Republic of the Philippines claims, the right to use the business name "Larap Iron Mines" and its
ame "Larap Iron Mines" and its goodwill, and all the records
SUPREME COURT
Manila
EN BANC
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
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 SEVENTY-FIVE 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.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with
costs against appellants.
Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and Natividad,
JJ., concur.

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
short-delivery in this case?

We think not. As already stated, neither of the parties had actually measured or weighed the whole
mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate their respective
claims only upon an estimated number of cubic meters of ore multiplied by the average tonnage
factor per cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore
that he sold to Fonacier, while appellants contend that by actual measurement, their witness
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.
 On 23 June 1983, petitioner commenced an action against respondent before the Regional Trial
Court of Quezon City, Branch 84, alleging that petitioner was entitled to renew the lease contract,
under paragraph 3 Section 2 thereof, for another ten (10) years, which paragraph in the contract
Republic of the Philippines should be construed in a liberal manner and with justice. In his prayer, he sought to compel
SUPREME COURT respondent to renew the lease agreement for another term, or asked the court to consider the
Manila original contract as renewed for another ten (10) years or to fix another period for the renewal
contract.

EN BANC
Respondent, in his answer, contended that a judicial interpretation of the contract involved was not
necessary, the contract being simply worded and phrased in a categorical and unequivocal manner
G.R. No. 80231 October 18, 1988 that had expressed clearly the intention of the parties to it, in respect of their mutual prestations.

CELSO A. FERNANDEZ, petitioner, On 5 November 1984, the trial court rendered judgment in favor of petitioner. The dispositive
vs. portion of the decision reads:
THE HONORABLE COURT OF APPEALS and MIGUEL TANJANGCO respondents.

WHEREFORE, judgment is hereby rendered declaring the Contract of

Celso A. Fernandez for and in his own behalf. lease executed between the plaintiff and the defendant on July 30,
1973 (Exh. "A", "1") renewed for another ten (10) years from July 1, 1983 to
June 30, 1993 with the corresponding increase of rental from P750.00 to
Ricardo J. Lardizabal for private respondent.
Pl,500.00 a month from July 1, 1983 to June 30, 1988 and to P3,750.00 a
month from July 1, 1988 to June 30, 1993. 3(Emphasis supplied)

Respondent immediately brought an appeal to the Court of Appeals, which court, on 9 June 1987,
FELICIANO, J.: reversed the trial court's decision. A Motion for Reconsideration was denied. Hence this Petition for
Review on Certiorari.

The controversy here revolves around the appropriate reading of a clause in a lease contract that
was executed about fifteen years ago. By a Resolution dated 18 November 1987, respondent was required to file a Comment on the
Petition, to which a Reply was filed by petitioner on 27 January 1988.

On 31 July 1973, respondent Miguel Tanjangco as lessor, and petitioner Celso A. Fernandez, 1 as
lessee, entered into a ten-year Contract of Lease 2 over a piece of land situated along Kahilum The only issue here relates to the interpretation of the phrase "renewable for another ten (10)
Street, Pandacan, Manila, where petitioner would put up the then proposed New Zamora Market. years at the option of both parties under such terms, conditions and rental reasonable at that
The parties agreed that the lease, which was scheduled to end on 1 July 1983, would be time", set out in paragraph (2) of the lease contract in question.
"renewable for another ten (10) years at the option of both parties under such terms, conditions
and rental reasonable at that time" and that, upon expiration of the lease, whatever improvements
The Court of Appeals read the above contract language as comprising, not technical terms or
were then existing thereon should automatically belong to the lessor without having to pay the
terms of legal art, but rather just plain and ordinary words. As such, the Court of Appeals
lessee.
understood the above language as requiring

Before the agreed term ended, or on 19 April 1983, respondent wrote petitioner about the former's
that the parties should mutually agree on a new contract which may not be
intention not to extend further or renew the lease. Petitioner replied, through a letter dated 6 June
the same as the original, under such terms, conditions and rental
1983, that he had opted to renew the contract for another ten (10) years so that he could recover
reasonable at that time. It follows therefore that the plaintiff [petitioner]
all the expenses he had incurred in the construction of the market.
cannot renew the lease by his unilateral act of exercising his option. Simply
stated, the option must be mutually and consen[s]ually exercised, and not
In another letter to petitioner dated 1 June 1983, respondent, through his lawyer, advised that unilaterally as was erroneously done by the plaintiff.
respondent could not accept petitioner's unilateral action to renew the lease because, under the
contract, any renewal or extension thereof was possible only "at the option of both parties.
 Applied to the lease contract under consideration, it appears that the lease
has expressed in clear, unmistakable and unambiguous terms the intention
of the parties that if the lease contract was to be renewed, the option to
renew should be made by both parties. 4
We agree with the respondent appellate court's reading: the intention of the parties to the lease
agreement is clearly discernible in the words of that agreement. The assent of both lessor and
lessee is essential for another contract to spring into juridical existence upon expiration of the
original one. The contract clause may be seen to consist of two (2) parts: first, the contract is
stipulated to be "renewable" for another ten years "at the option of both parties", second the
contract is specified to be "renewable under such terms, conditions and rental reasonable at that
time.' The first part of the clause stresses that the option or faculty to renew was given, not to the
lessee alone nor to the lessor by himself, but to the two (2) simultaneously who hence must both
exercise the option to renew if a new contract is to come about. The second portion of the contract
clause addresses the future and directs the parties to negotiate and reach mutual agreement on
the terms and conditions of the new contract, including the new rental rate, which terms and
conditions must be reasonable under such situation as may be extent when the time for renewal
arrives. The only term on which there has been some pre-agreement is the period of the new
contract: "another ten years." Clearly, the requirement of future mutual agreement as to renewal,
has here been specified with adequate precision.
In Millare vs. Hernando, 5 the Court had before it a lease contract which provided that the contract
"may be renewed after a period of five years under the terms and conditions as will be mutually
agreed upon by the parties at the time of renewal." The contract clause in the case at bar may be
seen to be closely similar to the contract stipulation in Millare, though the former is worded with a
slightly lower degree of particularity. In Millare, the respondent Judge ordered, against the lessor's
objection, the renewal of the lease for another five years and fixed the monthly rentals at P700.00
a month payable in arrears. In setting aside the Judge's Order, the Court said:
We are otherwise unable to comprehend how he arrived at the reading set
forth above. Paragraph 13 of the Contract of Lease can only mean that the
lessor and lessee may agree to renew the contract upon their reaching
agreement on the terms and conditions to be embodied in such renewal
contract. Failure to reach agreement on the terms and conditions of the
renewal contract will of course prevent the contract from being renewed at
all. In the instant case, the lessor and the lessee conspicuously failed to
reach agreement both on the amount of the rental to be payable during the
renewal term, and on the term of the renewed contract. 6 (Emphasis
supplied)
Petitioner, however, invokes Koh vs. Ongsiaco 7 and Cruz vs. Alberto 8 In Koh, the Court had to
construe the following provision in a contract of lease: "The term of the contract shall be that of one
year, counting from the lst of December of the present year (1913), which term shall be
extendible at the will of both parties." After finding as a matter of fact that the phrase "at the will of
both parties" had been intercalated in the contract without the knowledge and consent of the
lessee, the Court held that the option to extend the term of the. lease had in effect been vested in
the lessee alone:
The word "extendible" contained in the contract executed between the
plaintiff and the defendant, means that the term of the contract could be
extended and is equivalent to a promise to extend made by the defendant
to the plaintiff-lessee, and, as a unilateral stipulation, obliges the promisor
to fulfill his promise. Both the defendant Ongsiaco and the plaintiff Legarda
Koh testified that the contract was extendible at the expiration of its term
and the lessee, accepting the promise, acquired the right to demand its
fulfillment by virtue of the special and obligatory juridic relation established
between them.
The plaintiff-lessee, after notifying the lessor that he wished to continue the
contract, by virtue of the word "extendible" acquired the right to elect
between continuing his occupancy of the properties in accordance with the
lease, a promise for the extension of the term of which was made him, and
of giving them up by refraining from demanding the fulfillment of said
promise. Therefore, the right arising out of the grant of the extension of the
term of the lease is understood as having been created in favor of the
lessee, who is entitled to require that the lessor fulfill his promise-a
unilateral one contained in the contract and accepted by the lessee. The
consequence of that promise is that its fulfillment shall depend solely on the
will of one of the contracting parties, the one to whom the promise was
made. Such a concession cannot be considered as anomalous and
opposed to the principles of law touching contracts, inasmuch as the lessor
was entirely free to make or not to make the promise, within the most
ample liberty enjoyed by every citizen in the exercise of his rights; but once
the promise was made and the contract was made to read that the term of
the latter should be extendible, the lessor cannot be permitted afterwards to
evade fulfillment of this obligation which he freely
asssumed, ... 9 (Emphasis supplied)
In Cruz, the Court was faced with very similar language in another lease agreement written in
Spanish:
That the term of this contract of lease shall be six years counted from the
date of execution, and extendible for another six years agreed upon by both
parties. (Que el termino de este contrato de arrendamiento sera el de seis
(6) afios contados desde la fecha de su otorgamiento y prorrogable a otros
seis (6) aos convenidos poyambas partes.) 10 (Emphasis supplied)
The Court actually had before it at the same time another lease contract between the same parties
and covering a different portion of the same property: "Plus six years of extension agreed upon by
both parties mas seis (6) aos de prorroga convenida por ambas partes)." The Court read the
above stipulation in Spanish as importing that the parties had already previously agreed, at the
time of execution of the contract, to give the lessee a unilateral option to extend the period of the
lease for another six years:
It is contended on the part of the plaintiff-appellant that the expression
"agreed upon by both parties" was used to denote that, while the parties
were agreed upon a future extension of the lease, the same should not take
 place except by their mutual consent to be expressed in the future, that is
to say, upon the expiration of the original term. These words, so it is
insisted, do not refer to a past transaction but to some future agreement.
The trial judge held, on the contrary, that the phrase in question had the
effect of conceding to the lessee a term of six full years in addition to the
original term, being in practical effect equivalent to twelve years, if the
lessee should elect, as he did, to have the term extended. In this
connection his Honor noted that the words "agreed upon are used
adjectively in the contracts, as written in the original Spanish, to qualify
"years" and "extension", respectively, and furthermore, that in the form of
the perfect participle those qualifying words speak of something past and
already determined.
We are of the opinion that the trial judge was entirely correct in his
interpretation of the contracts, in question; and though it must be admitted
that this interpretation renders the words "agreed upon by both parties"
superfluous, yet this does not involve any strain upon the meaning of the
entire passage. If the interpretation which the appellant would have us
adopt be true, the entire clause relative to the extension of the term would
be superfluous, for if the extension is only to be effective upon a new
agreement of the parties to be made at the expiration of the original term,
why should anything at all be said about an extension? Parties who are free
to make one contract of lease are certainly free to make a new one when
the old has expired without being reminded of their faculty to do so by the
insertion of a clause of this kind in the first lease. This would not only be
superfluous but non-sensical. The clause relative to the extension of the
lease, should, if possible, be so interpreted as to give it some force.
As we interpret the contracts before us, the parties meant to express the
fact that they had already agreed that there might be an extension of the
lease and had agreed upon its duration, thus giving the defendant the right
of election to take for a second term or to quit upon the expiration of the
original term. The clause in question has the same meaning as if the words
'agreed upon by both parties had been omitted and the passage had
closed with a period after the word "years" in the first contract and after
'extension in the third contract. 11 (Emphasis supplied)
Petitioner urges that Koh and Cruz should be applied in the present case. We do not believe,
however, that Koh and Cruz are controlling here. Upon the other hand, we believe that the Koh and
Cruz rulings need to he re- examined and we do that below.
On the purely linguistic level, we note that the important, operative word in the contract clause in
both Koh and Cruz was "extendible"; in the case at bar, the contract used the term 94 renewable".
In Koh, the Court has in effect looking at the word 'extendible" standing alone: Mr. Justice Torres
found that the phrase "at the wig of both parties" had been unilaterally inserted by a stranger to the
contract the lessor's care taker of the property involved-without the consent of the lessee; the
phrase therefore could be disregarded. In Cruz, Mr. Justice Street felt compelled by what may well
be too mechanical a rendering into English of the past participle form in Spanish to read
"convenidos por ambas partes" as refering to a previous agreement contemporaneous with
execution of the contract to grant the lessee a unilateral option to continue with the lease beyond
the original term; 12 in any event Mr. Justice Street treated the phrase as a superfluity. 13 In the
case at bar, "renewable" does not stand alone: as noted earlier, it is qualified and amplified by two
phrases, the one stressing that the option to renew was not unilateral but mutual, and the other
emphasizing the need for future agreement between lessor and lessee on the detailed terms and
conditions of renewal.
As a matter of dictionary meaning, "extendible" means "capable of extension", and "renewable"
means "capable of renewal"; both are oriented towards the future. It may be seen that both
"extendible" and "renewable", when considered in and of themselves, are non-committal: they do
not purport to answer the intensely practical question of who is vested-lessor or lessee or both
acting together with the option to extend or renew a lease. Again, neither term by itself preempts
the question of what the specific terms and conditions of the extended or renewed lease shall be:
shall all terms and provisions of the old lease be carried forward into the future, or shall all or some
of them be renegotiated upon expiration of the old lease. 14 Thus, both Koh and Cruz seem to
impose an impossible burden upon single words. Put a little differently, both Mr. Justice Torres and
Mr. Justice Street read too much into a single word: they read "extendible" as if it said
"extendible at the option of the lessee alone, all other terms and conditions remaining unchanged".
In effect, Koh and Cruz treated "extendible" as a highly technical and cryptic term.
We do not believe that the use of either "extendible" or "renewable" should be given sacramental
significance. The important task in contract interpretation is always the ascertainment of the
intention of the contracting parties and that task is of course to be discharged by looking to the
words they used to project that intention in their contract, allthe words not just a particular word or
two, and words in context not words standing alone. In the case at bar, the intent of the parties is
observable with sufficient clarity and specificity in the language they used.
It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease
must be deemed to have been agreed upon for the benefit of both parties, absent language
showing that the term was deliberately set for the benefit of the lessee or lessor alone. 15 We are
not aware of any presumption in law that the term of a lease is designed for the benefit of the
lessee alone. Koh and Cruz in effect rested upon such a presumption. But that presumption cannot
reasonably be indulged in casually in an era of rapid economic change, marked 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.
Petitioner's contention that respondent had assured him over the telephone that the latter would
willingly renew the lease for another ten (10) years upon expiration of the original term, does not
persuade. Neither does his claim that he would not have agreed to retain the clause providing for
ownership of improvements made by the lessee vesting upon the lessor at the expiration of the
lease, had respondent not given him such assurance. The Court of Appeals noted that petitioner is
a lawyer and was, at the time of entering into the contract, aware of the fact that private
respondent might exercise the option not to renew and that the option to renew was not his alone.
Notwithstanding this awareness, petitioner entered into the lease agreement, probably convinced
that he would not only recover the costs of all the improvements he proposed to introduce into the
leased lot but also make profits in the process. In any event, an alleged verbal assurance of
renewal of a lease is inadmissible to qualify the terms of the written lease agreement under the
parole evidence rule 16 and unenforceable under the Statute of Frauds. 17
WHEREFORE, the Petition for Review is DENIED and the Decision of the Court of Appeals dated
9 June 1987 is hereby AFFIRMED. Costs against petitioner.
SO ORDERED.
epublic of the Philippines
SUPREME COURT
Manila
EN BANC
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 above-
mentioned 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.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18916 November 28, 1969
JOSE ABESAMIS, plaintiff-appellee,
vs.
WOODCRAFT WORKS, LTD., defendant-appellant.
Ramon O. de Veyra for plaintiff-appellee.
Zosimo Rivas for defendant-appellant.
MAKALINTAL, J.:
The plaintiff, doing business under the name "East Samar Lumber Mills," was the owner of a
timber concession and sawmill located at Dolores, Samar. On November 8, 1950 the defendant
Woodcraft Works, Ltd., entered into an agreement with the plaintiff to purchase from the latter
300,000 board feet of Philippine round logs at P60.00 per thousand board feet. Due to bad
weather conditions and the failure of the defendant to send the necessary vessels to Dolores,
Samar, only 13,068 board feet of logs were delivered.
On January 22, 1951 the parties entered into a new contract. The previous one was cancelled,
with the plaintiff waiving all his claims thereunder. Certain advances which had been given by the
defendant to the plaintiff, in the aggregate amount of P9,000.00, were transferred to and
considered as advances on the new contract. It was stipulated that the defendant would purchase
from the plaintiff 1,700,000 board feet of logs of the specifications stated in the contract
1,300,000 board feet at P78.00 per thousand and the rest at P70.00. It was also agreed that the
shipment was to be "before the end of July, but will not commence earlier than April with the option
to make partial shipment depending on the availability of logs and vessels."
Of the quantity of logs agreed upon, only two shipments were made, one in March and the other in
April, 1951, amounting to 333,832 board feet and 128,825 board feet, respectively, or a total of
462,657 board feet. On September 13, 1951 the plaintiff filed in the Court of First Instance of Leyte
an action for rescission of the contract of January 22, 1951 and for recovery of damages in the
sum of P155,000.00 by reason of the defendant's failure to comply with its obligations. The
defendant filed an answer and later an amended answer, denying the material allegations of the
complaint, with special defenses and counterclaims.
After due trial the lower court rendered judgment as follows:
WHEREFORE and on the strength of all the foregoing, the Court renders judgment:
declaring the aforementioned contract of January 22, 1951, rescinded; ordering the
defendant to pay to the plaintiff for actual damages suffered by the latter in the amount
of P145,623.03, plus the amount of P50,000.00 representing the plaintiff's actual loss
of credit in the operation of his business, and, another sum of P5,000.00 as attorney's
fees. The defendant is likewise ordered to pay the costs.
The defendant appealed to this Court and now avers that the lower court erred: "(1) in stating that
Woodcraft Works, Ltd. was obligated to send the boat to receive the shipment of logs of the East
Samar Lumber Mills at Dolores, Samar, before the end of July 1951; (2) in deciding that (appellee)
had sufficient stock of logs to cover the contract on July 31, 1951; (3) in stating that appellant failed
to comply with the terms and conditions of the contract; (4) in granting damages to appellee; and
(5) in not granting damages and recovery of money in favor of herein appellant."
The main issue before us is whether or not appellant Woodcraft Works, Ltd. failed to comply with
its obligations under the contract, or more specifically, whether or not it was obligated to furnish the
vessel to receive the shipment of logs from appellee. Appellant contends that it was not.
The contract (Exh. A) does not expressly provide as to which of the parties should furnish the
vessel. But it does contain provisions which show clearly, albeit only by implication, that the
obligation to do so devolved upon appellant, thus:
Fees & Charges: Bureau of Forestry inspection charges and Philippine
Government wharfage fees are for account of Woodcraft Works, Ltd.
Dispatch of Ship: Immediately upon arrival of the vessel at Dolores, Samar,
you will commence loading at the rate of 200,000 bd. ft. per working day
per four hatches. Should the weather be unfavorable, be sure to have a
certificate signed by the captain confirming time idle due to this fact.
Furthermore, in the event the ship's gears are not functioning well, kindly
do likewise and get a statement from the captain.
Demurrage: Failure to load 200,000 bd. ft. per working day, you agree to
pay us the sum of P800.00 per day pro-rata.
The contract was in the form of a letter addressed by appellant to appellee, and the terms set forth
in the portions aforequoted, particularly with respect to wharfage dues, demurrage and condition of
the weather and of the ship's machinery, would have been of little concern to appellant and would
not have been imposed by it if appellee were the one to furnish the vessel. Besides, the
contemporaneous and subsequent acts of the parties, which under the law may be taken into
consideration to determine their intention (Art. 1371, Civil Code), point unequivocally to the same
conclusion. In the two shipments of logs in March and April of 1961 the vessels "SS AEULUS" and
"SS DON JOSE" were furnished by appellant. In several telegraphic communications exchanged
between the parties it was invariably appellee who requested information as to the arrival of the
vessels and appellant who gave the information accordingly.
Finally it was appellant, through its witness Irza Toeg, who had to explain at length during the trial
its failure to furnish the necessary vessels, as follows:
A. Well, when the shipping firms in Manila learned about the failures of the vessels
which we sent to Dolores, Samar to load, and news travels fast from one shipping
company to the other, the other shipping companies were very hesitant when we asked
for a vessel to call at the port of Dolores, Samar. They asked us whether any vessel
has already gone there to load and what is the loading rate for that particular vessel.
So the facts of loading rates that the East Samar Lumber Mills was able to effect on the
Bunyo Maru had a very bad effect in obtaining additional vessels. Other shipping
companies instructed their vessels not to go to Dolores, Samar because shipping
companies as a rule do not want to gamble and sent vessels to a loading port when
they know of the place and they know that the people operating there would not be
able to handle the loading of the vessels judging from their past performances.
... . You will recall that the first vessel that loaded in this contract was a foreign vessel
which was the Bunyo Maru. Out of the expected quantity of 400,000 bd. ft. of logs only
13,000 approximately was loaded. Therefore, that had a very bad effect on the other
foreign vessels. The second and third vessels however were of Philippine Registry, and
it was only thru our good connection with the shipping company that they even
permitted their vessels to call at Dolores, Samar. So, after the three sad experiences,
each one with considerable delay in the loading time with incomplete quantities that
should have been loaded, it was difficult for us to obtain vessels to call at that port.
(T.S.N. pp. 28-30, Deposition)
In the light of all these circumstances, appellant's claim that it was not obligated to furnish the
vessel cannot prevail.
It is next contended that appellee was not in a position to comply with his own obligation to ship the
quantities of logs called for under the contract. This was sought to be proven by means of a
certificate issued by the Bureau of Forestry (Exhs. 11 & 11-A), which is the official record of timber
cut under appellee's permit, showing that appellee's production from January to July, 1951,
amounted only to 1,926.64 cubic meters or 816,795 board feet of logs, which was short by 833,205
board feet of the quantity called for in the contract.
There is indeed a discrepancy between the certificate of production issued by the Bureau of
Forestry and the testimony of Francisco Abesamis regarding the quantity of the timber cut under
appellee's permit, but this was satisfactorily explained by him at the trial in this wise:
A. Because my export grade logs is a big quantity, and if we immediately report those
export grade logs to the Bureau of Forestry before shipment is made, we will be paying
forest charges for the logs for which we have not received payment yet. So we make it
a practice to report only the logs that are actually shipped. The forest charges amount
to so much money that we could hardly afford to pay this in advance. This was more or
less a convenience given to us by the lumber grader. And besides that, we prepare a
big quantity of logs but the lumber grader usually is instructed by the buyer to grade
only a certain portion of it because of the limitation of cargo space in buyer's vessel.
For example, we have there prepared 1,000,000 board feet but Mr. Selga is instructed
to inspect only 400,000 board feet which is the capacity of incoming vessel. So the
balance of 600,000 board feet could not be graded as this quantity could not be
loaded.
Abesamis categorically stated on the witness stand that by the end of July 1951 he had 1,300,000
board feet of logs available 800,000 at hand and ready for loading and the rest deposited at
various stations; and that he advised appellant of that fact in a telegram dated July 31, 1951 (Exh.
S), at the same time requesting that a grader and a vessel be dispatched to Dolores immediately
as the logs were in danger of deteriorating.
Nicanor Selga, lumber inspector of the Bureau of Forestry, reported to appellant that as of July 3,
1951 he had graded appellee's logs amounting to 488,015 board feet (Exh. aa). Of this quantity
appellant, in its reply telegram of July 13, 1951 (Exh. BB) said that it could accept 239,547 board
feet, made up of logs at least 13 feet in length and 20 inches in diameter. However, Selga likewise
testified that appellee had other logs some 600,000 board feet in all in the two barrios of
Aroganga and Genolaso. After July 3, 1951, which was the last day Selga made his inspection,
there is evidence that appellee continued its logging operations, such that there was enough to
cover the quantity called for in the contract by due date, that is, on July 31, 1951.
Appellee divides his claim for damages into three categories, each based on a separate breach of
contract by appellant.
First, appellee maintains that due to the failure of appellant to send a vessel to Dolores, Samar, the
storm on May 5, 1951 swept away almost all the logs then awaiting shipment, amounting to
410,000 board feet, valued at P73,537.77. On this point it should be noted that under the contract
shipment was to be made before the end of July 1951, but not to commence earlier than April of
the same year. The obligation between the parties was a reciprocal one, appellant to furnish the
vessel and appellee to furnish the logs. It was also an obligation with a term, which obviously was
intended for the benefit of both parties, the period having been agreed upon in order to avoid the
stormy weather in Dolores, Samar, during the months of January to March. The obligation being
reciprocal and with a period, neither party could demand performance nor incur in delay before the
expiration of the period. Consequently, when the typhoon struck on May 5, 1951 there was yet no
delay on the part of appellant, and the corresponding loss must be shouldered by appellee.
As regards the second breach it has been established that after the storm of May 5, 1951 appellee
continued its logging operations. Appellant was advised of the quantity of logs ready for shipment
and was urged to send a vessel to take delivery. It thereupon gave assurance that a vessel, the
"SS ALBAY," with a capacity of 450,000 board feet, was coming to Dolores, Samar, to load on June
25, 1951. Appellee readied the necessary quantity of logs but the vessel did not arrive. As a result,
60,000 board feet of logs which had been rafted broke loose and were lost. Appellee's loss on this
account amounted to a total of P7,685.26, representing the value of the logs lost, the cost of rafting
and other incidental expenses. It may be observed in this respect that although the obligation
would not become due until July 31, 1951 appellant waived the benefit of the period by assuring
appellee that it would take delivery of the logs on June 25, 1951. On that date appellee was ready
to comply, but appellant failed on his commitment, without any satisfactory explanation for such
failure. Therefore, appellant should bear the corresponding loss.

