot be considered
to have been done in bad faith.
The presumption of good faith of possession provided in Article 527, is only a presumption juris
tantum Said presumption cannot stand in the light of the evidence to the contrary in the record.

It was established that there was an agreement to extend indefinitely the payment of the installment
of P50,000.00 in July 1957 as provided in the promissory note. Consequently, Pacific Banking
Corporation was precluded from enforcing the payment of the said installment of July 1957, before
the expiration of the indefinite period of extension, which period had to be fixed by the court as
provided in Art. 1197 of the Civil Code (10 CJS p. 7611, citing Drake vs. Pueblo Nat. Bank, 96 P.
999, 44 Colo. 49).
Even the pledge which modified the fixed period in the original promissory note, did not provide for
dates of payment of installments, nor of any fixed date of maturity of the whole amount of
indebtedness. Accordingly, the date of maturity of the indebtedness should be as may be determined
by the proper court under Art. 1197 of the Civil Code. Hence, the disputed foreclosure and the
subsequent sale were premature.
The whole indebtedness was guaranteed by the continuing guaranty of Clarkin, who had a
corresponding deposit with Pacific Banking which guaranty and deposit, Babst and Charles Chua,
president of Pacific Banking, had actual knowledge of.
The Court of Appeals noted that no demand for payment of the P50,000.00 was made right after it
allegedly fell due. It was only on March 4, 1958 or 13 days after the execution of the pledge
instrument on February 19,1958 that PBC presented its demand for payment to Insular Farms.
As found by the Court of Appeals, there was really no investigation of Insular Farms' ability to pay
the loan after the pledge was executed but before the demand for payment, considering that the
latter was made barely two weeks after the execution of the pledge.
The inconsistency of the petitioner's position vis-a-vis the evidence on record is apparent. According
to Babst, the investigation was made by Mr. Joseph Tupaz, who rendered his report (TSN, IX: 6-9, C
Babst). The report, however, as found by the Court of Appeals,, was dated August 28, 1957 way
before the pledge was executed on February 19, 1958. Babst also Identified an auditor's report by
Sycip, Gorres and Velayo dated March 17, 1958. The first paragraph of the report states that the
auditors went to inspect Insular Farms pursuant to a request of Babst dated March 5, 1958 that is,
as found by the Court of Appeals just one day after Babst had through his letter of March 4,1958,
threatened Insular Farms, Clarkin and Hart, with the remedies available to Pacific Bank if the whole
loan was not paid within 48 hours. This can also mean that the investigation by the auditing firm was
a well conceived subterfuge, when all the while, foreclosure was already intended against private
respondents.
On account of the foregoing, the Court of Appeals concluded that the foreclosure was an act of bad
faith:
5th-Foregoing cannot but convince this Court that the foreclosure was not an act of
good faith on the part of the Pacific Banking for it must be bound by the acts or
representations, active or tacit of its agent or its Executive Vice-President Babst, ...
(pp. 56-57, Rollo)

Petitioners furthermore claim that the Court of Appeals erred in ordering them to pay damages to
private respondents as they were merely exercising a light under the law in foreclosing the pledge.
They also argue that assuming that private respondent suffered damages on account of the
foreclosure, such damages would be aminimum absque injuria, the damage having been caused by
the lawful and proper exercise of the right to foreclosure, and an act of prudence on the part of
Pacific Banking Corporation to protect its own interests and those of its depositors.
In the light of the above discussion and our finding that the foreclosure sale was premature and done
in bad faith, petitioners are liable for damages arising from a quasi-delict. We see no compelling
reason to set aside the findings of the respondent court on this matter.
Finally, the petitioners claim that it was error for the respondent court to hold petitioner Chester G.
Babst personally liable to private respondents under Articles 2180 and 2181 of the Civil Code.
Petitioners also contend that it was error to order Chester G. Babst to reimburse Pacific Banking
whatever Pacific Banking may be required to pay the private respondents, inasmuch as Pacific
Banking has not filed a cross claim against Chester G. Babst.
The Court of Appeals applied Article 2180 of the Civil Code, under which, "employers shall be liable
for the damages caused by their employees ... acting within the scope of their assigned tasks."
Chester G. Babst, as admitted, was Executive Vice-President of Pacific Banking Corporation and
"acted only upon direction by the Board of Directors of the Pacific Banking Corporation." (p. 127,
Rollo) The appellate court also applied Article 2181 of the same Code which provides that "whoever
pays for the damages caused by his dependents or employees may recover from the latter what he
has paid or delivered in satisfaction of the claim." (Art. 2181, Civil Code)
It must be noted, however, that as between Pacific Banking and Babst, the law merely gives the
employer a right to reimbursement from the employee for what is paid to the private respondent.
Article 2181 does not make recovery from the employee a mandatory requirement. A right to relief
shall be recognized only when the party concerned asserts it through a proper pleading filed in court.
In this case, the employer, Pacific Banking Corporation did not manifest any claim against Babst by
filing a cross-claim before the trial court; thus, it cannot make its light automatically enforceable.
Babst was made a party to the case upon the complaint of the private respondents in his official
capacity as Executive Vice President of the bank. In the absence of a cross-claim against Babst, the
court has no basis for enforcing a right against him to which his co-defendant may be entitled. We
leave the matter to the two petitioners' own internal arrangements or actions should the bank decide
to charge its own officer.
WHEREFORE, the petition for review on certiorari is DISMISSED subject to a MODIFICATION with
respect to the personal liability of petitioner Chester G. Babst to Pacific Banking Corporation which is
SET ASIDE.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-12692

January 30, 1960

COSMIC LUMBER COMPANY, INC., plaintiff-appellee,

vs.
GAPITA MANAOIS, defendant-appellant.
Primicias and Del Castillo for appellee.
Jose Rivera for appellant.
PADILLA, J.:
The defendants appeal from a judgment of the Court of First Instance of Pangasinan, Fourth Branch,
ordering her to pay the plaintiff the sum of P4,147.74, lawful interest thereon from 24 March 1954
when the original complaint was by the Court of Appeals to this Court for it involves only a question
of law.
As agreed upon by the parties, the facts are: On different dates from 10 November 1952 to 30 June
1953 the appellant bought, took delivery and received from the appellee hardware goods, lumber
and construction materials valued at the total sum of P12,127.57 (par. 1, stipulation of facts; Exhibits
A to Z; AA to OO), and from 4 November 1952 to 10 March 1954 the appellant paid the appellee the
total sum of P6,979.83 which the latter credited to the former's account (par. 3, stipulation of facts;
Exhibits PP, PP-1, QQ, QQ-1 to QQ-2). On 23 December 1954, after the original complaint had been
filed by the appellee ( 24 March 1954), the appellant paid the appellee the sum on P1,000 which the
latter also credited to the former's account (par. 6, stipulation of facts), thereby reducing her total
indebtedness to P4, 147.74.
The appellant does not deny that she received the wares and materials listed in the invoices
(Exhibits A to Z and AA to OO), and that she is still indebted to the appellee in the sum of P4,147.74.
At the hearing of the case on 4 June 1956, her counsel withdrew the objection (filed earlier during
the day) to the items listed in some of the invoices (Minutes of the session of 4 June 1956).
However, she argues that as no time for payment was stipulated or fixed and from the nature and
the circumstances of the obligation it could be inferred that a period was intended, the Court should
fix the period for payment pursuant to article 1197 of the new Civil Code.
The parties entered into a contract of sale on credit. In the invoices (Exhibit A to Z and AA to OO) of
the wares and material sold and delivered to the appellant, the words "credit sales" appear and it is
stated that
All civil actions on this contract shall be instituted in the courts of the City of Dagupan and it
is hereby agreed that all may/or purchases from this Company are payable in the said City of

Dagupan. It is agreed that if this bill is not paid within . . . days from date hereof I/we will pay
interest at the rate of 10 percentum per annum on all overdue accounts. The buyer hereby
agrees to pay and all attorney's fees and court costs should the seller institute legal action.
Goods travel at buyer's risk. No claim of whatsoever nature will be considered after 24 hours
from date of delivery.
The parties intended to fix a period for payment of the appellant's obligation but failed to do so.
Under article 1197 of the new Civil Code, the Court may fix it. Taking into consideration that from 10
November 1952, the first sale, and 30 June 1953, the last sale, to the present, more than six and
nearly seven years already have elapsed, the appellant who does not deny her obligation must be
ordered to pay the appellee the amount she still owes it within fifteen (15) days from the date the
judgment shall have become final.
With the slight modification just mentioned, the judgment appealed from is affirmed, with costs
against the appellant.
Paras, Bengzon, C.J., Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Endencia, Barrera and Gutierrez David, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-47350 April 21, 1981
F. S. DIVINAGRACIA AGRO-COMMERCIAL INC. petitioner,
vs.
HONORABLE COURT OF APPEALS and RUFINO FERNANDEZ, respondents.

GUERRERO, J.:
This is a petition for certiorari to review the decision of the Court of Appeals in CA-G.R. No. S.P.
06585 entitled "Rufino Q. Fernandez vs. Hon. Ricardo M. Ilarde, et al.," promulgated on September
22, 1977.
The facts of this case are clear, undisputed and may be summarized briefly as follows:
Private respondent's father was the original lessee of the building and lot owned by the late Doa
Concepcion Gay de Loring and the spouses Mercedes Van Kauffman and Jaime Ibaez de Aldecoa.
This lease dates back to 1899. After his father's demise, private respondent continued the lease. The
building and lot subject of the lease was bought by petitioner herein from the interest state estate of
the original owners for the sum of P250,000.00 on July 9, 1974. Before its purchase, private
respondent was a lessee of the said owners and was paying them a rental of P1,250.00 a month.
After the purchase, the rental corresponding to first half of the month of July, 1974 in the sum of
P625.00 was paid by private respondent to the original owners and that of the second half in the
sum of P625.00 to the new owner, petitioner herein. In the continuance of the lease, it was verbally
agreed by and between the petitioner and private respondent that the rental for the succeeding
months would be increased to P2,000.00 starting August, 1974. This went on until September, 1975.
About the second week of October, 1975, private respondent was informed by a representative of
petitioner, Atty. Santiago Divinagracia, that his contract of lease would terminate on October 31,
1975. When private respondent refused to vacate the premises on October 31, 1975, petitioner
reiterated the advice earlier made in a letter dated November 4, 1975 formally advising him of the
termination of the lease on October 31, 1975 and giving him, the private respondent, a final
extension to occupy the premises up to the end of November, 1975, for which reason petitioner
refused to accept further payment of rentals for December, 1975. Private respondent in turn
informed petitioner that he was depositing his rentals for the succeeding months with the Clerk of
Court.
A complaint for unlawful detainer was filed by herein petitioner against private respondent before the
City Court of Iloilo, Branch I, which rendered a decision in favor of private respondent, the dispositive
portion of which reads:

WHEREFORE, this court hereby renders its decision

a. Dismissing the complaint;
b. Ordering defendant to pay plaintiff the sum of P3,000.00 a month as the
reasonable rent for the use of the premises, beginning January, 1976;
c. Fixing the duration of the lease of defendant which, since 1899 to the present, is
76 years, at one year for every 10 years, i.e., that defendant may continue to lease
the premises for seven and a half (7-1/2) years to commence from finality of the
decision;
without pronouncement as to the costs.
From the decision, petitioner appealed to the Court of First Instance which modified the City Court's
decision by:
(a) Dismissing the complaint;
(b) Ordering defendant to pay plaintiff the sum of P3,000.00 a month, as the
reasonable rent for the use of the premises, beginning January, 1976; and
(c) Extending the duration of the lease by defendant of plaintiff's property to one (1)
year to commence from finality of the decision;
without pronouncement as to costs.
From the latter decision, private respondent filed a petition for review before the Court of Appeals
which modified the previous decision. The dispositive portion of the Appellate Court's decision
states:
WHEREFORE, and as thus modified, in the sense that the lease should be as it is
hereby extended for another five (5) years, the judgment of the court a quo is
affirmed in all other respects. Without pronouncement as to costs.
From the judgment of the Court of Appeals, petitioner herein appealed by certiorari to this Coat,
assigning a single error involving a legal issue, to wit:
The respondent Court of Appeals committed a grave error in the correct application of Article 1687 of
the New Civil Code by extending the lease for another five (5) years which is a grave abuse of
discretion amounting to lack or in excess of its jurisdiction.
Petitioner, in support of the foregoing assigned error argues upon the following considerations:
I. The Court of Appeals practically made a contract between the parties which is
contrary to the spirit and intent of Article 1687 of the New Civil Code;

II. The Court of Appeals did not show that the Court of First instance of Iloilo Branch
V, presided by the Hon. Judge Ricardo M. Ilarde to which this case was originally
appealed, gravely abused its discretion by reducing the term of the lease to only one
(1) year;
III. The conclusion arrived at by the Court of Appeals are contrary to law, the
admitted facts and admission of the parties;
IV. The Court of Appeals did not observe the criteria set out by this honorable Court
in the application of Article 1687 of the New Civil Code in the exercise of its
discretion.
The first and fourth arguments of the petitioner relate solely to the proper application of Article 1687
of the New Civil Code, hence We are constrained to consider and resolve them together. Petitioner
alleges that there was grave abuse of discretion by the Court of Appeals in reckoning the occupancy
of the lessee from 1899 when his predecessor-in-interest was the occupant of the premises. It
should have been reckoned only from his personal occupancy of the premises. Petitioner further
alleges that the Court of Appeals was oblivious of the following facts: (1) There was a change of
ownership - the lessor became owner only on July 9, 1974; (2) The leased premises is a commercial
lot; (3) the Private respondent was made to understand that in the future, the petitioner may need
the premises for its own use; (4) The private respondent has admitted that he has two stores, one at
the premises subject of this case and the other located at his own commercial building; and (5) The
petitioner herein was the one who filed the unlawful detainer case. It could have been another matter
had the private respondent filed an independent action asking for the fixing of the period of the
lease.
Withal, petitioner concluded that the decision of the respondent Court is most unfair, arbitrary and
inequitable. It is unjust and authoritarian. The Court practically made a contract between the parties.
It curtailed the basic human right of the parties of their freedom to contract. Petitioner's contention is
devoid of merit. In the first place, it is beyond dispute that Article 1687 of the New Civil Code is
applicable, which article states:
Art. 1687. If the period for the lease has not been fixed, it is understood to be from
year to year, if the rent agreed upon is annual; from month to month, if it is monthly,
from week to week, if the rent is weekly; and from day to day, if the rent is to be paid
daily. However, even though a monthly rent is paid and no period for the lease has
been set, the court may fix a longer term for the lease after the lessee has occupied
the premises for over one year. ...
Article 1687 of the New Civil Code must be correlated with Article 1197 of the New Civil Code which
provides:
Art. 1197. If the obligation does not fix a period, but from its nature and
circumstances it can be inferred that a period was intended, the court may fix the
duration thereof. ...

Considering both Articles together, it is at once clear and evident that the court is accorded the
power to fix a longer term for the lease, which power is potestative or discretionary in nature. This
prerogative is addressed to the court's sound judgment and is controlled by equitable considerations.
"The court may fix a longer term where equities come into play demanding an extension." (Divino v.
Fable de Marcos, 4 SCRA 186).
It may not, therefore, be contended that the Court of Appeals in the exercise of its discretionary
power under Article 1687 in relation with Article 1197 made a contract between the parties, since the
very purpose of the law is not the fixing of a longer term for the lease, but to make the indefinite
period of lease definite by fixing once and for all the remaining duration of the lease.
Neither can We sustain the factors assigned by the petitioner herein, which the Court of Appeals
refused to appreciate. Squarely resolving these factors that there was a change of ownership, the
lessor became the owner only on July 9, 1974, and that the lease is not recorded in the Registry of
Property, is of no moment. In the first place, that purchaser is bound to continue the lease is explicit
under Article 1676 of the Civil Code, more specifically the same article provides: "The purchaser of a
piece of land which is under a lease that is not recorded in the Registry of Property may terminate
the lease, save when there is a stipulation to the contrary in the contract of sale, or when the
purchaser knows of the existence of the lease." Such knowledge of the lease was established in the
findings of the Court of Appeals, thus:
... that private respondent knew of the existence of such lease is eloquently shown
by the fact that when the private respondent bought the property on July 9, 1974, the
private respondent received only the rental corresponding to the second half of the
month of July, or the sum of P625.00. The rental for the first half of the same month
was in fact paid to the former owner. This circumstance not only shows that private
respondent knew of the existence of such prior lease, but also that they knew the
monthly rental fixed for the lease of the premises. ... we therefore entertain no doubt
that private respondent knew of the existence of such lease and that from its
actuation from August 1974 to September 1975, it allowed the herein petitioner to
continue with the lease indefinitely ... .
Secondly, that the leased premises is a commercial lot finds no legal significance. Article 1687 does
not make any qualification nor distinction as to its application. Under the principle of expressio unius
est exclusion alterius, the law applies to both residential and commercial lands as well. Thirdly, that
private respondent was made to understand that in the future the petitioner may need the premises
for its own use is without importance in the case at bar. Whether or not there was such an
understanding would not affect the lease contract existing between the parties. Such knowledge is
not sufficient to terminate an existing contract in compliance with the provisions of Article 1687. To
hold otherwise would be making a fetish of a technicality which the law abominates Besides, every
owner is precisely interested in his own property and the fact that he may need the property at some
future time is beyond human scruples. But then the question of when such future time win arise is
potestative in nature and will depend on the prevailing circumstances and conditions as well as the
acquiescence of the parties, so that by reason of equity, justice and fairness, Article 1687 supplies
the remedy in the event the parties decide to terminate their contract. Fourthly, that private
respondents admitted that he has two stores, one at the subject premises and the other at his own

commercial establishment, does not alter the applicability of Article 1687, considering the fact that
the private respondent's other store is also tenanted and as the Court of Appeals correctly pointed
out, "... It would be most difficult for him to eject the tenants of his property for him to move in. ...
Moreover, petitioner established his hardware business in the premises since 1946. Any sudden
transfer would certainly affect his business ..." . Finally, the fact that petitioner herein was the one
who filed the unlawful detainer case instead of the private respondent is immaterial considering that
private respondent had in his counterclaim prayed that "the Court fix the term of the lease to ten (10)
years from the final termination of the case." The provision of Article 1687 may be interposed as a
defense in the answer (Imperial Insurance, Inc. v. Simon, 14 SCRA 855), or as a counterclaim
therein. The exercise of the power given to the Court in Article 1687 to extend the period of the lease
when the defendant has been in occupancy of the premises for more than a year, does not
contemplate a separate action for that purpose. That power may be exercised as an incident in the
action for ejectment itself and by the court having jurisdiction over it (Ramirez vs. Sy Chit, 21 SCRA
1364). Moreover, We cannot lose sight of the fact that it would be an idle and costly procedure to
require the lessee to file another action to have the term of the lease fixed, with all the possible
delays and inconveniences attendant upon a lawsuit.
Apropos the second argument that the Court of Appeals did not show that the Court of First Instance
of Iloilo to which this case was originally appealed, gravely abused its discretion, the petitioner
maintains that since it is the lower court which is familiar with the reigning conditions of each locality.
its judgment on the additional term to be granted to the lessee in each case should not be interfered
with on appeal, absent a clear abuse of discretion.
It is well to stress that in a petition for review, the appellate court has the discretion to alter, modify or
affirm the decision brought to it on appeal. In the exercise of such discretion, it may either increase
or decrease the extension of the lease period granted by the lower court.
The onus probandi that the respondent Court committed grave abuse of discretion is upon the
petitioner himself, and not the court reviewing the decision. The petitioner must show on certiorari
that the appellate Court exercised its discretion arbitrarily or despotically. We have examined the
records and We find nothing of importance to warrant a disturbance of the conclusions reached by
the respondent Court of Appeals. In view of Our settled and established jurisprudence, that when the
lower court has jurisdiction over the subject matter of the case, its actuation in the exercise of such
jurisdiction is not correctible by certiorari (Matanog v. Alejandro, G.R. Nos. L-22502-03, June 30,
1964).
The final argument of the petitioner faults the Court of Appeals' findings as contrary to law, admitted
facts and admission of the parties. The advocation is without merit. It is a legal rule that not every
error in the proceeding or every erroneous conclusion of law or of fact is abuse of discretion. In the
absence of any indication and cogent reason, We will not encroach upon the respondent Court's
prerogative. After a careful perusal of the judgment of the Court of Appeals, We find no reversible
error committed that would warrant the reversal of the present case. We are in full accord with the
findings and conclusions of the respondent Court as the same are final and binding upon Us. Hence,
We again reiterate the voluminous jurisprudence to the effect that "findings of facts of the Court of
Appeals are binding on the Supreme Court and cannot be reviewed. (Torres v. People, 39 SCRA 28;

Heirs of Francisco Pasco v. Han Pia, 45 SCRA 164; Tolentino v. De Jesus, 56 SCRA 167; Tiongco v.
De la Merced, 58 SCRA 89).
We are not unmindful that the foregoing established rule admits of exceptions, such that the findings
of fact of the Court of Appeals may be reviewed by Us:
(1) When the same 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 misapprehension of facts; and
(5) When the Court of Appeals, in making its findings, went beyond the issues of the
case and the same are contrary to the admissions of both appellant and appellee.
(Ramos v. CA, 63 SCRA 331; Napolis v. CA, 43 SCRA 301).
We find that not one of the exceptional circumstances aforementioned is present in the case at bar.
The findings of facts of the appealed decision are sufficiently supported by substantial evidence, and
the conclusions drawn therefrom are not against the law or jurisprudence. The decision of the Court,
of Appeals rests on cited doctrinal jurisprudence, justice and equity as it stated that:
Considering the doctrine laid down in the said decisions (Gregorio Araneta, Inc. vs.
Dolores de Mesa, 35 SCRA 137, and Divino vs. Marcos, et al., 4 SCRA 186), and the
fact that the petitioner had been in the occupancy of the premises since 1899,
petitioner's occupancy has gone for no less than 70 years, We, therefore, find in the
broader interest of justice and equity the extension of the lease should be for a
period of five (5) years.
After having gone at length over the records of the present case, and in the light of the above
pronouncement, We are positively convinced that the petitioner is not entitled to the writ of certiorari.
There is absolutely no showing that the respondent Court acted so "arbitrarily", "despoticall" or
"capriciously" as to amount to lack of jurisdiction in reviewing the appealed decision. It is settled to
the point of being elementary that the only question involved in certiorari is jurisdiction, either want of
jurisdiction or excess thereof, and abuse of discretion shall warrant the issuance of the extraordinary
remedy of certiorari when the same is so grave as when the power is exercised in an arbitrary or
despotic manner by reason of passion, prejudice or personal hostility, and it must be so patent and
gross as to amount to an evasion of positive duty, or to a virtual refusal to perform a duty enjoined,
or to act at all, in contemplation of law (Abig v. Constantino, 2 SCRA 299; Abad Santos v. Province of
Tarlac, 67 Phil. 480; Alafriz v. Wable 72 Phil. 278). Even mere abuse of discretion is not sufficient by
itself to justify the issuance of a writ of certiorari. For that purpose, the abuse of discretion must be
grave and patent and it must be shown that it was exercised arbitrarily or despotically. (Travera
Luna, Inc. v. Nable, 72 Phil. 278; Villa Rey Transit, Inc. v. Bello, 75 SCRA 735) which is not the case
made out by the present petition.

WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Appeals is hereby
AFFIRMED, with costs against the petitioner.
SO ORDERED.
Makasiar, Fernandez and Melencio-Herrera, JJ., concur.

Separate Opinions

TEEHANKEE , Acting C.J., concurring:

I concur in the result of the judgment penned by Mr. Justice Guerrero affirming the decision of the
Court of Appeals. Said decision of the Court of Appeals extended the lease of respondent over the
commercial property for an unqualified period of five (5) years "in the broader interest of justice and
equity and modified that of the Court of First Instance which extended the duration of respondents's
lease of petitioner's property "to one (1) year to commence from finality of the decision." Accordingly,
it should be understood that such flat and unqualified five-year extension granted by the appellate
court should be counted from the date of promulgation of its decision on September 22, 1977 which
will therefore expire on September 21, 1982.

Separate Opinions
TEEHANKEE , Acting C.J., concurring:
I concur in the result of the judgment penned by Mr. Justice Guerrero affirming the decision of the
Court of Appeals. Said decision of the Court of Appeals extended the lease of respondent over the
commercial property for an unqualified period of five (5) years "in the broader interest of justice and
equity and modified that of the Court of First Instance which extended the duration of respondents's
lease of petitioner's property "to one (1) year to commence from finality of the decision." Accordingly,
it should be understood that such flat and unqualified five-year extension granted by the appellate
court should be counted from the date of promulgation of its decision on September 22, 1977 which
will therefore expire on September 21, 1982.

G.R. No. 164748

January 27, 2006

THE SECRETARY OF EDUCATION and DR. BENITO TUMAMAO, Schools Division

Superintendent of Isabela, Petitioners,
vs.
HEIRS OF RUFINO DULAY, SR., represented by IGNACIA VICENTE, RUFINO DULAY, JR.,
SUSANA DULAY, ADELAIDA DULAY, LUZVIMINDA DULAY and CECILIA DULAY, Respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. CV
No. 78314 which affirmed the Decision2 of the Regional Trial Court (RTC) of Santiago City, Isabela,
Branch 35, in Civil Case No. 35-2397.
The spouses Rufino Dulay, Sr. and Ignacia Vicente were the owners of a parcel of land located in
Rizal, Santiago, Isabela, with an area of 29,002 square meters. The lot was covered by Original
Certificate of Title No. P-6776.
On August 3, 1981, the spouses Dulay executed a deed of donation3 over a 10,000-square-meter
portion of their property in favor of the Ministry of Education and Culture (now the Department of
Education, Culture and Sports [DECS]). The deed provided, among others:
That for and in consideration of the benefits that may be derived from the use of the above described
property which is intended for school purposes, the said DONORS do by by (sic) these presents
TRANSFER AND CONVEY by way of DONATION unto the DONEE, its successors and assigns, the
above property to become effective upon the signing of this document.4
The property was subdivided. On April 13, 1983, Transfer Certificate of Title (TCT) No. T1433375 covering the portion identified as Lot 8858-A was issued in the name of the Ministry of
Education and Culture, represented by Laurencio C. Ramel, the Superintendent of Schools of
Isabela. However, the property was not used for school purposes and remained idle.
Sometime in 1988, the DECS, through its Secretary, started construction of the Rizal National High
School building on a parcel of land it acquired from Alejandro Feliciano. The school site was about 2
kilometers away from the land donated by the spouses Dulay.
In a letter6 to the DECS Secretary dated August 19, 1994, the spouses Dulay requested that the
property be returned to them considering that the land was never used since 1981, or a period of
more than 13 years. On August 28, 1994, the Barangay Council of Rizal, Santiago City issued
Resolution No. 397 recognizing the right of the donors to redeem the subject parcel of land because
of the DECS failure to utilize it for the intended purpose. It further resolved that the Rizal National
High School no longer needed the donated land "considering its distance from the main campus and
[the] failure to utilize the property for a long period of time."

On December 22, 1994, Rufino Dulay, Sr. passed away at the age of 80.8 His heirs sought the help
of the Sangguniang Panlungsod of Santiago City via an undated letter 9 requesting the approval of a
resolution allowing them to redeem the donated property. The Sangguniang Panlungsod denied the
request inasmuch as the city government was not a party to the deed of donation. 10
On August 31, 1997, the heirs of Dulay, Sr., herein respondents, filed a complaint for the revocation
of the deed of donation and cancellation of TCT No. T-143337 before the RTC of Santiago City,
Isabela, Branch 35, against the DECS Secretary and Dr. Benito Tumamao, the Schools Division
Superintendent of Isabela. Respondents alleged that there was a condition in the deed of donation:
that the DECS, as donee, utilize the subject property for school purposes, that is, the construction of
a building to house the Rizal National High School. Respondents alleged that the DECS did not fulfill
the condition and that the land remained idle up to the present. Respondents also averred that the
donation inter vivos was inofficious, since the late Rufino Dulay, Sr. donated more than what he
could give by will.
Petitioners, through the Office of the Solicitor General (OSG), interposed the following defenses: (a)
the DECS complied with said condition because the land was being used by the school as its
technology and home economics laboratory; (b) the donation was not inofficious for the donors were
the owners of five other parcels of land, all located at Rizal, Santiago City; (c) the DECS acquired
the disputed property by virtue of purchase made on December 8, 1997 by the barangay of Rizal,
Santiago City in the amount of P18,000.00 as certified by its former Barangay Captain, Jesus San
Juan;11 and (d) the action of the respondents had prescribed. The OSG also claimed that students
planted a portion of the land with rice, mahogany seedlings, and fruit-bearing trees; the produce
would then be sold and the proceeds used for the construction of a school building on the subject
property.
In their Reply,12 respondents denied that the donated land was being used as a technology and
home economics laboratory, and averred that there were no improvements on the property.
Moreover, the fact that rice was planted on the lot was contrary to the intended purpose of the
donation. The respondents likewise denied that the property had been sold to the barangay. While
the other properties of the late donor had been sold, the deeds thereon had not been registered, and
the tax declarations not yet transferred in the names of the purchasers.
Thereafter, trial ensued. On March 6, 2001, an ocular inspection of the property was conducted by
the parties and their respective counsels, including the Presiding Judge. It was confirmed that the
land was barren, save for a small portion which was planted with palay. A demolished house was
also found in the periphery of the donated lot.13
On December 26, 2002, the trial court rendered its decision in favor of respondents. The fallo reads:
WHEREFORE, in the light of the foregoing considerations, the Court hereby DECLARES the deed of
donation, Exhibit "A," executed by the late Rufino Dulay, Sr. and his wife Ignacia Vicente over a
portion of the land covered by O.C.T. No. P-6776 and now covered by T.C.T. No. T-143337 in the
name of the donee Department of Education and Culture as REVOKED. The defendant DECS is
ORDERED to execute the deed of reconveyance of the land in favor of the plaintiffs heirs of Rufino
Dulay, Sr.

SO ORDERED.14
In revoking the deed of donation, the trial court ruled that the donation was subject to a resolutory
condition, namely, that the land donated shall be used for school purposes. It was no longer
necessary to determine the intended "school purpose" because it was established that the donee did
not use the land. Thus, the condition was not complied with since the property was donated in July
1981. Moreover, the DECS did not intend to use the property for school purposes because a school
had already been built and established in another lot located in the same barangay, about two
kilometers away from the subject land. Finally, the trial court rejected petitioners contention that the
donation was inofficious.
Aggrieved, the OSG appealed the decision to the CA.
On July 30, 2004, the appellate court rendered judgment affirming the decision. The court held that
the DECS failed to comply with the condition in the donation, that is, to use the property for school
purposes. The CA further ruled that the donation was onerous considering that the donee was
burdened with the obligation to utilize the land for school purposes; therefore, the four-year
prescriptive period under Article 764 of the New Civil Code did not apply. Moreover, the CA declared
that a deed of donation is considered a written contract and is governed by Article 1144 of the New
Civil Code, which provides for a 10-year prescriptive period from the time the cause of action
accrues. According to the CA, the respondents cause of action for the revocation of the donation
should be reckoned from the expiration of a reasonable opportunity for the DECS to comply with
what was incumbent upon it.
Petitioners filed a motion for reconsideration, which the CA denied.
Petitioners seek relief from this Court via petition for review on certiorari, contending that:
I.
THE DEPARTMENT OF EDUCATION, THROUGH THE RIZAL NATIONAL HIGH SCHOOL,
HAD COMPLIED WITH THE CONDITION IMPOSED IN THE DEED OF DONATION.
II.
RESPONDENTS RIGHT TO SEEK THE REVOCATION OF THE DEED OF DONATION, IF
THERE BE ANY, IS ALREADY BARRED BY PRESCRIPTION AND LACHES.15
The Court shall resolve the issues raised by petitioners seriatim.
The donee failed to comply with the condition imposed in the deed of donation
The issue of whether or not petitioner DECS was able to comply with the condition imposed in the
deed of donation is one of fact. There is a question of fact when the doubt or difference arises as to
the truth or falsehood of alleged facts or when the query necessarily solicits calibration of the whole
evidence considering mostly the credibility of witnesses, existence and relevancy of specific

surrounding circumstances, their relation to each other and to the whole and probabilities of the
situation.16 Under Rule 45 of the 1997 Rules of Civil Procedure, only questions of law may be raised
in a petition for review on certiorari, for the simple reason that this Court is not a trier of facts. It is not
for the Court to calibrate the evidence on record, as this is the function of the trial court. Although
there are well-defined exceptions to the rule, nevertheless, after a review of the records, we find no
justification to depart therefrom. Moreover, the trial courts findings of facts, as affirmed by the
appellate court on appeal, are binding on this Court, unless the trial and appellate courts overlooked,
misconstrued or misinterpreted facts and circumstances of substance which, if considered, would
change the outcome of the case. The case has been reviewed thoroughly, and we find no
justification to reverse the CA decision.
Petitioners, through the OSG, maintain that the condition (to use the property for school purposes) is
not limited to the construction of a school building, but includes utilizing it as a technology and home
economics laboratory where students and teachers plant palay, mahogany seedlings, and fruitbearing trees. The OSG insists that the donee did not specify in the deed that the property should be
used for the construction of a school building. According to the OSG, the proceeds of the harvest
were used and are still being used by the Rizal National High School for the construction and
improvement of its present school site. Moreover, it was verified that there was palay planted on the
donated property during the ocular inspection on the property.
In their comment on the petition, respondents dispute petitioners contentions, and aver that no
evidence was presented to prove that, indeed, palay, mahogany seedlings and fruit-bearing trees
were planted on the property. Respondents also emphasized that when the trial court inspected the
subject property, it was discovered to be barren and without any improvement although some
portions thereof were planted with palay. Petitioners even failed to adduce evidence to identify the
person who planted the palay.
The contention of petitioners has no merit.
As gleaned from the CA decision, petitioners failed to prove that the donated property was used for
school purposes as indicated in the deed of donation:
We find it difficult to sustain that the defendant-appellants have complied with the condition of
donation. It is not amiss to state that other than the bare allegation of the defendant-appellants, there
is nothing in the records that could concretely prove that the condition of donation has been
complied with by the defendant-appellants. In the same breadth, the planting of palay on the land
donated can hardly be considered and could not have been the "school purposes" referred to and
intended by the donors when they had donated the land in question. Also, the posture of the
defendant-appellants that the land donated is being used as technology and home economics
laboratory of the Rizal National High School is far from being the truth considering that not only is the
said school located two kilometers away from the land donated but also there was not even a single
classroom built on the land donated that would reasonably indicate that, indeed, classes have been
conducted therein. These observations, together with the unrebutted ocular inspection report made
by the trial court which revealed that the land donated remains idle and without any improvement
thereon for more than a decade since the time of the donation, give Us no other alternative but to

conclude that the defendant-appellants have, indeed, failed to comply with what is incumbent upon
them in the deed of donation.17
In its Order18 dated March 6, 2001, the RTC reiterated that during the ocular inspection of the
property conducted in the presence of the litigants and their counsel, it observed that "the land was
barren; there were no improvements on the donated property though a portion thereof was planted
with palay [and a demolished house built in 1979.]"
Moreover, petitioners failed to adduce a shred of evidence to prove that the palay found in the
property was planted by DECS personnel or at its instance or even by students of the Rizal National
High School. No evidence was adduced to prove that there were existing plans to use the property
for school purposes. Petitioners even debilitated their cause when they claimed in the trial court that
the barangay acquired the property by purchase, relying on the certification of former Barangay
Captain Jesus San Juan.
The right to seek the revocation of donation had not yet prescribed when respondents filed their
complaint
Anent the second issue, we reject the contention of the OSG that respondents cause of action is
already barred by prescription under Article 764 of the New Civil Code, or four years from the noncompliance with the condition in the deed of donation. Since such failure to comply with the condition
of utilizing the property for school purposes became manifest sometime in 1988 when the DECS
utilized another property for the construction of the school building, the four-year prescriptive period
did not commence on such date. Petitioner was given more than enough time to comply with the
condition, and it cannot be allowed to use this fact to its advantage. It must be stressed that the
donation is onerous because the DECS, as donee, was burdened with the obligation to utilize the
land donated for school purposes. Under Article 733 of the New Civil Code, a donation with an
onerous cause is essentially a contract and is thus governed by the rules on contract. 19 We fully
agree with the ruling of the appellate court:
xxx With this, [we] decline to apply the four-year prescriptive period for the revocation of donation
provided under Article 764 of the New Civil Code and instead apply the general rules on contracts
since Article 733 of the same Code, specifically provided that onerous donations shall be governed
by the rules on contracts.
Corollarily, since a deed of donation is considered a written contract, it is governed by Article 1144 of
the New Civil Code, which provides that the prescriptive period for an action arising from a written
contract is ten (10) years from the time the cause of action accrues. In the case of donation, the
accrual of the cause of action is from the expiration of the time within which the donee must comply
with the conditions or obligations of the donation. In the instant case, however, it must be noted that
the subject donation fixed no period within which the donee can comply with the condition of
donation. As such, resort to Article 1197 of
the New Civil Code is necessary. Said article provides that if the obligation does not fix a period, but
from its nature and the circumstances it can be inferred that a period was intended, the courts may
fix the duration thereof. Indeed, from the nature and circumstances of the condition of the subject

donation, it can be inferred that a period was contemplated by the donors. The donors could not
have intended their property to remain idle for a very long period of time when, in fact, they
specifically obliged the defendant-appellants to utilize the land donated for school purposes and thus
put it in good use. xxx20
In Central Philippine University v. Court of Appeals,21 a case squarely in point, we have established
that the legal possibility of bringing the action begins with the expiration of a reasonable opportunity
for the donee to fulfill what has been charged upon it by the donor. Likewise, we held that even if
Article 1197 of the New Civil Code provides that the courts may fix the duration when the obligation
does not determine the period but from its nature and circumstances it can be inferred that a period
was intended, the general rule cannot be applied because to do so would be a mere technicality and
would serve no other purpose than to delay or lead to an unnecessary and expensive multiplication
of suits.22
Altogether, it has been 16 years since the execution of the deed of donation. Petitioner DECS failed
to use the property for the purpose specified in the deed of donation. The property remained barren
and unutilized. Even after respondents sought the return of the property before the courts, petitioner
DECS still failed to draw up plans to use the property for school purposes. In fine, petitioner DECS
has no use for the property; hence, the same shall be reverted to the respondents.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
78314 dated July 30, 2004 is AFFIRMED.
SO ORDERED.

G.R. No. L-11827

July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC.,
SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO
TY, defendants-appellants.
Alejo Mabanag for plaintiff-appellee.
Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.
REYES, J.B.L., J.:
This appeal comes to us directly from the Court of First Instance because the claims involved
aggregate more than P200,000.00.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in the
municipality of Jose Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and
appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into a
contract with any individual or juridical person for the exploration and development of the mining
claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might be
extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record on
Appeal, pp. 17-19) conveying the development and exploitation of said mining claims into the Larap
Iron Mines, a single proprietorship owned solely by and belonging to him, on the same royalty basis
provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and exploitation of the
mining claims in question, opening and paving roads within and outside their boundaries, making
other improvements and installing facilities therein for use in the development of the mines, and in
time extracted therefrom what he claim and estimated to be approximately 24,000 metric tons of iron
ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to
Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject to
certain conditions. As a result, a document entitled "Revocation of Power of Attorney and Contract"
was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that Fonacier would receive from the mining
claims, all his rights and interests on all the roads, improvements, and facilities in or outside said
claims, the right to use the business name "Larap Iron Mines" and its goodwill, and all the records
and documents relative to the mines. In the same document, Gaite transferred to Fonacier all his
rights and interests over the "24,000 tons of iron ore, more or less" that the former had already
extracted from the mineral claims, in consideration of the sum of P75,000.00, P10,000.00 of which
was paid upon the signing of the agreement, and

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out
of the first letter of credit covering the first shipment of iron ores and of the first amount
derived from the local sale of iron ore made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.
To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of
Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated
December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its
stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and
Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was presented
to him by Fonacier together with the "Revocation of Power of Attorney and Contract", Exhibit "A", on
December 8, 1954, he refused to sign said Exhibit "A" unless another bond under written by a
bonding company was put up by defendants to secure the payment of the P65,000.00 balance of
their price of the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"),was executed by the same parties to the first bond Exhibit "A-1", with
the Far Eastern Surety and Insurance Co. as additional surety, but it provided that the liability of the
surety company would attach only when there had been an actual sale of iron ore by the Larap
Mines & Smelting Co. for an amount of not less then P65,000.00, and that, furthermore, the liability
of said surety company would automatically expire on December 8, 1955. Both bonds were attached
to the "Revocation of Power of Attorney and Contract", Exhibit "A", and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two
executed and signed the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier
entered into a "Contract of Mining Operation", ceding, transferring, and conveying unto the Larap
Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in question,
together with the improvements therein and the use of the name "Larap Iron Mines" and its good will,
in consideration of certain royalties. Fonacier likewise transferred, in the same document, the
complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the
Larap & Smelting Co., in consideration for the signing by the company and its stockholders of the
surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety
and Insurance Company, no sale of the approximately 24,000 tons of iron ore had been made by the
Larap Mines & Smelting Co., Inc., nor had the P65,000.00 balance of the price of said ore been paid
to Gaite by Fonacier and his sureties payment of said amount, on the theory that they had lost right
to make use of the period given them when their bond, Exhibit "B" automatically expired (Exhibits "C"
to "C-24"). And when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed
the present complaint against them in the Court of First Instance of Manila (Civil Case No. 29310) for
the payment of the P65,000.00 balance of the price of the ore, consequential damages, and
attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon
by Gaite was subject to a condition that the amount of P65,000.00 would be payable out of the first
letter of credit covering the first shipment of iron ore and/or the first amount derived from the local
sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing of the
complaint, no sale of the iron ore had been made, hence the condition had not yet been fulfilled; and

that consequently, the obligation was not yet due and demandable. Defendant Fonacier also
contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was
actually delivered, and counterclaimed for more than P200,000.00 damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00 become due
and demandable when the defendants failed to renew the surety bond underwritten by the Far
Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were
actually in existence in the mining claims when these parties executed the "Revocation of Power of
Attorney and Contract", Exhibit "A."
On the first question, the lower court held that the obligation of the defendants to pay plaintiff the
P65,000.00 balance of the price of the approximately 24,000 tons of iron ore was one with a term:
i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be effected
within one year or before December 8, 1955; that the giving of security was a condition precedent to
Gait's giving of credit to defendants; and that as the latter failed to put up a good and sufficient
security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on December 8, 1955, the
obligation became due and demandable under Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000
tons of iron ore at the mining claims in question at the time of the execution of the contract Exhibit
"A."
Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him, jointly
and severally, P65,000.00 with interest at 6% per annum from December 9, 1955 until payment, plus
costs. From this judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for resolution: a
motion to declare the appellants Larap Mines & Smelting Co., Inc. and George Krakower in
contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as having become
academic and a motion for new trial and/or to take judicial notice of certain documents, filed by
appellee Gaite. The motion for contempt is unmeritorious because the main allegation therein that
the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is "property in litigation", has not been substantiated; and even if true, does
not make these appellants guilty of contempt, because what is under litigation in this appeal is
appellee Gaite's right to the payment of the balance of the price of the ore, and not the iron ore itself.
As for the several motions presented by appellee Gaite, it is unnecessary to resolve these motions in
view of the results that we have reached in this case, which we shall hereafter discuss.
The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee
Gaite the P65,000.00 (balance of the price of the iron ore in question)is one with a period or term
and not one with a suspensive condition, and that the term expired on December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of
iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit "A":
7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his
rights and interests over the 24,000 tons of iron ore, more or less, above-referred to together
with all his rights and interests to operate the mine in consideration of the sum of SEVENTYFIVE THOUSAND PESOS (P75,000.00) which the latter binds to pay as follows:
a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of
the first letter of credit covering the first shipment of iron ore made by the Larap Mines &
Smelting Co., Inc., its assigns, administrators, or successors in interest.
We find the court below to be legally correct in holding that the shipment or local sale of the iron ore
is not a condition precedent (or suspensive) to the payment of the balance of P65,000.00, but was
only a suspensive period or term. What characterizes a conditional obligation is the fact that its
efficacy or obligatory force (as distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed. That the parties to the
contract Exhibit "A" did not intend any such state of things to prevail is supported by several
circumstances:
1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of
Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first letter of credit covering the first
shipment of iron ores . . ." etc. There is no uncertainty that the payment will have to be made sooner
or later; what is undetermined is merely the exact date at which it will be made. By the very terms of
the contract, therefore, the existence of the obligation to pay is recognized; only
its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one of the parties
assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and the
buyer to pay the price),but each party anticipates performance by the other from the very start. While
in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so that the
other understands that he assumes the risk of receiving nothing for what he gives (as in the case of
a sale of hopes or expectations, emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly appear. Nothing is found in the record
to evidence that Gaite desired or assumed to run the risk of losing his right over the ore without
getting paid for it, or that Fonacier understood that Gaite assumed any such risk. This is proved by
the fact that Gaite insisted on a bond a to guarantee payment of the P65,000.00, an not only upon a

bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, but also on one
by a surety company; and the fact that appellants did put up such bonds indicates that they admitted
the definite existence of their obligation to pay the balance of P65,000.00.
3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the ore
as a condition precedent, would be tantamount to leaving the payment at the discretion of the debtor,
for the sale or shipment could not be made unless the appellants took steps to sell the ore.
Appellants would thus be able to postpone payment indefinitely. The desireability of avoiding such a
construction of the contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the parties indented a
suspensive condition or a suspensive period (dies ad quem) for the payment of the P65,000.00, the
rules of interpretation would incline the scales in favor of "the greater reciprocity of interests", since
sale is essentially onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in fine,
provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests.
and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed to be
actually existing, with only its maturity (due date) postponed or deferred, that if such obligation were
viewed as non-existent or not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit,
and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid at
all; and that the previous sale or shipment of the ore was not a suspensive condition for the payment
of the balance of the agreed price, but was intended merely to fix the future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have
the right to insist that Gaite should wait for the sale or shipment of the ore before receiving payment;
or, in other words, whether or not they are entitled to take full advantage of the period granted them
for making the payment.
We agree with the court below that the appellant have forfeited the right court below that the
appellants have forfeited the right to compel Gaite to wait for the sale of the ore before receiving
payment of the balance of P65,000.00, because of their failure to renew the bond of the Far Eastern
Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding
company's undertaking on December 8, 1955 substantially reduced the security of the vendor's
rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon
which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The
case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:
"ART. 1198. The debtor shall lose every right to make use of the period:
(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he has
promised.
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory.
Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired
the securities given to the creditor (appellee Gaite), unless immediately renewed or replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with
full knowledge that on its face it would automatically expire within one year was a waiver of its
renewal after the expiration date. No such waiver could have been intended, for Gaite stood to lose
and had nothing to gain barely; and if there was any, it could be rationally explained only if the
appellants had agreed to sell the ore and pay Gaite before the surety company's bond expired on
December 8, 1955. But in the latter case the defendants-appellants' obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding
payment and instituting this action one year from and after the contract (Exhibit "A") was executed,
either because the appellant debtors had impaired the securities originally given and thereby
forfeited any further time within which to pay; or because the term of payment was originally of no
more than one year, and the balance of P65,000.00 became due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of
iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there had
been a short-delivery as claimed by appellants, they are entitled to the payment of damages, we
must, at the outset, stress two things: first, that this is a case of a sale of a specific mass of fungible
goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore, more or less," stated
in the contract Exhibit "A," being a mere estimate by the parties of the total tonnage weight of the
mass; and second, that the evidence shows that neither of the parties had actually measured of
weighed the mass, so that they both tried to arrive at the total quantity by making an estimate of the
volume thereof in cubic meters and then multiplying it by the estimated weight per ton of each cubic
meter.
The sale between the parties is a sale of a specific mass or iron ore because no provision was made
in their contract for the measuring or weighing of the ore sold in order to complete or perfect the
sale, nor was the price of P75,000,00 agreed upon by the parties based upon any such
measurement.(see Art. 1480, second par., New Civil Code). The subject matter of the sale is,
therefore, a determinate object, the mass, and not the actual number of units or tons contained
therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer all of
the ore found in the mass, notwithstanding that the quantity delivered is less than the amount
estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So.
872, applying art. 2459 of the Louisiana Civil Code). There is no charge in this case that Gaite did
not deliver to appellants all the ore found in the stockpiles in the mining claims in questions; Gaite

had, therefore, complied with his promise to deliver, and appellants in turn are bound to pay the lump
price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite
mass, but approximately 24,000 tons of ore, so that any substantial difference in this quantity
delivered would entitle the buyers to recover damages for the short-delivery, was there really a shortdelivery in this case?
We think not. As already stated, neither of the parties had actually measured or weighed the whole
mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate their respective claims
only upon an estimated number of cubic meters of ore multiplied by the average tonnage factor per
cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that
he sold to Fonacier, while appellants contend that by actual measurement, their witness Cirpriano
Manlagit found the total volume of ore in the stockpiles to be only 6.609 cubic meters. As to the
average weight in tons per cubic meter, the parties are again in disagreement, with appellants
claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims that
the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of
iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical
Division of the Bureau of Mines, a government pensionado to the States and a mining engineering
graduate of the Universities of Nevada and California, with almost 22 years of experience in the
Bureau of Mines. This witness placed the tonnage factor of every cubic meter of iron ore at between
3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds
to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-1") by
engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims involved at
the request of appellant Krakower, precisely to make an official estimate of the amount of iron ore in
Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by
appellant's witness Cipriano Manlagit is correct, if we multiply it by the average tonnage factor of
3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the estimate of
24,000 tons made by appellee Gaite, considering that actual weighing of each unit of the mass was
practically impossible, so that a reasonable percentage of error should be allowed anyone making
an estimate of the exact quantity in tons found in the mass. It must not be forgotten that the contract
Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging &
Improvement Co. vs U.S., 279, 46 L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the payment of
damages, nor could Gaite have been guilty of any fraud in making any misrepresentation to
appellants as to the total quantity of ore in the stockpiles of the mining claims in question, as
charged by appellants, since Gaite's estimate appears to be substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs
against appellants.

EN BANC
[G.R. No. 12611. August 7, 1918. ]
FELIPE AGONCILLO, and his wife, MARCELA MARIO, Plaintiffs-Appellees, v. CRISANTO JAVIER,
administrator of the estate of the late Anastasio Alano. FLORENCIO ALANO and JOSE
ALANO, Defendants-Appellants.
Basilio Aromin, for Appellants.
Felipe Agoncillo,, for Appellees.
SYLLABUS
1. OBLIGATIONS, JOINT AND SOLIDARY; PRESCRIPTION; INTERRUPTION OF PRESCRIPTION. A partial
payment or an acknowledgment made by one of several joint (moncomun) debtors will not stop the running
of the statute of limitations as to the others.
ON MOTION FOR A REHEARING
2. APPEAL; THEORY OF THE CASE. When the plaintiff deliberately adopts a certain theory with respect to
his action, and the case is tried and decided upon that theory, he will not be permitted to change his theory
on appeal when to permit him to do so would be unfair to the defendant.
3. CONTRACTS; PAYMENT; PRESCRIPTION. While any person, whether interested in the performance of
the contract or not, may make a payment for the benefit of the debtor, a partial payment made by a
stranger to the obligation without the authorization of the debtor will not stay the running of the period of
prescription with respect to the remainder of the debt.

DECISION

FISHER, J. :

On the twenty-seventh day of February, 1904, Anastasio Alano, Jose Alano, and Florencio Alano executed in
favor of the plaintiff, Da. Marcela Mario, a document of the following tenor:
jgc:chanroble s.com.ph

"We, the undersigned, Jose Alano and Florencio Alano (on our own behalf), and Anastasio Alano (on behalf
of his children Leonila, Anastasio and Leocadio), the former and the latter testamentary heirs of the Rev.
Anastasio C. Cruz, deceased, hereby solemnly promise under oath:
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"1. We will pay to Da. Marcela Mario within one year from this date, together with interest thereon at the
rate of 12 per cent per annum, the sum of P2,730.50, Philippine currency, this being the present amount of
indebtedness incurred in favor of that lady on the 20th of April, 1897, by our testator, the Rev. Anastasio C.
Cruz;
"2. To secure the payment of this debt we mortgage to the said Da. Marcela Mario the house and lot
bequeathed to us by the deceased, situated in this town, on calle Evangelista, formerly Asturias, recorded in
the register of deeds on the twenty-second of April, 1895, under number 730;
"3. In case of insolvency on our part, we cede by virtue of these presents the said house and lot to Da.
Marcela Mario, transferring to her all our rights to the ownership and possession of the lot; and if the said
property upon appraisal at the time of the maturity of this obligation should not be of sufficient value to
cover the total amount of this indebtedness, I, Anastasio Alano, also mortgage to the said lady my four
parcels of land situated in the barrio of San Isidro, to secure the balance, if any; the title deeds of said
property, as well as the title deeds of the said house and lot are this day delivered to Sr. Vicente Ilustre,
general attorney-in-fact of Da. Marcela Mario.
"In witness whereof we have signed these presents in Batangas, this twenty-seventh day of February, 1904.

(Sgd.) "JOSE ALANO.

(Sgd.) "ANASTASIO ALANO.
(Sgd.) "FLORENCIO ALANO."
No part of the interest or of the principal due upon this undertaking has been paid, except the sum of P200
paid in the year 1908 by the late Anastasio Alano.
In 1912, Anastasio Alano died intestate. At the instance of one of his creditors, proceedings upon the
administration of his estate were had in the Court of First Instance of Batangas. By order dated August 8,
1914, the court appointed an administrator and a committee to hear claims Notices were published, as
required, in a newspaper of general circulation, to inform the creditors of the time and place at which they
might appear to present their claims against the estate of the deceased (Exhibit No. 1). The time designated
in the notice for the presentation of claims expired on March 24, 1915. It appears that no claims whatever
were presented to the committee, and it having been shown to the court, by the statement of the
administrator, that the claim of the creditor at whose instance the administration proceeding was
commenced, had been settled by the heirs, the administrator was discharged and the proceeding terminated
by order dated November 8, 1915.
On April 27, 1916, at the instance of the plaintiff, Da. Marcela Mario, and upon the statement, made on her
behalf that she was a creditor of the deceased and that her claim was secured by mortgage upon real estate
belonging to the said deceased, the court reopened the intestate proceeding, and appointed one Javier to be
administrator of the estate. No request was made for a renewal of the commission of the committee on
claims. The appellants Jose and Florencio Alano objected to the appointment of Javier, but-their objection
was overruled by the court.
On March 17, 1916, the plaintiffs filed the complaint in this action against Javier, as administrator of the
estate of Anastasio Alano and against Florencio Alano and Jose Alano personally. The action is based upon
the execution of the document of February 27, 1904, above set forth, which is transcribed literally in the
complaint. It is averred that defendants have paid no part of the indebtedness therein acknowledged, with
the exception of the P200 paid on account in 1908. It is further averred that on April 22, 1910, the debtors
promised in writing that they would pay the debt in 1911, but that they had failed to do so. The prayer of
the complaint is that, unless defendants pay the debt for the recovery of which the action was brought, they
be required to convey to plaintiffs the house and lot described in paragraph two of the said document; that
this property be appraised; and that if its value is found to be less than the amount of the debt, with the
accrued interest at the stipulated rate, judgment be rendered in favor of the plaintiffs for the balance. No
relief is requested with respect to the undertaking of Anastasio Alano expressed in the third paragraph of the
document in suit, as guarantor for the payment of the difference, if any, between the value of the said house
and lot and the total amount of the indebtedness.
The defendants answered denying generally the facts alleged in the complaint, and setting up, as special
defenses that (1) any cause of action which plaintiff might have had against the estate of Anastasio Alano
has been barred by failure of the plaintiff to present her claim to the committee on claims for allowance; (2)
that the document upon which plaintiff relies does not constitute a valid mortgage; and (3) that as to all of
the defendants, the action is barred by the general statute of limitations.
The findings of the trial court upon the evidence were substantially as follows:

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1. That the document set forth in paragraph two of plaintiffs complaint was executed by the deceased,
Anastasio Alano, and by the defendants Javier and Jose Alano, as alleged;
2. That one year after the execution of the document, plaintiffs made a demand upon Anastasio Alano,
deceased, and the other two defendants herein, to comply with the terms of the agreement by the execution
of the conveyance of the house and lot, but that they requested an extension of time for the payment of the
debt, which was granted them;
3. That on March 27, 1908, the defendants paid P200 on account of the debt.
Upon these findings the court below gave judgment for plaintiffs, and from that judgment the defendants
have appealed to this court upon the law and the facts.

The question raised by the appellants require us to analyze the document upon which this action is based,
and to determine its legal effect. Appellants contend that the contract evidenced by that instrument is
merely a loan coupled with an ineffectual attempt to create a mortgage to effect the payment of debt. The
court below regarded it as a conveyance of the house and lot described in the contract which took effect
upon the failure of the debtors to pay the debt.
The principal undertaking evidenced by the document is, obviously, the payment of money. The attempt to
create a mortgage upon the house and lot described in the second clause of the contract is, of course,
invalid, as it is admitted that the so-called mortgage was never recorded. Equally inefficacious, and for the
same reasons, is the purported mortgage by Anastasio Alano of his land in the barrio of San Isidro described
in the third paragraph of the document. (Compaia General de Tabacos v. Jeanjaquet, 12 Phil. Rep., 195.)
The agreement to convey the house and lot at an appraised valuation in the event of failure to pay the debt
in money at its maturity is, however, in our opinion, perfectly valid. It is simply an undertaking that if the
debt is not paid in money, it will be paid in another way. As we read the contract, the agreement is not open
to the objection that the stipulation is a pacto comisorio. It is not an attempt to permit the creditor to
declare a forfeiture of the security upon the failure of the debtor to pay the debt at maturity. It is simply
provided that if the debt is not paid in money it shall be paid in another specific way by the transfer of
property at a valuation. Of course, such an agreement, unrecorded, creates no right in rem; but as between
the parties it is perfectly valid, and specific performance of its terms may be enforced, unless prevented by
the creation of superior rights in favor of third persons.
The contract now under consideration is not susceptible of the. interpretation that the title to the house and
lot in question was to be transferred to the creditor ipso facto upon the mere failure of the debtors to pay
the debt at its maturity. The obligations assumed by the debtors were alternative, and they had the right to
elect which they would perform (Civil Code, art. 1132). The conduct of the parties (Civil Code, art. 1782)
shows that it was not their understanding that the right to discharge the obligation by the payment of
money was lost to the debtors by their failure to pay the debt at its maturity. The plaintiff accepted a partial
payment from Anastasio Alano in 1908, several years after the debt matured. The prayer of the complaint is
that the defendants be required to execute a conveyance of the house and lot, after its appraisal, "unless
the defendants pay the plaintiff the debt which is the subject of this action."
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It is quite clear, therefore, that under the terms of the contract, as we read it, and as the parties themselves
have interpreted it, the liability of the defendants as to the conveyance of the house and lot is subsidiary
and conditional, being dependent upon their failure to pay the debt in money. It must follow, therefore, that
if the action to recover the debt has prescribed, the action to compel a conveyance of the house and lot is
likewise barred, as the agreement to make such conveyance was not an independent principal undertaking,
but merely a subsidiary alternative pact relating to the method by which the debt might be paid.
The undertaking to pay the debt, acknowledged by the contract in suit, is indisputably conjoint
(mancomunada). The concurrence of two or more debtors does not in itself create a solidary liability.
Obligations in solido arise only when it is expressly stipulated that they shall have this character (Civil Code,
art. 1137). That being so, the debt must be regarded as divided into as many equal parts as there are
debtors, each part constituting a debt distinct from the others. (Civil Code, art. 1138.) The result of this
principle is that the extinction of the debt of one of the various debtors does not necessarily affect the debts
of the others.
It is contended on behalf of the administrator of the estate of Anastasio Alano that the failure of the plaintiff
to present her claim for allowance to the committee on claims is a bar to her action so far as this defendant
is concerned. We are of the opinion that this objection is well taken. Section 695 of the Code of Civil
Procedure expressly requires that a claim of this kind be presented for allowance to the committee, and
declares that the failure to do so operates to extinguish the claim. The operation of this statute and the
absolute nature of the bar which it interposes against the subsequent assertion of claims not presented in
accordance with its requirements have frequently been considered by this court, and the doctrines
announced need not be here repeated. (Estate of De Dios, 24 Phil. Rep., 573; Santos v. Manarang, 27 Phil.
Rep 209). While it is true that under certain circumstances and within the statutory limits (sec. 690 of the
Code of Civil Procedure) the probate court may renew the commission of the committee on claims, and
permit the presentation of belated demands, in no case may a claim proper to be allowed by the committee,
such as is the one now under consideration, be enforced by an original action against the executor or
administrator of the estate. Our opinion is, therefore, that the objection to the action interposed on behalf of
the administrator of the estate of Anastasio Alano was well taken and that the court erred in rejecting it.

This conclusion makes it unnecessary to consider the effect of the payment made by Anastasio Alano in
1908 as regards the interruption of the period of prescription with respect to him. In this connection,
however, we feel constrained to remark that a careful reading of the document makes it extremely doubtful
whether Anastasio Alano was ever personally bound by its terms. It will be noted that he purports to have
signed it only as the representative of his children, Leonina, Anastasio, and Leocadio, who are not parties to
this suit.
With respect to the defendants Florencio and Jose Alano, their original liability admits of no dispute and the
only question open for consideration is that presented by their plea of prescription. The debt matured
February 27, 1905, and as the complaint was not filed within ten years from that date (Code of Civil
Procedure, sec. 43), it is obvious that the plea of prescription is well taken, unless the running of the statute
was interrupted.
While it appears that some verbal and written demands for payment were made upon these defendants, it
has been recently decided, upon mature consideration, that an extrajudicial demand is not sufficient, under
the law as it now stands, to stop the running of the statute. (Pelaez v. Abreu, 26 Phil. Rep., 415). There
must be either (1) a partial payment, (2) a written acknowledgment or (3) a written promise to pay the
debt. It is not contended that there has been any written acknowledgment or promise on the part of the
defendants Jose and Florencio Alano, or either of them plaintiff relies solely upon the payment made in
1908 by Anastasio Alano. But there is not the slightest foundation in the evidence for the belief that the
payment made by Anastasio was for the benefit of Jose or Florencio or that it was authorized by either of
them. Bearing in mind the express declaration of article 1138 of the Civil Code that joint (mancomunada)
obligations are, as regards each of the debtors, to be reputed as separate debts with respect to each of the
debtors, it follows of necessity that a payment or acknowledgment by one of such joint debtors will not stop
the running of the period of prescription as to the others. That such is the law may be demonstrated by
ample authority.
In his commentaries on articles 1138 and 1139 of the Civil Code, Manresa says that one of the effects of the
rule established by the code that the debt is to be regarded as "divided into as many parts . . . as there are
debtors" is that "the interruption of prescription by the claim of a creditor addressed to a single debtor or by
an acknowledgment made by one of the debtors in favor of one or more of the creditors is not to be
understood as prejudicial to or in favor of the other debtors or creditors." (Manresa, Commentaries on the
Civil Code, vol. 8, p. 182.)
The same doctrine is recognized in the Italian Civil Law as stated by Giorgi in his work on Obligations as
follows:
jgc:chanroble s.com.ph

"The obligation appears to be one, when as a matter of fact it is an aggregate of as many separate and
independent obligations as there are creditors and debtors. Each creditor cannot demand more than his
part; each debtor cannot be required to pay more than his share. Prescription, novation, merger, and any
other cause of modification or extinction does not extinguish or modify the obligation except with respect to
the creditor or debtor affected, without extending its operation to any other part of the debt or of the credit.
The obligation is, in a word, pro rata, or in partes viriles." (Giorgi on Obligations, vol. 1, p. 83, Spanish
translation.)
The same view is taken by the French law writers. In the article on obligations in Dalloz Encyclopedia
(Jurisprudence Generale) vol. 33, p. 297, the author says:
jgc:chanrobles.com .ph

"The conjoint (pro rata) obligation is divided by operation of law among the nonsolidary codebtors. It is as
though there were many debts as there are persons bound Hence it follows that if one of the debtors is
insolvent the loss falls upon the creditor and not upon the other debtors, and that if prescription is
interrupted with respect to one of the debtors, it is not interrupted with respect to the others."
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In the State of Louisiana, whose Civil Code, like ours, is largely taken from the Code of Napoleon, the
Supreme Court has established the same doctrine on the subject of the interruption of prescription.
In the case of Buard v. Lemee, Syndic (12 Robinsons Reports, 243), the Supreme Court of Louisiana said:

jgc:chanrobles.com .ph

"It results . . . that when the acknowledgment of a debt is made by a joint debtor, such acknowledgment
does not interrupt the prescription with regard to the others. Each is bound for his virile share of the debt;
and, therefore, each is at liberty to act for himself, and the effect of his acts cannot be extended to the
benefit or prejudice of his codebtors; so true is this that the law has never intended that a suit brought

against one of the several debtors should interrupt prescription with regard to all, unless they be debtors in
solido."
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This doctrine was recognized and applied by the Supreme Court of Louisiana in the subsequent cases of
Succession of Cornelius Voorhies (21 La. Ann., 659) and Smith v. Coon (22 La. Ann., 445).
There is no presumption that one conjoint (pro-rata) debtor is authorized to perform any act having the
effect of stopping the running of the statute of limitations as to the others. When the act relied upon is
performed by some person other than the debtor, the burden rests upon the plaintiff to show that it was
expressly authorized. (17 R. C. L., 911 and cases there cited.) In this case there is no such evidence. The
statement in the letter of Da. Maria Lontok, to whom the P200 payment was made, is that it was a payment
made on account of "the debt of Anastasio Alano." (Plaintiffs Exhibit D.) Da. Maria Lontok in her testimony
does not attempt to say that the payment was made for the account of any one but Anastasio Alano, from
whom she received it. The statement that Florencio Alano was with Anastasio at the time is not in itself
sufficient to constitute proof that the payment was made for his benefit. (Lichauco v. Limjuco and Gonzalo,
19 Phil. Rep., 12.)
Plaintiff argues that the undertaking to convey the house and lot constitutes an indivisible obligation, and
that even where the promise is not in solidum, the concurrence of two or more debtors in an obligation
whose performance is indivisible creates such a relation between them that the interruption of prescription
as to one of necessity interrupts it as to all. The distinction is one which is well established, although the
authorities cited do not fully support plaintiffs contentions, but in this particular case the question is
academic, for the undertaking is in the alternative to pay a sum of money an essentially divisible
obligation or to convey the house. As the alternative indivisible obligation is imposed only in the event
that the debtors fail to pay the money, it is subject to a suspensive condition, and the prescription of the
obligation whose nonperformance constitutes the condition effectively prevents the condition from taking
place.
We are, therefore, constrained to hold with defendants and to reverse the decision of the lower court. We do
this most regretfully, as the evidence in this case shows that plaintiff has been extremely lenient with
defendants and has refrained from pressing her claim against them when it fell due, and for a long period of
years thereafter, purely out of consideration for them. The defense of prescription interposed, particularly as
regards Jose and Florencio Alano, is as indefensible from the standpoint of fair dealing and honesty as it is
unassailable from the stand-point of legal technicality. However, the law, as we see it, is clear and it is our
duty to enforce it.
The judgment of the lower court is reversed and the action is dismissed as to all the defendants. No costs
will be allowed. So ordered.
Torres, Johnson, Street and Avancea, JJ., concur.
Malcolm, J., dissents.
RESOLUTION ON MOTION FOR A RECONSIDERATION.
September 20, 1918.
FISHER, J. :

Plaintiff seeks a reconsideration of the decision of this court rendered herein. With respect to plaintiffs
contention concerning the action against the estate of Anastasio Alano, we have nothing to add to what was
said in the former decision. As regards the defendants, Florencio Alano and Jose Alano, the principal
argument advanced by plaintiff is that those defendants, as testamentary heirs of the late Anastasio C. Cruz,
are liable, in solidum, for the debt in suit, which is evidenced by the document signed by these defendants
on February 27, 1904, set forth at length in our decision. Plaintiff argues that the obligation being solidary,
by reason of its hereditary origin (Fabie v. Yulo, 24 Phil. Rep., 240) the running of the statute of limitations
was interrupted with respect to all the debtors, by the payment of P200 made by the late Anastasio Alano in
1908. The whole argument rests upon article 1084 of the Civil Code and the statement contained in the
document of February 27, 1904, that the Alano brothers are the "testamentary heirs" of the original debtor,
and the assumption that the latter died, and that his inheritance was accepted, before the present Code of

Civil Procedure was enacted. There is nothing in the record to indicate, even remotely, when the Reverend
Cruz died. If he died after the new Code took effect, the acceptance of his inheritance did not impose upon
his testamentary heirs any personal obligation to respond to the payment of the debts of the deceased.
(Pavia v. De la Rosa, 8 Phil. Rep., 70.) There having been neither allegation nor proof with respect to the
date of the death of the original debtor, we cannot presume, to the prejudice of the defendants, that he died
and that his succession was opened under the old regime.
But even had it been proved that the late Reverend Cruz died before Act No. 190 took effect, and that the
debt, by reason of its hereditary origin, imposed upon the five Alano brothers the solidary obligation of
paying it, as the evidence does not show that the payment made by Anastasio Alano in 1908 was authorized
by any one of the solidary debtors, it cannot have the effect of interrupting the prescription. It must be kept
in mind that Anastasio Alano was in no sense a solidary debtor of the plaintiff, either with respect to the
origin of the obligation or by his participation in the execution of the document by which the indebtedness
was acknowledged. It is unquestionable that payment made by any one of the several solidary debtors
interrupts the running of the statute of limitations with respect to the others, and that a third person may
make a payment without the knowledge and even against the will of the debtor, but payments so made by a
stranger to the debt do not interrupt the operation of the statute of limitations.
"The general rule is that an acknowledgment or new promise to pay must, in order to take a case out of the
statute, be made by the person to be charged or by some person legally authorized by him so to act." (17
Ruling Case Law, p. 911.)
"In the case of a part payment by a stranger, or by a person not authorized to represent the debtor, it is
obvious that there is no ground for assuming any admission of an existing liability on his part or for inferring
a new promise by him to pay the balance of the debt." (17 Ruling Case Law, p. 935.)
Furthermore, it is to be observed that in accordance with the express terms of article 50 of the Code of Civil
Procedure, payment in order to have the effect of interrupting the running of the statute, must be made by
the person to be charged.
Independently of these considerations, it is obvious that this action was not brought as though based upon
an obligation which had accrued under the provisions of the Civil Code, formerly in force, relating to the
acceptance of an estate without benefit of inventory. The action has been brought solely and exclusively for
the enforcement of the obligation created by the execution of the document of credit of 1904. This is the
reason, no doubt, why plaintiff made no effort to prove the date of the death of Reverend Cruz; whether his
heirs accepted the inheritance with or without the benefit of inventory; if they were all adults at the time of
the death of the testator; whether they inherited in equal parts or in some proportion. It is natural that she
should have made no effort to produce evidence upon these points, as there is nothing in the allegations of
the complaint to support its admission. If the defendants had replied admitting the facts alleged, it is evident
that it would have been necessary to decide the case in accordance with the law in force in 1904,
considering the execution of the document in question as the act from which the obligation in suit
originated, although it appears from the document that the consideration for its execution was the debt of a
third person.
When the plaintiff deliberately adopts a certain theory with respect to the basis of his right of action, and the
case is tried and decided in the court below and in this court upon that theory, plaintiff will not be permitted
to change the theory of his action upon a motion for rehearing. (Molina v. Somes, 24 Phil. Rep., 49.) To do
so would be to deprive the defendant of an opportunity to defend. The defendant naturally produces
evidence relating to the evidence offered on behalf of plaintiff. If the issue of the liability of Florencio and
Jose Alano upon the theory now advanced by plaintiff had been presented in the court below, it is possible
that these defendants might have been able to prove that their testator died after the enactment of the new
code or, if he died before, that they were minors at that time; that the inheritance was accepted by their
guardian without the intervention of the family council (Civil Code, art. 992), or that it was expressly
accepted with benefit of inventory, and that the value of the property inherited is less than the amount of
the debt (Civil Code, art. 1023), or that the effect of the execution of the document of 1904 was a novation
of the obligation by which the latter was converted into a simple joint indebtedness. The defendants
Florencio and Jose Alano having had no opportunity to invoke any of these defenses, which might have been
available to them, it would be unjust to give judgment against them upon the theory of their obligation now
invoked by plaintiff. The motion for a rehearing is denied.
Torres, Johnson, Street and Avancea, JJ., concur.

EN BANC
[G.R. No. L-3435. April 28, 1951.]
CLARA TAMBUNTING DE LEGARDA, ET AL., Plaintiffs-Appellants, v. VICTORIA DESBARATS
MIAILHE, substituting WILLIAM J. B. BURKE, Defendant-Appellee.
Jose S. Sarte and M. H. de Joya, for appellant Vicente L. Legarda.
Salvador Barrios, for appellant Pacifica Price de Barrios.
Eduardo D. Gutierrez, for appellant Augusto Tambunting.
Feliciano Jover Ledesma and Ross, Selph, Carrascoso & Janda, for
appellee.
SYLLABUS
1. OBLIGATIONS; ALTERNATE OBLIGATIONS. In alternative obligations, there is no right to choose
undertaking that are impossible or illegal (Civ. Code, art. 1132, par. 2 and art. 1170). An alternative
obligation to pay in English currency, which fell due in 1943, became impossible of performance, and
therefore the right of election ceased to exist in 1943. In other words, the debtors obligation has since then
ceased to be alternative.
2. ID.; TENDER OF PAYMENT AND CONSIGNATION. Office of payment or consignation, to be effective,
must comply with some legal requirements (Civ. Code, articles 1157, 1166, and 1170). Tender of payment
made by the plaintiffs in Japanese military notes was a valid tender because it was the only currency
permissible at the time, and the same was made in accordance with the agreement because payment in
Japanese military notes during the occupation is tantamount to payment in Philippine currency. But the
consignation of the sum of P75,920.83 in Japanese currency made by the plaintiffs with the clerk of court
does not have any legal effect because it was made in certified check, and a check "does not meet the
requirements of a legal tender."

