G.R. No.

191555 January 20, 2014

UNION BANK OF THE PHILIPPINES, Petitioner,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on Certiorari are the Decision
1 2

dated November 3, 2009 and Resolution dated February 26, 2010 of

3

the Court of Appeals (CA) in CA-G.R. SP No. 93833 which affirmed

the Orders dated November 9, 2005 and January 30, 2006 of the
4

Regional Trial Court of Makati, Branch 58 (RTC) in Civil Case No.

5

7648 denying the motion to affirm legal compensation filed by 6

petitioner Union Bank of the Philippines (Union Bank) against

respondent Development Bank of the Philippines (DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union
Banks predecessor-in-interest, Bancom Development Corporation
(Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of
Cession of Property In Payment of Debt (dacion en pago) whereby
7

the former ceded in favor of the latter certain properties (including a

processing plant in Marilao, Bulacan [processing plant]) in
consideration of the following: (a) the full and complete satisfaction of
FIs loan obligations to DBP; and (b) the direct assumption by DBP of
FIs obligations to Bancom in the amount of P17,000,000.00
(assumed obligations). 8

On the same day, DBP, as the new owner of the processing plant,
leased back for 20 years the said property to FI (Lease Agreement)
9

which was, in turn, obliged to pay monthly rentals to be shared by

DBP and Bancom.
DBP also entered into a separate agreement with Bancom
10

(Assumption Agreement) whereby the former: (a) confirmed its

assumption of FIs obligations to Bancom; and (b) undertook to remit
up to 30% of any and all rentals due from FI to Bancom (subject
rentals) which would serve as payment of the assumed obligations, to
be paid in monthly installments. The pertinent portions of the
Assumption Agreement reads as follows:
WHEREAS, DBP has agreed and firmly committed in favor of
Bancom that the above obligations to Bancom which DBP has
assumed shall be settled, paid and/or liquidated by DBP out of a
portion of the lease rentals or part of the proceeds of sale of those
properties of the Assignors conveyed to DBP pursuant to the [Deed of
Cession of Property in Payment of Debt dated May 21, 1979] and
which are the subject of [the Lease Agreement] made and executed
by and between DBP and [FI], the last hereafter referred to as the
"Lessee" to be effective as of July 31, 1978.
xxxx
4. DBP hereby covenants and undertakes that the amount up to 30%
of any and all rentals due from the Lessee pursuant to the Lease
Agreement shall be remitted by DBP to Bancom at the latters offices
at Pasay Road, Makati, Metro Manila within five (5) days from due
dates thereof, and applied in payment of the Assumed Obligations.
Likewise, the amount up to 30% of the proceeds from any sale of the
Leased Properties shall within the same period above, be remitted by
DBP to Bancom and applied in payment or prepayment of the
Assumed Obligations. x x x.
Any balance of the Assumed Obligations after application of the entire
rentals and or the entire sales proceeds actually received by Bancom
on the Leased Properties shall be paid by DBP to Bancom not later
than December 29, 1998. (Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under
the Lease Agreement to Foodmasters Worldwide, Inc. (FW); while 11

on May 9, 1984, Bancom conveyed all its receivables, including,

among others, DBPs assumed obligations, to Union Bank. 12

Claiming that the subject rentals have not been duly remitted despite
its repeated demands, Union Bank filed, on June 20, 1984, a
collection case against DBP before the RTC, docketed as Civil Case
No. 7648. In opposition, DBP countered, among others, that the
13

obligations it assumed were payable only out of the rental payments

made by FI. Thus, since FI had yet to pay the same, DBPs obligation
to Union Bank had not arisen. In addition, DBP sought to implead
14

FW as third party-defendant in its capacity as FIs assignee and, thus,

should be held liable to Union Bank. 15

In the interim, or on May 6, 1988, DBP filed a motion to dismiss on

the ground that it had ceased to be a real-party-in-interest due to the
supervening transfer of its rights, title and interests over the subject
matter to the Asset Privatization Trust (APT). Said motion was,
however, denied by the RTC in an Order dated May 27, 1988. 16