Third and finally, as heretofore pointed out, by the end of July 1951 appellee had sufficient logs
ready for shipment in accordance with the contract. But appellant, in spite of the representations
made by the former, failed to send a vessel on the aforesaid date. There is no evidence that such
failure was due to circumstances beyond appellant's control. As a result logs totalling 800,000
board feet were destroyed by marine borers, causing a loss of P62,000.00, for which appellant
should be held liable.

The trial court sentenced appellant to pay P50,000.00 representing appellee's loss of credit in the
operation of his business. The decision does not say upon what evidence the award is based. Nor
is there any attempt in appellee's brief to justify the amount awarded. Actual or compensatory
damages must be established by clear evidence. In this case, other than a few letters of demand
for payment of money accounts received by appellee from its creditors and presented as exhibits,
there is nothing to go upon, and the mere fact that such demands were made does not necessarily
prove loss of credit. This item must therefore be eliminated.

IN VIEW OF THE FOREGOING, the judgment appealed from is affirmed, with the modification that
appellant Woodcraft Works, Ltd. is sentenced to pay appellee the aggregate sum of P69,685.26 by
way of damages, plus P5,000 as attorney's fees, without costs in this instance.

Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Castro, Teehankee and Barredo,
JJ., concur.

THIRD DIVISION
[G.R. No. 138739. July 6, 2000]
RADIOWEALTH FINANCE COMPANY, petitioner, vs. Spouses VICENTE and MA. SUMILANG
DEL ROSARIO, respondents.
DECISION
PANGANIBAN, J.:
When a demurrer to evidence granted by a trial court is reversed on appeal, the reviewing
court cannot remand the case for further proceedings. Rather, it should render judgment on the
basis of the evidence proffered by the plaintiff. Inasmuch as defendants in the present case
admitted the due execution of the Promissory Note both in their Answer and during the pretrial, the
appellate court should have rendered judgment on the bases of that Note and on the other pieces
of evidence adduced during the trial.
The Case
Before us is a Petition for Review on Certiorari of the December 9, 1997 Decision [1] and the
May 3, 1999 Resolution[2] of the Court of Appeals in CA-GR CV No. 47737. The assailed Decision
disposed as follows:
WHEREFORE, premises considered, the appealed order (dated November 4, 1994) of the
Regional Trial Court (Branch XIV) in the City of Manila in Civil Case No. 93-66507 is hereby
REVERSED and SET ASIDE. Let the records of this case be remanded to the court a quo for
further proceedings. No pronouncement as to costs.[3]
The assailed Resolution denied the petitioners Partial Motion for Reconsideration. [4]
The Facts
The facts of this case are undisputed. On March 2, 1991, Spouses Vicente and Maria
Sumilang del Rosario (herein respondents), jointly and severally executed, signed and delivered in
favor of Radiowealth Finance Company (herein petitioner), a Promissory
Note[5] for P138,948. Pertinent provisions of the Promissory Note read:
FOR VALUE RECEIVED, on or before the date listed below, I/We promise to pay jointly and
severally Radiowealth Finance Co. or order the sum of ONE HUNDRED THIRTY EIGHT
THOUSAND NINE HUNDRED FORTY EIGHT Pesos (P138,948.00) without need of notice or
demand, in installments as follows:
P11,579.00 payable for 12 consecutive months starting on ________ 19__ until the
amount of P11,579.00 is fully paid. Each installment shall be due every ____ day of
each month. A late payment penalty charge of two and a half (2.5%) percent per
month shall be added to each unpaid installment from due date thereof until fully paid.
xxxxxxxxx
It is hereby agreed that if default be made in the payment of any of the installments or late
payment charges thereon as and when the same becomes due and payable as specified above,
the total principal sum then remaining unpaid, together with the agreed late payment charges
thereon, shall at once become due and payable without need of notice or demand.
xxxxxxxxx
If any amount due on this Note is not paid at its maturity and this Note is placed in the hands of an
attorney or collection agency for collection, I/We jointly and severally agree to pay, in addition to
the aggregate of the principal amount and interest due, a sum equivalent to ten (10%) per cent
thereof as attorneys and/or collection fees, in case no legal action is filed, otherwise, the sum will
be equivalent to twenty-five (25%) percent of the amount due which shall not in any case be less
than FIVE HUNDRED PESOS (P500.00) plus the cost of suit and other litigation expenses and, in
addition, a further sum of ten per cent (10%) of said amount which in no case shall be less than
FIVE HUNDRED PESOS (P500.00), as and for liquidated damages. [6]
Thereafter, respondents defaulted on the monthly installments. Despite repeated demands,
they failed to pay their obligations under their Promissory Note.
On June 7, 1993, petitioner filed a Complaint [7] for the collection of a sum of money before
the Regional Trial Court of Manila, Branch 14. [8] During the trial, Jasmer Famatico, the credit and
collection officer of petitioner, presented in evidence the respondents check payments, the demand
letter dated July 12, 1991, the customers ledger card for the respondents, another demand letter