DECISION

BAUTISTA ANGELO, J.:

This is an appeal from a judgment of the Court of First Instance of Manila rendered on August 5, 1949,
dismissing the complaint and ordering plaintiff Clara Tambunting de Legarda to pay to the defendant the
sum of P70,000, with interest thereon at the rate of 3 1/2 per cent per annum, from January 1, 1942, up to
the date of full payment thereof, plus the sum of P2,500 as costs of suit and attorneys fees, within 120 days
from the date of notice, and ordering the sale of the property mortgaged in accordance with law in the event
of failure of said plaintiff to pay the amount of the judgment within the period above mentioned.
The background of this case, which originated during the Japanese occupation, is correctly stated in the
judgment of the lower court, as follows:
jgc:chanroble s.com.ph

"On June 3, 1944, plaintiffs filed a complaint against the original defendant William J. B. Burke, alleging
defendants unjustified refusal to accept payment in discharge of a mortgage indebtedness in his favor, and
praying that the latter be ordered (1) to receive the sum of P75,920.83 deposited by plaintiff Clara
Tambunting de Legarda, the mortgagor, on the same date with the clerk of this court in payment of the
mortgage indebtedness of said plaintiff to defendant herein, (2) to execute the corresponding deed of
release of mortgage, and (3) to pay damages in the sum of P1,000.
"The gist of defendants answer dated the 19th of July, 1944, is that plaintiffs have no cause of action for the
reason that at the instance of plaintiff Clara Tambunting de Legarda an agreement was had on May 26,
1944, whereunder defendant condoned the interests due and to become due on the mortgage indebtedness

till the termination of the war, in consideration of the undertaking of said plaintiff (with the consent of her
husband Vicente L. Legarda, the other plaintiff) to pay her obligation to defendant upon such termination of
the war; and that the war then had not yet terminated.
"Upon the issues raised, after due hearing, decision was rendered by this Court through the then Judge,
Honorable Jose Gutierrez David (now Appellate Court Justice), ordering defendant to accept the sum of
P75,920.83 deposited by plaintiff Clara Tambunting de Legarda in the office of the clerk of court; to execute
forthwith a deed of release of mortgage covering the property in question; to pay plaintiff the sum of
P120.40 representing the cost of the certification of the check deposited in the court and consignation,
together with the clerks commission for the deposit of the money in court and the costs of the suit.
"Defendant, on or about January 14, 1945, presented a motion to set aside the foregoing decision and for a
new trial. Before this Court could act on this motion, liberation came.
"On October 10, 1945, petition was filed on behalf of plaintiffs for the reconstitution of the record of this
case.
"On October 23, 1945, defendant filed a supplemental answer alleging that the payment (by way of
consignation in Japanese military notes made by plaintiff Clara Tambunting de Legarda in satisfaction of the
mortgage obligation in question, which was originally contracted on the 17th of February, 1926, was null and
void, and did not discharge the said obligation; and that, as plaintiffs well knew, defendant did not plead the
foregoing facts in his original answer because had he done so "he and his attorneys would have been taken
by the Japanese military police to Fort Santiago where they would have been tortured and most probably
killed. The supplemental answer contains a counter-claim whereunder defendant sought the foreclosure of
the real estate mortgage on the property in question. Basis of the counter-claim are the averments that the
original mortgage executed by plaintiff Clara Tambunting de Legarda with the consent of her husband,
plaintiff Vicente L. Legarda, was for the sum of P75,000; that said mortgage was renewed from time to time
until on March 16, 1940, at plaintiff Clara Tambunting de Legardas request, defendant entered into another
agreement with whereunder the latter granted said plaintiff a fourth extension of three years for the
payment of the remaining balance of P70,000, and further reduced the interest rate from 9 per cent to 7 per
cent per annum; that in the said agreement of March 16, 1940, defendant was granted an option to demand
the payment of the principal and interests either in Philippine currency or in English currency at the rate of
two @shillings ( 0.2/0d.) for one peso, Philippine currency; that in May, 1944, plaintiff Clara Tambunting de
Legarda attempted to pay her obligation to defendant in Japanese military notes; that defendant, as
plaintiffs well knew, was not disposed and did not wish to receive payment in worthless Japanese military
notes; that to prevent his being reported to the Japanese military police in Fort Santiago, defendant agreed
to condone the interests then due on the obligation from December 1, 1941, until the termination of the war,
with the understanding that payment should not be effected until the end of the war; that plaintiff Clara
Tambunting de Legarda violated her agreement with defendant, sought to force payment by depositing the
amount in Japanese military notes in court, and thereafter filed the complaint herein; that
notwithstanding demand made on October 16, 1945, plaintiff failed to pay the principal of P70,000, together
with interests thereon at the rate of 7 per cent per annum which defendant claims upon the allegation that
plaintiff having violated her agreement defendant was relieved from his undertaking to condone the
interest.
"In the order of December 24, 1945, declaring that the record of this case was reconstituted for all legal
purposes, the then Judge presiding this court, Honorable Jose Gutierrez David, denied the admission of the
foregoing supplemental answer.
"Appeal was taken by defendant from the above order of the 24th of December 1945.
"The Honorable Supreme Court in its decision on appeal (Clara Tambunting de Legarda and Vicente L.
Legarda, plaintiffs-appellees v. Antonio Carrascoso, Jr., substituting William J. B. Burke, DefendantAppellant, GRL-331) declared that the supplemental answer heretofore adverted to should have been
allowed and consequently directed that a new trial be had . . . .
"The record was returned to this court.
On March 31, 1949, a motion consisting of two parts was filed on behalf of defendant. The first prayed for
the substitution of Victoria Desbarats Miailhe as party defendant for the reason that William J. B. Burke died
in the City of Manila on July 23, 1946, and his claim against plaintiffs was adjudicated to the said Victoria
Desbarats Miailhe as heir of the said William J. B. Burke. The second sought the admission of an amended

supplemental answer. In the main the amended supplemental answer is a reproduction of the original
supplemental answer filed on October 23, 1945, with the significant change that instead of demanding
payment from plaintiffs in Philippine pesos for the discharge of the obligation of plaintiff Clara Tambunting de
Legarda, defendant now seeks payment in pounds sterling, English currency. By order of this court of April
2, 1949, the petition for substitution was granted and the amended supplemental answer was admitted into
the record of this case.
"The issues raised in the counterclaim in the amended supplemental answer were met in the plaintiffs reply
dated April 4, 1949, which substantially denies the allegation that Burke was not disposed and did not wish
to receive payment in Japanese military notes and refused payment to avoid being reported to the Japanese
military police. The reply alleges that the demand made by the new defendant Victoria Desbarats Miailhe is
unavailing because it was presented too late, that is, after the present case had long been sub judice and
the obligation to be collected was already extinguished."
cralaw virtua1aw library

On August 5, 1949, the Court, presided over by Judge Conrado Sanchez, rendered judgment for the
defendant as stated in the early part of this decision. From this judgment, plaintiffs appealed. The principal
question of fact which is presented for our determination in this appeal is whether the agreement had by the
plaintiffs and William J. B. Burke during the Japanese occupation was that the rate of the annual interest of
the indebtedness was merely reduced to 3 1/2 per cent, as claimed by plaintiffs, or whether said agreement
was in the sense that the defendant condoned the interests then due and which might hereafter become due
on said obligation with the understanding that plaintiff Clara Tambunting de Legarda would pay her
obligation upon the termination of the war.
On this point, Judge Jose Gutierrez David, who originally decided this case, gave weight and credence to the
evidence presented in behalf of the plaintiffs, disregarding entirely the evidence submitted in behalf of the
defendant, and concluded that the alleged agreement was never entered into, as evidenced by the letters
plaintiff Clara Tambunting de Legarda sent to defendant William J. B. Burke, not only tendering the payment
of her obligation, but also giving notice that she will deposit same in court as required by law to protect her
interests. The court also gave credence to the claim of the plaintiffs that defendant Burke agreed to reduce
the rate of interest from 7 per cent to 3 1/2 per cent per annum from January 1, 1942, in the conference
they had sometime in February or March, 1942. Judge Conrado Sanchez, who took over the court after the
case was returned following the revocation by this court of the order denying the supplemental answer of
the defendant, adopted in full said findings of fact of Judge Gutierrez David.
We have carefully examined the evidence, testimonial as well as documentary, submitted by both parties in
this case with a view to an enlightened determination of this important question of fact which may be
considered as the crux of this case, and we have not been able to see eye to eye on this matter with the two
Judges who decided this case in the lower court. As a rule, the determination of a question of fact depends
largely on the credibility of witnesses unless some documentary evidence is available, which clearly
substantiates the issue and whose genuineness and probative value is not disputed. In this case, most of the
evidence presented is testimonial, with only some corroborating letters, and on the basis of this evidence
the preponderance in our opinion militates in favor of the defendant. And we say so because, on one hand,
only Vicente Legarda testified for the plaintiffs, whereas Antonio Carrascoso and William J. B. Burke testified
for the defendant. True, their testimony is contradictory, but in our opinion the testimony of witnesses
Carrascoso and Burke deserve more weight and credence. Of course these three witnesses are well known in
our community and their character for probity has never been assailed, but we are more inclined to accept
the view of Carrascoso and Burke because it is more consonant with fairness and the history of the
transaction. It appears that the indebtedness in question was granted to Clara Tambunting de Legarda as far
back as February 1926, with the obligation to pay it within five (5) years but which period has been
extended from time to time with the gradual reduction of the rate of interest up to January 1942, when, as
intimated by the plaintiff, a further reduction of the interest to 3 1/2 per cent per annum was granted by the
defendant. During this long period of time the plaintiffs enjoyed the use of the money, with a continued
reduction of the rate of interest, and defendant had lavished upon her his unusual liberality when he
extended to her his help and relief whenever she so requested as the exigencies of her financial situation
warranted. The life of this indebtedness would not have been so prolonged as to be overtaken by war were it
not for the desire of the defendant to help the mortgagor in her hour of need, yet Vicente Legarda went out
of his way to propose that his wife Clara Tambunting be exempted from paying all the interests due from
January 1, 1942, up to the termination of the war, which caused the defendant to utter some unkind words
and to be resentful. Nevertheless, through the mediation of Attorney Carrascoso, plaintiffs at last became
reasonable and agreed not to pay the obligation until the termination of the war provided that all the
interests due and which might become due be condoned. It is not strange nor unnatural that should happen,
considering the background of the loan. And there is nothing incredible in it considering the letter written by

Burke to Clara Tambunting wherein the same understanding was reiterated (Exhibit "B"). Doctor Burke
would not have stated in his letter that there was such an understanding if it was not true, considering the
fact that he was so sick then and had practically one leg in the grave. We find no reason to discredit this
statement of Burke which finds full corroboration in the testimony of Attorney Carrascoso.
Granting, however, for the sake of argument that such an agreement is not true and was set up by the
defendant as a mere defense to justify his refusal to accept payment of the mortgage indebtedness in
Japanese military notes, the next question to be determined is whether or not the consignation made by the
plaintiffs during the Japanese time had the effect of relieving Clara Tambunting de Legarda from the
payment of her mortgage obligation in contemplation of law.
There is no dispute that on June 3, 1944, Clara Tambunting de Legarda deposited in court the sum of
P75,920.83 for the purpose of satisfying the full amount then due on her obligation. But it is likewise true
that the money deposited was in certified check, representing Japanese Military notes, which notes
defendant Burke refused to receive as payment a few days before the consignation.
The offer of payment or consignation to be effective must comply with some legal requirements. On this
point our Civil Code contains the following provisions:
jgc:chanroble s.com.ph

"A debt shall not be deemed paid unless there has been a complete delivery of the thing or a performance of
the undertaking which constitute the subject-matter of the obligation. (Art. 1157, Civil Code.)
"The debtor of one thing cannot oblige his creditor to receive another, even though it should be of equal or
greater value than that due.
"In obligations to do, one undertaking cannot be substituted by another against the will of the creditor. (Art.
1166, Civil Code.)
"Payment of debts of money shall be made in the specie stipulated and, should it not be possible to deliver
such specie, in silver or gold coin legally current in the Philippines. (Art. 1170, Civil Code.)"
As formerly stated, in the mortgage renewal executed by plaintiffs and defendant on March 16, 1940,
defendant was given the option to demand payment of the obligation either in Philippine currency, or in
English currency. And this option has to be exercised "al tiempo del vencimiento de esta obligacin," (Exhibit
"5"), or on February 17, 1943.
But defendant claims that on that date he could not very well refuse to accept the worthless Japanese
Military notes tendered to him, nor insist on the payment of English currency, for he then entertained the
fear that, had he done so, he would have been reported to the Japanese authorities, taken to Fort Santiago,
and killed. But could the defendant then insist on the payment of English currency even if he could do so
without exposing himself to bodily peril under the stipulation just mentioned?
Our answer is in the negative. As we have stated before, the option to demand payment of the indebtedness
has to be exercised upon maturity of the obligation, which is February 17, 1943. On this date, the only
currency available is the Philippine currency, or the Japanese Military notes, because all other currencies,
including the English, were outlawed by a proclamation issued by the Japanese Imperial Commander on
January 3, 1942. This means that the right of election ceased to exist on that date because it had become
legally impossible. And this is so because in alternative obligations there is no right to choose undertakings
that are impossible or illegal (Civil Code, art. 1132, par. 2). In other words, the obligation on the part of the
debtor to pay the mortgage indebtedness has since then ceased to be alternative. (Articles 1134 & 1136(1)
of the Civil Code.)
It appears, therefore, that the tender of payment made by the plaintiff in Japanese Military notes was a valid
tender because it was the only currency permissible at the time, and the same was made in accordance with
the agreement because payment in Japanese Military notes during the occupation is tantamount to payment
in Philippine currency. (Haw Pia v. China Banking Corporation, 45 Off. Gaz., Supp. [9] 229; Phil. Trust v.
Araneta, 46 Off. Gaz., 4254; Allison D. Gibbs v. Eulogio Rodriguez, 47 Off. Gaz., 186.) But the consignation
of the sum of P75,920.83 in Japanese currency made by the plaintiffs with the clerk of court does not have
any legal effect because it was made in certified check, and a check "does not meet the requirements of a
legal tender."
cralaw virtua1aw library

"In her sole assigned error the plaintiff contends that the Court erred in holding that the consignation of the

check with the clerk of court was invalid and that it did not have the effect of paying her obligation. The
court correctly held that the consignation was unavailing and that it did not produce any legal effect because
the defendant did not accept it and it was not in the form of money or legal tender. Article 1170 of the Civil
Code provides that payment of debts of money shall be made in the specie stipulated and, should it not be
possible to deliver such specie, in silver or gold coin legally current; and provides further, that the delivery of
promissory notes payable to order, or drafts or other commercial paper, shall produce the effects of payment
only when realized or when, by the fault of the creditor, the privileges inherent in their negotiable character
have been lost. Under this legal provision the defendant was not under a duty to accept the check because it
is known that it does not constitute legal tender, and the consignation having been refused, it did not
produce any legal effect and could not be considered as payment made by the plaintiff of the repurchase
price. In Belisario v. Natividad (1934, 60 Phil., 156) it was held that a creditor is not bound to accept a check
in satisfaction of his demand because a check even if good when offered, does not meet the requirements of
a legal tender." (Villanueva v. Santos, 39 Off. Gaz., 681-682). (Emphasis supplied.)
"It is not necessary, in our opinion, to examine all the questions raised by appellant in his brief, in view of
our conclusion on the question of the validity of the consignation made in court.
"Under article 1127 of the Civil Code, Consignation should not be efficacious unless made strictly in
accordance with the provision governing payment. And Article 1170 provides that, payment of debts of
money shall be made in the specie stipulated and, should it not be possible to deliver such specie, in silver
or gold coin which is legal-tender in the Philippines. Under this provision, a consignation by check is not
binding upon the creditor (Meliciano v. Natividad, 60 Phil., 156), unless accepted by him (Gutierrez v. Carpio,
58 Phil., 334, 336), and in the instant case, there has been no such acceptance. In one case it was held by
this court that where e person entitled to make a repurchase of some property, deposits with the court, by
way of consignation, a check for the re-purchase price, the vendee is not under a duty to accept the check
and may refuse the consignation which cannot produce the effect of payment." (Villanueva v. Santos, 39 Off.
Gaz., March 8, 1941, p. 681).
"True that the consignation in the instant case was made by means of a managers check. But a managers
check is, like an ordinary check, not legal-tender in the Philippines. Even treasury certificates are not legaltender except for the payment of taxes and public debts, under sec. 1626 of Act No. 2711 as amended by
Act No. 3058. In the United States, the general rule is that an offer of a bank check for the amount due is
not a good tender and this is true even though the check is certified (62 C. J., p. 668), except where no
objection is made on the ground (62 C. J., p. 668). Again it is said that, on the same principle a check is
not good legal-tender as against an objection duly made, whether the check is certified or not . . ." 40 Am.
Jur., p. 764; Cuaycong v. Rius, (47 Off. Gaz., 6125).
To recapitulate, we may state that, even if the claim of the plaintiff that Clara Tambunting de Legarda did
not enter into any agreement with the defendant William J. B. Burke regarding payment of her obligation,
subject to condonation of interests, after the termination of the war, is correct, and even if the tender of
payment by Clara Tambunting of her obligation was made in Philippine currency in pursuance of the
mortgage contract, yet the consignation made in Court can not have any legal effect for the simple reason
that it was made by means of a certified check, which is not a legal tender within the meaning of the law. It
is obvious, therefore, that such consignation did not have the effect of relieving her from her obligation to
the defendant.
As regards the other issues, we find correct the findings and conclusions reached by the lower court on the
matter.
Wherefore, the decision appealed from is hereby affirmed in toto, with costs against the appellants.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor and Jugo, JJ., concur.
Padilla, J., concurs in the result.
Separate Opinions
FERIA; J., concurring and dissenting:

chanrob1es virtual 1aw library

I concur in the result on the first ground; but I dissent from the decision as based on the second ground that
"the consignation of the sum of P75,920.83, in Japanese currency made by the plaintiffs with the Clerk of

Court does not have legal effect, because it was made in certified check, and a check does not meet the
requirement of a legal tender," because I am of the opinion that consignation is different from tender, and
the consignation of said certified check is sufficient compliance with the law. I reserved my right to write a
dissenting opinion on the matter.

SECOND DIVISION
G.R. No. 101723 May 11, 2000
INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP. (INIMACO), petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, (Fourth Division) Cebu City, and ENRIQUE
SULIT, SOCORRO MAHINAY, ESMERALDO PEGARIDO, TITA BACUSMO, GINO NIERE,
VIRGINIA BACUS, ROBERTO NEMENZO, DARIO GO, and ROBERTO
ALEGARBES, respondents.

BUENA, J.:
This is a petition for certiorari assailing the Resolution dated September 4, 1991 issued by the
National Labor Relations Commission in RAB-VII-0711-84 on the alleged ground that it committed a
grave abuse of discretion amounting to lack of jurisdiction in upholding the Alias Writ of Execution
issued by the Labor Arbiter which deviated from the dispositive portion of the Decision dated March
10, 1987, thereby holding that the liability of the six respondents in the case below is solidary despite
the absence of the word "solidary" in the dispositive portion of the Decision, when their liability
should merely be joint.
The factual antecedents are undisputed:
In September 1984, private respondent Enrique Sulit, Socorro Mahinay, Esmeraldo Pegarido, Tita
Bacusmo, Gino Niere, Virginia Bacus, Roberto Nemenzo, Dariogo, and Roberto Alegarbes filed a
complaint with the Department of Labor and Employment, Regional Arbitration Branch No. VII in
Cebu City against Filipinas Carbon Mining Corporation, Gerardo Sicat, Antonio Gonzales, Chiu Chin
Gin, Lo Kuan Chin, and petitioner Industrial Management Development Corporation (INIMACO), for
payment of separation pay and unpaid wages.
In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held that:
RESPONSIVE, to all the foregoing, judgment is hereby entered, ordering
respondents Filipinas Carbon and Mining Corp. Gerardo Sicat, Antonio
Gonzales/Industrial Management Development Corp. (INIMACO), Chiu Chin Gin and
Lo Kuan Chin, to pay complainants Enrique Sulit, the total award of P82,800.00;
ESMERALDO PEGARIDO the full award of P19,565.00; Roberto Nemenzo the total
sum of P29,623.60 and DARIO GO the total award of P6,599.71, or the total
aggregate award of ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED
EIGHTY-EIGHT PESOS AND 31/100 (P138,588.31) to be deposited with this
Commission within ten (10) days from receipt of this Decision for appropriate
disposition. All other claims are hereby Dismiss (sic) for lack of merit.
SO ORDERED.
Cebu City, Philippines.

10 March 1987. 1
No appeal was filed within the reglementary period thus, the above Decision became final and
executory. On June 16, 1987, the Labor Arbiter issued a writ of execution but it was returned
unsatisfied. On August 26, 1987, the Labor Arbiter issued an Alias Writ of Execution which ordered
thus:
NOW THEREFORE, by virtue of the powers vested in me by law, you are hereby
commanded to proceed to the premises of respondents Antonio Gonzales/Industrial
Management Development Corporation (INIMACO) situated at Barangay Lahug,
Cebu City, in front of La Curacha Restaurant, and/or to Filipinas Carbon and Mining
corporation and Gerardo Sicat at 4th Floor Universal RE-Bldg. 106 Paseo de Roxas,
Legaspi Village, Makati Metro Manila and at Philippine National Bank, Escolta,
Manila respectively, and collect the aggregate award of ONE HUNDRED THIRTYEIGHT THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE
CENTAVOS (P138,588.31) and thereafter turn over said amount to complainants
ENRIQUE SULIT, ESMERALDO PEGARIDO, ROBERTO NEMENZO AND DARIO
GO or to this Office for appropriate disposition. Should you fail to collect the said sum
in cash, you are hereby authorized to cause the satisfaction of the same on the
movable or immovable property(s) of respondents not exempt from execution. You
are to return this writ sixty (6) (sic) days from your receipt hereof, together with your
corresponding report.
You may collect your legal expenses from the respondents as provided for by law.
SO ORDERED. 2
On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of Execution and Set Aside
Decision," 3alleging among others that the alias writ of execution altered and changed the tenor of
the decision by changing the liability of therein respondents from joint to solidary, by the insertion of
the words "AND/OR" between "Antonio Gonzales/Industrial Management Development Corporation
and Filipinas Carbon and Mining Corporation, et al." However, in an order dated September 14,
1987, the Labor Arbiter denied the motion.
On October 2, 1987, petitioner appealed 4 the Labor Arbiter's Order dated September 14, 1987 to the
respondent NLRC.
The respondent NLRC dismissed the appeal in a Decision 5 dated August 31, 1988, the pertinent
portions of which read:
In matters affecting labor rights and labor justice, we have always adopted the liberal
approach which favors the exercise of labor rights and which is beneficial to labor as
a means to give full meaning and import to the constitutional mandate to afford
protection to labor. Considering the factual circumstances in this case, there is no
doubt in our mind that the respondents herein are called upon to pay, jointly and
severally, the claims of the complainants as was the latters' prayers. Inasmuch as
respondents herein never controverted the claims of the complainants below, there is
no reason why complainants' prayer should not be granted. Further, in line with the
powers granted to the Commission under Article 218 (c) of the Labor code, "to waive
any error, defect or irregularity whether in substance or in form" in a proceeding
before Us, We hold that the Writ of Execution be given due course in all respects.

On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept Payment Of P23,198.05
Representing One Sixth Pro Rata Share of Respondent INIMACO As Full and Final Satisfaction of
Judgment As to Said Respondent." 6 The private respondents opposed the motion. In an
Order 7 dated August 15, 1989, the Labor Arbiter denied the motion ruling thus:
WHEREFORE, responsive to the foregoing respondent INIMACO's Motions are
hereby DENIED. The Sheriff of this Office is order (sic) to accept INIMACO's tender
payment (sic) of the sum of P23,198.05, as partial satisfaction of the judgment and to
proceed with the enforcement of the Alias Writ of Execution of the levied properties,
now issued by this Office, for the full and final satisfaction of the monetary award
granted in the instant case.
SO ORDERED.
Petitioner appealed the above Order of the Labor Arbiter but this was again dismissed by the
respondent NLRC in its Resolution 8 dated September 4, 1991 which held that:
The arguments of respondent on the finality of the dispositive portion of the decision
in this case is beside the point. What is important is that the Commission has ruled
that the Writ of Execution issued by the Labor Arbiter in this case is proper. It is not
really correct to say that said Writ of Execution varied the terms of the judgment. At
most, considering the nature of labor proceedings there was, an ambiguity in said
dispositive portion which was subsequently clarified by the Labor Arbiter and the
Commission in the incidents which were initiated by INIMACO itself. By sheer
technicality and unfounded assertions, INIMACO would now reopen the issue which
was already resolved against it. It is not in keeping with the established rules of
practice and procedure to allow this attempt of INIMACO to delay the final disposition
of this case.
WHEREFORE, in view of all the foregoing, this appeal is DISMISSED and the Order
appealed from is hereby AFFIRMED.
With double costs against appellant.
Dissatisfied with the foregoing, petitioner filed the instant case, alleging that the respondent NLRC
committed grave abuse of discretion in affirming the Order of the Labor Arbiter dated August 15,
1989, which declared the liability of petitioner to be solidary.
The only issue in this petition is whether petitioner's liability pursuant to the Decision of the Labor
Arbiter dated March 10, 1987, is solidary or not.
Upon careful examination of the pleadings filed by the parties, the Court finds that petitioner
INIMACO's liability is not solidary but merely joint and that the respondent NLRC acted with grave
abuse of discretion in upholding the Labor Arbiter's Alias Writ of Execution and subsequent Orders to
the effect that petitioner's liability is solidary.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation. 9 In a joint obligation each obligor
answers only for a part of the whole liability and to each obligee belongs only a part of the
correlative
rights. 10

Well-entrenched is the rule that solidary obligation cannot lightly be inferred. 11 There is a solidary
liability only when the obligation expressly so states, when the law so provides or when the nature of
the obligation so requires. 12
In the dispositive portion of the Labor Arbiter, the word "solidary" does not appear. The
said fallo expressly states the following respondents therein as liable, namely: Filipinas Carbon and
Mining Corporation, Gerardo Sicat, Antonio Gonzales, Industrial Management Development
Corporation (petitioner INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor can it be inferred
therefrom that the liability of the six (6) respondents in the case below is solidary, thus their liability
should merely be joint.
Moreover, it is already a well-settled doctrine in this jurisdiction that, when it is not provided in a
judgment that the defendants are liable to pay jointly and severally a certain sum of money, none of
them may be compelled to satisfy in full said judgment. In Oriental Commercial Co. vs. Abeto and
Mabanag 1 this Court held:
It is of no consequence that, under the contract of suretyship executed by the parties,
the obligation contracted by the sureties was joint and several in character. The final
judgment, which superseded the action for the enforcement of said contract,
declared the obligation to be merely joint, and the same cannot be executed
otherwise. 14
Granting that the Labor Arbiter has committed a mistake in failing to indicate in the dispositive
portion that the liability of respondents therein is solidary, the correction which is substantial
can no longer be allowed in this case because the judgment has already become final and
executory.
It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to settlement of
rights of the parties. 15 Once a decision or order becomes final and executory, it is removed from the
power or jurisdiction of the court which rendered it to further alter or amend it. 16 It thereby becomes
immutable and unalterable and any amendment or alteration which substantially affects a final and
executory judgment is null and void for lack of jurisdiction, including the entire proceedings held for
that purpose. 17 An order of execution which varies the tenor of the judgment or exceeds the terms
thereof is a
nullity. 18
None of the parties in the case before the Labor Arbiter appealed the Decision dated March 10,
1987, hence the same became final and executory. It was, therefore, removed from the jurisdiction
of the Labor Arbiter or the NLRC to further alter or amend it. Thus, the proceedings held for the
purpose of amending or altering the dispositive portion of the said decision are null and void for lack
of jurisdiction. Also, the Alias Writ of Execution is null and void because it varied the tenor of the
judgment in that it sought to enforce the final judgment against "Antonio Gonzales/Industrial
Management Development Corp. (INIMACO) and/or Filipinas Carbon and Mining Corp. and Gerardo
Sicat," which makes the liability solidary.
WHEREFORE, the petition is hereby GRANTED. The Resolution dated September 4, 1991 of the
respondent National Labor Relations is hereby declared NULL and VOID. The liability of the
respondents in RAB-VII-0711-84 pursuant to the Decision of the Labor Arbiter dated March 10, 1987
should be, as it is hereby, considered joint and petitioner's payment which has been accepted
considered as full satisfaction of its liability, without prejudice to the enforcement of the award,
against the other five (5) respondents in the said case.

SO ORDERED.

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision
appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is
twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and brokerforwarder for damages sustained by a shipment while in defendants' custody, filed by
the insurer-subrogee who paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama,
Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern
Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance
Policy No. 81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged
unto the custody of defendant Metro Port Service, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment
from defendant Metro Port Service, Inc., one drum opened and without seal (per
"Request for Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries
of the shipment to the consignee's warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents was adulterated/fake (per
"Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to
pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against defendants
(per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O).
(pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court
said:
Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the
shipment was discharged in good order from the vessel unto the custody of Metro
Port Service so that any damage/losses incurred after the shipment was incurred
after the shipment was turned over to the latter, is no longer its liability (p. 17,
Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent
or at fault for the shipment was already in damage and bad order condition when
received by it, but nonetheless, it still exercised extra ordinary care and diligence in
the handling/delivery of the cargo to consignee in the same condition shipment was
received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the
custody of defendants (in whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the
losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's
pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment
sustained losses/damages. The two drums were shipped in good
order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that
was shipped (Exhs. B and C). But when on December 12, 1981 the

shipment was delivered to defendant Metro Port Service, Inc., it

excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the
losses/damages were sustained while in the respective and/or
successive custody and possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter notes,
it is stated that when the shipment was "landed on vessel" to dock of
Pier # 15, South Harbor, Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was) in damaged condition,
covered by the vessel's Agent's Bad Order Tally Sheet No. 86427."
The report further states that when defendant Allied Brokerage
withdrew the shipment from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag
partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the
consignee, one drum was found with adulterated/faked contents. It is
obvious, therefore, that these losses/damages occurred before the
shipment reached the consignee while under the successive
custodies of defendants. Under Art. 1737 of the New Civil Code, the
common carrier's duty to observe extraordinary diligence in the
vigilance of goods remains in full force and effect even if the goods
are temporarily unloaded and stored in transit in the warehouse of the
carrier at the place of destination, until the consignee has been
advised and has had reasonable opportunity to remove or dispose of
the goods (Art. 1738, NCC). Defendant Eastern Shipping's own
exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3Eastern) states that on December 12, 1981 one drum was found
"open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of
12% per annum from October 1, 1982, the date of filing of this
complaints, until fully paid (the liability of defendant Eastern Shipping,
Inc. shall not exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant Metro Port Service,
Inc. shall be to the extent of the actual invoice value of each package,

crate box or container in no case to exceed P5,000.00 each, pursuant

to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of
defendant/cross-claimant Allied Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants, and therefore they are
liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 8789, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE
ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all
that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack
to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by,
the carrier for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court
of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its
failure to observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro
Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil
Code, are exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and
the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that
of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5
[1967]. The relationship between the consignee and the common carrier is similar to
that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line,
et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care
of the goods that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver
the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption
of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a
quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants" (the herein petitioner among
them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this
case, is inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries
and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred
in its complaint that the total amount of its claim for the value of the undelivered goods amounted to

P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the
stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed
upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and
Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest
thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The
appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court
ruled:

Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as the
starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty." And as was held by this Court in Rivera
vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and
not known until definitely ascertained, assessed and determined by the courts after proof
(Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for
Injury to Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00
which is the value of the boat F B Pacita III together with its accessories, fishing gear
and equipment minus P80,000.00 which is the value of the insurance recovered and
the amount of P10,000.00 a month as the estimated monthly loss suffered by them
as a result of the fire of May 6, 1969 up to the time they are actually paid or
already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the
filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully
paid. When the appellate court's decision became final, the case was remanded to the lower
court for execution, and this was when the trial court issued its assailed resolution which
applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their

petition for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan, or forbearance of any money, goods, or credits and
the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve (12%) percent per annum. This Circular shall take effect
immediately. (Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans
or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money, goods
or credits does not fall within the coverage of the said law for it is not within the ambit
of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered
in an Action for Damages for injury to persons and loss of property and does not
involve any loan, much less forbearances of any money, goods or credits. As
correctly argued by the private respondents, the law applicable to the said case is
Article 2209 of the New Civil Code which reads
Art. 2209. If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory damages in the amount of
P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum
but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages
arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29,
1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the
amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken
to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to
render a decision imposing, as We do hereby impose, upon the defendant and the
third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against
the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of
twelve (12%) per cent per annum imposed on the total amount of the monetary award was in
contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine
Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving
loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines
Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260
[1985]). It is true that in the instant case, there is neither a loan or a forbearance, but
then no interest is actually imposed provided the sums referred to in the judgment
are paid upon the finality of the judgment. It is delay in the payment of such final
judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed
on the total sum, from the filing of the complaint until paid; in other words, as part of
the judgment for damages. Clearly, they are not applicable to the instant case.
(Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was
a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount
of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as
exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In
a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to
recover damages, held the award, however, for moral damages by the trial court, later sustained by the
IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred
Thousand (P100,000.00) Pesos as moral damages, with

six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from
a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the
trial court moral and exemplary damages without, however, providing any legal interest thereon. When the
decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros
Oriental dated October 31, 1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay,
jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest
at the legal rate from the date of the filing of the complaint until fully paid (Emphasis
supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to
the trial court, and an entry of judgment was made. The writ of execution issued by the trial
court directed that only compensatory damages should earn interest at 6% per annum from
the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the
legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank
Circular No. 416] does not apply to actions based on a breach of employment
contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed
from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay
the private respondents certain sums of money as just compensation for their lands so expropriated "with
legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the
Civil Code, the Court 15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods
or credits but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the interest adjudged
by the trial court is in the nature of indemnity for damages. The legal interest required
to be paid on the amount of just compensation for the properties expropriated is
manifestly in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina
v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v. Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code)
or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases
that there has been a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under
the Civil Code governs when the transaction involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that
in these cases, a common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17depending on whether or not the amount involved is a loan or forbearance, on the
one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which
remained consistent in holding that the running of the legal interest should be from the time of the filing of
the complaint until fully paid, the "second group" varied on the commencement of the running of the legal
interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the
court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the
date of the decision.'" American Express International v. IAC, introduced a different time frame for
reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid."
The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of
the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on the
equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in

writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per
annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or until
the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT
(6%), shall be imposed on such amount upon finality of this decision until the payment thereof.
SO ORDERED.

THIRD DIVISION

G.R. No. 128721 March 9, 1999

CRISMINA GARMENTS, INC., petitioner,
vs.
COURT OF APPEALS and NORMA SIAPNO, respondent.

PANGANIBAN, J.:
Interest shall be computed in accordance with the stipulation of the parties. In the absence of such
agreement, the rate shall be twelve percent (12%) per annum when the obligation arises out of a
loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).
The Case
On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari 1 assailing the
December 28, 1995 Decision 2 and March 17, 1997 Resolution 3 of the Court of Appeals in CA-GR CV No.
28973. On September 24, 1997, this Court issued a minute Resolution 4 denying the petition "for its failure
to show any reversible error on the part of the Court of Appeals."
Petitioner then filed a Motion for Reconsideration, 5 arguing that the interest rate should be computed at
6 percent per annum as provided under Article 2209 of the Civil Code, not 12 percent per annum as
prescribed under Circular No. 416 of the Central Bank of the Philippines. Acting on the Motion, the Court
reinstated 6 the Petition, but only with respect to the issue of which interest rate should be applied. 7
The Facts
As the facts of the case are no longer disputed, we are reproducing hereunder the findings of the
appellate court:
During the period from February 1979 to April 1979, the [herein petitioner], which was
engaged in the export of girls' denim pants, contracted the services of the
[respondent], the sole proprietress of the D'Wilmar Garments, for the sewing of
20,762 pieces of assorted girls['] denims supplied by the [petitioner] under Purchase
Orders Nos. 1404, dated February 15, 1979, 0430 dated February 1, 1979, 1453
dated April 30, 1979. The [petitioner] was obliged to pay the [respondent], for her
services, in the total amount of P76,410.00. The [respondent] sew[ed] the materials
and delivered the same to the [petitioner] which acknowledged the same per Delivery
Receipt Nos. 0030 dated February 9, 1979; 0032, dated February 15, 1979; 0033
dated February 21, 1979; 0034, dated February 24, 1979; 0036, dated February 20,
1979; 0038, dated March 11, 1979[;] 0039, dated March 24, 1979; 0040 dated March

27, 1979; 0041, dated March 29, 1979; 0044, dated Marc[h] 25, 1979; 0101 dated
May 18, 1979[;] 0037, dated March 10, 1979 and 0042 dated March 10, 1979, in
good order condition. At first, the [respondent] was told that the sewing of some of
the pants w[as] defective. She offered to take delivery of the defective pants.
However, she was later told by [petitioner]'s representative that the goods were
already good. She was told to just return for her check of P76,410.00. However, the
[petitioner] failed to pay her the aforesaid amount. This prompted her to hire the
services of counsel who, on November 12, 1979, wrote a letter to the [petitioner]
demanding payment of the aforesaid amount within ten (10) days from receipt
thereof. On February 7, 1990, the [petitioner]'s [v]ice-[p]resident-[c]omptroller, wrote
a letter to [respondent]'s counsel, averring, inter alia, that the pairs of jeans sewn by
her, numbering 6,164 pairs, were defective and that she was liable to the [petitioner]
for the amount of P49,925.51 which was the value of the damaged pairs of denim
pants and demanded refund of the aforesaid amount.
On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with
the [trial court] for the collection of the principal amount of P76,410.00. . . .
xxx xxx xxx
After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in
favor of the [respondent] against the [petitioner], the dispositive portion of which
reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the latter to pay the former:
(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted
from the filing of this complaint on January 8, 1981, until fully paid;
(2) The sum of P5,000 as attorney[']s fees; and
(3) The costs of this suit;
(4) Defendant's counterclaim is hereby dismissed. 8
The Court of Appeals (CA) affirmed the trial court's ruling, except for the award of attorney's fees
which was deleted. 9 Subsequently, the CA denied the Motion for Reconsideration. 10
Hence, this recourse to this Court 11
Sole Issue
In light of the Court's Resolution dated April 27, 1998, petitioner submits for our consideration this
sole issue:

Whether or not it is proper to impose interest at the rate of twelve percent (12%) per
annum for an obligation that does not involve a loan or forbearance of money in the
absence of stipulation of the parties. 12
This Court's Ruling
We sustain petitioner's contention that the interest rate should be computed at six percent (6%) per
annum.
Sole Issue: Interest Rate
The controversy revolves around petitioner's payment of the price beyond the period prescribed in a
contract for a piece of work. Article 1589 on the Civil Code provides that "[t]he vendee [herein
petitioner] shall owe interest for the period between the delivery of the thing and the payment of the
price . . . should he be in default from the time of judicial or extrajudicial demand for the payment of
the price." The only issue now is the applicable rate of interest for the late payment.
Because the case before us is "an action for the enforcement of an obligation for payment of money
arising from a contract for a piece of work," 13 petitioner submits that the interest rate should be six
percent (6%), pursuant to Article 2209 of the Civil Code, which states:
If the obligation consists in the payment of money and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum." (Emphasis supplied.)
On the other hand, private respondent maintains that the interest rate should be twelve percent (12
%) per annum, in accordance with Central Bank (CB) Circular No. 416, which reads:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended,
otherwise known as the "Usury Law", the Monetary Board, in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for the loan or
forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest, shall be twelve per cent
(12%) per annum." (Emphasis supplied.)
She argues that the circular applies, since "the money sought to be recovered by her is in the form of
forbearance." 14
We agree with the petitioner. In Reformina v. Tomol Jr., 15 this Court stressed that the interest rate
under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a
judgment involving a loan or forbearance of money, goods or credits. Cases beyond the scope of the said
circular are governed by Article 2209 of the Civil Code, 16which considers interest a form of indemnity for
the delay in the performance of an obligation. 17

In Eastern Shipping Lines, Inc. v. Court of Appeals, 18 the Court gave the following guidelines for the
application of the proper interest rates:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of
the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be . . . the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to forbearance of
credit. 19
In Keng Hua Paper Products Co., Inc. v. CA, 20 we also ruled that the monetary award shall earn
interest at twelve percent (12%) per annum from the date of finality of the judgment until its satisfaction,
regardless of whether or not the case involves a loan of forbearance of money. The interim period is
deemed to be equivalent to a forbearance of a credit. 21
Because the amount due in this case arose from a contract for a piece of work, not from a loan or
forbearance of money, the legal interest of six percent (6%) per annum should be applied.

Furthermore, since the amount of the demand could be established with certainty when the
Complaint was filed, the six percent (6%) interest should be computed from the filing of the said
Complaint. But after the judgment becomes final and exuecutory until the obligation is satisfied, the
interest should be reckoned at twelve percent (%12) per year.
Private respondent maintains that the twelve percent (12%) interest should be imposed, because the
obligation arose from a forbearance of
money. 22 This is erroneous. In Eastern Shipping, 23 the Court observed that a "forbearance" in the context
of the usury law is a "contractual obligation of lender or creditor to refrain, during a given period of time,
from requiring the borrower or debtor to repay a loan or debt then due and payable." Using this standard,
the obligation in this case was obviously not a forbearance of money, goods or credit.
WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six percent (6%)
per annum, computed from the time of the filing of the Complaint in the trial court until the finality of
the judgment. If the adjudged principal and the interest (or any part thereof) remain unpaid
thereafter, the interest rate shall be twelve percent (12%) per annum computed from the time the
judgment becomes final and executory until it is fully satisfied. No pronouncement as to costs.
SO ORDERED.

FIRST DIVISION

G.R. No. 116863 February 12, 1998

KENG HUA PAPER PRODUCTS CO. INC., petitioner,
vs.
COURT OF APPEALS; REGIONAL TRIAL COURT OF MANILA, BR. 21; and SEA-LAND
SERVICE, INC., respondents.

PANGANIBAN, J.:
What is the nature of a bill of lading? When does a bill of lading become binding on a consignee?
Will an alleged overshipment justify the consignee's refusal to receive the goods described in the bill
of lading? When may interest be computed on unpaid demurrage charges?
Statement of the Case
These are the main questions raised in this petition assailing the Decision 1 of the Court of
Appeals 2 promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the decision 3 dated
September 28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court of Manila, Branch 21. The
dispositive portion of the said RTC decision reads:
WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has
proved its cause of action and right to relief. Accordingly, judgment is hereby
rendered in favor of the Plaintiff and against Defendant, ordering the Defendant to
pay plaintiff:
1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from
the date of the extrajudicial demand until fully paid;
2. A sum equivalent to ten (10%) percent of the total amount due as Attorney's fees
and litigation expenses.
Send copy to respective counsel of the parties.
SO ORDERED. 4
The Facts
The factual antecedents of this case as found by the Court of Appeals are as follows:

Plaintiff (herein private respondent), a shipping company, is a foreign corporation

licensed to do business in the Philippines. On June 29, 1982, plaintiff received at its
Hong Kong terminal a sealed container, Container No. SEAU 67523, containing
seventy-six bales of "unsorted waste paper" for shipment to defendant (herein
petitioner), Keng Hua Paper Products, Co. in Manila. A bill of lading (Exh. A) to cover
the shipment was issued by the plaintiff.
On July 9, 1982, the shipment was discharged at the Manila International Container
Port. Notices of arrival were transmitted to the defendant but the latter failed to
discharge the shipment from the container during the "free time" period or grace
period. The said shipment remained inside the plaintiff's container from the moment
the free time period expired on July 29, 1982 until the time when the shipment was
unloaded from the container on November 22, 1983, or a total of four hundred eightyone (481) days. During the 481-day period, demurrage charges accrued. Within the
same period, letters demanding payment were sent by the plaintiff to the defendant
who, however, refused to settle its obligation which eventually amounted to
P67,340.00. Numerous demands were made on the defendant but the obligation
remained unpaid. Plaintiff thereafter commenced this civil action for collection and
damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it
purchased fifty (50) tons of waste paper from the shipper in Hong Kong, Ho Kee
Waste Paper, as manifested in Letter of Credit No. 824858 (Exh. 7. p. 110. Original
Record) issued by Equitable Banking Corporation, with partial shipment permitted;
that under the letter of credit, the remaining balance of the shipment was only ten
(10) metric tons as shown in Invoice No. H-15/82 (Exh. 8, p. 111, Original Record);
that the shipment plaintiff was asking defendant to accept was twenty (20) metric
tons which is ten (10) metric tons more than the remaining balance; that if defendant
were to accept the shipment, it would be violating Central Bank rules and regulations
and custom and tariff laws; that plaintiff had no cause of action against the defendant
because the latter did not hire the former to carry the merchandise; that the cause of
action should be against the shipper which contracted the plaintiff's services and not
against defendant; and that the defendant duly notified the plaintiff about the wrong
shipment through a letter dated January 24, 1983 (Exh. D for plaintiff, Exh. 4 for
defendant, p. 5. Folder of Exhibits).
As previously mentioned, the RTC found petitioner liable for demurrage; attorney's fees and
expenses of litigation. The petitioner appealed to the Court of Appeals, arguing that the lower court
erred in (1) awarding the sum of P67,340 in favor of the private respondent, (2) rejecting petitioner's
contention that there was overshipment, (3) ruling that petitioner's recourse was against the shipper,
and (4) computing legal interest from date of extrajudicial demand. 5
Respondent Court of Appeals denied the appeal and affirmed the lower court's decision in toto. In a
subsequent resolution, 6 it also denied the petitioner's motion for reconsideration.
Hence, this petition for review. 7

The Issues
In its memorandum, petitioner submits the following issues:
I. Whether or not petitioner had accepted the bill of lading;
II. Whether or not the award of the sum of P67,340.00 to private
respondent was proper;
III. Whether or not petitioner was correct in not accepting the
overshipment;
IV. Whether or not the award of legal interest from the date of private
respondent's extrajudicial demand was proper; 8
In the main, the case revolves around the question of whether petitioner bound by the bill of lading.
We shall, thus, discuss the above four issues as they intertwine with this main question.
The Court's Ruling
The petition is partly meritorious. We affirm petitioner's liability for demurrage, but modify the interest
rate thereon.
Main Issue: Liability Under the Bill of Lading
A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a
contract by which three parties, namely, the shipper, the carrier, and the consignee undertake
specific responsibilities and assume stipulated obligations. 9 A "bill of lading delivered and accepted
constitutes the contract of carriage even though not signed," 10 because the "(a)cceptance of a paper
containing the terms of a proposed contract generally constitutes an acceptance of the contract and of all
of its terms and conditions of which the acceptor has actual or constructive notice." 11In a nutshell, the
acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives
rise to the presumption that the same was a perfected and binding contract. 12
In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract
between the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier (Private
Respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and the consignee
were liable for the payment of demurrage charges for the failure to discharge the containerized
shipment beyond the grace period allowed by tariff rules. Applying said stipulation, both lower courts
found petitioner liable. The aforementioned section of the bill of lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify
the carrier and ship and hold them harmless against, and the carrier shall have a lien
on the goods for, all expenses and charges for mending cooperage, baling, repairing
or reconditioning the goods, or the van, trailers or containers, and all expenses
incurred in protecting, caring for or otherwise made for the benefit of the goods,

whether the goods be damaged or not, and for any payment, expense, penalty fine,
dues, duty, tax or impost, loss, damage, detention, demurrage, or liability of
whatsoever nature, sustained or incurred by or levied upon the carrier or the ship in
connection with the goods or by reason of the goods being or having been on board,
or because of shipper's failure to procure consular or other proper permits,
certificates or any papers that may be required at any port or place or shipper's
failure to supply information or otherwise to comply with all laws, regulations and
requirements of law in connection with the goods of from any other act or omission of
the shipper or consignee: (Emphasis supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because it never gave
its consent thereto. Although petitioner admits "physical acceptance" of the bill of lading, it argues
that its subsequent actions belie the finding that it accepted the terms and conditions printed
therein. 13 Petitioner cites as support the "Notice of Refused or On Hand Freight" it received on November
2, 1982 from private respondent, which acknowledged that petitioner declined to accept the shipment.
Petitioner adds that it sent a copy of the said notice to the shipper on December 23, 1982. Petitioner
points to its January 24, 1983 letter to the private respondent, stressing "that its acceptance of the bill of
lading would be tantamount to an act of smuggling as the amount it had imported (with full documentary
support) was only (at that time) for 10,000 kilograms and not for 20,313 kilograms as stated in the bill of
lading" and "could lay them vulnerable to legal sanctions for violation of customs and tariff as well as
Central Bank laws." 14 Petitioner further argues that the demurrage "was a consequence of the shipper's
mistake" of shipping more than what was bought. The discrepancy in the amount of waste paper it
actually purchased, as reflected in the invoice vis-a-vis the excess amount in the bill of lading, allegedly
justifies its refusal to accept the shipment. 15
Petitioner Bound by
the Bill of Lading
We are not persuaded. Petitioner admits that it "received the bill of lading immediately after the
arrival of the shipment" 16 on July 8, 1982. 17 Having been afforded an opportunity to examine the said
document, petitioner did not immediately object to or dissent from any term or stipulation therein. It was
only six months later, on January 24, 1983, that petitioner sent a letter to private respondent saying that it
could not accept the shipment. Petitioner's inaction for such a long period conveys the clear inference that
it accepted the terms and conditions of the bill of lading. Moreover, said letter spoke only of petitioner's
inability to use the delivery permit, i.e. to pick up the cargo, due to the shipper's failure to comply with the
terms and conditions of the letter of credit, for which reason the bill of lading and other shipping
documents were returned by the "banks" to the shipper. 18 The letter merely proved petitioner's refusal to
pick up the cargo, not its rejection of the bill of lading.
Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance of
the bill of lading, is of no consequence. Said notice was not written by petitioner; it was sent by
private respondent to petitioner in November 1982, or four months after petitioner received the bill of
lading. If the notice has any legal significance at all, it is to highlight petitioner's prolonged failure to
object to the bill of lading. Contrary to petitioner's contention, the notice and the letter support not
belie the findings of the two lower courts that the bill of lading was impliedly accepted by
petitioner.

As aptly stated by Respondent Court of Appeals:

In the instant case, (herein petitioner) cannot and did not allege non-receipt of its
copy of the bill of lading from the shipper. Hence, the terms and conditions as well as
the various entries contained therein were brought to its knowledge. (Herein
petitioner) accepted the bill of lading without interposing any objection as to its
contents. This raises the presumption that (herein petitioner) agreed to the entries
and stipulations imposed therein.
Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6)
months to be exact, before notifying (herein private respondent) of the "wrong
shipment". It was only on January 24, 1983 that (herein petitioner) sent (herein
private respondent) such a letter of notification (Exh D for plaintiff, Exh. 4 for
defendant; p. 5, Folder of Exhibits). Thus, for the duration of those six months (herein
private respondent never knew the reason for (herein petitioner's) refusal to
discharge the shipment.
After accepting the bill of lading, receiving notices of arrival of the shipment, failing to
object thereto, (herein petitioner) cannot now deny that it is bound by the terms in the
bill of lading. If it did not intend to be bound, (herein petitioner) would not have waited
for six months to lapse before finally bringing the matter to (herein private
respondent's attention. The most logical reaction in such a case would be to
immediately verify the matter with the other parties involved. In this case, however,
(herein petitioner) unreasonably detained (herein private respondent's) vessel to the
latter's prejudice. 19
Petitioner's attempt to evade its obligation to receive the shipment on the pretext that this may cause
it to violate customs, tariff and central bank laws must likewise fail. Mere apprehension of violating
said laws, without a clear demonstration that taking delivery of the shipment has become legally
impossible, 20 cannot defeat the petitioner's contractual obligation and liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for the first time
only in petitioner's memorandum before this Court. Clearly, we cannot now entertain an issue raised
for the very first time on appeal, in deference to the well-settled doctrine that "(a)n issue raised for
the first time on appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal." 21
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the
private respondent's vessel constitutes a violation of the terms of the bill of lading. It should thus be
liable for demurrage to the former.
In The Apollon, 22 Justice Story made the following relevant comment on the nature of demurrage:
In truth, demurrage is merely an allowance or compensation for the delay or
detention of a vessel. It is often a matter of contract, but not necessarily so. The very

circumstance that in ordinary commercial voyages, a particular sum is deemed by

the parties a fair compensation for delays, is the very reason why it is, and ought to
be, adopted as a measure of compensation, in cases ex delicto. What fairer rule can
be adopted than that which founds itself upon mercantile usage as to indemnity, and
fixes a recompense upon the deliberate consideration of all the circumstances
attending the usual earnings and expenditures in common voyages? It appears to us
that an allowance, by way of demurrage, is the true measure of damages in all cases
of mere detention, for that allowance has reference to the ship's expenses, wear and
tear, and common employment. 23
Amount of Demurrage Charges
Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the filing of
the complaint, private respondent made no demand for the sum of P67,340. Moreover, private
respondent's loss and prevention manager, Loi Gillera, demanded P50,260; but its counsel, Sofronio
Larcia, subsequently asked for a different amount of P37,800.
Petitioner's position is puerile. The amount of demurrage charges in the sum of P67,340 is a factual
conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding on this
Court. 24 Besides, such factual finding is supported by the extant evidence. 25 The apparent discrepancy
was a result of the variance of the dates when the two demands were made. Necessarily, the longer the
cargo remained unclaimed, the higher the demurrage. Thus, while in his letter dated April 24,
1983, 26 private respondent's counsel demanded payment of only P37,800, the additional demurrage
incurred petitioner due to its continued refusal to receive delivery of the cargo ballooned to P67,340 by
November 22, 1983. The testimony of Counsel Sofronio Larcia as regards said letter of April 24, 1983
elucidates, viz:
Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment and
the shipment stayed at the port for a longer period.
Q So, what happened to the shipment?
A The shipment incurred additional demurrage charges which
amounted to P67,340.00 as of November 22, 1983 or more than a
year after almost a year after the shipment arrived at the port.
Q So, what did you do?
A We requested our collection agency to pursue the collection of this
amount. 27
Bill of Lading Separate from
Other Letter of Credit Arrangements

In a letter of credit, there are three distinct and independent contracts:

(1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the
issuing bank, and (3) the letter of credit proper in which the bank promises to pay the seller pursuant
to the terms and conditions stated therein. "Few things are more clearly settled in law than that the
three contracts which make up the letter of credit arrangement are to be maintained in a state of
perpetual separation." 28 A transaction involving the purchase of goods may also require, apart from a
letter of credit, a contract of transportation specially when the seller and the buyer are not in the same
locale or country, and the goods purchased have to be transported to the latter.
Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be treated
independently of the contract of sale between the seller and the buyer, and the contract for the
issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between the
amount of the goods described in the commercial invoice in the contract of sale and the amount
allowed in the letter of credit will not affect the validity and enforceability of the contract of carriage as
embodied in the bill of lading. As the bank cannot be expected to look beyond the documents
presented to it by the seller pursuant to the letter of credit, 29neither can the carrier be expected to go
beyond the representations of the shipper in the bill of lading and to verify their accuracy vis-a-viz the
commercial invoice and the letter of a credit. Thus, the discrepancy between the amount of goods
indicated in the invoice and the amount in the bill of lading cannot negate petitioner's obligation to private
respondent arising from the contract of transportation. Furthermore, private respondent, as carrier, had no
knowledge of the contents of the container. The contract of carriage was under the arrangement known
as "Shipper's Load And Count," and shipper was solely responsible for the loading of the container while
carrier was oblivious to the contents of the shipment. Petitioner's remedy in case of overshipment lies
against the seller/shipper, not against the carrier.
Payment of Interest
Petitioner posits that it "first knew" of the demurrage claim of P67,340 only when it received, by
summons, private respondent's complaint. Hence, interest may not be allowed to run from the date
of private respondent's extrajudicial demands on March 8, 1983 for P50,260 or on April 24, 1983 for
P37,800, considering that, in both cases, "there was no demand for interest." 30 We agree.
Jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit. 31
The case before us involves an obligation not arising from a loan or forbearance of money; thus,
pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per annum.
Since the bill of lading did not specify the amount of demurrage, and the sum claimed by private
respondent increased as the days went by, the total amount demanded cannot be deemed to have
been established with reasonable certainty until the trial court rendered its judgment. Indeed,
"(u)nliquidated damages or claims, it is said, are those which are not or cannot be known until
definitely ascertained, assessed and determined by the courts after presentation of proof.
" 32Consequently, the legal interest rate is six percent, to be computed from September 28, 1990, the date
of the trial court's decision. And in accordance with Philippine National Bank 33 and Eastern
Shipping, 34 the rate of twelve percent per annum shall be charged on the total then outstanding, from the
time the judgment becomes final and executory until its satisfaction.
Finally, the Court notes that the matter of attorney's fees was taken up only in the dispositive portion
of the trial court's decision. This falls short of the settled requirement that the text of the decision
should state the reason for the award of attorney's fees, for without such justification, its award
would be a "conclusion without a premise, its basis being improperly left to speculation and
conjecture." 35
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the legal
interest of six percent per annum shall be computed from September 28, 1990 until its full payment
before finality of judgment. The rate of interest shall be adjusted to twelve percent per annum,
computed from the time said judgment became final and executory until full satisfaction. The award
of attorney's fees is DELETED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 113926 October 23, 1996
SECURITY BANK AND TRUST COMPANY, petitioner,
vs.
REGIONAL TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA
VENTURA, respondents.

HERMOSISIMA, JR. J.:p

Questions of law which are of first impression are sought to be resolved in this case: Should the rate
of interest on a loan or forbearance of money, goods or credits, as stipulated in a contract, far in
excess of the ceiling prescribed under or pursuant to the Usury Law, prevail over Section 2 of
Central Bank Circular No. 905 which prescribes that the rate of interest thereof shall continue to be
12% per annum? Do the Courts have the discretion to arbitrarily override stipulated interest rates of
promissory notes and stipulated interest rates of promissory notes and thereby impose a 12%
interest on the loans, in the absence of evidence justifying the imposition of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the decision of Honorable Judge
Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61, dated March 30, 1993, which
found private respondent Eusebio liable to petitioner for a sum of money. Interest was lowered by
the court a quo from 23% per annum as agreed upon the parties to 12% per annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No.
TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the total amount of One
Hundred Thousand Pesos (P100,000.00) payable in six monthly installments with a stipulated
interest of 23% per annum up to the fifth installment. 1
On July 28, 1983, respondent Eusebio again executed Promissory Note No. TL/74/1296/83 in favor
of petitioner SBTC. Respondent bound himself to pay the sum of One Hundred Thousand Pesos
(P100,000.00) in six (6) monthly installments plus 23% interest per annum. 2
Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in the amount
of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay this note in six (6) monthly
installments plus interest at the rate of 23% per annum. 3

On all the abovementioned promissory notes, private respondent Leila Ventura had signed as comaker. 4
Upon maturity which fell on the different dates below, the principal balance remaining on the notes
stood at:
1) PN No. TL/74/748/83 P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983.
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a
collection case was filed in court by petitioner SBTC. 5 On March 30, 1993, the court a quo rendered a
judgment in favor of petitioner SBTC, the dispositive portion which reads:
WHEREFORE, premises above-considered, and plaintiff's claim having been duly
proven, judgment is hereby rendered in favor of plaintiff and as against defendant
Eusebio who is hereby ordered to:
1. Pay the sum of P16,655.00, plus interest of 12% per annum starting 27 September
1983, until fully paid;
2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August
1983, until fully paid;
3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August
1983, until fully paid;
4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as
and by way of attorney's fees; and to
5. Pay the costs of this suit.
SO ORDERED. 6
On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC contending that:
(1) the interest rate agreed upon by the parties during the signing of the promissory
notes was 23% per annum;
(2) the interests awarded should be compounded quarterly from due date as
provided in the three (3) promissory notes;
(3) defendants Leila Ventura should likewise be held liable to pay the balance on the
promissory notes since she has signed as co-maker and as such, is liable jointly and
severally with defendant Eusebio without a need for demand upon her. 7

Consequently, an Order was issued by the court a quo denying the motion to grant the rates of
interest beyond 12% per annum; and holding defendant Leila Ventura jointly and severally liable with
co-defendants Eusebio.
Hence, this petition.
The sole issue to be settled in this petition is whether or not the 23% rate of interest per
annum agreed upon by petitioner bank and respondents is allowable and not against the Usury Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the agreed rate of interest as stipulated
on the three (3) promissory notes is 23% per annum. 8 The applicable provision of law is the Central
Bank Circular No. 905 which took effect on December 22, 1982, particularly Sections 1 and 2 which
state: 9
Sec. 1. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods or credits, regardless of
maturity and whether secured or unsecured, that may be charged or collected by any
person, whether natural or judicial, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
Sec. 2. The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of express contract as to
such rate of interest, shall continue to be twelve per cent (12%) per annum.
CB Circular 905 was issued by the Central Bank's Monetary Board pursuant to P.D. 1684
empowering them to prescribe the maximum rates of interest for loans and certain forbearances, to
wit:
Sec. 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as
follows:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate of
interest for the loan or renewal thereof or the forbearance of any money, goods or
credits, and to change such rate or rates whenever warranted by prevailing economic
and social conditions: Provided, That changes in such rate or rates may be effected
gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for loans of low priority, such as consumer loans or renewals
thereof as well as such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for these institutions need not
necessarily be uniform. The Monetary Board is also authorized to prescribed different
maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries. 10

The court has ruled in the case of Philippine National Bank v. Court of Appeals 11 that:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree
to adjust, upward or downward, the interest previously stipulated.
All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular
No. 905. Contrary to the claim of respondent court, this circular did not repeal nor in anyway amend
the Usury Law but simply suspended the latter's effectivity.
Basic is the rule of statutory construction that when the law is clear and unambiguous, the court is
left with no alternative but to apply the same according to its clear language. As we have held in the
case of Quijano v. Development Bank of the Philippines: 12
. . . We cannot see any room for interpretation or construction in the clear and
unambiguous language of the above-quoted provision of law. This Court had
steadfastly adhered to the doctrine that its first and fundamental duty is the
application of the law according to its express terms, interpretation being called for
only when such literal application is impossible. No process of interpretation or
construction need be resorted to where a provision of law peremptorily calls for
application. Where a requirement or condition is made in explicit and unambiguous
terms, no discretion is left to the judiciary. It must see to it that is mandate is obeyed.
The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question
that rate. It is not for respondent court a quo to change the stipulations in the contract where it is not
illegal. Furthermore, Article 1306 of the New Civil Code provides that 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. We find no valid
reason for the respondent court a quo to impose a 12% rate of interest on the principal balance
owing to petitioner by respondent in the presence of a valid stipulation. In a loan or forbearance of
money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall
be 12% per annum. 13 Hence, only in the absence of a stipulation can the court impose the 12% rate of
interest.
The promissory notes were signed by both parties voluntarily. Therefore, stipulations therein are
binding between them. Respondent Eusebio, likewise, did not question any of the stipulations
therein. In fact, in the Comment filed by respondent Eusebio to this court, he chose not to question
the decision and instead expressed his desire to negotiate with the petitioner bank for "terms within
which to settle his obligation." 14
IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby AFFIRMED
with the MODIFICATION that the rate of interest that should be imposed be 23% per annum.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Baguio City
FIRST DIVISION

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p
On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses
Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0
Million pesos payable in a period of six years at an interest rate of 21% per annum. To secure the
loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter
parcel of land, together with the building erected thereon (the Marvin Plaza) located at Pasong
Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan was
executed between the parties. Pertinent portions of the said agreement are quoted below:
SPECIAL CONDITIONS
xxx xxx xxx
The loan shall be subject to interest at the rate of twenty one per cent (21%) per
annum, payable semi-annually in arrears, the first interest payment to become due
and payable six (6) months from date of initial release of the loan. The loan shall
likewise be subject to the appropriate service charge and a penalty charge of three
per cent (30%) per annum to be imposed on any amount remaining unpaid or not
rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever policy it may
adopt in the future; provided, that the interest rate on this/these

accommodations shall be correspondingly decreased in the event

that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date
of the increase or decrease of the maximum interest rate. 1
Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984,
respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to
Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21% to a
high of 68% between March of 1984 to September, 1986. 4
Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in
March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a
writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by
Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could
unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation clause, and
in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3,
1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an
interest rate above the 21% stipulated in the credit agreement. By this time the spouses were
already in default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB
countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and
scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower court,
on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public auction of
the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the
supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the
interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which
was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank
the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest
calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5
As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally
consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663.
They prayed therein for a writ of preliminary injunction with a temporary restraining order. The case
was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank
sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of
preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990.
On April 17, 1990 respondent bank filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto
Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge
Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990,
respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of
Appeals, assailing the following orders of the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary
injunction restraining the foreclosure sale of Mavin Plaza set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent
bank's motion to lift the writ of injunction issued by Judge Guadiz as well as its
motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's
subsequent motion to lift the writ of preliminary injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's
motion for reconsideration.
On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and
upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as
amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by
respondent court in its resolution dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two
principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates
from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is
granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of
P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the
interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of
interest it imposed was based on the agreement of the parties. Respondent bank further contends
that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were
unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties; and
(2) that there must be mutuality between the parties based on their essential equality. 6 Any contract

which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable
result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the
will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly
stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it
has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of
interest rate provision of the credit agreement signed between the parties is that petitioners were
bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3)
upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in
this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily
resolved by a careful reading of the credit agreement because the same plainly uses the phrase
"interest rate agreed upon," in reference to the original 21% interest rate. The interest provision
states:
(c) interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future; provided,
that the interest rate on this/these accommodations shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law
or by the Monetary Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or decrease of the
maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from
unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because
the aforestated increases violated the principle of mutuality of contracts expressed in Article 1308 of the
Civil Code. The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury
Law ceiling on interest rates
. . . increases in interest rates are not subject to any ceiling
prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for that matter, to unilaterally and
successively increase the agreed interest rates from 18% to 48% within a span of
four (4) months, in violation of P.D. 116 which limits such changes to once every
twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest
rate on the private respondent's loan, violated the mutuality of contracts ordained in
Article 1308 of the Civil Code:
Art. 308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia
vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million
loan agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation being reduced
to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95
Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
PNB's successive increases of the interest rate on the private respondent's loan,
over the latter's protest, were arbitrary as they violated an express provision of the
Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an
instrument in writing signed by the party to be bound as burdened by such
amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil
Code which provides that "no interest shall be due unless it has been expressly
stipulated in writing."
The debtor herein never agreed in writing to pay the interest increases fixed by the
PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4)
months is excessive, as found by the Court of Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan,
over the latter's vehement protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the
bank, or any lending institution for that matter, to progressively increase interest rates on borrowings
to an extent which would have made it virtually impossible for debtors to comply with their own
obligations. True, escalation clauses in credit agreements are perfectly valid and do not contravene
public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still
subject to laws and provisions governing agreements between parties, which agreements while
they may be the law between the contracting parties implicitly incorporate provisions of existing

law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905,
nothing in the said circular could possibly be read as granting respondent bank carte
blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to
a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending
institutions to industries and businesses in order to stimulate growth. This would not, obviously, be
the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners'
borrowings in the instant case.
Apart from violating the principle of mutuality of contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the credit agreement specifically requires that the
increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above,
this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the
escalation clauses of such contracts, not being a grant of specific authority.
Furthermore, the escalation clause of the credit agreement requires that the same be made "within
the limits allowed by law," obviously referring specifically to legislative enactments not administrative
circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However,
the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties
intended the word "law" to refer to both legislative enactments and administrative circulars and
issuances, the agreement would not have gone as far as making a distinction between "law or the
Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. This
distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and
Mortgage Bank v. Navarro 8 where the Court held that:
What should be resolved is whether BANCO FILIPINO can increase the interest rate
on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our
considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase.
the interest rate stipulated in this contract without advance notice to me/us in the
event.
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be
increased "in the event a law should be enacted increasing the lawful rate of interest
that may be charged on this particular kind of loan." The Escalation Clause was
dependent on an increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a
circular duly issued is not strictly a statute or a law, it has, however, the force and
effect of law." (Emphasis supplied). "An administrative regulation adopted pursuant to
law has the force and effect of law." "That administrative rules and regulations have
the force of law can no longer be questioned."
The distinction between a law and an administrative regulation is recognized in the
Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of
September 24, 1976 (supra). According to the guidelines, for a loan's interest to be
subject to the increases provided in CIRCULAR No. 494, there must be an
Escalation Clause allowing the increase "in the event that any law or Central Bank
regulation is promulgated increasing the maximum rate for loans." The guidelines
thus presuppose that a Central Bank regulation is not within the term "any law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17,
1980, adding section 7-a to the Usury Law, providing that parties to an agreement
pertaining to a loan could stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest is increased "by
law or by the Monetary Board." To quote:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance
of money, goods or credits may stipulate that the rate of interest
agreed upon may be increased in the event that the applicable
maximum rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall
be reduced in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of the increase or
decrease in the maximum rate of interest.' (Paragraphing and
emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should
specifically provide: (1) that there can be an increase in interest if increased by law or
by the Monetary Board; and (2) in order for such stipulation to be valid, it must

include a provision for reduction of the stipulated interest "in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board."
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank
in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to
as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount
of P40,142,518.00 in settlement of their obligations; respondent bank was demanding
P58,377,487.00 over and above those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not
only the increases of the interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon which the increases are
anchored.
We go now to respondent bank's claim that the principal issue in the case at bench involves its right
to foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.
Presidential Decree No. 385 was issued principally to guarantee that government financial
institutions would not be denied substantial cash inflows necessary to finance the government's
development projects all over the country by large borrowers who resort to litigation to prevent or
delay the government's collection of their debts or loans. 10 In facilitating collection of debts through its
automatic foreclosure provisions, the government is however, not exempted from observing basic
principles of law, and ordinary fairness and decency under the due process clause of the Constitution. 11
In the first place, because of the dispute regarding the interest rate increases, an issue which was
never settled on merit in the courts below, the exact amount of petitioner's obligations could not be
determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only
after settlement of the question involving the interest rate on the loan, and only after the spouses
refused to meet their obligations following such determination. In Filipinas Marble Corporation
v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held
that:
We cannot, at this point, conclude that respondent DBP together with the Bancom
people actually misappropriated and misspent the $5 million loan in whole or in part
although the trial court found that there is "persuasive" evidence that such acts were
committed by the respondent. This matter should rightfully be litigated below in the
main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be
applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the
petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of
the loan would be a gross mistake. It would unduly prejudice the petitioner, its
employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which
was applied wisely or not, for the benefit of the petitioner be determined.
Consequently, the extent of the loan where there was no failure of consideration and
which may be properly satisfied by foreclosure proceedings under P.D. 385 will have
to await the presentation of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble
Corporation, held:
The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in
the sugar industry during the Marcos Martial Law years. This we can not allow to
happen. For the benefit of future generations, all the dirty linen in the
PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the
same may NEVER be repeated.
It is of paramount national interest, that we allow the trial court to proceed with
dispatch to allow the parties below to present their evidence.
Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with
the letter of the Credit Agreement, honestly believed to be the real amount of their remaining
obligations with the respondent bank. The latter could not therefore claim that there was no honestto-goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to
inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts
below, in spite of the unsettled differences in interpretation of the credit agreement was obviously
made in bad faith, to gain the upper hand over petitioners.
In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring
the parties to agree to changes in the interest rate in writing, we hold that the unilateral and
progressive increases imposed by respondent PNB were null and void. Their effect was to increase
the total obligation on an eighteen million peso loan to an amount way over three times that which
was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in
the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur
business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27,
1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE.
The case is remanded to the Regional Trial Court of Makati for further proceedings.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-25704

April 24, 1968

ANGEL JOSE WAREHOUSING CO., INC., plaintiff-appellee,

vs.
CHELDA ENTERPRISES and DAVID SYJUECO, defendants-appellants.
Luis A. Guerrero for plaintiff-appellee.
Burgos and Sarte for defendants-appellants.
BENGZON, J.P., J.:
Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29, 1964 against the
partnership Chelda Enterprises and David Syjueco, its capitalist partner, for recovery of alleged
unpaid loans in the total amount of P20,880.00, with legal interest from the filing of the complaint,
plus attorney's fees of P5,000.00. Alleging that post dated checks issued by defendants to pay said
account were dishonored, that defendants' industrial partner, Chellaram I. Mohinani, had left the
country, and that defendants have removed or disposed of their property, or are about to do so, with
intent to defraud their creditors, preliminary attachment was also sought.
Answering, defendants averred that they obtained four loans from plaintiff in the total amount of
P26,500.00, of which P5,620.00 had been paid, leaving a balance of P20,880.00; that plaintiff
charged and deducted from the loan usurious interests thereon, at rates of 2% and 2.5% per month,
and, consequently, plaintiff has no cause of action against defendants and should not be permitted to
recover under the law. A counterclaim for P2,000.00 attorney's fees was interposed.
Plaintiff filed on June 25, 1964 an answer to the counterclaim, specifically denying under oath the
allegations of usury.
After trial, decision was rendered, on November 10, 1965. The court found that there remained due
from defendants an unpaid principal amount of P20,287.50; that plaintiff charged usurious interests,
of which P1,048.15 had actually been deducted in advance by plaintiff from the loan; that said
amount of P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50, leaving
a balance of P19,247.351 still payable to the plaintiff. Said court held that notwithstanding the
usurious interests charged, plaintiff is not barred from collecting the principal of the loan or its
balance of P19,247.35. Accordingly, it stated, in the dispositive portion of the decision, thus:
WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to
the plaintiff the amount of P19,247.35, with legal interest thereon from May 29, 1964 until
paid, plus an additional sum of P2,000.00 as damages for attorney's fee; and, in case the
assets of defendant partnership be insufficient to satisfy this judgment in full, ordering the

defendant David Syjueco to pay to the plaintiff one-half (1/2) of the unsatisfied portion of this
judgment.
With costs against the defendants.

1wph1.t

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest,
may the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's
favor?
To refute the lower court's decision which is based on the doctrine laid down by this Court in Lopez
v. El Hogar Filipino, 47 Phil. 249, holding that a contract of loan with usurious interest is valid as to
the loan but void as to the usurious interest, appellants argue that in light of the New Civil Code
provisions said doctrine no longer applies. In support thereof, they cite the case decided by the
Court of Appeals in Sebastian v. Bautista, 58 O.G. No. 15, p. 3146.
The Sebastian case was an action for recovery of a parcel of land. The Court of First Instance
therein decided in plaintiff's favor, on the ground that the so-called sale with pacto de retro of said
land was in fact only an equitable mortgage. In affirming the trial court, the writer of the opinion of the
Court of Appeals went further to state the view that the loan secured by said mortgage was usurious
in nature, and, thus, totally void. Such reasoning of the writer, however, was not concurred in by the
other members of the Court, who concurred in the result and voted for affirmance on the grounds
stated by the trial court. Furthermore, the affirmance of the existence of equitable mortgage
necessarily implies the existence of a valid contract of loan, because the former is an accessory
contract to the latter.
Great reliance is made by appellants on Art. 1411 of the New Civil Code which states:
Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract,
and the act constitutes criminal offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. Moreover, the provisions of the
Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to
the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound to comply with his promise.
Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule
of pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against
each other. Said rule, however, appellants add, is modified as to the borrower, by express provision
of the law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the
interest allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he
cannot recover on the contract. So they continue the New Civil Code provisions must be
upheld as against the Usury Law, under which a loan with usurious interest is not totally void,
because of Article 1961 of the New Civil Code, that: "Usurious contracts shall be governed by the
Usury Law and other special laws, so far as they are not inconsistent with this Code." (Emphasis
ours.)

We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same
as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from
previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with
usurious interest is not totally void only as to the interest.
True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a
contract's nullity proceeds from illegality of the cause or object of said contract.
However, appellants fail to consider that a contract of loan with usurious interest consists of principal
and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay
interest thereon.2
And said two stipulations are divisible in the sense that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of interest likewise
renders a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil
Code provides in this regard: "In case of a divisible contract, if the illegal terms can be separated
from the legal ones, the latter may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only
as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal.
Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6,
any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in
said law, may recover the whole interest paid. The New Civil Code, in Article 1413 states: "Interest
paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with
interest thereon from the date of payment." Article 1413, in speaking of "interest paid in excess of the
interest allowed by the usury laws" means the whole usurious interest; that is, in a loan of P1,000,
with interest of P20% per annum P200 for one year, if the borrower pays said P200, the whole
P200 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is in
this case that the law does not allow division. The whole stipulation as to interest is void, since
payment of said interest is the cause or object and said interest is illegal. The only change effected,
therefore, by Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in
excess of that allowed by law, which the Usury Law already provided for, but to add that the same
can be recovered "with interest thereon from the date of payment."
The foregoing interpretation is reached with the philosophy of usury legislation in mind; to
discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the
loan becomes one without stipulation as to payment of interest. It should not, however, be
interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the
expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a
further deterrence to usury.