The RTC Ruling in Civil Case No. 7648

Finding the complaint to be meritorious, the RTC, in a Decision 17
dated May 8, 1990, ordered: (a) DBP to pay Union Bank the sum of
P4,019,033.59, representing the amount of the subject rentals (which,
again, constitutes 30% of FIs [now FWs] total rental debt), including
interest until fully paid; and (b) FW, as third-party defendant, to
indemnify DBP, as third- party plaintiff, for its payments of the subject
rentals to Union Bank. It ruled that there lies no evidence which would
show that DBPs receipt of the rental payments from FW is a
condition precedent to the formers obligation to remit the subject
rentals under the Lease Agreement. Thus, when DBP failed to remit
the subject rentals to Union Bank, it defaulted on its assumed
obligations. DBP then elevated the case on appeal before the CA,
18

docketed as CA-G.R. CV No. 35866.

The CA Ruling in CA-G.R. CV No. 35866
In a Decision dated May 27, 1994 (May 27, 1994 Decision), the CA
19

set aside the RTCs ruling, and consequently ordered: (a) FW to pay
DBP the amount of P32,441,401.85 representing the total rental debt
incurred under the Lease Agreement, including P10,000.00 as
attorneys fees; and (b) DBP, after having been paid by FW its unpaid
rentals, to remit 30% thereof (i.e., the subject rentals) to Union Bank.
20

It rejected Union Banks claim that DBP has the direct obligation to
remit the subject rentals not only from FWs rental payments but also
out of its own resources since said claim contravened the "plain
meaning" of the Assumption Agreement which specifies that the
payment of the assumed obligations shall be made "out of the portion
of the lease rentals or part of the proceeds of the sale of those
properties of [FI] conveyed to DBP." It also construed the phrase
21

under the Assumption Agreement that DBP is obligated to "pay any

balance of the Assumed Obligations after application of the entire
rentals and/or the entire sales proceeds actually received by [Union
Bank] on the Leased Properties . . . not later than December 29,
1998" to mean that the lease rentals must first be applied to the
payment of the assumed obligations in the amount of
P17,000,000.00, and that DBP would have to pay out of its own
money only in case the lease rentals were insufficient, having only
until December 29, 1998 to do so. Nevertheless, the monthly
installments in satisfaction of the assumed obligations would still have
to be first sourced from said lease rentals as stipulated in the
assumption agreement. In view of the foregoing, the CA ruled that
22

DBP did not default in its obligations to remit the subject rentals to
Union Bank precisely because it had yet to receive the rental
payments of FW. 23

Separately, the CA upheld the RTCs denial of DBPs motion to

dismiss for the reason that the transfer of its rights, title and interests
over the subject matter to the APT occurred pendente lite, and, as
such, the substitution of parties is largely discretionary on the part of
the court.
At odds with the CAs ruling, Union Bank and DBP filed separate
petitions for review on certiorari before the Court, respectively
docketed as G.R. Nos. 115963 and 119112, which were thereafter
consolidated.
The Courts Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution dated December 13,
24

1995. First, it upheld the CAs finding that while DBP directly assumed
FIs obligations to Union Bank, DBP was only obliged to remit to the
latter 30% of the lease rentals collected from FW, from which any
deficiency was to be settled by DBP not later than December 29,
1998. Similarly, the Court agreed with the CA that the denial of
25

DBPs motion to dismiss was proper since substitution of parties, in

case of transfers pendente lite, is merely discretionary on the part of
the court, adding further that the proposed substitution of APT will
amount to a novation of debtor which cannot be done without the
consent of the creditor.26

On August 2, 2000, the Courts resolution became final and

executory. 27

The RTC Execution Proceedings

On May 16, 2001, Union Bank filed a motion for execution before the
28

RTC, praying that DBP be directed to pay the amount of

P9,732,420.555 which represents the amount of the subject rentals
(i.e., 30% of the FWs total rental debt in the amount of
P32,441,401.85). DBP opposed Union Banks motion, contending
29

that it sought to effectively vary the dispositive portion of the CAs

May 27, 1994 Decision in CA-G.R. CV No. 35866. Also, on
September 12, 2001, DBP filed its own motion for execution against
FW, citing the same CA decision as its basis.
In a Consolidated Order dated October 15, 2001 (Order of
30