and Metropolitan Bank dishonor slips. Famatico admitted that he did not have personal knowledge
of the transaction or the execution of any of these pieces of documentary evidence, which had
merely been endorsed to him.
On July 4, 1994, the trial court issued an Order terminating the presentation of evidence for
the petitioner.[9] Thus, the latter formally offered its evidence and exhibits and rested its case on
July 5, 1994.
Respondents filed on July 29, 1994 a Demurrer to Evidence [10] for alleged lack of cause of
action. On November 4, 1994, the trial court dismissed [11] the complaint for failure of petitioner to
substantiate its claims, the evidence it had presented being merely hearsay.
On appeal, the Court of Appeals (CA) reversed the trial court and remanded the case for
further proceedings.
Hence, this recourse.[12]
Ruling of the Court of Appeals
According to the appellate court, the judicial admissions of respondents established their
indebtedness to the petitioner, on the grounds that they admitted the due execution of the
Promissory Note, and that their only defense was the absence of an agreement on when the
installment payments were to begin. Indeed, during the pretrial, they admitted the genuineness not
only of the Promissory Note, but also of the demand letter dated July 12, 1991. Even if the
petitioners witness had no personal knowledge of these documents, they would still be admissible
if the purpose for which [they are] produced is merely to establish the fact that the statement or
document was in fact made or to show its tenor[,] and such fact or tenor is of independent
relevance.
Besides, Articles 19 and 22 of the Civil Code require that every person must -- in the
exercise of rights and in the performance of duties -- act with justice, give all else their due, and
observe honesty and good faith. Further, the rules on evidence are to be liberally construed in
order to promote their objective and to assist the parties in obtaining just, speedy and inexpensive
determination of an action.
Issue
The petitioner raises this lone issue:
The Honorable Court of Appeals patently erred in ordering the remand of this case to the trial court
instead of rendering judgment on the basis of petitioners evidence. [13]
For an orderly discussion, we shall divide the issue into two parts: (a) legal effect of the
Demurrer to Evidence, and (b) the date when the obligation became due and demandable.
The Courts Ruling
The Petition has merit. While the CA correctly reversed the trial court, it erred in remanding
the case "for further proceedings."
Consequences of a Reversal, on Appeal, of a Demurrer to Evidence
Petitioner contends that if a demurrer to evidence is reversed on appeal, the defendant
should be deemed to have waived the right to present evidence, and the appellate court should
render judgment on the basis of the evidence submitted by the plaintiff. A remand to the trial court
"for further proceedings" would be an outright defiance of Rule 33, Section 1 of the 1997 Rules of
Court.
On the other hand, respondents argue that the petitioner was not necessarily entitled to its
claim, simply on the ground that they lost their right to present evidence in support of their defense
when the Demurrer to Evidence was reversed on appeal. They stress that the CA merely found
them indebted to petitioner, but was silent on when their obligation became due and demandable.
The old Rule 35 of the Rules of Court was reworded under Rule 33 of the 1997 Rules, but
the consequence on appeal of a demurrer to evidence was not changed. As amended, the
pertinent provision of Rule 33 reads as follows:
SECTION 1. Demurrer to evidence.After the plaintiff has completed the presentation of his
evidence, the defendant may move for dismissal on the ground that upon the facts and the law the
plaintiff has shown no right to relief. If his motion is denied, he shall have the right to present
evidence. If the motion is granted but on appeal the order of dismissal is reversed he shall be
deemed to have waived the right to present evidence. [14]
Explaining the consequence of a demurrer to evidence, the Court in Villanueva Transit v.
Javellana[15] pronounced:
The rationale behind the rule and doctrine is simple and logical. The defendant is permitted,
without waiving his right to offer evidence in the event that his motion is not granted, to move for a
dismissal (i.e., demur to the plaintiffs evidence) on the ground that upon the facts as thus
established and the applicable law, the plaintiff has shown no right to relief. If the trial
court denies the dismissal motion, i.e., finds that plaintiffs evidence is sufficient for an award of
judgment in the absence of contrary evidence, the case still remains before the trial court which
should then proceed to hear and receive the defendants evidence so that all the facts and
evidence of the contending parties may be properly placed before it for adjudication as well as
before the appellate courts, in case of appeal. Nothing is lost.The doctrine is but in line with the
established procedural precepts in the conduct of trials that the trial court liberally receive all
proffered evidence at the trial to enable it to render its decision with all possibly relevant proofs in
the record, thus assuring that the appellate courts upon appeal have all the material before them
necessary to make a correct judgment, and avoiding the need of remanding the case for retrial or
reception of improperly excluded evidence, with the possibility thereafter of still another appeal,
with all the concomitant delays. The rule, however, imposes the condition by the same token that if
his demurrer is granted by the trial court, and the order of dismissal is reversed on appeal, the
movant losses his right to present evidence in his behalf and he shall have been deemed to have
elected to stand on the insufficiency of plaintiffs case and evidence. In such event, the appellate
court which reverses the order of dismissal shall proceed to render judgment on the merits on the
basis of plaintiffs evidence. (Underscoring supplied)
In other words, defendants who present a demurrer to the plaintiffs evidence retain the right
to present their own evidence, if the trial court disagrees with them; if the trial court agrees with
them, but on appeal, the appellate court disagrees with both of them and reverses the dismissal
order, the defendants lose the right to present their own evidence. [16] The appellate court shall, in
addition, resolve the case and render judgment on the merits, inasmuch as a demurrer aims to
discourage prolonged litigations.[17]
In the case at bar, the trial court, acting on respondents demurrer to evidence, dismissed
the Complaint on the ground that the plaintiff had adduced mere hearsay evidence. However, on
appeal, the appellate court reversed the trial court because the genuineness and the due
execution of the disputed pieces of evidence had in fact been admitted by defendants.
Applying Rule 33, Section 1 of the 1997 Rules of Court, the CA should have rendered
judgment on the basis of the evidence submitted by the petitioner. While the appellate court
correctly ruled that the documentary evidence submitted by the [petitioner] should have been
allowed and appreciated xxx, and that the petitioner presented quite a number of documentary
exhibits xxx enumerated in the appealed order, [18] we agree with petitioner that the CA had
sufficient evidence on record to decide the collection suit. A remand is not only frowned upon by
the Rules, it is also logically unnecessary on the basis of the facts on record.
Due and Demandable Obligation
Petitioner claims that respondents are liable for the whole amount of their debt and the
interest thereon, after they defaulted on the monthly installments.
Respondents, on the other hand, counter that the installments were not yet due and
demandable. Petitioner had allegedly allowed them to apply their promotion services for its
financing business as payment of the Promissory Note. This was supposedly evidenced by the
blank space left for the date on which the installments should have commenced. [19] In other words,
respondents theorize that the action for immediate enforcement of their obligation is premature
because its fulfillment is dependent on the sole will of the debtor. Hence, they consider that the
proper court should first fix a period for payment, pursuant to Articles 1180 and 1197 of the Civil
Code.
This contention is untenable. The act of leaving blank the due date of the first installment
did not necessarily mean that the debtors were allowed to pay as and when they could. If this was
the intention of the parties, they should have so indicated in the Promissory Note. However, it did
not reflect any such intention.
On the contrary, the Note expressly stipulated that the debt should be amortized monthly in
installments of P11,579 for twelve consecutive months. While the specific date on which each
installment would be due was left blank, the Note clearly provided that each installment should be
payable each month.
Furthermore, it also provided for an acceleration clause and a late payment penalty, both of
which showed the intention of the parties that the installments should be paid at a definite
date. Had they intended that the debtors could pay as and when they could, there would have
been no need for these two clauses.
Verily, the contemporaneous and subsequent acts of the parties manifest their intention and
knowledge that the monthly installments would be due and demandable each month. [20] In this
case, the conclusion that the installments had already became due and demandable is bolstered
by the fact that respondents started paying installments on the Promissory Note, even if the checks
were dishonored by their drawee bank. We are convinced neither by their avowals that the
obligation had not yet matured nor by their claim that a period for payment should be fixed by a
court.
Convincingly, petitioner has established not only a cause of action against the respondents,
but also a due and demandable obligation. The obligation of the respondents had matured and
they clearly defaulted when their checks bounced. Per the acceleration clause, the whole debt
became due one month (April 2, 1991) after the date of the Note because the check representing
their first installment bounced.
As for the disputed documents submitted by the petitioner, the CA ruling in favor of their
admissibility, which was not challenged by the respondents, stands. A party who did not appeal
cannot obtain affirmative relief other than that granted in the appealed decision. [21]
It should be stressed that respondents do not contest the amount of the principal
obligation. Their liability as expressly stated in the Promissory Note and found by the CA
is P13[8],948.00[22] which is payable in twelve (12) installments at P11,579.00 a month for twelve
(12) consecutive months. As correctly found by the CA, the "ambiguity" in the Promissory Note is
clearly attributable to human error.[23]
Petitioner, in its Complaint, prayed for 14% interest per annum from May 6, 1993 until fully
paid. We disagree. The Note already stipulated a late payment penalty of 2.5 percent monthly to
be added to each unpaid installment until fully paid. Payment of interest was not expressly
stipulated in the Note. Thus, it should be deemed included in such penalty.
In addition, the Note also provided that the debtors would be liable for attorneys fees
equivalent to 25 percent of the amount due in case a legal action was instituted and 10 percent of
the same amount as liquidated damages. Liquidated damages, however, should no longer be
imposed for being unconscionable.[24] Such damages should also be deemed included in the 2.5
percent monthly penalty. Furthermore, we hold that petitioner is entitled to attorneys fees, but only
in a sum equal to 10 percent of the amount due which we deem reasonable under the proven
facts.[25]
The Court deems it improper to discuss respondents' claim for moral and other
damages. Not having appealed the CA Decision, they are not entitled to affirmative relief, as
already explained earlier.[26]
WHEREFORE, the Petition is GRANTED. The appealed Decision is MODIFIED in that the
remand is SET ASIDE and respondents are ordered TO PAY P138,948, plus 2.5 percent penalty
charge per month beginning April 2, 1991 until fully paid, and 10 percent of the amount due as
attorneys fees. No costs.
 SO ORDERED.
Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 11433 December 20, 1916
ARTHUR F. ALLEN, plaintiff-appellant,
vs.
THE PROVINCE OF ALBAY AND THE PROVINCE OF AMBOS CAMARINES, defendants-
appellees.
Lawrence, Ross and Block for appellant.
Attorney-General Avancea for appellees.
TRENT, J.:
On February 25, 1913, the Director of Public Works, acting for the Provinces of Albay and Ambos
Camarines, advertised for the sealed proposals, to be opened March 15, 1913, for the construction
of a reenforced concrete bridge over the Agus River on the Albay-Ambos Camarines boundary. At
the request of the plaintiff, the opening of the bids was postponed until March 20, on which date
plaintiff submitted his bid to construct the proposed bridge for the sum of P30,690. On April 25,
1913, the Director of Public Works asked the provincial boards of Albay and Ambos Camarines for
authority to contract with the plaintiff for the construction of the bridge. The boards passed the
necessary resolutions of May 6 and the plaintiff was notified of their action on June 13. The formal
construct was duly executed on June 26, 1913. The bridge was completed and accepted by the
defendant provinces on April 1, 1914. The plaintiff was paid the construct price less P1,301.45,
P925 being retained as liquidated damages at the rate of P25 per day from February 15, 1914, to
March 31, 1914; P175.03 for expenses of inspection from November 1, 1913, to February 15,
1914; and P201.42 for the operation and maintenance of a ferry across the Agus River during the
last mentioned period. This action was instituted for the purpose of recovering the amount of
P1,301.45, P200 overcharges on steel not delivered, P2,000 for damages caused by the
defendants' delay, and P878 for extra work and material furnished on the bridge at defendants'
request. From a judgment in favor of the defendants dismissing the complaint on the merits, with
costs, the plaintiff appealed and now urges that the trial court erred (1) in finding that the delay in
completing the work under the contract in question was due to the fault and negligence of the
plaintiff and not to that of the defendants; (2) in holding that the defendants were entitled to deduct
from the contract price for the construction of the bridge (a) the sum of P925 as a penalty or
liquidated damages, (b) the amount of P201.42 for the operation and maintenance of a ferry, and
(c) the amount of P175.03 for expense of inspection; and (3) in rendering judgment in favor of the
defendants, dismissing the plaintiff's complaint and not rendering judgment for the plaintiff for the
amounts prayed for. The first and second alleged errors will be considered together.
The contract which was, as we have said, duly executed on June 26, 1913, provided in paragraph
4 for the completion of the bridge on or before the 1st day of September, 1913. And in paragraph 5
it was agreed that in the event that the necessary steel should be furnished by the provinces at
ship side in Legaspi, a deduction from the contract price should be made of 11 centavos per kilo of
steel thus delivered. The advertisement, instructions to bidders, general conditions, specifications,
proposal, and plans were made a part of the contract.
The plaintiff in his proposal stated:
All work contemplated by this contract is to be completed on or before four months
after contractor furnishes sand and gravel.
The provincial board of Albay in its resolution of May 6 stated that it had received a communication
from the Director of Public Works to the effect that "Mr. Allen's bid was the only one received for
this work which the contractor agrees to finish in four months." The time for the commencement of
the work is not stated. The provincial board of Ambos Camarines in its resolution of May 6 stated
"All work to be completed on or before November 1, 1913." In "Information to bidders," which was
made a part of the contract, it was provided that "the contractor will be required to complete the
bridge and have same ready for traffic on or before September 1, 1913." The Province of Ambos
Camarines in its resolution of January 6, 1914, stated that the time for the completion of the bridge
was intended to be November 1, 1913, and the Province of Albay in its resolution of May 5, 1914,
stated that, "granting the contention of the provincial board of Ambos Camarines, it was the
intention of the parties to fix the original date for the termination of the work on November 1, 1913,
although the original contract fixed September 1, 1913, . . ." On December 1, 1913, F. T. James,
acting on behalf of the plaintiff, addressed the following letter to the provincial board of the
Province of Albay:
December 1, 1913
GENTLEMEN: I have the honor to request that an extension of time be granted me for the
construction of the Argos River Bridge.
Immediately upon entering into contract with the Province of Albay on June 26, 1913, I ordered
cement for the work, but due to the shortage in the Manila market at that time did not receive
delivery until the middle of July, when same was shipped to Legaspi where it arrived four days
later.
I had made previous arrangements to have this cement hauled to the bridge site by automobile
truck, but when an attempt was made to do so in July, the recent rains so softened the road
beyond Polangui that it was impossible to send a loaded truck over it with any assurance of safe
arrival of the cargo of cement at Argos River in good condition. Therefore I was obliged to haul by
truck to Ligao only and from there to Argos by carabao carts.
The contractor in Ligao then began to haul cement and also the steel for the bridge. Shortly a
quarantine on animals was put into effect in the town of Polangui, and the hauling had to stop,
when I had had delivered at the bridge site only a few barrels of cement and a very small number
of bars of steel for the piles. It was not until early in October, therefore, that sufficient steel and
cement were delivered at the Argos River to warrant beginning work casting the piles. This work
began however immediately this condition obtained and the sixty concrete piles were completed
November 22.
Due to the fact that the material in the Argos River, into which the piles must be driven, is
exceptionally hard and of a very compact nature it is almost imperative that the piles have
considerably more than the usual thirty days for ripening before driving, and of necessity I must
wait at least until December 15 before handling even the first piles cast. My pile driver is being
shipped to Nueva Caceres at present writing. I am obliged to send all my plant and balance of
materials in any by that port due to the fact that nobody in Albay is willing to attempt hauling heavy
machinery over the road beyond Polangui for reasons best known to the honorable board, and it is
only a question of hauling same from Nueva Caceres to Argos River as to the actual date of
beginning driving.
As was unforeseen, at the time of entering into contract for this bridge, I have been obliged to use
two plants on my work in the Province of Bulacan where it was anticipated that one would be
enough, due to the unusual conditions and delays from floods and typhoons, so I have not been
able to ship my engine and driver so as to have it at Argos River on the date expected. Therefore,
for these above-named reasons, I have the honor to request that I be granted an extension of time
until February 15, 1914, to complete the Argos Bridge.
Very respectfully.
ARTHUR F. ALLEN, Contractor,
(Sgd.) Per F. T. JAMES.
On May 5, 1914, the provincial board of the Province of Albay passed resolution No. 227, the
pertinent parts of which are as follows:
xxx xxx xxx
Whereas there exists pending a petition of the contractor for the extension of the
termination of the work of the cited bridge until the 15th day of February, 1914;
xxx xxx xxx
Resolved, That this board proposes an amicable settlement for the final settlement of
this matter based upon the following conditions:
Grant extension to February 15, 1914, providing the contractor will paying to the
province the sum of P1,725.78, being the amount for extra cost for inspection expense,
interest on loan, cost of ferry operation to February 15, and 37 days liquidated
damages at P25 per day for the time between February 15 and April 1, 1914.
xxx xxx xxx
Resolved further, That all previous resolutions of this board in this regard to this matter
which are in conflict hereof are hereby repealed.
Resolved lastly, That copies of this resolution be furnished the district engineer, Albay,
contractor Allen, provincial treasurer and provincial board of Ambos Camarines.
On June 17, 1914, the provincial board of Albay passed resolution No. 383 which, after stating the
reasons for the resolution, reads:
Resolved, That the final payment to A. F. Allen for the construction of the Agus River
Bridge be, and hereby is, authorized according to the contract, deducting the amount of
P1,301.45, same to cover inspection charges from November 1, 1913, to February 15,
1914, operation and maintenance of ferry from November 1, 1913, to February 15,
1914, and 37 days liquidated damages from February 15 to March 31, 1914,
inclusively, Sundays and holidays excepted, at P25 per day.
xxx xxx xxx
Copies of the above resolution were furnished the provincial treasure and district engineer of
Albay, the provincial board of Ambos Camarines, and the plaintiff.
The provincial board of Ambos Camarines, in its resolution No. 669 passed June 24, 1914,
concurred in resolution No. 383 of the Province of Albay.
The provincial board of Ambos Camarines passed on January 6, 1914, resolution No. 50, the
pertinent parts of which reads as follows:
The recorder presented copy of resolution No. 1114 of the provincial board of Albay,
series of 1913, with accompanying papers, being the application of Mr. A. F. Allen for
an extension of the time in which he is to complete the Agus Bridge (on the provincial
boundary) and the recommendation of the Director of Public Works and the district
engineer of Albay.
Being informed of the contents of said resolution and accompanying papers, .
On motion,
 The board resolved as follows:
xxx xxx xxx
(b) As to any further extension, the facts alleged by contractor which must be basis of
same, obstacles impeding the transport of his supplies, occurring within the Province of
Albay, this board proposes to be guided by the recommendations of the board of Albay
in the matter. However, as it does not appear that the contractor acquiesces and
accepts the extension and conditions embodied in the resolution of the board of Albay,
but on the contrary, Mr. James, representing the contractor being present, informs the
board of Camarines that the contractor is not satisfied with the extension and
conditions embodied in the before-mentioned resolution of Albay, therefore this board
abstains from concurring in resolution No. 1114 of Albay and suggests that, if the Albay
board finds cause for extending the contract time past November 1, 1913, that the
contractor's concurrence and acceptance of such further extension be procured before
forwarding for the concurrence of this board. Further this board believes that any
arbitrary extensions (contractor not concurring or accepting conditions) or extensions
`by grace' could better and more property be had upon completion of the bridge as a
final adjustment of the matter.
Approved unanimously.
Resolution No. 1114 of the provincial board of Albay, series 1913, referred to in resolution No. 50 of
the provincial board of Ambos Camarines, was not presented during the trial in the court below and
forms no part of the record of this case.
The provinces, exercising their right under the contract, furnished all the steel at shipside in
Legaspi. The steel was received by the contractor on the following dates: 27,056 kilos on July 26,
1913; 3,636 kilos on August 4, 1913; and 7,890 kilos on September 1, 1913. The bridge site is 51.7
kilometers from Legaspi.
The first question to be determined is that relating to the time agreed upon for the completion of
the bridge. Did the contracting parties fix September 1, 1913, as the date ? On the one hand we
have an explicit statement in the information to bidders that "the contractor shall commence the
work herein contracted to be done in ample time to complete the contract within the time
specified." In the contract it was expressly stipulated that the contractor must complete the work on
or before the 1st day of September, 1913, or pay P25 a day as liquidated damages for every day
thereafter. And James in his letter of December 1, after referring to the fact that the contract was
signed on June 26, requested an extension of time for the completion of the work until February
15, 1914. While on the other hand, we have the statement of the plaintiff's proposal to the effect
that the work contemplated should be completed on or before four months after the contractor
furnished gravel and sand; the statement of the provincial board of Albay that the contractor
agreed to finish the bridge in four months; the same board's later statement referring to the
contention of the board of Ambos Camarines that it was the intention of the parties to fix the time
on November 1, the two statements of the provincial board of Ambos Camarines to the effect that it
understood that November 1 was the date agreed on; and the fact that the provinces deducted
inspection expenses and expenses for the operation of the ferry from November 1.
It will thus be seen that the provinces did intend that the date for the completion of the work should
be November 1 and not September 1. Such were the instructions to the Director of Public Works in
consummating the contract, but the Director did not comply with these instructions as to the date
for the termination of the work. He and the contractor agreed that the date should be September 1.
Although this was not in accordance with the intention of the provinces, yet they (the provinces)
subsequently ratified the contract by their own acts furnishing the steel and making payments.
The result is that the provinces obligated themselves through the Director of Public Works to
furnish all the steel at ship side in Legaspi early enough to permit the contractor to complete the
bridge by September 1. This the provinces did not do, as quite a large shipment of steel arrived in
Legaspi on the very day agreed upon for the completion of the bridge. It may true that the
contractor could not have completed the bridge by September 1, if all of the steel had arrived in
Legaspi immediately after the signing of the contract.
Even admitting that the true date for the completion of the bridge was November 1, yet the
contractor could not have completed the work on or before that date on account of the quarantine
established and enforced by the authorities. James, in his letter of December 1 asking for the
extension of time, said, "The contractor in Ligao then began to haul the cement and also the steel
for the bridge. Shortly a quarantine on animals was put into effect in the town of Polangui, and the
hauling had to stop when I had had delivered at the site only a few barrels of cement and a very
small number of bars of steel for the piles." And James in his testimony says, "Jaucian was unable
to promptly deliver these materials at the Argus bridge site, due to a rinderpest quarantine placed, I
think, by the Bureau of Agriculture on carabao and cattle passing on the interprovincial road
between Ambos Camarines, Albay, and in all of the towns north of Ligao," Jaucian in his deposition
testified that he encountered difficulties in hauling materials for the bridge from Ligao to the Agus
River; that the first difficulty was the quarantine placed upon animals in Polangui; that he had been
delivering the materials for a week when the quarantine was ordered; that the quarantine, as he
remembered, commenced in July and was removed in October or November; that the quarantine
was uninterrupted during this time; and that it consisted in a definite or absolute prohibition against
the passage of animals from kilometer 30 to kilometer 40. So it is conclusively established that the
only way that the contractor had of moving the materials from Ligao to the bridge site was by
means of animals and that this could not be done from sometime in July until October or
November on account of the quarantine.
Marshall, the district engineer who represented the provinces during the construction of the bridge,
testified that the plans called for the piles of the bridge to be 11 meters long; that the contract was
signed on this basis; that after the contract had signed Von Schmelling, the former district
engineer, was down there and in a verbal conversation it was decided that instead of casting the
piles 11 meters long they should be cast 9 meters long, thereby saving something like 13 cubic
meters of concrete; that on October 11 or 12 there came a flood and the water rose about 15
centimeters higher than the extreme high water shown in the original plans; that it was thereafter
agreed to raise the caps on the piles 42 centimeters higher; and that the raising of the bridge was
outside of the original specifications. The testimony of this witness is corroborated on this point by
both the plaintiff and James.
The plaintiff, through his agent, requested an extension of time until February 15, l914, within
which to complete the bridge, but the parties did not agree upon the extension. From the resolution
of the provincial board of Ambos Camarines, dated January 6, 1914, it appears that Albay imposed
certain conditions in consideration for the extension, which were rejected by the plaintiff.
We must, therefore, conclude that the provinces waived the contract time, whether it were
September 1 or November 1, by their failure to deliver the steel promptly, by reason of having
placed the strict quarantine on animals and on account of the change in the plans subsequent to
October 12, and that the waiver operated to eliminate the definite date from which to assess
liquidated damages; and through the plaintiff, in continuing the work, was obligated to complete the
same within a reasonable time, the liquidated damage clause was not thereby restored and made
applicable to an unreasonable time. Where strict performance on the part of the contractor is
prevented or waived by the other party, a claim by such party of fines and penalties for delay or
failure cannot be sustained. (District of Columbia vs. Camden Iron Works, 181 U. S. 453.) The
same rule applies in cases containing liquidated damage clauses. (United Engineering and
Contracting Co. vs. U. S., 47 Ct. Cls., 489 [1912].) If it be true that the plaintiff contractor was
responsible for a large number of days of delay and the provinces for only a few of the days
thereof, yet, under such circumstances, we cannot "apportion" such delay between the contracting
parties and hold the contractor liable in liquidated damages for the number of days delayed by him
in completing the bridge. (Jefferson Hotel Co. vs. Brumbaugh, 168 Fed. Rep., 867 and cases cited
therein; Willis vs. Webster, 37 N. Y. Sup., 354; Mosler Safe Co. vs. Maiden Lane Safe Dep. Co.,
199 N. Y., 479; 37 L. R. A., (N. S.) 363, decided in 1910.) The result is that the provinces are
limited to such damages which they may have suffered on account of an unreasonable delay on
the part of the plaintiff in completing the bridge, if there were, in fact, an unreasonable delay. It
would seem, however, that as the plaintiff asked for an extension on December 1, sometime after
the quarantine had been raised and also after the change in the plans had been made, until
February 15, 1914, he should have finished the work on or before the latter date and all time
thereafter would constitute an unreasonable delay. However this may be, the provinces have
proven no actual damages resulting after February 15. It is true that they deducted P175.03 for
inspection charges, but this was done for such inspection prior to February 15, and the same is
true of the item of P021.42 for the maintenance of a ferry. Certainly there was no unreasonable
delay prior to February 15. Consequently, the provinces had no right to withhold the P1,301.45.