The principal debt remaining without stipulation for payment of interest can thus be recovered by
judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest
from the date of the demand (in this case from the filing of the complaint). Such interest is not due
to stipulation, for there was none, the same being void. Rather, it is due to the general provision of
law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way
of damages (Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to
pay the principal debt with interest thereon at the legal rate, from the date of filing of the complaint.
As regards, however, the attorney's fees, the court a quo stated no basis for its award, beyond
saying that as a result of defendants' refusal to pay the amount of P19,247.35 notwithstanding
repeated demands, plaintiff was obliged to retain the services of counsel. The rule as to attorney's
fees is that the same are not recoverable, in the absence of stipulation. Several exceptions to this
rule are provided (Art. 2208, Civil Code). Unless shown to fall under an exception, the act of plaintiff
in engaging counsel's services due to refusal of defendants to pay his demand, does not justify
award of attorney's fees (Estate of Buan v. Camaganacan, L-21569, Feb. 28, 1966). Defendants,
moreover, had reason to resist the claim, since there was yet no definite ruling of this Court on the
point of law involved herein in light of the New Civil Code. Said award should therefore be deleted.
WHEREFORE, with the modification that the award of attorney's fees in plaintiff's favor is deleted
therefrom, and the correction of the clerical error as to the principal still recoverable, from
P19,247.35 to P19,239.35, the appealed judgment is hereby affirmed. No costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 141811

November 15, 2001

FIRST METRO INVESTMENT CORPORATION, petitioner,

vs.
ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES,
MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M. LADORES, VICENTE M.
DE VERA, JR., and FELIPE B. SESE, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals2 dated
November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision3 of the Regional Trial Court of
Pasig City, Branch 159 dated June 2, 1994 in Civil Case No. 39224. Essentially, the Court of Appeals
found and declared that the fees provided for in the Underwriting and Consultancy Agreements
executed by and between petitioner First Metro Investment Corp. (FMIC) and respondent Este del
Sol Mountain Reserve, Inc. (Este del Sol) simultaneously with the Loan Agreement dated January
31, 1978 were mere subterfuges to camouflage the usurious interest charged by petitioner FMIC.
The facts of the case are as follows:
It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of
Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance
the construction and development of the Este del Sol Mountain Reserve, a sports/resort complex
project located at Barrio Puray, Montalban, Rizal.4
Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered
basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the
diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly
amortizations to commence at the beginning of the thirteenth month from the date of the first release
in accordance with the Schedule of Amortization.5 In case of default, an acceleration clause was,
among others, provided and the amount due was made subject to a twenty (20%) percent one-time
penalty on the amount due and such amount shall bear interest at the highest rate permitted by law
from the date of default until full payment thereof plus liquidated damages at the rate of two (2%)
percent per month compounded quarterly on the unpaid balance and accrued interests together with
all the penalties, fees, expenses or charges thereon until the unpaid balance is fully paid, plus
attorney's fees equivalent to twenty-five (25%) percent of the sum sought to be recovered, which in
no case shall be less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer were
hired.6
In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several
documents7 as security for payment, among them, (a) a Real Estate Mortgage dated January 31,
1978 over two (2) parcels of land being utilized as the site of its development project with an area of
approximately One Million Twenty-Eight Thousand and Twenty-Nine (1,028,029) square meters and
particularly described in TCT Nos. N-24332 and N-24356 of the Register of Deeds of Rizal, inclusive

of all improvements, as well as all the machineries, equipment, furnishings and furnitures existing
thereon; and (b) individual Continuing Suretyship agreements by co-respondents Valentin S. Daez,
Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente
M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the payment of all the
obligations of respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred
Thousand Pesos (P7,500,000.00) each.8
Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting
Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the
public offering of One Hundred Twenty Thousand (120,000) common shares of respondent Este del
Sol's capital stock for a one-time underwriting fee of Two Hundred Thousand Pesos (P200,000.00).
In addition to the underwriting fee, the Underwriting Agreement provided that for supervising the
public offering of the shares, respondent Este del Sol shall pay petitioner FMIC an annual
supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for a period of four (4)
consecutive years. The Underwriting Agreement also stipulated for the payment by respondent Este
del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred
Pesos (P332,500.00) per annum for a period of four (4) consecutive years. Simultaneous with the
execution of and in accordance with the terms of the Underwriting Agreement, a Consultancy
Agreement was also executed on January 31, 1978 whereby respondent Este del Sol engaged the
services of petitioner FMIC for a fee as consultant to render general consultancy services. 9
In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the
amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee of petitioner
FMIC in connection with the public offering of the common shares of stock of respondent Este del
Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee for a
period of four (4) years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision fee for
the year beginning February, 1978, in accordance to the Underwriting Agreement. 10 The said
amounts of fees were deemed paid by respondent Este del Sol to petitioner FMIC which deducted
the same from the first release of the loan.
Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a
revised Schedule of Amortization, it appeared to have incurred a total obligation of Twelve Million Six
Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos
(P12,679,630.98) per the petitioner's Statement of Account dated June 23, 1980, 11 to wit:

STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE,

INC.
AS OF JUNE 23, 1980

PARTICULARS

Total amount due as of 11-22-78 per revised amortization

schedule dated 1-3-78

AMOUNT

P7,999,631.42

Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 222-79 (92 days)

327,096.04

Balance

8,326,727.46

One time penalty of 20% of the entire unpaid obligations

under Section 6.02 (ii) of Loan Agreement

1,665,345.49

Past due interest under Section 6.02 (iii) of loan Agreement:

@ 19% p.a. from 2-22-79 to 11-30-79 (281 days)
@ 21% p.a. from 11-30-79 to 6-23-80 (206 days)

1,481,879.93
1,200,714.10

Other charges publication of extra judicial foreclosure of

REM made on 5-23-80 & 6-6-80

Total Amount Due and Collectible as of June 23, 1980

4,964.00

P12,679,630.98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June
23, 1980.12At the public auction, petitioner FMIC was the highest bidder of the mortgaged properties
for Nine Million Pesos (P9,000,000.00). The total amount of Three Million One Hundred Eighty-Eight
Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) was deducted
therefrom, that is, for the publication fee for the publication of the Sheriff's Notice of Sale, Four
Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the
foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorney's fees, Three
Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos
(P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand Three
Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and
penalty charges and partly against the principal, due as of June 23, 1980, thereby leaving a balance
of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and SeventyThree Centavos (P6,863,297.73) on the principal amount of the loan as of June 23, 1980. 13
Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol
by virtue of their continuing surety agreements, the payment of the alleged deficiency balance,
despite individual demands sent to each of them,14 petitioner instituted on November 11, 1980 the
instant collection suit15 against the respondents to collect the alleged deficiency balance of Six Million
Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three
Centavos (P6,863,297.73) plus interest thereon at twenty-one (21%) percent per annum from June
24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for attorney's fees and costs.
In their Answer, the respondents sought the dismissal of the case and set up several special and
affirmative defenses, foremost of which is that the Underwriting and Consultancy Agreements

executed simultaneously with and as integral parts of the Loan Agreement and which provided for
the payment of Underwriting, Consultancy and Supervision fees were in reality subterfuges resorted
to by petitioner FMIC and imposed upon respondent Este del Sol to camouflage the usurious interest
being charged by petitioner FMIC.16
The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior
Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an Account
Manager of its Account Management Group, as well as documentary evidence. On the other hand,
co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja, former
Senior Manager and Assistant Vice-President of FMIC, testified for the respondents.
After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive portion
of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants,
ordering defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73 plus
21% interest per annum, from June 24, 1980, until the entire amount is fully paid, plus the
amount equivalent to 25% of the total amount due, as attorney's fees, plus costs of suit.
Defendants' counterclaims are dismissed, for lack of merit.
Finding the decision of the trial court unacceptable, respondents interposed an appeal to the Court
of Appeals. On November 8, 1999, the appellate court reversed the challenged decision of the trial
court. The appellate court found and declared that the fees provided for in the Underwriting and
Consultancy Agreements were mere subterfuges to camouflage the excessively usurious interest
charged by the petitioner FMIC on the loan of respondent Este del Sol; and that the stipulated
penalties, liquidated damages and attorney's fees were "excessive, iniquitous, unconscionable and
revolting to the conscience," and declared that in lieu thereof, the stipulated one time twenty (20%)
percent penalty on the amount due and ten (10%) percent of the amount due as attorney's fees
would be reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate
court dismissed the complaint as against the individual respondents sureties and ordered petitioner
FMIC to pay or reimburse respondent Este del Sol the amount of Nine Hundred Seventy-One
Thousand Pesos (P971,000.00) representing the difference between what is due to the petitioner
and what is due to respondent Este del Sol, based on the following computation: 17

A: DUE TO THE [PETITIONER]

Principal of Loan

Add: 20% one-time

Penalty
Attorney's fees

Less: Proceeds of foreclosure Sale

P7,382,500.00

1,476,500.00
900,000.00 P9,759,000.00

9,000,000.00

Deficiency

P759,000.00

B. DUE TO [RESPONDENT ESTE DEL SOL]

Return of usurious interest in the form of:

Underwriting fee
Supervision fee
Consultancy fee

Total amount due Este

P 200,000.00
200,000.00
1,330,000.00

P1,730,000.00

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of
P971,000.00 or (P1,730,000.00 less P759,000.00).
Petitioner moved for reconsideration of the appellate court's adverse decision. However, this was
denied in a Resolution18 dated February 9, 2000 of the appellate court.
Hence, the instant petition anchored on the following assigned errors: 19
THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN
ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT
WHEN IT:
a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS
SHOULD NOT BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN
AGREEMENT, AND INSTEAD, THEY SHOULD BE CONSIDERED AS A SINGLE
CONTRACT.
b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE
SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE
PETITIONER.
c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S WITNESSES ON
THE SERVICES PERFORMED BY PETITIONER.
d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR
RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii]
THAT RESPONDENTS HAD ADMITTED THE VALIDITY OF THE UNDERWRITING AND
CONSULTANCY AGREEMENTS.
e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH
PARTY AFTER THE FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE ASSAILED
DECISION, EVEN GRANTING JUST FOR THE SAKE OF ARGUMENT THAT THE
APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE PROVISIONS OF THE

LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED

DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND
UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE" AND [ii] THE
UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS
SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST
CHARGED" UPON THE RESPONDENT ESTE BY PETITIONER.
f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE
INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.
Petitioner essentially assails the factual findings and conclusion of the appellate court that the
Underwriting and Consultancy Agreements were executed to conceal a usurious loan. Inquiry upon
the veracity of the appellate court's factual findings and conclusion is not the function of this Court for
the Supreme Court is not a trier of facts. Only when the factual findings of the trial court and the
appellate court are opposed to each other does this Court exercise its discretion to re-examine the
factual findings of both courts and weigh which, after considering the record of the case, is more in
accord with law and justice.
After a careful and thorough review of the record including the evidence adduced, we find no reason
to depart from the findings of the appellate court.
First, there is no merit to petitioner FMIC's contention that Central Bank Circular No. 905 which took
effect on January 1, 1983 and removed the ceiling on interest rates for secured and unsecured
loans, regardless of maturity, should be applied retroactively to a contract executed on January 31,
1978, as in the case at bar, that is, while the Usury Law was in full force and effect. It is an
elementary rule of contracts that the laws, in force at the time the contract was made and entered
into, govern it.20 More significantly, Central Bank Circular No. 905 did not repeal nor in any way
amend the Usury Law but simply suspended the latter's effectivity.21 The illegality of usury is wholly
the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal
another law.22 Thus, retroactive application of a Central Bank Circular cannot, and should not, be
presumed.23
Second, when a contract between two (2) parties is evidenced by a written instrument, such
document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the
face of written contracts to determine the intention of the parties. However, this rule is not without
exception.24 The form of the contract is not conclusive for the law will not permit a usurious loan to
hide itself behind a legal form. Parol evidence is admissible to show that a written document though
legal in form was in fact a device to cover usury. If from a construction of the whole transaction it
becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should
and will permit no scheme, however ingenious, to becloud the crime of usury.25
In the instant case, several facts and circumstances taken altogether show that the Underwriting and
Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by
petitioner FMIC to conceal and collect excessively usurious interest, and these are:
a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the
same date of the Loan Agreement.26 Furthermore, under the Underwriting Agreement payment of the
supervision and consultancy fees was set for a period of four (4) years 27 to coincide ultimately with
the term of the Loan Agreement.28 This fact means that all the said agreements which were executed
simultaneously were set to mature or shall remain effective during the same period of time.

b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an
underwriting agreement29 and specifically mentioned that such underwriting agreement is a condition
precedent30 for petitioner FMIC to extend the loan to respondent Este del Sol, indicating and as
admitted by petitioner FMIC's employees,31 that such Underwriting Agreement is "part and parcel of
the Loan Agreement."32
c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three
Hundred Thirty Thousand Pesos (P1,330,000.00) 33 as consultancy fee despite the clear provision in
the Consultancy Agreement that the said agreement is for Three Hundred Thirty-Two Thousand Five
Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year consultancy
fee shall be due upon signing of the said consultancy agreement. 34
d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand
Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos (P1,330,000.00),
respectively, were billed by petitioner to respondent Este del Sol on February 22, 1978, 35 that is, on
the same occasion of the first partial release of the loan in the amount of Two Million Three Hundred
Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00).36 It is from this first partial release of the
loan that the said corresponding bills for Underwriting, Supervision and Constantly fees were
conducted and apparently paid, thus, reverting back to petitioner FMIC the total amount of One
Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to
respondent Este del Sol.37
e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share
of stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing to
comply with its obligation under the Underwriting Agreement.38 Besides, there was really no need for
an Underwriting Agreement since respondent Este del Sol had its own licensed marketing arm to sell
its shares and all its shares have been sold through its marketing arm. 39
f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement, 40 aside from
the fact that there was no need for a Consultancy Agreement, since respondent Este del Sol's
officers appeared to be more competent to be consultants in the development of the projected
sports/resort complex.41
All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC
that the Loan, Underwriting and Consultancy Agreements are separate and independent
transactions. The Underwriting and Consultancy Agreements which were executed and delivered
contemporaneously with the Loan Agreement on January 31, 1978 were exacted by petitioner FMIC
as essential conditions for the grant of the loan. An apparently lawful loan is usurious when it is
intended that additional compensation for the loan be disguised by an ostensibly unrelated contract
providing for payment by the borrower for the lender's services which are of little value or which are
not in fact to be rendered, such as in the instant case.42 In this connection, Article 1957 of the New
Civil Code clearly provides that:
Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury shall be void. The borrower may recover in accordance
with the laws on usury.
In usurious loans, the entire obligation does not become void because of an agreement for usurious
interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious
interest is void, consequently, the debt is to be considered without stipulation as to the interest.43 The
reason for this rule was adequately explained in the case of Angel Jose Warehousing Co., Inc. v.
Chelda Enterprises44 where this Court held:

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The
illegality lies only as to the prestation to pay the stipulated interest; hence, being separable,
the latter only should be deemed void, since it is the only one that is illegal.
Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right to receive
back the principal amount of the loan. With respect to the debtor, the amount paid as interest under
a usurious agreement is recoverable by him, since the payment is deemed to have been made
under restraint, rather than voluntarily.45
This Court agrees with the factual findings and conclusion of the appellate court, to wit:
We find the stipulated penalties, liquidated damages and attorney's fees, excessive,
iniquitous and unconscionable and revolting to the conscience as they hardly allow the
borrower any chance of survival in case of default. And true enough, ESTE folded up when
the appellee extrajudicially foreclosed on its (ESTE's) development project and literally
closed its offices as both the appellee and ESTE were at the time holding office in the same
building. Accordingly, we hold that 20% penalty on the amount due and 10% of the proceeds
of the foreclosure sale as attorney's fees would suffice to compensate the appellee,
especially so because there is no clear showing that the appellee hired the services of
counsel to effect the foreclosure, it engaged counsel only when it was seeking the recovery
of the alleged deficiency.
Attorney's fees as provided in penal clauses are in the nature of liquidated damages. So long as
such stipulation does not contravene any law, morals, or public order, it is binding upon the parties.
Nonetheless, courts are empowered to reduce the amount of attorney's fees if the same is
"iniquitous or unconscionable."46 Articles 1229 and 2227 of the New Civil Code provide that:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred
Thirty Pesos and Seventy-Five Centavos (93,188,630.75) for the stipulated attorney's fees
equivalent to twenty-five (25%) percent of the alleged amount due, as of the date of the auction sale
on June 23, 1980, is manifestly exorbitant and unconscionable. Accordingly, we agree with the
appellate court that a reduction of the attorney's fees to ten (10%) percent is appropriate and
reasonable under the facts and circumstances of this case.
Lastly, there is no merit to petitioner FMIC's contention that the appellate court erred in awarding an
amount allegedly not asked nor prayed for by respondents. Whether the exact amount of the relief
was not expressly prayed for is of no moment for the reason that the relief was plainly warranted by
the allegations of the respondents as well as by the facts as found by the appellate court. A party is
entitled to as much relief as the facts may warrant 47
In view of all the foregoing, the Court is convinced that the appellate court committed no reversible
error in its challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 72275 November 13, 1991

PACIFIC BANKING CORPORATION, petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents.
Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J.:p
This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of the Intermediate
Appellate Court (now Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the decision of the trial court
against herein private respondent Roberto Regala, Jr., one of the defendants in the case for sum of money filed by Pacific Banking
Corporation.

The facts of the case as adopted by the respondent appellant court from herein petitioner's brief
before said court are as follows:
On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as
Celia Regala for brevity), applied for and obtained from the plaintiff the issuance and
use of Pacificard credit card (Exhs. "A", "A-l",), under the Terms and Conditions
Governing the Issuance and Use of Pacificard (Exh. "B" and hereinafter referred to
as Terms and Conditions), a copy of which was issued to and received by the said
defendant on the date of the application and expressly agreed that the use of the
Pacificard is governed by said Terms and Conditions. On the same date, the
defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala, executed
a "Guarantor's Undertaking" (Exh. "A-1-a") in favor of the appellee Bank, whereby
the latter agreed "jointly and severally of Celia Aurora Syjuco Regala, to pay the
Pacific Banking Corporation upon demand, any and all indebtedness, obligations,
charges or liabilities due and incurred by said Celia Aurora Syjuco Regala with the
use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking
Corporation". It was also agreed that "any changes of or novation in the terms and
conditions in connection with the issuance or use of the Pacificard, or any extension
of time to pay such obligations, charges or liabilities shall not in any manner release
me/us from responsibility hereunder, it being understood that I fully agree to such

charges, novation or extension, and that this understanding is a continuing one and
shall subsist and bind me until the liabilities of the said Celia Syjuco Regala have
been fully satisfied or paid.
Plaintiff-appellee Pacific Banking Corporation has contracted with accredited
business establishments to honor purchases of goods and/or services by Pacificard
holders and the cost thereof to be advanced by the plaintiff-appellee for the account
of the defendant cardholder, and the latter undertook to pay any statements of
account rendered by the plaintiff-appellee for the advances thus made within thirty
(30) days from the date of the statement, provided that any overdue account shall
earn interest at the rate of 14% per annum from date of default.
The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or
services on credit (Exh. "C", "C-l" to "C-112") under her Pacificard, for which the
plaintiff advanced the cost amounting to P92,803.98 at the time of the filing of the
complaint.
In view of defendant Celia Regala's failure to settle her account for the purchases
made thru the use of the Pacificard, a written demand (Exh. "D") was sent to the
latter and also to the defendant Roberto Regala, Jr. (Exh. " ") under his "Guarantor's
Undertaking."
A complaint was subsequently filed in Court for defendant's (sic) repeated failure to
settle their obligation. Defendant Celia Regala was declared in default for her failure
to file her answer within the reglementary period. Defendant-appellant Roberto
Regala, Jr., on the other hand, filed his Answer with Counterclaim admitting his
execution of the "Guarantor's Understanding", "but with the understanding that his
liability would be limited to P2,000.00 per month."
In view of the solidary nature of the liability of the parties, the presentation of
evidence ex-parte as against the defendant Celia Regala was jointly held with the
trial of the case as against defendant Roberto Regala.
After the presentation of plaintiff's testimonial and documentary evidence, fire struck
the City Hall of Manila, including the court where the instant case was pending, as
well as all its records.
Upon plaintiff-appellee's petition for reconstitution, the records of the instant case
were duly reconstituted. Thereafter, the case was set for pre-trial conference with
respect to the defendant-appellant Roberto Regala on plaintiff-appellee's motion,
after furnishing the latter a copy of the same. No opposition thereto having been
interposed by defendant-appellant, the trial court set the case for pre-trial
conference. Neither did said defendant-appellant nor his counsel appear on the date
scheduled by the trial court for said conference despite due notice. Consequently,
plaintiff-appellee moved that the defendant-appellant Roberto Regala he declared as
in default and that it be allowed to present its evidence ex-parte, which motion was

granted. On July 21, 1983, plaintiff-appellee presented its evidence ex-parte. (pp. 2326, Rollo)
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of which
reads:
WHEREFORE, the Court renders judgment for the plaintiff and against the
defendants condemning the latter, jointly and severally, to pay said plaintiff the
amount of P92,803.98, with interest thereon at 14% per annum, compounded
annually, from the time of demand on November 17, 1978 until said principal amount
is fully paid; plus 15% of the principal obligation as and for attorney's fees and
expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered judgment modifying the decision of the
trial court. Private respondent Roberto Regala, Jr. was made liable only to the extent of the monthly
credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the advances made
during the one year period of the card's effectivity counted from October 29, 1975 up to October 29,
1976. The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated December 5, 1983 is modified
only as to appellant Roberto Regala, Jr., so as to make him liable only for the
purchases made by defendant Celia Aurora Syjuco Regala with the use of the
Pacificard from October 29, 1975 up to October 29, 1976 up to the amount of
P2,000.00 per month only, with interest from the filing of the complaint up to the
payment at the rate of 14% per annum without pronouncement as to costs. (p.
32, Rollo)
A motion for reconsideration was filed by Pacific Banking Corporation which the respondent
appellate court denied for lack of merit on September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the appellate
court correctly recognized Celia Regala's obligation to Pacific Banking Corp. for the purchases of
goods and services with the use of a Pacificard credit card in the total amount of P92,803.98 with
14% interest per annum, it erred in limiting private respondent Roberto Regala, Jr.'s liability only for
purchases made by Celia Regala with the use of the card from October 29, 1975 up to October 29,
1976 up to the amount of P2,000.00 per month with 14% interest from the filing of the complaint.
There is merit in this petition.

The pertinent portion of the "Guarantor's Undertaking" which private respondent Roberto Regala, Jr.
signed in favor of Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco Regala
to pay the Pacific Banking Corporation upon demand any and all indebtedness,
obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with
the use of the Pacificard or renewals thereof issued in his favor by the Pacific
Banking Corporation. Any changes of or Novation in the terms and conditions in
connection with the issuance or use of said Pacificard, or any extension of time to
pay such obligations, charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that the undertaking is a
continuing one and shall subsist and bind me/us until all the liabilities of the said
Celia Syjuco Regala have been fully satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking,"
was in substance a contract of surety. As distinguished from a contract of guaranty where the
guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the
latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the
principal debtor (Art. 2047, Civil Code of the Philippines).
We need not look elsewhere to determine the nature and extent of private respondent Roberto
Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally with the debtor Celia
Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations,
charges or liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or
renewals thereof issued in (her) favor by Pacific Banking Corporation." This undertaking was also
provided as a condition in the issuance of the Pacificard to Celia Regala, thus:
5. A Pacificard is issued to a Pacificard-holder against the joint and several signature
of a third party and as such, the Pacificard holder and the guarantor assume joint
and several liabilities for any and all amount arising out of the use of the Pacificard.
(p. 14, Rollo)
The respondent appellate court held that "all the other rights of the guarantor are not thereby lost by
the guarantor becoming liable solidarily and therefore a surety." It further ruled that although the
surety's liability is like that of a joint and several debtor, it does not make him the debtor but still the
guarantor (or the surety), relying on the case of Government of the Philippines v. Tizon. G.R. No. L22108, August 30, 1967, 20 SCRA 1182. Consequently, Article 2054 of the Civil Code providing for a
limited liability on the part of the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not
for more than the principal debtor, both as regards the amount and the onerous nature of the
conditions. 2 It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that
Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree however, that
Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself
up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change or novation of the
terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety a
continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's
Undertaking" Roberto signed, thus:

. . . Any changes of or novation in the terms and conditions in connection with the
issuance or use of said Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us from the responsibility
hereunder, it being understood that the undertaking is a continuing one and shall
subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have
been fully satisfied or paid. (p. 12, supra; emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of
future changes in the terms and conditions governing the issuance of the credit card to his wife and
that, notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may
secure additional and future debts of the principal debtor the amount of which is not yet known (see
Article 2053, supra).
The application by respondent court of the ruling in Government v. Tizon, supra is misplaced. It was
held in that case that:
. . . although the defendants bound themselves in solidum, the liability of the Surety
under its bond would arise only if its co-defendants, the principal obligor, should fail
to comply with the contract. To paraphrase the ruling in the case of Municipality of
Orion vs. Concha, the liability of the Surety is "consequent upon the liability" of Tizon,
or "so dependent on that of the principal debtor" that the Surety "is considered in law
as being the same party as the debtor in relation to whatever is adjudged, touching
the obligation of the latter"; or the liabilities of the two defendants herein "are so
interwoven and dependent as to be inseparable." Changing the expression, if the
defendants are held liable, their liability to pay the plaintiff would be solidary, but the
nature of the Surety's undertaking is such that it does not incur liability unless and
until the principal debtor is held liable.
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this
sense that a surety, although solidarily liable with the principal debtor, is different from the debtor. It
does not mean, however, that the surety cannot be held liable to the same extent as the principal
debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses
in the contract of suretyship(see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate court is
SET ASIDE and the decision of the trial court is REINSTATED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 144134

November 11, 2003

MARIVELES SHIPYARD CORP., Petitioner,

vs.
HON. COURT OF APPEALS, LUIS REGONDOLA, MANUELIT GATALAN, ORESCA AGAPITO,
NOEL ALBADBAD, ROGELIO PINTUAN, DANILO CRISOSTOMO, ROMULO MACALINAO,
NESTOR FERER, RICKY CUESTA, ROLLY ANDRADA, LARRY ROGOLA, FRANCISCO
LENOGON, AUGUSTO QUINTO, ARFE BERAMO, BONIFACIO TRINIDAD, ALFREDO
ASCARRAGA, ERNESTO MAGNO, HONORARIO HORTECIO, NELBERT PINEDA, GLEN
ESTIPULAR, FRANCISCO COMPUESTO, ISABELITO CORTEZ, MATURAN ROSAURO,
SAMSON CANAS, FEBIEN ISIP, JESUS RIPARIP, ALFREDO SIENES, ADOLAR ALBERT,
HONESTO CABANILLAS, AMPING CASTILLO and ELWIN REVILLA, Respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Resolution,1 dated December 29, 1999, of the Court of Appeals in CAG.R. SP No. 55416, which dismissed outright the petition for certiorari of Mariveles Shipyard Corp.,
due to a defective certificate of non-forum shopping and non-submission of the required documents
to accompany said petition. Mariveles Shipyard Corp., had filed a special civil action for certiorari
with the Court of Appeals to nullify the resolution2 of the National Labor Relations Commission
(NLRC), dated April 22, 1999, in NLRC NCR Case No. 00-09-005440-96-A, which affirmed the Labor
Arbiters decision,3 dated May 22, 1998, holding petitioner jointly and severally liable with Longest
Force Investigation and Security Agency, Inc., for the underpayment of wages and overtime pay due
to the private respondents. Likewise challenged in the instant petition is the resolution 4 of the Court
of Appeals, dated July 12, 2000, denying petitioners motion for reconsideration.
The facts, as culled from records, are as follows:
Sometime on October 1993, petitioner Mariveles Shipyard Corporation engaged the services of
Longest Force Investigation and Security Agency, Inc. (hereinafter, "Longest Force") to render
security services at its premises. Pursuant to their agreement, Longest Force deployed its security
guards, the private respondents herein, at the petitioners shipyard in Mariveles, Bataan.
According to petitioner, it religiously complied with the terms of the security contract with Longest
Force, promptly paying its bills and the contract rates of the latter. However, it found the services
being rendered by the assigned guards unsatisfactory and inadequate, causing it to terminate its
contract with Longest Force on April 1995.5Longest Force, in turn, terminated the employment of the
security guards it had deployed at petitioners shipyard.
On September 2, 1996, private respondents filed a case for illegal dismissal, underpayment of
wages pursuant to the PNPSOSIA-PADPAO rates, non-payment of overtime pay, premium pay for
holiday and rest day, service incentive leave pay, 13th month pay and attorneys fees, against both

Longest Force and petitioner, before the Labor Arbiter. Docketed as NLRC NCR Case No. 00-09005440-96-A, the case sought the guards reinstatement with full backwages and without loss of
seniority rights.
For its part, Longest Force filed a cross-claim6 against the petitioner. Longest Force admitted that it
employed private respondents and assigned them as security guards at the premises of petitioner
from October 16, 1993 to April 30, 1995, rendering a 12 hours duty per shift for the said period. It
likewise admitted its liability as to the non-payment of the alleged wage differential in the total
amount of P2,618,025 but passed on the liability to petitioner alleging that the service fee paid by the
latter to it was way below the PNPSOSIA and PADPAO rate, thus, "contrary to the mandatory and
prohibitive laws because the right to proper compensation and benefits provided under the existing
labor laws cannot be waived nor compromised."
The petitioner denied any liability on account of the alleged illegal dismissal, stressing that no
employer-employee relationship existed between it and the security guards. It further pointed out
that it would be the height of injustice to make it liable again for monetary claims which it had already
paid. Anent the cross-claim filed by Longest Force against it, petitioner prayed that it be dismissed
for lack of merit. Petitioner averred that Longest Force had benefited from the contract, it was now
estopped from questioning said agreement on the ground that it had made a bad deal.
On May 22, 1998, the Labor Arbiter decided NLRC NCR Case No. 00-09-005440-96-A, to wit:
WHEREFORE, conformably with the foregoing, judgment is hereby rendered ordering the
respondents as follows:
1. DECLARING respondents Longest Force Investigation & Security Agency, Inc. and Mariveles
Shipyard Corporation jointly and severally liable to pay the money claims of complainants
representing underpayment of wages and overtime pay in the total amount of P2,700,623.40 based
on the PADPAO rates of pay covering the period from October 16, 1993 up to April 29, 1995 broken
down as follows:
1wphi1

UNDERPAYMENT OF WAGES:
PERIOD
COVERED

Oct. 16-Dec.
15/93(2 mos.)

MONTHLY
PADPAO
RATES
(8 hrs. duty)

ACTUAL
SALARY

UNDERPAYMENT
FOR THE
PERIOD

WAGE
DIRRERENTIALS

P5,485.00

P5,000

P485.00

P970.00

Dec. 16/93-Mar.
31/94 (3.5 mos.)

6,630.00

5,000

1,630.00

5,705.00

Apr. 1-Dec.
31/94 (9 mos.)

7,090.00

5,810

1,280.00

11,520.00

Jan. 1-Apr.
29/95 (3.97 mos.)

7,220.00

5,810

1,410.00

5,597

TOTAL UNDERPAYMENTS - - - - - - - - - - - - - -

P23,792.70

OVERTIME:
Oct. 16-Dec. 15/93
(2 mos.)

P5,485

x2

= P 5,485.00

2
Dec. 16/93-Mar.
31/94 (3.5 mos)

6,630

x 3.5

= 11,602.50

2
Apr. 1-Dec.
31/94 (9 mos.)

7,090

x9

31,905.00

x 3.97

14,331.70

2
Jan. 1-Apr.
29/95 (3.97 mos.)

7,220
2
TOTAL OVERTIME - - - - - - - - -

P63,324.20

Sub-Total of Underpayments and Overtime P87,116.90

1awp++i1

1. Luis Regondula (the same)

P 87,116.90

2. Manolito Catalan (the same)

87,116.90

3. Oresca Agapito (the same)

87,116.90

4. Noel Alibadbad (the same)

87,116.90

5. Rogelio Pintuan (the same)

87,116.90

6. Danilo Crisostomo (the same)

87,116.90

7. Romulo Macalinao (the same)

87,116.90

8. Nestor Ferrer (the same)

87,116.90

9. Ricky Cuesta (the same)

87,116.90

10. Andrada Ricky (the same)

87,116.90

11. Larry Rogola (the same)

87,116.90

12. Francisco Lenogon (the same)

87,116.90

13. Augosto Quinto (the same)

87,116.90

14. Arfe Beramo (the same)

87,116.90

15. Bonifacio Trinidad (the same)

87,116.90

16. Alfredo Azcarraga (the same)

87,116.90

17. Ernesto Magno (the same)

87,116.90

18. Honario Hortecio (the same)

87,116.90

19. Nelbert Pineda (the same)

87,116.90

20. Glen Estipular (the same)

87,116.90

21. Francisco Compuesto (the same)

87,116.90

22. Isabelito Cortes (the same)

87,116.90

23. Maturan Rosauro (the same)

87,116.90

24. Samson Canas (the same)

87,116.90

25. Febien Isip (the same)

87,116.90

26. Jesus Riparip (the same)

87,116.90

27. Alfredo Sienes (the same)

87,116.90

28. Adolar Albert (the same)

87,116.90

29. Cabanillas Honesto (the same)

87,116.90

30. Castillo Amping (the same)

87,116.90

31. Revilla Elwin (the same)

87,116.90

GRAND TOTAL

P 2,700,623.90

2. DECLARING both respondents liable to pay complainants attorneys fees equivalent to ten
(10%) percent of the total award recovered or the sum of P270,062.34.
3. ORDERING respondent Longest Force Investigation & Security Agency, Inc. to reinstate
all the herein complainants to their former or equivalent positions without loss of seniority
rights and privileges with full backwages which as computed as of the date of this decision
are as follows:
Backwages:
10/16 12/15/93 = 2 mos.
P 5,485.00 x 2 mos.

= P 10,970.00

12/16/93 3/31/94=3.5 mos.

P 6,630.00 x 3.5 mos.

= 23,205.00

4/1 12/31/94 = 9 mos.

P 7,090.00 x 9 mos.

= 63,810.00

1/1 4/29/95 = 3.97 mos.

P 7,220.00 x 3.97 mos.

= 28,663.40

TOTAL

P 126,684.407

1. Luis Regondula (same)

P 126,684.408

2. Manolito Catalan (same)

126,684.40

3. Oresca Agapito (same)

126,684.40

4. Noel Alibadbad (same)

126,684.40

5. Rogelio Pintuan (same)

126,684.40

6. Danilo Crisostomo (same)

126,684.40

7. Romulo Macalinao (same)

126,684.40

8. Nestor Ferrer (same)

126,684.40

9. Ricky Cuesta (same)

126,684.40

10. Andrada Rolly (same)

126,684.40

11. Larry Rogola (same)

126,684.40

12. Francisco Lenogon (same)

126,684.40

13. Augosto Quinto (same)

126,684.40

14. Arfe Beramo (same)

126,684.40

15. Bonifacio Trinidad (same)

126,684.40

16. Alfredo Azcarraga (same)

126,684.40

17. Ernesto Magno (same)

126,684.40

18. Honario Hortecio (same)

126,684.40

19. Nelbert Pineda (same)

126,684.40

20. Glen Estipular (same)

126,684.40

21. Francisco Compuesto (same)

126,684.40

22. Isabelito Cortes (same)

126,684.40

23. Maturan Rosauro (same)

126,684.40

24. Samson Canas (same)

126,684.40

25. Febien Isip (same)

126,684.40

26. Jesus Riparip (same)

126,684.40

27. Alfredo Sienes (same)

126,684.40

28. Adolar Albert (same)

126,684.40

29. Cabanillas Honesto (same)

126,684.40

30. Castillo Amping (same)

126,684.40

31. Revilla Elwin (same)

126,684.40

GRAND TOTAL

P3,927,216.409

4. ORDERING said Longest Force Investigation & Security Agency, Inc. to pay attorneys
fees equivalent to ten (10%) percent of the total award recovered representing backwages in
the amount of P392,721.64.10
5. DISMISSING all other claims for lack of legal basis.
SO ORDERED.11
Petitioner appealed the foregoing to the NLRC in NLRC NCR Case No. 00-09-005440-96-A. The
labor tribunal, however, affirmed in toto the decision of the Labor Arbiter. Petitioner moved for
reconsideration, but this was denied by the NLRC.
The petitioner then filed a special civil action for certiorari assailing the NLRC judgment for having
been rendered with grave abuse of discretion with the Court of Appeals, docketed as CA-G.R. SP
No. 55416. The Court of Appeals, however, denied due course to the petition and dismissed it
outright for the following reasons:
1. The verification and certification on non-forum shopping is signed not by duly authorized
officer of petitioner corporation, but by counsel (Section 1, Rule 65, 1997 Rules of Civil
Procedure).
2. The petition is unaccompanied by copies of relevant and pertinent documents, particularly
the motion for reconsideration filed before the NLRC (Section 1, Rule 65, 1997 Rules of Civil
Procedure).12
The petitioner then moved for reconsideration of the order of dismissal. The appellate court denied
the motion, pointing out that under prevailing case law subsequent compliance with formal
requirements for filing a petition as prescribed by the Rules, does not ipso facto warrant a
reconsideration. In any event, it found no grave abuse of discretion on the part of the NLRC to grant
the writ of certiorari.
Hence, this present petition before us. Petitioner submits that THE COURT OF APPEALS GRAVELY
ERRED:
1. .IN DISMISSING THE PETITION AND DENYING THE MOTION FOR
RECONSIDERATION DESPITE THE FACT THAT PETITIONER SUBSTANTIALLY
COMPLIED WITH THE REQUIREMENTS OF SECTION 1, RULE 65, 1997 RULES OF
CIVIL PROCEDURE.
2. .IN RULING THAT PETITIONER WAS NOT DENIED DUE PROCESS OF LAW.
3. .IN AFFIRMING THE DECISION OF THE NATIONAL LABOR RELATIONS
COMMISSION THAT "LONGEST FORCE" AND PETITIONER ARE JOINTLY AND
SEVERALLY LIABLE FOR PAYMENT OF WAGES AND OVERTIME PAY DESPITE THE
CLEAR SHOWING THAT PETITIONER HAVE ALREADY PAID THE SECURITY SERVICES
THAT WAS RENDERED BY PRIVATE RESPONDENTS.
4. WHEN IT FAILED TO RULE THAT ONLY "LONGEST FORCE" SHOULD BE SOLELY
AND ULTIMATELY LIABLE IN THE INSTANT CASE.13

We find the issues for our resolution to be: (1) Was it error for the Court of Appeals to sustain its
order of dismissal of petitioners special civil action for certiorari, notwithstanding subsequent
compliance with the requirements under the Rules of Court by the petitioner? (2) Did the appellate
court err in not holding that petitioner was denied due process of law by the NLRC? and (3) Did the
appellate court grievously err in finding petitioner jointly and severally liable with Longest Force for
the payment of wage differentials and overtime pay owing to the private respondents?
On the first issue, the Court of Appeals in dismissing CA-G.R. SP No. 55416 observed that: (1) the
verification and certification of non-forum shopping was not signed by any duly authorized officer of
petitioner but merely by petitioners counsel; and (2) the petition was not accompanied by a copy of
motion for reconsideration filed before the NLRC, thus violating Section 1, 14 Rule 65 of the Rules of
Court. Hence, a dismissal was proper under Section 3, 15 Rule 46 of the Rules.
In assailing the appellate courts ruling, the petitioner appeals to our sense of compassion and kind
consideration. It submits that the certification signed by its counsel and attached to its petition filed
with the Court of Appeals is substantial compliance with the requirement. Moreover, petitioner calls
our attention to the fact that when it filed its motion for reconsideration before the Court of Appeals, a
joint verification and certification of non-forum shopping duly signed by its Personnel Manager 16 and
a copy of the Motion for Reconsideration17 filed before the NLRC were attached therein. Thus,
petitioner prays that we take a liberal stance to promote the ends of justice.
Petitioners plea for liberality, however, cannot be granted by the Court for reasons herein elucidated.
It is settled that the requirement in the Rules that the certification of non-forum shopping should be
executed and signed by the plaintiff or the principal means that counsel cannot sign said certification
unless clothed with special authority to do so.18 The reason for this is that the plaintiff or principal
knows better than anyone else whether a petition has previously been filed involving the same case
or substantially the same issues. Hence, a certification signed by counsel alone is defective and
constitutes a valid cause for dismissal of the petition.19 In the case of natural persons, the Rule
requires the parties themselves to sign the certificate of non-forum shopping. However, in the case
of the corporations, the physical act of signing may be performed, on behalf of the corporate entity,
only by specifically authorized individuals for the simple reason that corporations, as artificial
persons, cannot personally do the task themselves.20 In this case, not only was the originally
appended certification signed by counsel, but in its motion for reconsideration, still petitioner utterly
failed to show that Ms. Rosanna Ignacio, its Personnel Manager who signed the verification and
certification of non-forum shopping attached thereto, was duly authorized for this purpose. It cannot
be gainsaid that obedience to the requirements of procedural rule is needed if we are to expect fair
results therefrom. Utter disregard of the rules cannot justly be rationalized by harking on the policy of
liberal construction.21
Thus, on this point, no error could be validly attributed to respondent Court of Appeals. It did not err
in dismissing the petition for non-compliance with the requirements governing the certification of
non-forum shopping.
Anent the second issue, petitioner avers that there was denial of due process of law when the Labor
Arbiter failed to have the case tried on the merits. Petitioner adds that the Arbiter did not observe the
mandatory language of the then Sec. 5(b) Rule V (now Section 11, per amendment in Resolution
No. 01-02, Series of 2002) of the NLRC New Rules of Procedure which provided that:
If the Labor Arbiter finds no necessity of further hearing after the parties have submitted their
position papers and supporting documents, he shall issue an Order to that effect and shall inform the
parties, stating the reasons therefor. 22

Petitioners contention, in our view, lacks sufficient basis. Well settled is the rule that the essence of
due process is simply an opportunity to be heard, or, as applied to administrative proceedings, an
opportunity to explain ones side or an opportunity to seek a reconsideration of the action or ruling
complained of.23 Not all cases require a trial-type hearing. The requirement of due process in labor
cases before a Labor Arbiter is satisfied when the parties are given the opportunity to submit their
position papers to which they are supposed to attach all the supporting documents or documentary
evidence that would prove their respective claims, in the event the Labor Arbiter determines that no
formal hearing would be conducted or that such hearing was not necessary.24 In any event, as found
by the NLRC, petitioner was given ample opportunity to present its side in several hearings
conducted before the Labor Arbiter and in the position papers and other supporting documents that it
had submitted. We find that such opportunity more than satisfies the requirement of due process in
labor cases.
On the third issue, petitioner argues that it should not be held jointly and severally liable with Longest
Force for underpayment of wages and overtime pay because it had been religiously and promptly
paying the bills for the security services sent by Longest Force and that these are in accordance with
the statutory minimum wage. Also, petitioner contends that it should not be held liable for overtime
pay as private respondents failed to present proof that overtime work was actually performed. Lastly,
petitioner claims that the Court of Appeals failed to render a decision that finally disposed of the case
because it did not specifically rule on the immediate recourse of private respondents, that is, the
matter of reimbursement between petitioner and Longest Force in accordance with Eagle Security
Agency Inc. v. NLRC,25 and Philippine Fisheries Development Authority v. NLRC.26
Petitioners liability is joint and several with that of Longest Force, pursuant to Articles 106, 107 and
109 of the Labor Code which provide as follows:
ART. 106. CONTRACTOR OR SUBCONTRACTOR Whenever an employer enters into a contract
with another person for the performance of the formers work, the employees of the contractor and of
the latters subcontractor, if any, shall be paid in accordance with the provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in
accordance with this Code, the employer shall be jointly and severally liable with his contractor or
subcontractor to such employees to the extent of the work performed under the contract, in the same
manner and extent that he is liable to employees directly employed by him.
xxx
ART. 107. INDIRECT EMPLOYER. The provisions of the immediately preceding Article shall
likewise apply to any person, partnership, association or corporation which, not being an employer,
contracts with an independent contractor for the performance of any work, task, job or project.
ART. 109. SOLIDARY LIABILITY. The provisions of existing laws to the contrary notwithstanding,
every employer or indirect employer shall be held responsible with his contractor or subcontractor for
any violation of any provision of this Code. For purposes of determining the extent of their civil
liability under this Chapter, they shall be considered as direct employers.
In this case, when petitioner contracted for security services with Longest Force as the security
agency that hired private respondents to work as guards for the shipyard corporation, petitioner
became an indirect employer of private respondents pursuant to Article 107 abovecited. Following
Article 106, when the agency as contractor failed to pay the guards, the corporation as principal
becomes jointly and severally liable for the guards wages. This is mandated by the Labor Code to
ensure compliance with its provisions, including payment of statutory minimum wage. The security

agency is held liable by virtue of its status as direct employer, while the corporation is deemed the
indirect employer of the guards for the purpose of paying their wages in the event of failure of the
agency to pay them. This statutory scheme gives the workers the ample protection consonant with
labor and social justice provisions of the 1987 Constitution. 27
Petitioner cannot evade its liability by claiming that it had religiously paid the compensation of guards
as stipulated under the contract with the security agency. Labor standards are enacted by the
legislature to alleviate the plight of workers whose wages barely meet the spiraling costs of their
basic needs. Labor laws are considered written in every contract. Stipulations in violation thereof are
considered null. Similarly, legislated wage increases are deemed amendments to the contract. Thus,
employers cannot hide behind their contracts in order to evade their (or their contractors or
subcontractors) liability for noncompliance with the statutory minimum wage. 28
However, we must emphasize that the solidary liability of petitioner with that of Longest Force does
not preclude the application of the Civil Code provision on the right of reimbursement from his codebtor by the one who paid.29 As held in Del Rosario & Sons Logging Enterprises, Inc. v. NLRC,30 the
joint and several liability imposed on petitioner is without prejudice to a claim for reimbursement by
petitioner against the security agency for such amounts as petitioner may have to pay to
complainants, the private respondents herein. The security agency may not seek exculpation by
claiming that the principals payments to it were inadequate for the guards lawful compensation. As
an employer, the security agency is charged with knowledge of labor laws; and the adequacy of the
compensation that it demands for contractual services is its principal concern and not any others. 31
On the issue of the propriety of the award of overtime pay despite the alleged lack of proof thereof,
suffice it to state that such involves a determination and evaluation of facts which cannot be done in
a petition for review. Well established is the rule that in an appeal via certiorari, only questions of law
may be reviewed.32
One final point. Upon review of the award of backwages and attorneys fees, we discovered certain
errors that happened in the addition of the amount of individual backwages that resulted in the
erroneous total amount of backwages and attorneys fees. These errors ought to be properly rectified
now. Thus, the correct sum of individual backwages should be P126,648.40 instead of P126,684.40,
while the correct sum of total backwages awarded and attorneys fees should
be P3,926,100.40 and P392,610.04, instead of P3,927,216.40 and P392,721.64, respectively.
WHEREFORE, the Resolution of the Court of Appeals in CA-G.R. SP No. 55416 is AFFIRMED with
MODIFICATION. Petitioner and Longest Force are held liable jointly and severally for underpayment
of wages and overtime pay of the security guards, without prejudice to petitioners right of
reimbursement from Longest Force Investigation and Security Agency, Inc. The amounts payable to
complaining security guards, herein private respondents, by way of total backwages and attorneys
fees are hereby set at P3,926,100.40 and P392,610.04, respectively. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 147791

September 8, 2006

CONSTRUCTION DEVELOPMENT CORPORATION OF THE PHILIPPINES, petitioner,

vs.
REBECCA G. ESTRELLA, RACHEL E. FLETCHER, PHILIPPINE PHOENIX SURETY &
INSURANCE INC., BATANGAS LAGUNA TAYABAS BUS CO., and WILFREDO
DATINGUINOO, respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review assails the March 29, 2001 Decision1 of the Court of Appeals in CA-G.R. CV
No. 46896, which affirmed with modification the February 9, 1993 Decision2 of the Regional Trial
Court of Manila, Branch 13, in Civil Case No. R-82-2137, finding Batangas Laguna Tayabas Bus Co.
(BLTB) and Construction Development Corporation of the Philippines (CDCP) liable for damages.
The antecedent facts are as follows:
On December 29, 1978, respondents Rebecca G. Estrella and her granddaughter, Rachel E.
Fletcher, boarded in San Pablo City, a BLTB bus bound for Pasay City. However, they never reached
their destination because their bus was rammed from behind by a tractor-truck of CDCP in the South
Expressway. The strong impact pushed forward their seats and pinned their knees to the seats in
front of them. They regained consciousness only when rescuers created a hole in the bus and
extricated their legs from under the seats. They were brought to the Makati Medical Center where
the doctors diagnosed their injuries to be as follows:
Medical Certificate of Rebecca Estrella
Fracture, left tibia mid 3rd
Lacerated wound, chin
Contusions with abrasions, left lower leg
Fracture, 6th and 7th ribs, right3
Medical Certificate of Rachel Fletcher
Extensive lacerated wounds, right leg posterior aspect popliteal area
and antero-lateral aspect mid lower leg with severance of muscles.
Partial amputation BK left leg with severance of gastro-soleus and
antero-lateral compartment of lower leg.
Fracture, open comminuted, both tibial4
Thereafter, respondents filed a Complaint5 for damages against CDCP, BLTB, Espiridion Payunan,
Jr. and Wilfredo Datinguinoo before the Regional Trial Court of Manila, Branch 13. They alleged (1)

that Payunan, Jr. and Datinguinoo, who were the drivers of CDCP and BLTB buses, respectively,
were negligent and did not obey traffic laws; (2) that BLTB and CDCP did not exercise the diligence
of a good father of a family in the selection and supervision of their employees; (3) that BLTB
allowed its bus to operate knowing that it lacked proper maintenance thus exposing its passengers
to grave danger; (4) that they suffered actual damages amounting to P250,000.00 for Estrella and
P300,000.00 for Fletcher; (5) that they suffered physical discomfort, serious anxiety, fright and
mental anguish, besmirched reputation and wounded feelings, moral shock, and lifelong social
humiliation; (6) that defendants failed to act with justice, give respondents their due, observe honesty
and good faith which entitles them to claim for exemplary damage; and (7) that they are entitled to a
reasonable amount of attorney's fees and litigation expenses.
CDCP filed its Answer6 which was later amended to include a third-party complaint against Philippine
Phoenix Surety and Insurance, Inc. (Phoenix).7
On February 9, 1993, the trial court rendered a decision finding CDCP and BLTB and their
employees liable for damages, the dispositive portion of which, states:
WHEREFORE, judgment is rendered:
In the Complaint
1. In favor of the plaintiffs and against the defendants BLTB, Wilfredo Datinguinoo,
Construction and Development Corporation of the Philippines (now PNCC) and Espiridion
Payunan, Jr., ordering said defendants, jointly and severally to pay the plaintiffs the sum of
P79,254.43 as actual damages and to pay the sum of P10,000.00 as attorney's fees or a
total of P89,254.43;
2. In addition, defendant Construction and Development Corporation of the Philippines and
defendant Espiridion Payunan, Jr., shall pay the plaintiffs the amount of Fifty Thousand
(P50,000.00) Pesos to plaintiff Rachel Fletcher and Twenty Five Thousand (P25,000.00)
Pesos to plaintiff Rebecca Estrella;
3. On the counterclaim of BLTB Co. and Wilfredo Datinguinoo
Dismissing the counterclaim;
4. On the crossclaim against Construction and Development Corporation of the Philippines
(now PNCC) and Espiridion Payunan, Jr.
Dismissing the crossclaim;
5. On the counterclaim of Construction and Development Corporation of the Philippines (now
PNCC)
Dismissing the counterclaim;
6. On the crossclaim against BLTB
Dismissing the crossclaim;

7. On the Third Party Complaint by Construction and Development Corporation of the

Philippines against Philippine Phoenix Surety and Insurance, Incorporated
Dismissing the Third Party Complaint.
SO ORDERED.8
The trial court held that BLTB, as a common carrier, was bound to observe extraordinary diligence in
the vigilance over the safety of its passengers. It must carry the passengers safely as far as human
care and foresight provide, using the utmost diligence of very cautious persons, with a due regard for
all the circumstances. Thus, where a passenger dies or is injured, the carrier is presumed to have
been at fault or has acted negligently. BLTB's inability to carry respondents to their destination gave
rise to an action for breach of contract of carriage while its failure to rebut the presumption of
negligence made it liable to respondents for the breach. 9
Regarding CDCP, the trial court found that the tractor-truck it owned bumped the BLTB bus from
behind. Evidence showed that CDCP's driver was reckless and driving very fast at the time of the
incident. The gross negligence of its driver raised the presumption that CDCP was negligent either in
the selection or in the supervision of its employees which it failed to rebut thus making it and its
driver liable to respondents.10
Unsatisfied with the award of damages and attorney's fees by the trial court, respondents moved that
the decision be reconsidered but was denied. Respondents elevated the case 11 to the Court of
Appeals which affirmed the decision of the trial court but modified the amount of damages, the
dispositive portion of which provides:
WHEREFORE, the assailed decision dated October 7, 1993 of the Regional Trial Court,
Branch 13, Manila is hereby AFFIRMED with the following MODIFICATION:
1. The interest of six (6) percent per annum on the actual damages of P79,354.43 should
commence to run from the time the judicial demand was made or from the filing of the
complaint on February 4, 1980;
2. Thirty (30) percent of the total amount recovered is hereby awarded as attorney's fees;
3. Defendants-appellants Construction and Development Corporation of the Philippines (now
PNCC) and Espiridion Payunan, Jr. are ordered to pay plaintiff-appellants Rebecca Estrella
and Rachel Fletcher the amount of Twenty Thousand (P20,000.00) each as exemplary
damages and P80,000.00 by way of moral damages to Rachel Fletcher.
SO ORDERED.12
The Court of Appeals held that the actual or compensatory damage sought by respondents for the
injuries they sustained in the form of hospital bills were already liquidated and were ascertained.
Accordingly, the 6% interest per annum should commence to run from the time the judicial demand
was made or from the filing of the complaint and not from the date of judgment. The Court of
Appeals also awarded attorney's fees equivalent to 30% of the total amount recovered based on the
retainer agreement of the parties. The appellate court also held that respondents are entitled to
exemplary and moral damages. Finally, it affirmed the ruling of the trial court that the claim of CDCP
against Phoenix had already prescribed.

Hence, this petition raising the following issues:

I
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING
RESPONDENTS BLTB AND/OR ITS DRIVER WILFREDO DATINGUINOO SOLELY LIABLE
FOR THE DAMAGES SUSTAINED BY HEREIN RESPONDENTS FLETCHER AND
ESTRELLA.
II
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN AWARDING
EXCESSIVE OR UNFOUNDED DAMAGES, ATTORNEY'S FEES AND LEGAL INTEREST
TO RESPONDENTS FLETCHER AND ESTRELLA.
III
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING
RESPONDENT PHOENIX LIABLE UNDER ITS INSURANCE POLICY ON THE GROUND
OF PRESCRIPTION.
The issues for resolution are as follows: (1) whether BLTB and its driver Wilfredo Datinguinoo are
solely liable for the damages sustained by respondents; (2) whether the damages, attorney's fees
and legal interest awarded by the CA are excessive and unfounded; (3) whether CDCP can recover
under its insurance policy from Phoenix.
Petitioner contends that since it was made solidarily liable with BLTB for actual damages and
attorney's fees in paragraph 1 of the trial court's decision, then it should no longer be held liable to
pay the amounts stated in paragraph 2 of the same decision. Petitioner claims that the liability for
actual damages and attorney's fees is based on culpa contractual, thus, only BLTB should be held
liable. As regards paragraph 2 of the trial court's decision, petitioner claims that it is ambiguous and
arbitrary because the dispositive portion did not state the basis and nature of such award.
Respondents, on the other hand, argue that petitioner is also at fault, hence, it was properly joined
as a party. There may be an action arising out of one incident where questions of fact are common to
all. Thus, the cause of action based on culpa aquiliana in the civil suit they filed against it was valid.
The petition lacks merit.
The case filed by respondents against petitioner is an action for culpa aquiliana or quasi-delict under
Article 2176 of the Civil Code.13 In this regard, Article 2180 provides that the obligation imposed by
Article 2176 is demandable for the acts or omissions of those persons for whom one is responsible.
Consequently, an action based on quasi-delict may be instituted against the employer for an
employee's act or omission. The liability for the negligent conduct of the subordinate
is direct and primary, but is subject to the defense of due diligence in the selection and supervision
of the employee.14 In the instant case, the trial court found that petitioner failed to prove that it
exercised the diligence of a good father of a family in the selection and supervision of Payunan, Jr.
The trial court and the Court of Appeals found petitioner solidarily liable with BLTB for the actual
damages suffered by respondents because of the injuries they sustained. It was established that

Payunan, Jr. was driving recklessly because of the skid marks as shown in the sketch of the police
investigator.
It is well-settled in Fabre, Jr. v. Court of Appeals,15 that the owner of the other vehicle which collided
with a common carrier is solidarily liable to the injured passenger of the same. We held, thus:
The same rule of liability was applied in situations where the negligence of the driver of the
bus on which plaintiff was riding concurred with the negligence of a third party who was the
driver of another vehicle, thus causing an accident. In Anuran v. Buo, Batangas Laguna
Tayabas Bus Co. v. Intermediate Appellate Court, and Metro Manila Transit Corporation v.
Court of Appeals, the bus company, its driver, the operator of the other vehicle and the
driver of the vehicle were jointly and severally held liable to the injured passenger or
the latter's heirs. The basis of this allocation of liability was explained in Viluan v. Court of
Appeals, thus:
Nor should it make any difference that the liability of petitioner [bus owner] springs
from contract while that of respondents [owner and driver of other vehicle] arises
from quasi-delict. As early as 1913, we already ruled in Gutierrez vs. Gutierrez, 56 Phil.
177, that in case of injury to a passenger due to the negligence of the driver of the bus on
which he was riding and of the driver of another vehicle, the drivers as well as the owners of
the two vehicles are jointly and severally liable for damages. x x x
xxxx
As in the case of BLTB, private respondents in this case and her co-plaintiffs did not stake
out their claim against the carrier and the driver exclusively on one theory, much less on that
of breach of contract alone. After all, it was permitted for them to allege alternative
causes of action and join as many parties as may be liable on such causes of action
so long as private respondent and her co-plaintiffs do not recover twice for the same
injury. What is clear from the cases is the intent of the plaintiff there to recover from both the
carrier and the driver, thus justifying the holding that the carrier and the driver were jointly
and severally liable because their separate and distinct acts concurred to produce the same
injury.16(Emphasis supplied)
In a "joint" obligation, each obligor answers only for a part of the whole liability; in a "solidary" or
"joint and several" obligation, the relationship between the active and the passive subjects is so
close that each of them must comply with or demand the fulfillment of the whole obligation.
In Lafarge Cement v. Continental Cement Corporation,17we reiterated that joint tort feasors are jointly
and severally liable for the tort which they commit. Citing Worcester v. Ocampo,18 we held that:
x x x The difficulty in the contention of the appellants is that they fail to recognize that the
basis of the present action is tort. They fail to recognize the universal doctrine that each joint
tort feasor is not only individually liable for the tort in which he participates, but is also jointly
liable with his tort feasors. x x x
It may be stated as a general rule that joint tort feasors are all the persons who command,
instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done for their benefit. They are
each liable as principals, to the same extent and in the same manner as if they had
performed the wrongful act themselves. x x x

Joint tort feasors are jointly and severally liable for the tort which they commit. The persons
injured may sue all of them or any number less than all. Each is liable for the whole damages
caused by all, and all together are jointly liable for the whole damage. It is no defense for one
sued alone, that the others who participated in the wrongful act are not joined with him as
defendants; nor is it any excuse for him that his participation in the tort was insignificant as
compared to that of the others. x x x
Joint tort feasors are not liable pro rata. The damages can not be apportioned among them,
except among themselves. They cannot insist upon an apportionment, for the purpose of
each paying an aliquot part. They are jointly and severally liable for the whole amount. x x x
A payment in full for the damage done, by one of the joint tort feasors, of course satisfies any
claim which might exist against the others. There can be but satisfaction. The release of one
of the joint tort feasors by agreement generally operates to discharge all. x x x
Of course the court during trial may find that some of the alleged tort feasors are liable and
that others are not liable. The courts may release some for lack of evidence while
condemning others of the alleged tort feasors. And this is true even though they are charged
jointly and severally.19
Petitioner's claim that paragraph 2 of the dispositive portion of the trial court's decision is ambiguous
and arbitrary and also entitles respondents to recover twice is without basis. In the body of the trial
court's decision, it was clearly stated that petitioner and its driver Payunan, Jr., are jointly and
solidarily liable for moral damages in the amount of P50,000.00 to respondent Fletcher and
P25,000.00 to respondent Estrella.20 Moreover, there could be no double recovery because the
award in paragraph 2 is for moral damages while the award in paragraph 1 is for actual damages
and attorney's fees.
Petitioner next claims that the damages, attorney's fees, and legal interest awarded by the Court of
Appeals are excessive.
Moral damages may be recovered in quasi-delicts causing physical injuries. 21 The award of moral
damages in favor of Fletcher and Estrella in the amount of P80,000.00 must be reduced since
prevailing jurisprudence fixed the same at P50,000.00.22 While moral damages are not intended to
enrich the plaintiff at the expense of the defendant, the award should nonetheless be commensurate
to the suffering inflicted.23
The Court of Appeals correctly awarded respondents exemplary damages in the amount of
P20,000.00 each. Exemplary damages may be awarded in addition to moral and compensatory
damages.24 Article 2231 of the Civil Code also states that in quasi-delicts, exemplary damages may
be granted if the defendant acted with gross negligence.25 In this case, petitioner's driver was driving
recklessly at the time its truck rammed the BLTB bus. Petitioner, who has direct and primary liability
for the negligent conduct of its subordinates, was also found negligent in the selection and
supervision of its employees. In Del Rosario v. Court of Appeals,26 we held, thus:
ART. 2229 of the Civil Code also provides that such damages may be imposed, by way of
example or correction for the public good. While exemplary damages cannot be recovered
as a matter of right, they need not be proved, although plaintiff must show that he is entitled
to moral, temperate or compensatory damages before the court may consider the question
of whether or not exemplary damages should be awarded. Exemplary Damages are
imposed not to enrich one party or impoverish another but to serve as a deterrent against or
as a negative incentive to curb socially deleterious actions.

Regarding attorney's fees, we held in Traders Royal Bank Employees Union-Independent v. National
Labor Relations Commission,27 that:
There are two commonly accepted concepts of attorney's fees, the so-called ordinary and
extraordinary. In its ordinary concept, an attorney's fee is the reasonable compensation paid
to a lawyer by his client for the legal services he has rendered to the latter. The basis of this
compensation is the fact of his employment by and his agreement with the client.
In its extraordinary concept, an attorney's fee is an indemnity for damages ordered by
the court to be paid by the losing party in a litigation. The basis of this is any of the
cases provided by law where such award can be made, such as those authorized in Article
2208, Civil Code, and is payable not to the lawyer but to the client, unless they have
agreed that the award shall pertain to the lawyer as additional compensation or as
part thereof.28 (Emphasis supplied)
In the instant case, the Court of Appeals correctly awarded attorney's fees and other expenses of
litigation as they may be recovered as actual or compensatory damages when exemplary damages
are awarded; when the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiff's valid, just and demandable claim; and in any other case where the court deems it just and
equitable that attorney's fees and expenses of litigation should be recovered. 29
Regarding the imposition of legal interest at the rate of 6% from the time of the filing of the
complaint, we held in Eastern Shipping Lines, Inc. v. Court of Appeals,30 that when an obligation,
regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for payment of interest in the concept of actual and compensatory
damages,31 subject to the following rules, to wit
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.32 (Emphasis supplied)

Accordingly, the legal interest of 6% shall begin to run on February 9, 1993 when the trial court
rendered judgment and not on February 4, 1980 when the complaint was filed. This is because at
the time of the filing of the complaint, the amount of the damages to which plaintiffs may be entitled
remains unliquidated and unknown, until it is definitely ascertained, assessed and determined by the
court and only upon presentation of proof thereon.33 From the time the judgment becomes final and
executory, the interest rate shall be 12% until its satisfaction.
Anent the last issue of whether petitioner can recover under its insurance policy from Phoenix, we
affirm the findings of both the trial court and the Court of Appeals, thus:
As regards the liability of Phoenix, the court a quo correctly ruled that defendant-appellant
CDCP's claim against Phoenix already prescribed pursuant to Section 384 of P.D. 612, as
amended, which provides:
Any person having any claim upon the policy issued pursuant to this chapter shall,
without any unnecessary delay, present to the insurance company concerned a
written notice of claim setting forth the nature, extent and duration of the injuries
sustained as certified by a duly licensed physician. Notice of claim must be filed
within six months from date of the accident, otherwise, the claim shall be deemed
waived. Action or suit for recovery of damage due to loss or injury must be brought in
proper cases, with the Commissioner or Courts within one year from denial of the
claim, otherwise, the claimant's right of action shall prescribe. (As amended by PD
1814, BP 874.)34
The law is clear and leaves no room for interpretation. A written notice of claim must be filed within
six months from the date of the accident. Since petitioner never made any claim within six months
from the date of the accident, its claim has already prescribed.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 46896 dated March 29, 2001, which modified the Decision of the Regional Trial Court of Manila,
Branch 13, in Civil Case No. R-82-2137, is AFFIRMED with the MODIFICATIONS that petitioner is
held jointly and severally liable to pay (1) actual damages in the amount of P79,354.43; (2) moral
damages in the amount of P50,000.00 each for Rachel Fletcher and Rebecca Estrella; (3)
exemplary damages in the amount of P20,000.00 each for Rebecca Estrella and Rachel Fletcher;
and (4) thirty percent (30%) of the total amount recovered as attorney's fees. The total amount
adjudged shall earn interest at the rate of 6% per annum from the date of judgment of the trial court
until finality of this judgment. From the time this Decision becomes final and executory and the
judgment amount remains unsatisfied, the same shall earn interest at the rate of 12% per annum
until its satisfaction.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 157917

August 29, 2012

SPOUSES TEODORO1 and NANETTE PERENA, Petitioners,

vs.
SPOUSES TERESITA PHILIPPINE NICOLAS and L. ZARATE, NATIONAL RAILWAYS, and the
COURT OF APPEALS Respondents.
DECISION
BERSAMIN, J.:
The operator of a. school bus service is a common carrier in the eyes of the law. He is bound to
observe extraordinary diligence in the conduct of his business. He is presumed to be negligent when
death occurs to a passenger. His liability may include indemnity for loss of earning capacity even if
the deceased passenger may only be an unemployed high school student at the time of the
accident.
The Case
By petition for review on certiorari, Spouses Teodoro and Nanette Perefia (Perefias) appeal the
adverse decision promulgated on November 13, 2002, by which the Court of Appeals (CA) affirmed
with modification the decision rendered on December 3, 1999 by the Regional Trial Court (RTC),
Branch 260, in Paraaque City that had decreed them jointly and severally liable with Philippine
National Railways (PNR), their co-defendant, to Spouses Nicolas and Teresita Zarate (Zarates) for
the death of their 15-year old son, Aaron John L. Zarate (Aaron), then a high school student of Don
Bosco Technical Institute (Don Bosco).
Antecedents
The Pereas were engaged in the business of transporting students from their respective residences
in Paraaque City to Don Bosco in Pasong Tamo, Makati City, and back. In their business, the
Pereas used a KIA Ceres Van (van) with Plate No. PYA 896, which had the capacity to transport 14
students at a time, two of whom would be seated in the front beside the driver, and the others in the
rear, with six students on either side. They employed Clemente Alfaro (Alfaro) as driver of the van.
In June 1996, the Zarates contracted the Pereas to transport Aaron to and from Don Bosco. On
August 22, 1996, as on previous school days, the van picked Aaron up around 6:00 a.m. from the
Zarates residence. Aaron took his place on the left side of the van near the rear door. The van, with
its air-conditioning unit turned on and the stereo playing loudly, ultimately carried all the 14 student
riders on their way to Don Bosco. Considering that the students were due at Don Bosco by 7:15

a.m., and that they were already running late because of the heavy vehicular traffic on the South
Superhighway, Alfaro took the van to an alternate route at about 6:45 a.m. by traversing the narrow
path underneath the Magallanes Interchange that was then commonly used by Makati-bound
vehicles as a short cut into Makati. At the time, the narrow path was marked by piles of construction
materials and parked passenger jeepneys, and the railroad crossing in the narrow path had no
railroad warning signs, or watchmen, or other responsible persons manning the crossing. In fact, the
bamboo barandilla was up, leaving the railroad crossing open to traversing motorists.
At about the time the van was to traverse the railroad crossing, PNR Commuter No. 302 (train),
operated by Jhonny Alano (Alano), was in the vicinity of the Magallanes Interchange travelling
northbound. As the train neared the railroad crossing, Alfaro drove the van eastward across the
railroad tracks, closely tailing a large passenger bus. His view of the oncoming train was blocked
because he overtook the passenger bus on its left side. The train blew its horn to warn motorists of
its approach. When the train was about 50 meters away from the passenger bus and the van, Alano
applied the ordinary brakes of the train. He applied the emergency brakes only when he saw that a
collision was imminent. The passenger bus successfully crossed the railroad tracks, but the van
driven by Alfaro did not. The train hit the rear end of the van, and the impact threw nine of the 12
students in the rear, including Aaron, out of the van. Aaron landed in the path of the train, which
dragged his body and severed his head, instantaneously killing him. Alano fled the scene on board
the train, and did not wait for the police investigator to arrive.
Devastated by the early and unexpected death of Aaron, the Zarates commenced this action for
damages against Alfaro, the Pereas, PNR and Alano. The Pereas and PNR filed their respective
answers, with cross-claims against each other, but Alfaro could not be served with summons.
At the pre-trial, the parties stipulated on the facts and issues, viz:
A. FACTS:
(1) That spouses Zarate were the legitimate parents of Aaron John L. Zarate;
(2) Spouses Zarate engaged the services of spouses Perea for the adequate and safe
transportation carriage of the former spouses' son from their residence in Paraaque to his
school at the Don Bosco Technical Institute in Makati City;
(3) During the effectivity of the contract of carriage and in the implementation thereof, Aaron,
the minor son of spouses Zarate died in connection with a vehicular/train collision which
occurred while Aaron was riding the contracted carrier Kia Ceres van of spouses Perea,
then driven and operated by the latter's employee/authorized driver Clemente Alfaro, which
van collided with the train of PNR, at around 6:45 A.M. of August 22, 1996, within the vicinity
of the Magallanes Interchange in Makati City, Metro Manila, Philippines;
(4) At the time of the vehicular/train collision, the subject site of the vehicular/train collision
was a railroad crossing used by motorists for crossing the railroad tracks;

(5) During the said time of the vehicular/train collision, there were no appropriate and safety
warning signs and railings at the site commonly used for railroad crossing;
(6) At the material time, countless number of Makati bound public utility and private vehicles
used on a daily basis the site of the collision as an alternative route and short-cut to Makati;
(7) The train driver or operator left the scene of the incident on board the commuter train
involved without waiting for the police investigator;
(8) The site commonly used for railroad crossing by motorists was not in fact intended by
the railroad operator for railroad crossing at the time of the vehicular collision;
(9) PNR received the demand letter of the spouses Zarate;
(10) PNR refused to acknowledge any liability for the vehicular/train collision;
(11) The eventual closure of the railroad crossing alleged by PNR was an internal
arrangement between the former and its project contractor; and
(12) The site of the vehicular/train collision was within the vicinity or less than 100 meters
from the Magallanes station of PNR.
B. ISSUES
(1) Whether or not defendant-driver of the van is, in the performance of his functions, liable
for negligence constituting the proximate cause of the vehicular collision, which resulted in
the death of plaintiff spouses' son;
(2) Whether or not the defendant spouses Perea being the employer of defendant Alfaro
are liable for any negligence which may be attributed to defendant Alfaro;
(3) Whether or not defendant Philippine National Railways being the operator of the railroad
system is liable for negligence in failing to provide adequate safety warning signs and
railings in the area commonly used by motorists for railroad crossings, constituting the
proximate cause of the vehicular collision which resulted in the death of the plaintiff spouses'
son;
(4) Whether or not defendant spouses Perea are liable for breach of the contract of carriage
with plaintiff-spouses in failing to provide adequate and safe transportation for the latter's
son;
(5) Whether or not defendants spouses are liable for actual, moral damages, exemplary
damages, and attorney's fees;

(6) Whether or not defendants spouses Teodorico and Nanette Perea observed the
diligence of employers and school bus operators;
(7) Whether or not defendant-spouses are civilly liable for the accidental death of Aaron John
Zarate;
(8) Whether or not defendant PNR was grossly negligent in operating the commuter train
involved in the accident, in allowing or tolerating the motoring public to cross, and its failure
to install safety devices or equipment at the site of the accident for the protection of the
public;
(9) Whether or not defendant PNR should be made to reimburse defendant spouses for any
and whatever amount the latter may be held answerable or which they may be ordered to
pay in favor of plaintiffs by reason of the action;
(10) Whether or not defendant PNR should pay plaintiffs directly and fully on the amounts
claimed by the latter in their Complaint by reason of its gross negligence;
(11) Whether or not defendant PNR is liable to defendants spouses for actual, moral and
exemplary damages and attorney's fees.2
The Zarates claim against the Pereas was upon breach of the contract of carriage for the safe
transport of Aaron; but that against PNR was based on quasi-delict under Article 2176, Civil Code.
In their defense, the Pereas adduced evidence to show that they had exercised the diligence of a
good father of the family in the selection and supervision of Alfaro, by making sure that Alfaro had
been issued a drivers license and had not been involved in any vehicular accident prior to the
collision; that their own son had taken the van daily; and that Teodoro Perea had sometimes
accompanied Alfaro in the vans trips transporting the students to school.
For its part, PNR tended to show that the proximate cause of the collision had been the reckless
crossing of the van whose driver had not first stopped, looked and listened; and that the narrow path
traversed by the van had not been intended to be a railroad crossing for motorists.
Ruling of the RTC
On December 3, 1999, the RTC rendered its decision, 3 disposing:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendants ordering them to jointly and severally pay the plaintiffs as follows:
(1) (for) the death of Aaron- Php50,000.00;
(2) Actual damages in the amount of Php100,000.00;
(3) For the loss of earning capacity- Php2,109,071.00;

(4) Moral damages in the amount of Php4,000,000.00;

(5) Exemplary damages in the amount of Php1,000,000.00;
(6) Attorneys fees in the amount of Php200,000.00; and
(7) Cost of suit.
SO ORDERED.
On June 29, 2000, the RTC denied the Pereas motion for reconsideration, 4 reiterating that the
cooperative gross negligence of the Pereas and PNR had caused the collision that led to the death
of Aaron; and that the damages awarded to the Zarates were not excessive, but based on the
established circumstances.
The CAs Ruling
Both the Pereas and PNR appealed (C.A.-G.R. CV No. 68916).
PNR assigned the following errors, to wit:5
The Court a quo erred in:
1. In finding the defendant-appellant Philippine National Railways jointly and severally liable
together with defendant-appellants spouses Teodorico and Nanette Perea and defendantappellant Clemente Alfaro to pay plaintiffs-appellees for the death of Aaron Zarate and
damages.
2. In giving full faith and merit to the oral testimonies of plaintiffs-appellees witnesses despite
overwhelming documentary evidence on record, supporting the case of defendantsappellants Philippine National Railways.
The Pereas ascribed the following errors to the RTC, namely:
The trial court erred in finding defendants-appellants jointly and severally liable for actual, moral and
exemplary damages and attorneys fees with the other defendants.
The trial court erred in dismissing the cross-claim of the appellants Pereas against the Philippine
National Railways and in not holding the latter and its train driver primarily responsible for the
incident.
The trial court erred in awarding excessive damages and attorneys fees.
The trial court erred in awarding damages in the form of deceaseds loss of earning capacity in the
absence of sufficient basis for such an award.

On November 13, 2002, the CA promulgated its decision, affirming the findings of the RTC, but
limited the moral damages to P 2,500,000.00; and deleted the attorneys fees because the RTC did
not state the factual and legal bases, to wit:6
WHEREFORE, premises considered, the assailed Decision of the Regional Trial Court, Branch 260
of Paraaque City is AFFIRMED with the modification that the award of Actual Damages is reduced
to P 59,502.76; Moral Damages is reduced to P 2,500,000.00; and the award for Attorneys Fees is
Deleted.
SO ORDERED.
The CA upheld the award for the loss of Aarons earning capacity, taking cognizance of the ruling in
Cariaga v. Laguna Tayabas Bus Company and Manila Railroad Company,7 wherein the Court gave
the heirs of Cariaga a sum representing the loss of the deceaseds earning capacity despite Cariaga
being only a medical student at the time of the fatal incident. Applying the formula adopted in the
American Expectancy Table of Mortality:
2/3 x (80 - age at the time of death) = life expectancy
the CA determined the life expectancy of Aaron to be 39.3 years upon reckoning his life expectancy
from age of 21 (the age when he would have graduated from college and started working for his own
livelihood) instead of 15 years (his age when he died). Considering that the nature of his work and
his salary at the time of Aarons death were unknown, it used the prevailing minimum wage
of P 280.00/day to compute Aarons gross annual salary to be P 110,716.65, inclusive of the
thirteenth month pay. Multiplying this annual salary by Aarons life expectancy of 39.3 years, his
gross income would aggregate to P 4,351,164.30, from which his estimated expenses in the sum
of P 2,189,664.30 was deducted to finally arrive at P 2,161,500.00 as net income. Due to Aarons
computed net income turning out to be higher than the amount claimed by the Zarates,
only P 2,109,071.00, the amount expressly prayed for by them, was granted.
On April 4, 2003, the CA denied the Pereas motion for reconsideration. 8
Issues
In this appeal, the Pereas list the following as the errors committed by the CA, to wit:
I. The lower court erred when it upheld the trial courts decision holding the petitioners jointly and
severally liable to pay damages with Philippine National Railways and dismissing their cross-claim
against the latter.
II. The lower court erred in affirming the trial courts decision awarding damages for loss of earning
capacity of a minor who was only a high school student at the time of his death in the absence of
sufficient basis for such an award.
III. The lower court erred in not reducing further the amount of damages awarded, assuming
petitioners are liable at all.

Ruling
The petition has no merit.
1.
Were the Pereas and PNR jointly
and severally liable for damages?
The Zarates brought this action for recovery of damages against both the Pereas and the PNR,
basing their claim against the Pereas on breach of contract of carriage and against the PNR on
quasi-delict.
The RTC found the Pereas and the PNR negligent. The CA affirmed the findings.
We concur with the CA.
To start with, the Pereas defense was that they exercised the diligence of a good father of the
family in the selection and supervision of Alfaro, the van driver, by seeing to it that Alfaro had a
drivers license and that he had not been involved in any vehicular accident prior to the fatal collision
with the train; that they even had their own son travel to and from school on a daily basis; and that
Teodoro Perea himself sometimes accompanied Alfaro in transporting the passengers to and from
school. The RTC gave scant consideration to such defense by regarding such defense as
inappropriate in an action for breach of contract of carriage.
We find no adequate cause to differ from the conclusions of the lower courts that the Pereas
operated as a common carrier; and that their standard of care was extraordinary diligence, not the
ordinary diligence of a good father of a family.
Although in this jurisdiction the operator of a school bus service has been usually regarded as a
private carrier,9primarily because he only caters to some specific or privileged individuals, and his
operation is neither open to the indefinite public nor for public use, the exact nature of the operation
of a school bus service has not been finally settled. This is the occasion to lay the matter to rest.
A carrier is a person or corporation who undertakes to transport or convey goods or persons from
one place to another, gratuitously or for hire. The carrier is classified either as a private/special
carrier or as a common/public carrier.10 A private carrier is one who, without making the activity a
vocation, or without holding himself or itself out to the public as ready to act for all who may desire
his or its services, undertakes, by special agreement in a particular instance only, to transport goods
or persons from one place to another either gratuitously or for hire. 11The provisions on ordinary
contracts of the Civil Code govern the contract of private carriage.The diligence required of a private
carrier is only ordinary, that is, the diligence of a good father of the family. In contrast, a common
carrier is a person, corporation, firm or association engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for compensation, offering such
services to the public.12Contracts of common carriage are governed by the provisions on common
carriers of the Civil Code, the Public Service Act,13 and other special laws relating to transportation. A
common carrier is required to observe extraordinary diligence, and is presumed to be at fault or to

have acted negligently in case of the loss of the effects of passengers, or the death or injuries to
passengers.14
In relation to common carriers, the Court defined public use in the following terms in United States v.
Tan Piaco,15viz:
"Public use" is the same as "use by the public". The essential feature of the public use is not
confined to privileged individuals, but is open to the indefinite public. It is this indefinite or
unrestricted quality that gives it its public character. In determining whether a use is public, we must
look not only to the character of the business to be done, but also to the proposed mode of doing it.
If the use is merely optional with the owners, or the public benefit is merely incidental, it is not a
public use, authorizing the exercise of the jurisdiction of the public utility commission. There must be,
in general, a right which the law compels the owner to give to the general public. It is not enough that
the general prosperity of the public is promoted. Public use is not synonymous with public interest.
The true criterion by which to judge the character of the use is whether the public may enjoy it by
right or only by permission.
In De Guzman v. Court of Appeals,16 the Court noted that Article 1732 of the Civil Code avoided any
distinction between a person or an enterprise offering transportation on a regular or an isolated
basis; and has not distinguished a carrier offering his services to the general public, that is, the
general community or population, from one offering his services only to a narrow segment of the
general population.
Nonetheless, the concept of a common carrier embodied in Article 1732 of the Civil Code coincides
neatly with the notion of public service under the Public Service Act, which supplements the law on
common carriers found in the Civil Code. Public service, according to Section 13, paragraph (b) of
the Public Service Act, includes:
x x x every person that now or hereafter may own, operate, manage, or control in the Philippines, for
hire or compensation, with general or limited clientle, whether permanent or occasional, and done
for the general business purposes, any common carrier, railroad, street railway, traction railway,
subway motor vehicle, either for freight or passenger, or both, with or without fixed route and
whatever may be its classification, freight or carrier service of any class, express service, steamboat,
or steamship line, pontines, ferries and water craft, engaged in the transportation of passengers or
freight or both, shipyard, marine repair shop, ice-refrigeration plant, canal, irrigation system, gas,
electric light, heat and power, water supply and power petroleum, sewerage system, wire or wireless
communications systems, wire or wireless broadcasting stations and other similar public services. x
x x.17
Given the breadth of the aforequoted characterization of a common carrier, the Court has considered
as common carriers pipeline operators,18 custom brokers and warehousemen,19 and barge
operators20 even if they had limited clientle.
As all the foregoing indicate, the true test for a common carrier is not the quantity or extent of the
business actually transacted, or the number and character of the conveyances used in the activity,
but whether the undertaking is a part of the activity engaged in by the carrier that he has held out to

the general public as his business or occupation. If the undertaking is a single transaction, not a part
of the general business or occupation engaged in, as advertised and held out to the general public,
the individual or the entity rendering such service is a private, not a common, carrier. The question
must be determined by the character of the business actually carried on by the carrier, not by any
secret intention or mental reservation it may entertain or assert when charged with the duties and
obligations that the law imposes.21
Applying these considerations to the case before us, there is no question that the Pereas as the
operators of a school bus service were: (a) engaged in transporting passengers generally as a
business, not just as a casual occupation; (b) undertaking to carry passengers over established
roads by the method by which the business was conducted; and (c) transporting students for a fee.
Despite catering to a limited clientle, the Pereas operated as a common carrier because they held
themselves out as a ready transportation indiscriminately to the students of a particular school living
within or near where they operated the service and for a fee.
The common carriers standard of care and vigilance as to the safety of the passengers is defined by
law. Given the nature of the business and for reasons of public policy, the common carrier is bound
"to observe extraordinary diligence in the vigilance over the goods and for the safety of the
passengers transported by them, according to all the circumstances of each case." 22 Article 1755 of
the Civil Code specifies that the common carrier should "carry the passengers safely as far as
human care and foresight can provide, using the utmost diligence of very cautious persons, with a
due regard for all the circumstances." To successfully fend off liability in an action upon the death or
injury to a passenger, the common carrier must prove his or its observance of that extraordinary
diligence; otherwise, the legal presumption that he or it was at fault or acted negligently would
stand.23 No device, whether by stipulation, posting of notices, statements on tickets, or otherwise,
may dispense with or lessen the responsibility of the common carrier as defined under Article 1755
of the Civil Code. 24
And, secondly, the Pereas have not presented any compelling defense or reason by which the
Court might now reverse the CAs findings on their liability. On the contrary, an examination of the
records shows that the evidence fully supported the findings of the CA.
As earlier stated, the Pereas, acting as a common carrier, were already presumed to be negligent
at the time of the accident because death had occurred to their passenger.25 The presumption of
negligence, being a presumption of law, laid the burden of evidence on their shoulders to establish
that they had not been negligent.26 It was the law no less that required them to prove their
observance of extraordinary diligence in seeing to the safe and secure carriage of the passengers to
their destination. Until they did so in a credible manner, they stood to be held legally responsible for
the death of Aaron and thus to be held liable for all the natural consequences of such death.
There is no question that the Pereas did not overturn the presumption of their negligence by
credible evidence. Their defense of having observed the diligence of a good father of a family in the
selection and supervision of their driver was not legally sufficient. According to Article 1759 of the
Civil Code, their liability as a common carrier did not cease upon proof that they exercised all the
diligence of a good father of a family in the selection and supervision of their employee. This was the

reason why the RTC treated this defense of the Pereas as inappropriate in this action for breach of
contract of carriage.
The Pereas were liable for the death of Aaron despite the fact that their driver might have acted
beyond the scope of his authority or even in violation of the orders of the common carrier.27 In this
connection, the records showed their drivers actual negligence. There was a showing, to begin with,
that their driver traversed the railroad tracks at a point at which the PNR did not permit motorists
going into the Makati area to cross the railroad tracks. Although that point had been used by
motorists as a shortcut into the Makati area, that fact alone did not excuse their driver into taking that
route. On the other hand, with his familiarity with that shortcut, their driver was fully aware of the
risks to his passengers but he still disregarded the risks. Compounding his lack of care was that loud
music was playing inside the air-conditioned van at the time of the accident. The loudness most
probably reduced his ability to hear the warning horns of the oncoming train to allow him to correctly
appreciate the lurking dangers on the railroad tracks. Also, he sought to overtake a passenger bus
on the left side as both vehicles traversed the railroad tracks. In so doing, he lost his view of the train
that was then coming from the opposite side of the passenger bus, leading him to miscalculate his
chances of beating the bus in their race, and of getting clear of the train. As a result, the bus avoided
a collision with the train but the van got slammed at its rear, causing the fatality. Lastly, he did not
slow down or go to a full stop before traversing the railroad tracks despite knowing that his
slackening of speed and going to a full stop were in observance of the right of way at railroad tracks
as defined by the traffic laws and regulations.28 He thereby violated a specific traffic regulation on
right of way, by virtue of which he was immediately presumed to be negligent. 29
The omissions of care on the part of the van driver constituted negligence, 30 which, according to
Layugan v. Intermediate Appellate Court,31 is "the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the conduct of human affairs, would
do, or the doing of something which a prudent and reasonable man would not do, 32 or as Judge
Cooley defines it, (t)he failure to observe for the protection of the interests of another person, that
degree of care, precaution, and vigilance which the circumstances justly demand, whereby such
other person suffers injury."33
The test by which to determine the existence of negligence in a particular case has been aptly stated
in the leading case of Picart v. Smith,34 thuswise:
The test by which to determine the existence of negligence in a particular case may be stated as
follows: Did the defendant in doing the alleged negligent act use that reasonable care and caution
which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of
negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary
conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case
is not determined by reference to the personal judgment of the actor in the situation before him. The
law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence
and prudence and determines liability by that.
The question as to what would constitute the conduct of a prudent man in a given situation must of
course be always determined in the light of human experience and in view of the facts involved in
the particular case. Abstract speculation cannot here be of much value but this much can be

profitably said: Reasonable men govern their conduct by the circumstances which are before them
or known to them. They are not, and are not supposed to be, omniscient of the future. Hence they
can be expected to take care only when there is something before them to suggest or warn of
danger. Could a prudent man, in the case under consideration, foresee harm as a result of the
course actually pursued? If so, it was the duty of the actor to take precautions to guard against that
harm. Reasonable foresight of harm, followed by the ignoring of the suggestion born of this
prevision, is always necessary before negligence can be held to exist. Stated in these terms, the
proper criterion for determining the existence of negligence in a given case is this: Conduct is said to
be negligent when a prudent man in the position of the tortfeasor would have foreseen that an effect
harmful to another was sufficiently probable to warrant his foregoing the conduct or guarding against
its consequences. (Emphasis supplied)
Pursuant to the Picart v. Smith test of negligence, the Pereas driver was entirely negligent when he
traversed the railroad tracks at a point not allowed for a motorists crossing despite being fully aware
of the grave harm to be thereby caused to his passengers; and when he disregarded the foresight of
harm to his passengers by overtaking the bus on the left side as to leave himself blind to the
approach of the oncoming train that he knew was on the opposite side of the bus.
Unrelenting, the Pereas cite Phil. National Railways v. Intermediate Appellate Court, 35 where the
Court held the PNR solely liable for the damages caused to a passenger bus and its passengers
when its train hit the rear end of the bus that was then traversing the railroad crossing. But the
circumstances of that case and this one share no similarities. In Philippine National Railways v.
Intermediate Appellate Court, no evidence of contributory negligence was adduced against the
owner of the bus. Instead, it was the owner of the bus who proved the exercise of extraordinary
diligence by preponderant evidence. Also, the records are replete with the showing of negligence on
the part of both the Pereas and the PNR. Another distinction is that the passenger bus in Philippine
National Railways v. Intermediate Appellate Court was traversing the dedicated railroad crossing
when it was hit by the train, but the Pereas school van traversed the railroad tracks at a point not
intended for that purpose.
At any rate, the lower courts correctly held both the Pereas and the PNR "jointly and severally"
liable for damages arising from the death of Aaron. They had been impleaded in the same complaint
as defendants against whom the Zarates had the right to relief, whether jointly, severally, or in the
alternative, in respect to or arising out of the accident, and questions of fact and of law were
common as to the Zarates.36 Although the basis of the right to relief of the Zarates (i.e., breach of
contract of carriage) against the Pereas was distinct from the basis of the Zarates right to relief
against the PNR (i.e., quasi-delict under Article 2176, Civil Code), they nonetheless could be held
jointly and severally liable by virtue of their respective negligence combining to cause the death of
Aaron. As to the PNR, the RTC rightly found the PNR also guilty of negligence despite the school
van of the Pereas traversing the railroad tracks at a point not dedicated by the PNR as a railroad
crossing for pedestrians and motorists, because the PNR did not ensure the safety of others through
the placing of crossbars, signal lights, warning signs, and other permanent safety barriers to prevent
vehicles or pedestrians from crossing there. The RTC observed that the fact that a crossing guard
had been assigned to man that point from 7 a.m. to 5 p.m. was a good indicium that the PNR was
aware of the risks to others as well as the need to control the vehicular and other traffic there. Verily,
the Pereas and the PNR were joint tortfeasors.

2.
Was the indemnity for loss of
Aarons earning capacity proper?
The RTC awarded indemnity for loss of Aarons earning capacity. Although agreeing with the RTC on
the liability, the CA modified the amount. Both lower courts took into consideration that Aaron, while
only a high school student, had been enrolled in one of the reputable schools in the Philippines and
that he had been a normal and able-bodied child prior to his death. The basis for the computation of
Aarons earning capacity was not what he would have become or what he would have wanted to be
if not for his untimely death, but the minimum wage in effect at the time of his death. Moreover, the
RTCs computation of Aarons life expectancy rate was not reckoned from his age of 15 years at the
time of his death, but on 21 years, his age when he would have graduated from college.
We find the considerations taken into account by the lower courts to be reasonable and fully
warranted.
Yet, the Pereas submit that the indemnity for loss of earning capacity was speculative and
unfounded. They cited People v. Teehankee, Jr.,37 where the Court deleted the indemnity for victim
Jussi Leinos loss of earning capacity as a pilot for being speculative due to his having graduated
from high school at the International School in Manila only two years before the shooting, and was at
the time of the shooting only enrolled in the first semester at the Manila Aero Club to pursue his
ambition to become a professional pilot. That meant, according to the Court, that he was for all
intents and purposes only a high school graduate.
1wphi1

We reject the Pereas submission.

First of all, a careful perusal of the Teehankee, Jr. case shows that the situation there of Jussi Leino
was not akin to that of Aaron here. The CA and the RTC were not speculating that Aaron would be
some highly-paid professional, like a pilot (or, for that matter, an engineer, a physician, or a lawyer).
Instead, the computation of Aarons earning capacity was premised on him being a lowly minimum
wage earner despite his being then enrolled at a prestigious high school like Don Bosco in Makati, a
fact that would have likely ensured his success in his later years in life and at work.
And, secondly, the fact that Aaron was then without a history of earnings should not be taken against
his parents and in favor of the defendants whose negligence not only cost Aaron his life and his right
to work and earn money, but also deprived his parents of their right to his presence and his services
as well. Our law itself states that the loss of the earning capacity of the deceased shall be the liability
of the guilty party in favor of the heirs of the deceased, and shall in every case be assessed and
awarded by the court "unless the deceased on account of permanent physical disability not caused
by the defendant, had no earning capacity at the time of his death." 38Accordingly, we emphatically
hold in favor of the indemnification for Aarons loss of earning capacity despite him having been
unemployed, because compensation of this nature is awarded not for loss of time or earnings but for
loss of the deceaseds power or ability to earn money.39
This favorable treatment of the Zarates claim is not unprecedented. In Cariaga v. Laguna Tayabas
Bus Company and Manila Railroad Company,40 fourth-year medical student Edgardo Carriagas

earning capacity, although he survived the accident but his injuries rendered him permanently
incapacitated, was computed to be that of the physician that he dreamed to become. The Court
considered his scholastic record sufficient to justify the assumption that he could have finished the
medical course and would have passed the medical board examinations in due time, and that he
could have possibly earned a modest income as a medical practitioner. Also, in People v.
Sanchez,41 the Court opined that murder and rape victim Eileen Sarmienta and murder victim Allan
Gomez could have easily landed good-paying jobs had they graduated in due time, and that their
jobs would probably pay them high monthly salaries from P 10,000.00 to P 15,000.00 upon their
graduation. Their earning capacities were computed at rates higher than the minimum wage at the
time of their deaths due to their being already senior agriculture students of the University of the
Philippines in Los Baos, the countrys leading educational institution in agriculture.
3.
Were the amounts of damages excessive?
The Pereas plead for the reduction of the moral and exemplary damages awarded to the Zarates in
the respective amounts of P 2,500,000.00 and P 1,000,000.00 on the ground that such amounts
were excessive.
The plea is unwarranted.
The moral damages of P 2,500,000.00 were really just and reasonable under the established
circumstances of this case because they were intended by the law to assuage the Zarates deep
mental anguish over their sons unexpected and violent death, and their moral shock over the
senseless accident. That amount would not be too much, considering that it would help the Zarates
obtain the means, diversions or amusements that would alleviate their suffering for the loss of their
child. At any rate, reducing the amount as excessive might prove to be an injustice, given the
passage of a long time from when their mental anguish was inflicted on them on August 22, 1996.
Anent the P 1,000,000.00 allowed as exemplary damages, we should not reduce the amount if only
to render effective the desired example for the public good. As a common carrier, the Pereas
needed to be vigorously reminded to observe their duty to exercise extraordinary diligence to
prevent a similarly senseless accident from happening again. Only by an award of exemplary
damages in that amount would suffice to instill in them and others similarly situated like them the
ever-present need for greater and constant vigilance in the conduct of a business imbued with public
interest.
WHEREFORE, we DENY the petition for review on certiorari; AFFIRM the decision promulgated on
November 13, 2002; and ORDER the petitioners to pay the costs of suit.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-7721

March 25, 1914

INCHAUSTI & CO., plaintiff-appellant,

vs.
GREGORIO YULO, defendant-appellee.
Hausserman, Cohn and Fisher for appellant.
Rohde and Wright for appellee.
Bruce, Lawrence, Ross and Block, Amici Curiae, for Manuel, Francisco and Carmen Yulo.
ARELLANO, C.J.:
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 Teodoro Yulo and after his death continued with his
widow and children, whose principal representative is Gregorio Yulo. Teodoro Yulo, a property owner
of Iloilo, for the exploitation and cultivation of his numerous haciendas in the province of Occidental
Negros, had been borrowing money from the firm of Inchausti & Company under specific conditions.
On April 9, 1903; Teodoro Yulo died testate and for the execution of the provisions of his will he had
appointed as administrators his widow and five of his sons, Gregorio Yulo being one of the latter. He
thus left a widow, Gregoria Regalado, who died on October 22d of the following year, 1904, there
remaining of the marriage the following legitimate children: Pedro, Francisco, Teodoro, Manuel,
Gregorio, Mariano, Carmen, Concepcion, and Jose Yulo y Regalado. Of these children Concepcion
and Jose were minors, while Teodoro was mentally incompetent. At the death of their predecessor in
interest, Teodoro Yulo, his widow and children held the conjugal property in common and at the
death of this said widow, Gregoria Regalado, these children preserved the same relations under the
name of Hijos de T. Yulo continuing their current account with Inchausti & Company in the best and
most harmonious reciprocity until said balance amounted to two hundred thousand pesos. In for the
payment of the disbursements of money which until that time it had been making in favor of its
debtors, the Yulos.
First. Gregorio Yulo, for himself and in representation of his brothers Pedro Francisco, Manuel,
Mariano, and Carmen, executed on June 26, 1908, a notarial document (Exhibit S) whereby all
admitted their indebtedness to Inchausti & Company in the sum of P203,221.27 and, in order to
secure the same with interest thereon at 10 per cent per annum, they especially mortgaged an
undivided six-ninth of their thirty-eight rural properties, their remaining urban properties, lorchas, and
family credits which were listed, obligating themselves to make a forma inventory and to describe in
due form all the said properties, as well as to cure all the defects which might prevent the inscription
of the said instrument in the registry of property and finally to extend by the necessary formalities the
aforesaid mortgage over the remaining three-ninths part of all the property and rights belonging to
their other brothers, the incompetent Teodoro, and the minors Concepcion and Jose.
Second. On January 11, 1909, Gregorio Yulo in representation of Hijos de T. Yulo answered a letter
of the firm of Inchausti & Company in these terms: "With your favor of the 2d inst. we have received
an abstract of our current account with your important firm, closed on the 31st of last December, with
which we desire to express our entire conformity as also with the balance in your favor of

P271,863.12." On July 17, 1909, Inchausti & Company informed Hijos de T. Yulo of the reduction of
the said balance to P253,445.42, with which balance Hijos de T. Yulo expressed its conformity by
means of a letter of the 19th of the same month and year. Regarding this conformity a new
document evidencing the mortgage credit was formalized.
Third. On August 12, 1909, Gregorio Yulo, for himself and in representation of his brother Manuel
Yulo, and in their own behalf Pedro Yulo, Francisco Yulo, Carmen Yulo, and Concepcion Yulo, the
latter being of age at the time, executed the notarial instrument (Exhibit X). Through this, the said
persons, including Concepcion Yulo ratified all the contents of the prior document of June 26, 1908,
severally and jointly acknowledged and admitted their indebtedness to Inchausti & Company for the
net amount of two hundred fifty-three thousand four hundred forty-five pesos and forty-two centavos
(P253,445.42) which they obligated themselves to pay, with interest at ten per cent per annum, in
five installments at the rate of fifty thousand pesos (P50,000), except the last, this being fifty-three
thousand four hundred forty-five pesos and forty-two centavos (P53,445.42), beginning June 30,
1910, continuing successively on the 30th of each June until the last payment on June 30, 1914.
Among other clauses, they expressly stipulated the following:
Fifth. The default in payment of any of the installments established in clause 3, or the
noncompliance of any of the other obligations which by the present document and that of
June 26, 1908, we, the Yulos, brothers and sisters, have assumed, will result in the maturity
of all the said installments, and as a consequence thereof, if they so deem expedient
Messrs. Inchausti & Company may exercise at once all the rights and actions which to them
appertain in order to obtain the immediate and total payment of our debt, in the same
manner that they would have so done at the maturity of the said installments.
Fifteenth. All the obligations which by this, as well as by the document of June 26, 1908,
concern us, will be understood as having been contradicted in solidum by all of us, the Yulos,
brothers and sisters.
Sixteenth. It is also agreed that this instrument shall be confirmed and ratified in all its parts,
within the present week, by our brother Don Mariano Yulo y Regalado who resides in
Bacolod, otherwise it will not be binding on Messrs. Inchausti & Company who can make use
of their rights to demand and obtain immediate payment of their credit without any further
extension or delay, in accordance with what we have agreed.
Fourth. This instrument was neither ratified nor confirmed by Mariano Yulo.
Fifth. The Yulos, brothers and sisters, who executed the preceding instrument, did not pay the first
installment of the obligation.
Sixth. Therefore, on March 27, 1911, Inchausti & Company brought an ordinary action in the Court of
First Instance of Iloilo, against Gregorio Yulo for the payment of the said balance due of two hundred
fifty-three thousand, four hundred forty-five pesos and forty-two centavos P253,445.42) with interest
at ten per cent per annum, on that date aggregating forty-two thousand, nine hundred forty-four
pesos and seventy-six centavos (P42,944.76)
Seventh. But, on May 12, 1911, Francisco, Manuel, and Carmen Yulo y Regalado executed in favor
Inchausti & Company another notarial instrument in recognition of the debt and obligation of
payment in the following terms: "First, the debt is reduce for them to two hundred twenty-five
thousand pesos (P225,000); second, the interest is likewise reduced for them to 6 percent per
annum, from March 15, 1911; third, the installments are increase to eight, the first of P20,000,
beginning on June 30, 1911, and the rest of P30,000 each on the same date of each successive

year until the total obligation shall be finally and satisfactorily paid on June 30, 1919," it being
expressly agreed "that if any of the partial payments specified in the foregoing clause be not paid at
its maturity, the amount of the said partial payment together with its interest shall bear interest at the
rate of 15 per cent per annum from the date of said maturity, without the necessity of demand until
its complete payment;" that "if during two consecutive years the partial payments agreed upon be
not made, they shall lose the right to make use of the period granted to them for the payment of the
debt or the part thereof which remains unpaid, and that Messrs. Inchausti & Company may consider
the total obligation due and demandable, and proceed to collect the same together with the interest
for the delay above stipulated through all legal means." (4th clause.)
Thus was it stipulated between Inchausti & Company and the said three Yulos, brothers and sisters
by way of compromise so that Inchausti & Company might, as it did, withdraw the claims pending
in the special proceedings for the probate of the will of Don Teodoro Yulo and of the intestacy of
Doa Gregoria Regalado stipulating expressly however in the sixth clause that "Inchausti &
Company should include in their suit brought in the Court of First Instance of Iloilo against Don
Gregorio Yulo, his brother and joint co-obligee, Don Pedro Yulo, and they will procure by all legal
means and in the least time possible a judgment in their favor against the said Don Gregorio and
Don Pedro, sentencing the later to pay the total amount of the obligation acknowledged by them in
the aforementioned instrument of August 12, 1909; with the understanding that if they should deem it
convenient for their interests, Don Francisco, Don Manuel, and Doa Carmen Yulo may appoint an
attorney to cooperate with the lawyers of Inchausti & Company in the proceedings of the said case."
Eighth. Matters being thus on July 10, 1911, Gregorio Yulo answered the complaint and alleged as
defenses; first, that an accumulation of interest had taken place and that compound interest was
asked for the Philippine currency at par with Mexican; second, that in the instrument of August 21,
1909, two conditions were agreed one of which ought to be approved by the Court of First Instance,
and the other ratified and confirmed by the other brother Mariano Yulo, neither of which was
complied with; third , that with regard to the same debt claims were presented before the
commissioners in the special proceedings over the inheritances of Teodoro Yulo and Gregoria
Regalado, though later they were dismissed, pending the present suit; fourth and finally, that the
instrument of August 12, 1909, was novated by that of May 12, 1911, executed by Manuel, Francisco
and Carmen Yulo.
Ninth. The Court of First Instance of Iloilo decided the case "in favor of the defendant without
prejudice to the plaintiff's bringing within the proper time another suit for his proportional part of the
joint debt, and that the plaintiff pay the costs." (B. of E., 21.)
The plaintiff appealed from this judgment by bill of exceptions and before this court made the
following assignment of errors:
I. That the court erred in considering the contract of May 12, 1911, as constituting a novation of that
of August 12, 1909.
II. That the court erred in rendering judgment in favor of the defendant.
III. And that the court erred n denying the motion for a new trial.
"No one denies in this case," says the trial judge, "that the estate of Teodoro Yulo or his heirs owe
Inchausti & Company an amount of money, the object of this action, namely, P253,445.42" (B. of E.
18). "The fact is admitted," says the defendant, "that the plaintiff has not collected the debt, and that
the same is owing" (Brief, 33). "In the arguments of the attorneys," the judge goes on, "it was really
admitted that the plaintiff had a right to bring an action against Gregorio Yulo, as one of the conjoint

and solidary obligors in the contract of August 12, 1909; but the defendant says that the plaintiff has
no right to sue him alone, since after the present suit was brought, the plaintiff entered into a
compromise with the other conjoint and solidary debtors, the result being the new contract of May
12, 1911, by virtue of which the payments were extended, the same constituting a novation of the
contract which gave him the same privileges that were given his conjoint and solidary codebtors.
This (the judge concludes) is the only question brought up by the parties." (B. of E., 19.)
And this is the only one which the Supreme Court has to solve by virtue of the assignments of errors
alleged. Consequently, there is no need of saying anything regarding the first three defenses of the
answer, nor regarding the lack of the signature of Mariano Yulo ratifying and confirming the
instrument of August 12, 1909, upon which the appellee still insists in his brief for this appeal;
although it will not be superfluous to state the doctrine that a condition, such as is contained in the
sixteenth clause of the said contract (third point in the statement of facts), is by no means of
suspensive but a resolutory condition; the effect of the failure of compliance with the said clause,
that is to say, the lack of the ratification and confirmance by Mariano Yulo being not to suspend but
to resolve the contract, leaving Inchausti & Company at liberty, as stipulated, "to make use of its
rights to demand and obtain the immediate payment of its credit."
The only question indicated in the decision of the inferior court involves, however, these others: First,
whether the plaintiff can sue Gregorio Yulo alone, there being other obligors; second, if so, whether it
lost this right by the fact of its having agreed with the other obligors in the reduction of the debt, the
proroguing of the obligation and the extension of the time for payment, in accordance with the
instrument of May 12, 1911; third, whether this contract with the said three obligors constitutes a
novation of that of August 12, 1909, entered into with the six debtors who assumed the payment of
two hundred fifty-three thousand and some odd pesos, the subject matter of the suit; and fourth, if
not so, whether it does have any effect at all in the action brought, and in this present suit.
With respect to the first it cannot be doubted that, the debtors having obligated themselves in
solidum, the creditor can bring its action in toto against any one of them, inasmuch as this was
surely its purpose in demanding that the obligation contracted in its favor should be solidary having
in mind the principle of law that, "when the obligation is constituted as a conjoint and solidary
obligation each one of the debtors is bound to perform in full the undertaking which is the subject
matter of such obligation." (Civil Code, articles 1137 and 1144.)
And even though the creditor may have stipulated with some of the solidary debtors diverse
installments and conditions, as in this case, Inchausti & Company did with its debtors Manuel,
Francisco, and Carmen Yulo through the instrument of May 12, 1911, this does not lead to the
conclusion that the solidarity stipulated in the instrument of August 12, 1909 is broken, as we already
know the law provides that "solidarity may exist even though the debtors are not bound in the same
manner and for the same periods and under the same conditions." (Ibid, article 1140.) Whereby the
second point is resolved.
With respect to the third, there can also be no doubt that the contract of May 12, 1911, does not
constitute a novation of the former one of August 12, 1909, with respect to the other debtors who
executed this contract, or more concretely, with respect to the defendant Gregorio Yulo: First,
because "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" (Civil Code, article 1204); and the instrument of May 12, 1911, far from expressly declaring
that the obligation of the three who executed it substitutes the former signed by Gregorio Yulo and
the other debtors, expressly and clearly stated that the said obligation of Gregorio Yulo to pay the
two hundred and fifty-three thousand and odd pesos sued for exists, stipulating that the suit must
continue its course and, if necessary, these three parties who executed the contract of May 12, 1911,

would cooperate in order that the action against Gregorio Yulo might prosper (7th point in the
statement of facts), with other undertakings concerning the execution of the judgment which might
be rendered against Gregorio Yulo in this same suit. "It is always necessary to state that it is the
intention of the contracting parties to extinguish the former obligation by the new one" (Judgment in
cassation, July 8, 1909). There exist no incompatibility between the old and the new obligation as
will be demonstrated in the resolution of the last point, and for the present we will merely reiterate
the legal doctrine that an 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. (Judgments in cassation of June 28, 1904 and of July 8, 1909.)
With respect to the last point, the following must be borne in mind:
Facts. First. Of the nine children of T. Yulo, six executed the mortgage of August 12, 1909,
namely, Gregorio, Pedro, Francisco, Manuel, Carmen, and Concepcion, admitting a debt of
P253,445.42 at 10 per cent per annum and mortgaging six-ninths of their hereditary properties.
Second. Of those six children, Francisco, Manuel and Carmen executed the instrument of May 12,
1911, wherein was obtained a reduction of the capital to 225,000 pesos and of the interest to 6 per
cent from the 15th of March of the same year of 1911. Third. The other children of T. Yulo named
Mariano, Teodoro, and Jose have not taken part in these instruments and have not mortgaged their
hereditary portions. Fourth. By the first instrument the maturity of the first installment was June 30,
1910, whereas by the second instrument, Francisco, Manuel, and Carmen had in their favor as the
maturity of the first installment of their debt, June 30, 1912, and Fifth, on March 27, 1911, the action
against Gregorio Yulo was already filed and judgment was pronounced on December 22, 1911,
when the whole debt was not yet due nor even the first installment of the same respective the three
aforesaid debtors, Francisco, Manuel, and Carmen.
In jure it would follow that by sentencing Gregorio Yulo to pay 253,445 pesos and 42 centavos of
August 12, 1909, this debtor, if he should pay all this sum, could not recover from his joint debtors
Francisco, Manuel, and Carmen their proportional parts of the P253,445.42 which he had paid,
inasmuch as the three were not obligated by virtue of the instrument of May 12, 1911, to pay only
225,000 pesos, thus constituting a violation of Gregorio Yulo's right under such hypothesis, of being
reimbursed for the sum paid by him, with the interest of the amounts advanced at the rate of onesixth part from each of his five codebtors. (Civ. Code, article 1145, par. 2). This result would have
been a ponderous obstacle against the prospering of the suit as it had been brought. It would have
been very just then to have absolved the solidary debtor who having to pay the debt in its entirety
would not be able to demand contribution from his codebtors in order that they might reimburse
him pro rata for the amount advanced for them by him. But such hypothesis must be put out of
consideration by reason of the fact that occurred during the pendency of the action, which fact the
judge states in his decision. "In this contract of May last," he says, "the amount of the debt was
reduced to P225,000 and the attorney of the plaintiff admits in his plea that Gregorio Yulo has a right
to the benefit of this reduction." (B. of E., 19.) This is a fact which this Supreme Court must hold as
firmly established, considering that the plaintiff in its brief, on page 27, corroborates the same in
these words: "What effect," it says, "could this contract have over the rights and obligations of the
defendant Gregorio Yulo with respect to the plaintiff company? In the first place, we are the first to
realize that it benefits him with respect to the reduction of the amount of the debt. 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 article 1143 of the Civil Code, the defendant has the right to enjoy
the benefits of the partial remission of the debt granted by the creditor."
Wherefore we hold that although the contract of May 12, 1911, has not novated that of August 12,
1909, it has affected that contract and the outcome of the suit brought against Gregorio Yulo alone

for the sum of P253,445.42; and in consequence thereof, the amount stated in the contract of August
12, 1909, cannot be recovered but only that stated in the contract of May 12, 1911, by virtue of the
remission granted to the three of the solidary debtors in this instrument, in conformity with what is
provided in article 1143 of the Civil Code, cited by the creditor itself.
If the efficacy of the later instrument over the former touching the amount of the debt had been
recognized, should such efficacy not likewise be recognized concerning the maturity of the same? If
Francisco, Manuel, and Carmen had been included in the suit, they could have alleged the defense
of the nonmaturity of the installments since the first installment did not mature until June 30, 1912,
and without the least doubt the defense would have prospered, and the three would have been
absolved from the suit. Cannot this defense of the prematurity of the action, which is implied in the
last special defense set up in the answer of the defendant Gregorio Yulo be made available to him in
this proceeding?
The following commentary on article 1140 of the Civil Code sufficiently answers this question: ". . . .
Before the performance of the condition, or before the execution of a term which affects one debtor
alone proceedings may be had against him or against any of the others for the remainder which may
be already demandable but the conditional obligation or that which has not yet matured cannot be
demanded from any one of them. Article 1148 confirms the rule which we now enunciate inasmuch
as in case the total claim is made by one creditor, which we believe improper if directed against the
debtor affected by the condition or the term, the latter can make use of such exceptions as are
peculiarly personal to his own obligation; and if against the other debtors, they might make use of
those exceptions, even though they are personal to the other, inasmuch as they alleged they are
personal to the other, inasmuch as they alleged them in connection with that part of the
responsibility attaching in a special manner to the other." (8 Manresa, Sp. Civil Code, 196.)
Article 1148 of the Civil Code. "The solidary debtor may utilize against the claims of the creditor of
the defenses arising from the nature of the obligation and those which are personal to him. Those
personally pertaining to the others may be employed by him only with regard to the share of the debt
for which the latter may be liable."
Gregorio Yulo cannot allege as a defense to the action that it is premature. When the suit was
brought on March 27, 1911, the first installment of the obligation had already matured of June 30,
1910, and with the maturity of this installment, the first not having been paid, the whole debt had
become mature, according to the express agreement of the parties, independently of the resolutory
condition which gave the creditor the right to demand the immediate payment of the whole debt upon
the expiration of the stipulated term of one week allowed to secure from Mariano Yulo the ratification
and confirmation of the contract of August 12, 1909.
Neither could he invoke a like exception for the shares of his solidary codebtors Pedro and
Concepcion Yulo, they being in identical condition as he.
But as regards Francisco, Manuel, and Carmen Yulo, none of the installments payable under their
obligation, contracted later, had as yet matured. The first payment, as already stated, was to mature
on June 30, 1912. This exception or personal defense of Francisco, Manuel, and Carmen Yulo "as to
the part of the debt for which they were responsible" can be sent up by Gregorio Yulo as a partial
defense to the action. The part of the debt for which these three are responsible is three-sixths of
P225,000 or P112,500, so that Gregorio Yulo may claim that, even acknowledging that the debt for
which he is liable is P225,000, nevertheless not all of it can now be demanded of him, for that part of
it which pertained to his codebtors is not yet due, a state of affairs which not only prevents any
action against the persons who were granted the term which has not yet matured, but also against

the other solidary debtors who being ordered to pay could not now sue for a contribution, and for this
reason the action will be only as to the P112,500.
Against the propriety and legality of a judgment against Gregorio Yulo for this sum, to wit, the threesixths part of the debt which forms the subject matter of the suit, we do not think that there was any
reason or argument offered which sustains an opinion that for the present it is not proper to order
him to pay all or part of the debt, the object of the action.
It has been said in the brief of the appellee that the prematurity of the action is one of the defenses
derived from the nature of the obligation, according to the opinion of the commentator of the Civil
Code, Mucius Scaevola, and consequently the defendant Gregorio Yulo may make use of it in
accordance with article 1148 of the said Code. It may be so and yet, taken in that light, the effect
would not be different from that already stated in this decision; Gregorio Yulo could not be freed from
making any payment whatever but only from the payment of that part of the debt which corresponds
to his codebtors Francisco, Manuel, and Carmen. The same author, considering the case of the
opposing contention of two solidary debtors as to one of whom the obligation is pure and
unconditional and as to the other it is conditional and is not yet demandable, and comparing the
disadvantages which must flow from holding that the obligation is demandable with these which
must follow if the contrary view is adopted, favors this solution of the problem:
There is a middle ground, (he says), from which we can safely set out, to wit, that the creditor
may of course, demand the payment of his credit against the debtor not favored by any
condition or extension of time." And further on, he decides the question as to whether the
whole debt may be recovered or only that part unconditionally owing or which has already
matured, saying, "Without failing to proceed with juridical rigor, but without falling into
extravagances or monstrosities, we believe that the solution of the difficulty is perfectly
possible. How? By limiting the right of the creditor to the recovery of the amount owed by the
debtors bound unconditionally or as to whom the obligation has matured, and leaving in
suspense the right to demand the payment of the remainder until the expiration of the term of
the fulfillment of the condition. But what then is the effect of solidarity? How can this
restriction of right be reconciled with the duty imposed upon each one of the debtors to
answer for the whole obligation? Simply this, by recognizing in the creditor the power, upon
the performance of the condition or the expiration of the term of claiming from any one or all
of the debtors that part of the obligation affected by those conditions. (Scaevola, Civil Code,
19, 800 and 801.)
It has been said also by the trial judge in his decision that if a judgment be entered against Gregorio
Yulo for the whole debt of P253,445.42, he cannot recover from Francisco, Manuel, and Carmen
Yulo that part of the amount which is owed by them because they are obliged to pay only 225,000
pesos and this is eight installments none of which was due. For this reason he was of the opinion
that he (Gregorio Yulo) cannot be obliged to pay his part of the debt before the contract of May 12,
1911, may be enforced, and "consequently he decided the case in favor of the defendant, without
prejudice to the plaintiff proceeding in due time against him for his proportional part of the joint debt."
(B. of E., 21 and 22.)
But in the first place, taking into consideration the conformity of the plaintiff and the provision of
article 1143 of the Civil Code, it is no longer possible to sentence the defendant to pay the
P253,445.42 of the instrument of August 12, 1909, but, if anything, the 225,000 of the instrument of
May 12, 1911.
In the second place, neither is it possible to curtail the defendant's right of recovery from the signers
of the instrument of May 12, 1911, for he was justly exonerated from the payment of that part of the

debt corresponding to them by reason of there having been upheld in his favor the exception of an
unmatured installment which pertains to them.
In the third place, it does not seem just, Mucius Scaevola considers it "absurd," that, there being a
debtor who is unconditionally obligated as to when the debt has matured, the creditor should be
forced to await the realization of the condition (or the expiration of the term.) Not only is there no
reason for this, as stated by the author, but the court would even fail to consider the special law of
the contract, neither repealed nor novated, which cannot be omitted without violating article 1091 of
the Civil Code according to which "the obligations arising from contracts have the force of law
between the contracting parties and must be complied with in accordance with the tenor of the
same." Certain it is that the trial court, in holding that this action was premature but might be brought
in the time, regarded the contract of August 12, 1909, as having been expressly novated; but it is
absolutely impossible in law to sustain such supposed novation, in accordance with the legal
principles already stated, and nevertheless the obligation of the contract of May 12, 1911, must
likewise be complied with in accordance with its tenor, which is contrary in all respects to the
supposed novation, by obliging the parties who signed the contract to carry on the suit brought
against Gregorio Yulo. The contract of May 12, 1911, has affected the action and the suit, to the
extent that Gregorio Yulo has been able to make in his favor the defense of remission of part of the
debt, thanks to the provision of article 1148, because it is a defense derived from the nature of the
obligation, so that although the said defendant was not party to the contract in question, yet because
of the principle of solidarity he was benefited by it.
The defendant Gregorio Yulo cannot be ordered to pay the P253,445.42 claimed from him in the suit
here, because he has been benefited by the remission made by the plaintiff to three of his
codebtors, many times named above.
Consequently, the debt is reduced to 225,000 pesos.
But, as it cannot be enforced against the defendant except as to the three-sixths part which is what
he can recover from his joint codebtors Francisco, Manuel, and Carmen, at present, judgment can
be rendered only as to the P112,500.
We therefore sentence the defendant Gregorio Yulo to pay the plaintiff Inchausti & Company
P112,500, with the interest stipulated in the instrument of May 12, 1911, from March 15, 1911, and
the legal interest on this interest due, from the time that it was claimed judicially in accordance with
article 1109 of the Civil Code, without any special finding as to costs. The judgment appealed from is
reversed. So ordered.
Carson, Trent, and Araullo, JJ., concur.

Separate Opinions
MORELAND, J., dissenting:
In my judgment the action must be dismissed, as it was brought prematurely. The defendant was
entitled to all of the benefits of the contract of May 12, 1911, between the plaintiff and Francisco,
Manuel, and Carmen. One of these provisions was that the first payment need not be made until
June 30, 1912. The action was commenced on the 27t of March, 1911, and although this date was

prior to the date of the second contract, that is, the contract with Francisco, Manuel, and Carmen,
said contract was executed before the trial of the action, and some of the beneficial provisions
therein contained were to produce their effects from March 15, 1911, a date prior to the
commencement of the action. At the time of the trial the defendant could, in my judgment, have
interposed, under the allegations of the amended answer, any of the defenses which could have
been made use of by Francisco, Manuel, or Carmen if they had been the defendant. That being the
case, nothing was due the plaintiff at the time it sued and accordingly its action must be dismissed
with costs.
For these reasons I vote to affirm.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 96405 June 26, 1996

BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

ROMERO, J.:p
This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the
Regional Trial Court of Misamis Oriental, Branch 18, 1 which disposed of Civil Case No. 10507 for
collection of a sum of money and damages, as follows:
WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily
liable and ordered to pay to the plaintiff Philippine Bank of Communications,
Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00), with
interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per
annum on the total amount due, as liquidated damages or penalty from May 5, 1983
until fully paid; plus 10% of the total amount due for expenses of litigation and
attorney's fees; and to pay the costs.
The counterclaim, as well as the cross claim, are dismissed for lack of merit.
SO ORDERED.
Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed
with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly
and severally liable to private respondent Philippine Bank of Communications, Cagayan de Oro City
branch. The promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation. Consequently, on
November 14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding
payment thereof. 2 On December 11, 1984 private respondent also sent by registered mail a final letter of
demand to Rene C. Naybe. Since both obligors did not respond to the demands made, private
respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against the
three obligors.

On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case.
However, on January 9, 1987, the lower court reconsidered the dismissal order and required the
sheriff to serve the summonses. On January 27, 1987, the lower court dismissed the case against
defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the
summons addressed to petitioner was served as the sheriff learned that defendant Naybe had gone
to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend,
Rudy Campos, who told him that he was a partner of Pio Tio, the branch manager of private
respondent in Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to
him that Rene C. Naybe was interested in the business and would contribute a chainsaw to the
venture. He added that, although Naybe had no money to buy the equipment, Pio Tio had assured
Naybe of the approval of a loan he would make with private respondent. Campos then persuaded
petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but with the
understanding that he would only be a co-maker for the loan of P50,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by
Campos at his office. He affixed his signature thereto but in one copy, he indicated that he bound
himself only for the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that
he was made liable for the amount of P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten figure "-- 50,000 --"
clearly appears directly below the admitted signature of the petitioner in the promissory
note. 3 Hence, the latter's uncorroborated testimony on his limited liability cannot prevail over the
presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added
that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the promissory
note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that, even
granting that said limited amount had actually been agreed upon, the same would have been merely
collateral between him and Naybe and, therefore, not binding upon the private respondent as creditorbank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor
consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio
Tio denied having participated in the alleged business venture although he knew for a fact that the
falcata logs operation was encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31,
1990, affirmed that of the lower court. His motion for reconsideration of the said decision having
been denied, he filed the instant petition for review on certiorari.
On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of
Court and paragraph 2 of Circular
No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its
questioned decision. 4 His motion for the reconsideration of the denial of his petition was likewise denied
with finality in the Resolution of April 24, 1991. 5 Thereafter, petitioner filed a motion for leave to file a
second motion for reconsideration which, in the Resolution of May 27, 1991, the Court denied. In the
same Resolution, the Court ordered the entry of judgment in this case. 6

Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the latter motion, he
asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance
with Circular No. 1-88. Thus, on August 7, 1991, the Court granted his prayer that his petition be
given due course and reinstated the same. 7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the
decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker
in the promissory note. It supports petitioner's allegation that they were induced to sign the
promissory note on the belief that it was only for P5,000.00, adding that it was Campos who caused
the amount of the loan to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court
of Appeals should have declared the promissory note null and void on the following grounds: (a) the
promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b)
the loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00;
(c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or
credit committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f)
petitioner and Judge Pantanosas were not present at the time the loan was released in
contravention of the bank practice, and (g) notices of default are sent simultaneously and separately
but no notice was validly sent to him. 8 Finally, petitioner contends that in signing the promissory note,
his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the amount of
P5,000.00, the promissory note stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this
Court is not a trier of facts. Having lost the chance to fully ventilate his factual claims below,
petitioner may no longer be accorded the same opportunity in the absence of grave abuse of
discretion on the part of the court below. Had he presented Judge Pantanosas affidavit before the
lower court, it would have strengthened his claim that the promissory note did not reflect the correct
amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with
the formalities prescribed by law but . . . a mere commercial paper which does not bear the signature
of . . . attesting witnesses," parol evidence may "overcome" the contents of the promissory
note. 9 The first paragraph of the parol evidence rule 10 states:
When the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents of the
written agreement.
Clearly, the rule does not specify that the written agreement be a public document.
What is required is that the agreement be in writing as the rule is in fact founded on "long experience
that written evidence is so much more certain and accurate than that which rests in fleeting memory

only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to
admit weaker evidence to control and vary the stronger and to show that the
parties intended a different contract from that expressed in the writing signed by them." 11 Thus, for
the parol evidence rule to apply, a written contract need not be in any particular form, or be signed by both
parties. 12 As a general rule, bills, notes and other instruments of a similar nature are not subject to be
varied or contradicted by parol or extrinsic evidence. 13
By alleging fraud in his answer, 14 petitioner was actually in the right direction towards proving that he
and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous
agreement was the inducing and moving cause of the written contract, it may be shown by parol
evidence. 15 However, fraud must be established by clear and convincing evidence, mere preponderance
of evidence, not even being adequate. 16 Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and, expectedly, self-serving testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and
against Pantanosas, his co-maker, constituted a release of his obligation, especially because the
dismissal of the case against Pantanosas was upon the motion of private respondent itself. He cites
as basis for his argument, Article 2080 of the Civil Code which provides that:
The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter.
It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not
as a guarantor. This is patent even from the first sentence of the promissory note which states as
follows:
Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the
City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY
(P50,000.00) Pesos, Philippine Currency, together with interest . . . at the rate of
SIXTEEN (16) per cent per annum until fully paid.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation. 17 on the other hand, Article 2047 of the
Civil Code states:
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such a case the contract is
called a suretyship. (Emphasis supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:

A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor and a fiador
in solidum (surety). The latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted, retains all the other
rights, actions and benefits which pertain to him by reason of the fiansa; while a
solidary co-debtor has no other rights than those bestowed upon him in Section 4,
Chapter 3, Title I, Book IV of the Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate
part of the debt. There is a solidary liability only when the obligation expressly so states, when the
law so provides or when the nature of the obligation so requires. 19
Because the promissory note involved in this case expressly states that the three signatories therein
are jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation. 20 The choice is left to the solidary creditor to determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as
having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned
decision of the Court of Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 85396 October 27, 1989
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, PHILIPPINE BLOOMING MILLS, INC. and ALFREDO
CHING, respondents.
Ponce Enrile, Cayetano, Reyes & Manalastas for petitioner.
Balgos & Perez for respondents,

MELENCIO-HERRERA, J.:
Will a Securities and Exchange Commission (SEC) Order suspending, during the pendency of a
rehabilitation proceeding, payment of all claims against the principal debtor bar or preclude the
creditor from recovering from the surety? Respondents Philippine Blooming Mills (PBM) and its
Surety, Alfredo Ching, answer in the affirmative; petitioner Bank in the negative.
The facts:
On 4 May 1979, Alfredo Ching signed a 'Comprehensive Surety Agreement' with Rizal Commercial
Banking Corporation (RCBC), binding himself to jointly and severally guarantee the prompt payment
of all PBM obligations owing RCBC in the aggregate sum of Forty Million (P40,000,000.00) Pesos.
Between 8 September to 30 October 1980, PBM filed several applications for letters of credit with
RCBC. Through said applications, PBM obligated itself, among other things, to pay on demand for all
draft(s) drawn under or purporting to be drawn under the credits. Everything being in order, RCBC
opened the corresponding letters of credit and imported various goods for PBM's account. In due
time the imported goods arrived and were released, in trust, to PBM who acknowledged receipt
thereof through various trust receipts. All in all, PBM's obligations stood at P7,982,649.08.
Less than a year later, or on 7 August 1981, RCBC filed a Complaint for collection of said sum
against respondents PBM and Alfredo Ching with the then Court of First Instance of Pasig, docketed
as CV-42333. Upon filing of a bond satisfactory to the Court, a Writ of Preliminary Attachment was
issued against the assets and properties of respondents PBM and Ching on the same day. By way
of special and affirmative defenses they alleged that "although the trust receipts stipulate due dates,
the true intent and agreement of the parties was that the maturity dates of the trust receipts were to

be extended at the end of the stipulated dates, as had been the customary practice of RCBC with
PBM."
On 23 September 1981, PBM and Ching moved to discharge the attachment, which RCBC opposed.
On 4 December 1981 the Court issued an Order lifting the attachment upon their filing of a
satisfactory counter-bond.
Meanwhile, on 1 April 1982, PBM filed a Petition for Suspension of Payments with the Securities and
Exchange Commission, docketed as SEC Case No. 2250, seeking at the same time its
rehabilitation.
In an injunctive Order, dated 6 July 1982, all actions for claims against PBM pending before any
Court or tribunal, in whatever stage the same may have been, were ordered suspended by the SEC
in order to give the Commission the opportunity to pass upon the feasibility of any rehabilitation
plans. And on 26 April 1988, SEC approved the revised rehabilitation plan and ordered its
implementation.
On 14 October 1982, RCBC pursued its claims with the Trial Court and filed, unopposed, a Motion
for Summary Judgment in CV-42333, a motion for extension to file said opposition having been
earlier withdrawn. RCBC contended that respondents PBM and Ching had not denied their
indebtedness to RCBC and, therefore, no genuine issue was raised in the pleadings.
On 25 November 1982, the CFI rendered such summary judgment ** in RCBC's favor, declaring:
WHEREFORE, judgment is hereby rendered against the defendants (PBM and
Ching) in favor of plaintiff (RCBC) ordering defendants to pay plaintiff jointly and
severally the following:
a) P7,982,649.08 inclusive of interest, service charges and penalties as of August 7,
1981 on account of their liability in solidum arising from the trust receipts and
comprehensive surety agreements plus such other additional amount by way of
interest, service charges and penalties from August 7,1981 until fully paid; and
b) P10,000.00 as attorney's fees.
With costs against the defendants.
SO ORDERED (p. 192, Original Record).
On appeal, respondent Court of Appeals,*** ruling that it was precipitate and improper for the lower Court to have continued
with the proceedings despite the SEC Order of suspension, set aside the lower Court Decision and ordered it to hold in abeyance the
determination of the merits invoked in CV-42333 pending the outcome of SEC Case No. 2250. On 6 October 1988, the Appellate Court
denied RCBC's Motion for Reconsideration.

Hence, this Petition for Review, to which we gave due course on 31 May 1989, and required the
filing of Memoranda by the parties, the last of which was submitted on 27 July 1989.

RCBC takes the position that the SEC injunctive Order pertains and affects only PBM, the
corporation under rehabilitation, and that its right, as creditor, to proceed against respondent Ching,
as Surety, is not affected by said Order. In fine, RCBC avers that to hold the injunctive Order
applicable to both respondents PBM and Ching is to deprive RCBC of its right to proceed against the
Surety based on the latter's separate and independent undertaking.
PBM and Ching counter that the liabilities incurred by PBM were corporate in character and, hence,
as a corporate officer, Alfredo Ching cannot be held liable therefor; that the pendency of SEC Case
No. 2250 and the rendition of an Order therein on 26 April 1988 implementing respondent PBM's
rehabilitation plan must necessarily benefit the Surety, inasmuch as payment of PBM obligations
must be made pursuant to that plan; and that the liability of the Surety can not be more than what
would remain after payment of all the obligations of the principal. Moreover, they continue, it is usual
for majority stockholders to act as co-signors with their respective corporations where promissory
notes, collaterals or guaranty or security agreements are involved. Respondent Ching's action may,
it is claimed, be classified as a corporate act.
Under the attendant facts and circumstances, we answer the question earlier posed in the negative.
Where an obligation expressly states a solidary liability, the concurrence of two or more creditors or
two or more debtors in one and the same obligation implies that each one of the former has a right to
demand, or that each one of the latter is bound to render, entire compliance with the prestation
(Article 1207, Civil Code). The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously (Article 1216, Civil Code).
That there exists a Comprehensive Surety Agreement between RCBC and respondent Ching is
admitted. There is no escaping the attendant liability that binds respondent Ching, as Surety. He is
charged as an original promissor by virtue of his primary obligation under the Suretyship Agreement.
That Agreement is bare of words imputing to respondent Ching any liability other than that of a
Surety who binds himself to insure a debt in his personal capacity, lacking consideration therefor
notwithstanding (p. 94, Original Record). That respondent Ching acted for and on behalf of
respondent PBM as part of its usual corporate procedure is not supported by the evidence nor the
pleadings on record, nor the Agreement itself .We can not give any additional meaning to the plain
language of the subject agreement. It is basic that the parties are bound by the terms of their
contract, which is the law between them. As held in Zenith Insurance Corporation vs. Court of
Appeals (No. L-57957, 29 December 1982,119 SCRA 485), the extent of a surety's liability is
determined only by the clause of the contract of suretyship. It cannot be extended by implication,
beyond the terms of the contract. Conversely, liability therefor may not be restricted unless expressly
so stated.
Neither can respondent Ching seek refuge behind the SEC injunctive Order. Under Section 3 of P.D.
902-A, as amended by P.D. 1758, the Commission is given absolute jurisdiction, supervision and
control only over corporations or associations, which are grantees of a primary franchise and/or a
license or permit issued by the government to operate in the Philippines. The SEC injunctive Order
can not effect a suspension of payment of respondent Surety's due and demandable obligation, it
being clear therefrom that the rehabilitation receivers were limited "to tak(ing) custody and control

over all the existing assets and property of PBM." Nothing in said Order puts respondent Ching
within its scope.
To further avoid payment of their obligation, PBM and Ching allege a customary extension given by
petitioner in PBM's favor, which, it is averred, must necessarily benefit the Surety. Suffice it to say
that the summary judgment made by the lower Court offers an acceptable explanation finding
respondents' obligation as matured and demandable. Thus:
The trust receipts from No. 2042 to 2100 in the schedule (pages 2 and 3, complaint)
shows that the maturity dates thereof vary from May 12, 1981 at the latest and
February 19, 1981 at the earliest. The alleged agreement to extend, granting its
existence, obviously would have had a much earlier date than the maturity dates of
the trust receipts and considering that the instant case was brought on August 7,
1981, there should have been, to say the least, representation made prior to the
maturity dates or at least on the dates of maturity thereof. But it has not even been
alleged by defendants that such representations were made by defendants. It is too
far fetched to rule that the Court will grant an extension of time to pay, when no such
extension has ever been requested by defendants. The obligation, therefore, is
covered by Article 1193 of the Civil Code and hence, demandable when the day
comes (pp. 199-200, Original Record).
The lower Court correctly found the case to be without any genuine issue of fact and ripe for
summary judgment. Respondents' bare allegation of customary extensions is not corroborated by
any documentary evidence but remains plain self-serving assertions.
In fine, the SEC injunctive Order is of no effect as far as the respondent Surety, Alfredo Ching, is
concerned. He can be sued separately to enforce his liability as Surety for PBM (Traders Royal Bank
vs. Court of Appeals, et al. G.R. No. 78412, September 26, 1989).
WHEREFORE, the Decision of the Court of Appeals, dated 30 June 1988, and its Resolution
denying reconsideration thereof, dated 6 October 1988, are SET ASIDE. The judgment of the lower
Court is hereby REINSTATED and made executory as far as respondent, Alfredo Ching, is
concerned.
Costs against private respondents, Philippine Blooming Mills and Alfredo Ching.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 155173

November 23, 2004

LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge Philippines, Inc.), LUZON

CONTINENTAL LAND CORPORATION, CONTINENTAL OPERATING CORPORATION and
PHILIP ROSEBERG, petitioners,
vs.
CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and ANTHONY A.
MARIANO, respondents.

DECISION

PANGANIBAN, J.:
May defendants in civil cases implead in their counterclaims persons who were not parties to the
original complaints? This is the main question to be answered in this controversy.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to nullify the May 22,
20022 and the September 3, 2002 Orders3 of the Regional Trial Court (RTC) of Quezon City (Branch
80) in Civil Case No. Q-00-41103. The decretal portion of the first assailed Order reads:
"WHEREFORE, in the light of the foregoing as earlier stated, the plaintiff's motion to dismiss
claims is granted. Accordingly, the defendants' claims against Mr. Lim and Mr. Mariano
captioned as their counterclaims are dismissed."4
The second challenged Order denied petitioners' Motion for Reconsideration.
The Facts
Briefly, the origins of the present controversy can be traced to the Letter of Intent (LOI) executed by
both parties on August 11, 1998, whereby Petitioner Lafarge Cement Philippines, Inc. (Lafarge) -- on
behalf of its affiliates and other qualified entities, including Petitioner Luzon Continental Land
Corporation (LCLC) -- agreed to purchase the cement business of Respondent Continental Cement
Corporation (CCC). On October 21, 1998, both parties entered into a Sale and Purchase Agreement
(SPA). At the time of the foregoing transactions, petitioners were well aware that CCC had a case
pending with the Supreme Court. The case was docketed as GR No. 119712, entitled Asset
Privatization Trust (APT) v. Court of Appeals and Continental Cement Corporation.

In anticipation of the liability that the High Tribunal might adjudge against CCC, the parties, under
Clause 2 (c) of the SPA, allegedly agreed to retain from the purchase price a portion of the contract
price in the amount of P117,020,846.84 -- the equivalent of US$2,799,140. This amount was to be
deposited in an interest-bearing account in the First National City Bank of New York (Citibank) for
payment to APT, the petitioner in GR No. 119712.
However, petitioners allegedly refused to apply the sum to the payment to APT, despite the
subsequent finality of the Decision in GR No. 119712 in favor of the latter and the repeated
instructions of Respondent CCC. Fearful that nonpayment to APT would result in the foreclosure, not
just of its properties covered by the SPA with Lafarge but of several other properties as well, CCC
filed before the Regional Trial Court of Quezon City on June 20, 2000, a "Complaint with Application
for Preliminary Attachment" against petitioners. Docketed as Civil Case No. Q-00-41103, the
Complaint prayed, among others, that petitioners be directed to pay the "APT Retained Amount"
referred to in Clause 2 (c) of the SPA.
Petitioners moved to dismiss the Complaint on the ground that it violated the prohibition on forumshopping. Respondent CCC had allegedly made the same claim it was raising in Civil Case No. Q00-41103 in another action, which involved the same parties and which was filed earlier before the
International Chamber of Commerce. After the trial court denied the Motion to Dismiss in its
November 14, 2000 Order, petitioners elevated the matter before the Court of Appeals in CA-GR SP
No. 68688.
In the meantime, to avoid being in default and without prejudice to the outcome of their appeal,
petitioners filed their Answer and Compulsory Counterclaims ad Cautelam before the trial court in
Civil Case No. Q-00-41103. In their Answer, they denied the allegations in the Complaint. They
prayed -- by way of compulsory counterclaims against Respondent CCC, its majority stockholder
and president Gregory T. Lim, and its corporate secretary Anthony A. Mariano -- for the sums of (a)
P2,700,000 each as actual damages, (b) P100,000,000 each as exemplary damages, (c)
P100,000,000 each as moral damages, and (d) P5,000,000 each as attorney's fees plus costs of
suit.
Petitioners alleged that CCC, through Lim and Mariano, had filed the "baseless" Complaint in Civil
Case No. Q-00-41103 and procured the Writ of Attachment in bad faith. Relying on this Court's
pronouncement in Sapugay v. CA,5 petitioners prayed that both Lim and Mariano be held "jointly and
solidarily" liable with Respondent CCC.
On behalf of Lim and Mariano who had yet to file any responsive pleading, CCC moved to dismiss
petitioners' compulsory counterclaims on grounds that essentially constituted the very issues for
resolution in the instant Petition.
Ruling of the Trial Court
On May 22, 2002, the Regional Trial Court of Quezon City (Branch 80) dismissed petitioners'
counterclaims for several reasons, among which were the following: a) the counterclaims against
Respondents Lim and Mariano were not compulsory; b) the ruling in Sapugay was not applicable;
and c) petitioners' Answer with Counterclaims violated procedural rules on the proper joinder of
causes of action.6
Acting on the Motion for Reconsideration filed by petitioners, the trial court -- in an Amended Order
dated September 3, 20027 -- admitted some errors in its May 22, 2002 Order, particularly in its
pronouncement that their counterclaim had been pleaded against Lim and Mariano only. However,

the RTC clarified that it was dismissing the counterclaim insofar as it impleaded Respondents Lim
and Mariano, even if it included CCC.
Hence this Petition.8
Issues
In their Memorandum, petitioners raise the following issues for our consideration:
"[a] Whether or not the RTC gravely erred in refusing to rule that Respondent CCC has no
personality to move to dismiss petitioners' compulsory counterclaims on Respondents Lim
and Mariano's behalf.
"[b] Whether or not the RTC gravely erred in ruling that (i) petitioners' counterclaims against
Respondents Lim and Mariano are not compulsory; (ii) Sapugay v. Court of Appeals is
inapplicable here; and (iii) petitioners violated the rule on joinder of causes of action." 9
For clarity and coherence, the Court will resolve the foregoing in reverse order.
The Court's Ruling
The Petition is meritorious.
First Issue:
Counterclaims and Joinder of Causes of Action.
Petitioners' Counterclaims Compulsory
Counterclaims are defined in Section 6 of Rule 6 of the Rules of Civil Procedure as "any claim which
a defending party may have against an opposing party." They are generally allowed in order to avoid
a multiplicity of suits and to facilitate the disposition of the whole controversy in a single action, such
that the defendant's demand may be adjudged by a counterclaim rather than by an independent suit.
The only limitations to this principle are (1) that the court should have jurisdiction over the subject
matter of the counterclaim, and (2) that it could acquire jurisdiction over third parties whose presence
is essential for its adjudication.10
A counterclaim may either be permissive or compulsory. It is permissive "if it does not arise out of or
is not necessarily connected with the subject matter of the opposing party's claim." 11 A permissive
counterclaim is essentially an independent claim that may be filed separately in another case.
A counterclaim is compulsory when its object "arises out of or is necessarily connected with the
transaction or occurrence constituting the subject matter of the opposing party's claim and does not
require for its adjudication the presence of third parties of whom the court cannot acquire
jurisdiction."12
Unlike permissive counterclaims, compulsory counterclaims should be set up in the same action;
otherwise, they would be barred forever. NAMARCO v. Federation of United Namarco
Distributors13 laid down the following criteria to determine whether a counterclaim is compulsory or
permissive: 1) Are issues of fact and law raised by the claim and by the counterclaim largely the
same? 2) Would res judicata bar a subsequent suit on defendant's claim, absent the compulsory

counterclaim rule? 3) Will substantially the same evidence support or refute plaintiff's claim as well
as defendant's counterclaim? 4) Is there any logical relation between the claim and the
counterclaim? A positive answer to all four questions would indicate that the counterclaim is
compulsory.
Adopted in Quintanilla v. CA14 and reiterated in Alday v. FGU Insurance Corporation,15 the
"compelling test of compulsoriness" characterizes a counterclaim as compulsory if there should exist
a "logical relationship" between the main claim and the counterclaim. There exists such a
relationship when conducting separate trials of the respective claims of the parties would entail
substantial duplication of time and effort by the parties and the court; when the multiple claims
involve the same factual and legal issues; or when the claims are offshoots of the same basic
controversy between the parties.
We shall now examine the nature of petitioners' counterclaims against respondents with the use of
the foregoing parameters.
Petitioners base their counterclaim on the following allegations:
"Gregory T. Lim and Anthony A. Mariano were the persons responsible for making the bad
faith decisions for, and causing plaintiff to file this baseless suit and to procure an
unwarranted writ of attachment, notwithstanding their knowledge that plaintiff has no right to
bring it or to secure the writ. In taking such bad faith actions, Gregory T. Lim was motivated
by his personal interests as one of the owners of plaintiff while Anthony A. Mariano was
motivated by his sense of personal loyalty to Gregory T. Lim, for which reason he
disregarded the fact that plaintiff is without any valid cause.
"Consequently, both Gregory T. Lim and Anthony A. Mariano are the plaintiff's co-joint
tortfeasors in the commission of the acts complained of in this answer and in the compulsory
counterclaims pleaded below. As such they should be held jointly and solidarily liable as
plaintiff's co-defendants to those compulsory counterclaims pursuant to the Supreme Court's
decision in Sapugay v. Mobil.
xxx

xxx

xxx

"The plaintiff's, Gregory T. Lim and Anthony A. Mariano's bad faith filing of this baseless case
has compelled the defendants to engage the services of counsel for a fee and to incur costs
of litigation, in amounts to be proved at trial, but in no case less than P5 million for each of
them and for which plaintiff Gregory T. Lim and Anthony A. Mariano should be held jointly
and solidarily liable.
"The plaintiff's, Gregory T. Lim's and Anthony A. Mariano's actions have damaged the
reputations of the defendants and they should be held jointly and solidarily liable to them for
moral damages of P100 million each.
"In order to serve as an example for the public good and to deter similar baseless, bad faith
litigation, the plaintiff, Gregory T. Lim and Anthony A. Mariano should be held jointly and
solidarily liable to the defendants for exemplary damages of P100 million each." 16
The above allegations show that petitioners' counterclaims for damages were the result of
respondents' (Lim and Mariano) act of filing the Complaint and securing the Writ of Attachment in
bad faith. Tiu Po v. Bautista17 involved the issue of whether the counterclaim that sought moral,

actual and exemplary damages and attorney's fees against respondents on account of their
"malicious and unfounded" complaint was compulsory. In that case, we held as follows:
"Petitioners' counterclaim for damages fulfills the necessary requisites of a compulsory
counterclaim. They are damages claimed to have been suffered by petitioners as a
consequence of the action filed against them. They have to be pleaded in the same action;
otherwise, petitioners would be precluded by the judgment from invoking the same in an
independent action. The pronouncement in Papa vs. Banaag (17 SCRA 1081) (1966) is in
point:
"Compensatory, moral and exemplary damages, allegedly suffered by the creditor in
consequence of the debtor's action, are also compulsory counterclaim barred by the
dismissal of the debtor's action. They cannot be claimed in a subsequent action by the
creditor against the debtor."
"Aside from the fact that petitioners' counterclaim for damages cannot be the subject of an
independent action, it is the same evidence that sustains petitioners' counterclaim that will
refute private respondent's own claim for damages. This is an additional factor that
characterizes petitioners' counterclaim as compulsory."18
Moreover, using the "compelling test of compulsoriness," we find that, clearly, the recovery of
petitioners' counterclaims is contingent upon the case filed by respondents; thus, conducting
separate trials thereon will result in a substantial duplication of the time and effort of the court and
the parties.
Since the counterclaim for damages is compulsory, it must be set up in the same action; otherwise, it
would be barred forever. If it is filed concurrently with the main action but in a different proceeding, it
would be abated on the ground of litis pendentia; if filed subsequently, it would meet the same fate
on the ground of res judicata.19
Sapugay v. Court of Appeals Applicable to the Case at Bar
Sapugay v. Court of Appeals finds application in the present case. In Sapugay, Respondent Mobil
Philippines filed before the trial court of Pasig an action for replevin against Spouses Marino and
Lina Joel Sapugay. The Complaint arose from the supposed failure of the couple to keep their end of
their Dealership Agreement. In their Answer with Counterclaim, petitioners alleged that after incurring
expenses in anticipation of the Dealership Agreement, they requested the plaintiff to allow them to
get gas, but that it had refused. It claimed that they still had to post a surety bond which, initially fixed
at P200,000, was later raised to P700,000.
The spouses exerted all efforts to secure a bond, but the bonding companies required a copy of the
Dealership Agreement, which respondent continued to withhold from them. Later, petitioners
discovered that respondent and its manager, Ricardo P. Cardenas, had intended all along to award
the dealership to Island Air Product Corporation.
In their Answer, petitioners impleaded in the counterclaim Mobil Philippines and its manager -Ricardo P. Cardenas -- as defendants. They prayed that judgment be rendered, holding both jointly
and severally liable for pre-operation expenses, rental, storage, guarding fees, and unrealized profit
including damages. After both Mobil and Cardenas failed to respond to their Answer to the
Counterclaim, petitioners filed a "Motion to Declare Plaintiff and its Manager Ricardo P. Cardenas in
Default on Defendant's Counterclaim."