The plaintiff sought to recover, in addition to the amount withheld, P200 overcharges on steel, and
P878 for extra work and material furnished at defendant's request. While it is true that the question
whether the plaintiff is entitled to recover these amounts is raised by the third assignment of error,
yet no specific reference is made in the plaintiff's brief to said amounts, counsel saying nothing
more than, It is respectfully submitted that appellant is entitled to a reversal of the decision of the
Court of First Instance, and to an order for judgment in accordance with the prayer of his
complaint." We have examined the record, however, and find that the evidence is not sufficient to
warrant an affirmative holding that the plaintiff is entitled to recover these items or either of them.

For the foregoing reasons the judgment appealed from is reversed and judgment will be entered in
favor of the plaintiff and against the defendants for the sum of P1,301.45, with legal interest from
April 1, 1914. No costs will be allowed in this instance. So ordered.

Torres, Johnson and Carson, JJ., concur.

Araullo, J., concurs in the result.
 The Company may at its option reinstate or replace the property damaged or
destroyed, or any part thereof, instead of paying the amount of the loss of damages, or
may join with any other Company or insurers in so doing, but the Company shall not be
bound to reinstate exactly or completely, but only as circumstances permit and in
reasonable sufficient manner, and in no case shall the Company be bound to expend
more in reinstatement that it would have cost to reinstate such property as it was at the
time of the occurrence of such loss or damage, nor more than the sum insured by the
Company thereon.
Republic of the Philippines
SUPREME COURT
Manila If this clause of the policies is valid, its effect is to make the obligation of the insurance company an
alternative one, that is to say, that it may either pay the insured value of house, or rebuild it. It must
be noted that in alternative obligations, the debtor, the insurance company in this case, must notify
EN BANC the creditor of his election, stating which of the two prestations he is disposed to fulfill, in
accordance with article 1133 of the Civil Code. The object of this notice is to give the creditor, that
is, the plaintiff in the instant case, opportunity to express his consent, or to impugn the election
G.R. No. L-22738 December 2, 1924
made by the debtor, and only after said notice shall the election take legal effect when consented
by the creditor, or if impugned by the latter, when declared proper by a competent court. In the
ONG GUAN CAN and THE BANK OF THE PHILIPPINE ISLANDS, plaintiffs-appellees, instance case, the record shows that the appellant company did not give a formal notice of its
vs. election to rebuild, and while the witnesses, Cedrun and Cacho, speak of the proposed
THE CENTURY INSURANCE CO., LTD., defendant-appellant. reconstruction of the house destroyed, yet the plaintiff did not give his assent to the proposition, for
the reason that the new house would be smaller and of materials of lower kind than those
employed in the construction of the house destroyed. Upon this point the trial judge very aptly says
Eiguren & Razon for appellant. in his decision: "It would be an imposition unequitable, as well as unjust, to compel the plaintiff to
Aurelio Montinola and Jose M. Hontiverso for appellees. accept the rebuilding of a smaller house than the one burnt, with a lower kind of materials than
those of said house, without offering him an additional indemnity for the difference in size between
the two house, which circumstances were taken into account when the insurance applied for by the
plaintiff was accepted by the defendant." And we may add: Without tendering either the insured
value of the merchandise contained in the house destroyed, which amounts to the sum of
P15,000.itc@alf
VILLAMOR, J.:

We find in the record nothing to justify the reversal of the finding of the trial judge, holding that the
On April 19, 1924, the Court of First Instance of Iloilo rendered a judgment in favor of the plaintiff,
election alleged by the appellant to rebuild the house burnt instead of paying the value of the
sentencing the defendant company to pay him the sum of P45,000, the value of certain policies of
insurance is improper. To our mind, the judgment appealed from is in accordance with the merits of
fire insurance, with legal interest thereon from February 28, 1923, until payment, with the costs.
the case and the law, and must be, as is hereby, affirmed with the cost against the appellant. So
The defendant company appealed from this judgment, and now insists that the same must be
ordered.
modified and that it must be permitted to rebuild the house burnt, subject to the alignment of the
street where the building was erected, and that the appellant be relieved from the payment of the
sum in which said building was insured. Johnson, Street, Malcolm, Avancea, Ostrand, Johns and Romualdez, JJ., concur.

A building of the plaintiff was insured against fire by the defendant in the sum of P30,000, as well
as the goods and merchandise therein contained in the sum of P15,000. The house and
merchandise insured were burnt early in the morning of February 28, 1923, while the policies
issued by the defendant in favor of the plaintiff were in force.

The appellant contends that under clause 14 of the conditions of the policies, it may rebuild the
house burnt, and although the house may be smaller, yet it would be sufficient indemnity to the
insured for the actual loss suffered by him.

The clause cites by the appellant is as follows:lawphi1.net


Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally
liable with the principal debtor in case the latter defaults in the payment of the loan, is such
undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor
who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner
Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with
compounded interest at the rate of 6% per annum to be computed every 30 days from the date
thereof.1 On four occasions after the execution of the promissory note and even after the loan
matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made after the last payment on September
26, 1991.2
Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent
corporation filed a complaint3 against petitioner Palmares as the lone party-defendant, to the
exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 petitioner alleged that sometime in August 1990,
immediately after the loan matured, she offered to settle the obligation with respondent corporation
but the latter informed her that they would try to collect from the spouses Azarraga and that she
need not worry about it; that there has already been a partial payment in the amount of
P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as
the penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees
to be liable on the note but only upon default of the principal debtor, respondent corporation acted
in bad faith in suing her alone without including the Azarragas when they were the only ones who
benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution of the
trial court: (1) what the rate of interest, penalty and damages should be; (2) whether the liability of
the defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella
Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability.5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the
memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo
City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing of a
separate action for a sum of money against the spouses Osmea and Merlyn Azarraga who are
primarily liable on the instrument.6 This was based on the findings of the court a quo that the filing
of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga
spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the
obligation is considered a valid tender of payment sufficient to discharge a person's secondary
liability on the instrument; as co-maker, is only secondarily liable on the instrument; and that the
promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered
judgment declaring herein petitioner Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing
with interest at six percent (6%) per month computed from the date the loan was
contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the
outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate court declared that petitioner
Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the
principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is
primarily liable on the note and hence may be sued by the creditor corporation for the entire
obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although
she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the
imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law
is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even
if the promissory note were to be considered as a contract of adhesion, the same is not entirely
prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres,
he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore
solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not
establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's liability as
that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M.
B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly
imposing the interests and penalty charges on the outstanding balance of the
promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by
respondent corporation. They are further refuted by accepted doctrines in the American jurisdiction
after which we patterned our statutory law on surety and guaranty. This case then affords us the
opportunity to make an extended exposition on the ramifications of these two specialized
contracts, for such guidance as may be taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily
liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand
payment of the above loan from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note subject to the same conditions above-
contained.8
Petitioner contends that the provisions of the second and third paragraph are conflicting in that
while the second paragraph seems to define her liability as that of a surety which is joint and
solidary with the principal maker, on the other hand, under the third paragraph her liability is
actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the
principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply
stated, although the second paragraph says that she is liable as a surety, the third paragraph
defines the nature of her liability as that of a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule is that clauses in the contract should be
interpreted in relation to one another and not by parts. In other words, the second paragraph
should not be taken in isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that
she could be held liable only as a guarantor for several reasons. First, the words "jointly and
severally or solidarily liable" used in the second paragraph are technical and legal terms which are
not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is
likely to enter into such transactions without fully realizing the nature and extent of her liability. On
the contrary, the wordings used in the third paragraph are easier to comprehend. Second, the law
looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of the
surety cannot be extended by implication beyond specified limits, taking into consideration the
peculiar nature of a surety agreement which holds the surety liable despite the absence of any
direct consideration received from either the principal obligor or the creditor. Third, the promissory
note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation. The
note was brought to petitioner partially filled up, the contents thereof were never explained to her,
and her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should
be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the
third paragraph of the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the
principal debtors cannot be considered in default in the absence of a judicial or extrajudicial
demand. It is true that the complaint alleges the fact of demand, but the purported demand letters
were never attached to the pleadings filed by private respondent before the trial court. And, while
petitioner may have admitted in her Amended Answer that she received a demand letter from
respondent corporation sometime in 1990, the same did not effectively put her or the principal
debtors in default for the simple reason that the latter subsequently made a partial payment on the
loan in September, 1991, a fact which was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance of
the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially complied with, the court may equitably
reduce the penalty10 on grounds of substantial justice. More importantly, respondent corporation
never refuted petitioner's allegation that immediately after the loan matured, she informed said
respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages
to be paid since petitioner has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the
petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary
award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note
executed between the parties is a contract of adhesion, it has been the consistent holding of the
Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding
effects thereof have been upheld. The peculiar nature of such contracts necessitate a close
scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as
consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has
construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly
albeit not unreasonably against the drafter thereof when justified in light of the operative facts and
surrounding circumstances.12 The factual scenario obtaining in the case before us warrants a
liberal application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. 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 case the contract is called a
suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation
shall control.13 In the case at bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarily liable" contained in the second
paragraph of her contract are technical and legal terms which could not be easily understood by an
ordinary layman like her is diametrically opposed to her manifestation in the contract that she "fully
understood the contents" of the promissory note and that she is "fully aware" of her solidary liability
with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo,
she cannot now be heard to claim otherwise. Any reference to the existence of fraud is unavailing.
Fraud must be established by clear and convincing evidence, mere preponderance of evidence not
even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced
only by her own uncorroborated and, expectedly, self-serving allegations. 14
Having entered into the contract with full knowledge of its terms and conditions, petitioner is
estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or
as to the legal effect of the undertaking.15The rule that ignorance of the contents of an instrument
does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship. And
the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving
her of liability.16
Petitioner would like to make capital of the fact that although she obligated herself to be jointly and
severally liable with the principal maker, her liability is deemed restricted by the provisions of the
third paragraph of her contract wherein she agreed "that M.B. Lending Corporation may demand
payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in
the payment of the note," which makes her contract one of guaranty and not suretyship. The
purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor.17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that
the debtor shall pay.18 Stated differently, a surety promises to pay the principal's debt if the principal
will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay.19 A surety binds himself to perform if
the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does
not contract that the principal will pay, but simply that he is able to do so. 20 In other words, a surety
undertakes directly for the payment and is so responsible at once if the principal debtor makes
default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made
out of the principal debtor.21
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically
remove it from the ambit of a contract of suretyship. The second and third paragraphs of the
aforequoted portion of the promissory note do not contain any other condition for the enforcement
of respondent corporation's right against petitioner. It has not been shown, either in the contract or
the pleadings, that respondent corporation agreed to proceed against herein petitioner only if and
when the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that
wherein one lends his credit by joining in the principal debtor's obligation, so as to render himself
directly and primarily responsible with him, and without reference to the solvency of the principal. 22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule
on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has
once been judicially determined under the rule of reasonable construction applicable to all written
contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is
not to be extended beyond its strict meaning. 23 The rule, however, will apply only after it has been
definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot
be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation
contained in the third paragraph of the controverted suretyship contract merely elucidated on and
made more specific the obligation of petitioner as generally defined in the second paragraph
thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her
liability attaches only upon default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered. 24 Several attendant
factors in that genre lend support to our finding that petitioner is a surety. For one, when petitioner
was informed about the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her mind, she knew that she was
directly and primarily liable upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the time of initial payment up
to the last, which were all issued in her name and of the Azarraga spouses. 25 This can only be
construed to mean that the payments made by the principal debtors were considered by
respondent corporation as creditable directly upon the account and inuring to the benefit of
petitioner. The concomitant and simultaneous compliance of petitioner's obligation with that of her
principals only goes to show that, from the very start, petitioner considered herself equally bound
by the contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with
the principal,26and as such is deemed an original promisor and debtor from the beginning. 27 This is
because in suretyship there is but one contract, and the surety is bound by the same agreement
which binds the principal.28 In essence, the contract of a surety starts with the agreement, 29 which
is precisely the situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows the terms
and conditions stipulated between respondent corporation, as creditor, and the principal obligors. A
surety is usually bound with his principal by the same instrument, executed at the same time and
upon the same consideration; he is an original debtor, and his liability is immediate and
direct.30 Thus, it has been held that where a written agreement on the same sheet of paper with
and immediately following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the terms of the
principal contract, the signers were "sureties" jointly liable with the buyer.31 A surety usually enters
into the same obligation as that of his principal, and the signatures of both usually appear upon the
same instrument, and the same consideration usually supports the obligation for both the principal
and the surety.32
There is no merit in petitioner's contention that the complaint was prematurely filed because the
principal debtors cannot as yet be considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent
corporation may demand payment of the loan from her in case the principal maker defaults,
subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of
the note states that "should I fail to pay in accordance with the above schedule of payment, I
hereby waive my right to notice and demand." Hence, demand by the creditor is no longer
necessary in order that delay may exist since the contract itself already expressly so declares. 33 As
a surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing suit against
them, since the commencement of the suit is a sufficient demand. 34 On this point, it may be worth
mentioning that a surety is not even entitled, as a matter of right, to be given notice of the
principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the
interest of the surety, his mere failure to voluntarily give information to the surety of the default of
the principal cannot have the effect of discharging the surety. The surety is bound to take notice of
the principal's default and to perform the obligation. He cannot complain that the creditor has not
notified
him in the absence of a special agreement to that effect in the contract of suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the principal debtors,
by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory
or contractual requirement, it is not necessary that payment or performance of his obligation be
first demanded of the principal, especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal be called on to account. 36 The
underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A
surety is liable as much as his principal is liable, and absolutely liable as soon as default is made,
without any demand upon the principal whatsoever or any notice of default. 37 As an original
promisor and debtor from the beginning, he is held ordinarily to know every default of his
principal.38
Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of
the principal debtors who allegedly were the only ones who benefited from the proceeds of the
loan. What petitioner is trying to imply is that the creditor, herein respondent corporation, should
have proceeded first against the principal before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed against
the principal.39Under Article 1216 of the Civil Code, the creditor may proceed against any one of
the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to proceed even against the surety
alone.40 Since, generally, it is not necessary for the creditor to proceed against a principal in order
to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the
same that of the principal, then soon as the principal is in default, the surety is likewise in default,
and may be sued immediately and before any proceedings are had against the
principal.41 Perforce, in accordance with the rule that, in the absence of statute or agreement
otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute
and in the absence of any agreement limiting the application of the security, require the creditor or
obligee, before proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound. 42
We agree with respondent corporation that its mere failure to immediately sue petitioner on her
obligation does not release her from liability. Where a creditor refrains from proceeding against the
principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does
not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate
notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the
surety whether given at the principal's request or without it, and whether it is yielded by the creditor
through sympathy or from an inclination to favor the principal, or is only the result of passiveness.
The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the
surety, even if such delay continues until the principal becomes insolvent. 43 And, in the absence of
proof of resultant injury, a surety is not discharged by the creditor's mere statement that the
creditor will not look to the surety,44 or that he need not trouble himself. 45 The consequences of the
delay, such as the subsequent insolvency of the principal, 46or the fact that the remedies against the
principal may be lost by lapse of time, are immaterial. 47
The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against
the principal at any time.48 At any rate, if the surety is dissatisfied with the degree of activity
displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the creditor.49
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the
creditor without change in the time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the surety.50 In order to constitute an
extension discharging the surety, it should appear that the extension was for a definite period,
pursuant to an enforceable agreement between the principal and the creditor, and that it was made
without the consent of the surety or with a reservation of rights with respect to him. The contract
must be one which precludes the creditor from, or at least hinders him in, enforcing the principal
contract within the period during which he could otherwise have enforced it, and which precludes
the surety from paying the debt.51
None of these elements are present in the instant case. Verily, the mere fact that respondent
corporation gave the principal debtors an extended period of time within which to comply with their
obligation did not effectively absolve here in petitioner from the consequences of her undertaking.
Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by
some act of the creditor,52 herein respondent corporation, failing in which we cannot grant the relief
prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and
penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed
the collection of the loan in order that the interests and penalty charges would accumulate. The
statement, likewise traversed by said respondent, is misleading.
In an affidavit53 executed by petitioner, which was attached to her petition, she stated, among
others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan
has been released and that she has not paid the same upon its maturity. I received a
telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and
of my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At
the same time, I offered to pay MB Lending the outstanding balance of the principal
obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr. Banusing
advised me not to worry because he will try to collect first from Merlyn and Osmea
Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing
who reminded that the loan of Merlyn and Osmea Azarraga, together with interest and
penalties thereon, has not been paid. Since I had no available funds at that time, I
offered to pay MB Lending by delivering to them a parcel of land which I own. Mr.
Banusing's secretary, however, refused my offer for the reason that they are not
interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against
me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed
against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to
pay the outstanding balance of the principal obligation of Merlyn Azarraga in the
amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus,
counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay
the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea
Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order
to effectively discharge her from liability. There are a number of circumstances which conjointly
inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment from
petitioner. It was petitioner who initially requested that the creditor try to collect from her principal
first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was
occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner.
At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if
the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she
owned. Respondent corporation was acting well within its rights when it refused to accept the offer.
The debtor of a thing cannot compel the creditor to receive a different one, although the latter may
be of the same value, or more valuable than that which is due. 54 The obligee is entitled to demand
fulfillment of the obligation or performance as stipulated. A change of the object of the obligation
would constitute novation requiring the express consent of the parties. 55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding
balance of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again,
respondent corporation cannot be blamed for refusing the amount being offered because it fell way
below the amount it had computed, based on the stipulated interests and penalty charges, as
owing and due from herein petitioner. A debt shall 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.56 In other words, the prestation must be fulfilled completely. A person entering into a
contract has a right to insist on its performance in all particulars. 57
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay
because the moment the latter accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, then the obligation shall be deemed
fully complied with.58 Precisely, this is what respondent corporation wanted to avoid when it
continually refused to settle with petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and
attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had
already been paid even before the filing of the present case. Article 1229 of the Civil Code provides
that the court shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. And, even if there has been no performance, the penalty
may also be reduced if it is iniquitous or leonine.