Among the issues raised in Sapugay was whether Cardenas, who was not a party to the original
action, might nevertheless be impleaded in the counterclaim. We disposed of this issue as follows:
"A counterclaim is defined as any claim for money or other relief which a defending party
may have against an opposing party. However, the general rule that a defendant cannot by a
counterclaim bring into the action any claim against persons other than the plaintiff admits of
an exception under Section 14, Rule 6 which provides that 'when the presence of parties
other than those to the original action is required for the granting of complete relief in the
determination of a counterclaim or cross-claim, the court shall order them to be brought in as
defendants, if jurisdiction over them can be obtained.' The inclusion, therefore, of Cardenas
in petitioners' counterclaim is sanctioned by the rules."20
The prerogative of bringing in new parties to the action at any stage before judgment is intended to
accord complete relief to all of them in a single action and to avert a duplicity and even a multiplicity
of suits thereby.
In insisting on the inapplicability of Sapugay, respondents argue that new parties cannot be included
in a counterclaim, except when no complete relief can be had. They add that "[i]n the present case,
Messrs. Lim and Mariano are not necessary for petitioners to obtain complete relief from
Respondent CCC as plaintiff in the lower court. This is because Respondent CCC as a corporation
with a separate [legal personality] has the juridical capacity to indemnify petitioners even without
Messrs. Lim and Mariano."21
We disagree. The inclusion of a corporate officer or stockholder -- Cardenas in Sapugay or Lim and
Mariano in the instant case -- is not premised on the assumption that the plaintiff corporation does
not have the financial ability to answer for damages, such that it has to share its liability with
individual defendants. Rather, such inclusion is based on the allegations of fraud and bad faith on
the part of the corporate officer or stockholder. These allegations may warrant the piercing of the veil
of corporate fiction, so that the said individual may not seek refuge therein, but may be held
individually and personally liable for his or her actions.
In Tramat Mercantile v. Court of Appeals,22 the Court held that generally, it should only be the
corporation that could properly be held liable. However, circumstances may warrant the inclusion of
the personal liability of a corporate director, trustee, or officer, if the said individual is found guilty of
bad faith or gross negligence in directing corporate affairs.
Remo Jr. v. IAC23 has stressed that while a corporation is an entity separate and distinct from its
stockholders, the corporate fiction may be disregarded if "used to defeat public convenience, justify a
wrong, protect fraud, or defend crime." In these instances, "the law will regard the corporation as an
association of persons, or in case of two corporations, will merge them into one." Thus, there is no
debate on whether, in alleging bad faith on the part of Lim and Mariano the counterclaims had in
effect made them "indispensable parties" thereto; based on the alleged facts, both are clearly parties
in interest to the counterclaim.24
Respondents further assert that "Messrs. Lim and Mariano cannot be held personally liable [because
their assailed acts] are within the powers granted to them by the proper board resolutions; therefore,
it is not a personal decision but rather that of the corporation as represented by its board of
directors."25 The foregoing assertion, however, is a matter of defense that should be threshed out
during the trial; whether or not "fraud" is extant under the circumstances is an issue that must be
established by convincing evidence.26

Suability and liability are two distinct matters. While the Court does rule that the counterclaims
against Respondent CCC's president and manager may be properly filed, the determination of
whether both can in fact be held jointly and severally liable with respondent corporation is entirely
another issue that should be ruled upon by the trial court.
However, while a compulsory counterclaim may implead persons not parties to the original
complaint, the general rule -- a defendant in a compulsory counterclaim need not file any responsive
pleading, as it is deemed to have adopted the allegations in the complaint as its answer -- does not
apply. The filing of a responsive pleading is deemed a voluntary submission to the jurisdiction of the
court; a new party impleaded by the plaintiff in a compulsory counterclaim cannot be considered to
have automatically and unknowingly submitted to the jurisdiction of the court. A contrary ruling would
result in mischievous consequences whereby a party may be indiscriminately impleaded as a
defendant in a compulsory counterclaim; and judgment rendered against it without its knowledge,
much less participation in the proceedings, in blatant disregard of rudimentary due process
requirements.
The correct procedure in instances such as this is for the trial court, per Section 12 of Rule 6 of the
Rules of Court, to "order [such impleaded parties] to be brought in as defendants, if jurisdiction over
them can be obtained," by directing that summons be served on them. In this manner, they can be
properly appraised of and answer the charges against them. Only upon service of summons can the
trial court obtain jurisdiction over them.
In Sapugay, Cardenas was furnished a copy of the Answer with Counterclaim, but he did not file any
responsive pleading to the counterclaim leveled against him. Nevertheless, the Court gave due
consideration to certain factual circumstances, particularly the trial court's treatment of the Complaint
as the Answer of Cardenas to the compulsory counterclaim and of his seeming acquiescence
thereto, as evidenced by his failure to make any objection despite his active participation in the
proceedings. It was held thus:
"It is noteworthy that Cardenas did not file a motion to dismiss the counterclaim against him
on the ground of lack of jurisdiction. While it is a settled rule that the issue of jurisdiction may
be raised even for the first time on appeal, this does not obtain in the instant case. Although
it was only Mobil which filed an opposition to the motion to declare in default, the fact that the
trial court denied said motion, both as to Mobil and Cardenas on the ground that Mobil's
complaint should be considered as the answer to petitioners' compulsory counterclaim, leads
us to the inescapable conclusion that the trial court treated the opposition as having been
filed in behalf of both Mobil and Cardenas and that the latter had adopted as his answer the
allegations raised in the complaint of Mobil. Obviously, it was this ratiocination which led the
trial court to deny the motion to declare Mobil and Cardenas in default. Furthermore,
Cardenas was not unaware of said incidents and the proceedings therein as he testified and
was present during trial, not to speak of the fact that as manager of Mobil he would
necessarily be interested in the case and could readily have access to the records and the
pleadings filed therein.
"By adopting as his answer the allegations in the complaint which seeks affirmative relief,
Cardenas is deemed to have recognized the jurisdiction of the trial court over his person and
submitted thereto. He may not now be heard to repudiate or question that jurisdiction." 27
Such factual circumstances are unavailing in the instant case. The records do not show that
Respondents Lim and Mariano are either aware of the counterclaims filed against them, or
that they have actively participated in the proceedings involving them. Further, in dismissing
the counterclaims against the individual respondents, the court a quo -- unlike in Sapugay --

cannot be said to have treated Respondent CCC's Motion to Dismiss as having been filed on
their behalf.
Rules on Permissive Joinder of Causes
of Action or Parties Not Applicable
Respondent CCC contends that petitioners' counterclaims violated the rule on joinder of causes of
action. It argues that while the original Complaint was a suit for specific performance based on a
contract, the counterclaim for damages was based on the tortuous acts of respondents. 28 In its
Motion to Dismiss, CCC cites Section 5 of Rule 2 and Section 6 of Rule 3 of the Rules of Civil
Procedure, which we quote:
"Section 5. Joinder of causes of action. A party may in one pleading assert, in the
alternative or otherwise, as many causes of action as he may have against an opposing
party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties; x x
x"
Section 6. Permissive joinder of parties. All persons in whom or against whom any right to
relief in respect to or arising out of the same transaction or series of transactions is alleged to
exist whether jointly, severally, or in the alternative, may, except as otherwise provided in
these Rules, join as plaintiffs or be joined as defendants in one complaint, where any
question of law or fact common to all such plaintiffs or to all such defendants may arise in the
action; but the court may make such orders as may be just to prevent any plaintiff or
defendant from being embarrassed or put to expense in connection with any proceedings in
which he may have no interest."
The foregoing procedural rules are founded on practicality and convenience. They are meant to
discourage duplicity and multiplicity of suits. This objective is negated by insisting -- as the court a
quo has done -- that the compulsory counterclaim for damages be dismissed, only to have it possibly
re-filed in a separate proceeding. More important, as we have stated earlier, Respondents Lim and
Mariano are real parties in interest to the compulsory counterclaim; it is imperative that they be
joined therein. Section 7 of Rule 3 provides:
"Compulsory joinder of indispensable parties. Parties in interest without whom no final
determination can be had of an action shall be joined either as plaintiffs or defendants."
Moreover, in joining Lim and Mariano in the compulsory counterclaim, petitioners are being
consistent with the solidary nature of the liability alleged therein.
Second Issue:
CCC's Personality to Move to Dismiss the Compulsory Counterclaims
Characterizing their counterclaim for damages against Respondents CCC, Lim and Mariano as "joint
and solidary," petitioners prayed:
"WHEREFORE, it is respectfully prayed that after trial judgment be rendered:
"1. Dismissing the complaint in its entirety;

"2. Ordering the plaintiff, Gregory T. Lim and Anthony A. Mariano jointly and solidarily to pay
defendant actual damages in the sum of at least P2,700,000.00;
"3. Ordering the plaintiff, Gregory T. Lim and Anthony A, Mariano jointly and solidarily to pay
the defendants LPI, LCLC, COC and Roseberg:
"a. Exemplary damages of P100 million each;
"b. Moral damages of P100 million each; and
"c. Attorney's fees and costs of suit of at least P5 million each.
Other reliefs just and equitable are likewise prayed for."29
Obligations may be classified as either joint or solidary. "Joint" or "jointly" or "conjoint" means
mancum or mancomunada or pro rata obligation; on the other hand, "solidary obligations" may be
used interchangeably with "joint and several" or "several." Thus, petitioners' usage of the term "joint
and solidary" is confusing and ambiguous.
The ambiguity in petitioners' counterclaims notwithstanding, respondents' liability, if proven, is
solidary. This characterization finds basis in Article 1207 of the Civil Code, which provides that
obligations are generally considered joint, except when otherwise expressly stated or when the law
or the nature of the obligation requires solidarity. However, obligations arising from tort are, by their
nature, always solidary. We have assiduously maintained this legal principle as early as 1912 in
Worcester v. Ocampo,30 in which we held:
"x x x The difficulty in the contention of the appellants is that they fail to recognize that the
basis of the present action is tort. They fail to recognize the universal doctrine that each joint
tort feasor is not only individually liable for the tort in which he participates, but is also jointly
liable with his tort feasors. x x x
"It may be stated as a general rule that joint tort feasors are all the persons who command,
instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done for their benefit. They are
each liable as principals, to the same extent and in the same manner as if they had
performed the wrongful act themselves. x x x
"Joint tort feasors are jointly and severally liable for the tort which they commit. The persons
injured may sue all of them or any number less than all. Each is liable for the whole damages
caused by all, and all together are jointly liable for the whole damage. It is no defense for one
sued alone, that the others who participated in the wrongful act are not joined with him as
defendants; nor is it any excuse for him that his participation in the tort was insignificant as
compared to that of the others. x x x
"Joint tort feasors are not liable pro rata. The damages can not be apportioned among them,
except among themselves. They cannot insist upon an apportionment, for the purpose of
each paying an aliquot part. They are jointly and severally liable for the whole amount. x x x
"A payment in full for the damage done, by one of the joint tort feasors, of course satisfies
any claim which might exist against the others. There can be but satisfaction. The release of
one of the joint tort feasors by agreement generally operates to discharge all. x x x

"Of course the court during trial may find that some of the alleged tort feasors are liable and
that others are not liable. The courts may release some for lack of evidence while
condemning others of the alleged tort feasors. And this is true even though they are charged
jointly and severally."
In a "joint" obligation, each obligor answers only for a part of the whole liability; in a "solidary" or
"joint and several" obligation, the relationship between the active and the passive subjects is so
close that each of them must comply with or demand the fulfillment of the whole obligation. 31 The fact
that the liability sought against the CCC is for specific performance and tort, while that sought
against the individual respondents is based solely on tort does not negate the solidary nature of their
liability for tortuous acts alleged in the counterclaims. Article 1211 of the Civil Code is explicit on this
point:
"Solidarity may exist although the creditors and the debtors may not be bound in the same
manner and by the same periods and conditions."
The solidary character of respondents' alleged liability is precisely why credence cannot be given to
petitioners' assertion. According to such assertion, Respondent CCC cannot move to dismiss the
counterclaims on grounds that pertain solely to its individual co-debtors. 32 In cases filed by the
creditor, a solidary debtor may invoke defenses arising from the nature of the obligation, from
circumstances personal to it, or even from those personal to its co-debtors. Article 1222 of the Civil
Code provides:
"A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are
derived from the nature of the obligation and of those which are personal to him, or pertain to
his own share. With respect to those which personally belong to the others, he may avail
himself thereof only as regards that part of the debt for which the latter are responsible."
(Emphasis supplied).
The act of Respondent CCC as a solidary debtor -- that of filing a motion to dismiss the counterclaim
on grounds that pertain only to its individual co-debtors -- is therefore allowed.
However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed it
on behalf of Co-respondents Lim and Mariano; it did not pray that the counterclaim against it be
dismissed. Be that as it may, Respondent CCC cannot be declared in default. Jurisprudence teaches
that if the issues raised in the compulsory counterclaim are so intertwined with the allegations in the
complaint, such issues are deemed automatically joined. 33 Counterclaims that are only for damages
and attorney's fees and that arise from the filing of the complaint shall be considered as special
defenses and need not be answered.34
CCC's Motion to Dismiss the Counterclaim on Behalf of Respondents Lim and Mariano Not Allowed
While Respondent CCC can move to dismiss the counterclaims against it by raising grounds that
pertain to individual defendants Lim and Mariano, it cannot file the same Motion on their behalf for
the simple reason that it lacks the requisite authority to do so. A corporation has a legal personality
entirely separate and distinct from that of its officers and cannot act for and on their behalf, without
being so authorized. Thus, unless expressly adopted by Lim and Mariano, the Motion to Dismiss the
compulsory counterclaim filed by Respondent CCC has no force and effect as to them.
In summary, we make the following pronouncements:

1. The counterclaims against Respondents CCC, Gregory T. Lim and Anthony A. Mariano are
compulsory.
2. The counterclaims may properly implead Respondents Gregory T. Lim and Anthony A.
Mariano, even if both were not parties in the original Complaint.
3. Respondent CCC or any of the three solidary debtors (CCC, Lim or Mariano) may include,
in a Motion to Dismiss, defenses available to their co-defendants; nevertheless, the same
Motion cannot be deemed to have been filed on behalf of the said co-defendants.
4. Summons must be served on Respondents Lim and Mariano before the trial court can
obtain jurisdiction over them.
WHEREFORE, the Petition is GRANTED and the assailed Orders REVERSED. The court of origin is
hereby ORDERED to take cognizance of the counterclaims pleaded in petitioners' Answer with
Compulsory Counterclaims and to cause the service of summons on Respondents Gregory T. Lim
and Anthony A. Mariano. No costs.
SO ORDERED.

EN BANC
[G.R. No. 11307. October 5, 1918. ]
ROMAN JAUCIAN, Plaintiff-Appellant, v. FRANCISCO QUEROL, administrator of the intestate
estate of the deceased Hermenegildo Rogero, Defendant-Appellee.
Manly, Goddard & Lockwood, for Appellant.
Albert E. Somersille, for Appellee.
SYLLABUS
1. PRINCIPAL AND SURETY; EXHAUSTION OF PROPERTY OF PRINCIPAL DEBTOR. The right of a guarantor
or surety, to insist on the exhaustion of the property of the principal debtor, before his own shall be taken in
execution, does not exist where the guarantor or surety is jointly and severally bound with the principal
debtor. (Art. 1831, Civil Code.)
2. ID.; OBLIGATION ABSOLUTE WHERE SURETY BOUND JOINTLY AND SEVERALLY WITH PRINCIPAL.
Where a guarantor or surety is jointly and severally bound with the principal debtor, the obligation of the
guarantor or surety, equally with that of the principal debtor, is absolute and not contingent within the
meaning of section 746 of the Code of Civil Procedure.
3. EXECUTORS AND ADMINISTRATORS; CLAIMS AGAINST ESTATE OF DECEASED PERSON; BAR OF SECTION
695, CODE OF CIVIL PROCEDURE. Where two persons are bound in solidium for the same debt and one of
them dies, the whole indebtedness can be proved against the estate f the latter; and if the claim is not
presented to the committee appointed to allow claims against the estate within the time contemplated in
section 689 of the Code of Civil Procedure the same will be barred as against such estate, under the
provisions of section 695 of the same Code.
4. CONTRACTS; APPORTIONABLE JOINT OBLIGATIONS AND SOLIDARY JOINT OBLIGATIONS. The opinion
contains an exposition of the difference between the juridical conceptions of liability incident to multiple
obligations, as embodied in the civil law and common law respectively; and the civil law distinction is noted
between the apportionable joint obligation and the solidary joint obligation. At common law each of the
debtors in a multiple obligation is liable in solidum for the whole, the obligation not being apportionable
among the debtors.
5. ID; ID. Therefore, when the English expression "joint obligation" is used In its common-law sense, as
in a statute adopted from a common-law State, it should be translated into Spanish by "obligacion solidaria"
or other appropriate equivalent. It is otherwise where a person uses in English in this jurisdiction the word
"joint" in speaking of the joint obligation recognized in article 1138 of the Civil Code. Here the word "joint" is
properly translated by "mancomunada."
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Per MALCOLM and FISHER .JJ., concurring:

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6. EXECUTORS AND ADMINISTRATORS: CLAIMS. The doctrine announced in the case of McMicking v. Sy
Conbieng ([1912], 21 Phil Rep., 211), to the effect that claims not presented within two years are barred,
followed and approved.
7. ID.; ABSOLUTE CLAIMS. It is established by the express terms of section 695 of the Code of Civil
Procedure and the decisions by which it has been construed that absolute claims against a deceased person
are barred, unless presented to the committee on claims within the time limited.
8. ID.; CONTINGENT CLAIMS. Contingent claims must be presented to the committee to hear claims
against the estate within the time prescribed for the presentation of any other claim; otherwise they are
barred.
9. ID.; ID.; STATUTORY CONSTRUCTION. It must be assumed that the Legislature desires certainty rather
than uncertainty in the tenure of property transmitted by descent. "The object of the law in fixing a definite
period within which claims must be presented is to insure the speedy settling of the affairs of the deceased
person and the early delivery of the property of the estate into the hands of the persons entitled to receive
it." (In re Estate of De Dios [1913], 24 Phil. Rep., 573, 576.)

10. ID.; ID.; ID.; SECTIONS 748 AND 749, THE CODE OF CIVIL PROCEDURE, CONSTRUED. Sections 748
and 749 of the Code of Civil Procedure, in speaking of contingent claims which are demandable after they
become absolute, against the administration or against the distributees, use the expression "such contingent
claims." The use of the word "such" is clearly intended to limit the word "contingent claim" to the class
referred to in the two preceding sections that is, to such contingent claims as have been presented to the
committee and reported to the court pursuant to the requirements of sections 746 and 747.
11. ID., ID., ID.; SECTION 746, THE CODE OF CIVIL PROCEDURE, CONSTRUED. The word "may" in
section 746 is not to be construed as authorizing the holder of a contingent claim to disregard the existence
of the committee without suffering any untoward consequences. He "may" present his contingent claim, if he
desires to preserve his right to enforce it against the estate of the distributees, but if he does not he may
not thereafter so assert it.
12. ID.; ID.; ID.; SECTION 695, THE CODE OF CIVIL PROCEDURE, CONSTRUED. The expression "proper
to be allowed by the committee," as limiting the word "claims" in section 695 is not intended to distinguish
absolute claims from contingent claims, but to distinguish those which may in no event be passed upon by
the committee, because excluded by section 703, from those over which it has jurisdiction.
13. DESCENT AND DISTRIBUTION; STATUTE OF NON-CLAIM. Under the system formerly in force here
heirs might take the estate of their decedent unconditionally, in which event they were liable absolutely for
all his debts, or with benefit of inventory, being then liable only to the extent of the value of their respective
distributive shares. But that system has been abolished (Suiliong & Co. v. Chio-Taysan [1908], 12 Phil. Rep.,
13), and the heir is now not personally responsible as such for the debts of the deceased, but the property
comes to him "charged with the debts of the deceased, so that he cannot alienate or discharge it free of
such debts until and unless they are extinguished either by payment, prescription, or . . ." by the operation
of the statute of non-claim.
14. ACTIONS; CHANGE OF THEORY UPON APPEAL. Where a cause has been tried upon a particular issue,
the appellate court should proceed upon the same theory.
15. CONTRACTS; OBLIGATIONS; TERMS "JOINT, "MANCOMUNADA," JOINTLY," "MANCOMUNADAMENTE,"
"JOINTLY AND SEVERALLY," "SOLIDARIAMENTE (IN SOLIDUM), CONSTRUED. The terms joint,
"mancomunada," "jointly," "mancomunadamente," "jointly and severally," "solidariamente" (in solidum),
have heretofore been authoritatively construed in the decisions of this court and in decisions of the supreme
court of Louisiana and the Supreme Court of the United States. The following cases can be noted Sharruf v.
Tayabas Land Co. and Ginainati ([1918], 37 Phil Rep., 655); Parot v. Gemora ([1906], 7 Phil. Rep., 94);
Pimentel v. Gutierrez ([1909], 14 Phil. Rep., 49); Chinese Chamber of Commerce v. Pua Te Ching ([1910],
16 Phil. Rep., 406); De Leon v. Nepomuceno and De Jesus ([1917], 37 Phil. Rep., 180); Groves v. Sentell
([1894], 153 U. S.,.465); Adle v. Metoyer ([1846] , 1 La. Ann., 254); Ledoux & Co. v. Rucker ([1850], 5 La.
Ann., 500); Pecquet v. Pecquets Executor ([1865], 17 La. Ann., 204); Rogers & Woodall v. Gibbs ([1872] 24
La. Ann., 467); Duggan v. De Lizardi ([1843], 5 Robinsons Reports, 224); Commissioners of New Orleans
Improvement & Banking Co. v. The Citizens Bank ([1845], 10 Robinsons Reports, 14).

DECISION

STREET, J. :

This appeal by bill of exceptions was brought to reverse a judgment of the Court of First Instance of the
Province of Albay whereby said court has refused to allow a claim in favor of the plaintiff, Roman Jaucian,
against the estate of Hermenegilda Rogero upon the facts hereinbelow stated.
In October, 1908, Lino Dayandante and Hermenegilda Rogero executed a private writing in which they
acknowledged themselves to be indebted to Roman Jaucian in the sum of P13,332.33. The terms of this
obligation are fully set out at page 38 of the bill of exceptions. Its first clause is in the following words:

jgc:chanroble s.com.ph

"We jointly and severally acknowledge our indebtedness in the sum of P13,332.33 Philippine currency (a
balance made October 23, 1908) bearing interest at the rate of 10 per cent per annum to Roman Jaucian, of

age, a resident of the municipality of Ligao, Province of Albay, Philippine Islands and married to Pilar Tell."

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Hermenegilda Rogero signed this document in the capacity of surety for Lino Dayandante; but as clearly
appears from the instrument itself both debtors bound themselves jointly and severally to the creditor, and
there is nothing in the terms of the obligation itself to show that the relation between the two debtors was
that of principal and surety.
In November, 1909, Hermenegilda Rogero brought an action in the Court of First Instance of Albay against
Jaucian, asking that the document in question be canceled as to her upon the ground that her signature was
obtained by means of fraud. In his answer to the complaint, Jaucian, by way of cross-complaint, asked for
judgment against the plaintiff for the amount due upon the obligation, which appears to have matured at
that time. Judgment was rendered in the Court of First Instance in favor of the plaintiff, from which
judgment the defendant appealed to the Supreme Court.
In his appeal to this court, Jaucian did not assign as error the failure of the lower court to give him judgment
on his cross-demand, and therefore the decision upon the appeal was limited to the issues concerning the
validity of the document.
While the case was pending in the Supreme Court, Hermenegilda Rogero died and the administrator of her
estate was substituted as the party plaintiff and appellee. On November 25, 1913, the Supreme Court
rendered its decision reversing the judgment of the trial court and holding that the disputed claim was valid.
1
During the pendency of the appeal, proceedings were had in the Court of First Instance of Albay for the
administration of the estate of Hermenegilda Rogero; Francisco Querol was named administrator; and a
committee was appointed to pass upon claims against the estate. This committee made its report on
September 3, 1912. On March 24, 1914, or about a year and a half after the filing of the report of the
committee on claims against the Rogero estate, Jaucian entered an appearance in the estate proceedings,
and filed with the court a petition in which he averred the execution of the document of October, 1908, by
the deceased, the failure of her coobligor Dayandante, to pay any part of the debt, except P100 received
from him in March, 1914, and the complete insolvency of Dayandante. Upon these facts Jaucian prayed the
court for an order directing the administrator of the Rogero estate to pay him the principal sum of
P13,332.33, plus P7,221.66, as interest thereon from October 24, 1908, to March 24, 1914 with interest on
the principal sum from March 24, 1914 at 10 per cent per annum, until paid.
A copy of this petition was served upon the administrator of the estate, who, on March 30, 1914, appeared
by his attorney and opposed the granting of the petition upon the grounds that the claim had never been
presented to the committee on claims for allowance; that more than eighteen months had passed since the
filing of the report of the committee, and that the court was therefore without jurisdiction to entertain the
demand of the claimant. A hearing was had upon the petition before the Honorable P. M. Moir, then sitting in
the Court of First Instance of Albay. On April 13, 1914, he rendered his decision, in which, after reciting the
facts substantially as above set forth, he said:
jgc:chanroble s.com.ph

"During the pendency of that action (the cancellation suit) in the Supreme Court Hermenegilda Rogero died,
and Francisco Querol was named administrator of the estate, and he was made a party defendant to the
action then pending in the Supreme Court. As such he had full knowledge of the claim presented and was
given an opportunity to make his defense. It is presumed that defense was made in the Supreme Court.
"No contingent claim was filed before the commissioners by Roman Jaucian, who seems to have rested
content with the action pending. Section 746 et seq. of the Code of Civil Procedure provides for the
presentation of contingent claims, against the estate. This claim is a contingent claim, because, according to
the decision of the Supreme Court, Hermenegilda Rogero was a surety of Lino Dayandante. The object of
presenting the claim to the commissioners is simply to allow them to pass on the claim and to give the
administrator an opportunity to defend the estate against the claim. This having been given by the
administrator defending the suit in the Supreme Court, the court considers this a substantial compliance
with the law, and the said defense having been made by the administrator, he cannot now come into court
and hide behind a technicality and say that the claim had not been presented to the commissioners and
that, the commissioners having long since made report, the claim cannot be referred to the commissioners
and therefore the claim of Roman Jaucian is barred. The court considers that paragraph (e) of the opposition
is well taken and that there must be legal action taken against Lino Dayandante to determine whether or not
he is insolvent, and that declaration under oath to the effect that he has no property except P100 worth of
property, which he has ceded to Roman Jaucian, is not sufficient.

"Hermenegilda Rogero having been simply surety for Lino Dayandante, the administrator has a right to
require that Roman Jaucian produce a judgment for his claim against Lino Dayandante, in order that the said
administrator may be subrogated to the rights of Jaucian against Dayandante. The simple affidavit of the
principal debtor that he had no property except P100 worth of property which he has ceded to the creditor is
not sufficient for the court to order the surety to pay the debt of the principal. When this action shall have
been taken against Lino Dayandante and an execution returned no effects, then the claim of Jaucian
against the estate will be ordered paid or any balance that may be due to him."
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Acting upon the suggestions contained in this order Jaucian brought an action against Dayandante and
recovered a judgment against him for the full amount of the obligation evidenced by the document of
October 24, 1918. Execution was issued upon this judgment, but was returned by the sheriff wholly
unsatisfied, no property of the judgment debtor having been found.
On October 28, 1914, counsel for Jaucian filed another petition in the proceedings upon the estate of
Hermenegilda Rogero, in which they averred, upon the grounds last stated that Dayandante was insolvent,
and renewed the prayer of the original petition. It was contended that the court, by its order of April 13,
1914, had "admitted the claim."
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The petition was again opposed by the administrator of the estate upon the grounds (a) that the claim was
not admitted by the order of April 13, 1914, and that "the statement of the court with regard to the
admissibility of the claim was mere dictum;" and (b) "that the said claim during the life and after the death
of Hermenegilda Rogero, which occurred on August 2, 1911, was a mere contingent claim against the
property of the said Hermenegilda Rogero, was not reduced to judgment during the lifetime of said
Hermenegilda Rogero, and was not presented to the commissioners on claims during the period of six
months from which they were appointed in this estate, said commissioners having given due and lawfull
notice of their sessions and more than one year having expired since the report of the said commissioners;
and this credit is outlawed or prescribed, and that this court has no jurisdiction to consider this claim."
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On November 24, 1914, the Honorable J. C. Jenkins, then sitting in the Court of First Instance of Albay, after
hearing argument, entered an order refusing to grant Jaucians petition. To this ruling the appellant excepted
and moved for a rehearing. On December 11, 1914, the judge a quo entered an order denying the rehearing
and setting forth at length, the reasons upon which he based his denial of the petition. These grounds were
briefly, that as the claim had never been presented to the committee on claims, it was barred; that the court
had no jurisdiction to entertain it; that the decision of the Supreme Court in the action brought by the
deceased against Jaucian did not decide anything except that the document therein disputed was a valid
instrument.
In this court the appellant contends that the trial judge erred (a) in refusing to give effect to the order made
by the Honorable P. M. Moir, dated April 13, 1914; and (b) in refusing to order the administrator of the
estate of Hermenegilda Rogero to pay the appellant the amount demanded by him. The contention with
regard to the order of April 13, 1914, is that no appeal from it having been taken, it became final.
An examination of the order in question, however, leads us to conclude that it was not a final order, and
therefore it was not appealable. In effect, it held that whatever rights Jaucian might have against the estate
of Rogero were subject to the performance of a condition precedent, namely, that he should first exhaust
this remedy against Dayandante. The court regarded Dayandante as the principal debtor, and the deceased
as a surety only liable for such deficiency as might result after the exhaustion of the assets of the principal
coobligor. The pivotal fact upon which the order was based was the failure of appellant to show that he had
exhausted his remedy against Dayandante, and this failure the court regarded as a complete bar to the
granting of the petition at that time. The court made no order requiring the appellee to make any payment
whatever, and that part of the opinion, upon which the order was based which contained statements of what
the court intended to do when the petition should be renewed, was not binding upon him or any other judge
by whom he might be succeeded. Regardless of what may be our views with respect to the jurisdiction of
the court to have granted the relief demanded by appellant in any event, it is quite clear from what we have
stated that the order of April 13, 1914, required no action by the administrator at that time, was not final,
and therefore was not appealable. We therefore conclude that no rights were conferred by the said order of
April 13, 1914, and that it did not preclude the administrator from making opposition to the petition of the
appellant when it was renewed.
Appellant contends that his claim against the deceased was contingent. His theory is that the deceased was
merely a surety of Dayandante. His argument is that as section 746 of the Code of Civil Procedure provides

that contingent claims may be presented with the proof to the committee," it follows that such presentation
is optional. Appellant, furthermore, contends that if a creditor holding a contingent claim does not see fit to
avail himself of the privilege thus provided, there is nothing in the law which says that his claim is barred or
prescribed, and that such creditor, under section 748 of the Code of Civil Procedure, at any time within two
years from the time allowed other creditors to present their claims, may, if his claim becomes absolute
within that period present it to the court for allowance. On the other hand counsel for appellee contends (1)
that contingent claims like absolute claims are barred for non-presentation to the committee but (2) that the
claim in question was in reality an absolute claim and therefore indisputably barred.
The second contention takes logical precedence over the first and our view of its conclusiveness renders any
consideration of the first point entirely unnecessary to a determination of the case. Bearing in mind that the
deceased Hermenegilda Rogero, though surety for Lino Dayandante, was nevertheless bound jointly and
severally with him in the obligation, the following provisions of law are here pertinent.
Article 1822 of the Civil Code provides:

jgc:chanroble s.com.ph

"By security a person binds himself to pay or perform for a third person in case the latter should fail to do
so.
"If the surety binds himself jointly with the principal debtor, the provisions of section fourth, chapter third,
title first, of this book shall be observed."
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Article 1144 of the same code provides:

jgc:chanrobles.com .ph

"A creditor may sue any of the joint and several (solidarios) debtors or all of them simultaneously. The
claims instituted against one shall not be an obstacle for those that may be later presented against the
others, as long as it does not appear that the debt has been collected in full."
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Article 1830 of the same code provides:

jgc:chanrobles.com .ph

"The surety can not be compelled to pay a creditor until application has been previously made of all the
property of the debtor."
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Article 1831 provides:

jgc:chanroble s.com.ph

"This application can not take place

"(1) . . . (2) If he has jointly bound himself with the debtor . . . ."

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The foregoing articles of the Civil Code make it clear that Hermenegilda Rogero was liable absolutely and
unconditionally for the full amount of the obligation without any right to demand the exhaustion of the
property of the principal debtor previous to its payment. Her position so far as the creditor was concerned
was exactly the same as if she had been the principal debtor.
The absolute character of the claim and the duty of the committee to have allowed it in full as such against
the estate of Hermenegilda Rogero had it been opportunely presented and found t be a valid claim is further
established by section 698 of the Code of Civil Procedure, which provides:
jgc:chanroble s.com.ph

"When two or more persons are indebted on a joint contract, or upon a judgment founded on a joint
contract, and either of them dies, his estate shall be liable therefore, and it shall be allowed by the
committee as if the contract had been with him alone or the judgment against him alone. But the estate
shall have the right to recover contribution from the other joint debtor."
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In the official Spanish translation of the Code of Civil Procedure, the sense of the English word "joint," as
used in two places in the section above quoted, is rendered b the Spanish word "mancomunadamente." This
is incorrect. The sense of the word "joint," as here used, would be more properly translated in Spanish by
the word "solidaria," though even this word does not express the meaning of the English with entire fidelity.
The section quoted, it should be explained, was originally taken by the author, or compiler, of our Code of
Civil Procedure from the statutes of the State of Vermont; and the word "joint" is, therefore, here used in
the sense which attaches to it in the common law. Now, in the common law system there is no conception of
obligation corresponding to the divisible joint obligation contemplated in article 1138 of the Civil Code. This

article declares in effect that, if not otherwise expressly determined, every obligation in which there are
numerous debtors we here ignore plurality of creditors shall be considered divided into a many parts as
there are debtors, and each part shall be deemed to be the distinct obligation of one of the respective
debtors. In other words, the obligation is apportionable among the debtors; and in case of the simple joint
contract neither debtor can be required to satisfy more than his
In the common law system every debtor in a joint obligation is liable in solidum for the whole; and the only
legal peculiarity worthy of remark concerning the "joint" contract at common law is that the creditor is
required to sue all the debtors at once. To avoid the inconvenience of this procedural requirement and to
permit the creditor in a joint contract to do what the creditor in a solidary obligation can do under article
1144 of the Civil Code, it is not unusual for the parties to a common law contract to stipulate that the
debtors shall be "jointly and severally" liable. The force of this expression is to enable the creditor to sue any
one of the debtors or all together at pleasure.
It will thus be seen that the purpose of section 698 of the Code of Civil Procedure, considered as a product
of common law ideas, is not to convert an apportionable joint obligation into a solidary joint obligation for
the idea of the benefit of division is totally foreign to the common law system but to permit the creditor to
proceed at once separately against the estate of the deceased debtor, without attempting to draw the other
debtors into intestate or testamentary proceedings. The joint contract of the common law is and always has
been a solidary obligation so far as the extent of the debtors liability is concerned.
In Spanish law the comprehensive and generic term by which to indicate multiplicity of obligation, arising
from plurality of debtors or creditors, is mancomunidad, which term includes (1) mancomunidad simple, or
mancomunidad properly such, and (2) mancomunidad solidaria. In other words the Spanish system
recognizes two species of multiple obligation, namely, the apportionable joint obligation and the solidary
joint obligation. The solidary obligation is, therefore, merely a form of joint obligation.
The idea of the benefit of division as a feature of the simple joint obligation appears to be a peculiar creation
of Spanish jurisprudence. No such idea prevailed in the Roman law, and it is not recognized either in the
French or in the Italian system.
"This conception is a badge of honor to Spanish legislation, honorably shared with the Spanish-American,
since French and Italian codes do not recognize the distinction or difference, just expounded, between the
two sorts of multiple obligation. . . ." (Giorgi, Theory of Obligations, Span. ed., vol. I, p. 77, note.)
Considered with reference to comparative jurisprudence, liability in solidum appears to be the normal
characteristic of the multiple obligation, while the benefit of division in the Spanish system is an illustration
of the abnormal, evidently resulting from the operation of a positive rule created by the lawgiver. This
exceptional feature of the simple joint obligation in Spanish law dates from an early period; and the rule in
question is expressed with simplicity and precision in a passage transcribed into the Novisima Recopilacion
as follows:
jgc:chanroble s.com.ph

"If two persons bind themselves by contract, simply and not otherwise, to do or accomplish something, it is
thereby to be understood that each is bound for one-half, unless it is specified in the contract that each is
bound in solidum, or it is agreed among themselves that they shall be bound in some other manner, and this
notwithstanding any customary law to the contrary; . . ." (Law X, tit. I, book X, Novisima Recopilacion,
copied from law promulgated at Madrid in 1488 by Henry IV.)
The foregoing exposition of the conflict between the juridical conceptions of liability incident to the multiple
obligation, as embodied respectively in the common law system and the Spanish Civil Code, prepares us for
a few words of comment upon the problem of translating the terms which we have been considering from
English into Spanish or from Spanish into English.
The Spanish expression to be chosen as the equivalent of the English word "joint" or "jointly" must, of
course, depend upon the idea to be conveyed; and it must be remembered that the matter to be translated
may be an enunciation either of a common law conception or of a civil law idea. In Sharruf v. Tayabas Land
Co. and Ginainati (37 Phil Rep., 655), a judge of one of the Courts of First Instance in these Islands
rendered judgment in English declaring the defendants to be "Jointly liable. It was held that he meant
"jointly" in the sense of "mancomunadamente," because the obligation upon which the judgment was based
was apportionable under article 1138 of the Civil Code. This mode of translation does not, however, hold
good where the word to be translated has reference to a multiple common law obligation, as in article 698 of
the Code of Civil Procedure. Here it is necessary to render the word "joint" by the Spanish word "solidaria."
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In translating the Spanish word "mancomunada" into English a similar difficulty is presented. In the
Philippine Islands at least we must probably continue to tolerate the use of the English word "joint" as an
approximate English equivalent, ambiguous as it may be to a reader indoctrinated with the ideas of the
common law. The Latin phrase pro rata is a make shift, the use of which is not to be commended. The
Spanish word "solidaria" is properly rendered in English by the word "solidary," though it is not inaccurate
here to use the compound expression "joint and several." The use of the Latin phrase in solidum" is also
permissible. We close these observations with the suggestion that a person writing in English may at times
find it conducive to precision to use the expanded expressions "apportionable joint obligation" and "solidary
joint obligation," as conveying the full juridical sense of "obligacion mancamunada" and "obligacion
solidaria," respectively.
From what has been said it is clear that Hermenegilda Rogero, and her estate after her death, was liable
absolutely for the whole obligation, under section 698 of the Code of Civil Procedure; and if the claim had
been duly presented to the committee for allowance it should have been allowed, just as if the contract had
been with her alone.
It is thus apparent that by the express and incontrovertible provisions both of the Civil Code and the Code of
Civil Procedure, this claim was an absolute claim. Applying section 695 of the Code of Civil Procedure, this
court has frequently decided that such claims are barred if not presented to the committee in time (In re
estate of Garcia Pascual, 11 Phil. Rep., 34; Ortiga Bros. & Co. v. Enage and Yap Tico, 18 Phil. Rep., 345, 351;
Santos v. Manarang, 27 Phil. Rep., 209, 213); and we are of the opinion that, for this reason, the claim was
properly rejected by Judge Jenkins.
There is no force, in our judgment, in the contention that the pendency of the suit instituted by the
deceased for the cancellation of the document in which the obligation in question was recorded was a bar to
the presentation of the claim against the estate. The fact that the lower court had declared the document
void was not conclusive, as its judgment was not final, and even assuming that if the claim had been
presented to the committee for allowance, it would have been rejected and that the decision of the
committee would have been sustained by the Court of First Instance, the rights of the creditor could have
been protected by an appeal from that decision.
Appellant apparently takes the position that had his claim been filed during the pendency of the cancellation
suit, it would have been met with the plea of another suit pending and that this plea would have been
successful. This view of the law is contrary to the doctrine of the decision in the case of Hongkong &
Shanghai Banking Corporation v. Aldecoa & Co. ([1915], 30 Phil. Rep., 255)
Furthermore, even had Jaucian, in his appeal from the decision in the cancellation suit, endeavored to obtain
judgment on his cross-complaint, the death of the debtor would probably have required the discontinuance
of the action presented by the cross-complaint or counterclaim, under section 703.
As already observed the case is such as not to require the court to apply sections 746-749, inclusive, of the
Code of Civil Procedure, nor to determine the conditions under which contingent claims are barred. But a
few words of comment may be added to show further that the solidary obligation upon which this
proceeding is based is not a contingent claim, such as is contemplated in those sections.
The only concrete illustration of a contingent claim given in section 746 is the case where a person is liable
as surety for the deceased, that is, where the principal debtor is dead. This is a very different situation from
that presented in the concrete case now before us, where the surety is the person who is dead. In the
illustration put in section 746 where the principal debtor is dead and the surety is the party preferring the
claim against the estate of the deceased it is obvious that the surety has no claim against the estate of
the principal debtor, unless he himself satisfies the obligation in whole or in part upon which both are bound.
It is at this moment, and not before, that the obligation of the principal to indemnify the surety arises (art.
1838, Civil Code); and by virtue of such payment the surety is subrogated in all the rights which the creditor
had against the debtor (art. 1839, same Gode).
Another simple illustration of a contingent liability is found in the case of the indorser of a negotiable
instrument, who is not liable until his liability is fixed by dishonor and notice, or protest and notice, in
conformity with the requirements of law. Until this event happens there is a mere possibility of a liability,
which in fact may never become fixed at all. The claims of all persons who assume the responsibility of mere
guarantors is as against their principles of the same contingent character.

It is possible that "contingency," in the cases contemplated in section 746, may depend upon other facts
than those which relate to the creation or inception of liability. It may be, for instance, that the circumstance
that a liability is subsidiary, and the execution has to be postponed after judgment is obtained until the
exhaustion of the assets of the person or entity primarily liable, makes a claim contingent within the
meaning of said section; but upon this point it is unnecessary to express an opinion, It is enough to say that
where, as in the case now before us, liability extends unconditionally to the entire amount stated in the
obligation, or, in other words, where the debtor is liable in solidum and without postponement of execution,
the liability is not contingent but absolute
For the reasons stated, the decision of the trial court denying appellants petition and his motion for a new
trial was correct and must be affirmed. No costs will be allowed on this appeal. So ordered.
Arellano, C.J., Torres, Johnson, Araullo and Avancea, JJ., concur.
Separate Opinions
MALCOLM and FISHER, JJ., concurring:

chanrob1es virtual 1aw library

The determination of the issues raised by this appeal requires a careful analysis of the provisions of the
Code of Civil procedure relating to the presentation and allowance of claims against the estates of deceased
persons.
Appellant contends that his claim against the deceased as contingent. His theory is that the deceased was
merely a surety of Dayandante. His argument is that as section 746 of the Code of Civil Procedure provides
that contingent claims "may be presented with the proof to the committee," it follows that such presentation
is optional. Appellant, furthermore, contends that if a creditor holding a contingent claim does not see fit to
avail himself of the privilege thus provided, there is nothing in the law which says that his claim is barred or
prescribed, and that such creditor, under section 748 of the Code of Civil Procedure, at any time within two
years from the time allowed other creditors to present their claims, may, if his claim becomes absolute
within that period, present it to the court for allowance. On the other hand, counsel for appellee contends
that "contingent claims, like absolute claims, against the estate of a deceased person, must be filed before
the committee on claims of said estate within the time limited by law for the operation of the committee, to
give the contingent claims status for allowance by the court, when they become absolute, otherwise the
contigent claims are barred.
As to absolute claims, the statute expressly provides that the failure to file them within the time named
results in their complete extinction. This clearly appears from the wording of section 695, which reads as
follows:
jgc:chanroble s.com.ph

"A person having a claim against a deceased person proper to be allowed by the committee, who does not,
after publication of the required notice, exhibit his claim to the committee as provided in this chapter, shall
be barred from recovering such demand . . . .
That absolute claims, if not presented to the committee in time, are absolutely barred has frequently been
decided by this court and by the Supreme Court of Vermont, from which State the Philippine statute was
taken. (In re estate of Garcia Pascual [1908], 11 Phil., 34; Ortiga Bros. & Co. v. Enage and Yap Tico [1911],
18 Phil., 345; Briggs v. The Estate of Thomas [1859], 32 Vt., 176; Ewing v. Griswold [1871], 43 Vt., 400
subject to certain exceptions in cases in which there has been a fraudulent concealment of assets. In re
estate of Reyes [1910], 17 Phil., 188.)
The effect of this statute is, obviously, to curtail very materially the time allowed under the ordinary statute
of limitations for the enforcement of a claim, in the event of the death of the debtor. This effect, and the
reason for it, were pointed out very clearly in the case of Santos v. Manarang ([1914], 27 Phil., 209, 213), in
which it was said:
jgc:chanroble s.com.ph

"It cannot be questioned that this section supersedes the ordinary limitation of actions provided for in
chapter 3 of the Code. It is strictly confined, in its application, to claims against the estates of deceased
persons, and has been almost universally adopted as part of the probate law of the United States. It is
commonly termed the statute of non-claims, and its purpose is to settle the affairs of the estate with
dispatch, so that the residue may be delivered to the persons entitled thereto without their being afterwards
called upon to respond in actions for claims, which, under the ordinary statute of limitations, have not yet

prescribed."

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It must be quite obvious that every reason which can be adduced as justifying the policy of the law with
regard to absolute claims applies with even greater force to contingent claims. Unless there is a fixed and
definite period after which all claims not made known are forever barred, what security have the distributees
against the interruption of their possession? Under the system formerly in force here heirs might take the
estate of their decedent unconditionally, in which event they were liable absolutely for all his debts, or with
benefit of inventory, being then liable only to the extent of the value of their respective distributive shares.
But that system has been abolished (Sui- liong & Co. v. Chio-Taysan [1908], 12 Phil., 13), and the heir is
now not personally responsible as such for the debts of the deceased. On the other hand, as stated in the
case cited, the property of the deceased comes to him "charged with the debts of the deceased, so that he
cannot alienate or discharge it free of such debts until and unless they are extinguished either by payment,
prescription, or . . ." by the operation of the statute of non-claim. It is thus to the interest of the heirs and
devisees to have the property discharged of this indefinite liability as soon as
Ordinarily, this is accomplished by judicial administration; this procedure is compulsory as to all estates, with
one exception, namely, that established by section 596 of the Code of Civil Procedure, which authorizes the
distribution of the property of a deceased person by written agreement of the heirs, when all of them are of
full age and legal capacity, and there are no debts or the known debts have been paid. Section 597, as
amended by Act No. 2331, establishes a summary procedure applicable to estates not exceeding three
thousand pesos, under which the property of the deceased is distributed without the appointment of a
committee on claims. But as it is clear that when an estate is distributed summarily by either of these
methods creditors having just claims against the deceased may be overlooked, section 598, as amended,
provides:
jgc:chanroble s.com.ph

"But if it shall appear, at any time within two years after the settlement and distribution of an estate in
accordance with the provisions of either of the preceding sections of this chapter, that there are debts
outstanding against the estate which have not been paid, or that an heir or other persons (sic) has been
unduly deprived of his lawful participation in the estate, any creditor, heir, or other such person, may compel
the settlement of the estate in the courts in the manner hereinafter provided, unless his credit or lawful
participation in the estate shall be paid, with interest. The court shall then appoint an administrator who
may recover the assets of the estate for the purpose of paying such credit or lawful participation; and the
real estate belonging to the deceased shall remain charged with the liability to creditors, heirs or other
persons for the full period of two years after such distribution, notwithstanding any transfer thereof that may
have been made."
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It will be observed that the section last quoted does not distinguish between claims, absolute and
contingent, but limits to two years the time within which the holder of any claim against the deceased may
assert it against the distributees. While the statute does not say in so many words that all claims not
presented within two years are barred, that is the plain inference and it has been so construed by this court
in the case of McMicking v. Sy Conbieng ([1912], 21 Phil., 211). The decision in this case definitely decided
that all claims, absolute or contingent, against an estate partitioned without judicial proceedings and without
notice to creditors are barred and extinguished if no asserted within two years. It is equally firmly
established by the express terms of section 695 and the decisions by which it has been construed that
absolute claims against the estates judicially administered are barred, unless presented to the committee on
claims within the time limited.
We will now consider the effect of the failure to present a contingent claim against an estate undergoing
judicial administration in which a committee on claims has been legally appointed and notice given to
creditors to present their claims.
With respect to contingent claims, the Code of Civil Procedure provides:

jgc:chanroble s.com.ph

"If a person is liable as surety for the deceased, or has other contingent claims against his estate which can
not be proved as a debt before the committee, the same may be presented, with the proof, to the
committee, who shall state in their report that such claim was presented to them." (Sec. 746.)
If the court is satisfied from the report of the committee, or from proof exhibited to it, that such contingent
claim is valid, it may order the executor or administrator to retain in his hands sufficient estate to pay such
contingent claim, when the same becomes absolute, or, if the estate is insolvent, sufficient to pay a portion
equal to the dividend of the other creditors." (Sec. 747.)

"If such contingent claim becomes absolute and is presented to the court, or to the executor or
administrator, within two years from the time limited for other creditors to present their claims, it may be
allowed by the court if not disputed by the executor or administrator, and, if disputed, it may be proved
before the committee, for that purpose, as if presented for allowance before the committee had made its
report." (Sec. 748.)
"If such contingent claim is allowed, the creditor shall receive payment to the same extent as the other
creditors, if the estate retained by the executor or administrator is sufficient. But if the claim is not
established during the time limited in the preceding section, or if the assets retained in the hands of the
executor or administrator are not exhausted in the payment of such claims, such assets, or the residue of
them, shall be disposed of by the order of the court to the persons entitled to the same; but the assets so
distributed shall still remain subject to the liability of the claim when established, and the creditor may
maintain an action against the distributees to recover his debt, and such distributees and their estate shall
be liable for such debts in proportion to the estate they have respectively received from the property of the
deceased." (Sec. 749.)
The authority of the committee with respect to contingent claims differs materially from that which it
exercises over absolute claims. As to the latter the committee has complete authority, and its decisions,
unless an appeal is taken to the court, are final. But as regards contingent claims, the committee does not in
the first instance pass upon their validity. When such claims, with the proof, are presented to the committee
it becomes their duty to report them to the court. If the court, "from the report of the committee or from
"the proofs exhibited to it," is satisfied that such contingent claim is valid, the executor or administrator may
be required to retain in his possession sufficient assets to pay the claim, when it becomes absolute, or
enough to pay the creditor his proportionate share. The time during which the retained assets are to be held
is two years from the time limited for other creditors to present their claims. If the claim matures within that
time, and demand is made to the court for its payment, the court may direct the administrator to pay it, but
if he objects it must then be proved before the original committee or a new committee appointed for that
purpose. The court in no event has authority to allow a disputed claim, originally contingent, and to require
the administrator or executor to pay it, until it has been passed upon by the committee. If the claim does
not become absolute within the two years the retained assets are delivered to the distributees and the
estate is closed. If "such claim" matures after the two years the creditor may sue the distributees, who are
liable in proportion to the share of the estate respectively received by them.
In the light of these provisions, can it be maintained that a creditor holding a contingent claim may, at his
option, refrain from presenting it to the committee, and after it becomes absolute, require its payment by
the administrator if it has matured within the two years, or recover it from the distributees if it matures after
that time. In other words, do sections 748 and 749 refer to contingent claims in general, or only to
contingent claims which have been presented to the committee pursuant to the provisions of sections 746
and 747?
If we hold that sections 748 and 749 are not limited by sections 746 and 747, but are to be read as though
those sections were nonexistent, the result must be that the heirs and distributees of an estate can never be
certain, until the expiration of the full term of the statute of limitations, that they may safely enjoy the
property which has descended to them. For a period of indefinite duration indefinite because of the
uncertainty engendered by section 45 of the Code of Civil Procedure they must be exposed to the claims
of unknown creditors of the deceased who may come forward to demand payment of claims which were
contingent when the estate was distributed, but which have since become absolute. During that period of
uncertainty the distributees will never know at what moment they may be called upon to pay over the whole
amount received by them from the estate of the decedent.
On the other hand, if we construe sections 748 and 749 as being limited by the two preceding sections, and
hold that only such contingent claims as have been presented to the committee may be recovered from the
estate or the distributees, then the doubt and uncertainty will disappear. If no such contingent claims are
presented to the committee they will be nonexistent so far as the distributees are concerned. If such claims
are proved, but do not become absolute within the two years, the distributees will know that their respective
shares are subject to a contingent liability, definite in amount, and may govern themselves accordingly.
In construing a statute it is proper to bear in mind the purpose of the legislature in enacting it, with a view
to adopting, if possible, that interpretation which will accomplish rather than defeat the legislative intent. It
will not be disputed that it must be assumed that the legislature desires certainty rather than uncertainty in
the tenure of property transmitted by descent. As was said in the case of McMicking v. Sy Conbieng ([1912],
21 Phil., 211): "It is the undisputed policy of every people which maintains the principle of private ownership

of property that he who owns a thing shall not be deprived of its possession or use except for the most
urgent and imperative reasons and then only so long as is necessary to make the rights which underlie those
reasons effective." In the De Dios case ([1913], 24 Phil., 573, 576), it was said: "It is distinctly against the
interest of justice and in direct opposition to the policy of the law to extend unduly the time within which the
estate should be administered and thereby to keep the property from the possession and use of those who
are entitled to it . . ." It must be equally contrary to the policy of the law to allow property which has passed
by descent into other hands to be subject for an indefinite term to contingent claims of indefinite amount.
It is true that in this particular case the demand was made within two years and while the assets,
apparently, were still undistributed. Nevertheless, if the principle contended for by appellant be established,
and creditors holding contingent claims against estates judicially administered may disregard the committee
on claims entirely, then they may enforce such claims against the distributees after the estate is closed.
Unless the time for the presentation of such claims is limited by the sections under consideration it is wholly
unlimited, save by the general statute of prescription.
Examining the statute in the light of these considerations we are of the opinion that the contention of the
appellant cannot be sustained. Sections 748 and 749, in speaking of contingent claims which are
demandable after they become absolute, against the administration or against the distributees, use the
expression "such contingent claim." The use of the word "such" is, we think, clearly intended to limit the
words "contingent claim" to the class referred to in the two preceding sections that is, to such contingent
claims as have been presented to the committee and reported to the court pursuant to the requirements of
sections 746 and 747.
As on most important questions, authorities both pro and con can be cited. For instance, in the case of
McKeen v. Waldron ([1879], 25 Minn., 466), the Supreme Court of Minnesota held, construing a similar
statute, that contingent claims need not be presented to the committee and are not barred by the failure to
do so; that by the failure to present a contingent claim, the creditor loses his rights to have assets retained
by the executor or administrator, but if his claim becomes absolute, he may maintain an action against the
distributees to recover such claim to the extent of the estate so distributed. But we do not consider the
reasoning of this decision of controlling or even of persuasive authority as applied to our own statute. In
interpreting its provisions we must take into consideration the object which the legislature had in view in
enacting it. As stated by this court in the case of De Dios (24 Phil., 573): "The object of the law in fixing a
definite period within which claims must be presented is to insure the speedy settling of the affairs of a
deceased person and the early delivery of the property of the estate into the hands of the persons entitled
to receive it." (See also Verdier v. Roach [1892], 96 Cal., 467.) The affairs of a deceased person are not
"speedily settled" if contingent claims, uncertain and indefinite, are left outstanding. An estate left in this
precarious condition can hardly be said to be "settled" at all.
We do not agree with the contention of appellant that the use of the word "may" in section 746 is to be
construed as authorizing the holder of a contingent claim to disregard the existence of the committee
without suffering any untoward consequences. He "may" present his contingent claim, if he desires to
preserve his right to enforce it against the estate or the distributees, but if he does not, he may not
thereafter so assert it.
With respect to the contention that the bar established by section 695 is limited to claims "proper to be
allowed by the committee" our reply is that contingent claims fall within this definition equally with absolute
claims. It is true that as long as they are contingent the committee is not required to pass upon them finally,
but merely to report them so that the court may make provision for their payment by directing the retention
of assets. But if they become absolute after they have been so presented, unless admitted by the
administrator or executor, they are to be proved before the committee, just as are other claims. We are of
the opinion that the expression "proper to be allowed by the Committee," as limiting the word "claims" in
section 695 is not intended to distinguish absolute claims from contingent claims, but to distinguish those
which may in no event be passed upon by the committee, because excluded by section 703, from those over
which it has jurisdiction.
There is no force, in our judgment, in the contention that the pendency of the suit instituted by the
deceased for the cancellation of the document in which the obligation in question was recorded was a bar to
the presentation of the claim against the estate. The fact that the lower court had declared the document
void was not conclusive, as its judgment was not final, and even assuming that if the claim had been
presented to the committee for allowance, it would have been rejected and that the decision of the
committee would have been sustained by the Court of First Instance, the rights of the creditor could have
been protected by an appeal from that decision. Appellant apparently takes the position that had his claim

been filed during the pendency of the cancellation suit it would have been met with the plea of another suit
pending and that this plea would have been successful. This view of the law is contrary to the doctrine of the
decision in the case of Hongkong & Shanghai Bank v. Aldecoa & Co. ([1915], 30 Phil., 255). Further more,
even had Jaucian, in his appeal from the decision in the cancellation suit, endeavored to obtain judgment on
his cross-complaint, the death of the debtor would probably have required the discontinuance of the action
presented by the cross-complaint or counterclaim, under section 703.
In the consideration of this appeal we have assumed that the claim is a contingent one. The document upon
which it is based is not before us. Both parties, however, until the brief of appellee was filed, seem to have
agreed that the deceased was a mere surety or, more strictly speaking, a guarantor for Dayandante, and
that the claim against her was contingent. This being undeniable, and the cause having been tried upon a
particular issue, accepted by the parties and the court, the appellate court should proceed upon the same
theory. (Molina v. Somes [1913], 24 Phil., 49; Limpangco Sons v. Yangco Steamship Co. [1916], 34 Phil.,
597; Agoncillo and Marino v. Javier [1918], p. 424, ante.)
Of course, it is quite obvious that if the claim was indeed absolute, as contended by appellee and as
conceded in the main decision, the practical result would be the same, as there can be no doubt that all
absolute claims not presented to the committee are barred by the express terms of section 695 of the Code
of Civil Procedure, as heretofore construed by this court. (In re estate of Garcia Pascual, supra; Ortiga Bros.
& Co. v. Enage and Yap Tico, supra, Briggs v. The Estate of Thomas, supra; Ewing v. Griswold. supra; Estate
of Reyes, supra; in connection with McMicking v. Sy Conbieng, supra.) In view of these decisions additional
argument is unnecessary.
The main decision also contains a discussion of the subject of "apportionable joint obligations" and "solidary
joint obligations." Here again it is only worthy of note that the terms" joint," "mancomunada," " jointly,"
mancomunadamente," "jointly and severally," "solidariamente" (in solidum) have heretofore been
authoritatively construed in the decisions of this court and in decisions of the supreme court of Louisiana and
the Supreme Court of the United States. The following cases can be noted: Sharruf v. Tayabas Land Co. and
Ginainati ([1918], 37 Phil. Rep., 655); Parot v. Gemora ([1906], 7 Phil., 94); Pimentel v. Gutierrez ([1909],
14 Phil., 49); Chinese Chamber of Commerce v. Pua Te Ching ([1910], 16 Phil., 406); De Leon v.
Nepomuceno and De Jesus ([1917], 37 Phil. Rep., 180); Groves v. Sentell ([1894], 153 U. S., 465); Adle v.
Metoyer ([1846] , 1 La. Ann., 254); Ledoux & Co. V3. Rucker ([1850], 5 La. Ann., 500); Pecquet v. Pecquets
Executor ([1865], 17 La. Ann., 467); Duggan v. De Lizardi ([1843], 5 Robinsons Reports, 224);
Commissioners of New Orleans Improvement & Banking Co. v. The Citizens Bank ([1845], 10 Robinsons
Reports, 14). For example, in the decision first above cited (Sharruf v. Tayabas Land Co. and Ginainati), we
find the following:
jgc:chanroble s.com.ph

"We agree with the appellant that this promissory note evidences a joint and not a joint and several
obligation, but it appearing that the trial judge correctly rendered judgment holding the defendants jointly
liable, there is no necessity for any modification of the terms of the Judgment in that regard. Our decision in
the case of De Leon v. Nepomuceno and De Jesus (37 Phil. Rep., 180) should make it quite clear that in this
jurisdiction at least, the word jointly when used by itself in a judgment rendered in English is equivalent to
the word mancomunadamente, and that it is necessary to use the words joint and several in order to
convey the idea expressed in the Spanish term solidariamente (in solidum); and further, that a contract, or a
judgment based thereon, which fails to set forth that a particular obligation is joint and several must be
taken to have in contemplation a joint (mancomunada), and not a joint and several (solidary) obligation.
"A similar distinction is made in the technical use of the English words joint and joint and several or
solidary in Louisiana, doubtless under like historic influences to those which have resulted in this
construction we have always given these terms.
"A joint obligation under the law of Louisiana binds the parties thereto only for their proportion of the debt
(La. Civ. Code, arts. 2080, 2086), whilst a solidary obligation, on the contrary, binds each of the obligators
for the whole debt. (Groves v. Sentell, 14 Sup. Ct., 898, 901; 153 U. S., 465; 38 L. Ed., 785.)"
We are Of the opinion, therefore, that contingent claims not presented to the committee on claims within the
time named for that purpose are barred.
For the reasons stated, the decision of the trial court denying appellants petition and his motion for a new
trial was correct and should be affirmed.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-5942

May 14, 1954

REHABILITATION FINANCE CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, ESTELITO MADRID and JESUS
ANDUIZA, respondents.
Sixto de la Costa for petitioner.
Zacarias Gutierrez Lora for respondent Jesus de Anduiza.
Sabido and Sabido for respondent Estelito Madrid.
CONCEPCION, J.:
This is an appeal by certiorari, taken by the Rehabilitation Finance Corporation, hereinafter referred
to as the Bank, from a decision of the Court of Appeals. The pertinent facts are set forth in said
decision, from which we quote:
"On or before October 31, 1951 for value received, I/we, jointly executed the following
promissory note
"P13,800.00 Legaspi, Albay, October 31, 1941
"On or before October 31, 1951 for value received, I/we, jointly and severally, promise to pay
the AGRICULTURAL AND INDUSTRIAL BANK, or order, at its office at Manila or Agency at
Legaspi, Albay, Philippines, the sum of THIRTEEN THOUSAND EIGHT HUNDRED PESOS
(P13,800.00), Philippine currency, with interest at the rate of six per centum, (6%) per
annum, from the date hereof until paid. Payments of the principal and the corresponding
interest are to be made in ten (10 years equal annual installments of P1,874.98 each in
accordance with the following schedule of amortizations:
xxx

xxx

xxx

All unpaid installments shall bear interest at the rate of six per centum, (6%) per annum.

(Sgd.) QUINTANA CANO

Mortgagor

(Sgd.) JESUS DE ANDUIZA

Mortgagor

(Exhibit "C")
Mortgagors Anduiza and Cano failed to pay the yearly amortizations that fell due on October
31, 1942 and 1943. As plaintiff Estelito Madrid, who was at the outbreak of the last war the

manager of the branch office of the National Abaca and other Fiber Corporation in Sorsogon,
and who temporarily lived in the house of Jesus de Anduiza in said province during the
Japanese occupation, learned of the latters' failure to pay the aforesaid amortizations due
the creditor Agricultural and Industrial Bank, he went to its central office in Manila in October,
1944, and offered to pay the indebtedness of Jesus de Anduiza. Accordingly, he paid on
October 23, 1944, P7,374.83 for the principal, and 2,625.17 for the interest, or a total of
P10,000.00 (Exh. "A"), thereby leaving a balance of P6,425.17 which was likewise paid on
October 30th of the same year (Exh. "B").
Alleging that defendant Jesus de Anduiza has failed to pay the plaintiff in the amount of
P16,425.17 inspite of demands therefor, and that defendant Agricultural and Industrial Bank
(now R. F. C.) refused to cancel the mortgage executed by said Anduiza, Estelito Madrid
instituted the present action on July 3, 1948, in the Court of First Instance of Manila, praying
for judgment (a) declaring as paid the indebtedness amounting to P16,425.17 of Jesus de
Anduiza to the Agricultural and Industrial Bank; (b) ordering the Agricultural and Industrial
Bank (now R. F. C.) to release the properties mortgaged to it and to execute the
corresponding cancellation of the mortgage; (c) condemning defendant Jesus de Anduiza to
pay plaintiff the amount of P16,425.17, with legal interest from the filing of the complaint until
completely paid, declaring such obligation a preferred lien over Anduiza's properties which
plaintiff freed from the mortgage, and sentencing the defendants to pay the plaintiff the sum
of P2,000.00 as damages and the costs, without prejudice to conceding him other remedies
just and equitable.
On July 14, 1948, defendant Agricultural and Industrial Bank (now R. F. C.) filed its answer,
alleging that the loan of P13,800.00 had not become due and demandable in October, 1944,
as the same was payable in ten years at P1,874.98 annually; that up to October 30, 1944,
plaintiff delivered the total sum of P16,425.17 to the Agricultural Bank which accepted the
same as deposit pending proof of the existence of Jesus de Anduiza's authority and approval
which plaintiff promised to present; that it was agreed that if plaintiff could not prove said
authority the deposit will be annulled; and that the Agricultural and Industrial Bank and its
successor the Rehabilitation Finance Corporation cannot release the properties mortgaged
because defendant Anduiza refused to approve, authorize or recognize said deposit made
by plaintiff. It is further averred, as special defense, that the amount of P16,425.17, in view of
the refusal of defendant Jesus de Anduiza to approve and authorize same for payment of his
loan, was declared null and void by Executive Order No. 49 of June 6, 1945; that on June 4,
1948, defendant Anduiza personally came to the office of the Rehabilitation Finance
Corporation, apprising it that he did not authorize the plaintiff to pay for his loan with the
Agricultural and Industrial Bank; and that on June 4, 1948, he paid the sum of P2,000.00 on
account of his loan and interest in arrears. Defendant Agricultural and Industrial Bank (now
R. F. C.) therefore prayed (1) to dismiss the complaint and to declare plaintiff's deposit in the
sum of P16,245.17 null and void in accordance with the provisions of Executive Order No. 49
series of 1945; (2) to concede to defendant Agricultural and Industrial Bank such other legal
remedies which may be justified in the premises; and (3) to order plaintiff to pay the costs.
Defendant Jesus de Anduiza filed his answer on August 9, 1948, with special defenses and
counterclaim, alleging that when plaintiff paid the total amount of P16,425.17 to the
Agricultural and Industrial Bank his indebtedness thereto was not yet due and demandable;
that the payment was made without his knowledge and consent; that the Agricultural and
Industrial Bank did not accept the amount of P16,425.17 from Estelito Madrid as payment of
his loan but as mere deposit to be applied later as payment in the event he would approve
the same; that said deposit was declared null and void by Executive Order No. 49 of June 6,
1945; that on June 4, 1948, he personally informed the official of the Rehabilitation Finance
Corporation that he did not authorize the plaintiff to pay the Agricultural and Industrial Bank

for his loan; and the same date he paid the corporation the sum of P2,000.00 on account of
his loan and the interest in arrears.
On June 20, 1949, the trial court rendered in favor of the plaintiff a judgment which was set
aside later on upon motion of counsel for the Rehabilitation Finance Corporation on June
28th, in which it was alleged that his failure to appear at the hearing on June 9, 1949, was
due to a misunderstanding. Consequently, and later defendant corporation had introduced its
evidence, the court on August 11, 1949, rendered decision dismissing plaintiff's complaint
without pronouncement as to costs.
On or about September 7, 1949, defendant Jesus de Anduiza filed an amended answer
which the trial court, upon considering the same as well as his co-defendant's opposition
thereto, denied its admission on September 20, 1949. The motion for new trial filed by
defendant Anduiza and plaintiff Estelito Madrid was likewise denied for lack of merit on the
same date, September 20th. Consequently, plaintiff Estelito Madrid and defendant Jesus de
Anduiza brought this case to this Court by way of appeal, ... . (Pp. 1-6, Decision, C. A.)
Upon the foregoing facts, the Court of Appeals rendered the aforementioned decision, the dispositive
part of which reads as follows:
Wherefore, the judgment appealed from is hereby reversed, directing the Rehabilitation
Finance Corporation, successor in interest of the Agricultural and Industrial Bank, to cancel
the mortgage executed by Jesus de Anduiza and Quintana Cano in favor of said bank; and
ordering Jesus de Anduiza to pay plaintiff Estelito Madrid the amount of P16,425.17, without
pronouncement as to costs. (Pp. 17-18, idem.)
The Bank assails said decision of the Court of Appeals upon the ground that payments by
respondent Estelito Madrid had been made against the express will of Anduiza and over the
objection of the Bank; that the latter accepted said payments, subject to the condition that a written
instrument, signed by Anduiza, authorizing the same, would be submitted by Madrid, who has not
done so; that the payments in question were made by Madrid in the name of Anduiza and, therefore,
through misrepresentation and without good faith; that said payments were not beneficial to Anduiza;
and that the obligation in question was not fully due and demandable at the time of the payments
aforementioned.
At the outset, it should be noted that the makers of the promissory note quoted above promised to
pay the obligation evidenced thereby "on or before October 31, 1951." Although the full amount of
said obligation was not demandable prior to October 31, 1951, in view of the provision of the note
relative to the payment in ten (10) annual installments, it is clear, therefore, that the makers or
debtors were entitled to make a complete settlement of the obligation at any time before said date.
With reference to the other arguments of petitioner herein, Article 1158 of the Civil Code of Spain,
which was in force in the Philippines at the time of the payment under consideration and of the
institution of the present case (July 3, 1948,) reads:
Payment maybe made by any person, whether he has an interest in the performance of the
obligation or not, and whether the payment is known and approved by the debtor or whether
he is unaware of it.
One who makes a payment for the account of another may recover from the debtor the
amount of the payment, unless it was made against his express will.

In the latter case he can recover from the debtor only in so far as the payment has been
beneficial to him.
It is clear therefrom that respondent Madrid was entitled to pay the obligation of Anduiza irrespective
of the latter's will or that of the Bank, and even over the objection of either or both. Commencing on
said Article 1158, Manresa says:
Si es amplio el principio declarado en el art. 1158 por razonde las personas o que exteinde,
no lo es menos por la ausencia de restricciones basadas en la voluntad del deudor. La
primera parte de dicho articulo parece limitar la posibilidad del pago por untercero a los
casos en que el deudor conozca y aprueba tal hecho olo ignore. Pero los dos parrafos
siguentes extienden tal posibilidadal caso en que el deudor desapruebe el pago y aun se
oponga a que lo verifiquen, puesto que determinado la ley los efectos, si bien parciales,
limitados, que un pago hecho en tales condiciones puede producir contra el mismo
deudor que a el se opuso, es claro que al atribuirle tales efectos le atribuye plena eficacia
respecto del acreedo, que no esta autorizado para hacer oposicion alguna.
Menos duda aun puede ofrecer la validez del pago, conociendolo el deudor y omitiendo
expresar su conformidad; hipotesis menos extrema que la anterior, y en la cual puede verse
incluso una aprobacion tacita, aprobacion que autoriza, inclusa la subrogacion misma del
tercero, segun veremos al hablar de la novacion.
Tenemos, por tanto, que sea cual fuere la situacion en que este o se coloque el deudor
respecto del pago hecho por un tercero, no impide a este verificarlo con eficacia respecto
del acreedor, y aun tambienrespecto de aquel mismo, segun se expresa luego.
La jurisprudencia, confirmado el sentido de la ley, ha venido a declarar tambien que no es
necesario para el pago el concurso deldeudor; asi vienen a establecerlo la sentencia de 4 de
Noviembre de 1897, que ratifica los preceptos contenidos en el art. 1158 y en el siguiente, y
la de 5 de Abril de 1913, declarativa de que, siendo el pago de una deuda el medio mas
directo de extinguir la obligacion, acto que mejora la situacion del prestatario, puede
realizarlo cualquiera aun contradiciendolo o ignorandolo aquel. En la jurisprudencia
hipotecaria hay una resolucion de la Direccion general de losRegistros de 22 de Marso de
1893, muy explicita e importante, en la cual se declara respecto de esta cuestion que puede
'el pago es un actojuridico tan independiente del deudor, que puede ser firme y valedero
hecho por tercera persona que no tenga interes en la obligacion, y aun cuando el deudor lo
ignore totalmente, segun el art. 1158 del Codigo Civil; que "de ese principio legal se deduce
que no cabe reputar nulo el pago de una obligacion porque falte el consentimiento del
deudor, ni menos estimar nula la escritura en que el pago conste, por carecer de ni la firma
de este"; que en ese modo de extinguirse las obligaciones, lo verdaderamente capital es la
voluntad del acreedor, y asi lo ha entendido el articulo 82 de la Ley Hipotecaria, al no exigir
para la cancelacion de las hipotecas mas que el consentimiento de aquel en cuyo favor se
hallen constituidas; y por ultimo, que "aunque el art. 27 de la Ley del Notariado exige bajo
pena de nulidad que se firmen la escrituras, se refiere a los que en ellas intervien en
encalidad de otorgantes, denominacion que en los actos unilaterales cuadra tan solo al que
en virtud de los mismos queda obligado".
No ha sido menos explicita y fundala la jurisprudencia en cuanto a declarar que tampoco el
acreedor puede impedir validamente elpago hecho por un tercero, declarandose en la
sentencia de 4 de Noviembre de 1897, a que antes de hizo referencia, que ni estos
preceptos que comentamos, ni los demas de esta seccion o de otros lugares del Codigo",
aplicables a la materia, "ni el art. 1161 de la Ley Procesal, requiren el consentimiento del

acreedor para la eficacia del pago y para la consiguiente subrogacion, porque de derecho,
que nova mas alla del cumplimiento de la obligaciones, se acoba o extingue con el pago.
Pudiera creerse que la doctrina de dicha sentencia era opuesta a la de la Direccion, que
antes hemos transcrito, y que esta reconocia la facultad del acreedor para consentir o
impedir el pago; pero lejos de ser asi no hay contradiccion, limitandose dicho Centro registro
no pueden considerarse extinguidos los derechos del acreedor sin que este intervenga en el
pago; pero esto no incluyo que se le pueda imponer la admision de este contra su voluntad.
(8 Manresa,4th ed., pp. 242-243; Emphasis supplied.)
This is in line with the view of Mucius Scaevola, which is as follows:
En efecto; el unico derecho del acreedor en las obligaciones es el de que se le pague. No
puede, por lo tanto, oponerse a que la obligacion le sea cumplida por una persona distinta
del deudor. Por otra parte, el deudor queda libre de su compromiso desde el momento en
que el credito esta satisfecho, puesto que, a partir de entonces, nada se debe. Podran,
pues, discutirse los efectos del pago hecho por una tercera persona en cuanto a la relacion
que de esto se deduzca para lo sucesivo entre el tercero y el deudor; pero negar que al
deuda quede liberada, desatado el vinculado, perdida en el acreedor la facultad de reclamar
e insubsistente sobre el deudor el peso de su compromiso, seria de todo punto temerario.
Lo presumible es que tenga interes en el cumplimiento de la obligacion quien trata de
sustituirse al deudor en el pago; es natural la defensa de los intereses propios, y poco
corriente y poco acostumbrado que, por pura generosidad, se satisfaga la deuda de otro
sinalgun beneficio por parte del que de esta manera procede. En este sentido, el fiador, que
es, si no un deudor principal, deudor al fin, puesto que ha enlazado sus intereses, con su
cuenta y razon, a los de la persona obligada, y se ha comprometido subsidiriamente con ella
a; pago de lo que debia, se adelantara muchas veces, por distintos motivos, a pagar la
deuda, teniendo en ello propio y legitimo beneficio. Aparte del interes juridico, motivos
particulares de otro orden, que implican un genero cualquiera de provecho, pueden mover
tambien el animo de una persona para sustituirse en el lugar del deudor.
Pero ni siquiera se necesita que esto suceda. Las doctrinas juridicas han permitido que
haga el pago cualquiera persona, tenga o no interes en el cumplimiento de la obligacion,
segun expresamentedetermina el art. 1158 del Codigo. Es de suponer el interes,
naturalmente, por lo que decimos mas arriba; pero la ley se reconoce sin facultades para
entrar en este terreno, y obedeciendo a las meras consideraciones juridicas de la
satisfaccion del compromiso por la entrega de la cosa o prestacion del hecho y de la
liberacion consiguientedel deudor, prescinde del genero de motivos interesados o
desinteresados, incluso de mera liberalidad, que hayan polido producir la determinacion de
la tercer persona que ofrece al acreedor la realizacion del compromiso.
Y no para en esto; sino que el mismo art. 1158 establece que podra hacer el pago
cualquiera persona, ya lo conozca o lo apruebe, ya lo ignore el deudor. Anticipandose,
ademas, a la pregunta de loque sucedera en el caso de que en deudor lo conozca y no lo
apruebe, aade a continuacion que el que pague por cuenta de otro podra reclamar del
deudor lo que hubiese pagado, a no haberlo hecho contra su expresa voluntad. Es lo que se
decia en la ya citada Ley dePartidas: "aunque el deudor lo supiese y lo contradijese".
Ahora bien; en algun caso de estos, podra acreedor negarse a recibar la deuda? Ya hemos
dicho que no. Su derecho se reduce en todo caso a pedir y a recibir lo que se le debe. Es
indiferente para el la cualidad de la persona que llega a su presencia, poniendo en sus
manos el hecho o la cosa que son debidas. Habra ocasiones en que, por motivos de endole

particular, el acreedor se sienta contrariado en recibir la prestacion de un tercero. El

prestamista, por ejemplo, que crea haberse asegurado el disfructe perpetuo de las rentas de
su deudor, se vera amargamente sorprendido con el pago hecho por un tercero, que da al
traste de esta manera en un segundo con las risueas esperanzas de toda la vida. Motivos
de este orden, y tambien otras veces algunos mas elevados, impulsaran al acreedor a
resistir el pago de lo que se debe. Sin embargo, el derecho no ha podido tomar en cuenta
ninguna de tales consideraciones, con las que se iria en definitiva contra el principio de
haber de aceptarse todo aquello que resulte favorable para el deudor. Por lo tanto, en caso
de resistencia, el tercero que ofrece el pago tendra derecho a consignar la cosa debida
como si fuese al deudor mismo, dando a la consignacion cuantos efectos le estan asignados
por la ley. (19 Scaevola, pp. 881-883; emphasis supplied.)
The opinion of Sanchez Roman is couched in the following language:
Los terceros extraos a la obligacion pueden pagar, ignorandolo el deudor, sabiendolo y no
contraciendolo o sabiendolo y contradiciendolo. En el primer caso existe una gestion de
negocios; en el segundo, un mandato tacito; y en el tercero, se produce una cesion de
crediton. . . . .
xxx

xxx

xxx

En el caso de pago hecho por un tercero, el acreedor no puede negarse a recibirlo, y

cualquiera le contituira en la responsibilidad de la mora accipiendi. Cierto que esta no es
regla expresa de ley ni de jurisprudencia, pero es buena doctrina de Derecho cientifico,
generalizada entre los escritores, y de la cual dice Goyena, con razon: "La ley no puede
permitir que el acreedor se obstinemaliciosamente en conservar la facultad de atormenter a
su deudor, que un hijo no pueda extinguir la obligacion de su padre, ni este la de su hijo a su
amigo, o un hombre beneficio la de un desgraciado ausente. Y no se diga que el tercero no
tiene mas que entregar el dinero al deudor para que haga directamente el pago; pues en el
caso de ausencia esto es imposible, y en otras ocasiones la delicadeza frustraria las miras
del hombre bienhechor. (4 Sanchez Roman, 259-260; Emphasis supplied.)
It may not be amiss to add that, contrary to petitioner's pretense, the payments in question were not
made against the objection either of Anduiza or of the Bank. And although, later on, the former
questioned the validity of the payments, subsequently, he impliedly, but clearly, acquiesced therein,
for he joined Madrid in his appeal from the decision of the Court of First Instance of Manila, referred
to above. Similarly, the receipts issued by the Bank acknowledging said payments without
qualification, belie its alleged objection thereto. The Bank merely demanded a signed statement of
Anduiza sanctioning said payments, as a condition precedent, not to its acceptance, which had
already been made, but to the execution of the deed of cancellation of the mortgage constituted in
favor of said institution.
Needless to say, this condition was null and void, for, as pointed out above, the Bank, as creditor,
had no other right than to exact payment, after which the obligation in question, as regards said
creditor, and, hence, the latter's status and rights as such, become automatically extinguished.
Two other consequences flow from the foregoing, namely:
(1) The good or bad faith of the payor is immaterial to the issue before us. Besides, the exercise of a
right, vested by law without any qualification, can hardly be legally considered as tainted with bad
faith. Again, according to Sanchez Roman "para que el pago hecho por el tercero extinga la
obligacion, es preciso que se realice a nombre del deudor". (4 Sanchez Roman, 260.) Accordingly,

the circumstance that payment by Madrid had been effected in the name of Anduiza, upon which the
Bank relies in support of its aforesaid allegation of bad faith, does not prove the existence of the
latter.
(2) The Bank can not invoke the provision that the payor "may only recover from the debtor insofar
as the payment has been beneficial to him," when made against his express will. This is a defense
that may be availed of by the debtor, not by the Bank, for it affects solely the rights of the former. At
any rate, in order that the rights of the payor may be subject to said limitation, the debtor must
oppose the payments before or at the time the same were made, not subsequently thereto.
Entendemos como evidente, que los preceptos del art. 1158 que comentamos, y las distintas
hipotesis que establece, giran sobre la base de que la oposicion del deudor al pago ha de
monstrarse con anterioridad a la realization de este pues de ser aquella posterior, no cabe
estimar verdadera y eficaz opocision de buena fe, ya que en el caso de que antes hubiera
conocido el proyecto de pago, habria en su silencio una aprobacion tacita que autorizaria
incluso la subrogacion del tercero, y si lo habia ignorado antes de realizarse, se estaria en la
situacion distinta prevista y regulada en los dos primeros parrafos del articulo 1158 y en el
1159. (8 Manresa, 4th ed., pp. 248-249.)
Indeed, it is only fair that the effects of said payments be determined at the time it was made, and
that the rights then acquired by the payor be not dependent upon, or subject to modification by,
subsequent unilateral acts or omissions of the debtor. At any rate, the theory that Anduiza had not
been benefited by the payments in question is predicated solely upon his original refusal to
acknowledge the validity of said payments. Obviously, however, the question whether the same were
beneficial or not to Anduiza, depends upon the law, not upon his will. Moreover, his former animosity
towards Madrid sufficed to negate the beneficial effects of the payment under consideration, the
subsequent change of front of Anduiza, would constitute an admission and proof of said beneficial
effects.
Being in conformity with law, the decision appealed from is hereby affirmed, therefore, in toto.
Paras, C.J., Pablo, Bengzon, Montemayor, Reyes, Jugo, and Bautista Angelo, JJ., concur.

FIRST DIVISION
[G.R. No. 93010. August 30, 1990.]
NICENCIO TAN QUIOMBING, Petitioner, v. COURT OF APPEALS, and Sps. FRANCISCO and
MANUELITA A. SALIGO, Respondents.
M.B. Tomacruz Law Office for Petitioner.
Jose J. Francisco for Private Respondents.

DECISION

CRUZ, J.:

May one of the two solidary creditors sue by himself alone for the recovery of amounts due to both of them
without joining the other creditor as a co-plaintiff? In such a case, is the defendant entitled to the dismissal
of the complaint on the ground of non-joinder of the second creditor as an indispensable party? More to the
point, is the second solidary creditor an indispensable party?
These questions were raised in the case at bar, with both the trial and respondent courts ruling in favor of
the defendants. The petitioner is now before us, claiming that the said courts committed reversible error and
misread the applicable laws in dismissing his complaint.
This case stemmed from a "Construction and Service Agreement" 1 concluded on August 30, 1983, whereby
Nicencio Tan Quiombing and Dante Biscocho, as the First Party, jointly and severally bound themselves to
construct a house for private respondents Francisco and Manuelita Saligo, as the Second Party, for the
contract price of P137,940.00, which the latter agreed to pay.
On October 10, 1984, Quiombing and Manuelita Saligo entered into a second written agreement 2 under
which the latter acknowledged the completion of the house and undertook to pay the balance of the contract
price in the manner prescribed in the said second agreement.
On November 19, 1984, Manuelita Saligo signed a promissory note for P125,363.50 representing the
amount still due from her and her husband, payable on or before December 31, 1984, to Nicencio Tan
Quiombing. 3
On October 9, 1986, Quiombing filed a complaint for recovery of the said amount, plus charges and
interests, which the private respondents had acknowledged and promised to pay but had not, despite
repeated demands as the balance of the contract price for the construction of their house. 4
Instead of filing an answer, the defendants moved to dismiss the complaint on February 4, 1987, contending
that Biscocho was an indispensable party and therefore should have been included as a co-plaintiff. The
motion was initially denied but was subsequently reconsidered and granted by the trial court. The complaint
was dismissed, but without prejudice to the filing of an amended complaint to include the other solidary
creditor as a co-plaintiff. 5
Rather than file the amended complaint, Quiombing chose to appeal the order of dismissal to the respondent
court, where he argued that as a solidary creditor he could act by himself alone in the enforcement of his
claim against the private respondents. Moreover, the amounts due were payable only to him under the
second agreement, where Biscocho was not mentioned at all.
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The respondent court sustained the trial court and held that it was not correct at that point to assume that
Quiombing and Biscocho were solidary obligees only. It noted that as they had also assumed the reciprocal
obligation of constructing the house, they should also be considered obligors of the private respondents
under the contract. If, as was possible, the answer should allege a breach of the agreement, "the trial court
cannot decide the dispute without the involvement of Biscocho whose rights will necessarily be affected since
he is a part of the First Party."
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Refuting the petitioners second contention, the respondent court declared that the "second agreement
referred to the Construction and Service Agreement as its basis and specifically stated that it (was) merely a
`part of the original agreement." 6
The concept of the solidary obligation requires a brief restatement.
Distinguishing it from the joint obligation, Tolentino makes the following observations in his distinguished
work on the Civil Code:
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A joint obligation is one in which each of the debtors is liable only for a proportionate part of the debt, and
each creditor is entitled only to a proportionate part of the credit. A solidary obligation is one in which each
debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation. Hence,
in the former, each creditor can recover only his share of the obligation, and each debtor can be made to
pay only his part; whereas, in the latter, each creditor may enforce the entire obligation, and each debtor
may be obliged to pay it in full. 7
The same work describes the concept of active solidarity thus:

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The essence of active solidarity consists in the authority of each creditor to claim and enforce the rights of
all, with the resulting obligation of paying every one what belongs to him; there is no merger, much less a
renunciation of rights, but only mutual representation. 8
It would follow from these observations that the question of who should sue the private respondents was a
personal issue between Quiombing and Biscocho in which the spouses Saligo had no right to interfere. It did
not matter who as between them filed the complaint because the private respondents were liable to either of
the two as a solidary creditor for the full amount of the debt. Full satisfaction of a judgment obtained against
them by Quiombing would discharge their obligation to Biscocho, and vice versa; hence, it was not
necessary for both Quiombing and Biscocho to file the complaint. Inclusion of Biscocho as a co-plaintiff,
when Quiombing was competent to sue by himself alone, would be a useless formality.
chanrobles.com :cralaw:re d

Article 1212 of the Civil Code provides:

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Each one of the solidary creditors may do whatever may be useful to the others, but not anything which
may be prejudice to the latter.
Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by himself
alone.
Parenthetically, it must be observed that the complaint having been filed by the petitioner, whatever amount
is awarded against the debtor must be paid exclusively to him, pursuant to Article 1214. This provision
states that "the debtor may pay any of the solidary creditors; but if any demand, judicial or extrajudicial,
has been made by any one of them, payment should be made to him."
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If Quiombing eventually collects the amount due from the solidary debtors, Biscocho may later claim his
share thereof, but that decision is for him alone to make. It will affect only the petitioner as the other
solidary creditor and not the private respondents, who have absolutely nothing to do with this matter. As far
as they are concerned, payment of the judgment debt to the complainant will be considered payment to the
other solidary creditor even if the latter was not a party to the suit.
Regarding the possibility that the private respondents might plead breach of contract in their answer, we
agree with the petitioner that it is premature to consider this conjecture for such it is at this stage. The
possibility may seem remote, indeed, since they have actually acknowledged the completion of the house in
the second agreement, where they also agreed to pay the balance of the contract price. At any rate, the
allegation, if made and proved, could still be enforceable against the petitioner alone as one of the solidary
debtors, subject to his right of recourse against Biscocho.
The respondent court was correct in ruling that the second agreement, which was concluded alone by the
petitioner with the private respondents, was based on the original Construction and Service Agreement. So
too in fact was the promissory note later signed by Manuelita Saligo since it was for the amount owing on
the construction cost. However, this matter is not really that important now in view of our conclusion that
the complaint could have been filed alone by the petitioner.

The rest of the pieces should easily fall into place.

Section 7, Rule 3 of the Rules of Court mandates the inclusion of indispensable parties as follows:

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Sec. 7. Compulsory joinder of indispensable parties. Parties in interest without whom no final
determination can be had of an action shall be joined either as plaintiffs or defendants.
Indispensable parties are those with such an interest in the controversy that a final decree would necessarily
affect their rights, so that the court cannot proceed without their presence. Necessary parties are those
whose presence is necessary to adjudicate the whole controversy, but whose interests are so far separable
that a final decree can be made in their absence without affecting them. 9 (Necessary parties are now called
proper parties under the 1964 amendments of the Rules of Court.) 10
According to Justice Jose Y. Feria, "where the obligation of the parties is solidary, either one of the parties is
indispensable, and the other is not even necessary (now proper) because complete relief may be obtained
from either." 11
We hold that, although he signed the original Construction and Service Agreement, Biscocho need not be
included as a co-plaintiff in the complaint filed by the petitioner against the private respondents. Quiombing
as solidary creditor can by himself alone enforce payment of the construction costs by the private
respondents and as a solidary debtor may by himself alone be held liable for any possible breach of contract
that may be proved by the private respondents. In either case, the participation of Biscocho is not at all
necessary, much less indispensable.
WHEREFORE, the petition is GRANTED. The decision of the respondent court dated March 27, 1990, is SET
ASIDE, and the Regional Trial Court of Antipolo, Rizal, is directed to REINSTATE Civil Case No. 913-A. Costs
against the private respondents.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 134100

September 29, 2000

PURITA ALIPIO, petitioner,

vs.
COURT OF APPEALS and ROMEO G. JARING, represented by his Attorney-In-Fact RAMON G.
JARING, respondents.
DECISION
MENDOZA, J.:
The question for decision in this case is whether a creditor can sue the surviving spouse for the
collection of a debt which is owed by the conjugal partnership of gains, or whether such claim must
be filed in proceedings for the settlement of the estate of the decedent. The trial court and the Court
of Appeals ruled in the affirmative. We reverse.
The facts are as follows:
Respondent Romeo Jaring1 was the lessee of a 14.5 hectare fishpond in Barito, Mabuco, Hermosa,
Bataan. The lease was for a period of five years ending on September 12, 1990. On June 19, 1987,
he subleased the fishpond, for the remaining period of his lease, to the spouses Placido and Purita
Alipio and the spouses Bienvenido and Remedios Manuel. The stipulated amount of rent
was P485,600.00, payable in two installments of P300,000.00 and P185,600.00, with the second
installment falling due on June 30, 1989. Each of the four sublessees signed the contract.
The first installment was duly paid, but of the second installment, the sublessees only satisfied a
portion thereof, leaving an unpaid balance of P50,600.00. Despite due demand, the sublessees
failed to comply with their obligation, so that, on October 13, 1989, private respondent sued the
Alipio and Manuel spouses for the collection of the said amount before the Regional Trial Court,
Branch 5, Dinalupihan, Bataan. In the alternative, he prayed for the rescission of the sublease
contract should the defendants fail to pay the balance.
Petitioner Purita Alipio moved to dismiss the case on the ground that her husband, Placido Alipio,
had passed away on December 1, 1988.2 She based her action on Rule 3, 21 of the 1964 Rules of
Court which then provided that "when the action is for recovery of money, debt or interest thereon,
and the defendant dies before final judgment in the Court of First Instance, it shall be dismissed to
be prosecuted in the manner especially provided in these rules." This provision has been amended
so that now Rule 3, 20 of the 1997 Rules of Civil Procedure provides:

When the action is for the recovery of money arising from contract, express or implied, and the
defendant dies before entry of final judgment in the court in which the action was pending at the time
of such death, it shall not be dismissed but shall instead be allowed to continue until entry of final
judgment. A favorable judgment obtained by the plaintiff therein shall be enforced in the manner
especially provided in these Rules for prosecuting claims against the estate of a deceased person.
The trial court denied petitioner's motion on the ground that since petitioner was herself a party to
the sublease contract, she could be independently impleaded in the suit together with the Manuel
spouses and that the death of her husband merely resulted in his exclusion from the case. 3 The
Manuel spouses failed to file their answer. For this reason, they were declared in default.
On February 26, 1991, the lower court rendered judgment after trial, ordering petitioner and the
Manuel spouses to pay private respondent the unpaid balance of P50,600.00 plus attorney's fees in
the amount of P10,000.00 and the costs of the suit.
Petitioner appealed to the Court of Appeals on the ground that the trial court erred in denying her
motion to dismiss. In its decision4 rendered on July 10, 1997, the appellate court dismissed her
appeal. It held:
The rule that an action for recovery of money, debt or interest thereon must be dismissed when the
defendant dies before final judgment in the regional trial court, does not apply where there are other
defendants against whom the action should be maintained. This is the teaching of Climaco v. Siy Uy,
wherein the Supreme Court held:
Upon the facts alleged in the complaint, it is clear that Climaco had a cause of action against the
persons named as defendants therein. It was, however, a cause of action for the recovery of
damages, that is, a sum of money, and the corresponding action is, unfortunately, one that does not
survive upon the death of the defendant, in accordance with the provisions of Section 21, Rule 3 of
the Rules of Court.
xxx

xxx

xxx

However, the deceased Siy Uy was not the only defendant, Manuel Co was also named defendant in
the complaint. Obviously, therefore, the order appealed from is erroneous insofar as it dismissed the
case against Co. (Underlining added)
Moreover, it is noted that all the defendants, including the deceased, were signatories to the contract
of sub-lease. The remaining defendants cannot avoid the action by claiming that the death of one of
the parties to the contract has totally extinguished their obligation as held in Imperial Insurance, Inc.
v. David:
We find no merit in this appeal. Under the law and well settled jurisprudence, when the obligation is
a solidary one, the creditor may bring his action in toto against any of the debtors obligated in
solidum. Thus, if husband and wife bound themselves jointly and severally, in case of his death, her
liability is independent of and separate from her husband's; she may be sued for the whole debt and

it would be error to hold that the claim against her as well as the claim against her husband should
be made in the decedent's estate. (Agcaoili vs. Vda. de Agcaoili, 90 Phil. 97). 5
Petitioner filed a motion for reconsideration, but it was denied on June 4, 1998. 6 Hence this petition
based on the following assignment of errors:
A. THE RESPONDENT COURT COMMITTED REVERSIBLE ERROR IN APPLYING
CLIMACO v. SIY UY, 19 SCRA 858, IN SPITE OF THE FACT THAT THE PETITIONER WAS
NOT SEEKING THE DISMISSAL OF THE CASE AGAINST REMAINING DEFENDANTS
BUT ONLY WITH RESPECT TO THE CLAIM FOR PAYMENT AGAINST HER AND HER
HUSBAND WHICH SHOULD BE PROSECUTED AS A MONEY CLAIM.
B. THE RESPONDENT COURT COMMITTED REVERSIBLE ERROR IN APPLYING
IMPERIAL INSURANCE INC. v. DAVID, 133 SCRA 317, WHICH IS NOT APPLICABLE
BECAUSE THE SPOUSES IN THIS CASE DID NOT BIND THEMSELVES JOINTLY AND
SEVERALLY IN FAVOR OF RESPONDENT JARING.7
The petition is meritorious. We hold that a creditor cannot sue the surviving spouse of a decedent in
an ordinary proceeding for the collection of a sum of money chargeable against the conjugal
partnership and that the proper remedy is for him to file a claim in the settlement of estate of the
decedent.
First. Petitioner's husband died on December 1, 1988, more than ten months before private
respondent filed the collection suit in the trial court on October 13, 1989. This case thus falls outside
of the ambit of Rule 3, 21 which deals with dismissals of collection suits because of the death of the
defendant during the pendency of the case and the subsequent procedure to be undertaken by the
plaintiff, i.e., the filing of claim in the proceeding for the settlement of the decedent's estate. As
already noted, Rule 3, 20 of the 1997 Rules of Civil Procedure now provides that the case will be
allowed to continue until entry of final judgment. A favorable judgment obtained by the plaintiff
therein will then be enforced in the manner especially provided in the Rules for prosecuting claims
against the estate of a deceased person. The issue to be resolved is whether private respondent
can, in the first place, file this case against petitioner.
Petitioner and her late husband, together with the Manuel spouses, signed the sublease contract
binding themselves to pay the amount of stipulated rent. Under the law, the Alipios' obligation (and
also that of the Manuels) is one which is chargeable against their conjugal partnership. Under Art.
161(1) of the Civil Code, the conjugal partnership is liable for
All debts and obligations contracted by the husband for the benefit of the conjugal partnership, and
those contracted by the wife, also for the same purpose, in the cases where she may legally bind the
partnership.8
When petitioner's husband died, their conjugal partnership was automatically dissolved 9 and debts
chargeable against it are to be paid in the settlement of estate proceedings in accordance with Rule
73, 2 which states:

Where estate settled upon dissolution of marriage. When the marriage is dissolved by the death of
the husband or wife, the community property shall be inventoried, administered, and liquidated, and
the debts thereof paid, in the testate or intestate proceedings of the deceased spouse. If both
spouses have died, the conjugal partnership shall be liquidated in the testate or intestate
proceedings of either.
As held in Calma v. Taedo,10 after the death of either of the spouses, no complaint for the collection
of indebtedness chargeable against the conjugal partnership can be brought against the surviving
spouse. Instead, the claim must be made in the proceedings for the liquidation and settlement of the
conjugal property. The reason for this is that upon the death of one spouse, the powers of
administration of the surviving spouse ceases and is passed to the administrator appointed by the
court having jurisdiction over the settlement of estate proceedings.11 Indeed, the surviving spouse is
not even a de facto administrator such that conveyances made by him of any property belonging to
the partnership prior to the liquidation of the mass of conjugal partnership property is void. 12
The ruling in Calma v. Taedo was reaffirmed in the recent case of Ventura v. Militante.13 In that
case, the surviving wife was sued in an amended complaint for a sum of money based on an
obligation allegedly contracted by her and her late husband. The defendant, who had earlier moved
to dismiss the case, opposed the admission of the amended complaint on the ground that the death
of her husband terminated their conjugal partnership and that the plaintiff's claim, which was
chargeable against the partnership, should be made in the proceedings for the settlement of his
estate. The trial court nevertheless admitted the complaint and ruled, as the Court of Appeals did in
this case, that since the defendant was also a party to the obligation, the death of her husband did
not preclude the plaintiff from filing an ordinary collection suit against her. On appeal, the Court
reversed, holding that
as correctly argued by petitioner, the conjugal partnership terminates upon the death of either
spouse. . . . Where a complaint is brought against the surviving spouse for the recovery of an
indebtedness chargeable against said conjugal [partnership], any judgment obtained thereby is void.
The proper action should be in the form of a claim to be filed in the testate or intestate proceedings
of the deceased spouse.
In many cases as in the instant one, even after the death of one of the spouses, there is no
liquidation of the conjugal partnership. This does not mean, however, that the conjugal partnership
continues. And private respondent cannot be said to have no remedy. Under Sec. 6, Rule 78 of the
Revised Rules of Court, he may apply in court for letters of administration in his capacity as a
principal creditor of the deceased . . . if after thirty (30) days from his death, petitioner failed to apply
for administration or request that administration be granted to some other person. 14
The cases relied upon by the Court of Appeals in support of its ruling, namely, Climaco v. Siy
Uy15 and Imperial Insurance, Inc. v. David,16 are based on different sets of facts. In Climaco, the
defendants, Carlos Siy Uy and Manuel Co, were sued for damages for malicious prosecution. Thus,
apart from the fact the claim was not against any conjugal partnership, it was one which does not
survive the death of defendant Uy, which merely resulted in the dismissal of the case as to him but
not as to the remaining defendant Manuel Co.

With regard to the case of Imperial, the spouses therein jointly and severally executed an indemnity
agreement which became the basis of a collection suit filed against the wife after her husband had
died. For this reason, the Court ruled that since the spouses' liability was solidary, the surviving
spouse could be independently sued in an ordinary action for the enforcement of the entire
obligation.
It must be noted that for marriages governed by the rules of conjugal partnership of gains, an
obligation entered into by the husband and wife is chargeable against their conjugal partnership and
it is the partnership which is primarily bound for its repayment.17 Thus, when the spouses are sued
for the enforcement of an obligation entered into by them, they are being impleaded in their capacity
as representatives of the conjugal partnership and not as independent debtors such that the concept
of joint or solidary liability, as between them, does not apply. But even assuming the contrary to be
true, the nature of the obligation involved in this case, as will be discussed later, is not solidary but
rather merely joint, making Imperial still inapplicable to this case.
From the foregoing, it is clear that private respondent cannot maintain the present suit against
petitioner. Rather, his remedy is to file a claim against the Alipios in the proceeding for the
settlement of the estate of petitioner's husband or, if none has been commenced, he can file a
petition either for the issuance of letters of administration18 or for the allowance of will,19 depending
on whether petitioner's husband died intestate or testate. Private respondent cannot short-circuit this
procedure by lumping his claim against the Alipios with those against the Manuels considering that,
aside from petitioner's lack of authority to represent their conjugal estate, the inventory of the Alipios'
conjugal property is necessary before any claim chargeable against it can be paid. Needless to say,
such power exclusively pertains to the court having jurisdiction over the settlement of the decedent's
estate and not to any other court.
1wphi1

Second. The trial court ordered petitioner and the Manuel spouses to pay private respondent the
unpaid balance of the agreed rent in the amount of P50,600.00 without specifying whether the
amount is to be paid by them jointly or solidarily. In connection with this, Art. 1207 of the Civil Code
provides:
The concurrence of two or more creditors or of two or more debtors in one and the same obligation
does not imply that each one of the former has a right to demand, or that each one of the latter is
bound to render, entire compliance with the prestations. There is a solidary liability only when the
obligation expressly so estates, or when the law or the nature of the obligation requires solidarity.
Indeed, if from the law or the nature or the wording of the obligation the contrary does not appear, an
obligation is presumed to be only joint, i.e., the debt is divided into as many equal shares as there
are debtors, each debt being considered distinct from one another.20
Private respondent does not cite any provision of law which provides that when there are two or
more lessees, or in this case, sublessees, the latter's obligation to pay the rent is solidary. To be
sure, should the lessees or sublessees refuse to vacate the leased property after the expiration of
the lease period and despite due demands by the lessor, they can be held jointly and severally liable
to pay for the use of the property. The basis of their solidary liability is not the contract of lease or
sublease but the fact that they have become joint tortfeasors.21 In the case at bar, there is no

allegation that the sublessees refused to vacate the fishpond after the expiration of the term of the
sublease. Indeed, the unpaid balance sought to be collected by private respondent in his collection
suit became due on June 30, 1989, long before the sublease expired on September 12, 1990.
Neither does petitioner contend that it is the nature of lease that when there are more than two
lessees or sublessees their liability is solidary. On the other hand, the pertinent portion of the
contract involved in this case reads:22
2. That the total lease rental for the sub-leased fishpond for the entire period of three (3) years and
two (2) months is FOUR HUNDRED EIGHT-FIVE THOUSAND SIX HUNDRED (P485,600.00)
PESOS, including all the improvements, prawns, milkfishes, crabs and related species thereon as
well all fishing equipment, paraphernalia and accessories. The said amount shall be paid to the SubLessor by the Sub-Lessees in the following manner, to wit:
A. Three hundred thousand (P300,000.00) Pesos upon signing this contract; and
B. One Hundred Eight-Five Thousand Six-Hundred (P185,6000.00) Pesos to be paid on June 30,
1989.
Clearly, the liability of the sublessees is merely joint. Since the obligation of the Manuel and Alipio
spouses is chargeable against their respective conjugal partnerships, the unpaid balance
of P50,600.00 should be divided into two so that each couple is liable to pay the amount
of P25,300.00.
WHEREFORE, the petition is GRANTED. Bienvenido Manuel and Remedios Manuel are ordered to
pay the amount of P25,300.00, the attorney's fees in the amount of P10,000.00 and the costs of the
suit. The complaint against petitioner is dismissed without prejudice to the filing of a claim by private
respondent in the proceedings for the settlement of estate of Placido Alipio for the collection of the
share of the Alipio spouses in the unpaid balance of the rent in the amount of P25,300.00.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 83086

June 19, 1991

REYNALDO C. HONRADO, JR., petitioner,

vs.
COURT OF APPEALS and JARDINE-MANILA FINANCE, INC., respondent.
A.M. Navarro Law Office for petitioner.
I.M. Barredo & Associates Law Office for private respondent.

FERNAN, C.J.:
In this petition for review on certiorari, petitioner Reynaldo C. Honrado, Jr. seeks the reversal of the
decision of the Court of Appeals dated August 5, 1987 which affirmed the decision dated January
22, 1986 of the Regional Trial Court, Branch CXL at Makati, Metro Manila. The dispositive portion of
the affirmed decision reads as follows:
1

WHEREFORE, judgment is hereby rendered ordering defendant Reynaldo C. Honrado, Jr.,

to pay plaintiff MB Finance, formerly Jardine-Manila Finance Corporation, as follows:
1. P81,325.05, of which P40,769.00 representing balance of the principal amount due shall
earn interest of 14% per annum from January 1984;
2. P4,076.00 as liquidated damages;
3. P6,115.35 as attorney's fees; and
4. The costs of suit.

The factual background of this case as found by the trial court and affirmed by the Court of Appeals
is as follows:
On August 21, 1978, Hadd Construction and Trading Corporation (HCTC for brevity) purchased on
installment basis a Toyota Corolla Hardtop, 2 Door, 1978 Model with Engine No. 3K-7515608, Serial
No. KE 35-915409, Plate No. B-YE-290 from Cressida Sales Corporation (Cressida for brevity).
HCTC represented by petitioner Reynaldo C. Honrado, Jr. as president, executed a promissory note
in favor of Cressida, in the amount of P49,120.20, payable at the rate of P1,364.45 a month for thirty
six (36) months beginning September 25, 1978 and every 25th day of the month thereafter until full
payment. In said promissory note, HCTC agreed to a waiver of formal demand and presentment as
well as notices of protest and dishonor, among others. Petitioner Honrado signed the promissory
note a second time as co-maker of HCTC.
3

A chattel mortgage on the motor vehicle was also executed by HCTC in favor of Cressida.
On September 4, 1978, Cressida executed a deed of assignment of the promissory note with
warranty of soundness in favor of Jardine-Manila Finance, Inc. for and in consideration of
P30,985.54. This was executed with HCTC's conformity, represented again by petitioner as its
president. Petitioner Honrado likewise signed this deed of assignment as co-maker.
4

For failure of HCTC to pay the monthly amortization as stipulated in the promissory note, private
respondent Jardine-Manila Finance, Inc. filed on May 22, 1979 an action for replevin and damages
with the Regional Trial Court of Makati, Branch CXL docketed as Civil Case No. 2096, praying for the
seizure and delivery of the questioned motor vehicle to private respondent, with alternative prayer,
that in the event the normal delivery of the motor vehicle cannot be effected, judgment be rendered
ordering HCTC to pay P41,011.34 with 14% interest per annum from the date the obligation became
due and demandable until fully paid. Private respondent impleaded petitioner Reynaldo Honrado, Jr.
as party-defendant on the contention that he signed the documents as co-maker.
After an answer with compulsory counterclaim was filed on November 7, 1981 by herein petitioner
as defendant therein, the case was thereafter set for pre-trial conference.
On September 14, 1983, private respondent informed the trial court that it was waiving the recovery
of the motor vehicle and chose to pursue instead its alternative prayer considering that since the
filing of the complaint, it has not been able to recover said motor vehicle, and that even if recovered,
its current value would not allegedly be commensurate to the amount of P41,011.34.
On the same day, private respondent moved to dismiss the case against HCTC without prejudice on
the ground that summons could not be served on said defendant corporation since it was no longer
holding office at its given address and its present address could not be ascertained. This motion was
granted by the trial court on October 3, 1983.
In due time, the trial court rendered the assailed decision against petitioner who seasonably
appealed to the Court of Appeals. On August 5, 1987, the Court of Appeals promulgated its decision
affirming that of the trial court.
1wphi1

Hence the present recourse of petitioner.

To support his prayer for reversal of the appellate court's decision, petitioner argues that he signed
the promissory note and deed of chattel mortgage in his official capacity as president of HCTC only.
He never intended to sign these documents as co-maker. Thus, petitioner in his Memorandum raises
the following issues:
1) WAS PRIVATE RESPONDENT CORRECT IN ITS CONTENTION THAT PETITIONER
WAS A CO-MAKER OF HCTC IN THE EXECUTION OF THE PROMISSORY NOTE AND
DEED OF CHATTEL MORTGAGE IN QUESTION?
2) WAS THE COURT OF APPEALS CORRECT IN ITS INTERPRETATION OF SUBJECT
PROMISSORY NOTE AND DEED OF CHATTEL MORTGAGE IN FAVOR OF PRIVATE
RESPONDENT AND AGAINST PETITIONER?
5

On the first issue, petitioner Honrado vehemently denies any liability as co-maker of HCTC on the
ground that the body of the documents in question, namely, the promissory note and deed of chattel
mortgage, indicates that the contract was between HCTC and Cressida only. In addition, petitioner

cites the testimony of Mr. George Caruncho, the sales agent of Cressida, who stated that petitioner
was asked to sign these documents in his official capacity as president of HCTC.
We find no merit in the above contention. Petitioner Honrado cannot plead that he signed these
documents in his official capacity only as president of HCTC and not as co-maker with HCTC. The
documents in question, including the deed of assignment which contains petitioner's signatures as
co-maker, whose genuineness and due execution were admitted by petitioner, clearly indicate
otherwise. As stated by respondent Court of Appeals:
The promissory note (Exhibit "A") clearly shows on its face that the appellant signed the
same in his capacity as President of the Hadd Construction & Trading Corp. and again as comaker in his private capacity (Exhibits "A-2" & "A-3"). Appellant also signed the Deed of
Chattel Mortgage and the Affidavit of Good Faith four (4) times; twice as President and twice
as co-maker (Exhibit "B"). And the appellant lastly signed his conformity to the Deed of
Assignment (Exhibit "C") as president and again as co-maker.
From the above facts, petitioner, by signing these documents several times as co-maker, is
presumed to be aware of the consequences of his actions. Considering that petitioner Honrado is of
age and a businessman, holding the highest position in Hadd Construction Trading Corporation, he
is presumed to have acted with due care, and to have signed the documents in question with full
knowledge of its contents as well as the attendant obligations and responsibilities. As aptly observed
by the trial court:
. . . defendant Honrado is presumed to have intended the ordinary consequences of his
voluntary act and taken ordinary care of his concerns. When defendant signed eight times on
three documents, and always as president and as co-maker, it is presumed that he had
exercised care in verifying his involvement in the transaction, considering his age, business
life, intelligence and the fact that he occupied the highest office in the corporation.
6

Furthermore, there is no evidence of fraud. Petitioner on cross-examination testified as follows:

Q At the left hand margin of the promissory note there appears a signature over the name
Reynaldo C. Honrado Jr., President, Hadd Construction and Trading Corp. Will you kindly tell
us if this is your signature?
A Yes, sir.
xxx

xxx

xxx

Q Also, at the right hand margin of the promissory note there appears a signature above the
typewritten name Reynaldo C. Honrado, Jr., co-maker, is this your signature?
A Yes, sir, that is my signature.

Since petitioner Honrado did not question and in fact admitted the genuineness and due execution of
these documents, including the genuineness of his signatures, then these documents must be given
legal effects.
The testimony of the sales agent, Mr. Caruncho, can not change the legal effect of these
documents. Granting that he told petitioner to sign these documents in his official capacity as
president of HCTC the mere fact that petitioner also signed voluntarily as co-maker proves his
1wphi1

participation in the transactions as a co-maker. Furthermore, Mr. Caruncho testified that when
petitioner signed these documents, all the type-written words already appeared therein.
On the matter of interpretation of contracts, it is basic and fundamental that if the terms of the
contract are clear, the literal meaning of the stipulation shall control. The intention of the parties to a
contract must be determined from the contract itself. When petitioner Honrado signed several times
on these documents as president of HCTC and as co-maker, there is no other interpretation but to
conclusively presume that he bound himself also as co-maker. He cannot therefore renege on the
obligations and liabilities attached to a co-maker. When the terms of a contract are clear and do not
leave room for doubt as to the intention of the contracting parties, it is not necessary to interpret the
same, the literal meaning of its clauses should be followed.
8

The promissory note clearly stipulates a solidary obligation as shown by the following clause "For
value received I/We jointly and severally promised to pay Cressida Motor Sales Corp. . . . Signed:
Hadd Construction & Trading Corporation by Reynaldo C. Honrado, Jr., President and Reynaldo C.
Honrado, Jr., Co-maker". In the case of Parot vs. Gemora, this Court had occasion to state:
10

Where a promissory note is signed by two or more persons promissing to pay the amount of
the said note juntos o separadamente, such co-makers are individually liable for the payment
of the full amount of the obligation of such contract.
Therefore, petitioner Honrado is solidarily liable to pay the full amount of the obligation as stipulated
in the promissory note to which private respondent is entitled.
However, the award of P81,325.00 based on the Statement of Account as of December 10,
1983, prepared by private respondent includes other charges aside from the principal obligation.
These charges have not been satisfactorily proved during the trial. Moreover, a careful examination
of the records of the case failed to support these charges. The records are bereft of any evidence to
show how these charges were computed nor is there an adequate showing that private respondent
is entitled thereto. A mere mention of the outstanding obligation of petitioner in the amount of
P81,747.05 as of December 10, 1985 in the testimony of Alfonso Flores, private respondent's
manager for collection, is not sufficient without proof presented before the court of the expenses
and other charges imputed to petitioner. Thus, in the interest of justice and equity, petitioner should
be liable only for the outstanding balance based on the promissory note in the amount of
P40,769.00. This is computed by deducting the total payments equivalent to four (4) monthly
installments made by HCTC in the amount of P8,351.20 from the principal amount of the promissory
note of P49,120.20. In addition, this amount of P40,769.00 shall earn interest at the rate of 14% per
annum to be computed from March 10, 1979 when the total amount of the principal obligation
became due and demandable until actual payment. The award of 10% liquidated damages and
15% attorney's fees based on the principal obligation is found to be equitable.
11

12

13

WHEREFORE, the assailed decision is hereby AFFIRMED, with modification as indicated below,
ordering petitioner Honrado to pay private respondent MB Finance, formerly Jardine-Manila Finance
Corporation as follows:
1) P40,769.00 with 14 % interest per annum from March 10, 1979 until actual payment;
2) P4,076.90 as liquidated damages;
3) P6,115.35 as attorney's fees; and

4) The costs of the suit.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-30115 September 28, 1973

FE PEREZ, plaintiff-appellant,
vs.
JOSEFINA GUTIERREZ, defendant third-party plaintiff-appellee, PANFILO ALAJAR, third-party
defendant-appellee.
Julian C. Gonzales, Jr. for plaintiff-appellant.
Gerardo E. Angeles for defendant-third-party plaintiff-appellee.
Apostadera, Palabrica and Muyco for third-party defendant-appellee.

CASTRO, J.:
This appeal from the decision dated June 9, 1967 of the Court of First Instance of Davao in its civil
case 3163 poses objections to the manner the trial court adjudicated the claim for damages filed by
the plaintiff-appellant Fe Perez against the defendant-third-party plaintiff-appellee Josefina Gutierrez.
The complaint (later amended) filed on October 29, 1959 by Fe Perez with the Court of First
Instance of Davao against Josefina Gutierrez, for breach of contract of carriage, alleges that on
September 6, 1959 while she, together with nine co-teachers, was a passenger of an AC jeepney
registered under the name of the defendant Gutierrez, the said vehicle, due to the reckless
negligence of its driver Leopoldo Cordero, met with an accident, resulting in injuries to herself which
required her hospitalization. In her answer, Josefina Gutierrez averred that if the claim of Fe Perez is
at all justified, responsibility therefor should devolve on one Panfilo Alajar, the actual owner, by
purchase, of the said passenger jeepney when the accident occurred and against whom she has
filed a third-party complaint.
The deed of sale attached to the third-party complaint recites, inter alia,
That it is mutually agreed by the herein vendor and vendee that the TITLE to the
aforementioned vehicle shall remain with the VENDOR, pending approval of the
herein SALE by the Public Service Commission, said motor vehicle being registered
as a public utility auto-calesa under "AC" denomination; ...

That the vendee herein, by these presents, do [sic] hereby binds himself and do [sic]
hereby assume, [sic] responsibility for all actions, claims, demands, and rights of
action, and whatever kind and nature, that may hereafter develop as a consequence
of or in the course of operation of the aforementioned vehicle; ...
In his answer to the third-party complaint, Panfilo Alajar disclaimed responsibility for the accident,
alleging that (a) the mentioned deed of sale is null and void because it has not been registered with
the Public Service Commission despite repeated demands on the 3rd-party complainant to do so; (b)
the said passenger jeepney remained in the control of the 3rd-party complainant who, together with
her lawyer-husband, had been collecting rentals from him for the use of the said vehicle; and (c) by
express agreement, title to the said vehicle remained with the 3rd-party complainant pending
approval of the sale by the Public Service Commission.
The defendant Leopoldo Cordero was declared in default and did not appeal.
On June 9, 1967, after trial on the merits, the court a quo rendered its decision, in the main finding
Leopoldo Cordero guilty of reckless imprudence, and finding that Panfilo Alajar owned and operated
the auto calesa in question and, in fact, after the accident, even assumed responsibility for the
payment of the hospital bills due to the Brokenshire Memorial Hospital for treatment of the injuries
suffered by Fe Perez. Based on these findings as well as the proof of the damages suffered by Fe
Perez, the court adjudged as follows:
WHEREFORE, premises considered, judgment is hereby rendered ordering thirdparty defendant Panfilo Alajar to pay plaintiff the amount of P1,552.20 hospital
expenses; P2,000.00, actual damages; P5,000.00 moral damages; P500.00
incidental expenses; and P2,000.00 attorney's fees.
Ordering likewise Panfilo Alajar to pay defendant third-party plaintiff Josefina
Gutierrez P500.00 moral damages; and P1,000.00 attorney's fees, and to pay the
costs of the proceedings on both cases.
The present appeal questions the correctness of the dispositive portion of the decision a quo which
adjudged Panfilo Alajar, instead of Josefina Gutierrez, as the party liable to her for the payment of
the damages adjudicated in her favor. Specifically, Fe Perez argues that the registered owner of a
motor vehicle should be the one held liable for damages resulting from breach of contract of carriage
by a common carrier.
We find the appeal meritorious and in accord with settled law on the matter.
In Peralta vs. Mangusang 1 this Court, in approbation of a similar argument, said:
The law (Sec. 20 [g], Public Service Act) really requires the approval of the Public
Service Commission in order that a franchise, or any privileges pertaining thereto,
may be sold or leased without infringing the certificate issued to the grantee. The
reason is obvious. Since a franchise is personal in nature any transfer or lease
thereof should be submitted for approval of the Public Service Commission, so that

the latter may take proper safeguards to protect the interest of the public. It follows
that if the property covered by the franchise is transferred or leased to another
without obtaining the requisite approval, the transfer is not binding on the Public
Service Commission and, in contemplation of law, the grantee continues to be
responsible under the franchise in relation to the Commission and to the public for
the consequences incident to the operation of the vehicle, one of them being the
collision under consideration. (Montoya v. Ignacio, 50 O.G. No. 1. 108; Vda. de
Medina, et al. v. Cresencia, et al., 52 O.G. No. 10, 4604; Erezo v. Jepte, et al., G.R.
No. L-9605, Sept. 30, 1957; Tamayo v. Aquino, 56 O.G. No. 36,5617).
In the earlier case of Erezo vs. Jepte, 2 which is cited in the foregoing opinion, this Court held that the
doctrine making the registered owner of a common carrier answerable to the public for negligence injuries
to its passengers or third persons, even though the vehicle had already been transferred to another, is
based upon the principle
... that in dealing with vehicles registered under the Public Service Law, the public
has the right to assume or presume that the registered owner is the actual owner
thereof, for it would be difficult for the public to enforce the actions that they may
have for injuries caused to them by the vehicles being negligently operated if the
public should be required to prove who the actual owner is. How would the public or
third persons know against whom to enforce their rights in case of subsequent
transfers of the vehicles? We do not imply by this doctrine, however, that the
registered owner may not recover whatever amount he had paid by virtue of his
liability to third persons from the person to whom he had actually sold, assigned or
conveyed the vehicle.
In Tamayo vs. Aquino, 3 also cited in Mangusang, supra, this Court, reiterating what was stated en
passant in Jepte, supra, described the nature of the liability of the actual transferee of a vehicle the
negligent operation of which gives rise to injuries to its passengers:
The question that is posed, therefore, is how should the holder of the certificate of
public convenience Tamayo participate with his transferee operator Rayos, in the
damages recoverable by the heirs of the deceased passenger, if their liability is not
that of joint tortfeasors in accordance with Article 2194 of the Civil Code. The
following considerations must be borne in mind in determining this question. As
Tamayo is the registered owner of the truck, his responsibility to the public or to any
passenger riding in the vehicle or truck must be direct, for the reasons given in our
decision in the case of Erezo vs. Jepte, supra, as quoted above. But as the
transferee, who operated the vehicle when the passenger died, is the one directly
responsible for the accident and death, he should in turn be made responsible to the
registered owner for what the latter may have been adjudged to pay. In operating the
truck without transfer thereof having been approved by the Public Service
Commission, the transferee acted merely as agent of the registered owner and
should be responsible to him (the registered owner), for any damages that he may
cause the latter by his negligence."

Upon the foregoing, it is quite clear that the court below erred in holding Panfilo Alajar, rather than
Josefina Gutierrez, as the one directly liable to Fe Perez for the latter's injuries and the
corresponding damages incurred. This Court notes moreover, that the court below inexplicably failed
to hold the driver (Leopoldo Cordero), whom it found guilty of reckless imprudence, jointly and
solidarily liable with Josefina Gutierrez to Fe Perez in accordance with the provisions of article 2184
in relation to article 2180 of the new Civil Code. 4
ACCORDINGLY, the judgment below is hereby modified in the sense that Josefina Gutierrez and
Leopoldo Cordero are hereby adjudged directly and jointly and solidarily liable to Fe Perez for the
sums adjudicated in the judgment below in her (Fe Perez') favor, while Panfilo Alajar is, in turn,
hereby held answerable to Josefina Gutierrez for such amount as the latter may pay to Fe Perez in
satisfaction of the judgment appealed from. Costs against both the defendant-third party plaintiffappellee Josefina Gutierrez and the third party defendant-appellee Panfilo Alajar.
Makalintal, Actg.. C.J., Zaldivar, Fernando, Teehankee, Barredo, Makasiar, Antonio and Esguerra,
JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 183374

June 29, 2010

MARSMAN DRYSDALE LAND, INC., Petitioner,

vs.
PHILIPPINE GEOANALYTICS, INC. AND GOTESCO PROPERTIES, INC., Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 183376
GOTESCO PROPERTIES, INC., Petitioner,
vs.
MARSMAN DRYSDALE LAND, INC. AND PHILIPPINE GEOANALYTICS, INC., Respondents.
DECISION
CARPIO MORALES, J.:
On February 12, 1997, Marsman Drysdale Land, Inc. (Marsman Drysdale) and Gotesco Properties,
Inc. (Gotesco) entered into a Joint Venture Agreement (JVA) for the construction and development of
an office building on a land owned by Marsman Drysdale in Makati City.1
The JVA contained the following pertinent provisions:

SECTION 4. CAPITAL OF THE JV

It is the desire of the Parties herein to implement this Agreement by investing in the PROJECT on a
FIFTY (50%) PERCENT- FIFTY (50%) PERCENT basis.
4.1. Contribution of [Marsman Drysdale]-[Marsman Drysdale] shall contribute the Property.
The total appraised value of the Property is PESOS: FOUR HUNDRED TWENTY MILLION
(P420,000,000.00).
For this purpose, [Marsman Drysdale] shall deliver the Property in a buildable condition within ninety
(90) days from signing of this Agreement barring any unforeseen circumstances over which
[Marsman Drysdale] has no control. Buildable condition shall mean that the old building/structure
which stands on the Property is demolished and taken to ground level.
4.2. Contribution of [Gotesco]- [Gotesco] shall contribute the amount of PESOS: FOUR HUNDRED
TWENTY MILLION (P420,000,000.00) in cash which shall be payable as follows:
4.2.1. The amount of PESOS: FIFTY MILLION (P50,000,000.00) upon signing of this Agreement.
4.2.2. The balance of PESOS: THREE HUNDRED SEVENTY MILLION (P370,000,000.00) shall be
paid based on progress billings, relative to the development and construction of the Building, but
shall in no case exceed ten (10) months from delivery of the Property in a Buildable condition as
defined in section 4.1.
A joint account shall be opened and maintained by both Parties for handling of said balance, among
other Project concerns.
4.3. Funding and Financing
4.3.1 Construction funding for the Project shall be obtained from the cash contribution of [Gotesco].
4.3.2 Subsequent funding shall be obtained from the pre-selling of units in the Building or, when
necessary, from loans from various banks or financial institutions. [Gotesco] shall arrange the
required funding from such banks or financial institutions, under such terms and conditions which will
provide financing rates favorable to the Parties.
4.3.3 [Marsman Drysdale] shall not be obligated to fund the Project as its contribution is limited to
the Property.
4.3.4 If the cost of the Project exceeds the cash contribution of [Gotesco], the proceeds obtained
from the pre-selling of units and proceeds from loans, the Parties shall agree on other sources and
terms of funding such excess as soon as practicable.
4.3.5 x x x x.

4.3.6 x x x x.
4.3.7 x x x x.
4.3.8 All funds advanced by a Party (or by third parties in substitution for advances from a Party)
shall be repaid by the JV.
4.3.9 If any Party agrees to make an advance to the Project but fails to do so (in whole or in part) the
other party may advance the shortfall and the Party in default shall indemnify the Party making the
substitute advance on demand for all of its losses, costs and expenses incurred in so doing.
(emphasis supplied; underscoring in the original)
Via Technical Services Contract (TSC) dated July 14, 1997,2 the joint venture engaged the services
of Philippine Geoanalytics, Inc. (PGI) to provide subsurface soil exploration, laboratory testing,
seismic study and geotechnical engineering for the project. PGI, was, however, able to drill only four
of five boreholes needed to conduct its subsurface soil exploration and laboratory testing, justifying
its failure to drill the remaining borehole to the failure on the part of the joint venture partners to clear
the area where the drilling was to be made.3 PGI was able to complete its seismic study though.
PGI then billed the joint venture on November 24, 1997 for P284,553.50 representing the cost of
partial subsurface soil exploration; and on January 15, 1998 for P250,800 representing the cost of
the completed seismic study.4
Despite repeated demands from PGI,5 the joint venture failed to pay its obligations.
Meanwhile, due to unfavorable economic conditions at the time, the joint venture was cut short and
the planned building project was eventually shelved. 6
PGI subsequently filed on November 11, 1999 a complaint for collection of sum of money and
damages at the Regional Trial Court (RTC) of Quezon City against Marsman Drysdale and Gotesco.
In its Answer with Counterclaim and Cross-claim, Marsman Drysdale passed the responsibility of
paying PGI to Gotesco which, under the JVA, was solely liable for the monetary expenses of the
project.7
Gotesco, on the other hand, countered that PGI has no cause of action against it as PGI had yet to
complete the services enumerated in the contract; and that Marsman Drysdale failed to clear the
property of debris which prevented PGI from completing its work. 8
By Decision of June 2, 2004,9 Branch 226 of the Quezon City RTC rendered judgment in favor of
PGI, disposing as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiff [PGI].
The defendants [Gotesco] and [Marsman Drysdale] are ordered to pay plaintiff, jointly:

(1) the sum of P535,353.50 with legal interest from the date of this decision until fully paid;
(2) the sum of P200,000.00 as exemplary damages;
(3) the sum of P200,000.00 as and for attorneys fees; and
(4) costs of suit.
The cross-claim of defendant [Marsman Drysdale] against defendant [Gotesco] is hereby GRANTED
as follows:
a) Defendant [Gotesco] is ordered to reimburse co-defendant [Marsman Drysdale] in the
amount of P535,353.[50] in accordance with the [JVA].
b) Defendant [Gotesco] is further ordered to pay co-defendant [Marsman Drysdale] the sum
of P100,000.00 as and for attorneys fees.
SO ORDERED. (underscoring in the original; emphasis supplied)
Marsman Drysdale moved for partial reconsideration, contending that it should not have been held
jointly liable with Gotesco on PGIs claim as well as on the awards of exemplary damages and
attorneys fees. The motion was, by Resolution of October 28, 2005, denied.
Both Marsman Drysdale and Gotesco appealed to the Court of Appeals which, by Decision of
January 28, 2008,10 affirmed with modification the decision of the trial court. Thus the appellate court
disposed:
WHEREFORE, premises considered, the instant appeal is PARTLY GRANTED. The assailed
Decision dated June 2, 2004 and the Resolution dated October 28, 2005 of the RTC of Quezon City,
Branch 226, in Civil Case No. Q99-39248 are hereby AFFIRMED with MODIFICATION deleting the
award of exemplary damages in favor of [PGI] and the P100,000.00 attorneys fees in favor of
[Marsman Drysdale] and ordering defendant-appellant [Gotesco] to REIMBURSE [Marsman
Drysdale] 50% of the aggregate sum due [PGI], instead of the lump sum P535,353.00 awarded by
the RTC. The rest of the Decision stands.
SO ORDERED. (capitalization and emphasis in the original; underscoring supplied)
In partly affirming the trial courts decision, the appellate court ratiocinated that notwithstanding the
terms of the JVA, the joint venture cannot avoid payment of PGIs claim since "[the JVA] could not
affect third persons like [PGI] because of the basic civil law principle of relativity of contracts which
provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice
a third person, even if he is aware of such contract and has acted with knowledge thereof." 11
Their motions for partial reconsideration having been denied,12 Marsman Drysdale and Gotesco filed
separate petitions for review with the Court which were docketed as G.R. Nos. 183374 and 183376,
respectively. By Resolution of September 8, 2008, the Court consolidated the petitions.

In G.R. No. 183374, Marsman Drysdale imputes error on the appellate court in
A. ADJUDGING [MARSMAN DRYSDALE] WITH JOINT LIABILITY AFTER CONCEDING
THAT [GOTESCO] SHOULD ULTIMATELY BE SOLELY LIABLE TO [PGI].
B. AWARDING ATTORNEYS FEES IN FAVOR OF [PGI]
C. IGNORING THE FACT THAT [PGI] DID NOT COMPLY WITH THE REQUIREMENT OF
"SATISFACTORY PERFORMANCE" OF ITS PRESTATION WHICH, PURSUANT TO THE
TECHNICAL SERVICES CONTRACT, IS THE CONDITION SINE QUA NON TO
COMPENSATION.
D. DISREGARDING CLEAR EVIDENCE SHOWING [MARSMAN DRYSDALES]
ENTITLEMENT TO AN AWARD OF ATTORNEYS FEES.13
On the other hand, in G.R. No. 183376, Gotesco peddles that the appellate court committed error
when it
ORDERED [GOTESCO] TO PAY P535,353.50 AS COST OF THE WORK PERFORMED BY [PGI]
AND P100,000.00 [AS] ATTORNEYS FEES [AND] TO REIMBURSE [MARSMAN DRYSDALE]
50% OF P535,353.50 AND PAY [MARSMAN DRYSDALE] P100,000.00 AS ATTORNEYS FEES. 14
On the issue of whether PGI was indeed entitled to the payment of services it rendered, the Court
sees no imperative to re-examine the congruent findings of the trial and appellate courts thereon.
Undoubtedly, the exercise involves an examination of facts which is normally beyond the ambit of
the Courts functions under a petition for review, for it is well-settled that this Court is not a trier of
facts. While this judicial tenet admits of exceptions, such as when the findings of facts of the
appellate court are contrary to those of the trial courts, or when the judgment is based on a
misapprehension of facts, or when the findings of facts are contradicted by the evidence on
record,15 these extenuating grounds find no application in the present petitions.
At all events, the Court is convinced that PGI had more than sufficiently established its claims
against the joint venture. In fact, Marsman Drysdale had long recognized PGIs contractual claims
when it (PGI) received a Certificate of Payment16 from the joint ventures project manager17 which
was endorsed to Gotesco for processing and payment. 18
The core issue to be resolved then is which between joint venturers Marsman Drysdale and Gotesco
bears the liability to pay PGI its unpaid claims.
To Marsman Drysdale, it is Gotesco since, under the JVA, construction funding for the project was to
be obtained from Gotescos cash contribution, as its (Marsman Drysdales) participation in the
venture was limited to the land.
Gotesco maintains, however, that it has no liability to pay PGI since it was due to the fault of
Marsman Drysdale that PGI was unable to complete its undertaking.

The Court finds Marsman Drysdale and Gotesco jointly liable to PGI.
PGI executed a technical service contract with the joint venture and was never a party to the JVA.
While the JVA clearly spelled out, inter alia, the capital contributions of Marsman Drysdale (land) and
Gotesco (cash) as well as the funding and financing mechanism for the project, the same cannot be
used to defeat the lawful claim of PGI against the two joint venturers-partners.
The TSC clearly listed the joint venturers Marsman Drysdale and Gotesco as the beneficial owner of
the project,19 and all billing invoices indicated the consortium therein as the client.
As the appellate court held, Articles 1207 and 1208 of the Civil Code, which respectively read:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the
latter is bound to render, entire compliance with the prestations. There is a solidary liability only
when the obligation expressly so states, or when the law or nature of the obligation requires
solidarity.
1avvphi1

Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding
article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as
many equal shares as there are creditors or debtors, the credits or debts being considered distinct
from one another, subject to the Rules of Court governing the multiplicity of suits. (emphasis and
underscoring supplied),
presume that the obligation owing to PGI is joint between Marsman Drysdale and Gotesco.
The only time that the JVA may be made to apply in the present petitions is when the liability of the
joint venturers to each other would set in.
A joint venture being a form of partnership, it is to be governed by the laws on partnership. 20 Article
1797 of the Civil Code provides:
Art. 1797. The losses and profits shall be distributed in conformity with the agreement. If only the
share of each partner in the profits has been agreed upon, the share of each in the losses shall be in
the same proportion.
In the absence of stipulation, the share of each in the profits and losses shall be in proportion to
what he may have contributed, but the industrial partner shall not be liable for the losses. As for the
profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the
profits in proportion to his capital. (emphasis and underscoring supplied)
In the JVA, Marsman Drysdale and Gotesco agreed on a 50-50 ratio on the proceeds of the
project.21 They did not provide for the splitting of losses, however. Applying the above-quoted
provision of Article 1797 then, the same ratio applies in splitting the P535,353.50 obligation-loss of
the joint venture.

The appellate courts decision must be modified, however. Marsman Drysdale and Gotesco being
jointly liable, there is no need for Gotesco to reimburse Marsman Drysdale for "50% of the aggregate
sum due" to PGI.
Allowing Marsman Drysdale to recover from Gotesco what it paid to PGI would not only be contrary
to the law on partnership on division of losses but would partake of a clear case of unjust enrichment
at Gotescos expense. The grant by the lower courts of Marsman Drysdale cross-claim against
Gotesco was thus erroneous.
Marsman Drysdales supplication for the award of attorneys fees in its favor must be denied. It
cannot claim that it was compelled to litigate or that the civil action or proceeding against it was
clearly unfounded, for the JVA provided that, in the event a party advances funds for the project, the
joint venture shall repay the advancing party. 22
Marsman Drysdale was thus not precluded from advancing funds to pay for PGIs contracted
services to abate any legal action against the joint venture itself. It was in fact hardline insistence on
Gotesco having sole responsibility to pay for the obligation, despite the fact that PGIs services
redounded to the benefit of the joint venture, that spawned the legal action against it and Gotesco.
Finally, an interest of 12% per annum on the outstanding obligation must be imposed from the time
of demand23as the delay in payment makes the obligation one of forbearance of money, conformably
with this Courts ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.24 Marsman Drysdale and
Gotesco should bear legal interest on their respective obligations.
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are AFFIRMED with
MODIFICATION in that the order for Gotesco to reimburse Marsman Drysdale is DELETED, and
interest of 12% per annum on the respective obligations of Marsman Drysdale and Gotesco is
imposed, computed from the last demand or on January 5, 1999 up to the finality of the Decision.
If the adjudged amount and the interest remain unpaid thereafter, the interest rate shall be 12% per
annum computed from the time the judgment becomes final and executory until it is fully satisfied.
The appealed decision is, in all other respects, affirmed.
Costs against petitioners Marsman Drysdale and Gotesco.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-34767 October 23, 1987
OPERATORS INCORPORATED, petitioner,
vs.
AMERICAN BISCUIT CO., INC., respondent.
No. L-35024 October 23, 1987
ASSOCIATED BISCUIT, INC., petitioner,
vs.
AMERICAN BISCUIT CO., INC., and OPERATORS INCORPORATED, respondents.
No. L-35073 October 23, 1987
AMERICAN BISCUIT CO., INC., petitioner,
vs.
ASSOCIATED BISCUIT CO., INC., and OPERATORS INCORPORATED respondents.

SARMIENTO, J.:
These appeals by certiorari, are the result of a three-cornered controversy involving the American
Biscuit Company, Inc., the Operators Incorporated, and the Associated Biscuit, Inc., in connection
with the operation of American Biscuit's business by Operators and Associated. The trial court
dismissed the claimS of the parties against each other. The Court of Appeals rendered a modified
decision condemning Associated to respond with certain damages. Notwithstanding such a
modification, an three parties came to this Court on separate petitions.
We consolidated the three cases and gave due course thereto.
The facts, as found by the Court of Appeals,

* are not disputed:

xxx xxx xxx

From the evidence adduced by the parties, it appears that plaintiff American Biscuit
Company was, before World War II, a manufacturer of biscuit, candy and bubble gum
products. After the liberation, it reopened its candy department. Financial difficulties
and reverses, however, forced it to discontinue its business operations.

To bail itself out of this financial distress, plaintiff, on September 26, 1953, entered
into an agreement with defendant Operators, Inc. Under this agreement, it ceded the
entire, total and complete present operation of its business to defendant Operators,
Inc., in consideration for which Operators, Inc. undertook to answer for existing
obligations of the plaintiff to its several creditors and to compensate plaintiff with a
percentage of the gross profits realized in the course of its operations. Insofar as are
pertinent to this case, the terms of this agreement, otherwise known as the Operating
Contract, provides as follows:
l. ABC gives, grants and cedes the entire, total and complete present
operation of the ABC unto the OPERATOR and the OPERATOR in
turn agrees and accepts to operate said business of the ABC;
xxx xxx xxx
6. This contract shall remain in full force and effect for a period of ten
(10) years extendable to another ten (10) years at the option of the
OPERATOR herein; and any breach of the terms and conditions of
this agreement, the suspension, cancellation, or desistance on the
part of the ABC with respect to the continuance of this operating
contract shall render the latter liable for damages unto the
OPERATOR in a sum not less than P300,000.00 by way of liquidated
damages, besides other damages that may be demandable and such
further sums as by then the OPERATOR may have disbursed on
account of the indebtedness of the ABC recoverable with twelve
(12%) per centum interest per annum;
xxx xxx xxx
10. That as aforesaid the ABC is presently indebted in the sum of
P220,000.00 more or less and that the ABC hereby gives full power
and authority unto the OPERATOR to settle said obligations through
partial payments and discounts;
xxx xxx xxx
12. ABC shall receive from the gross profits realized by the
OPERATOR an amount equivalent to TWENTY (20%) per cent, the
remaining EIGHTY (80%) per cent to be the property of the
OPERATORS;
The 20% herein set aside for the ABC shall however be first used to
amortize any and all advances, payments and disbursements made
by the OPERATOR on account of the ABC's obligations as under this
contract to be advanced, paid and disbursed by the OPERATOR,

whatever shall be remaining after deducting said amortization shall

be delivered to the ABC;
IT BEING UNDERSTOOD, that the 20% herein reserved for the ABC
shall be increased to 30% leaving 70% to the OPERATOR as soon
as the OPERATOR has fully reimbursed itself from the disbursements
which it has made in payment of the indebtedness of the ABC and of
other items herein mentioned.
13. Should any different or disagreement arises between the parties
hereto on the meaning or effect of this contract or any clause thereof,
or in respect to the amount of percentage accruing to both parties,
such difference or disagreement shall be referred to a Board of
Arbitrators to be composed of one arbitrator appointed by the ABC,
"one by the OPERATOR, and a third to be selected by the two
aforementioned arbitrators, the decision of said arbitrators to be
binding among the parties herein in so far as the same is permitted
by law. No action shall be instituted in any court by any party hereto
arising out of any such difference or disagreement, unless the same
shall have been submitted to said Board of Arbitrators, and any such
action shall be based only upon the award so obtained." (Operating
Contract, Exh. A; Exh. 9-Associated).
On June 12, 1954, or barely 10 months thereafter, plaintiff and Operators, Inc.,
entered into another agreement, this time with defendant Associated Biscuit
Operators, Inc., with the consent of plaintiff, who was a formal party thereto. In this
agreement, known as the Tripartite Agreement, Associated agreed to engage in the
manufacture and marketing of the biscuit products of American Biscuit Company,
Inc., under the terms and conditions of the Operating Contract of September 26,
1953. This Agreement in turn, among others, contains the following pertinent
covenants and stipulations:
l. Grant of Right.
The American Biscuit Co., Inc., with full knowledge and consent of the
Operators Incorporated, hereby grants unto the Associated Biscuit
Operator's Inc., the exclusive and irrevocable right to manufacture
and market the biscuit products of all kinds and denominations of
said American Biscuit Co., and for such quality and quantity and
during the period hereinbelow specified, subject to the same terms
and conditions, stipulations and agreements contained in the contract
between the American Biscuit Co., Inc., and the Operators
Incorporated of September 26, 1953 and the further agreements and
stipulations hereinbelow stated.

xxx xxx xxx

4. Capitalization.
The sum of TWO HUNDRED THOUSAND PESOS (P200,000.00)
minimum will be spent by the Associated Biscuit Operators, Inc.
exclusively for the manufacture and marketing of biscuit products, the
construction of buildings and improvements and the purchase of
machineries, equipments, appliances, furnitures and fixtures needed
and necessary and required for the biscuit business subject of this
contract, the Associated Biscuit Operators Inc., representing hereby
that it will invest any and all other capital necessary should
circumstances so demand;
xxx xxx xxx
6. Machineries and Equipments
All machineries, appliances, equipment, furnitures and fixtures and
any all that may be necessary and required for the business
operation provided for under this contract shall be acquired and
purchased by the Associated Biscuit Operators Inc., at their own
expenses and for their own account without any charges whatsoever
against the American Biscuit Co., Inc.;
The Associated Biscuit Operators Inc., shall keep said machineries,
equipments, appliances, furnitures and fixtures insured and in the
event of their destruction by fire or otherwise, the Associated Biscuit
Operators, Inc., shall immediately replace the same for purposes
agreed upon under this Contract;
7. Operation.
The Associated Biscuit Operators Inc. shall commence operation as
agreed upon under this contract and by virtue hereof within SIX (6)
MONTHS after dollar allocations have been granted to the Associated
Biscuit Operators Inc., and/or the American Biscuit Co., Inc., and the
purchase and importation of necessary machineries and equipments;
xxx xxx xxx
9. Allowances.
(A) Upon signing of this agreement, the Associated Biscuit Operators
Inc., shall advance to the American Biscuit Co., Inc., the sum of ONE
THOUSAND FIVE HUNDRED PESOS (Pl,500.00) and every

month(s) thereafter during the existence of this contract, a minimum

allowance of FIVE HUNDRED PESOS (P500.00), which may be
increased from time to time as the parties hereto may agree;
(B) It shall be the obligation of the Associated Biscuit Operators Inc.
to share equally with the Operators Incorporated in the payment of
any and all obligations and expenses in connection therewith of the
American Biscuit Co., Inc., existing as of September 26, 1953 and as
stipulated in the agreement of the same date, deductible, however,
from the American Biscuit Co., Inc.'s participation as hereinbelow
stipulated. (Exh. B; Exh. 10-Associated).
On June 17, 1954, or 5 days after the conclusion of the Tripartite Agreement, the
defendants, Operators and Associated, entered into an agreement in application of
their right(s) and obligations acquired under the terms of the foregoing agreements.
The defendants agreed
1. That the Associated Biscuit Operators Inc., shall be entitled to the
same right and privileges acquired by the Operators Incorporated
under the original contract. It is understood and agreed that the
Associated Biscuit Operators Inc., shag have full and exclusive
control and supervision over the management of its business affairs.
2. That as provided for in Paragraph 6 of the original contract, this
agreement shall remain in full force and effect for a period of TEN
(10) YEARS extendible for another period of TEN (10) YEARS at the
option of the Associated Biscuit Operators Inc.
3. That any building or buildings that may be constructed, and any
and are machineries, equipments, furnitures and fixtures that may be
installed therein, by the Associated Biscuit Operators, Inc., shall
remain the property of said corporation, subject only to the right of the
American Biscuit Co., Inc., to acquire and purchase the same as
provided for in the original and supplementary contracts.
4. That immediately upon the signing of this agreement, the
Associated Biscuit Operators, Inc., shall pay unto the Operators Inc.,
FIFTY (50%) PER CENTUM of any and all advances and payments
made by the latter for the account of the American Biscuit Co., Inc.,
prior to the signing of this contract: and, thereafter, as provided for in
the supplementary contract, the Associated Biscuit Operators, Inc.,
shall pay and deliver unto the Operators Incorporated FIFTY (50%)
PER CENTUM of the monthly cash advances and payments to be
made for the account of the obligations of the American Biscuit Co.,
Inc., still remaining unpaid.

5. That the Associated Biscuit Operators Inc., hereby further agreed

with the Operators Incorporated to pay the latter FIFTY (50%) PER
CENTUM of the monthly cash advance of ONE THOUSAND
(Pl,000.00) PESOS, Philippine Currency, payable to the American
Biscuit Co., Inc., under paragraph 7, subparagraph 3 of the original
contract and another FIFTY (50%) per centum of the FIVE
HUNDRED (P500.00) PESOS monthly cash advance to the American
Biscuit Co., Inc., as provided for in sub-paragraph A of paragraph 9 of
the supplementary contract; it being understood that the remaining
FIFTY (50%) PER CENTUM of the aforesaid FIVE HUNDRED
(P500.00) PESOS monthly cash advance shall be paid by the
Operators Incorporated to the American Biscuit Co., Inc.
6. That in the construction of the factory or any other building, the
Associated Biscuit Operators Inc. shall leave unoccupied certain
space on the lot, where said factory or building shall be built, for the
use and occupation of the Operators Inc. Such vacant space to be
reserved shall be determined by the parties hereto before the start of
the construction of the factory or building.
7. That the Associated Biscuit Operators, Inc., shall be entitled to the
use and occupation of FIFTY (50%) PER CENTUM of American
Biscuit Co., Inc. building at the factory site presently occupied by the
Operators Incorporated, including such furniture, fixtures and rolling
equipments owned by the American Biscuit Co., Inc., which are
presently in the possession of, and are being used by, the Operators
Incorporated. (Exh. 11-Associated).
Meanwhile, after the conclusion of the original operating contract between ABC and
Operators Inc., it appears that Operators Inc. commenced with its operations in the
manufacture of plaintiff's chiclet and bubble gum products, utilizing for this purpose
the plaintiff's site and establishment. In December 1954, Eu C. Leh became the
general manager of Operators Inc. Leh reorganized the Operators Inc., improving the
quality of the chewing gum which it was manufacturing. For this purpose, Operators
Inc. took over the machinery used for the manufacture of chewing gum only, such as
gum cutter, mixer, pulverizers and moving fans.
In March 1955 i.e., some eight (8) months after the conclusion of the Tripartite
Agreement it appears that differences had arisen between the two defendants on
the utilization of plaintiff's establishment and equipment. A conference was held in
plaintiff's premises in Paranaque, upon the instructions of its president, Mr. Jorge
Vargas. In the said conference, Operators Inc. was represented by Eu C. Leh, Judge
Rafael Dinglasan and Go Khe Bing. President for Associated were Juan Wong
Locsin, its president; Yan Won Can, its manager; and Atty. Demetrio Salem. In said
conference the parties agreed to divide the factory building into two portions, the
northern-portion having been assigned to Operators Inc. and the southern-portion to

Associated. The parties also divided the ABC's facilities, equipment and furniture.
The Chevrolet truck was assigned to was only for the manufacture of chewing gum,
was assigned to defendant Operators. The arrangement was approved by the
plaintiff. Associated Biscuit was allowed the use of the sugar pulverizer, the water
pump and the airconditioning facilities, on condition that it would pay the expenses of
maintenance, before the arrival of its own machinery. After the foregoing division of
factory premises, equipment and furniture, the parties took possession of their
respective shares. Operators continued with its manufacture of chiclet and chewing
gum. Associated commenced its manufacture of biscuits with the machinery it had
imported from Hongkong, awaiting meanwhile the arrival of the machinery they
undertook to import from their purpose from the United States thru the dollar
allocation secured from them by the American Biscuit.
Meanwhile also, since the two defendants operators and Associated-had both
undertaken to pay ABC's obligation, owing to its various creditors-accounts which
had been outstanding before the entry into the agreements and which, in fact,
were the motivating factors for the entry of the plaintiff into the operating agreements
arrangements were made between the parties with the China Banking Corporation
whereby the defendants would share fifty-fifty in the payment by monthly installments
of the P110,000.00 unpaid balance of the loan by the bank to plaintiff (Exh. 3-AOperators). This arrangement was religiously complied with by Operators Inc. which
paid Pl,500.00 monthly, making a total payment of more than P100,000.00 including
interest. Defendant Associated in turn, failed to make good its commitments to pay its
share of P55,000.00.
As a result of Associated's failure to observe its commitments towards the liquidation
of ABC's pending accounts, China Banking Corporation filed against plaintiff-Civil
Case No. 37045 (Exhs. F, F-1, F-2, F-3; Exh. 4 Operators). This case was again
dismissed on joint motion of the parties, upon the undertaking of Operators Inc., to
pay the obligations with the approval of Mr. Jorge Vargas. Operators Inc. thus fully
complied with its obligation under the contracts, and then plaintiff, in October 1963,
upon the termination of the operating contracts, entered into a contract of lease (Exh.
14 Operators) with Operators Inc., for the continued use of the premises and the
equipment of the plaintiff for another term of 10 years, renewable for the same
period. It also appears that in August 1958 Chua Tee re-filed the original cases filed
in the Court of First Instance of Rizal, i.e., Civil Cases Nos. 5123 and 5124 (Exhs. G
and sub-parts and K and sub-parts) 1
In addition, the Court of Appeals observed:
xxx xxx xxx
... It is true that Operators and Associated made periodical payments so as to
partially satisfy the claims of the creditors, but they were not enough; the creditors
were not satisfied, that was why on 23 June, 1955, Exh. P American Biscuit asked
Operators and Associated to wake up and warned them of rescission, and

Associated, which was the party that had failed to perform, replied in Exh. 1
Associated that,
we wish to inform you that the settlement of the obligation of the
China Banking Corporation is under negotiation with said bank and
we are just waiting for the action of the Board of said Bank on our
proposal.
but nothing tangible came out of that, so much so that on 23 August, 1955, a three
cornered conference took place in the office of American Biscuit, from which WW be
seen that American Biscuit confessed its plight with China Banking unto both
Associated and Operators, and therefore warned of rescission, see tsn. Exh. Y; ... 2
2nd. Again, under Exh. A in connection with Exh. B, Associated had bound itself to pay
to American Biscuit as monthly advances, the sum of P500.00 a month from July, 1954,
par. 9, Exh. B, as well as binding itself solidarity with Operators to advance the monthly
overhead of P1,000.00, par. 7, Exh. A; this was demanded from Associated not only in
the latter, Exh. P of 23 June, 1955, but more emphatically in the conference, the tripartite
conference, on 23 August, 1955, Exh- Y, again according to Exh. AA and AA-1 and as
admitted by Juan Locsin Wong, Associated's witness, Associated paid only up to
February, 1955 and this only in October, 1955; ... 3
xxx xxx xxx

... [I]t is not denied that Associated removed a Hudson Sharp Biscuit Cracker
Wrapper and a Sandwich Machine on 19 and 24 June, 1957, as well as a cutting
machine and a mixer, having sold the Hudson Biscuit Cracker and the Sandwich
Machine to one Kong Nian of Cebu, Exh. 12 and 13 Associated; representing them to
be;
"free from all liens and encumbrances," most contrary to par. 6 of Exh. B that had
made them partial securities in favor of American Biscuit ... 4
Amid this setting, American Biscuit filed a complaint against Operators Incorporated and Associated
Biscuit for the cancellation of the Operating Contract and the Tripartite Agreement, with prayers to
put Associated Biscuit under receivership and for damages. The complaint alleged that there was a
breach of the aforesaid agreements owing to the failure of Associated Biscuit to pay its share in
American Biscuit's indebtedness to its (American Biscuit's) creditors, and the failure of Associated
Biscuit to pay its share in the monthly overhead expenses of American Biscuit, in addition to the
removal by Associated Biscuit of machineries used in the business. American Biscuit maintained that
the payment of its indebtedness and of its overhead expenses was a joint and solidary obligation of
Operators and Associated Biscuit.
Operators submitted in its answer that the Operating Contract had been novated by the Tripartite
Agreement which allegedly severed its obligation from Associated Biscuit's own liabilities, and since
it had fully complied with its obligations, American Biscuit had no cause of action against it.

Operators counterclaimed for damages for alleged breach by American Biscuit of the arbitration
provisions of the Tripartite Agreement by coming to court directly.
For its part, Associated Biscuit averred that it had paid a substantial portion of its obligations under
the Tripartite Agreement and that it stopped payment only because American Biscuit had deprived it
of its contractual share in the latter's dollar allocations. Associated Biscuit likewise submitted a
counterclaim on the contention that it was American Biscuit that breached the Tripartite Agreement. It
filed a cross-claim against Operators for the latter's alleged failure to comply with their agreement
affording Associated Biscuit the right to half of American Biscuit's buildings, furniture, fixtures, and
rolling equipment. Associated Biscuit likewise alleged that Operators had connived with American
Biscuit in denying it of its share in the said dollar allocations.
As we said, the trial court dismissed the claims of all the parties against each other.
The Court of Appeals on the other hand, held:
xxx xxx xxx
... [T]he final result must be that between American Biscuit and Operators, while
Operators should be liable solidarity for breach of Exh. B by Associated, and must
therefore together with Associated, pay unto American Biscuit the liquidated
damages of P300.000.00, yet, American Biscuit must also be liable unto Operators
for breach of the same contract in regard to the arbitration clause and be liable
therefor for the same amount of P300,000.00, so that these claims will offset each
other, but as to Associated, it having been so clearly shown to be the transgressor, it
must respond unto American Biscuit in the liquidated damages of P300,000.00, but
as these liquidated damages due to American Biscuit from Associated and Operators
as solidary debtors are already offset by American Biscuit's liability to Operators for
the same amount of liquidated damages by reason of American Biscuit's own breach
of contract as against Operators, therefore American Biscuit can no longer recover
from Operators nor Associated but as of the two solidary debtors, Associated and
Operators, it was Associated that was solely at fault and had given occasion for
American Biscuit to impose the liquidated damages, therefore, Operator should in
turn be entitled to shift the responsibility therefor upon Associated, thus permitting it
to recover from Associated the P300,000.00 it had offset against American Biscuit;
and even as between Associated and Operators, as there has not been shown any
cause nor reason for Associated to complain against Operators, once, again under
Art. 2208, this Court finds it only just to grant attorney's fees unto Operators therefor,
which it win fix at P5,000.00; 5
and ruled that:
IN VIEW WHEREOF, judgment will have to be as it is hereby modified so that a new
one is dictated as follows: Associated is condemned to pay Operators the sum of
P300,000.00 plus attorney's fees in the sum of P5,000.00 plus costs; and as against

Associated, Exh. A and B are declared rescinded; costs of American Biscuit to be

paid by Associated. 6
In G.R. No. L-35024, Associated Biscuit submits the following:
ASSIGNMENT OF ERRORS
I
THE COURT OF APPEALS ERRED IN NOT HOLDING AMERICAN BISCUIT COMPANY, INC.,
LIABLE FOR BREAKING THE TEN-YEAR TERM OF THE TRIPARTITE AGREEMENT IN PLACING
PETITIONER'S BISCUIT BUSINESS UNDER RECEIVERSHIP WITHOUT JUST CAUSE.
II
THE COURT OF APPEALS ERRED IN REVERSING THE CONCLUSION OF THE TRIAL COURT
THAT PETITIONER'S USE OF THE PRODUCERS' DOLLAR QUOTA OF RESPONDENT
AMERICAN BISCUIT COMPANY, INC. WAS A CONTRACTUAL RIGHT UNDER THE TRIPARTITE
AGREEMENT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT'S CONCLUSION THAT
RESPONDENTS BROKE PETITIONER'S CONTRACTUAL RIGHT TO THE DOLLAR QUOTA AND
ABSOLVING THEM FROM LIABILITY THEREFROM.
IV
THE COURT OF APPEALS ERRED IN JUSTIFYING RESPONDENTS' BREACH OF
PETITIONER'S CONTRACTUAL RIGHT TO THE DOLLAR QUOTA BY HOLDING THAT
PETITIONER HAD FAILED TO SATISFY THE CREDITORS OF AMERICAN BISCUIT COMPANY,
INC. SINCE AUGUST, 1955.
V
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONER HAD FULFILLED ITS
OBLIGATIONS REGARDING THE INDEBTEDNESS OF AMERICAN BISCUIT COMPANY, INC.
VI
THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER VIOLATED THE TRIPARTITE
AGREEMENT BECAUSE CHINA BANKING CORPORATION, CHUA TEE AND CHUA TEE & CO.,
FILED SUITS AGAINST AMERICAN BISCUIT COMPANY, INC. IN AUGUST, 1958, INSTEAD OF
CONDEMNING AMERICAN BISCUIT COMPANY, INC. TO PAY MORAL DAMAGES FOR ITS
FRAUDULENT COMPLAINT.