In a case previously decided by this Court which likewise involved private respondent M.B.
Lending Corporation, and which is substantially on all fours with the one at bar, we decided to
eliminate altogether the penalty interest for being excessive and unwarranted under the following
rationalization:

Upon the matter of penalty interest, we agree with the Court of Appeals that the
economic impact of the penalty interest of three percent (3 %) per month on total
amount due but unpaid should be equitably reduced. The purpose for which the penalty
interest is intended that is, to punish the obligor will have been sufficiently served
by the effects of compounded interest. Under the exceptional circumstances in the
case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of
P8,600.00 was made on due date; and the heavy (albeit still lawful) regular
compensatory interest, the penalty interest stipulated in the parties' promissory note is
iniquitous and unconscionable and may be equitably reduced further by eliminating
such penalty interest altogether.59

Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be
eliminated.

Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with
an agreement thereon between the parties, the court may nevertheless reduce such attorney's
fees fixed in the contract when the amount thereof appears to be unconscionable or
unreasonable.60 To that end, it is not even necessary to show, as in other contracts, that it is
contrary to morals or public policy.61 The grant of attorney's fees equivalent to 25% of the total
amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid
amount involved and the extent of the work involved in this simple action for collection of a sum of
money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be
sufficient in this case.62

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION
that the penalty interest of 3% per month is hereby deleted and the award of attorney's fees is
reduced to P10,000.00.

SO ORDERED.

Melo, Puno, Mendoza and Martinez, JJ., concur.

 (c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer,
and Insular Bank of Asia and America as drawee, in the total amount of
P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.
Republic of the Philippines
SUPREME COURT On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
Manila respondent Pilipinas Bank ("Pilipinas"). It reads as follows:

THIRD DIVISION PILIPINAS BANK

Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

G.R. No. 89252 May 24, 1993

February 9, 1981

RAUL SESBREO, petitioner, VALUE DATE
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents. TO Raul Sesbreo

Salva, Villanueva & Associates for Delta Motors Corporation. April 6, 1981

MATURITY DATE
Reyes, Salazar & Associates for Pilipinas Bank.
NO. 10805

DENOMINATED CUSTODIAN RECEIPT

FELICIANO, J.:
This confirms that as a duly Custodian Bank, and upon instruction of
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our
P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; custody the following securities to you [sic] the extent herein indicated.
the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance,
also on 9 February 1981, issued the following documents to petitioner:
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of
one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731
for a term of 32 days at 17.0% per annum; 2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the
sale of DMC PN No. 2731 to petitioner, with the notation that the said
security was in custodianship of Pilipinas Bank, as per Denominated We further certify that these securities may be inspected by you or your
Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and duly authorized representative at any time during regular banking hours.
 Upon your written instructions we shall undertake physical delivery of the
above securities fully assigned to you should this Denominated
Custodianship Receipt remain outstanding in your favor thirty (30) days
after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas,
Makati Branch, and handed her a demand letter informing the bank that his placement with
Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding,
and that he in effect was asking for the physical delivery of the underlying promissory note.
Petitioner then examined the original of the DMC PN No. 2731 and found: that the security had
been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of
P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation
("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE."
Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking
private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas
allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has
been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and
Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released DMC
PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the
partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had
assigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to
petitioner on the promissory note, and explained in turn that it had previously agreed with
Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN
No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC
DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September
1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against
private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August 1987,
dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with
costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision
dated 21 March 1989, the Court of Appeals denied the appeal and held: 6
Be that as it may, from the evidence on record, if there is anyone that
appears liable for the travails of plaintiff-appellant, it is Philfinance. As
correctly observed by the trial court:
This act of Philfinance in accepting the investment
of plaintiff and charging it against DMC PN No. 2731
when its entire face value was already obligated or
earmarked for set-off or compensation is difficult to
comprehend and may have been motivated with
bad faith. Philfinance, therefore, is solely and legally
obligated to return the investment of plaintiff,
together with its earnings, and to answer all the
damages plaintiff has suffered incident thereto.
Unfortunately for plaintiff, Philfinance was not
impleaded as one of the defendants in this case at
bar; hence, this Court is without jurisdiction to
pronounce judgement against it. (p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from,
the same is hereby affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court
resolved to give due course to the petition and required the parties to file their respective
memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends
that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from
private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private
respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated
in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate
entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three
(3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo
Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of
petitioner vis-a-visDelta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of
course, there is a third relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court
nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently,
not necessary for present purposes to deal with this third relationship, except to the extent it
necessarily impinges upon or intersects the first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of
the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to
petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:
The words "not negotiable," stamped on the face of the bill of lading, did
not destroy its assignability, but the sole effect was to exempt the bill from
the statutory provisions relative thereto, and a bill, though not
negotiable, may be transferred by assignment; the assignee taking subject
to the equities between the original parties. 12 (Emphasis added)

Nor could plaintiff-appellant have acquired any right over DMC PN No.
2731 as the same is "non-negotiable" as stamped on its face (Exhibit "6"),
negotiation being defined as the transfer of an instrument from one person
to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue
on the instrument in his own name and cannot demand or receive payment
(Section 51, id.) 9
DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-
transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from
assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which
should be quoted in full:

April 10, 1980

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been
validly transferred, in part to him by assignment and that as a result of such transfer, Delta as
debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him Philippine Underwriters Finance Corp.
by the payee Philfinance. Benavidez St., Makati,
Metro Manila.

Delta, however, disputes petitioner's contention and argues:

Attent
ion:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise Mr.
transferred by Philfinance as manifested by the word "non-negotiable" Alfred
stamp across the face of the Note 10 and because maker Delta and payee o O.
Philfinance intended that this Note would be offset against the outstanding Bana
obligation of Philfinance represented by Philfinance PN No. 143-A issued to ria
Delta as payee; SVP-
Treas
urer
(2) that the assignment of DMC PN No. 2731 by Philfinance was without
Delta's consent, if not against its instructions; and
GENTLEMEN:

(3) assuming (arguendo only) that the partial assignment in favor of

petitioner was valid, petitioner took the Note subject to the defenses This refers to our outstanding placement of P4,601,666.67 as evidenced by
available to Delta, in particular, the offsetting of DMC PN No. 2731 against your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6,
Philfinance PN No. 143-A. 11 1981.

We consider Delta's arguments seriatim. As agreed upon, we enclose our non-negotiable Promissory Note No. 2730
and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic]
against your PN No. 143-A upon co-terminal maturity.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from the assignment or transfer of an instrument whether that be negotiable or non-
negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute Please deliver the proceeds of our PNs to our representative, Mr. Eric
may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where Castillo.
the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being
negotiated, also be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course, different. A non- Very Truly Yours,
negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the instrument:
 (Sgd.)
Florencio B. Biagan
Senior Vice President
We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition
upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity
thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an
assignee or transferee of the Note who parted with valuable consideration in good faith and without
notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our
conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by
their exchange of their promissory notes was this: Delta invested, by making a money market
placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the
same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2)
promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus,
Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta
promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had
been effected without the consent of Delta, we note that such consent was not necessary for the
validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that
Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional
subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation,
which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal
terms of the substituting obligation or by the evident incompatibility of the new and old obligations
on every point. 16 Nothing of the sort is present in the instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731
to Philfinance, an entity engaged in the business of buying and selling debt instruments and other
securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the
Court, speaking through Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money
market transaction. As defined by Lawrence Smith "the money market is a
market dealing in standardized short-term credit instruments (involving
large amounts) where lenders and borrowers do not deal directly with each
other but through a middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtness of any
person or entity. . ., which are issued, endorsed, sold or transferred or in
any manner conveyed to another person or entity, with or without recourse".
The fundamental function of the money market device in its operation is to
match and bring together in a most impersonal manner both the "fund
users" and the "fund suppliers." The money market is an "impersonal
market", free from personal considerations. "The market mechanism is
intended to provide quick mobility of money and securities."
The impersonal character of the money market device overlooks the
individuals or entities concerned. The issuer of a commercial paper in the
money market necessarily knows in advance that it would be
expenditiously transacted and transferred to any investor/lender without
need of notice to said issuer. In practice, no notification is given to the
borrower or issuer of commercial paper of the sale or transfer to the
investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively novel
institution in the Philippine commercial scene. It has been intended to
facilitate the flow and acquisition of capital on an impersonal basis. And as
specifically required by Presidential Decree No. 678, the investing public
must be given adequate and effective protection in availing of the credit of
a borrower in the commercial paper market. 18(Citations omitted; emphasis
supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No.
2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of
its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet
taken place and indeed none could have taken place. The essential requirements of compensation
are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
(Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was
explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where
Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against
[Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days
before the "co-terminal maturity" date, that is to say, before any compensation had taken place.
Further, the assignment to petitioner would have prevented compensation had taken place
between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the
assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and
debtors of each other in their own right to the extent of the amount assigned by Philfinance to
petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was
a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the
portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only
on 14 July 1981, 19 that is, after the maturity not only of the money market placement made by
petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other
words, petitioner notified Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached maturity. It is a firmly settled
doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the
assignee is merely substituted in the place of the assignor 20and that the assignee acquires his
rights subject to the equities i.e., the defenses which the debtor could have set up against the
original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil
Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made
by a creditor in favor of a third person, cannot set up against the assignee
the compensation which would pertain to him against the assignor, unless
the assignor was notified by the debtor at the time he gave his consent, that
he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous
to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credits prior to the same and also later ones
until he had knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the
Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he
contacted to pay; and if he pay before notice that his debt has been
assigned, the law holds him exonerated, for the reason that it is the duty of
the person who has acquired a title by transfer to demand payment of the
debt, to give his debt or notice. 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981,
DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance
could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as
assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note
assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment or sale was
effected on 9 February 1981. He could have notified Delta as soon as his money market
placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that
time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have
notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC
PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication
that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to
uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance
remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner
contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued
DCR No. 10805 with the following words:
Upon your written instruction, we [Pilipinas] shall undertake physical
delivery of the above securities fully assigned to you . 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part
of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in
solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation
on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No.
2731 of a certain face value, to mature on 6 April 1981 and payable to the
order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by Philfinance
to petitioner (9 February 1981), holding that Note on behalf and for the
benefit of petitioner, at least to the extent it had been assigned to petitioner
by payee Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized
representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically deliver
the DMC PN No. 2731 (or a participation therein to the extent of
P307,933.33) "should this Denominated Custodianship receipt remain
outstanding in [petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner,
either upon maturity thereof or any other time. We note that both in his complaint and in his
testimony before the trial court, petitioner referred merely to the obligation of private respondent
Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's
theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion
of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the
trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas
cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary
liability only when the law or the nature of the obligation requires solidarity," The record here
exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas.
Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has
petitioner argued that the very nature of the custodianship assumed by private respondent
Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by
Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private
respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of
petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and
deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to
petitioner Sesbreo.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the
obligation of the depository was owed, however, to petitioner Sesbreo as beneficiary of the
custodianship or depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was established as an integral
part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting
of the depositary or custodianship agreement was equivalent to constructive delivery of the Note
(to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that
custodianship agreements are designed to facilitate transactions in the money market by providing
a basis for confidence on the part of the investors or placers that the instruments bought by them
are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their
reach, that those instruments will be there available to the placers of funds should they have need
of them. The depositary in a contract of deposit is obliged to return the security or the thing
deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the
contract, even though a term for such return may have been established in the said
contract. 26 Accordingly, any stipulation in the contract of deposit or custodianship that runs counter
to the fundamental purpose of that agreement or which was not brought to the notice of and
accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is
any party that needs the equalizing protection of the law in money market transactions, it is the
members of the general public whom place their savings in such market for the purpose of
generating interest revenues. 27 The custodian bank, if it is not related either in terms of equity
ownership or management control to the borrower of the funds, or the commercial paper dealer, is
normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The
custodian bank would have every incentive to protect the interest of its client the borrower or
dealer as against the placer of funds. The providers of such funds must be safeguarded from the
impact of stipulations privately made between the borrowers or dealers and the custodian banks,
and disclosed to fund-providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited
with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again
note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and
therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place.
Instead of complying with the demand of the petitioner, Pilipinas purported to require and await the
instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect
physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreo. The
ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty
[30] days after its maturity") was not a defense against petitioner's demand for physical surrender
of the Note on at least three grounds: firstly, such term was never brought to the attention of
petitioner Sesbreo at the time the money market placement with Philfinance was made; secondly,
such term runs counter to the very purpose of the custodianship or depositary agreement as an
integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of
Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to
demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages
sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as
depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner
of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or
unlawful deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie,
the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731
assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus
legal interest of six percent (6%)per annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of reimbursement as
Pilipinas may have vis-a-vis Philfinance.
III.
The third principal contention of petitioner that Philfinance and private respondents Delta and
Pilipinas should be treated as one corporate entity need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired
either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to
implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been
organized as separate corporate entities. Petitioner asks us to pierce their separate corporate
entities, but has been able only to cite the presence of a common Director Mr. Ricardo Silverio,
Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor
proved that one or another of the three (3) concededly related companies used the other two (2) as
mere alter egos or that the corporate affairs of the other two (2) were administered and managed
for the benefit of one. There is simply not enough evidence of record to justify disregarding the
separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner. 28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-
G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED
and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's
complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to
indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the
rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and
Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24765 August 29, 1969
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
MAXIMO STA. MARIA, ET AL., defendant,
VALERIANA, EMETERIA, TEOFILO, QUINTIN, ROSARIO and LEONILA, all surnamed STA.
MARIA,defendants-appellants.
Tomas Besa and Jose B. Galang for plaintiff-appellee.
G.P. Nuguid, Jr. for defendants-appellants.
TEEHANKEE, J.:
In this appeal certified to this Court by the Court of Appeals as involving purely legal issues, we
hold that a special power of attorney to mortgage real estate is limited to such authority to
mortgage and does not bind the grantor personally to other obligations contracted by the grantee,
in the absence of any ratification or other similar act that would estop the grantor from questioning
or disowning such other obligations contracted by the grantee.
Plaintiff bank filed this action on February 10, 1961 against defendant Maximo Sta. Maria and his
six brothers and sisters, defendants-appellants, Valeriana, Emeteria, Teofilo, Quintin, Rosario and
Leonila, all surnamed Sta. Maria, and the Associated Insurance & Surety Co., Inc. as surety, for
the collection of certain amounts representing unpaid balances on two agricultural sugar crop
loans due allegedly from defendants. 1
The said sugar crop loans were obtained by defendant Maximo Sta. Maria from plaintiff bank under
a special power of attorney, executed in his favor by his six brothers and sisters, defendants-
appellants herein, to mortgage a 16-odd hectare parcel of land, jointly owned by all of them, the
pertinent portion of which reads as follows:
That we, VALERIANA, EMETERIA, TEOFILO, QUINTIN, ROSARIO and LEONILA all
surnamed STA. MARIA, sole heirs of our deceased parents CANDIDO STA. MARIA
and FRANCISCA DE LOS REYES, all of legal age, Filipinos, and residents of
Dinalupihan, Bataan, do hereby name, constitute and appoint Dr. MAXIMO STA.
MARIA, of legal age, married, and residing at Dinalupihan, Bataan to be our true and
lawful attorney of and in our place, name and stead to mortgage, or convey as security
to any bank, company or to any natural or juridical person, our undivided shares over a
certain parcel of land together the improvements thereon which parcel of land is more
particularly described as follows, to wit:
"Situated in the Barrio of Pinulot, Municipality of Dinalupihan, Bataan,
containing an area of 16.7249 hectares and bounded as follows to wit:
North by property of Alejandro Benito; on the Northeast, by public land and
property of Tomas Tulop; on the southeast, by property of Ramindo Agustin;
on the southwest, by properties of Jose V. Reyes and Emilio Reyes; and on
the northwest, by excluded portion claimed by Emilio Reyes."
of which parcel of land aforementioned we are together with our said attorney who is
our brother, the owners in equal undivided shares as evidenced by Transfer Certificate
of Title No. T-2785 of the Registry of Deeds of Bataan dated Feb. 26th 1951. (Exh. E) 2
In addition, Valeriana Sta. Maria alone also executed in favor of her brother, Maximo, a special
power of attorney to borrow money and mortgage any real estate owned by her, granting him the
following authority:
For me and in my name to borrow money and make, execute, sign and deliver
mortgages of real estate now owned by me standing in my name and to make,
execute, sign and deliver any and all promissory notes necessary in the premises.
(Exh. E-I)3
By virtue of the two above powers, Maximo Sta. Maria applied for two separate crop loans, for the
1952-1953 and 1953-1954 crop years, with plaintiff bank, one in the amount of P15,000.00, of
which only the sum of P13,216.11 was actually extended by plaintiff, and the other in the amount of
P23,000.00, of which only the sum of P12,427.57 was actually extended by plaintiff. As security for
the two loans, Maximo Sta. Maria executed in his own name in favor of plaintiff bank two chattel
mortgages on the standing crops, guaranteed by surety bonds for the full authorized amounts of
the loans executed by the Associated Insurance & Surety Co., Inc. as surety with Maximo Sta.
Maria as principal. The records of the crop loan application further disclose that among the
securities given by Maximo for the loans were a "2nd mortgage on 25.3023 Has. of sugarland,
including sugar quota rights therein" including, the parcel of land jointly owned by Maximo and his
six brothers and sisters herein for the 1952-1953 crop loan, with the notation that the bank already
held a first mortgage on the same properties for the 1951-1952 crop loan of Maximo, 4 and a 3rd
mortgage on the same properties for the 1953-1954 crop loan. 5
The trial court rendered judgment in favor of plaintiff and against defendants thus:1wph1.t
 WHEREFORE premises considered, judgment is hereby rendered condemning the mortgage does not carry with it the authority to contract obligation. This Court thus held
defendant Maximo R. Sta. Maria and his co-defendants Valeriana, Quintin, Rosario, in the said case:
Emeteria, Teofilo, and Leonila all surnamed Sta. Maria and the Associated Insurance
and Surety Company, Inc., jointly and severally, to pay the plaintiff, the Philippine
National Bank, Del Carmen Branch, as follows: Appellant claims that the trial court erred in holding that only Cesario A.
Fabricante is liable to pay the mortgage debt and not his wife who is
exempt from liability. The trial court said: "Only the defendant Cesario A.
1. On the first cause of action, the sum of P8,500.72 with a daily interest of P0.83 on Fabricante is liable for the payment of this amount because it does not
P6,100.00 at 6% per annum beginning August 21, 1963 until fully paid; appear that the other defendant Maria G. de Fabricante had authorized
Cesario A. Fabricante to contract the debt also in her name. The power of
attorney was not presented and it is to be presumed that the power (of
2. On the second cause of action, the sum of P14,299.79 with a daily interest of P1.53 attorney) was limited to a grant of authority to Cesario A. Fabricante to
on P9,346.44 at 6% per annum until fully paid; and mortgage the parcel of land covered by Transfer Certificate of Title in the
name of Maria G. de Fabricante.
3. On both causes of action the further sum equivalent to 10% of the total amount due
as attorney's fee as of the date of the execution of this decision, and the costs. 6 We went over the contents of the deed of mortgage executed by Cesario
Fabricante in favor of Appellant on April 18, 1944, and there is really
nothing therein from which we may infer that Cesario was authorized by his
Defendant Maximo Sta. Maria and his surety, defendant Associated Insurance & Surety Co., Inc.
wife to construct the obligation in her name. The deed shows that the
who did not resist the action, did not appeal the judgment. This appeals been taken by his six
authority was limited to the execution of the mortgage insofar as the
brothers and sisters, defendants-appellants who reiterate in their brief their main contention in their
property of the wife is concerned. There is a difference between authority to
answer to the complaint that under this special power of attorney, Exh. E, they had not given their
mortgage and authority to contract obligation. Since the power of attorney
brother, Maximo, the authority to borrow money but only to mortgage the real estate jointly owned
was not presented as evidence, the trial court was correct in presuming that
by them; and that if they are liable at all, their liability should not go beyond the value of the
the power was merely limited to a grant of authority to mortgage unless the
property which they had authorized to be given as security for the loans obtained by Maximo. In
contrary is shown.9
their answer, defendants-appellants had further contended that they did not benefit whatsoever
from the loans, and that the plaintiff bank's only recourse against them is to foreclose on the
property which they had authorized Maximo to mortgage. 2. The authority granted by defendants-appellants (except Valeriana) unto their brother,
Maximo, was merely to mortgage the property jointly owned by them. They did not
grant Maximo any authority to contract for any loans in their names and behalf. Maximo
We find the appeal of defendants-appellants, except for defendant Valeriana Sta. Maria who had
alone, with Valeriana who authorized him to borrow money, must answer for said loans
executed another special power of attorney, Exh. E-1, expressly authorizing Maximo to borrow
and the other defendants-appellants' only liability is that the real estate authorized by
money on her behalf, to be well taken.
them to be mortgaged would be subject to foreclosure and sale to respond for the
obligations contracted by Maximo. But they cannot be held personally liable for the
1. Plaintiff bank has not made out a cause of action against defendants-appellants payment of such obligations, as erroneously held by the trial court.
(except Valeriana), so as to hold them liable for the unpaid balances of the loans
obtained by Maximo under the chattel mortgages executed by him in his own name
3. The fact that Maximo presented to the plaintiff bank Valeriana's additional special
alone. In the early case of Bank of P.I. vs. De Coster, this Court, in holding that the
power of attorney expressly authorizing him to borrow money, Exh. E-1, aside from the
broad power of attorney given by the wife to the husband to look after and protect the
authority to mortgage executed by Valeriana together with the other defendants-
wife's interests and to transact her business did not authorize him to make her liable as
appellants also in Maximo's favor, lends support to our view that the bank was not
a surety for the payment of the pre-existing debt of a third person, cited the
satisfied with the authority to mortgage alone. For otherwise, such authority to borrow
fundamental construction rule that "where in an instrument powers and duties are
would have been deemed unnecessary and a surplusage. And having failed to require
specified and defined, that all of such powers and duties are limited andconfined to
that Maximo submit a similar authority to borrow, from the other defendants-appellants,
those which are specified and defined, and all other powers and duties are
plaintiff, which apparently was satisfied with the surety bond for repayment put up by
excluded." 7 This is but in accord with the disinclination of courts to enlarge an authority
Maximo, cannot now seek to hold said defendants-appellants similarly liable for the
granted beyond the powers expressly given and those which incidentally flow or derive
unpaid loans. Plaintiff's argument that "a mortgage is simply an accessory contract,
therefrom as being usual or reasonably necessary and proper for the performance of
and that to effect the mortgage, a loan has to be secured" 10 falls, far short of the mark.
such express powers. Even before the filing of the present action, this Court in the
Maximo had indeed, secured the loan on his own account and the defendants-
similar case of De Villa vs. Fabricante 8 had already ruled that where the power of
appellants had authorized him to mortgage their respective undivided shares of the real
attorney given to the husband by the wife was limited to a grant of authority to
property jointly owned by them as security for the loan. But that was the extent of their
mortgage a parcel of land titled in the wife's name, the wife may not be held liable for
authority land consequent liability, to have the real property answer for the loan in case
the payment of the mortgage debt contracted by the husband, as the authority to
of non-payment. It is not unusual in family and business circles that one would allow
 his property or an undivided share in real estate to be mortgaged by another as Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano and
security, either as an accommodation or for valuable consideration, but the grant of Barredo, JJ., concur.
such authority does not extend to assuming personal liability, much less solidary 1wph1.t Reyes, J.B.L., J., is on official leave.
liability, for any loan secured by the grantee in the absence of express authority so
given by the grantor.

4. The outcome might be different if there had been an express ratification of the loans
by defendants-appellants or if it had been shown that they had been benefited by the
crop loans so as to put them in estoppel. But the burden of establishing such
ratification or estoppel falls squarely upon plaintiff bank. It has not only failed to
discharge this burden, but the record stands undisputed that defendant-appellant
Quintin Sta. Maria testified that he and his co-defendants executed the authority to
mortgage "to accommodate (my) brother Dr. Maximo Sta. Maria ... and because he is
my brother, I signed it to accommodate him as security for whatever he may apply as
loan. Only for that land, we gave him as, security" and that "we brothers did not receive
any centavo as benefit." 11 The record further shows plaintiff bank itself admitted during
the trial that defendants-appellants "did not profit from the loan" and that they "did not
receive any money (the loan proceeds) from (Maximo)." 12 No estoppel, therefore, can
be claimed by plaintiff as against defendants-appellants.

5. Now, as to the extent of defendant Valeriana Sta. Maria's liability to plaintiff. As

already stated above, Valeriana stands liable not merely on the mortgage of her share
in the property, but also for the loans which Maximo had obtained from plaintiff bank,
since she had expressly granted Maximo the authority to incur such loans. (Exh. E-1.)
Although the question has not been raised in appellants' brief, we hold that Valeriana's
liability for the loans secured by Maximo is not joint and several or solidary as adjudged
by the trial court, but only joint, pursuant to the provisions of Article 1207 of the Civil
Code that "the concurrence ... of two or more debtors in one and the same obligation
does not imply that ... each one of the (debtors) is bound to render entire compliance
with the prestation. There is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity." It should be
noted that in the additional special power of attorney, Exh. E-1, executed by Valeriana,
she did not grant Maximo the authority to bind her solidarity with him on any loans he
might secure thereunder.

6. Finally, as to the 10% award of attorney's fees, this Court believes that considering
the resources of plaintiff bank and the fact that the principal debtor, Maximo Sta. Maria,
had not contested the suit, an award of five (5%) per cent of the balance due on the
principal, exclusive of interests, i.e., a balance of P6,100.00 on the first cause of action
and a balance of P9,346.44 on the second cause of action, per the bank's statements
of August 20, 1963, (Exhs. Q-1 and BB-1, respectively) should be sufficient.

WHEREFORE, the judgment of the trial court against defendants-appellants Emeteria, Teofilo,
Quintin, Rosario and Leonila, all surnamed Sta. Maria is hereby reversed and set aside, with costs
in both instances against plaintiff. The judgment against defendant-appellant Valeriana Sta. Maria
is modified in that her liability is held to be joint and not solidary, and the award of attorney's fees is
reduced as set forth in the preceding paragraph, without costs in this instance.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-55138 September 28, 1984
ERNESTO V. RONQUILLO, petitioner,
vs.
HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents.
Gloria A. Fortun for petitioner.
Roselino Reyes Isler for respondents.
CUEVAS, J.:
This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals (now
the Intermediate Appellate Court) in CA-G.R. No. SP-10573, entitled "Ernesto V. Ronquillo versus
the Hon. Florellana Castro-Bartolome, etc." and the Order of said court dated August 20, 1980,
denying petitioner's motion for reconsideration of the above resolution.
Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the then
Court of First Instance of Rizal (now the Regional Trial Court), Branch XV filed by private
respondent Antonio P. So, on July 23, 1979, for the collection of the sum of P17,498.98 plus
attorney's fees and costs. The other defendants were Offshore Catertrade Inc., Johnny Tan and
Pilar Tan. The amount of P117,498.98 sought to be collected represents the value of the checks
issued by said defendants in payment for foodstuffs delivered to and received by them. The said
checks were dishonored by the drawee bank.
On December 13, 1979, the lower court rendered its Decision 1 based on the compromise
agreement submitted by the parties, the pertinent portion of which reads as follows:
1. Plaintiff agrees to reduce its total claim of P117,498-95 to only P11,000 .
00 and defendants agree to acknowledge the validity of such claim and
further bind themselves to initially pay out of the total indebtedness of
P10,000.00 the amount of P55,000.00 on or before December 24, 1979,
the balance of P55,000.00, defendants individually and jointly agree to pay
within a period of six months from January 1980, or before June 30, 1980;
(Emphasis supplied)
xxx xxx xxx
4. That both parties agree that failure on the part of either party to comply
with the foregoing terms and conditions, the innocent party will be entitled
to an execution of the decision based on this compromise agreement and
the defaulting party agrees and hold themselves to reimburse the innocent
party for attorney's fees, execution fees and other fees related with the
execution.
xxx xxx xxx
On December 26, 1979, herein private respondent (then plaintiff filed a Motion for Execution on the
ground that defendants failed to make the initial payment of P55,000.00 on or before December
24, 1979 as provided in the Decision. Said motion for execution was opposed by herein petitioner
(as one of the defendants) contending that his inability to make the payment was due to private
respondent's own act of making himself scarce and inaccessible on December 24, 1979. Petitioner
then prayed that private respondent be ordered to accept his payment in the amount of
P13,750.00. 2
During the hearing of the Motion for Execution and the Opposition thereto on January 16, 1980,
petitioner, as one of the four defendants, tendered the amount of P13,750.00, as his prorata share
in the P55,000.00 initial payment. Another defendant, Pilar P. Tan, offered to pay the same amount.
Because private respondent refused to accept their payments, demanding from them the full initial
installment of P 55,000.00, petitioner and Pilar Tan instead deposited the said amount with the
Clerk of Court. The amount deposited was subsequently withdrawn by private respondent. 3
On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution for
the balance of the initial amount payable, against the other two defendants, Offshore Catertrade
Inc. and Johnny Tan 4 who did not pay their shares.
On January 22, 1980, private respondent moved for the reconsideration and/or modification of the
aforesaid Order of execution and prayed instead for the "execution of the decision in its entirety
against all defendants, jointly and severally." 5 Petitioner opposed the said motion arguing that
under the decision of the lower court being executed which has already become final, the liability of
the four (4) defendants was not expressly declared to be solidary, consequently each defendant is
obliged to pay only his own pro-rata or 1/4 of the amount due and payable.
On March 17, 1980, the lower court issued an Order reading as follows:
 ORDER
Regardless of whatever the compromise agreement has intended the
payment whether jointly or individually, or jointly and severally, the fact is
that only P27,500.00 has been paid. There appears to be a non-payment in
accordance with the compromise agreement of the amount of P27,500.00
on or before December 24, 1979. The parties are reminded that the
payment is condition sine qua non to the lifting of the preliminary
attachment and the execution of an affidavit of desistance.
WHEREFORE, let writ of execution issue as prayed for
On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same was
set for hearing on March 25,1980.
Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the
satisfaction of the sum of P82,500.00 as against the properties of the defendants (including
petitioner), "singly or jointly hable." 6
On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's sale,
for the sale of certain furnitures and appliances found in petitioner's residence to satisfy the sum of
P82,500.00. The public sale was scheduled for April 2, 1980 at 10:00 a.m. 7
Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which was
set for hearing on March 25, 1980, was upon motion of private respondent reset to April 2, 1980 at
8:30 a.m. Realizing the actual threat to property rights poised by the re-setting of the hearing of s
motion for reconsideration for April 2, 1980 at 8:30 a.m. such that if his motion for reconsideration
would be denied he would have no more time to obtain a writ from the appellate court to stop the
scheduled public sale of his personal properties at 10:00 a.m. of the same day, April 2, 1980,
petitioner filed on March 26, 1980 a petition for certiorari and prohibition with the then Court of
Appeals (CA-G.R. No. SP-10573), praying at the same time for the issuance of a restraining order
to stop the public sale. He raised the question of the validity of the order of execution, the writ of
execution and the notice of public sale of his properties to satisfy fully the entire unpaid obligation
payable by all of the four (4) defendants, when the lower court's decision based on the
compromise agreement did not specifically state the liability of the four (4) defendants to be
solidary.
On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the scheduled
public sale in that same day did not proceed in view of the pendency of a certiorari proceeding
before the then Court of Appeals.
On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as
follows:
This Court, however, finds the present petition to have been filed
prematurely. The rule is that before a petition for certiorari can be brought
against an order of a lower court, all remedies available in that court must
first be exhausted. In the case at bar, herein petitioner filed a petition
without waiting for a resolution of the Court on the motion for
reconsideration, which could have been favorable to the petitioner. The fact
that the hearing of the motion for reconsideration had been reset on the
same day the public sale was to take place is of no moment since the
motion for reconsideration of the Order of March 17, 1980 having been
seasonably filed, the scheduled public sale should be suspended.
Moreover, when the defendants, including herein petitioner, defaulted in
their obligation based on the compromise agreement, private respondent
had become entitled to move for an execution of the decision based on the
said agreement.
WHEREFORE, the instant petition for certiorari and prohibition with
preliminary injunction is hereby denied due course. The restraining order
issued in our resolution dated April 9, 1980 is hereby lifted without
pronouncement as to costs.
SO ORDERED.
Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the lower
court had already denied the motion referred to and consequently, the legal issues being raised in
the petition were already "ripe" for determination. 8 The said motion was however denied by the
Court of Appeals in its Resolution dated August 20, 1980.
Hence, this petition for review, petitioner contending that the Court of Appeals erred in
(a) declaring as premature, and in denying due course to the petition to restrain implementation of
a writ of execution issued at variance with the final decision of the lower court filed barely four (4)
days before the scheduled public sale of the attached movable properties;
(b) denying reconsideration of the Resolution of June 30, 1980, which declared as premature the
filing of the petition, although there is proof on record that as of April 2, 1980, the motion referred to
was already denied by the lower court and there was no more motion pending therein;
(c) failing to resolve the legal issues raised in the petition and in not declaring the liabilities of the
defendants, under the final decision of the lower court, to be only joint;
(d) not holding the lower court's order of execution dated March 17, 1980, the writ of execution and
the notice of sheriff's sale, executing the lower court's decision against "all defendants, singly and
jointly", to be at variance with the lower court's final decision which did not provide for solidary
obligation; and
(e) not declaring as invalid and unlawful the threatened execution, as against the properties of
petitioner who had paid his pro-rata share of the adjudged obligation, of the total unpaid amount
payable by his joint co-defendants.
The foregoing assigned errors maybe synthesized into the more important issues of
1. Was the filing of a petition for certiorari before the then Court of Appeals against the Order of
Execution issued by the lower court, dated March 17, 1980, proper, despite the pendency of a
motion for reconsideration of the same questioned Order?
2. What is the nature of the liability of the defendants (including petitioner), was it merely joint, or
was it several or solidary?
Anent the first issue raised, suffice it to state that while as a general rule, a motion for
reconsideration should precede recourse to certiorari in order to give the trial court an opportunity
to correct the error that it may have committed, the said rule is not absolutes 9 and may be
dispensed with in instances where the filing of a motion for reconsideration would serve no useful
purpose, such as when the motion for reconsideration would raise the same point stated in the
motion 10 or where the error is patent for the order is void 11 or where the relief is extremely
urgent, as in cases where execution had already been ordered 12 where the issue raised is one
purely of law. 13
In the case at bar, the records show that not only was a writ of execution issued but petitioner's
properties were already scheduled to be sold at public auction on April 2, 1980 at 10:00 a.m. The
records likewise show that petitioner's motion for reconsideration of the questioned Order of
Execution was filed on March 17, 1980 and was set for hearing on March 25, 1980 at 8:30 a.m.,
but upon motion of private respondent, the hearing was reset to April 2, 1980 at 8:30 a.m., the very
same clay when petitioner's properties were to be sold at public auction. Needless to state that
under the circumstances, petitioner was faced with imminent danger of his properties being
immediately sold the moment his motion for reconsideration is denied. Plainly, urgency prompted
recourse to the Court of Appeals and the adequate and speedy remedy for petitioner under the
situation was to file a petition for certiorari with prayer for restraining order to stop the sale. For him
to wait until after the hearing of the motion for reconsideration on April 2, 1980 before taking
recourse to the appellate court may already be too late since without a restraining order, the public
sale can proceed at 10:00 that morning. In fact, the said motion was already denied by the lower
court in its order dated April 2, 1980 and were it not for the pendency of the petition with the Court
of Appeals and the restraining order issued thereafter, the public sale scheduled that very same
morning could have proceeded.
The other issue raised refers to the nature of the liability of petitioner, as one of the defendants in
Civil Case No. 33958, that is whether or not he is liable jointly or solidarily.
In this regard, Article 1207 and 1208 of the Civil Code provides
Art. 1207. The concurrence of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render, entire compliance
with the prestation. Then is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires
solidarity.
Art. 1208. If from the law,or the nature or the wording of the obligation to
which the preceding article refers the contrary does not appear, the credit
or debt shall be presumed to be divided into as many equal shares as there
are creditors and debtors, the credits or debts being considered distinct
from one another, subject to the Rules of Court governing the multiplicity of
quits.
The decision of the lower court based on the parties' compromise agreement, provides:
1. Plaintiff agrees to reduce its total claim of P117,498.95 to only
P110,000.00 and defendants agree to acknowledge the validity of such
claim and further bind themselves to initially pay out of the total
indebtedness of P110,000.00, the amount of P5,000.00 on or before
December 24, 1979, the balance of P55,000.00, defendants individually
and jointly agree to pay within a period of six months from January 1980 or
before June 30, 1980. (Emphasis supply)
Clearly then, by the express term of the compromise agreement and the decision based upon it,
the defendants obligated themselves to pay their obligation "individually and jointly".
The term "individually" has the same meaning as "collectively", "separately", "distinctively",
respectively or "severally". An agreement to be "individually liable" undoubtedly creates a several
obligation, 14 and a "several obligation is one by which one individual binds himself to perform the
whole obligation. 15
In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or separadamente or
in the promissory note is an express statement making each of the persons who signed
it individually liable for the payment of the fun amount of the obligation contained therein." Likewise
in Un Pak Leung vs. Negorra 17 We held that "in the absence of a finding of facts that the
defendants made themselves individually hable for the debt incurred they are each liable only for
one-half of said amount
The obligation in the case at bar being described as "individually and jointly", the same is therefore
enforceable against one of the numerous obligors.
IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby DISMISSED.
Cost against petitioner.
SO ORDERED.
Makasiar (Chairman), Abad Santos and Escolin, JJ., concur.
Aquino, J., concurs in the result.
Concepcion, Jr. and Guerrero, JJ., are on leave.