VII
THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER'S DISCONTINUANCE OF ITS
MONTHLY ALLOWANCE FOR OVERHEAD EXPENSES TO AMERICAN BISCUIT COMPANY, INC.
AFTER FEBRUARY, 1955 WAS A BREACH OF THE TRIPARTITE AGREEMENT.
VIII
THE COURT OF APPEALS ERRED IN CONSIDERING AS A CONTRACTUAL BREACH
PETITIONER'S DISPOSAL OF TWO PIECES OF EQUIPMENT, ALTHOUGH THE TRIAL COURT
HAD NOT RULED ON THAT POINT AND THE LONE ASSIGNMENT OF ERROR THRUST IN BY
AMERICAN BISCUIT COMPANY, INC. WAS ADMITTEDLY GENERAL OR NON-SPECIFIC.
IX
THE COURT OF APPEALS FURTHER ERRED IN NOT DECLARING THE RESCISSION OF THE
CONTRACTS AT THE INSTANCE OF PETITIONER, WITH REIMBURSEMENT OF ITS ADVANCES
AND DAMAGES, LIQUIDATED AND MORAL, PLUS LEGAL INTEREST.
X
THE COURT OF APPEALS ERRED IN DISMISSING PETITIONER'S CROSS-CLAIM AGAINST
OPERATORS INCORPORATED AND CONDEMNING PETITIONER TO PAY IT P300,000.00
INSTEAD.
XI
THE COURT OF APPEALS ERRED IN ENTERTAINING RESPONDENTS' APPEAL OVER
PETITIONER'S OBJECTIONS. 7
Operators Incorporated, as the petitioner in G.R. No. L-34767, in turn assigns these errors:
I
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT UNDER THE OPERATING
CONTRACT (Exh. A) AND THE TRIPARTITE AGREEMENT (Exh. B) DEFENDANT-APPELLANT
OPERATORS INC. IS NOT ANSWERABLE OR RESPONSIBLE UNTO PLAINTIFF-APPELLANT
AMERICAN BISCUIT CO., INC., IN SOLIDUM WITH DEFENDANT-APPELLANT ASSOCIATED
BISCUIT INC., FOR THE LATTER'S MISFEASANCES
II
THE COURT OF APPEALS ERRED IN HOLDING THAT "DEFENDANT-APPELLANT OPERATORS
INC., IS LIABLE FOR THE LIQUIDATED DAMAGES PRESCRIBED AT P300,000 IN PARAGRAPH
13 OF THE TRIPARTITE AGREEMENT (EXH. B).

III
THE COURT OF APPEALS ERRED IN NOT SENTENCING OR CONDEMNING PLAINTIFFAPPELLEE AMERICAN BISCUIT CO., TO PAY DEFENDANT-APPELLANT OPERATORS INC.,
THE SUM OF P300,000.00 BY WAY OF LlQUIDATED DAMAGES AND THE SUM OF P20,000 AS
ATTORNEY'S FEES, UNDER PARAGRAPH 6 OF THE OPERATING AGREEMENT (EXH. A) 8
And in G.R. No. L-35073, American Biscuit argues that:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER'S "ACCUSATION OF
BREACH" WAS, PURSUANT TO THE GOVERNING CONTRACTS, REFERABLE TO
ARBITRATION, CONSIDERING THAT THE SAME IS BASED ON THE FAILURE OF DEFENDANT
ASSOCIATED BISCUIT, INC. TO CARRY OUT THEIR TERMS AND CONDITIONS, ESPECIALLY
ITS FAILURE TO SATISFY THE INDEBTEDNESS OF PETITIONER MENTIONED THEREIN,
WHICH, UNDER SAID GOVERNING AGREEMENTS, EXPRESSLY GRANTS PETITIONER THE
RIGHT TO FILE, SUIT FOR THE CANCELLATION OR ABROGATION OF THE SAME.
IT IS NOT BASED ON ANY DISAGREEMENT AS TO THE MEANING OR EFFECT OF THE
GOVERNING CONTRACTS OR ANY CLAUSE THEREOF OR IN RESPECT TO THE
PERCENTAGE ACCRUING TO THE PARTIES, ANY OF WHICH CASES IS REFERABLE TO A
BOARD OF ARBITRATORS UNDER THE SAME CONTRACTS.
II.
PETITIONER AND DEFENDANT OPERATIONS, INC. HAD NOTHING AT ALL REFERABLE TO
ARBITRATION BECAUSE THEY HAD NO QUARREL WHATSOEVER AS BORNE OUT BY THE
EVIDENCE ON RECORD AND AS EXPRESSLY NOTED BY THE COURT OF APPEALS IN ITS
DECISION.
III.
ASSUMING ARGUENDO THAT PETITIONER'S "ACCUSATION OF BREACH" WAS SUBJECT TO
ARBITRATION, WHEN DEFENDANT OPERATORS FILED ITS ANSWER, ENTERED INTO TRIAL
AND COMPLETED ITS EVIDENCE WITHOUT EVEN FILING A MOTION TO STAY THE
PROCEEDING PURSUANT TO SEC. 7 OF REPUBLIC ACT 876 (ARBITRATION LAW) FROM THE
FILING OF THE COMPLAINT ON 15 SEPTEMBER 1958 UP TO THE RENDITION OF THE LOWER
COURT'S JUDGMENT ON 14 APRIL 1969, IT UNQUESTIONABLY WAIVED ITS RIGHT TO AVAIL
ITSELF OF THE CONTRACTUAL ARBITRATION CLAUSE.
IV.
IF THE COURT OF APPEALS CONSIDERS THE IMPOSITION OF P300,000.00 IN LIQUIDATED
DAMAGES AGAINST PETITIONER AS FAIR, NOTWITHSTANDING THE FACT THAT
OPERATORS, INC. WAIVED ITS RIGHT TO ARBITRATION, THEN FOR EACH AND EVERY

BREACH OF ASSOCIATED BISCUIT, INC. THE COURT OF APPEALS SHOULD HAVE IMPOSED
P300,000.00 LIKEWISE AS LIQUIDATED DAMAGES AGAINST IT AND IN TURN AGAINST
OPERATORS, INC., BEING A SOLIDARITY OBLIGOR. 9
The threshold inquiry is whether or not the appeals (in the Court of Appeals) of American Biscuit and
Operators Inc. should have been dismissed at the outset since they assigned no errors. There is no
merit in this contention. In Miguel vs. Court of Appeals, 10 citing Cabrera vs. Belen, 11 we declared that:
... [A]pellants need not make specific assignment of errors provided they discuss at
length and assail in their brief the correctness of the trial court's findings regarding
the matter. Said discussion warrants the appellate court to rule upon the point
because it substantially complies with sec. 7, Rule 51 of the Revised Rules of Court,
intended merely to compel the appellant to specify the questions which he wants to
raise and be disposed of in his appeal. A clear discussion regarding an error
allegedly committed by the trial court accomplishes the purpose of a particular
assignment of error.
As correctly noted by the appellate court, "an examination of the briefs of American Biscuit and
Operators who show that while their assignments of error are really general, the bodies of their briefs
are specific enough." 12
The fundamental question is whether or not Associated Biscuit violated the terms of the Operating
Contract and the Tripartite Agreement. On this question, both the trial and appellate courts were
agreed that Associated Biscuit failed to comply with its dual contractual commitments of settling the
financial obligations of American Biscuits and of paying its monthly overhead expenses. It is a finding
that finds ample support in the evidence. The Court of Appeals pointed out that (1) on June 23,
1955, American Biscuit had asked Associated Biscuit and Operators, under pain of rescission of the
contract, to satisfy the claims of its creditors, but in spite of assurances by Associated Biscuit,
nothing tangible came about, leading to the tripartite conference of August 13, 1955. As a result, the
parties arrived at an arrangement that obliged Associated and Operators to make a promissory note
payable on March 13, 1957. But again, this was not paid; and (2) in both the letter of June 23, 1955
and the tripartite conference of August 23, 1955, American Biscuit demanded from Associated
Biscuit the payment of the former's monthly overhead expenses but Associated made payments
good only up to February, 1955, and the payment itself was made only in October, 1955. These are
factual findings that bind this Court. 13
We are not convinced with the following arguments of Associated Biscuit:
xxx xxx xxx
... Short of execution of judgments and consequent closure of the candy department,
there could be no breach of paragraph 9 of the Operating Contract; and there had
been neither judgment nor execution on those cases [filed by the creditors of
American Biscuit against the latter] before American Biscuit Company, Inc.,
commenced [the instant case] Civil Case No. 37540 on or about September 12,
1958. 14

The theory then, of Associated Biscuit is that paragraph 9 of the Operating Contract stipulating that:
9. The OPERATOR hereby agrees, guarantees and represents that it will at all times
protect and safeguard the A B C from lawsuits arising from the claims of its present
creditors by and through the payment and satisfaction of the latter's claims.
is violated only upon an actual execution of any judgment against American Biscuit and a physical
takeover of the company's properties.
Such a stand is not only patently against the clear wordings of the Operating Contract, it is absurd. It
should be observed that Associated Biscuit itself outlined in its brief that American Biscuit had
entered into the Operating Contract at a time when its creditors had already commenced foreclosure
proceedings upon its properties and at a time when its equipment and machineries were already in
danger of being sold at public auction.15 That was why Operators and Associated Biscuit, under paragraph 9 of the Operating
Contract, obligated themselves to "protect and safeguard the ABC from lawsuits ... by and through the payment and satisfaction of the
[creditors'] claims." The "execution of judgments" and the "consequent closure of the candy department" were precisely the consequences
American Biscuit had feared and foreseen, for which Operators and Associated Biscuit were made to assume the liabilities they now deny.
Clearly, when there is insufficient payment, as factually shown in the cases at bar, there is a violation of the Operating Contract.

For one of the essential ingredients of payment as a mode of extinguishing obligations is integrity,
that is, the payment must be complete or full. Article 1233 of the Civil Code states: "A debt shag not
be understood to have been paid unless the thing or service in which the obligation consists has
been completely delivered or rendered, as the case may be."
Associated Biscuit cannot claim that its share in the dollar quota of American Biscuit is a contractual
right. The fact is that, as found by the appellate court, American Biscuit did not refuse to share the
quota with Associated Biscuit. Furthermore, in its very brief, Associated Biscuit avers:
Honoring the adjustments, American Biscuit Company, Inc. allowed petitioner to use
half of its dollar quota as petitioner prepared to operate the biscuit department in
1955; and petitioner had enjoyed the quota equally with the Operators Incorporated
until June 1957, when the quota was suspended by the Central Bank for failure of
American Biscuit Company, Inc. to file the required production report. 16
As the Court of Appeals correctly noted, after the Operating Contract and the Tripartite Agreement
had gone into effect, American Biscuit went into inactivity, and since Operators and Associated
Biscuit had then taken charge of the business, it was their foremost obligation to see that the
production report was duly filed.
We agree with the Court of Appeals that Associated had failed to exercise due diligence with respect
to the American Biscuit's quota allocations. It was a part of its contractual undertaking and its efforts
were wanting in that regard. Moreover, even as Associated Biscuit was actually sharing in the quota
allocations until June, 1957, it, as late as March, 1957, had continuously failed to satisfy the of
American Biscuit's creditors and to pay the overhead expenses of the biscuit company. These are
hard facts Associated Biscuit cannot now disavow by a torture of the words of the contracts.

The position of Operators that under the Operating Contract and the Tripartite Agreement it is not
answerable for the misfeasance of Associated, is belied by the very provisions of the Tripartite
Agreement, thus:
10. Incorporating Clauses.
Paragraphs 9, 10, 11, the provisions on Board of Arbitrators, 14, 15, 16 and 17 of the
contract of September 26, 1953 between the American Biscuit Co., Inc. and
Operators Incorporated are hereby incorporated into this Contract by way of
reference and made an essential part hereof; and the word "OPERATORS"
mentioned in said paragraphs is to be understood as to include the Associated
Biscuit Operators Inc., for purposes of this Contract; and both the Operators
Incorporated and the Associated Biscuit Operators Inc., in so far as liabilities and
obligations therein contained in said paragraphs shall be made answerable to the
American Biscuit Co., Inc., jointly and severally. 17
There is thus no mistaking the fact that Operators and Associated had assumed, per their
agreements, American's liabilities to its creditors in solidum.
Article 1207 of the new Civil Code states that: "there is a solidary liability when the obligation
expressly so states .... " 18
What may have led Operators in denying the solidary character of its obligations was the fact that it
was engaged in the manufacture of candy whereas Associated Biscuit was supposed to
manufacture biscuits, and the fact that the two operators were required to invest different minimum
amounts in the venture. But these conditions do not alter the solidary nature of their obligations as
expressly provided. According to Article 1211 of the Civil Code, "solidarity may exist although the
debtors may not be bound in the same manner and by the same periods and conditions." 19 Accordingly,
the disparity in their functions under the contracts does not vary the fact that they were bound, in connection with American's liabilities, jointly
and severally.

American Biscuit's own submission, however, that:

The Court of Appeals erred in holding that petitioner's "accusation of breach" was,
pursuant to the defendant Associated Biscuit, Inc. to carry out their terms and
conditions, especially its failure to satisfy the indebtedness of petitioner mentioned
therein, which, under said governing agreements, expressly grants petitioner the
right to file suit for the cancellation or abrogation of the same. 20
lacks merit.
A closer scrutiny of the contracts in question will show that, contrary to the contention of American
Biscuit, there was, as between itself and Operators, a disagreement as to the meaning and effect of
the governing contracts, a disagreement referable, indeed, to a Board of Arbitrators pursuant to the
arbitration clause. And this was violated by American Biscuit when it made Operators a co-defendant
in the complaint for the cancellation of the aforesaid agreements.

To be sure, even if the solidary nature of Operators' liability is self-evident, American Biscuit cannot
disregard such an arbitration clause stipulated in the contracts. Solidarity does not make a solidary
obligor an indispensable party in a suit filed by the creditor. Article 1216 of the Civil Code says that
the creditor "may proceed against anyone of the solidary debtors or some or all of them
simultaneously. 21
At the very least then, the inclusion of Operators in the case filed below is a dead issue. The dispute
between the parties should have been the subject of arbitration as agreed upon.
IN VIEW OF THE FOREGOING, the decision appealed from is hereby affirmed in toto. No costs.
IT IS SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 138677

February 12, 2002

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,

vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing
the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security
Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount
of P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a
promissory note binding themselves, jointly and severally, to pay the sum borrowed with an interest
of 15.189% per annum upon maturity and to pay a penalty of 5% every month on the outstanding
principal and interest in case of default. In addition, petitioners agreed to pay 10% of the total
amount due by way of attorneys fees if the matter were indorsed to a lawyer for collection or if a suit
were instituted to enforce payment. The obligation matured on 8 September 1981; the bank,
however, granted an extension but only up until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May
1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to
petitioners informing them that they had five days within which to make full payment. Since
petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with the Regional
Trial Court of Makati, Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27
March 1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing
of the case reset on two consecutive occasions. In view of the absence of petitioners and their
counsel on 28 August 1985, the third hearing date, the bank moved, and the trial court resolved, to
consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of
the trial court declaring them as having waived their right to present evidence and prayed that they
be allowed to prove their case. The court a quo denied the motion in an order, dated 5 September
1988, and on 20 October 1989, it rendered its decision,1 the dispositive portion of which read:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
ordering the latter to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2%
service charge and 5% per month penalty charge, commencing on 20 May 1982 until fully
paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as
attorneys fees; and
"3. To pay the costs of the suit."2
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court
of their motion to present evidence and assailing the imposition of the 2% service charge, the 5%
per month penalty charge and 10% attorney's fees. In its decision 3 of 7 March 1996, the appellate
court affirmed the judgment of the trial court except on the matter of the 2% service charge which
was deleted pursuant to Central Bank Circular No. 783. Not fully satisfied with the decision of the
appellate court, both parties filed their respective motions for reconsideration. 4 Petitioners prayed for
the reduction of the 5% stipulated penalty for being unconscionable. The bank, on the other hand,
asked that the payment of interest and penalty be commenced not from the date of filing of
complaint but from the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon
must commence not on the date of filing of the complaint as we have previously held in our decision
but on the date when the obligation became due.
"Default generally begins from the moment the creditor demands the performance of the obligation.
However, demand is not necessary to render the obligor in default when the obligation or the law so
provides.
"In the case at bar, defendants-appellants executed a promissory note where they undertook to pay
the obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest
in case of non-payment from the date of default.
"x x x

xxx

xxx

"While we maintain that defendants-appellants must be bound by the contract which they
acknowledged and signed, we take cognizance of their plea for the application of the provisions of
Article 1229 x x x.
"Considering that defendants-appellants partially complied with their obligation under the promissory
note by the reduction of the original amount of P120,000.00 to P114,416.00 and in order that they
will finally settle their obligation, it is our view and we so hold that in the interest of justice and public
policy, a penalty of 3% per month or 36% per annum would suffice.

"x x x

xxx

xxx

"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendantsappellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee
Security Bank and Trust Company the following:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3%
per month penalty charge commencing May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys
fees."5
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly
discovered evidence,6 alleging that while the case was pending before the trial court, petitioner
Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January
1984 to secure the existing indebtedness of petitioners Ligutan and dela Llana with the bank.
Petitioners contended that the execution of the real estate mortgage had the effect of novating the
contract between them and the bank. Petitioners further averred that the mortgage was
extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the bank did
not credit them with the proceeds of the sale. The appellate court denied the omnibus motion for
reconsideration and to admit newly discovered evidence, ratiocinating that such a second motion for
reconsideration cannot be entertained under Section 2, Rule 52, of the 1997 Rules of Civil
Procedure. Furthermore, the appellate court said, the newly-discovered evidence being invoked by
petitioners had actually been known to them when the case was brought on appeal and when the
first motion for reconsideration was filed.7
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to
this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court,
submitting thusly "I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest
and the penalty of three (3%) percent per month or thirty-six (36%) percent per annum
imposed by private respondent bank on petitioners loan obligation are still manifestly
exorbitant, iniquitous and unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the
ten (10%) percent award of attorneys fees which is highly and grossly excessive,
unreasonable and unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting petitioners newly
discovered evidence which could not have been timely produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding that there was a novation
of the cause of action of private respondents complaint in the instant case due to the
subsequent execution of the real estate mortgage during the pendency of this case and the
subsequent foreclosure of the mortgage."8

Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to
be deleted by petitioners was even insufficient to fully cover and compensate for the cost of money
brought about by the radical devaluation and decrease in the purchasing power of the peso,
particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence. The Bank
would stress that only the amount of P5,584.00 had been remitted out of the entire loan of
P120,000.00.9
A penalty clause, expressly recognized by law,10 is an accessory undertaking to assume greater
liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the
coercive force of the obligation11 and to provide, in effect, for what could be the liquidated damages
resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the measure of damages caused by the
breach.12 Although a court may not at liberty ignore the freedom of the parties to agree on such
terms and conditions as they see fit that contravene neither law nor morals, good customs, public
order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it
is iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied
with.13
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the court. In Rizal
Commercial Banking Corp. vs. Court of Appeals,14 just an example, the Court has tempered the
penalty charges after taking into account the debtors pitiful situation and its offer to settle the entire
obligation with the creditor bank. The stipulated penalty might likewise be reduced when a partial or
irregular performance is made by the debtor.15 The stipulated penalty might even be deleted such as
when there has been substantial performance in good faith by the obligor,16 when the penalty clause
itself suffers from fatal infirmity, or when exceptional circumstances so exist as to warrant it. 17
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty
interest from 5% a month to 3% a month which petitioner still disputes. Given the circumstances, not
to mention the repeated acts of breach by petitioners of their contractual obligation, the Court sees
no cogent ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that
has not been raised and ventilated before the courts below. In any event, the interest stipulation, on
its face, does not appear as being that excessive. The essence or rationale for the payment of
interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or a
penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that
effect, the two being distinct concepts which may separately be demanded. 18What may justify a court
in not allowing the creditor to impose full surcharges and penalties, despite an express stipulation
therefor in a valid agreement, may not equally justify the non-payment or reduction of interest.
Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank's existence.19

Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's
fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the
extent of services rendered by counsel for the bank and the nature of the case. Bearing in mind that
the rate of attorneys fees has been agreed to by the parties and intended to answer not only for
litigation expenses but also for collection efforts as well, the Court, like the appellate court, deems
the award of 10% attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to
admit newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 "Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for
reconsideration of a judgment or final resolution by the same party shall be entertained. Considering
that the instant motion is already a second motion for reconsideration, the same must therefore be
denied.
"Furthermore, it would appear from the records available to this court that the newly-discovered
evidence being invoked by defendants-appellants have actually been existent when the case was
brought on appeal to this court as well as when the first motion for reconsideration was filed. Hence,
it is quite surprising why defendants-appellants raised the alleged newly-discovered evidence only at
this stage when they could have done so in the earlier pleadings filed before this court.
1wphi1

"The propriety or acceptability of such a second motion for reconsideration is not contingent upon
the averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore
presented and rejected. Otherwise, attainment of finality of a judgment might be stayed off
indefinitely, depending on the partys ingenuousness or cleverness in conceiving and formulating
'additional flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice to the
rights of the movant for reconsideration."20
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan
would not have resulted in the extinguishment of the original contract of loan because of novation.
Petitioners acknowledge that the real estate mortgage contract does not contain any express
stipulation by the parties intending it to supersede the existing loan agreement between the
petitioners and the bank.21 Respondent bank has correctly postulated that the mortgage is but an
accessory contract to secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the
parties to the new contract; third, the extinguishment of the obligation; and fourth, the validity of the
new one.22 In order that an obligation may be extinguished by another which substitutes the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligation be on
every point incompatible with each other.23 An obligation to pay a sum of money is not extinctively
novated by a new instrument which merely changes the terms of payment or adding compatible
covenants or where the old contract is merely supplemented by the new one. 24When not expressed,
incompatibility is required so as to ensure that the parties have indeed intended such novation
despite their failure to express it in categorical terms. The incompatibility, to be sure, should take
place in any of the essential elements of the obligation, i.e., (1) the juridical relation or tie, such as
from a mere commodatum to lease of things, or from negotiorum gestio to agency, or from a

mortgage to antichresis,25 or from a sale to one of loan;26 (2) the object or principal conditions, such
as a change of the nature of the prestation; or (3) the subjects, such as the substitution of a
debtor27 or the subrogation of the creditor. Extinctive novation does not necessarily imply that the
new agreement should be complete by itself; certain terms and conditions may be carried, expressly
or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 157480

May 6, 2005

PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioners,

vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an
agreement is terminated, it is deemed valid at inception. Prior to termination, the contract binds the
parties, who are thus obliged to observe its provisions. However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their status quo ante. Hence, there is mutual restitution of
benefits received. The consequences of termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not contrary to law, morals, good customs, public
order or public policy, they shall be respected by courts. The judiciary is not authorized to make or
modify contracts; neither may it rescue parties from disadvantageous stipulations. Courts, however,
are empowered to reduce iniquitous or unconscionable liquidated damages, indemnities and
penalties agreed upon by the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the May 22, 2002
Decision2 of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
Resolution3 denying petitioners Motion for Reconsideration. The assailed Decision disposed thus:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil
Case No. 93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering
[Respondent] Philippine Amusement and Gaming Corporation to pay [Petitioner] Pryce
Properties Corporation the total amount of P687,289.50 as actual damages representing the
accrued rentals for the quarter September to November 1993 with interest and penalty at the
rate of two percent (2%) per month from date of filing of the complaint until the amount shall
have been fully paid, and the sum of P50,000.00 as attorneys fees; (2) In Civil Case No. 9368337, the appealed decision is REVERSED and SET ASIDE and a new judgment is
rendered ordering [Petitioner] Pryce Properties Corporation to reimburse [Respondent]
Philippine Amusement and Gaming Corporation the amount of P687,289.50 representing the
advanced rental deposits, which amount may be compensated by [Petitioner] Pryce
Properties Corporation with its award in Civil Case No. 93-68266 in the equal amount
of P687,289.50."4

The Facts
According to the CA, the facts are as follows:
"Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC
for brevity) made representations with the Philippine Amusement and Gaming Corporation
(PAGCOR) on the possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro
City. [A] series of negotiations followed. PAGCOR representatives went to Cagayan de Oro
City to determine the pulse of the people whether the presence of a casino would be
welcomed by the residents. Some local government officials showed keen interest in the
casino operation and expressed the view that possible problems were surmountable. Their
negotiations culminated with PPCs counter-letter proposal dated October 14, 1992.
"On November 11, 1992, the parties executed a Contract of Lease x x x involving the
ballroom of the Hotel for a period of three (3) years starting December 1, 1992 and until
November 30, 1995. On November 13, 1992, they executed an addendum to the contract x x
x which included a lease of an additional 1000 square meters of the hotel grounds as living
quarters and playground of the casino personnel. PAGCOR advertised the start of their
casino operations on December 18, 1992.
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed
Resolution No. 2295 x x x dated November 19, 1990 declaring as a matter of policy to
prohibit and/or not to allow the establishment of a gambling casino in Cagayan de Oro City.
Resolution No. 2673 x x x dated October 19, 1992 (or a month before the contract of lease
was executed) was subsequently passed reiterating with vigor and vehemence the policy of
the City under Resolution No. 2295, series of 1990, banning casinos in Cagayan de Oro City.
On December 7, 1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted
Ordinance No. 3353 x x x prohibiting the issuance of business permits and canceling existing
business permits to any establishment for using, or allowing to be used, its premises or any
portion thereof for the operation of a casino.
"In the afternoon of December 18, 1992 and just hours before the actual formal opening of
casino operations, a public rally in front of the hotel was staged by some local officials,
residents and religious leaders. Barricades were placed [which] prevented some casino
personnel and hotel guests from entering and exiting from the Hotel. PAGCOR was
constrained to suspend casino operations because of the rally. An agreement between PPC
and PAGCOR, on one hand, and representatives of the rallyists, on the other, eventually
ended the rally on the 20th of December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang
Panlungsod of Cagayan de Oro City, prohibiting the operation of casinos and providing for
penalty for violation thereof. On January 7, 1993, PPC filed a Petition for Prohibition with
Preliminary Injunction x x x against then public respondent Cagayan de Oro City and/or
Mayor Pablo P. Magtajas x x x before the Court of Appeals, docketed as CA G.R. SP No.
29851 praying inter alia, for the declaration of unconstitutionality of Ordinance No. 3353.
PAGCOR intervened in said petition and further assailed Ordinance No. 4475-93 as being

violative of the non-impairment of contracts and equal protection clauses. On March 31,
1993, the Court of Appeals promulgated its decision x x x, the dispositive portion of which
reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 337593 are hereby DECLARED UNCONSTITUTIONAL and VOID and the respondents
and all other persons acting under their authority and in their behalf are
PERMANENTLY ENJOINED from enforcing those ordinances.
SO ORDERED.
"Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the
case to the Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July
20, 1994 x x x, the Supreme Court denied the petition and affirmed the decision of the Court
of Appeals.
"In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which,
however, another public rally was held. Casino operations continued for some time, but were
later on indefinitely suspended due to the incessant demonstrations. Per verbal advice x x x
from the Office of the President of the Philippines, PAGCOR decided to stop its casino
operations in Cagayan de Oro City. PAGCOR stopped its casino operations in the hotel prior
to September, 1993. In two Statements of Account dated September 1, 1993 x x x, PPC
apprised PAGCOR of its outstanding account for the quarter September 1 to November 30,
1993. PPC sent PAGCOR another Letter dated September 3, 1993 x x x as a follow-up to
the parties earlier conference. PPC sent PAGCOR another Letter dated September 15, 1993
x x x stating its Board of Directors decision to collect the full rentals in case of pretermination of the lease.
"PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not
amenable to the payment of the full rentals citing as reasons unforeseen legal and other
circumstances which prevented it from complying with its obligations. PAGCOR further
stated that it had no other alternative but to pre-terminate the lease agreement due to the
relentless and vehement opposition to their casino operations. In a letter dated October 12,
1993 x x x, PAGCOR asked PPC to refund the total of P1,437,582.25 representing the
reimbursable rental deposits and expenses for the permanent improvement of the Hotels
parking lot. In a letter dated November 5, 1993 x x x, PAGCOR formally demanded from
PPC the payment of its claim for reimbursement.
"On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court
of Manila docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed
a case for sum of money in the Regional Trial Court of Manila docketed as Civil Case No. 9368337.
"In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the
contract of lease due to PAGCORs continuing breach of the contract and further stated that

it was exercising its rights under the contract of lease pursuant to Article 20 (a) and (c)
thereof.
"On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266,
which the trial court admitted in an Order dated February 11, 1994. In an Order dated April
27, 1994, Civil Case No. 93-68377 was ordered consolidated with Civil Case No. 93-68266.
These cases were jointly tried by the court a quo. On August 17, 1995, the court a quo
promulgated its decision. Both parties appealed." 5
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award
actual and moral damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the
courts ruling that the 2 percent penalty was to be imposed from the date of the promulgation of the
Decision, not from the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule that the Contract of
Lease had already been terminated as early as September 21, 1993, or at the latest, on October 14,
1993, when PPC received PAGCORs letter dated October 12, 1993. The gaming corporation added
that the trial court erred in 1) failing to consider that PPC was entitled to avail itself of the provisions
of Article XX only when PPC was the party terminating the Contract; 2) not finding that there were
valid, justifiable and good reasons for terminating the Contract; and 3) dismissing the Complaint of
PAGCOR in Civil Case No. 93-68337 for lack of merit, and not finding PPC liable for the
reimbursement of PAGCORS cash deposits and of the value of improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination of the Contract of
Lease was unjustified. The appellate court explained that public demonstrations and rallies could not
be considered as fortuitous events that would exempt the gaming corporation from complying with
the latters contractual obligations. Therefore, the Contract continued to be effective until PPC
elected to terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had
the right to ask for (1) rescission of the Contract and indemnification for damages; or (2) only
indemnification plus the continuation of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC
correctly exercised the option to terminate the lease agreement. Previously, the Contract remained
effective, and PPC could collect the accrued rentals. However, from the time it terminated the
Contract on November 25, 1993, PPC could no longer demand payment of the remaining rentals as
part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR
had acted in gross or evident bad faith in failing to pay the rentals from September to November
1993. Such failure was shown especially by the fact that PPC still had in hand three (3) months
advance rental deposits of PAGCOR. The former could have simply applied this deposit to the

unpaid rentals, as provided in the Contract. Neither did PPC adequately show that its reputation had
been besmirched or the hotels goodwill eroded by the establishment of the casino and the public
protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR had
not presented official receipts to prove the latters alleged expenses. The appellate court, however,
upheld the trial courts award to PPC of P50,000 attorneys fees.
Hence this Petition.6
Issues
In their Memorandum, petitioner raised the following issues:
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that
Pryce was not entitled to future rentals or lease payments for the unexpired period of the
Contract of Lease between Pryce and PAGCOR?
"Sub-Issues:
"1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the
right of PRYCE to terminate the Contract for cause and to moreover collect rentals from
PAGCOR corresponding to the remaining term of the lease valid and binding?
"2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract,
PRYCE having rescinded the Contract of Lease?
"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited
by PAGCOR support its position that PRYCE was not entitled to future rentals?
"4. Would the collection by PRYCE of future rentals not give rise to unjust enrichment?
"5. Could we not have harmonized Article 1659 of the Civil Code and Article 20 of the
Contract of Lease?
"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts,
particularly in the PRYCE-PAGCOR Contract of Lease?"7
The Courts Ruling
The Petition is partly meritorious.
Main Issue:

Collection of Remaining Rentals

PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it argues
that termination, as defined under the Contract, is different from the remedy of rescission prescribed
under Article 1659 of the Civil Code. On the other hand, PAGCOR contends, as the CA ruled, that
Article 1659 of the Civil Code governs; hence, PPC is allegedly no longer entitled to future rentals,
because it chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith." 8 In deference to the
rights of the parties, the law9allows them to enter into stipulations, clauses, terms and conditions they
may deem convenient; that is, as long as these are not contrary to law, morals, good customs, public
order or public policy. Likewise, it is settled that if the terms of the contract clearly express the
intention of the contracting parties, the literal meaning of the stipulations would be controlling. 10
In this case, Article XX of the parties Contract of Lease provides in part as follows:
"XX. BREACH OR DEFAULT
"a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained
shall be deemed essential conditions of this contract, and in the event of default or breach of
any of such terms, conditions and/or covenants, or should the LESSEE become bankrupt, or
insolvent, or compounds with his creditors, the LESSOR shall have the right to terminate and
cancel this contract by giving them fifteen (15 days) prior notice delivered at the leased
premises or posted on the main door thereof. Upon such termination or cancellation, the
LESSOR may forthwith lock the premises and exclude the LESSEE therefrom, forcefully or
otherwise, without incurring any civil or criminal liability. During the fifteen (15) days notice,
the LESSEE may prevent the termination of lease by curing the events or causes of
termination or cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding
to the remaining term of the lease as well as for any and all damages, actual or
consequential resulting from such default and termination of this contract.
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to
terminate and cancel the Contract in the event of a default or breach by the lessee; and 2) to make
PAGCOR fully liable for rentals for the remaining term of the lease, despite the exercise of such right
to terminate. Plainly, the parties have voluntarily bound themselves to require strict compliance with
the provisions of the Contract by stipulating that a default or breach, among others, shall give the

lessee the termination option, coupled with the lessors liability for rentals for the remaining term of
the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public order
or public policy. Neither is there anything objectionable about the inclusion in the Contract of
mandatory provisions concerning the rights and obligations of the parties. 11 Being the primary law
between the parties, it governs the adjudication of their rights and obligations. A court has no
alternative but to enforce the contractual stipulations in the manner they have been agreed upon and
written.12 It is well to recall that courts, be they trial or appellate, have no power to make or modify
contracts.13 Neither can they save parties from disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for "termination plus the full payment
of future rentals" under the provisions of the Contract, rather than just rescission under Article 1659
of the Civil Code. This Court is not unmindful of the fact that termination and rescission are terms
that have been used loosely and interchangeably in the past. But distinctions ought to be made,
especially in this controversy, in which the terms mean differently and lead to equally different
consequences.
The term "rescission" is found in 1) Article 119114 of the Civil Code, the general provision on
rescission of reciprocal obligations; 2) Article 1659, 15 which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the lessor and the lessee in contracts of lease are
concerned; and 3) Article 138016 with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,17 Justice J. B. L. Reyes differentiated
rescission under Article 1191 from that under Article 1381 et seq. as follows:
"x x x. The rescission on account of breach of stipulations is not predicated on injury to
economic interests of the party plaintiff but on the breach of faith by the defendant, that
violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may
be scanned without disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his obligations to the defendant.
This rescission is a principal action retaliatory in character, it being unjust that a party be held
bound to fulfill his promises when the other violates his. As expressed in the old Latin
aphorism: Non servanti fidem, non est fides servanda. Hence, the reparation of damages
for the breach is purely secondary.
"On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action
is subordinated to the existence of that prejudice, because it is the raison detre as well as
the measure of the right to rescind. x x x."18
Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil
Code, and that the term became the basis for rescission under Article 1191 (and, conformably, also
Article 1659).19

Now, as to the distinction between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA20 held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial enforcement of a lease contract. Thus,
the remedy was not rescission, but termination or cancellation, of the contract. The Court explained:
"x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate the
contract because they sought its partial enforcement in praying for rental arrearages. There
is a distinction in law between cancellation of a contract and its rescission. To rescind is to
declare a contract void in its inception and to put an end to it as though it never were. It is
not merely to terminate it and release parties from further obligations to each other but to
abrogate it from the beginning and restore the parties to relative positions which they would
have occupied had no contract ever been made.
"x x x. The termination or cancellation of a contract would necessarily entail enforcement of
its terms prior to the declaration of its cancellation in the same way that before a lessee is
ejected under a lease contract, he has to fulfill his obligations thereunder that had accrued
prior to his ejectment. However, termination of a contract need not undergo judicial
intervention. x x x."21 (Italics supplied)
Rescission has likewise been defined as the "unmaking of a contract, or its undoing from the
beginning, and not merely its termination." Rescission may be effected by both parties by mutual
agreement; or unilaterally by one of them declaring a rescission of contract without the consent of
the other, if a legally sufficient ground exists or if a decree of rescission is applied for before the
courts.22 On the other hand, termination refers to an "end in time or existence; a close, cessation or
conclusion." With respect to a lease or contract, it means an ending, usually before the end of the
anticipated term of such lease or contract, that may be effected by mutual agreement or by one party
exercising one of its remedies as a consequence of the default of the other.23
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to
their original situation prior to the inception of the contract.24 Applying this principle to this case, it
means that PPC would re-acquire possession of the leased premises, and PAGCOR would get back
the rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation; neither is
the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply
with their contractual obligations. Only after the contract has been cancelled will they be released
from their obligations.
In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease
Contract from the beginning. This fact was evident when it first sought to collect the accrued rentals
from September to November 1993 because, as previously stated, it actually demanded the
enforcement of the Lease Contract prior to termination. Any intent to rescind was not shown, even
when it abrogated the Contract on November 25, 1993, because such abrogation was not
the rescission provided for under Article 1659.
Future Rentals

As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is inapplicable, because the remedy
resorted to by the lessors in that case was rescission, not termination. The rights and obligations of
the parties in Rios were governed by Article 1659 of the Civil Code; hence, the Court held that the
damages to which the lessor was entitled could not have extended to the lessees liability for future
rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of
anothers property after the termination of a contract. We stress that by abrogating the Contract in
the present case, PPC released PAGCOR from the latters future obligations, which included the
payment of rentals. To grant that right to the former is to unjustly enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest
from a reading of the mandatory provision under subparagraph (a) in conjunction with subparagraph
(c) of the Contract. 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."26
Quite common in lease contracts, this clause functions to strengthen the coercive force of the
obligation and to provide, in effect, for what could be the liquidated damages resulting from a
breach.27 There is nothing immoral or illegal in such indemnity/penalty clause, absent any showing
that it was forced upon or fraudulently foisted on the obligor.28
In obligations with a penal clause, the general rule is that the penalty serves as a substitute for the
indemnity for damages and the payment of interests in case of noncompliance; that is, if there is no
stipulation to the contrary,29 in which case proof of actual damages is not necessary for the penalty to
be demanded.30 There are exceptions to the aforementioned rule, however, as enumerated in
paragraph 1 of Article 1226 of the Civil Code: 1) when there is a stipulation to the contrary, 2) when
the obligor is sued for refusal to pay the agreed penalty, and 3) when the obligor is guilty of fraud. In
these cases, the purpose of the penalty is obviously to punish the obligor for the breach. Hence, the
obligee can recover from the former not only the penalty, but also other damages resulting from the
nonfulfillment of the principal obligation. 31
In the present case, the first exception applies because Article XX (c) provides that, aside from the
payment of the rentals corresponding to the remaining term of the lease, the lessee shall also be
liable "for any and all damages, actual or consequential, resulting from such default and termination
of this contract." Having entered into the Contract voluntarily and with full knowledge of its
provisions, PAGCOR must be held bound to its obligations. It cannot evade further liability for
liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts. 32 This
power is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:

"Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
"Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable."
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of
the courts. To be considered in fixing the amount of penalty are factors such as -- but not limited to -the type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach and
its consequences; the supervening realities; the standing and relationship of the parties; and the
like.33
In this case, PAGCORs breach was occasioned by events that, although not fortuitous in law, were
in fact real and pressing. From the CAs factual findings, which are not contested by either party, we
find that PAGCOR conducted a series of negotiations and consultations before entering into the
Contract. It did so not only with the PPC, but also with local government officials, who assured it that
the problems were surmountable. Likewise, PAGCOR took pains to contest the ordinances 34 before
the courts, which consequently declared them unconstitutional. On top of these developments, the
gaming corporation was advised by the Office of the President to stop the games in Cagayan de Oro
City, prompting the former to cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino operations had to be suspended for
days on end since their start in December 1992; and indefinitely from July 15, 1993, upon the advice
of the Office of President, until the formal cessation of operations in September 1993. Needless to
say, these interruptions and stoppages meant that PAGCOR suffered a tremendous loss of expected
revenues, not to mention the fact that it had fully operated under the Contract only for a limited time.
While petitioners right to a stipulated penalty is affirmed, we consider the claim for future rentals to
the tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under
the circumstances, the advanced rental deposits in the sum of P687,289.50 should be sufficient
penalty for respondents breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are
hereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to pay
petitioner the additional amount of P687,289.50 as penalty, which may be set off or applied against
the formers advanced rental deposits. Meanwhile, the CAs award to petitioner of actual damages
representing the accrued rentals for September to November 1993 -- with interest and penalty at the
rate of two percent (2%) per month, from the date of filing of the Complaint until the amount shall
have been fully paid -- as well as the P50,000 award for attorneys fees, is AFFIRMED. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 172384

September 12, 2007

ERMINDA F. FLORENTINO, Petitioner,

vs.
SUPERVALUE, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court,
filed by petitioner Erminda F. Florentino, seeking to reverse and set aside the Decision, 1 dated 10
October 2003 and the Resolution,2 dated 19 April 2006 of the Court of Appeals in CA-G.R. CV No.
73853. The appellate court, in its assailed Decision and Resolution, modified the Decision dated 30
April 2001 of the Regional Trial Court (RTC) of Makati, Branch 57, in Civil Case No. 00-1015, finding
the respondent Supervalue, Inc., liable for the sum of P192,000.00, representing the security
deposits made by the petitioner upon the commencement of their Contract of Lease. The dispositive
portion of the assailed appellate courts Decision thus reads:
WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The April 30, 2001 Decision
of the Regional Trial Court of Makati, Branch 57 is therefore MODIFIED to wit: (a) the portion
ordering the [herein respondent] to pay the amount of P192,000.00 representing the security
deposits and P50,000.00 as attorneys fees in favor of the [herein petitioner] as well as giving
[respondent] the option to reimburse [petitioner] of the value of the improvements introduced by
the [petitioner] on the leased [premises] should [respondent] choose to appropriate itself or require
the [petitioner] to remove the improvements, is hereby REVERSED and SET ASIDE; and (b) the
portion ordering the return to [petitioner] the properties seized by [respondent] after the former
settled her obligation with the latter is however MAINTAINED.3
The factual and procedural antecedents of the instant petition are as follows:
Petitioner is doing business under the business name "Empanada Royale," a sole proprietorship
engaged in the retail of empanada with outlets in different malls and business establishments within
Metro Manila.4
Respondent, on the other hand, is a domestic corporation engaged in the business of leasing stalls
and commercial store spaces located inside SM Malls found all throughout the country.5
On 8 March 1999, petitioner and respondent executed three Contracts of Lease containing similar
terms and conditions over the cart-type stalls at SM North Edsa and SM Southmall and a store

space at SM Megamall. The term of each contract is for a period of four months and may be
renewed upon agreement of the parties.6
Upon the expiration of the original Contracts of Lease, the parties agreed to renew the same by
extending their terms until 31 March 2000.7
Before the expiration of said Contracts of Lease, or on 4 February 2000, petitioner received two
letters from the respondent, both dated 14 January 2000, transmitted through facsimile
transmissions.8
In the first letter, petitioner was charged with violating Section 8 of the Contracts of Lease by not
opening on 16 December 1999 and 26 December 1999. 9
Respondent also charged petitioner with selling a new variety of empanada called "mini-embutido"
and of increasing the price of her merchandise from P20.00 to P22.00, without the prior approval of
the respondent.10
Respondent observed that petitioner was frequently closing earlier than the usual mall hours, either
because of non-delivery or delay in the delivery of stocks to her outlets, again in violation of the
terms of the contract. A stern warning was thus given to petitioner to refrain from committing similar
infractions in the future in order to avoid the termination of the lease contract. 11
In the second letter, respondent informed the petitioner that it will no longer renew the Contracts of
Lease for the three outlets, upon their expiration on 31 March 2000.12
In a letter-reply dated 11 February 2000, petitioner explained that the "mini-embutido" is not a new
variety of empanada but had similar fillings, taste and ingredients as those of pork empanada; only,
its size was reduced in order to make it more affordable to the buyers.13
Such explanation notwithstanding, respondent still refused to renew its Contracts of Lease with the
petitioner. To the contrary, respondent took possession of the store space in SM Megamall and
confiscated the equipment and personal belongings of the petitioner found therein after the
expiration of the lease contract.14
In a letter dated 8 May 2000, petitioner demanded that the respondent release the equipment and
personal belongings it seized from the SM Megamall store space and return the security deposits, in
the sum of P192,000.00, turned over by the petitioner upon signing of the Contracts of Lease. On 15
June 2000, petitioner sent respondent another letter reiterating her previous demands, but the latter
failed or refused to comply therewith. 15
On 17 August 2000, an action for Specific Performance, Sum of Money and Damages was filed by
the petitioner against the respondent before the RTC of Makati, Branch 57. 16
In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged that the respondent made
verbal representations that the Contracts of Lease will be renewed from time to time and, through
the said representations, the petitioner was induced to introduce improvements upon the store space

at SM Megamall in the sum of P200,000.00, only to find out a year later that the respondent will no
longer renew her lease contracts for all three outlets.17
In addition, petitioner alleged that the respondent, without justifiable cause and without previous
demand, refused to return the security deposits in the amount of P192,000.00.18
Further, petitioner claimed that the respondent seized her equipment and personal belongings found
inside the store space in SM Megamall after the lease contract for the said outlet expired and
despite repeated written demands from the petitioner, respondent continuously refused to return the
seized items.19
Petitioner thus prayed for the award of actual damages in the sum of P472,000.00, representing the
sum of security deposits, cost of improvements and the value of the personal properties seized.
Petitioner also asked for the award of P300,000.00 as moral damages; P50,000.00 as exemplary
damages; and P80,000.00 as attorneys fees and expenses of litigation.20
For its part, respondent countered that petitioner committed several violations of the terms of their
Contracts of Lease by not opening from 16 December 1999 to 26 December 1999, and by
introducing a new variety of empanada without the prior consent of the respondent, as mandated by
the provision of Section 2 of the Contract of Lease. Respondent also alleged that petitioner infringed
the lease contract by frequently closing earlier than the agreed closing hours. Respondent finally
averred that petitioner is liable for the amount P106,474.09, representing the penalty for selling a
new variety of empanada, electricity and water bills, and rental adjustment, among other charges
incidental to the lease agreements. Respondent claimed that the seizure of petitioners personal
belongings and equipment was in the exercise of its retaining lien, considering that the petitioner
failed to settle the said obligations up to the time the complaint was filed. 21
Considering that petitioner already committed several breaches of contract, the respondent thus
opted not to renew its Contracts of Lease with her anymore. The security deposits were made in
order to ensure faithful compliance with the terms of their lease agreements; and since petitioner
committed several infractions thereof, respondent was justified in forfeiting the security deposits in
the latters favor.
On 30 April 2001, the RTC rendered a Judgment22 in favor of the petitioner and found that the
physical takeover by the respondent of the leased premises and the seizure of petitioners
equipment and personal belongings without prior notice were illegal. The decretal part of the RTC
Judgment reads:
WHEREFORE, premises duly considered, judgment is hereby rendered ordering the [herein
respondent] to pay [herein petitioner] the amount of P192,000.00 representing the security deposits
made by the [petitioner] and P50,000.00 as and for attorneys fees.
The [respondent] is likewise ordered to return to the [petitioner] the various properties seized by the
former after settling her account with the [respondent].

Lastly, the [respondent] may choose either to reimburse the [petitioner] one half (1/2) of the value of
the improvements introduced by the plaintiff at SM Megamall should [respondent] choose to
appropriate the improvements to itself or require the [petitioner] to remove the improvements, even
though the principal thing may suffer damage thereby. [Petitioner] shall not, however, cause anymore
impairment upon the said leased premises than is necessary.
The other damages claimed by the plaintiff are denied for lack of merit.
Aggrieved, the respondent appealed the adverse RTC Judgment to the Court of Appeals.
In a Decision23 dated 10 October 2003, the Court of Appeals modified the RTC Judgment and found
that the respondent was justified in forfeiting the security deposits and was not liable to reimburse
the petitioner for the value of the improvements introduced in the leased premises and to pay for
attorneys fees. In modifying the findings of the lower court, the appellate court declared that in view
of the breaches of contract committed by the petitioner, the respondent is justified in forfeiting the
security deposits. Moreover, since the petitioner did not obtain the consent of the respondent before
she introduced improvements on the SM Megamall store space, the respondent has therefore no
obligation to reimburse the petitioner for the amount expended in connection with the said
improvements.24 The Court of Appeals, however, maintained the order of the trial court for
respondent to return to petitioner her properties after she has settled her obligations to the
respondent. The appellate court denied petitioners Motion for Reconsideration in a
Resolution25 dated 19 April 2006.
Hence, this instant Petition for Review on Certiorari26 filed by the petitioner assailing the Court of
Appeals Decision. For the resolution of this Court are the following issues:
I. Whether or not the respondent is liable to return the security deposits to the petitions.
II. Whether or not the respondent is liable to reimburse the petitioner for the sum of the
improvements she introduced in the leased premises.
III. Whether or not the respondent is liable for attorneys fees.27
The appellate court, in finding that the respondent is authorized to forfeit the security deposits, relied
on the provisions of Sections 5 and 18 of the Contract of Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of SIXTY THOUSAND
PESOS (P60,000.00) equivalent to three (3) months rent as security for the full and faithful
performance to each and every term, provision, covenant and condition of this lease and not as a
pre-payment of rent. If at any time during the term of this lease the rent is increased[,] the LESSEE
on demand shall make an additional deposit equal to the increase in rent. The LESSOR shall not be
required to keep the deposit separate from its general funds and the deposit shall not be entitled to
interest. The deposit shall remain intact during the entire term and shall not be applied as payment
for any monetary obligations of the LESSEE under this contract. If the LESSEE shall faithfully
perform every provision of this lease[,] the deposit shall be refunded to the LESSEE upon the
expiration of this Lease and upon satisfaction of all monetary obligation to the LESSOR.

xxxx
Section 18. TERMINATION. Any breach, non-performance or non-observance of the terms and
conditions herein provided shall constitute default which shall be sufficient ground to terminate this
lease, its extension or renewal. In which event, the LESSOR shall demand that LESSEE
immediately vacate the premises, and LESSOR shall forfeit in its favor the deposit tendered without
prejudice to any such other appropriate action as may be legally authorized. 28
Since it was already established by the trial court that the petitioner was guilty of committing several
breaches of contract, the Court of Appeals decreed that she cannot therefore rightfully demand the
return of the security deposits for the same are deemed forfeited by reason of evident contractual
violations.
It is undisputed that the above-quoted provision found in all Contracts of Lease is in the nature of a
penal clause to ensure petitioners faithful compliance with the terms and conditions of the said
contracts.
A penal clause is an accessory undertaking to assume greater liability in case of breach. It is
attached to an obligation in order to insure performance and has a double function: (1) to provide for
liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater
responsibility in the event of breach.29 The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof of the existence and the measure of damages caused by
the breach.30 Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, 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.
The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code.
As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on such
terms and conditions as they see fit as long as they are not contrary to law, morals, good customs,
public order or public policy. Nevertheless, courts may equitably reduce a stipulated penalty in the
contracts in two instances: (1) if the principal obligation has been partly or irregularly complied with;
and (2) even if there has been no compliance if the penalty is iniquitous or unconscionable in
accordance with Article 1229 of the Civil Code which clearly provides:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable.31
In ascertaining whether the penalty is unconscionable or not, this court set out the following standard
in Ligutan v. Court of Appeals,32 to wit:

The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factor as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the court. xxx.
In the instant case, the forfeiture of the entire amount of the security deposits in the sum
of P192,000.00 was excessive and unconscionable considering that the gravity of the breaches
committed by the petitioner is not of such degree that the respondent was unduly prejudiced thereby.
It is but equitable therefore to reduce the penalty of the petitioner to 50% of the total amount of
security deposits.
It is in the exercise of its sound discretion that this court tempered the penalty for the breaches
committed by the petitioner to 50% of the amount of the security deposits. The forfeiture of the entire
sum of P192,000.00 is clearly a usurious and iniquitous penalty for the transgressions committed by
the petitioner. The respondent is therefore under the obligation to return the 50% of P192,000.00 to
the petitioner.
Turning now to the liability of the respondent to reimburse the petitioner for one-half of the expenses
incurred for the improvements on the leased store space at SM Megamall, the following provision in
the Contracts of Lease will enlighten us in resolving this issue:
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The LESSEE shall not make any
alterations, additions, or improvements without the prior written consent of LESSOR; and all
alterations, additions or improvements made on the leased premises, except movable or fixtures put
in at LESSEEs expense and which are removable, without defacing the buildings or damaging its
floorings, shall become LESSORs property without compensation/reimbursement but the LESSOR
reserves the right to require the removal of the said alterations, additions or improvements upon
expiration of the lease.
The foregoing provision in the Contract of Lease mandates that before the petitioner can introduce
any improvement on the leased premises, she should first obtain respondents consent. In the case
at bar, it was not shown that petitioner previously secured the consent of the respondent before she
made the improvements on the leased space in SM Megamall. It was not even alleged by the
petitioner that she obtained such consent or she at least attempted to secure the same. On the other
hand, the petitioner asserted that respondent allegedly misrepresented to her that it would renew the
terms of the contracts from time to time after their expirations, and that the petitioner was so induced
thereby that she expended the sum of P200,000.00 for the improvement of the store space leased.
This argument was squarely addressed by this court in Fernandez v. Court of Appeals, 33 thus:
The Court ruled that the stipulation of the parties in their lease contract "to be renewable" at the
option of both parties stresses that the faculty to renew was given not to the lessee alone nor to the
lessor by himself but to the two simultaneously; hence, both must agree to renew if a new contract is
to come about.

Petitioners contention that respondents had verbally agreed to extend the lease indefinitely is
inadmissible to qualify the terms of the written contract under the parole evidence rule, and
unenforceable under the statute of frauds.34
Moreover, it is consonant with human experience that lessees, before occupying the leased
premises, especially store spaces located inside malls and big commercial establishments, would
renovate the place and introduce improvements thereon according to the needs and nature of their
business and in harmony with their trademark designs as part of their marketing ploy to attract
customers. Certainly, no inducement or misrepresentation from the lessor is necessary for this
purpose, for it is not only a matter of necessity that a lessee should re-design its place of business
but a business strategy as well.
In ruling that the respondent is liable to reimburse petitioner one half of the amount of improvements
made on the leased store space should it choose to appropriate the same, the RTC relied on the
provision of Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for
which the lease is intended, without altering the form or substance of the property leased, the lessor
upon the termination of the lease shall pay the lessee one-half of the value of the improvements at
that time. Should the lessor refuse to reimburse said amount, the lessee may remove the
improvements, even though the principal thing may suffer damage thereby. He shall not, however,
cause any more impairment upon the property leased than is necessary.
While it is true that under the above-quoted provision of the Civil Code, the lessor is under the
obligation to pay the lessee one-half of the value of the improvements made should the lessor
choose to appropriate the improvements, Article 1678 however should be read together with Article
448 and Article 546 of the same statute, which provide:
Art. 448. The owner of the land on which anything has been built, sown or planted in good faith, shall
have the right to appropriate as his own the works, sowing or planting, after payment of the
indemnity provided for in articles 546 and 548, or to oblige the one who built or planted to pay the
price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot be
obliged to buy the land if its value is considerably more than that of the building or trees. In such
case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the
building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in
case of disagreement, the court shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to every possessor; but only possessor in good
faith may retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right of
retention, the person who has defeated him in the possession having the option of refunding the
amount of the expenses or of paying the increase in value which the thing may have acquired by
reason thereof.

Thus, to be entitled to reimbursement for improvements introduced on the property, the petitioner
must be considered a builder in good faith. Further, Articles 448 and 546 of the Civil Code, which
allow full reimbursement of useful improvements and retention of the premises until reimbursement
is made, apply only to a possessor in good faith, i.e., one who builds on land with the belief that he is
the owner thereof. A builder in good faith is one who is unaware of any flaw in his title to the land at
the time he builds on it.35 In this case, the petitioner cannot claim that she was not aware of any flaw
in her title or was under the belief that she is the owner of the subject premises for it is a settled fact
that she is merely a lessee thereof.
1wphi1

In Geminiano v. Court of Appeals,36 this Court was emphatic in declaring that lessees are not
possessors or builders in good faith, thus:
Being mere lessees, the private respondents knew that their occupation of the premises would
continue only for the life of the lease. Plainly, they cannot be considered as possessors nor builders
in good faith.
In a plethora of cases, this Court has held that Article 448 of the Civil Code, in relation to Article 546
of the same Code, which allows full reimbursement of useful improvements and retention of the
premises until reimbursement is made, applies only to a possessor in good faith, i.e., one who builds
on land with the belief that he is the owner thereof. It does not apply where one's only interest is that
of a lessee under a rental contract; otherwise, it would always be in the power of the tenant to
"improve" his landlord out of his property.
Since petitioners interest in the store space is merely that of the lessee under the lease contract,
she cannot therefore be considered a builder in good faith. Consequently, respondent may
appropriate the improvements introduced on the leased premises without any obligation to
reimburse the petitioner for the sum expended.
Anent the claim for attorneys fees, we resolve to likewise deny the award of the same. Attorneys
fees may be awarded when a party is compelled to litigate or to incur expenses to protect its interest
by reason of unjustified act of the other.37
In the instant petition, it was not shown that the respondent unjustifiably refused to grant the
demands of the petitioner so as to compel the latter to initiate legal action to enforce her right. As we
have found herein, there is basis for respondents refusal to return to petitioner the security deposits
and to reimburse the costs of the improvements in the leased premises. The award of attorneys fees
is therefore not proper in the instant case.
WHEREFORE, premises considered, the instant Petition is PARTLY GRANTED. The Court of
Appeals Decision dated 10 October 2003 in CA-G.R. CV No. 73853 is hereby AFFIRMED with the
MODIFICATION that the respondent may forfeit only 50% of the total amount of the security deposits
in the sum of P192,000.00, and must return the remaining 50% to the petitioner. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-21780

June 30, 1967

MAKATI DEVELOPMENT CORPORATION, plaintiff-appellant,

vs.
EMPIRE INSURANCE CO., defendant-appellee.
RODOLFO P. ANDAL, third-party defendant-appellee.
Salvador J. Lorayes for plaintiff-appellant Makati Development Corporation.
Tomacruz and Ferrer for defendant-appellee Empire Insurance Company, Inc.
Crispin D. Baizas and Associates for defendant-appellee Rodolfo Andal.
CASTRO, J.:
On March 31, 1959, the Makati Development Corporation sold to Rodolfo P. Andal a lot, with an area
of 1,589 square meters, in the Urdaneta Village, Makati, Rizal, for P55,615.
1wph1.t

A so-called "special condition" contained in the deed of sale provides that "[T]he VENDEE/S shall
commence the construction and complete at least 50% of his/her/their/its residence on the property
within two (2) years from March 31, 1959 to the satisfaction of the VENDOR and, in the event of
his/her/their/its failure to do so, the bond which the VENDEE/S has delivered to the VENDOR in the
sum of P11,123.00 and evidenced by a cash bond receipt dated April 10, 1959 will be forfeited in
favor of the VENDOR by the mere fact of failure of the VENDEE/S to comply with this special
condition." To insure faithful compliance with this "condition," Andal gave a surety bond on April 10,
1959 wherein he, as principal, and the Empire Insurance Company, as surety, jointly and severally,
undertook to pay the Makati Development Corporation the sum of P12,000 in case Andal failed to
comply with his obligation under the deed of sale.
Andal did not build his house; instead he sold the lot to Juan Carlos on January 18, 1960. As neither
Andal nor Juan Carlos built a house on the lot within the stipulated period, the Makati Development
Corporation, on April 3, 1961, that is, three days after the lapse of the two-year period, sent a notice
of claim to the Empire Insurance Co. advising it of Andal's failure to comply with his undertaking.
Demand for the payment of P12,000 was refused, whereupon the Makati Development Corporation
filed a complaint in the Court of First Instance of Rizal on May 22, 1961 against the Empire
Insurance Co. to recover on the bond in the full amount, plus attorney's fees. In due time, the Empire
Insurance Co. filed its answer with a third-party complaint against Andal. It asked that the complaint
be dismissed or, in the event of a judgment in favor of the Makati Development Corporation, that
judgment be rendered ordering Andal to pay the Empire Insurance Co. whatever amount it maybe
ordered to pay the Makati Development Corporation, plus interest at 12%, from the date of the filing
of the complaint until said amount was fully reimbursed, and attorney's fees.

In his answer, Andal admitted the execution of the bond but alleged that the "special condition" in the
deed of sale was contrary to law, morals and public policy. He averred that, at any rate, Juan Carlos
had started construction of a house on the lot.
Hearing was held and, on March 28, 1963, the lower court rendered judgment, sentencing the
Empire Insurance Co. to pay the Makati Development Corporation the amount of P1,500, with
interest at the rate of 12% from the time of the filing of the complaint until the amount was fully paid,
and to pay attorney's fees in the amount of P500, and the proportionate part of the costs. The court
directed that in case the amount of the judgment was paid by the Empire Insurance Co., Andal
should in turn pay the former the sum of P1,500 with interest at 12% from the time of the filing of the
complaint to the time of payment and to pay attorney's fees in the sum of P500 and proportionate
part of the costs. The Makati Development Corporation appealed directly to this Court.
In reducing Andal's liability for breach of his undertaking from P12,000, as stipulated in the bond to
P1,500, the court noted that
While no building has actually been constructed before the target date which is March 31,
1961, it is also a fact that even before that date the entire area was already fenced with a
stone wall and building materials were also stocked in the premises which are clear indicia of
the owner's desire to construct his house with the least possible delay. As a matter of fact the
incontrovertible testimony of Juan Carlos is to the effect that by the end of April 1961, he had
finished very much more than the required 50% stipulated in the contract of sale. In short
there was only really a little delay.
But the appellant argues that Andal became liable for the full amount of his bond upon his failure to
build a house within the two-year period which expired on March 31, 1961 and that the trial court
was without authority to reduce Andal's liability on the basis of Carlos' construction of a house a
month after the stipulated period because there was no privity of contract between Carlos and the
Makati Development Corporation.
To begin with, the so-called "special condition" in the deed of sale is in reality an obligation 1 to
build a house at least 50 per cent of which must be finished within two years. It was to secure the
performance of this obligation that a penal clause was inserted.
While it is true that in obligations with a penal sanction the penalty takes the place of "damages and
the payment of interest in case of non-compliance"2 and that the obligee is entitled to recover upon
the breach of the obligation without the need of proving damages,3 it is nonetheless true that in
certain instances a mitigation of the obligor's liability is allowed. Thus article 1229 of the Civil Code
states:
The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable.
Here the trial court found that Juan Carlos had finished more than 50 per cent of his house by April,
1961, or barely a month after the expiration on March 31, 1961 of the stipulated period. There was

therefore a partial performance of the obligation within the meaning and intendment of article
1229.4 The case of General Ins. & Surety Corp. vs. Republic, G.R. L-13873, Jan. 31, 19635 cannot
be invoked as authority for the forfeiture of the full amount of the bond because unlike this case
there was in that case no performance at all of any part of the obligation to secure the payment of
salaries to teachers. Indeed, it has been held that where there has been partial or irregular
compliance with the provisions in a contract for special indemnification in the event of failure to
comply with its terms, courts will rigidly apply the doctrine of strict construction against the
enforcement in its entirety of the indemnification, where it is clear from the contract that the amount
or character of the indemnity is fixed without regard to the probable damages which might be
anticipated as a result of a breach of the terms of the contract, or, in other words, where the
indemnity provided for is essentially a mere penalty having for its object the enforcement of
compliance with the contract.6 The penal clause in this case was inserted not to indemnify the Makati
Development Corporation for any damage it might suffer as a result of a breach of the contract but
rather to compel performance of the so-called "special condition" and thus encourage home building
among lot owners in the Urdaneta Village.
Considering that a house had been built shortly after the period stipulated, the substantial, if tardy,
performance of the obligation, having in view the purpose of the penal clause, fully justified the trial
court in reducing the penalty.
Still it is insisted that Carlos' construction of a house on the lot sold cannot be considered a partial
performance of Andal's obligation because Carlos bears no contractual relation to the Makati
Development Corporation. This case is in many respects analogous to Insular Gov't. vs.
Amechazurra, 10 Phil. 637 (1908) where a similar claim was made by a party and rejected by this
Court. There the defendant gave a bond for $800 to guarantee the return to the plaintiff of four
firearms issued to him "on demand" of the Government. Three of the firearms were stolen from the
defendant so that on demand of the Government he was able to produce only one. Subsequently the
constabulary recovered two of the missing guns and the question was whether defendant was
entitled to a mitigation of liability even if recovery of the firearms was made possible through the
efforts of third parties (the Constabulary) This Court gave an affirmative answer.
Indeed the stipulation in this case to commence the construction and complete at least 50 per cent
of the vendee's house within two years cannot be construed as imposing a strictly personal
obligation on Andal. To adopt such a construction would be to limit Andal's right to dispose of the lot.
There is nothing in the deed of sale restricting Andal's right to sell the lot at least within the two-year
period and we think it plain that a reading of such a limitation on one of the rights of ownership must
rest on more explicit language in the contract. It cannot be left to mere inference.
Accordingly, the decision appealed from is affirmed, at appellant's cost.
Concepcion, C.J., Reyes J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ.,
concur.

Footnotes

For a discussion of the difference between a penalty and a condition, see 3 Padilla, Civil
Law 208 (1956).
1

Civ. Code, art. 1226.

E.g., General Ins. & Surety Corp. vs. Republic, G.R. No. L-13873, Jan. 31, 1963; Lambert
vs. Fox, 26 Phil. 588 (1914); Palacios vs. Municipality of Cavite, 12 Phil. 140 (1908).
3

See Insular Gov't. vs. Punzalan, 7 Phil. 547 (1907).

The following is quoted from General Insurance:

"There is nothing against public policy in forfeiting the bond for the full amount. The
bond is penal in nature. Article 1226 of the Code states that in an obligation with a
penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to the
contrary, and the party to whom payment is to be made is entitled to recover the sum
stipulated without need of proving damages because one of the primary purposes of
a penalty clause is to avoid such necessity, (citations omitted). The mere nonperformance of the principal obligation gives rise to the right to the penalty. (citation
omitted)."

Laureano vs. Kilayco, 32 Phil. 194, 200 (1915).

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 116285

October 19, 2001

ANTONIO TAN, petitioner,

vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July
13, 1994 of the Court of Appeals affirming the Decision3 dated May 8, 1991 of the Regional Trial
Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the
principal amount of Two Million Pesos (P2,000,000.00), or in the total principal amount of Four
Million Pesos (P4,000,000.00) from respondent Cultural Center of the Philippines (CCP, for brevity)
evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979,
respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by
respondent CCP, and petitioner accordingly executed a promissory note (Exhibit "A") on August 31,
1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One
Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan
failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last
installment falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner
requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty
percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his
proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly
installments until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP
requesting for a moratorium on his loan obligation until the following year allegedly due to a
substantial deduction in the volume of his business and on account of the peso devaluation. No
favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a
letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt
of said letter, of the petitioners restructured loan which as of April 30, 1984 amounted to Six Million
Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum
of money, docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle
his said restructured loan obligation. The petitioner interposed the defense that he merely
accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from
respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the
case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle
his indebtedness to respondent CCP by proposing to make a down payment of One Hundred Forty
Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover

installment payments for one year, and every year thereafter until the balance is fully paid. However,
respondent CCP did not agree to the petitioners proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant,
ordering defendant to pay plaintiff, the amount of P7,996,314.67, representing defendants
outstanding account as of August 28, 1986, with the corresponding stipulated interest and
charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said
outstanding account, plus P50,000.00, as exemplary damages, plus costs.
Defendants counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to
the petitioners contention that the loan was merely for the accommodation of Wilson Lucmen for the
reason that the defense propounded was not credible in itself. Second, assuming, arguendo, that the
petitioner did not personally benefit from the said loan, he should have filed a third party complaint
against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three (3) times
the petitioner offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not
avoid his liability to pay his obligation under the promissory note (Exh. "A") which he must comply
with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is estopped from
denying his liability or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged
interest, surcharges, attorneys fees and exemplary damages against the petitioner. In his appeal,
the petitioner asked for the reduction of the penalties and charges on his loan obligation. He
abandoned his alleged defense in the trial court that he merely accommodated his friend, Wilson
Lucmen, in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993,
the appellate court rendered a decision, the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby
AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held
that:
We are unable to accept appellants (petitioners) claim for modification on the basis of
alleged partial or irregular performance, there being none. Appellants offer or tender of
payment cannot be deemed as a partial or irregular performance of the contract, not a single
centavo appears to have been paid by the defendant.
However, the appellate court modified the decision of the trial court by deleting the award for
exemplary damages and reducing the amount of awarded attorneys fees to five percent (5%), by
ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a
government lawyer, We believe the award of 25% as attorneys fees and P500,000.00 as

exemplary damages is out of proportion to the actual damage caused by the nonperformance of the contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioners motion for
reconsideration of the said decision.
Hence, this petition anchored on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR
TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON
SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF
INTEREST FOR THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST
PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT
AND THE OFFICE OF THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS
FEES AND IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the
promissory note marked Exhibit "A". The first question to be resolved in the case at bar is whether
there are contractual and legal bases for the imposition of the penalty, interest on the penalty and
attorneys fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of
attorneys fees and in not reducing the penalties considering that the petitioner, contrary to the
appellate courts findings, has allegedly made partial payments on the loan. And if penalty is to be
awarded, the petitioner is asking for the non-imposition of interest on the surcharges inasmuch as
the compounding of interest on surcharges is not provided in the promissory note marked Exhibit
"A". The petitioner takes exception to the computation of the private respondent whereby the
interest, surcharge and the principal were added together and that on the total sum interest was
imposed. Petitioner also claims that there is no basis in law for the charging of interest on the
surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition
of interest on surcharges.
We find no merit in the petitioners contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty 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.
The penalty may be enforced only when it is demandable in accordance with the provisions
of this Code.