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.cralawnad
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."cralaw virtua1aw library
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:chanrob1es virtual 1aw library
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:chanrob1es virtual 1aw
library
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:red
Article 1212 of the Civil Code provides:chanrob1es virtual 1aw library
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."cralaw virtua1aw library
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.
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:chanrob1es virtual 1aw library
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.

Regarding the possibility that the private respondents might plead breach of contract Narvasa (Chairman), Gancayco, Grio-Aquino and Medialdea, JJ., concur.
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.

SECOND DIVISION
[G.R. No. 96405. June 26, 1996]
BALDOMERO INCIONG, JR., petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; DOES NOT SPECIFY THAT THE
WRITTEN AGREEMENT BE A PUBLIC INSTRUMENT.- Clearly, the rule does not specify
that the written agreement be a public document. What is required is that the agreement
be in writing as the rule is in fact founded on "long experience that written evidence is so
much more certain and accurate than that which rests in fleeting memory only, that it would
be unsafe, when parties have expressed the terms of their contract in writing, to admit
weaker evidence to control and vary the stronger and to show that the parties intended a
different contract from that expressed in the writing signed by them" [FRANCISCO, THE
RULES OF COURT OF THE PHILIPPINES, Vol. VII, Part I, 1990 ed., p. 179] Thus, for the
parol evidence rule to apply, a written contract need not be in any particular form, or be
signed by both parties. As a general rule, bills, notes and other instruments of a similar
nature are not subject to be varied or contradicted by parol or extrinsic evidence.
2. CIVIL LAW; OBLIGATIONS; SOLIDARY OR JOINT AND SEVERAL OBLIGATION,
DEFINED.- A solidary or joint and several obligation is one in which each debtor is liable for
the entire obligation, and each creditor is entitled to demand the whole
obligation. [TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, 1991 ed., p. 217]
Section 4, Chapter 3, Title 1, Book IV of the Civil Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the
same obligation, the presumption is that the obligation is joint so that each of the debtors is
liable only for the proportionate part of the debt. There is a solidary liability only when the
obligation expressly so states, when the law so provides or when the nature of the
obligation so requires. [Sesbreo v. Court of Appeals, G.R. No. 89252, May 24, 1993, 222
SCRA 466, 481.]
3. ID.; GUARANTY; GUARANTOR AS DISTINGUISHED FROM SOLIDARY DEBTOR.- While a
guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains: "A guarantor who binds
himself in solidum with the principal debtor under the provisions of the second paragraph
does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor, and a fiador in solidum (surety). The latter, outside of the
liability he assumes to pay the debt before the property of the principal debtor has been
exhausted, retains all the other rights, actions and benefits which pertain to him by reason
of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him
in Section 4, Chapter 3, Title 1, Book IV of the Civil Code." [Tolentino, Civil Code of the
Philippines, Vol. V, 1992 ed., p. 502]
APPEARANCES OF COUNSEL
Emilio G. Abrogena for petitioner.
Teogenes X. Velez for private respondent.
DECISION
ROMERO, J.:
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,defendantBALDOMEROL.INCIONG,JR.isadjudgedsolidarilyliableandorderedto
paytotheplaintiffPhilippineBankofCommunications,CagayandeOroCity,theamountofFIFTY
THOUSANDPESOS(P50,000.00),withinterestthereonfromMay5,1983at16%perannumuntilfully
paid;and6%perannumonthetotalamountdue,asliquidateddamagesorpenaltyfromMay5,1983until
fullypaid;plus10%ofthetotalamountdueforexpensesoflitigationandattorney'sfees;andtopaythe
costs.
Thecounterclaim,aswellasthecrossclaim,aredismissedforlackofmerit.
SOORDERED."
Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he
signed with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves
jointly and severally liable to private respondent Philippine Bank of Communications, Cagayan de
Oro City branch. The promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation. Consequently, on
November 14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding
payment thereof.[2] On December 11, 1984 private respondent also sent by registered mail a final
letter of demand to Rene C. Naybe. Since both obligors did not respond to the demands made,
private respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00
against the three obligors.
On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute
the case. However, on January 9, 1987, the lower court reconsidered the dismissal order and
required the sheriff to serve the summonses. On January 27, 1987, the lower court dismissed the
case against defendant Pantanosas as prayed for by the private respondent herein. Meanwhile,
only the summons addressed to petitioner was served as the sheriff learned that defendant Naybe
had gone to Saudi Arabia.
 In his answer, petitioner alleged that sometime in January 1983, he was approached by his
friend, Rudy Campos, who told him that he was a partner of Pio Tio, the branch manager of private
respondent in Cagayan de Oro City, in the falcata logs operation business. Campos also intimated
to him that Rene C. Naybe was interested in the business and would contribute a chainsaw to the
venture. He added that, although Naybe had no money to buy the equipment Pio Tio had assured
Naybe of the approval of a loan he would make with private respondent.Campos then persuaded
petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but with the
understanding that he would only be a co-maker for the loan of P5,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were brought to him
by Campos at his office. He affixed his signature thereto but in one copy, he indicated that he
bound himself only for the amount of P5,000.00. Thus, it was by trickery, fraud and
misrepresentation that he was made liable for the amount of P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten figure
"P50,000-" clearly appears directly below the admitted signature of the petitioner in the promissory
note.[3] Hence, the latter's uncorroborated testimony on his limited liability cannot prevail over the
presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court
added that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of
the promissory note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower
court held that even granting that said limited amount had actually been agreed upon, the same
would have been merely collateral between him and Naybe and, therefore, not binding upon the
private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a
labor consultant who was supposed to take due care of his concerns, and that, on the witness
stand, Pio Tio denied having participated in the alleged business venture although he knew for a
fact that the falcata logs operation was encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its decision of August
31, 1990, affirmed that of the lower court. His motion for reconsideration of the said decision
having been denied, he filed the instant petition for review on certiorari.
On February 6,1991, the Court denied the petition for failure of petitioner to comply with the
Rules of Court and paragraph 2 of Circular No. 1-88, and to sufficiently show that respondent court
had committed any reversible error in its questioned decision. [4] His motion for the reconsideration
of the denial of his petition was likewise denied with finality in the Resolution of April 24, 1991.
[5]
Thereafter, petitioner filed a motion for leave to file a second motion for reconsideration which, in
the Resolution of May 27, 1991, the Court denied. In the same Resolution, the Court ordered the
entry of judgment in this case.[6]
Unfazed, petitioner filed a motion for leave to file a motion for clarification. In the latter
motion, he asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in
compliance with Circular No. 1-88. Thus, on August 7,1991, the Court granted his prayer that his
petition be given due course and reinstated the same. [7]
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the
rendition of the decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and
petitioner's co-maker in the promissory note. It supports petitioner's allegation that they were
induced to sign the promissory note on the belief that it was only for P5,000.00, adding that it was
Campos who caused the amount of the loan to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the instant petition that
the Court of Appeals should have declared the promissory note null and void on the following
grounds: (a) the promissory note was signed in the office of Judge Pantanosas, outside the
premises of the bank; (b) the loan was incurred for the purpose of buying a second-hand chainsaw
which cost only P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan was
not approved by the board or credit committee which was the practice, at it exceeded P5,000.00;
(e) the loan had no collateral; (f) petitioner and Judge Pantanosas were not present at the time the
loan was released in contravention of the bank practice, and (g) notices of default are sent
simultaneously and separately but no notice was validly sent to him. [8] Finally, petitioner contends
that in signing the promissory note, his consent was vitiated by fraud as, contrary to their
agreement that the loan was only for the amount of P5,000. 00, the promissory note stated the
amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule
that this Court is not a trier of facts. Having lost the chance to fully ventilate his factual claims
below, petitioner may no longer be accorded the same opportunity in the absence of grave abuse
of discretion on the part of the court below. Had he presented Judge Pantanosas' affidavit before
the lower court, it would have strengthened his claim that the promissory note did not reflect the
correct amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a public
deed with the formalities prescribed by law but x x x a mere commercial paper which does not bear
the signature of x x x attesting witnesses," parol evidence may "overcome" the contents of the
promissory note.[9] The first paragraph of the parol evidence rule [10] states:
"Whenthetermsofanagreementhavebeenreducedtowriting,itisconsideredascontainingalltheterms
agreeduponandtherecanbe,betweenthepartiesandtheirsuccessorsininterest,noevidenceofsuchterms
otherthanthecontentsofthewrittenagreement."
Clearly, the rule does not specify that the written agreement be a public document.
What is required is that agreement be in writing as the rule is in fact founded on "long
experience that written evidence is so much more certain and accurate than that which rests in
fleeting memory only, that it would be unsafe, when parties have expressed the terms of their
contract in writing, to admit weaker evidence to control and vary the stronger and to show that the
parties intended a different contract from that expressed in the writing signed by them." [11] Thus, for
the parol evidence rule to apply, a written contract need not be in any particular form, or be signed
by both parties.[12] As a general rule, bills, notes and other instruments of a similar nature are not
subject to be varied or contradicted by parol or extrinsic evidence. [13]
By alleging fraud in his answer,[14] petitioner was actually in the right direction towards
proving that he and his co-makers agreed to a loan of P5,000.00 only considering that, where a
parol contemporaneous agreement was the inducing and moving cause of the written contract, it
may be shown by parol evidence. [15] However, fraud must be established by clear and convincing
evidence, mere preponderance of evidence, not even being adequate. [16] Petitioner's attempt to
prove fraud must, therefore, fail as it was evidenced only by his own uncorroborated and,
expectedly, self-serving testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the principal
debtor, and against Pantanosas, his co-maker, constituted a release of his obligation, especially
because the dismissal of the case against Pantanosas was upon the motion of private respondent
itself. He cites as basis for his argument, Article 2080 of the Civil Code which provides that:
"Theguarantors,eventhoughtheybesolidary,arereleasedfromtheirobligationwheneverbysomeactof WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the
thecreditor,theycannotbesubrogatedtotherights,mortgages,andpreferencesofthelatter." questioned decision of the Court of Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.
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 Regalado (Chairman), Puno, Mendoza, and Torres, Jr., JJ., concur.
states as follows:

"Ninetyone(91)daysafterdate,forvaluereceived,I/we,JOINTLYandSEVERALLYpromisetopayto
thePHILIPPINEBANKOFCOMMUNICATIONSatitsofficeintheCityofCagayandeOro,Philippines
thesumofFIFTYTHOUSANDONLY(P50,000.00)Pesos,PhilippineCurrency,togetherwithinterestxx
xattherateofSIXTEEN(16)percentperannumuntilfullypaid."

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:

"Byguarantyaperson,calledtheguarantor,bindshimselftothecreditortofulfilltheobligationofthe
principaldebtorincasethelattershouldfailtodoso.

Ifapersonbindshimselfsolidarilywiththeprincipaldebtor,theprovisionsofSection4,Chapter3,TitleI
ofthisBookshallbeobserved,Insuchacasethecontractiscalledasuretyship."(Italicssupplied.)

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:

"Aguarantorwhobindshimselfinsolidumwiththeprincipaldebtorundertheprovisionsofthesecond
paragraphdoesnotbecomeasolidarycodebtortoallintentsandpurposes.Thereisadifferencebetweena
solidarycodebtor,andafiadorinsolidum(surety).Thelater,outsideoftheliabilityheassumestopaythe
debtbeforethepropertyoftheprincipaldebtorhasbeenexhausted,retainsalltheotherrights,actionsand
benefitswhichpertaintohimbyreasonofthefiansa;whileasolidarycodebtorhasnootherrightsthan
thosebestoweduponhiminSection4,Chapter3,titleI,BookIVoftheCivilCode." [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 solidarity 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.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-32162 September 28, 1984
THE PASAY CITY GOVERNMENT, THE CITY MAYOR OF DEFENDANT PASAY CITY
GOVERNMENT, THE MEMBERS OF THE MUNICIPAL BOARD OF PASAY ClTY and THE CITY
TREASURER OF PASAY CITY GOVERNMENT, petitioners-appellants,
vs.
THE HONORABLE COURT OF FIRST INSTANCE OF MANILA, BRANCH X and VICENTE
DAVID ISIP (doing business under the firm name V.D. ISIP SONS &
ASSOCIATES), respondents-appellees.
Enrico R Castro for petitioners-appellants.
Lorenzo D. Fuggan and F. V. Castillo for respondents-appellees.
MAKASIAR, J., Chairman:
This is a petition for review on certiorari of the order rendered by the Court of First Instance of
Manila, Branch X, presided by Honorable Judge Jose L. Moya on July 23, 1969, the dispositive
portion of which is as follows:
WHEREFORE, the motions for reconsideration, dated July 21 and July 22,
1969, are denied and it is ordered once more that the writ of execution as
well as of garnishment already issued be enforced by taking possession of
the amount of P613,096.00 from the deposits of the Pasay City government
in the branch of the Philippine National Bank in Pasay City and delivering
them to the plaintiff.
SO ORDERED (p. 78, rec.).
on the ground, among others, that:
xxx xxx xxx
It is further argued that under the compromise, the plaintiff is required to
submit a performance bond upon the approval thereof and that he has not
yet done so. At the hearing of the motion of June 21, it was in the amount of
P60,000.00 which was thereafter increased to P100,000.00 to make it
equal to 20% of the cost of the next stage of the construction to be
undertaken by the plaintiff. This is a sufficient compliance. Since the work is
to be undertaken by stages, it would be unreasonable to compel the plaintiff
to submit a performance bond equal to the cost of the entire project, it not
being known when the City of Pasay shall have the funds for the
completion thereof and it claim it does not even have money to pay for the
phase of the work finished years ago. Besides, there is nothing in the
compromise which makes the submission of the bond a condition
precedent to the payment of P613,096.00 to the plaintiff (p. 76, rec.).
On August 12, 1964, respondent-appellee V.D. Isip, Sons & Associates represented by Vicente
David Isip entered into a contract with the City of Pasay represented by the then Mayor Pablo
Cuneta. The contract entitled "Contract and Agreement" was for the construction of a new Pasay
City Hall at F.B. Harrison St., Pasay City. Pertinent provision of the said contract is as follows:
xxx xxx xxx
Whereas one of the conditions set forth in the proposal is that the
Contractor shag start the construction of the Pasay City Hall Building as per
plans and specifications by stages advancing the necessary amount
needed for each stage of work and the Party of the First Part (Pasay City)
to reimburse the amount spent on the work accomplished by the Contractor
before proceeding on the next stage ... ...
xxx xxx xxx
2. That the work shall be done in stages to be determined by the City
Engineer considering structural and functional criteria and consistent with
funds immediately available for the purpose;
3. That the Contractor shall advance the necessary amount needed for
each stage of work; Provided that the Contractor, shall before starting each
 stage of work, inform the First Party in writing as to the amount necessary On March 12, 1969, the respondent Court approved the said Compromise Agreement including a
to be advanced by the former; ... ... Manifestation and Addendum thereto. Relevant provisions of the said compromise agreement are
as follows:

4. That the Party of the First Part shall reimburse the Contractor the cost of
the work completed as estimated by the City Engineer for back stage of 1. That the contract and agreement, Annex "A" here of dated August 12,
work before the Contractor proceed to the next stage; ... ... (pp. 33-34, 1964 ... is hereby formally confirmed and officially approved by the parties
rec.). hereto, subject to the following changes and/or modification only:

Pursuant to the aforesaid contract, the respondent-appellee proceeded with the construction of the xxx xxx xxx
new Pasay City Hall building as per duly approved plans and specifications. The respondent-
appellee accomplished under various stages of construction the amount of work (including
supplies and materials) equivalent to an estimated value of ONE MILLION SEVEN HUNDRED B. That immediately upon final approval hereof by
THIRTEEN THOUSAND NINETY-SIX PESOS (P1,713,096.00) of the total contract price of FOUR this Honorable Court, the plaintiff contractor will
MILLION NINE HUNDRED FOURTEEN THOUSAND FIVE HUNDRED 80/100 PESOS submit and file in favor of Pasay City Government
(P4,914,500.80). a new performance bond in the amount required by
pertinent law, rules and regulations, in proportion to
the remaining value or cost of the unfinished work of
The appellants paid only the total amount of ONE MILLION ONE HUNDRED THOUSAND PESOS the construction as per approved plans and
(P1,100,000.00) to the respondent-appellee leaving an amount of SIX HUNDRED THIRTEEN specification
THOUSAND NINETY SIX PESOS (P613,096.00) immediately due from the petitioner-appellants to
the respondent-appellee.
xxx xxx xxx

Notwithstanding demands for payment thereof, the petitioner-appellants failed to remit the
aforesaid amount of P613,096.00 to the respondent-appellee. D. That if and when warranted by the finances and
income of the Pasay City Government and subject
to the pertinent and applicable government auditing
On May 16, 1968, respondent appellee filed an action for specific performance with damages and accounting rules and procedure, the plaintiff
against herein petitioners-appellants before the respondent Court. contractor shall without delay finish and complete
the construction as per attached plans and
specifications ... within a period of one (1) year from
On May 23, 1968, the appellants filed a motion for the amendment of the complaint and for bin of the date of final approval of this compromise
particulars (p. 9, Appellant's Brief; p. 159, rec.). This was denied by the respondent Court. The agreement by this Honorable Court, provided,
appellants later filed a motion for reconsideration. This was likewise denied. On August 10, 1968, however that in any case or event the construction
the appellants filed their answer. herein contemplated shall not extend beyond one
and a half (1 1/2) years from the date of the final
approval hereof by this Honorable Court;
The parties arrived at a draft of amicable agreement which was submitted to the Municipal Board
of Pasay City for its consideration. Protracted pre-trial hearings and conferences were held where
the respondent Court suggested and advised that "under the principle of quantum meruit, the xxx xxx xxx
plaintiff is forthwith entitled to at least that which is due to him for defendants under the contract
and that public interest must perforce require the continuity of construction of a public work project,
instead of delaying its immediate completion by litigating upon technical grounds which would 2. That within a reasonable period of time, at least ninety (90) days from the
undoubtedly redound to public detriment (p. 40, rec.). final approval of this Compromise Agreement by this Honorable Court, the
defendant Pasay City Government shall pay and remit the amount of SIX
HUNDRED THIRTEEN THOUSAND NINETY-SIX PESOS (P613,096.00) ...
On February 25, 1969, the Municipal Board of Pasay enacted Ordinance No. 1012 which approved to the plaintiff contractor, who, in turn, immediately upon receipt thereof,
the Compromise Agreement and also authorized and empowered the incumbent City Mayor Jovito shall be bound and obliged to commence and start the construction work
Claudio to represent the appellant Pasay City Government, subject to the final approval of the corresponding to the next stage thereof;
respondent Court herein.

3. That within a similar period, the defendant Pasay City Government shall
pay and remit to plaintiff contractor an amount equivalent to three (3%) per
 cent of the above mentioned amount of SIX HUNDRED THIRTEEN
THOUSAND NINETY-SIX PESOS (P613,096.00), for and as adverse
attorney's fees in this case;
4. That any and all other of plaintiff contractor in its complaint relative to and
arising out of the contract, Annex "A" hereof, are hereby waived and
relinquished and the case against the defendants City Mayor, Jovito 0.
Claudio, City Treasurer and Members of the Municipal Board of Pasay City,
either in their official or personal capacities, are hereby likewise waived,
relinquished and dismissed with prejudice;
5. That any willful, gross, deliberate and wanton violation and/or avoidance
of the terms and conditions of this Compromise Agreement by either of the
parties herein shall, with due notice, forthwith entitle the aggrieved party to
an immediate execution hereof and to the necessary and corresponding
reliefs and remedies therefor (pp. 43-46, rec.).
On April 10, 1969, the appellants filed an urgent motion seeking a declaration of legality of the
original contract and agreement dated August 4, 1964 from the respondent Court. On May 10,
1969, the respondent Court issued an order declaring that the original contract is legal and valid (p.
59, rec.).
On June 21, 1969, at the instance of the appellee, the respondent Court granted an order of
execution pursuant to which a writ of execution dated June 25, 1969 was issued.
On July 9, 1969, an application for and notice of garnishment were made and effected upon the
funds of appellant Pasay City Government with the Philippine National Bank (p. 61, rec.).
On July 11, 1969, the appellant filed an urgent motion to set aside the respondent Court's order of
June 21, 1969 and to quash the writ of execution issued pursuant thereto upon the following
grounds: 1) that the execution sought was then still premature, the period of 90 days stipulated not
having elapsed as yet; 2) that the obligations of the parties under the Compromise Agreement
were reciprocal and the appellee not having put up a new performance bond in the sufficient
amount equivalent to 20% of the remaining cost of construction as per agreement, the appellants
cannot be obliged to pay the sum due appellee as yet; 3) that the Sheriff has no power or authority
to levy or garnish on execution the general funds, especially more so, the trust funds of the
defendant Pasay City (pp. 6366, rec.).
On July 19, 1969, the respondent Court issued an order stating that inasmuch as the defendant
has not yet paid the plaintiff as of this date then "the writ of execution and of garnishment are
declared to be again in full force and effect ..." (p. 67, rec.).
On July 22, 1969, the appellants filed a motion for reconsideration on three grounds, to wit:
1. That the same is not supported by the facts and pertinent law, rule and
regulation on the matter;
2. That the funds of the defendant Pasay City Government which were
garnished by the City Sheriff are by law exempt from execution and/or
garnishment; and
3. That plaintiff's claim may not as yet be enforceable by ex- execution" (pp.
68-71, rec.).
On July 22, 1969, the respondent Court denied and rejected the appellants' motion for
reconsideration. The respondent Court ordered the enforcement of the garnishment already issued
to the City Sheriff for Pasay by taking possession of the amount of P613,096.00 from the deposits
of appellant Pasay City Government with the Philippine National Bank, Pasay City Branch and
delivering the same to the plaintiff.
On July 23, 1969, the respondent Court issued an order, the pertinent provision of which is now
being questioned by the appellants in this petition for review on certiorari, to wit:
It is further argued that under the compromise, the plaintiff is required to
submit a performance bond upon the approval thereof and that he has not
yet done so. At the hearing of the motion of June 21, it was shown that the
plaintiff has submitted a performance bond in the amount of P60,000.00
which was thereafter increased to P100,000.00 to make it equal to 20% of
the cost of the next stage of the construction to be undertaken by the
plaintiff. This is a sufficient compliance. Since the work is to be undertaken
by stages, it would be unreasonable to compel the plaintiff to submit a
performance bond equal to the cost of the entire project, it not being known
when the City of Pasay shall have the funds for the completion thereof and
it claims it does not even have money to pay for the phase of the work
finished years ago. Besides, there is nothing in the compromise which
makes the submission of the bond a condition precedent to the payment of
P613,096.00 to the plaintiff (p. 76, rec.).
On July 23, 1969, the appellants Med their notice of appeal from the orders of the respondent
Court dated June 21, July 19 and July 23, 1969 (p. 2, rec.).
On July 24, 1969, the appellants filed their manifestation and petition to suspend the writ of
execution and garnishment (pp. 80-82, rec.).
On July 25, 1969, the appellants filed their manifestation and withdrawal of notice of appeal On
July 28, 1969, the respondent Court approved said withdrawal (p. 85, rec.).
On August 22, 1969, the appellants filed an amended notice of appeal (pp. 86-87, rec.) and a
record on appeal which were duly approved as per order of the respondent Court dated January 7,
1970 and a notice of transmittal dated May 29, 1970 (p. 89, rec.).
On October 23, 1969, the plaintiff, Vicente David Isip, in the original complaint for specific
performance filed an urgent motion for permit to serve a supplemental complaint seeking
rescission of the original contract titled Contract and Agreement and of the Compromise
Agreement and claiming damages in the sum of P672,653.91 alleging the violations of the
defendants specially the Pasay City Government in complying with its obligations incumbent upon
it in the compromise agreement and in view of the rights granted to the plaintiff in paragraph 5 of
the resolutory clause of the compromise agreement.
On June 5, 1970, the Supreme Court resolved to require the petitioner-appellants to file a petition
for review on certiorari (p. 6, rec.).
On June 29, 1970, the defendants filed their cautionary answer to the supplemental complaint
alleging that the Court has no jurisdiction over the subject of the present supplemental complaint;
that the cause of action is already barred by prior judgment; that the principle of res
judicata applies; that plaintiff's supplemental complaint states no cause of action and that the
present claim of plaintiff has been paid, waived, abandoned and extinguished.
On July 14, 1970, the appellants filed their petition for review on certiorari (pp. 11-24, rec.). This
was denied for lack of merit by the Supreme Court.
On August 14, 1970, the respondent Court set for pre-trial the supplemental complaint.
On October 16, 1970, the Supreme Court granted the petitioner's motion for reconsideration and
their petition for review on certiorari was given due course (p. 102, rec.).
On July 21, 1971, the appellees filed their brief praying that the petition for review on certiorari be
dismissed since the issues involved in the supplemental complaint are prejudicial to the present
petition for review (p. 179, rec.). On December 6, 1971, the appellants filed their manifestation and
petition alleging that the supplemental complaint is not prejudicial to the present petition for review
(p. 199-201, rec.).
The two purposes of a compromise agreement are enunciated in Article 2028 of the New Civil
Code, to wit:
A. 2028. A compromise is a contract where by the parties,by making
reciprocal concessions, avoid a litigation or put an end to one already
commenced.
The first purpose "to avoid a litigation" occurs when there is a threat of an impending
litigation. At this point, no case has yet reached the courts. The moment a case has been filed in
court then the second purpose "to put an end to one already commenced" applies.
In the herein case, We are concerned with the second purpose. The latter purpose is given effect
in Article 2037 of the New Civil Code which reads:
Article 2037. A compromise has upon the parties the effect and authority
of res judicata; but there shall be no execution except in compliance with a
judicial compromise.
A compromise agreement not contrary to law, public order, public policy, morals or good customs is
a valid contract which is the law between the parties themselves (Municipal Board of Cabanatuan
City vs. Samahang Magsasaka, Inc., 62 SCRA 435). A judgment on a compromise is a final and
executory (Samonte vs. Samonte, 64 SCRA 524). It is immediately executory (Pamintuan vs.
Muos et al., L-26331, 22 SCRA 1109 [March 15, 1968]) in the absence of a motion to set the
same aside on the ground of fraud, mistake or duress (Cadano vs. Cadano L-34998, 49 SCRA 33
[January 11, 1973]).
In fact in the herein case before Us, execution has already been issued. Considering this in the
light of Article 2041 of the New Civil Code, to wit:
Art. 2041. If one of the parties fails or refuses to abide by the compromise,
the other party may either enforce the compromise or regard it as rescinded
and insist upon his original demand.,
it is obvious that the respondent-appellee did not only succeed in enforcing the compromise but
said plaintiff-appellee likewise wants to rescind the said compromise. It is clear from the language
of the law, specifically Article 2041 of the New Civil Code that one of the parties to a compromise
has two options: 1) to enforce the compromise; or 2) to rescind the same and insist upon his
original demand. The respondent-appellee in the case herein before Us wants to avail of both of
these options. This can not be done. The respondent-appellee cannot ask for rescission of the
compromise agreement after it has already enjoyed the first option of enforcing the compromise by
asking for a writ of execution resulting thereby in the garnishment of the Pasay City funds
deposited with the Philippine National Bank which eventually was delivered to the respondent-
appellee.
Upon the issuance of the writ of execution, the petitioner-appellants moved for its quashal alleging
among other things the exemption of the government from execution. This move on the part of the
petitioner-appellant is at first glance laudable for "all government funds deposited with the
Philippine National Bank by any agency or instrumentality of the government, whether by way of
general or special deposit, remain government funds and may not be subject to garnishment or
levy (Commissioner of Public Highways vs. San Diego, L-30098, 31 SCRA 616 [Feb. 18, 1970]).
But, inasmuch as an ordinance has already been enacted expressly appropriating the amount of
P613,096.00 of payment to the respondent-appellee, then the herein case is covered by the
exception to the general nile stated in the case of Republic vs. Palacio (L-20322, 23 SCRA 899
[May 29,1968]), to wit:
Judgments against a State in cases where it has consented to be sued,
generally operate merely to liquidate and establish plaintiff's claim in the
absence of express provision; otherwise they cannot be enforced by
processes of the law; and it is for the legislature to provide for the payment
in such manner as it sees fit.
Hence, the respondent Court was correct in refusing to quash the writ of execution it has issued.
Having established that the compromise agreement was final and immediately executory, and in
fact was already enforced, the respondent Court was in error when it still entertained the
supplemental complaint filed by the respondent-appellee for by then the respondent Court had no
more jurisdiction over the subject matter. When a decision has become final and executory, the
court no longer has the power and jurisdiction to alter, amend or revoke, and its only power thereof
is to order its execution (Ocampo vs. Caluag, L-21113, 19 SCRA 791 [April 27, 1967]).
After the perfection of an appeal, the trial court loses jurisdiction over its judgment and cannot
vacate the same Alama vs. Abbas, L-19616, 18 SCRA 679 [Nov. 29, 1966]; Commissioner of
Immigration vs. Romero, L-19782, 10 SCRA 216 [Jan. 31, 1964]; Valdez vs. CFI, etc., L-3366 [April
27, 1951] cited in Cabungcal vs. Fernandez, L-16520, 10 SCRA 731 [April 30, 1964]; Government
vs. Mendoza, 51 Phil. 403; Ayllon vs. Siojo, 26 Phil. 195).
Moreover, supplemental pleadings are meant to supply deficiencies in aid of original pleading, not
to entirely substitute the latter (British Traders' Insurance Co., Ltd. vs. Commissioner of Internal
Revenue, L-20501, 13 SCRA 719, 728 [April 30, 1965]). Here, the respondent-appellee originally
asked for specific performance which was later settled through a compromise agreement. After
this, the respondent-appellee asked for rescission of both the contract and agreement and the
compromise agreement using a supplemental complaint. It is clear that the supplemental complaint
We have before Us is not only to "supply deficiencies in aid of original pleading but is also meant
as an entirely new "substitute" to the latter. A supplemental complaint must be consistent with and
in aid of, the cause of action set forth in the original complaint and a new and independent cause
of action cannot be set up by such complaint (Bishop vs. Taylor, 210 App. Div. 1, 205 NVS 653),
especially where judgment has already been obtained by him in the original action (Anadarko First
National Bank vs. Anadarko First National Bank, 39 0kl. 225, 134 Phil. 866).
WE find no error in the order of the respondent Court dated July 23, 1969. From the reading of the
premises and provisions of the contract and agreement which was "formally confirmed and
officially approved by the parties" in the compromise agreement later entered into by the same
parties, subject only to the enumerated changes and/or modifications, it is obvious that the
contracting parties envisioned a stage by stage construction (on the part of the respondent-
appellee) and payment (on the part of the defendant-appellant). This is manifested in the contract
and agreement, to quote:
xxx xxx xxx
WHEREAS, one of the conditions set forth in the proposal is that the
Contractor shag start the construction of the Pasay City Hall building as per
plans and specifications by stages advancing the necessary amount
needed for each stage of work and the Party of the First Part to reimburse
the amount spent on the work accomplished by the Contractor before
proceeding on the next stage; Provided, the First Party shall supply the
cement needed;
xxx xxx xxx
2. That the work shall be done in stages to be determined by the City
Engineer considering structural and functional criteria and consistent with
funds immediately available for the purpose;
3. That the Contractor shall advance the necessary amount needed for
each stage of work; Provided that the Contractor shalt before starting each
stage of work, inform the First Party in writing as to the amount necessary
to be advanced by the former; ...
4. That the Party of the First Part shall reimburse the Contractor the cost of
the work completed as estimated by the City Engineer for each stage of
work before the Contractor proceed to the next stage; (pp. 33-34, rec.).
And sub-paragraph H of paragraph 1 and paragraph 2 of the compromise agreement also
reiterated the stage by stage construction and payment as follows:
H. That detailed, separate reports on the progress of the construction work
during each stage shall regularly be submitted to the City Enginer and the
City Mayor;
xxx xxx xxx
2. That within a reasonable period ,at least ninety(90) days from the final
approval of this Compromise Agreement by this Honorable Court, the
defendant Pasay City Government shall pay and remit the amount of SIX
HUNDRED THIRTEEN THOUSAND NINETY-SIX PESOS (P
613,096.00) ... ... to the plaintiff contractor, who, in turn, immediately upon
receipt thereof, shall be bound and obliged to commence and start the
construction work corresponding to the next stage thereof; ... ... (p. 45,
rec.).
Sub-paragraph B of paragraph 1 of the Compromise Agreement, to wit:
B. That immediately upon final approval hereof by this Honorable Court, the
plaintiff contractor will submit and file in favor of Pasay City Government
a new performance bond in the amount required by pertinent law, rules and
regulations, in proportion to the regular value or cost of the unfinished work
of the construction as per approved plans and specifications ... (p. 4, rec.),
read together with the stage-by-stage construction and payment approach, would inevitably lead to
the conclusion that the parties to the compromise contemplated a divisible obligation necessitating
therefore a performance bond "in proportion to" the uncompleted work.
What is crucial in sub-paragraph B of paragraph 1 of the compromise agreement are the words "in
proportion." If the parties really intended the legal rate of 20% performance bond to refer to the
whole unfinished work, then the provision should have required the plaintiff contractor to submit
and file a new performance bond to cover the remaining value cost of the unfinished work of the
construction. Using the words in proportion then significantly changed the meaning of the
paragraph to ultimately mean a performance bond equal to 20% of the next stage of work to be
done.
And, We note that in the Contract and Agreement, the respondent-appellee was allowed to file a NINETY SIX PESOS (P613,096.00), for and as adverse attorney's fees in
performance bond of P222,250.00 which is but 5% of the total bid of P4,914,500.80. A security this case; ... (p. 45, rec.).
bond was likewise filed with an amount of P97,290.00. The sum total of bond then filed was
P320,540.00 which is just 6.5% of the total Ibid. It is rather curious why all of a sudden the
petitioners-appellants are insisting on a 20% performance bond of the entire unfinished work when WE hereby grant the amount of P 18,392.78 which is 3% of P613,096.00 as attorney's fees in
they were quite content with a bond just 5% of the entire work. For Us to allow the petitioners- favor of the respondent-appellee.
appellants to adamantly stick to the 20% performance bond would be tantamount to allowing them
to evade their obligation in the compromise agreement. This cannot be allowed. The bond of a
WHEREFORE, THE ORDER OF THE RESPONDENT COURT DATED JULY 23, 1969 IS
contractor for a public work should not be extended beyond the reasonable intent as gathered from
HEREBY AFFIRMED AND THE PETITIONERS-APPELLANTS ARE HEREBY DIRECTED TO PAY
the purpose and language of the instrument construed in connection with the proposals, plans and
ATTORNEY'S FEES IN THE AMOUNT OF EIGHTEEN THOUSAND THREE HUNDRED NINETY-
specifications, and contract (John L. Roper Lumber Co. vs. Lawson, 195 NC 840, 143 SE 847,67
TWO AND 78/100 (P18,392.78) PESOS. COSTS AGAINST PETITIONERS-APPELLANTS.
ALR 984).

SO ORDERED.
The premium of the bond will be sizeable and will eat up the profit of the contractor, who is faced
with the fluctuation of prices of materials due to inflation and devaluation. Right now, many
contractors cannot proceed with the implementation of their contracts because of the extraordinary Abad Santos, Escolin and Cuevas, JJ., concur.
rise in cost of materials and labor. No contractor would be willing to bid for public works contracts
under the oppressive interpretation by petitioners-appellants.
Aquino, J., concurs in the result.

Again, the respondent Court was correct in ruling that the submission of the bond was not a
condition precedent to the payment of P613,096.00 to the plaintiff. Nowhere in the Contract and Concepcion, Jr. and Guerrero, JJ., are on leave.
Agreement nor in the Compromise Agreement could be found the fact that payment by the
petitioners- appellants of the amount of P613,096.00 was dependent upon the submission by the
respondent-appellee of the performance bond. It cannot be argued that reciprocal obligation was
created in the Compromise Agreement, for the obligation to pay on the part of the petitioners-
appellants was established several years ago when the respondent-appellee finished some of the
stages of construction. And, this argument is already moot and academic, for the amount of
P613,096.00 has already been collected through execution and garnishment upon the funds of
Pasay City with the Philippine National Bank.

Inasmuch as the parties in the herein case have agreed in the Compromise Agreement, to wit:

3. That within a similar period the defendant Pasay City Government shall
pay and remit to plaintiff contractor an amount equivalent to three (3%)
percent of the above mentioned amount of SIX HUNDRED THIRTEEN