In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both
interest and penalties in case of default on the part of the petitioner in the payment of the subject
restructured loan. The pertinent6 portion of the promissory note (Exhibit "A") imposing interest and
penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE
PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN
THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx

xxx

xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until
paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any
portion of it when due, I/We jointly and severally agree to pay additional penalty charges at
the rate of TWO per cent (2%) per month on the total amount due until paid, payable and
computed monthly. Default of payment of this note or any portion thereof when due shall
render all other installments and all existing promissory notes made by us in favor of the
CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable.
(Underscoring supplied)
xxx

xxx

xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan
constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil
Code.7 On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty
charge which is separate and distinct from the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v.
Court of Appeals,8 this Court has ruled that the New Civil Code permits an agreement upon a penalty
apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not
include the monetary interest, and as such the two are different and distinct from each other and
may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on
to state that such a stipulation about payment of an additional interest rate partakes of the nature of
a penalty clause which is sanctioned by law, more particularly under Article 2209 of the New Civil
Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per
cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time
of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated
monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or
compensatory interest. Having clarified the same, the next issue to be resolved is whether interest
may accrue on the penalty or compensatory interest without violating the provisions of Article 1959
of the New Civil Code, which provides that:

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge
for the reason that the law only allows imposition of interest on monetary interest but not the
charging of interest on penalty. He claims that since there is no law that allows imposition of interest
on penalties, the penalties should not earn interest. But as we have already explained, penalty
clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the
penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted
provision of Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding
of interest. The fifth paragraph of the said promissory note provides that: "Any interest which may be
due if not paid shall be added to the total amount when due and shall become part thereof, the
whole amount to bear interest at the maximum rate allowed by law."10 Therefore, any penalty interest
not paid, when due, shall earn the legal interest of twelve percent (12%) per annum, 11 in the absence
of express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from
the time it is judicially demanded, although the obligation may be silent upon this point." In the
instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in
court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the
petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and
the penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based
allegedly on the case of National Power Corporation v. National Merchandising
Corporation,12 wherein we ruled that the imposition of interest on the damages from the filing of the
complaint is unjust where the litigation was prolonged for twenty-five (25) years through no fault of
the defendant. However, the ruling in the said National Power Corporation (NPC) case is not
applicable to the case at bar inasmuch as our ruling on the issue of interest in that NPC case was
based on equitable considerations and on the fact that the said case lasted for twenty-five (25) years
"through no fault of the defendant." In the case at bar, however, equity cannot be considered
inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner
expressly agreed to the compounding of interest in case of failure on his part to pay the loan at
maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law
between the parties and does not appear to be inequitable or unjust, the said written stipulation
should be respected.
The private respondents Statement of Account (marked Exhibits "C" to "C-2") 13 shows the following
breakdown of the petitioners indebtedness as of August 28, 1986:

Principal

P2,838,454.68

Interest

P 576,167.89

Surcharge P4,581,692.10

P7,996,314.67

The said statement of account also shows that the above amounts stated therein are net of the
partial payments amounting to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One
Pesos and Forty-Three Centavos (P452,561.43) which were made during the period from May 13,
1983 to September 30, 1983.14 The petitioner now seeks the reduction of the penalty due to the said
partial payments. The principal amount of the promissory note (Exhibit "A") was Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos
(P3,411,421.32) when the loan was restructured on August 31, 1979. As of August 28, 1986, the
principal amount of the said restructured loan has been reduced to Two Million Eight Hundred ThirtyEight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus,
petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil
Code which provides that: "The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable."
Petitioner insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in
accordance with Bachrach Motor Company v. Espiritu.15
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten
percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner
has made partial payments which showed his good faith, a reduction of the penalty charge from two
percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be
justified under the said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the
total amount due to be unconscionable inasmuch as the same appeared to have been compounded
monthly.
Considering petitioners several partial payments and the fact he is liable under the note for the two
percent (2%) penalty charge per month on the total amount due, compounded monthly, for twentyone (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to
a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the
date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the
offers of the petitioner to enter into a compromise for the settlement of his debt by presenting
proposed payment schemes to respondent CCP. The said offers at compromise also showed his
good faith despite difficulty in complying with his loan obligation due to his financial problems.
However, we are not unmindful of the respondents long overdue deprivation of the use of its money
collectible from the petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring the suspension
of the running of the interest during that period when the respondent allegedly failed to assist the
petitioner in applying for relief from liability. In this connection, the petitioner referred to the private
respondents letter16 dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:

xxx

xxx

xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform
you that the center will assist you in applying for relief of liability through the Commission on
Audit and Office of the President xxx.
While your application is being processed and awaiting approval, the center will be accepting
your proposed payment scheme with the downpayment of P160,000.00 and monthly
remittances of P60,000.00 xxx.
xxx

xxx

xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been
suspended because the obligation to pay such interest and surcharge has become conditional, that
is dependent on a future and uncertain event which consists of whether the petitioners request for
condonation of interest and surcharge would be recommended by the Commission on Audit and the
Office of the President to the House of Representatives for approval as required under Section 36 of
Presidential Decree No. 1445. Since the condition has not happened allegedly due to the private
respondents reneging on its promise, his liability to pay the interest and surcharge on the loan has
not arisen. This is the petitioners contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the
private respondents promise to assist the petitioners in applying for relief therefrom through the
Commission on Audit and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the
petitioner is not part of the formally offered documentary evidence of either party in the trial court.
That letter cannot be considered evidence pursuant to Rule 132, Section 34 of the Rules of Court
which provides that: "The court shall consider no evidence which has not been formally offered xxx."
Besides, the said letter does not contain any categorical agreement on the part of respondent CCP
that the payment of the interest and surcharge on the loan is deemed suspended while his appeal
for condonation of the interest and surcharge was being processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner
to inform the Commission on Audit and the Office of the President of his application for condonation
of interest and surcharge. It was incumbent upon the petitioner to bring his administrative appeal for
condonation of interest and penalty charges to the attention of the said government offices.
On the issue of attorneys fees, the appellate court ruled correctly and justly in reducing the trial
courts award of twenty-five percent (25%) attorneys fees to five percent (5%) of the total amount
due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with
MODIFICATION in that the penalty charge of two percent (2%) per month on the total amount due,
compounded monthly, is hereby reduced to a straight twelve percent (12%) per annum starting from
August 28, 1986. With costs against the petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 116285

October 19, 2001

ANTONIO TAN, petitioner,

vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July
13, 1994 of the Court of Appeals affirming the Decision3 dated May 8, 1991 of the Regional Trial
Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the
principal amount of Two Million Pesos (P2,000,000.00), or in the total principal amount of Four
Million Pesos (P4,000,000.00) from respondent Cultural Center of the Philippines (CCP, for brevity)
evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979,
respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by
respondent CCP, and petitioner accordingly executed a promissory note (Exhibit "A") on August 31,
1979 in the amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One
Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan
failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the last
installment falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner
requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty
percent (20%) of the principal amount of the loan upon the respondent giving its conformity to his
proposal; and (b) the balance on the principal obligation payable in thirty-six (36) equal monthly
installments until fully paid. On October 20, 1983, petitioner again sent a letter to respondent CCP
requesting for a moratorium on his loan obligation until the following year allegedly due to a
substantial deduction in the volume of his business and on account of the peso devaluation. No
favorable response was made to said letters. Instead, respondent CCP, through counsel, wrote a
letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from receipt
of said letter, of the petitioners restructured loan which as of April 30, 1984 amounted to Six Million
Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum
of money, docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle
his said restructured loan obligation. The petitioner interposed the defense that he merely
accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from
respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the
case was pending in the trial court, the petitioner filed a Manifestation wherein he proposed to settle
his indebtedness to respondent CCP by proposing to make a down payment of One Hundred Forty
Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year to cover

installment payments for one year, and every year thereafter until the balance is fully paid. However,
respondent CCP did not agree to the petitioners proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant,
ordering defendant to pay plaintiff, the amount of P7,996,314.67, representing defendants
outstanding account as of August 28, 1986, with the corresponding stipulated interest and
charges thereof, until fully paid, plus attorneys fees in an amount equivalent to 25% of said
outstanding account, plus P50,000.00, as exemplary damages, plus costs.
Defendants counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to
the petitioners contention that the loan was merely for the accommodation of Wilson Lucmen for the
reason that the defense propounded was not credible in itself. Second, assuming, arguendo, that the
petitioner did not personally benefit from the said loan, he should have filed a third party complaint
against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three (3) times
the petitioner offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not
avoid his liability to pay his obligation under the promissory note (Exh. "A") which he must comply
with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner is estopped from
denying his liability or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged
interest, surcharges, attorneys fees and exemplary damages against the petitioner. In his appeal,
the petitioner asked for the reduction of the penalties and charges on his loan obligation. He
abandoned his alleged defense in the trial court that he merely accommodated his friend, Wilson
Lucmen, in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993,
the appellate court rendered a decision, the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby
AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held
that:
We are unable to accept appellants (petitioners) claim for modification on the basis of
alleged partial or irregular performance, there being none. Appellants offer or tender of
payment cannot be deemed as a partial or irregular performance of the contract, not a single
centavo appears to have been paid by the defendant.
However, the appellate court modified the decision of the trial court by deleting the award for
exemplary damages and reducing the amount of awarded attorneys fees to five percent (5%), by
ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a
government lawyer, We believe the award of 25% as attorneys fees and P500,000.00 as

exemplary damages is out of proportion to the actual damage caused by the nonperformance of the contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioners motion for
reconsideration of the said decision.
Hence, this petition anchored on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR
TO THE DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON
SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF
INTEREST FOR THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST
PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT
AND THE OFFICE OF THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEYS
FEES AND IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the
promissory note marked Exhibit "A". The first question to be resolved in the case at bar is whether
there are contractual and legal bases for the imposition of the penalty, interest on the penalty and
attorneys fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of
attorneys fees and in not reducing the penalties considering that the petitioner, contrary to the
appellate courts findings, has allegedly made partial payments on the loan. And if penalty is to be
awarded, the petitioner is asking for the non-imposition of interest on the surcharges inasmuch as
the compounding of interest on surcharges is not provided in the promissory note marked Exhibit
"A". The petitioner takes exception to the computation of the private respondent whereby the
interest, surcharge and the principal were added together and that on the total sum interest was
imposed. Petitioner also claims that there is no basis in law for the charging of interest on the
surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition
of interest on surcharges.
We find no merit in the petitioners contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty 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.
The penalty may be enforced only when it is demandable in accordance with the provisions
of this Code.

In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both
interest and penalties in case of default on the part of the petitioner in the payment of the subject
restructured loan. The pertinent6 portion of the promissory note (Exhibit "A") imposing interest and
penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE
PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN
THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx

xxx

xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until
paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any
portion of it when due, I/We jointly and severally agree to pay additional penalty charges at
the rate of TWO per cent (2%) per month on the total amount due until paid, payable and
computed monthly. Default of payment of this note or any portion thereof when due shall
render all other installments and all existing promissory notes made by us in favor of the
CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable.
(Underscoring supplied)
xxx

xxx

xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan
constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil
Code.7 On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty
charge which is separate and distinct from the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v.
Court of Appeals,8 this Court has ruled that the New Civil Code permits an agreement upon a penalty
apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not
include the monetary interest, and as such the two are different and distinct from each other and
may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on
to state that such a stipulation about payment of an additional interest rate partakes of the nature of
a penalty clause which is sanctioned by law, more particularly under Article 2209 of the New Civil
Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per
cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time
of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated
monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or
compensatory interest. Having clarified the same, the next issue to be resolved is whether interest
may accrue on the penalty or compensatory interest without violating the provisions of Article 1959
of the New Civil Code, which provides that:

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge
for the reason that the law only allows imposition of interest on monetary interest but not the
charging of interest on penalty. He claims that since there is no law that allows imposition of interest
on penalties, the penalties should not earn interest. But as we have already explained, penalty
clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the
penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted
provision of Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding
of interest. The fifth paragraph of the said promissory note provides that: "Any interest which may be
due if not paid shall be added to the total amount when due and shall become part thereof, the
whole amount to bear interest at the maximum rate allowed by law."10 Therefore, any penalty interest
not paid, when due, shall earn the legal interest of twelve percent (12%) per annum, 11 in the absence
of express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from
the time it is judicially demanded, although the obligation may be silent upon this point." In the
instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in
court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the
petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and
the penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based
allegedly on the case of National Power Corporation v. National Merchandising
Corporation,12 wherein we ruled that the imposition of interest on the damages from the filing of the
complaint is unjust where the litigation was prolonged for twenty-five (25) years through no fault of
the defendant. However, the ruling in the said National Power Corporation (NPC) case is not
applicable to the case at bar inasmuch as our ruling on the issue of interest in that NPC case was
based on equitable considerations and on the fact that the said case lasted for twenty-five (25) years
"through no fault of the defendant." In the case at bar, however, equity cannot be considered
inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner
expressly agreed to the compounding of interest in case of failure on his part to pay the loan at
maturity. Inasmuch as the said stipulation on the compounding of interest has the force of law
between the parties and does not appear to be inequitable or unjust, the said written stipulation
should be respected.
The private respondents Statement of Account (marked Exhibits "C" to "C-2") 13 shows the following
breakdown of the petitioners indebtedness as of August 28, 1986:

Principal

P2,838,454.68

Interest

P 576,167.89

Surcharge P4,581,692.10

P7,996,314.67

The said statement of account also shows that the above amounts stated therein are net of the
partial payments amounting to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One
Pesos and Forty-Three Centavos (P452,561.43) which were made during the period from May 13,
1983 to September 30, 1983.14 The petitioner now seeks the reduction of the penalty due to the said
partial payments. The principal amount of the promissory note (Exhibit "A") was Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos
(P3,411,421.32) when the loan was restructured on August 31, 1979. As of August 28, 1986, the
principal amount of the said restructured loan has been reduced to Two Million Eight Hundred ThirtyEight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus,
petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229 of the New Civil
Code which provides that: "The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable."
Petitioner insists that the penalty should be reduced to ten percent (10%) of the unpaid debt in
accordance with Bachrach Motor Company v. Espiritu.15
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten
percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner
has made partial payments which showed his good faith, a reduction of the penalty charge from two
percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be
justified under the said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the
total amount due to be unconscionable inasmuch as the same appeared to have been compounded
monthly.
Considering petitioners several partial payments and the fact he is liable under the note for the two
percent (2%) penalty charge per month on the total amount due, compounded monthly, for twentyone (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to
a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the
date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the
offers of the petitioner to enter into a compromise for the settlement of his debt by presenting
proposed payment schemes to respondent CCP. The said offers at compromise also showed his
good faith despite difficulty in complying with his loan obligation due to his financial problems.
However, we are not unmindful of the respondents long overdue deprivation of the use of its money
collectible from the petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring the suspension
of the running of the interest during that period when the respondent allegedly failed to assist the
petitioner in applying for relief from liability. In this connection, the petitioner referred to the private
respondents letter16 dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:

xxx

xxx

xxx

With reference to your appeal for condonation of interest and surcharge, we wish to inform
you that the center will assist you in applying for relief of liability through the Commission on
Audit and Office of the President xxx.
While your application is being processed and awaiting approval, the center will be accepting
your proposed payment scheme with the downpayment of P160,000.00 and monthly
remittances of P60,000.00 xxx.
xxx

xxx

xxx

The petitioner alleges that his obligation to pay the interest and surcharge should have been
suspended because the obligation to pay such interest and surcharge has become conditional, that
is dependent on a future and uncertain event which consists of whether the petitioners request for
condonation of interest and surcharge would be recommended by the Commission on Audit and the
Office of the President to the House of Representatives for approval as required under Section 36 of
Presidential Decree No. 1445. Since the condition has not happened allegedly due to the private
respondents reneging on its promise, his liability to pay the interest and surcharge on the loan has
not arisen. This is the petitioners contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the
private respondents promise to assist the petitioners in applying for relief therefrom through the
Commission on Audit and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the
petitioner is not part of the formally offered documentary evidence of either party in the trial court.
That letter cannot be considered evidence pursuant to Rule 132, Section 34 of the Rules of Court
which provides that: "The court shall consider no evidence which has not been formally offered xxx."
Besides, the said letter does not contain any categorical agreement on the part of respondent CCP
that the payment of the interest and surcharge on the loan is deemed suspended while his appeal
for condonation of the interest and surcharge was being processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner
to inform the Commission on Audit and the Office of the President of his application for condonation
of interest and surcharge. It was incumbent upon the petitioner to bring his administrative appeal for
condonation of interest and penalty charges to the attention of the said government offices.
On the issue of attorneys fees, the appellate court ruled correctly and justly in reducing the trial
courts award of twenty-five percent (25%) attorneys fees to five percent (5%) of the total amount
due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with
MODIFICATION in that the penalty charge of two percent (2%) per month on the total amount due,
compounded monthly, is hereby reduced to a straight twelve percent (12%) per annum starting from
August 28, 1986. With costs against the petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 85161 September 9, 1991
COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners,
vs.
COURT OF APPEALS and OSCAR VENTANILLA ENTERPRISES CORPORATION, respondents.
Esteban C. Manuel for petitioners.
Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p
Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No.
09504 "Enrique Sy and Country Bankers Insurance Corporation v. Oscar Ventanilla Enterprises
Corporation" affirming in toto the decision of the Regional Trial Court, Cabanatuan City, Branch XXV,
to wit:
WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and on the
counterclaim of the defendant O. Ventanilla Enterprises Corporation, judgment is
hereby rendered:
1. Declaring as lawful, the cancellation and termination of the Lease Agreement (Exh.
A) and the defendant's re-entry and repossession of the Avenue, Broadway and
Capitol theaters under lease on February 11, 1980;
2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id Lease
Agreement, and confirming the forfeiture of the plaintiffs remaining cash deposit of
P290,000.00 in favor of the defendant thereunder, as of February 11, 1980;
3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing
arrears in rentals, unremitted amounts for amusement tax delinquency and accrued
interest thereon, with further interest on said amounts at the rate of 12% per annum
(per lease agreement) from December 1, 1980 until the same is fully paid;
4. Ordering the plaintiff to pay the defendant the amount of P100,000.00,
representing the P10,000.00 portion of the monthly lease rental which were not
deducted from the cash deposit of the plaintiff from February to November, 1980,
after the forfeiture of the said cash deposit on February 11, 1980, with interest

thereon at the rate of 12% per annum on each of the said monthly amounts of
P10,000.00 from the time the same became due until it is paid;
5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of
P100,000.00, representing the P10,000.00 monthly increase in rentals which the
defendant failed to realize from February to November 1980 result from the
injunction, with legal interest thereon from the finality of this decision until fully paid;
6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per centum
(10%) of the above-mentioned amounts of P289,534.78, P100,000.00 and
P100,000.00, as and for attorney's fees; and
7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)
The antecedent facts of the case are as follows:
Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique
F. Sy, as lessee, entered into a lease agreement over the Avenue, Broadway and Capitol Theaters
and the land on which they are situated in Cabanatuan City, including their air-conditioning systems,
projectors and accessories needed for showing the films or motion pictures. The term of the lease
was for six (6) years commencing from June 13, 1977 and ending June 12,1983. After more than
two (2) years of operation of the Avenue, Broadway and Capitol Theaters, the lessor OVEC made
demands for the repossession of the said leased properties in view of the Sy's arrears in monthly
rentals and non-payment of amusement taxes. On August 8,1979, OVEC and Sy had a conference
and by reason of Sy's request for reconsideration of OVECs demand for repossession of the three
(3) theaters, the former was allowed to continue operating the leased premises upon his conformity
to certain conditions imposed by the latter in a supplemental agreement dated August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of
July 31, 1979) was reduced to P71,028.91 as of December 31, 1979. However, the accrued
amusement tax liability of the three (3) theaters to the City Government of Cabanatuan City had
accumulated to P84,000.00 despite the fact that Sy had been deducting the amount of P4,000.00
from his monthly rental with the obligation to remit the said deductions to the city government.
Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent to Sy demanding
payment of the arrears in rentals and amusement tax delinquency. The latter demand was with
warning that OVEC will re-enter and repossess the Avenue, Broadway and Capital Theaters on
February 11, 1980 in pursuance of the pertinent provisions of their lease contract of June 11, 1977
and their supplemental letter-agreement of August 13, 1979. But notwithstanding the said demands
and warnings SY failed to pay the above-mentioned amounts in full Consequently, OVEC padlocked
the gates of the three theaters under lease and took possession thereof in the morning of February
11, 1980 by posting its men around the premises of the Id movie houses and preventing the lessee's
employees from entering the same.
Sy, through his counsel, filed the present action for reformation of the lease agreement, damages
and injunction late in the afternoon of the same day. And by virtue of a restraining order dated
February 12, 1980 followed by an order directing the issuance of a writ of preliminary injunction

issued in said case, Sy regained possession and operation of the Avenue, Broadway and Capital
theaters.
As first cause of action, Sy alleged that the amount of deposit P600,000.00 as agreed upon,
P300,000.00 of which was to be paid on June 13, 1977 and the balance on December 13, 1977
was too big; and that OVEC had assured him that said forfeiture will not come to pass. By way of
second cause of action, Sy sought to recover from OVEC the sums of P100,000.00 which Sy
allegedly spent in making "major repairs" on Broadway Theater and the application of which to Sy's
due rentals; (2) P48,000.00 covering the cost of electrical current allegedly used by OVEC in its
alleged "illegal connection" to Capitol Theater and (3) P31,000.00 also for the cost of electrical
current allegedly used by OVEC for its alleged "illegal connection" to Broadway Theater and for
damages suffered by Sy as a result of such connection. Under the third cause of action, it is alleged
in the complaint that on February 11, 1980, OVEC had the three theaters padlocked with the use of
force, and that as a result, Sy suffered damages at the rate of P5,000.00 a day, in view of his failure
to go thru the contracts he had entered into with movie and booking companies for the showing of
movies at ABC. As fourth cause of action, Sy prayed for the issuance of a restraining
order/preliminary injunction to enjoin OVEC and all persons employed by it from entering and taking
possession of the three theaters, conditioned upon Sy's filing of a P500,000.00 bond supplied by
Country Bankers Insurance Corporation (CBISCO).
OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's
violation of the terms of the subject lease agreement, OVEC became authorized to enter and
possess the three theaters in question and to terminate said agreement and the balance of the
deposits given by Sy to OVEC had thus become forfeited; that OVEC would be losing P50,000.00
for every month that the possession and operation of said three theaters remain with Sy and that
OVEC incurred P500,000.00 for attorney's service.
The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease
agreement; that the repossession of the leased premises by OVEC after the cancellation and
termination of the lease was in accordance with the stipulation of the parties in the said agreement
and the law applicable thereto and that the consequent forfeiture of Sy's cash deposit in favor of
OVEC was clearly agreed upon by them in the lease agreement. The trial court further concluded
that Sy was not entitled to the writ of preliminary injunction issued in his favor after the
commencement of the action and that the injunction bond filed by Sy is liable for whatever damages
OVEC may have suffered by reason of the injunction.
On the counterclaim of OVEC the trial court found that the said lessor was deprived of the
possession and enjoyment of the leased premises and also suffered damages as a result of the filing
of the case by Sy and his violation of the terms and conditions of the lease agreement. Hence, it
held that OVEC is entitled to recover the said damages in addition to the arrears in rentals and
amusement tax delinquency of Sy and the accrued interest thereon. From the evidence presented, it
found that as of the end of November, 1980, when OVEC finally regained the possession of the
three (3) theaters under lease, Sy's unpaid rentals and amusement tax liability amounted to
P289,534.78. In addition, it held that Sy was under obligation to pay P10,000.00 every month from
February to November, 1980 or the total amount of P100,000.00 with interest on each amount of
P10,000.00 from the time the same became due. This P10,000.00 portion of the monthly lease

rental was supposed to come from the remaining cash deposit of Sy but with the consequent
forfeiture of the remaining cash deposit of P290,000.00, there was no more cash deposit from which
said amount could be deducted. Further, it adjudged Sy to pay attorney's fees equivalent to 10% of
the amounts above-mentioned.
Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00 every
month from February to November, 1980. The amount represents the supposed increase in rental
from P50,000.00 to P60,000.00 in view of the offer of one RTG Productions, Inc. to lease the three
theaters involved for P60,000.00 a month.
From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC
appealed insofar as the decision failed to hold the injunction bond liable for an damages awarded by
the trial court.
The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It
held that the provisions are fair and reasonable and therefore, should be respected and enforced as
the law between the parties. It held that the cancellation or termination of the agreement prior to its
expiration period is justified as it was brought about by Sy's own default in his compliance with the
terms of the agreement and not "motivated by fraud or greed." It also affirmed the award to OVEC of
the amount of P100,000.00 chargeable against the injunction bond posted by CBISCO which was
soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held that the trial court did not
err in not charging and holding the injunction bond posted by Sy liable for all the awards as the
undertaking of CBISCO under the bond referred only to damages which OVEC may suffer as a
result of the injunction.
From this decision, CBISCO and Sy filed this instant petition on the following grounds:
A
PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY ENRICH
OR BE BENEFITTED AT THE EXPENSE OF THE PETITIONERS.
B
RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW AND
GRAVE ABUSE OF DISCRETION IN NOT SETTING OFF THE P100,000.00
SUPPOSED DAMAGE RESULTING FROM THE INJUNCTION AGAINST THE
P290,000.00 REMAINING CASH DEPOSIT OF PETITIONER ENRIQUE SY.
C
RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS ERROR
OF LAW AND GRAVE ABUSE OF DISCRETION IN NOT DISMISSING PRIVATE

RESPONDENTS COUNTER-CLAIM FOR FAILURE TO PAY THE NECESSARY

DOCKET FEE. (p. 10, Rollo)
We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease agreement
would unjustly enrich the respondent OVEC at the expense of Sy and CBISCO contrary to law,
morals, good customs, public order or public policy. 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 lessee's
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
presentation (generally consisting in the payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases on Civil
Law, Vol. IV, First Edition, pp. 199-200) As a general rule, in obligations with a penal clause, the
penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In such case,
proof of actual damages suffered by the creditor is not necessary in order that the penalty may be
demanded (Article 1228, New Civil Code). However, there are exceptions to the rule that the penalty
shall substitute the indemnity for damages and the payment of interests in case of non-compliance
with the principal obligation. They are first, when there is a stipulation to the contrary; second, when
the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor is guilty of fraud
(Article 1226, par. 1, New Civil Code). It is evident that in all said cases, the purpose of the penalty is
to punish the obligor. Therefore, the obligee can recover from the obligor not only the penalty but
also the damages resulting from the non-fulfillment or defective performance of the principal
obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed
forfeited, without prejudice to any other obligation still owing by the lessee to the lessor, the penalty
cannot substitute for the P100,000.00 supposed damage resulting from the issuance of the
injunction against the P290,000.00 remaining cash deposit. This supposed damage suffered by
OVEC was the alleged P10,000.00 a month increase in rental from P50,000.00 to P60,000,00),
which OVEC failed to realize for ten months from February to November, 1980 in the total sum of
P100,000.00. This opportunity cost which was duly proven before the trial court, was correctly made
chargeable by the said court against the injunction bond posted by CBISCO. The undertaking
assumed by CBISCO under subject injunction refers to "all such damages as such party may
sustain by reason of the injunction if the Court should finally decide that the Plaintiff was/were not
entitled thereto." (Rollo, p. 101) Thus, the respondent Court correctly sustained the trial court in
holding that the bond shall and may answer only for damages which OVEC may suffer as a result of
the injunction. The arrears in rental, the unmeritted amounts of the amusement tax delinquency, the
amount of P100,000.00 (P10,000.00 portions of each monthly rental which were not deducted from
plaintiffs cash deposit from February to November, 1980 after the forfeiture of said cash deposit on
February 11, 1980) and attorney's fees which were all charged against Sy were correctly considered
by the respondent Court as damages which OVEC sustained not as a result of the injunction.
There is likewise no merit to the claim of petitioners that respondent Court committed serious error of
law and grave abuse of discretion in not dismissing private respondent's counterclaim for failure to

pay the necessary docket fee, which is an issue raised for the first time in this petition. Petitioners
rely on the rule in Manchester Development Corporation v. Court of Appeals, G.R. No. 75919, May
7, 1987, 149 SCRA 562 to the effect that all the proceedings held in connection with a case where
the correct docket fees are not paid should be peremptorily be considered null and void because, for
all legal purposes, the trial court never acquired jurisdiction over the case. It should be remembered
however, that in Davao Light and Power Co., Inc. v. Dinopol, G.R. 75195, August 19, 1988, 164
SCRA 748, this Court took note of the fact that the assailed order of the trial court was issued prior to
the resolution in the Manchester case and held that its strict application to the case at bar would
therefore be unduly harsh. Thus, We allowed the amendment of the complaint by specifying the
amount of damages within a non-extendible period of five (5) days from notice and the reassessment of the filing fees. Then, in Sun Insurance Office, Ltd. v. Asuncion, G.R. 79937-38,
February 3, 1989, 170 SCRA 274, We held that where the filing of the initiatory pleading is not
accompanied by payment of the docket fee, the court may allow payment of the fee within a
reasonable time but in no case beyond the applicable prescriptive or reglemen tary period.
Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the following
circumstances are present: (a) they arise out of or are necessarily connected with the transaction or
occurrence that is subject matter of the opposing party's claim; (b) they do not require for their
adjudication the presence of third parties of whom the court cannot acquire jurisdiction; and (c) the
court has jurisdiction to entertain the claim (see Javier v. Intermediate Appellate Court, G.R. 75379,
March 31, 1989, 171 SCRA 605). Whether the respective claims asserted by the parties arise out of
the same contract or transaction within the limitation on counterclaims imposed by the statutes
depends on a consideration of all the facts brought forth by the parties and on a determination of
whether there is some legal or equitable relationship between the ground of recovery alleged in the
counterclaim and the matters alleged as the cause of action by the plaintiff (80 C.J.S. 48). As the
counterclaims of OVEC arise from or are necessarily connected with the facts alleged in the
complaint for reformation of instrument of Sy, it is clear that said counterclaims are compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same
is hereby DENIED and the decision dated June 15, 1988 and the resolution dated September 21,
1988, both of the respondent Court of Appeals are AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 128703

October 18, 2000

TEODORO BAAS,*C. G. DIZON CONSTRUCTION, INC., and CENEN DIZON, petitioners,

vs.
ASIA PACIFIC FINANCE CORPORATION,1 substituted by INTERNATIONAL CORPORATE
BANK now known as UNION BANK OF THE PHILIPPINES, respondent.
DECISION
BELLOSILLO, J.:
C. G. DIZON CONSTRUCTION INC. and CENEN DIZON in this petition for review seek the reversal
of the 24 July 1996 Decision of the Court of Appeals dismissing their appeal for lack of merit and
affirming in toto the decision of the trial court holding them liable to Asia Pacific Finance Corporation
in the amount of P87,637.50 at 14% interest per annum in addition to attorney's fees and costs of
suit, as well as its 21 March 1997 Resolution denying reconsideration thereof. 2
On 20 March 1981 Asia Pacific Finance Corporation (ASIA PACIFIC for short) filed a complaint for a
sum of money with prayer for a writ of replevin against Teodoro Baas, C. G. Dizon Construction and
Cenen Dizon. Sometime in August 1980 Teodoro Baas executed a Promissory Note in favor of C.
G. Dizon Construction whereby for value received he promised to pay to the order of C. G. Dizon
Construction the sum of P390,000.00 in installments of "P32,500.00 every 25th day of the month
starting from September 25, 1980 up to August 25, 1981."3
Later, C. G. Dizon Construction endorsed with recourse the Promissory Note to ASIA PACIFIC, and
to secure payment thereof, C. G. Dizon Construction, through its corporate officers, Cenen Dizon,
President, and Juliette B. Dizon, Vice President and Treasurer, executed a Deed of Chattel
Mortgage covering three (3) heavy equipment units of Caterpillar Bulldozer Crawler Tractors with
Model Nos. D8-14A, D8-2U and D8H in favor of ASIA PACIFIC. 4 Moreover, Cenen Dizon executed
on 25 August 1980 a Continuing Undertaking wherein he bound himself to pay the obligation jointly
and severally with C. G. Dizon Construction.5
In compliance with the provisions of the Promissory Note, C. G. Dizon Construction made the
following installment payments to ASIA PACIFIC: P32,500.00 on 25 September 1980, P32,500.00 on
27 October 1980 and P65,000.00 on 27 February 1981, or a total of P130,000.00. Thereafter,
however, C. G. Dizon Construction defaulted in the payment of the remaining installments,
prompting ASIA PACIFIC to send a Statement of Account to Cenen Dizon for the unpaid balance
of P267,737.50 inclusive of interests and charges, and P66,909.38 representing attorney's fees. As
the demand was unheeded, ASIA PACIFIC sued Teodoro Baas, C. G. Dizon Construction and
Cenen Dizon.

While defendants (herein petitioners) admitted the genuineness and due execution of
the Promissory Note, the Deed of Chattel Mortgage and the Continuing Undertaking, they
nevertheless maintained that these documents were never intended by the parties to be legal, valid
and binding but a mere subterfuge to conceal the loan of P390,000.00 with usurious interests.
Defendants claimed that since ASIA PACIFIC could not directly engage in banking business, it
proposed to them a scheme wherein plaintiff ASIA PACIFIC could extend a loan to them without
violating banking laws: first, Cenen Dizon would secure a promissory note from Teodoro Baas with
a face value of P390,000.00 payable in installments; second, ASIA PACIFIC would then make it
appear that the promissory note was sold to it by Cenen Dizon with the 14% usurious interest on the
loan or P54,000.00 discounted and collected in advance by ASIA PACIFIC; and, lastly, Cenen Dizon
would provide sufficient collateral to answer for the loan in case of default in payment and execute a
continuing guaranty to assure continuous and prompt payment of the loan. Defendants also alleged
that out of the loan of P390,000.00 defendants actually received only P329,185.00 after ASIA
PACIFIC deducted the discounted interest, service handling charges, insurance premium,
registration and notarial fees.
Sometime in October 1980 Cenen Dizon informed ASIA PACIFIC that he would be delayed in
meeting his monthly amortization on account of business reverses and promised to pay instead in
February 1981. Cenen Dizon made good his promise and tendered payment to ASIA PACIFIC in an
amount equivalent to two (2) monthly amortizations. But ASIA PACIFIC attempted to impose a 3%
interest for every month of delay, which he flatly refused to pay for being usurious.
Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Cenen Dizon to surrender to it the
ownership of the two (2) bulldozer crawler tractors and, in turn, the latter would treat the former's
account as closed and the loan fully paid. Cenen Dizon supposedly agreed and accepted the offer.
Defendants averred that the value of the bulldozer crawler tractors was more than adequate to cover
their obligation to ASIA PACIFIC.
Meanwhile, on 21 April 1981 the trial court issued a writ of replevin against defendant C. G. Dizon
Construction for the surrender of the bulldozer crawler tractors subject of the Deed of Chattel
Mortgage. Of the three (3) bulldozer crawler tractors, only two (2) were actually turned over by
defendants - D8-14A and D8-2U - which units were subsequently foreclosed by ASIA PACIFIC to
satisfy the obligation. D8-14A was sold for P120,000.00 and D8-2U for P60,000.00 both to ASIA
PACIFIC as the highest bidder.
During the pendency of the case, defendant Teodoro Baas passed away, and on motion of the
remaining defendants, the trial court dismissed the case against him. On the other hand, ASIA
PACIFIC was substituted as party plaintiff by International Corporate Bank after the
disputed Promissory Note was assigned and/or transferred by ASIA PACIFIC to International
Corporate Bank. Later, International Corporate Bank merged with Union Bank of the Philippines. As
the surviving entity after the merger, and having succeeded to all the rights and interests of
International Corporate Bank in this case, Union Bank of the Philippines was substituted as a party
in lieu of International Corporate Bank.6

On 25 September 1992 the Regional Trial Court ruled in favor of ASIA PACIFIC holding the
defendants jointly and severally liable for the unpaid balance of the obligation under the Promissory
Note in the amount of P87,637.50 at 14% interest per annum, and attorney's fees equivalent to 25%
of the monetary award.7
On 24 July 1996 the Court of Appeals affirmed in toto the decision of the trial court thus Defendant-appellants' contention that the instruments were executed merely as a subterfuge to skirt
banking laws is an untenable defense. If that were so then they too were parties to the illegal
scheme. Why should they now be allowed to take advantage of their own knavery to escape the
liabilities that their own chicanery created?
Defendant-appellants also want us to believe their story that there was an agreement between them
and the plaintiff-appellee that if the former would deliver their 2 bulldozer crawler tractors to the
latter, the defendant-appellants' obligation would fully be extinguished. Again, nothing but the word
that comes out between the teeth supports such story. Why did they not write down such an
important agreement? Is it believable that seasoned businessmen such as the defendant-appellant
Cenen G. Dizon and the other officers of the appellant corporation would deliver the bulldozers
without a receipt of acquittance from the plaintiff-appellee x x x x In our book, that is not credible.
The pivotal issues raised are: (a) Whether the disputed transaction between petitioners and ASIA
PACIFIC violated banking laws, hence, null and void; and (b) Whether the surrender of the bulldozer
crawler tractors to respondent resulted in the extinguishment of petitioners' obligation.
On the first issue, petitioners insist that ASIA PACIFIC was organized as an investment house which
could not engage in the lending of funds obtained from the public through receipt of deposits. The
disputed Promissory Note, Deed of Chattel Mortgage and Continuing Undertaking were not intended
to be valid and binding on the parties as they were merely devices to conceal their real intention
which was to enter into a contract of loan in violation of banking laws.
We reject the argument. An investment company refers to any issuer which is or holds itself out as
being engaged or proposes to engage primarily in the business of investing, reinvesting or trading
in securities.8 As defined in Sec. 2, par. (a), of the Revised Securities Act,9 securities "shall include x
x x x commercial papers evidencing indebtedness of any person, financial or non-financial entity,
irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to
another with or without recourse, such as promissory notes x x x x" Clearly, the transaction between
petitioners and respondent was one involving not a loan but purchase of receivables at a discount,
well within the purview of "investing, reinvesting or trading in securities" which an investment
company, like ASIA PACIFIC, is authorized to perform and does not constitute a violation of the
General Banking Act.10 Moreover, Sec. 2 of the General Banking Act provides in part Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage in
the lending of funds obtained from the public through the receipt of deposits of any kind, and all
entities regularly conducting such operations shall be considered as banking institutions and shall be
subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws
(underscoring supplied).

Indubitably, what is prohibited by law is for investment companies to lend funds obtained from the
public through receipts of deposit, which is a function of banking institutions. But here, the funds
supposedly "lent" to petitioners have not been shown to have been obtained from the public by way
of deposits, hence, the inapplicability of banking laws.
On petitioners' submission that the true intention of the parties was to enter into a contract of loan,
we have examined the Promissory Note and failed to discern anything therein that would support
such theory. On the contrary, we find the terms and conditions of the instrument clear, free from any
ambiguity, and expressive of the real intent and agreement of the parties. We quote the pertinent
portions of the Promissory Note FOR VALUE RECEIVED, I/We, hereby promise to pay to the order of C.G. Dizon Construction, Inc.
the sum of THREE HUNDRED NINETY THOUSAND ONLY (P390,000.00), Philippine Currency in
the following manner:
P32,500.00 due every 25th of the month starting from September 25, 1980 up to August 25, 1981.
I/We agree that if any of the said installments is not paid as and when it respectively falls due, all the
installments covered hereby and not paid as yet shall forthwith become due and payable at the
option of the holder of this note with interest at the rate of 14% per annum on each unpaid
installment until fully paid.
If any amount due on this note is not paid at its maturity and this note is placed in the hands of an
attorney for collection, I/We agree to pay in addition to the aggregate of the principal amount and
interest due, a sum equivalent to TEN PERCENT (10%) thereof as Attorney's fees, in case no action
is filed, otherwise, the sum will be equivalent to TWENTY FIVE (25%) of the said principal amount
and interest due x x x x
Makati, Metro Manila, August 25, 1980.
(Sgd) Teodoro Baas
ENDORSED TO ASIA PACIFIC FINANCE CORPORATION WITH RECOURSE, C.G. DIZON
CONSTRUCTION, INC.
By: (Sgd.) Cenen Dizon (Sgd.) Juliette B. Dizon
President VP/Treasurer
Likewise, the Deed of Chattel Mortgage and Continuing Undertaking were duly acknowledged before
a notary public and, as such, have in their favor the presumption of regularity. To contradict them
there must be clear, convincing and more than merely preponderant evidence. In the instant case,
the records do not show even a preponderance of evidence in favor of petitioners' claim that the
Deed of Chattel Mortgage and Continuing Undertaking were never intended by the parties to be
legal, valid and binding. Notarial documents are evidence of the facts in clear and unequivocal
manner therein expressed.11

Interestingly, petitioners' assertions were based mainly on the self-serving testimony of Cenen
Dizon, and not on any other independent evidence. His testimony is not only unconvincing, as found
by the trial court and the Court of Appeals, but also self-defeating in light of the documents
presented by respondent, i.e., Promissory Note, Deed of Chattel Mortgage and Continuing
Undertaking, the accuracy, correctness and due execution of which were admitted by petitioners.
Oral evidence certainly cannot prevail over the written agreements of the parties. The courts need
only rely on the faces of the written contracts to determine their true intention on the principle that
when the parties have reduced their agreements in writing, it is presumed that they have made the
writings the only repositories and memorials of their true agreement.
The second issue deals with a question of fact. We have ruled often enough that it is not the function
of this Court to analyze and weigh the evidence all over again, its jurisdiction being limited to
reviewing errors of law that might have been committed by the lower court. 12 At any rate, while we
are not a trier of facts, hence, not required as a rule to look into the factual bases of the assailed
decision of the Court of Appeals, we did so just the same in this case if only to satisfy petitioners that
we have carefully studied and evaluated the case, all too mindful of the tenacity and vigor with which
the parties, through their respective counsel, have pursued this case for nineteen (19) years.
Petitioners contend that the parties already had a verbal understanding wherein ASIA PACIFIC
actually agreed to consider petitioners' account closed and the principal obligation fully paid in
exchange for the ownership of the two (2) bulldozer crawler tractors.
We are not persuaded. Again, other than the bare allegations of petitioners, the records are bereft of
any evidence of the supposed agreement. As correctly observed by the Court of Appeals, it is
unbelievable that the parties entirely neglected to write down such an important agreement. Equally
incredulous is the fact that petitioner Cenen Dizon, a seasoned businessman, readily consented to
deliver the bulldozers to respondent without a corresponding receipt of acquittance. Indeed, even the
testimony of petitioner Cenen Dizon himself negates the supposed verbal understanding between
the parties Q: You said and is it not a fact that you surrendered the bulldozers to APCOR by virtue of the seizure
order?
A: There was no seizure order. Atty. Carag during that time said if I surrender the two equipment, we
might finally close a deal if the equipment would come up to the balance of the loan. So I voluntarily
surrendered, I pulled them from the job site and returned them to APCOR x x x x
Q: You mentioned a certain Atty. Carag, who is he?
A: He was the former legal counsel of APCOR. They were handling cases. In fact, I talked with Atty.
Carag, we have a verbal agreement if I surrender the equipment it might suffice to pay off the
debt so I did just that (underscoring ours).13
1wphi1

In other words, there was no binding and perfected contract between petitioners and respondent
regarding the settlement of the obligation, but only a conditional one, a mere conjecture in fact,
depending on whether the value of the tractors to be surrendered would equal the balance of the

loan plus interests. And since the bulldozer crawler tractors were sold at the foreclosure sale for
only P180,000.00,14 which was not enough to cover the unpaid balance of P267,637.50, petitioners
are still liable for the deficiency.
Barring therefore a showing that the findings complained of are totally devoid of support in the
records, or that they are so glaringly erroneous as to constitute serious abuse of discretion, we see
no valid reason to discard them. More so in this case where the findings of both the trial court and
the appellate court coincide with each other on the matter.
With regard to the computation of petitioners' liability, the records show that petitioners actually paid
to respondent a total sum of P130,000.00 in addition to the P180,000.00 proceeds realized from the
sale of the bulldozer crawler tractors at public auction. Deducting these amounts from the principal
obligation of P390,000.00 leaves a balance of P80,000.00, to which must be added P7,637.50
accrued interests and charges as of 20 March 1981, or a total unpaid balance of P87,637.50 for
which petitioners are jointly and severally liable. Furthermore, the unpaid balance should earn 14%
interest per annum as stipulated in the Promissory Note, computed from 20 March 1981 until fully
paid.
On the amount of attorney's fees which under the Promissory Note is equivalent to 25% of the
principal obligation and interests due, it is not, strictly speaking, the attorney's fees recoverable as
between the attorney and his client regulated by the Rules of Court. Rather, the attorney's fees here
are in the nature of liquidated damages and the stipulation therefor is aptly called a penal clause. It
has been said that so long as such stipulation does not contravene the law, morals and public order,
it is strictly binding upon the obligor. It is the litigant, not the counsel, who is the judgment creditor
entitled to enforce the judgment by execution.15
Nevertheless, it appears that petitioners' failure to fully comply with their part of the bargain was not
motivated by ill will or malice, but due to financial distress occasioned by legitimate business
reverses. Petitioners in fact paid a total of P130,000.00 in three (3) installments, and even went to
the extent of voluntarily turning over to respondent their heavy equipment consisting of two (2)
bulldozer crawler tractors, all in a bona fide effort to settle their indebtedness in full. Article 1229 of
the New Civil Code specifically empowers the judge to equitably reduce the civil penalty when the
principal obligation has been partly or irregularly complied with. Upon the foregoing premise, we hold
that the reduction of the attorney's fees from 25% to 15% of the unpaid principal plus interests is in
order.
Finally, while we empathize with petitioners, we cannot close our eyes to the overriding
considerations of the law on obligations and contracts which must be upheld and honored at all
times. Petitioners have undoubtedly benefited from the transaction; they cannot now be allowed to
impugn its validity and legality to escape the fulfillment of a valid and binding obligation.
WHEREFORE, no reversible error having been committed by the Court of Appeals, its assailed
Decision of 24 July 1996 and its Resolution of 21 March 1997 are AFFIRMED. Accordingly,
petitioners C.G. Construction Inc. and Cenen Dizon are ordered jointly and severally to pay
respondent Asia Pacific Finance Corporation, substituted by International Corporate Bank (now
known as Union Bank of the Philippines), P87,637.50 representing the unpaid balance on

the Promissory Note, with interest at fourteen percent (14%) per annum computed from 20 March
1981 until fully paid, and fifteen percent (15%) of the principal obligation and interests due by way of
attorney's fees. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-39778 September 13, 1985
VIRGILIO SIY, petitioner,
vs.
COURT OF APPEALS, SERGIO VALDEZ, AND VIRGINIA VALDEZ, respondents.
Quintin C. Pardes for petitioner.
Romeo L. Mendoza & Assoc. Law Office for private respondent.

GUTIERREZ, JR., J.:

This is a petition for review which seeks to annul and set aside the decision of the Court of Appeals,
now Intermediate Appellate Court affirming the trial court's decision, ordering, among others, the
rescission of the contract of sale entered into between the petitioner and the private respondents.
The private respondents, spouses Valdez are the owners of a parcel of land containing an area of
155 square meters, more or less, and the house constructed thereon, situated at No. 333 Jefferson
Street, Makati, and covered by Transfer Certificate of Title No. 32718 of the Registry of Deeds of
Rizal. There is no dispute that the petitioner and private respondents entered into a contract of sale
regarding the said property. The controversy, however, stemmed from subsequent agreements
executed by the parties.
The first agreement entered into by the petitioner and private respondents was the Deed of
Conditional Sale (Exh. A) whereby for and in consideration of P22,000.00, the private respondents
as vendors agreed to sell to the petitioner as vendee the lot covered by TCT No. 32718 with all the
improvements thereon. The sale was subject to the condition that immediately upon the approval of
the petitioner's loan with the Social Security System (SSS) and its payment to the respondents, the
vendor shall execute the deed of absolute sale in favor of the vendee. The petitioner applied for a
loan with the SSS, through the Home Financing Commission (HFC). Since the property in question
was mortgaged to the Government Service Insurance System (GSIS), the HFC requested both
parties to execute a Deed of Sale with Assumption of Mortgage (Exh. G) which they did, stating
among others that the respondents sell, transfer, and convey to the petitioner the property for and in
consideration of the sum of P22,000.00, of which P6,400.00 (representing the amount allegedly
incurred by the petitioners for improvements on said property) had been paid and the balance of
P15,600. 00 payable upon approval of the petitioners loan with the SSS. In reality, however, the
respondents had not received a single centavo from the petitioner at the time. Subsequently, the
parties executed three more contracts. The first contract (Exh. I) which was executed more than one

month after Exhibit A provided that the respondents agreed to sell the property to the petitioner at
P14,000.00 while the latter must negotiate a loan with the SSS in order to settle the amount within a
period of thirty days from March 17, 1963. The contract also provided for the payment of rentals by
the petitioner at P50.00 a month from March 1, 1963 until the date of final settlement and damages
at the rate of P30.00 a day for each day of delay. The next day, another contract was executed by
the parties which was essentially the same as Exh. "1". Respondent Virginia Valdez explained that
she did not agree with the granting of another thirty-day extension to the petitioner and so Exh. "1"
was torn up. However, the respondents changed their minds after the mother of the petitioner
pleaded with them for another extension. Thus, Exh. "2" came into being. It provided that the full
amount of P14,000.00 would be paid on or before the 30th day from the date of the execution of the
contract and that failure of the petitioner to settle his obligation within that period shall make him
liable for damages at P30.00 for every day of delay.
The last agreement entered into by the parties, (Exh. 5), provided among others, that the
respondents agreed to receive the partial amount of P12,000.00 on the condition that the balance of
P4,376.00 is completely paid forty-five days after the date fixed by them and that failure of the
petitioner to pay the said balance on the agreed time will entitle the respondents to damages at
P20.00 for every day of delay until said balance shall have been fully paid.
Within the forty-five (45) days deadline, however, the petitioner failed to pay both the P12,000.00
which was supposed to be received by the respondents upon the execution of the agreement, (Exh.
5) and the balance of P4,376.00. Thus, when the petitioner's loan with the SSS was finally ready for
release, he requested the respondents to sign the deed of absolute sale and other papers required
by the SSS but the latter refused on the ground that the petitioner had already breached their latest
agreement (Exh. 5). The petitioner filed an action for specific performance with writ of preliminary
mandatory injunction seeking to compel the respondents to execute the deed of absolute sale of the
property and other such documents required by the SSS for the immediate release of the approved
loan.
In its first decision, the trial court rendered judgment in favor of the petitioner making the following
findings:
xxx xxx xxx
Apparently, the defendants are of the impression that the provision in the agreement
that 'failure of the plaintiff to settle said balance on or before the stipulated date will
entitle the defendants to collect P20.00 for every day of delay until balance is fully
paid' and just because plaintiff so failed to comply with it this will release them from
compliance with the condition mentioned in Exhibits 'A' and 'G'. The court agrees
with the defendant that plaintiff committed a breach granting that plaintiff failed to
comply with the stated proviso, but this is not the breach contemplated by law and
cannot be considered a sufficient cause for them to depart from their unfulfilled
obligation to the plaintiff because as the provision clearly states, defendants' rights
are adequately protected and compensated in the form of damages recoverable from
the plaintiff in case of non-compliance by the plaintiff.

Under the law (Article 119, New Civil Code), in reciprocal obligations, in case one of
the obligors should not comply with what is incumbent upon him, the injured party
may choose between the fulfillment and the rescission of the obligation with the
payment of damages in either case. In the instant case, plaintiff seeks not rescission
but fulfillment of the obligation. It is obvious when the parties herein agreed that the
consideration mentioned in Exhibits 'A' & 'G ' that will be paid upon the approval of
the loan, they mean approval and release of the loan. Weighing the evidence
presented both by the plaintiff and defendants, it is the opinion of the court that the
defendants by virtue of their contracts Exhibits 'A' and 'G', the defendants can be
compelled to fulfill the condition agreed thereon.
In due time, the private respondents filed a motion for reconsideration stating, among others, that the
decision of the lower court failed to consider the other contracts executed by the parties. Among
them was the agreement marked as Exhibit "5" which would clearly show that there was a limited
period within which the petitioner was given time to secure a loan from the SSS and pay P14,000.00,
the real consideration for the property agreed upon by the parties.
The petitioner filed his opposition to the respondents' motion for reconsideration. The respondents in
turn asked the lower court for five (5) days within which to submit a rejoinder. The extension was
granted in open court. However, even before the end of the five-day period, the court already issued
an order denying the respondents' motion for reconsideration. Another motion to reconsider was,
therefore, filed by the respondents praying that their rejoinder be taken into account since the same
was filed within the five-day period granted by the court.
Realizing its error, another decision was consequently rendered by the trial court, this time, in favor
of the private respondents, stating the following:
This Court observes that Exhibit '5' is an implementation or confirmation of the
provisions of both Exhibits '1' and '2' which are supplementary contracts providing for
a definite period of payment of the agreed purchase price of the property involved
herein. This period of payment is not provided for in Exhibits 'A' and 'G' thereby
modifying the later contracts in this regard. Article 1374 of the new Civil Code of the
Philippines, the Court believes, is also applicable to the instant case wherein it is
provided that the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken
together. Exhibits 'A', 'G', '1', '2' and '5' being complementary contracts, they should
be construed to correctly arrive at the true intention of the parties.
xxx xxx xxx
The wordings of Exhibit '5' when it states that the defendants-spouses agreed to
receive the partial amount of P12,000.00 only show that when Exhibit '5' was
executed, defendants did not yet receive said amount. It is still to be received, and
evidence of the plaintiff is wanting to show that he paid this amount of P12,000.00.
Neither is there any showing that the balance of P4,763.00 agreed upon in Exhibit '5'
had been paid by the plaintiff within forty-five days from July 9, 1963. This clearly

constitutes a breach of their last agreement Exhibit '5'. Article 1191 of the New Civil
Code provides that the power to rescind obligations is implied in reciprocal ones in
case one of the obligors should not comply with what is incumbent upon him. The
injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. There is no dispute that all the contracts
entered into by the parties herein are reciprocal ones. There is, likewise, no question
that the plaintiff is guilty of delay and the defendants- spouses are entitled to
damages occasioned by it in the light of the provisions of Article 1170 of the New
Civil Code providing that those who, in the performance of their obligations, are guilty
of delay and those who, in any manner, contravene the tenor thereof, are liable for
damages. The defendants-spouses elected rescission of their agreement of
purchase and sale with damages.
The petitioner filed a motion for reconsideration which the trial court denied. On appeal, the Court of
Appeals affirmed the decision in toto. Hence, this petition.
The issues raised are:
I
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
FIRST DECISION OF THE TRIAL COURT WAS NOT FINAL WHEN THE SAME
WAS SET ASIDE AND SUPERSEDED BY THE SECOND DECISION AND THUS,
THE TRIAL COURT HAD NO MORE JURISDICTION TO RENDER SAID SECOND
DECISION, AND
II
WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING THE
TRIAL COURT IN ORDERING THE RESCISSION OF THE AGREEMENT (EXHIBIT
5) AND THE PAYMENT OF DAMAGES AND ATTORNEY'S FEES.
The petitioner maintains that the motions for reconsideration filed by the respondents are both pro
forma because they presented issues which the trial court had already considered and ruled upon
and that the second motion for reconsideration merely asked the court to consider two documents
which were already submitted by respondents in evidence. The petitioner argues that the said
motion did not interrupt the running of the period to appeal and thus, when the second decision was
rendered the trial court had already lost its jurisdiction over the case, making such decision null and
void.
The above contentions are untenable.
In the first place, the very purpose of a motion for reconsideration is to point out the findings and
conclusions of the decision which in the movant's view, are not supported by law or the evidence.
The movant is, therefore, very often confined to the amplification or further discussion of the same
issues already passed upon by the court. Otherwise, his remedy would not be a reconsideration of

the decision but a new trial or some other remedy. In the case of Vina v. Court of Appeals (126
SCRA 381-382), we emphasized the nature of a motion for reconsideration. We ruled:
Contrary to petitioner's contention, REPUBLIC's Motion for Reconsideration dated
January 10, 1973 was not pro forma, even if we were to concede that it was a
reiteration of its previous Motion for suspension of the proceedings.
... Among the ends to which a motion for reconsideration is addressed, one is
precisely to convince the court that its ruling is erroneous and improper, contrary to
the law or the evidence (Rule 37, Section 1, subsection [c]; and in doing so, the
movant has to dwell of necessity upon the issues passed upon by the court. If a
motion for reconsideration may not discuss these issues, the consequence would be
that after a decision is rendered, the losing party would be confined to filing only
motions for reopening and new trial. We find in the Rules of Court no warrant for
ruling to that effect, a ruling that would, in effect eliminate subsection (c) of Section I
of Rule 37. (Guerra Enterprises Co., Inc. v. Court of First Instance of Lanao del Sur,
32 SCRA 317 [1970]).
Secondly, as far as the second motion of respondents is concerned, the same should not be strictly
construed as a motion for reconsideration although captioned as such because in reality, it is merely
a supplementary pleading aimed to call the court's attention to the fact that it had given the
respondents five days to file their rejoinder, with which they complied and, therefore, said rejoinder
should have been considered before the court acted upon the respondents' first motion for
reconsideration. Supplemental pleadings are meant to supply deficiencies in aid of original
pleadings, not to entirely substitute the latter (See Pasay City Government v. CFI of Manila, 132
SCRA 169), and neither should they be considered independently nor separately from such original
pleadings.
We, therefore, hold that the appellate court did not commit grave abuse of discretion in upholding the
trial court's jurisdiction when it rendered the second decision.
In the second assignment of error, the petitioner contends that the Court of Appeals committed a
reversible error in affirming the rescission of the contract when the respondents did not pray for
rescission and in ordering the payment of damages and attorney's fees notwithstanding the fact that
the complaint for specific performance was not instituted in bad faith.
It is noteworthy to mention that in their answer to the petitioner's complaint, the respondents prayed
for the annulment of both the Deed of Conditional Sale (Exh. 'A') and the Deed of Sale with
Assumption of Mortgage (Exh. 'G') which are the very bases of the supplemental agreements (Exhs.
'1', '2' and '5') executed between the petitioner and the respondent. The technical argument that the
respondents never prayed for the rescission of the contracts and that the trial court and the appellate
court should never have rescinded the same has no merit. Furthermore, by failing to pay the amount
of P12,000.00 and the balance of P4,376.00 as stipulated in the contract within the forty-five (45)
days period, the petitioner clearly committed a breach of contract which sufficiently and justly entitled
the respondents to ask for the rescission of the contracts. In the case of Nagarmull v. BinalbaganIsabel Sugar Co., Inc. (33 SCRA 52), we ruled that " ... The Breach of contract committed by

appellee gave appellant, under the law and even under general principles of fairness, the right to
rescind the contract or to ask for its specific performance, in either case with right to demand
damages ... It is evident, in the case at bar, that the respondents chose to rescind the contracts after
the petitioner repeatedly failed to pay not only the balance but the initial amount as downpayment in
consideration of which the contracts or agreements were executed. As a matter of fact, the petitioner
later asked the SSS to cancel his loan application. He thereby abandoned his own claim for specific
performance. Therefore, the appellate court correctly affirmed the rescission of the above-mentioned
contracts. It also correctly affirmed the payment of attorney's fees. While the petitioner may not have
acted in bad faith in filing his complaint, still the payment of attorney's fees is warranted in this case
because of the environmental circumstances which compelled the respondents to litigate for the
protection of their interests. (See Bert Osmena & Associates v. Court of Appeals, 120 SCRA 401 and
Article 2208 (2) New Civil Code).
We, however, find the award of damages in the amount of P4,376.00 unwarranted. In their motion
for reconsideration, the respondents explained how they arrived at this amount
Plaintiff obliged himself to pay P30.00 for everyday of delay after the lapse of thirty
days from the execution of the document of March 17, 1963 (Exh. 1-Defendants).
Thirty days from March 17, 1963 would be April 18, which will mark the beginning of
the counting of the days of delays. From April 18, 1963 to July 9, 1963, the number of
days of delay was 82 days. Plaintiff requested that this be reduced to 70 days and
defendants agreed. At P30.00 per day of delay the amount in 70 days will be
P2,100.00. The rental as provided for in the same exhibit 1 for defendants was
P50.00 per month. From March 1, 1963 to June 20, 1963, 4 months elapsed. At
P50.00 per month the rental would be P200.00. Plaintiff got or utilized adobe stones
belonging to defendant which he found in the premises when he and his parents
transferred to the lot in question in March 1963 the value of which was P76.00.
Adding this to the P2,100.00 which is the amount to be paid for the delay in making
payments and the P200.00 for 4 months rental, the total will be P2,376.00. The
agreed purchase price was Pl4,000.00 but Pl2,000.00 was the amount of loan the
Social Security System was then willing to give to plaintiff so that there will be a
shortage of P2,000.00 more to complete the payment of the purchase price. This
shortage of P2,000.00 was added to the P2,376.00 and the sum will be P4,376.00.
Hence, in the agreement of July 9, 1963, this amount of P4,376.00 was to be paid
within 45 days from the date thereof and the P12,000.00 which was the loan then
approved by the Social Security System was to be paid to defendants on the day of
the execution of the said agreement.
xxx xxx xxx
It is evident from the motion that the amount of P4,376.00 awarded by the appellate court as
damages is mainly based on "P30.00 per day of delay" penalty clause embodied in the agreement
marked Exhibit "1". Enforcement of the clause on daily penalties now would result in excessive
damages considering that the agreement was entered into way back in 1963. Moreover, the
P2,000.00 represents part of the purchase price of the sale which was already rescinded.

Under Article 1191 of the Civil Code, "the injured party may choose between the fulfillment and
rescission of the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become impossible ... ." The law,
however, does not authorize the injured party to rescind the obligation and at the same time seek its
partial fulfillment under the guise of recovering damages.
The appellate court, therefore, erred in including both the penalty clause and the part of the
purchase price in the computation of damages. There is no question that the petitioner must pay
damages for the use of the house and lot until he vacates the premises. The petitioner and his family
have lived in the respondents' house all these years without paying either the price he obligated
himself to pay or the monthly rentals he agreed to pay as early as 1963. At the very least, the
petitioner should pay P50.00 monthly rentals with legal interest from March, 1963.
WHEREFORE, the decision appealed from is MODIFIED in that the award of damages in the
amount of P4,376.00 is set aside. The petitioner is ordered to vacate the disputed property and to
pay FIFTY PESOS (P50.00) as monthly rentals with interest at the legal rate from March, 1963 up to
the time he and his successors-in-interest vacate the property in question. In all other respects, the
decision is AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-7991

January 29, 1914

LEON J. LAMBERT, plaintiff-appellant,

vs.
T. J. FOX, defendant-appellee.
O'Brien and DeWitt and C. W. Ney, for appellant.
J. C. Hixon, for appellee.
MORELAND, J.:
This is an action brought to recover a penalty prescribed on a contract as punishment for the breach
thereof.
Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail book and stationery
business, found itself in such condition financially that its creditors, including the plaintiff and the
defendant, together with many others, agreed to take over the business, incorporate it and accept
stock therein in payment of their respective credits. This was done, the plaintiff and the defendant
becoming the two largest stockholders in the new corporation called John R. Edgar & Co.,
Incorporated. A few days after the incorporation was completed plaintiff and defendant entered into
the following agreement:
Whereas the undersigned are, respectively, owners of large amounts of stock in John R.
Edgar and Co, Inc; and,
Whereas it is recognized that the success of said corporation depends, now and for at least
one year next following, in the larger stockholders retaining their respective interests in the
business of said corporation:
Therefore, the undersigned mutually and reciprocally agree not to sell, transfer, or otherwise
dispose of any part of their present holdings of stock in said John R. Edgar & Co. Inc., till
after one year from the date hereof.
Either party violating this agreement shall pay to the other the sum of one thousand (P1,000)
pesos as liquidated damages, unless previous consent in writing to such sale, transfer, or
other disposition be obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911, sold his stock in the said
corporation to E. C. McCullough of the firm of E. C. McCullough & Co. of Manila, a strong competitor
of the said John R. Edgar & Co., Inc.
This sale was made by the defendant against the protest of the plaintiff and with the warning that he
would be held liable under the contract hereinabove set forth and in accordance with its terms. In

fact, the defendant Foz offered to sell his shares of stock to the plaintiff for the same sum that
McCullough was paying them less P1,000, the penalty specified in the contract.
The learned trial court decided the case in favor of the defendant upon the ground that the intention
of the parties as it appeared from the contract in question was to the effect that the agreement
should be good and continue only until the corporation reached a sound financial basis, and that that
event having occurred some time before the expiration of the year mentioned in the contract, the
purpose for which the contract was made and had been fulfilled and the defendant accordingly
discharged of his obligation thereunder. The complaint was dismissed upon the merits.
It is argued here that the court erred in its construction of the contract. We are of the opinion that the
contention is sound. The intention of parties to a contract must be determined, in the first instance,
from the words of the contract itself. It is to be presumed that persons mean what they say when
they speak plain English. Interpretation and construction should by the instruments last resorted to
by a court in determining what the parties agreed to. Where the language used by the parties is
plain, then construction and interpretation are unnecessary and, if used, result in making a contract
for the parties. (Lizarraga Hermanos vs. Yap Tico, 24 Phil. Rep., 504.)
In the case cited the court said with reference to the construction and interpretation of statutes: "As
for us, we do not construe or interpret this law. It does not need it. We apply it. By applying the law,
we conserve both provisions for the benefit of litigants. The first and fundamental duty of courts, in
our judgment, is to apply the law. Construction and interpretation come only after it has been
demonstrated that application is impossible or inadequate without them. They are the very last
functions which a court should exercise. The majority of the law need no interpretation or
construction. They require only application, and if there were more application and less construction,
there would be more stability in the law, and more people would know what the law is."
What we said in that case is equally applicable to contracts between persons. In the case at bar the
parties expressly stipulated that the contract should last one year. No reason is shown for saying
that it shall last only nine months. Whatever the object was in specifying the year, it was their
agreement that the contract should last a year and it was their judgment and conviction that their
purposes would not be subversed in any less time. What reason can give for refusing to follow the
plain words of the men who made the contract? We see none.
The appellee urges that the plaintiff cannot recover for the reason that he did not prove damages,
and cites numerous American authorities to the effect that because stipulations for liquidated
damages are generally in excess of actual damages and so work a hardship upon the party in
default, courts are strongly inclined to treat all such agreements as imposing a penalty and to allow a
recovery for actual damages only. He also cites authorities holding that a penalty, as such, will not be
enforced and that the party suing, in spite of the penalty assigned, will be put to his proof to
demonstrate the damages actually suffered by reason of defendants wrongful act or omission.
In this jurisdiction penalties provided in contracts of this character are enforced . It is the rule that
parties who are competent to contract may make such agreements within the limitations of the law
and public policy as they desire, and that the courts will enforce them according to their terms. (Civil
Code, articles 1152, 1153, 1154, and 1155; Fornow vs. Hoffmeister, 6 Phil. Rep., 33; Palacios vs.
Municipality of Cavite, 12 Phil. Rep., 140; Gsell vs. Koch, 16 Phil. Rep., 1.) The only case recognized
by the Civil Code in which the court is authorized to intervene for the purpose of reducing a penalty
stipulated in the contract is when the principal obligation has been partly or irregularly fulfilled and
the court can see that the person demanding the penalty has received the benefit of such or irregular
performance. In such case the court is authorized to reduce the penalty to the extent of the benefits
received by the party enforcing the penalty.

In this jurisdiction, there is no difference between a penalty and liquidated damages, so far as legal
results are concerned. Whatever differences exists between them as a matter of language, they are
treated the same legally. In either case the party to whom payment is to be made is entitled to
recover the sum stipulated without the necessity of proving damages. Indeed one of the primary
purposes in fixing a penalty or in liquidating damages, is to avoid such necessity.
It is also urged by the appelle in this case that the stipulation in the contract suspending the power to
sell the stock referred to therein is an illegal stipulation, is in restraint of trade and, therefore, offends
public policy. We do not so regard it. The suspension of the power to sell has a beneficial purpose,
results in the protection of the corporation as well as of the individual parties to the contract, and is
reasonable as to the length of time of the suspension. We do not here undertake to discuss the
limitations to the power to suspend the right of alienation of stock, limiting ourselves to the statement
that the suspension in this particular case is legal and valid.
The judgment is reversed, the case remanded with instructions to enter a judgment in favor of the
plaintiff and against the defendant for P1,000, with interest; without costs in this instance.
Arellano, C.J., Trent and Araullo, JJ., concur.

Separate Opinions
CARSON, J., dissenting:
I concur.
I think it proper to observe, however that the doctrine touching the construction and interpretation of
penalties prescribed in ordinary civil contracts as set forth in the opinion is carried to is extreme limits
and that its statement in this form is not necessary to sustain the decision upon the facts in this case.
Without entering upon an extended discussion of the authorities, it is sufficient for my purposes to
cite the opinion of the supreme court of Spain, dated June 13, 1906, construing the provisions of
article 6 of Book 4, Title 1 of the Civil Code which treats of "contracts with a penal clause." In that
case the court held:
The rules and prescriptions governing penal matters are fundamentally applicable to the
penal sanctions of civil character.
This as well as other cases which might be cited from American as well as Spanish authorities
indicate that special rules of interpretations are and should be made use of by the courts in
construing penal clauses in civil contracts, and that case may well arise wherein the broad doctrine
laid down in the opinion of the court may not be applicable.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-45349 August 15, 1988
NEWTON JISON and SALVACION I. JOSUE petitioners,
vs.
COURT OF APPEALS and ROBERT 0. PHILLIPS & SONS, INC., respondents.
Ledesma, Saludo & Associates for petitioners.
Domicador L. Reyes and Magtanggol C. Gunigundo for respondents.

CORTES, J.:
The instant petition for review of the decision of the Court of Appeals poses the issue of the validity
of the rescission of a contract to sell a subdivision lot due to the failure of the lot buyer to pay
monthly installments on their due dates and the forfeiture of the amounts already paid.
The case is not one of first impression, and neither is it exceptional. On the contrary, it unambiguous.
the common plight of countless subdivision lot buyers.
Petitioners, the spouses Newton and Salvacion Jison, entered into a Contract to Sell with private
respondent, Robert O. Phillips & Sons, Inc., whereby the latter agreed to sell to the former a lot at
the Victoria Valley Subdivision in Antipolo, Rizal for the agreed price of P55,000.00, with interest at
8,1965 per annum, payable on an installment basis.
Pursuant to the contract, petitioners paid private respondents a down payment of P11,000.00 on
October 20, 1961 and from October 27, 1961; to May 8, 1965 a monthly installment of P533.85.
Thereafter, due to the failure of petitioners to build a house as provided in the contract, the stipulated
penalty of P5.00 per square meter was imposed to the effect that the monthly amortization was
increased to P707.24.
On January 1, 1966, February 1, 1966 and March 1, 1966, petitioners failed to pay the monthly
installments due on said dates although petitioners subsequently paid the amounts due and these
were accepted by private respondent.
Again on October 1, 1966, November 1, 1966, December 1, 1966 and January 1, 1967, petitioners
failed to pay. On January 11, 1967, private respondent sent a letter (Exh. "3") to petitioners calling
their attention to the fact that their account was four months overdue. This letter was followed up by

another letter dated February 27, 1967 (Exh. "3") where private respondent reminded petitioner of
the automatic rescission clause of the contract. Petitioners eventually paid on March 1, 1967.
Petitioners again failed to pay the monthly installments due on February 1, 1967, March 1, 1967 and
April 1, 1967. Thus, in a letter dated April 6, 1967 (Exh. "D"), private respondent returned petitioners'
check and informed them that the contract was cancelled when on April 1, 1987 petitioners failed to
pay the monthly installment due, thereby making their account delinquent for three months.
On April 19, 1967, petitioners tendered payment for all the installments already due but the tender
was refused. Thus, petitioners countered by filing a complaint for specific performance with the Court
of First Instance of Rizal on May 4, 1967 and consigning the monthly installments due with the court.
Following the hearing of the case, wherein the parties entered into a stipulation of facts, the trial
court on January 9, 1969 rendered judgment in favor of private respondent, dismissing the complaint
and declaring the contract cancelled and all payments already made by petitioner franchise. ordering
petitioners to pay P1,000.00 as and for attorney's fees; and declaring the consignation and tender of
payment made by petitioners as not amounting to payment of the corresponding monthly
installments.
Not satisfied with the decision of the trial court, petitioners appealed to the Court of Appeals.
Agreeing with the findings and conclusions of the trial court, the Court of Appeals on November 4,
1976 affirmed the former's decision.
Thus, the instant petition for review.
In assailing the decision of the Court of Appeals, petitioners attributed the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE
SUBSTANTIALLY, COMPLIED WITH THE TERMS OF THEIR AGREEMENT WITH PRIVATE
RESPONDENTS.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT TO SELL
MAY BE AUTOMATICALLY RESCINDED AND PRIVATE RESPONDENT MAY UNILATERALLY
RESCINDED SAID CONTRACT AND REJECT THE CONSIGNATION OF PAYMENTS MADE BY
PETITIONERS, WHICH ACTIONS OF PRIVATE RESPONDENT ARE HIGHLY INIQUITOUS AND
UNCONSCIONABLE.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PRIVATE
RESPONDENT'S ACT OF FORFEITING ALL PREVIOUS PAYMENTS MADE BY PETITIONERS IS

CONTRARY TO LAW, HIGHLY INIQUITOUS AND UNCONSCIONABLE. [Petitioners' Brief, pp. 1327.]
As stated at the outset, the principal issue in this case is the legality of the rescission of the contract
and the forfeiture of the payments already made by petitioners.
To support the rescission and forfeiture private respondent falls back on paragraph 3 of the contract
which reads:
This contract shall be considered automatically rescinded and cancelled and of no
further force and effect, upon the failure of the Vendee to pay when due Three (3) or
more consecutive monthly installments mentioned in Paragraph 2 of this Contract, or
to comply with any of the terms and conditions hereof, in which case the Vendor shall
have the right to resell the said parcel of land to any Vendee and any amount derived
from the sale on account hereof shall be forfeited in favor of the Vendor as liquidated
damages for the breach of the Contract by the Vendee, the latter hereby renouncing
and reconveying absolutely and forever in favor of the Vendor all rights and claims to
and for all the amount paid by the Vendee on account of the Contract, as well as to
and for all compensation of any kind, hereby also agreeing in this connection, to
forthwith vacate the said property or properties peacefully without further advise of
any kind.
Since the contract was executed and cancelled prior to the effectivity of Republic Act No. 65856, (the
Realty Installment Buyers', Protection Act) and Presidential Decree No. 957 (the Subdivision and
Condominium Buyers' Protective Decree), it becomes necessary to resort to jurisprudence and the
general provisions of law to resolve the controversy.
The decision in the recent case of Palay, Inc. v. Clave [G.R. No. L-56076, September 21, 1983, 124
SCRA 7,1969, factions the resolution of the controversy. In deciding whether the rescission of the
contract to sell a subdivision lot after the lot buyer has failed to pay several installments was valid,
the Court said:
Well settled is the rule, as held in previous k.- [Torralba v. De los Angeles, 96 SCRA
69, Luzon Brokerage Co., Inc. v. Maritime Building Co., 43 SCRA 93 and 86 SCRA
305; Lopez v. Commissioner of Customs, 37 SCRA 327; U.P. v. De los Angeles, 35
SCRA 102; Ponce Enrile v. CA, 29 SCRA 504; Froilan v. Pan Oriental Shipping Co.,
12 SCRA 276; Taylor v. Uy Tieng Piao; 43 Phil. 896, that judicial action for the
rescission of a contract is not necessary where the contract provides that it may be
cancelled for violation of any of its terms and conditions. However, even in the cited
cases, there was at least a written notice sent to the degeneration, informing him of
the rescission. As stressed in University of the Philippines v. Walfrido de los Angeles
[35 SCRA 102] the act of a party in treating a contract as cancelled should be made
known to the other....
xxx xxx xxx

In other words, resolution of reciprocal contracts may be made extrajudicially unless

successfully impugned in Court. If the debtor impugns the declaration it shall be
subject to judicial determination.
In this case, private respondent has denied that rescission is justified and has
resorted to judicial action. It is now for the Court to determine whether resolution of
the contract by petitioner was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative
against private respondent for lack of notice of resolution, as held in the U.P. v.
Angeles case, supra.
xxx xxx xxx
The indispensability of notice of cancellation to the buyer was to be later underscored
in Republic Act No. 65856, entitled "An Act to Provide Protection to Buyers of Real
Estate on Installment Payments." which took effect on September 14-15). when it
specifically provided:
Sec. 3 (b) ... the actual cataract, of the contract shall take place thirty days from
receipt by the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the cash surrender value to the
buyer.
There is no denying that in the instant case the resolution or rescission of the Contract to Sell was
valid. Neither can it be said that the cancellation of the contract was ineffective for failure of private
respondents to give petitioners notice thereof as petitioners were informed cancelled private
respondent that the contract was cancelled in the letter dated April 6, 1967 (Exh. "D"). As R.A. No.
65856, was not yet effective, the notice of cancellation need not be by notarial act, private
respondent's letter being sufficient compliance with the legal requirement.
The facts of 'fee instant case should be distinguished from those in the Palay Inc. case, as such
distinction will explain why the Court in said case invalidated the resolution of the contract. In said
case, the subdivision developer, without informing the buyer of the cancellation of the contract,
resold the lot to another person. The lot buyer in said case was only informed of the resolution of the
contract some six years later after the developer, rejected his request for authority to assign his
rights under the contract. Such a situation does not obtain illness: the instant case. In fact,
petitioners were informed of the cancellation of their contract in April 1967, when private respondent
wrote them the letter dated April 6, 1967 (Exh. "D"), and within a month they were able to file a
complaint against Private respondent.
While the resolution of the contract and the forfeiture of the amounts already paid are valid and
binding upon petitioners, the Court is convinced that the forfeiture of the amount of P5.00 although it
includes the accumulated fines for petitioners' failure to construct a house as required by the
contract, is clearly iniquitous considering that the contract price is only P6,173.15 The forfeiture of
fifty percent (50%) of the amount already paid, or P3,283.75 appears to be a fair settlement. In

arriving at this amount the Court gives weight to the fact that although petitioners have been
delinquent in paying their amortizations several times to the prejudice of private respondent, with the
cancellation of the contract the possession of the lot review.... to private respondent who is free to
resell it to another party. Also, had R.A. No. 65856, been applicable to the instant case, the same
percentage of the amount already paid would have been forfeited [Torralba 3(b).]
The Court's decision to reduce the amount forfeited finds support in the Civil Code. As stated in
paragraph 3 of the contract, in case the contract is cancelled, the amounts already paid shall be
forfeited in favor of the vendor as liquidated damages. The Code provides that liquidated damages,
whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable [Art. 2227.]
Further, in obligations with a penal clause, the judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor [Art. 1229; Hodges v.
Javellana, G.R. No. L-17247, April 28, 1962, 4 SCRA 1228]. In this connection, the Court said:
It follows that, in any case wherein there has been a partial or irregular compliance
with the provisions in a contract for special indemnification in the event of failure to
comply with its terms, courts will rigidly apply the doctrine of strict construction and
against the enforcement in its entirety of the industry.' where it is clear from the terms
of the contract that the amount or character of the indemnity is fixed without regard to
the probable damages which might be anticipated as a result of a breach of the
terms of the contract; or, in other words, where the indemnity provided for is
essentially a mere penalty having for its principal object the enforcement of
compliance with the corporations; (Laureano v. Kilayco, 32 Phil. 194 (1943).
This principle was reiterated in Makati Development Corp. v. Empire Insurance Co. [G.R. No. L21780, June 30, 1967, 20 SCRA 557] where the Court affirmed the judgment of the Court of First
Instance reducing the subdivision lot buyer's liability from the stipulated P12,000.00 to Plaintiffs after
finding that he had partially performed his obligation to complete at least fifty percent (50%) of his
house within two (2) years from March 31, 1961, fifty percent (50%) of the house having been
completed by the end of April 1961.
WHEREFORE, the Decision of the Court of Appeals is hereby MODIFIED as to the amount forfeited
which is reduced to fifty percent (50%) of the amount already paid or P23,656.32 and AFFIRMED as
to all other respects.
Private respondent is ordered to refund to petitioners the excess of P23,656.32 within thirty (30)
days from the date of finality of this judgment.
SO ORDERED.