Execution), the RTC granted both motions for execution. Anent Union
Banks motion, the RTC opined that the CAs ruling that DBPs
payment to Union Bank shall be demandable only upon payment of
FW must be viewed in light of the date when the same was rendered.
It noted that the CA decision was promulgated only on May 27, 1994,
which was before the December 29, 1998 due date within which DBP
had to fully pay its obligation to Union Bank under the Assumption
Agreement. Since the latter period had already lapsed, "[i]t would,
thus, be too strained to argue that payment by DBP of its assumed
obligation[s] shall be dependent on [FWs] ability, if not availability, to
pay." In similar regard, the RTC granted DBPs motion for execution
31

against FW since its liability to Union Bank and DBP remained

undisputed.
As a result, a writ of execution dated October 15, 2001 (October 15,
32

2001 Writ of Execution) and, thereafter, a notice of garnishment 33

against DBP were issued. Records, however, do not show that the
same writ was implemented against FW.
DBP filed a motion for reconsideration from the Execution Order,
34

averring that the latter issuance varied the import of the CAs May 27,
1994 Decision in CA-G.R. CV No. 35866 in that it prematurely
ordered DBP to pay the assumed obligations to Union Bank before
FWs payment. The motion was, however, denied on December 5,
2001. Thus, DBPs deposits were eventually garnished. Aggrieved,
35 36

DBP filed a petition for certiorari before the CA, docketed as CA-
37

G.R. SP No. 68300.

The CA Ruling in CA-G.R. SP No. 68300
In a Decision dated July 26, 2002, the CA dismissed DBPs petition,
38

finding that the RTC did not abuse its discretion when it issued the
October 15, 2001 Writ of Execution. It upheld the RTCs observation
that there was "nothing wrong in the manner how [said writ] was
implemented," as well as "in the zealousness and promptitude
exhibited by Union Bank" in moving for the same. DBP appealed the
CAs ruling before the Court, which was docketed as G.R. No.
155838.
The Courts Ruling in G.R. No. 155838
In a Decision dated January 13, 2004 (January 13, 2004 Decision),
39

the Court granted DBPs appeal, and thereby reversed and set aside
the CAs ruling in CA-G.R. SP No. 68300. It found significant points of
variance between the CAs May 27, 1994 Decision in CA-G.R. CV
No. 35866, and the RTCs Order of Execution/October 15, 2001 Writ
of Execution. It ruled that both the body and the dispositive portion of
the same decision acknowledged that DBPs obligation to Union Bank
for remittance of the lease payments is contingent on FWs prior
payment to DBP, and that any deficiency DBP had to pay by
December 29, 1998 as per the Assumption Agreement cannot be
determined until after the satisfaction of FWs own rental obligations
to DBP. Accordingly, the Court: (a) nullified the October 15, 2001 Writ
of Execution and all related issuances thereto; and (b) ordered Union
Bank to return to DBP the amounts it received pursuant to the said
writ. Dissatisfied, Union Bank moved for reconsideration which was,
40

however, denied by the Court in a Resolution dated March 24, 2004

with finality. Thus, the January 13, 2004 Decision attained finality on
April 30, 2004. Thereafter, DBP moved for the execution of the said
41

decision before the RTC. After numerous efforts on the part of Union
Bank proved futile, the RTC issued a writ of execution (September 6,
2005 Writ of Execution), ordering Union Bank to return to DBP all
funds it received pursuant to the October 15, 2001 Writ of Execution. 42

Union Banks Motion to Affirm Legal Compensation

On September 13, 2005, Union Bank filed a Manifestation and Motion
to Affirm Legal Compensation, praying that the RTC apply legal
43

compensation between itself and DBP in order to offset the return of

the funds it previously received from DBP. Union Bank anchored its
motion on two grounds which were allegedly not in existence prior to
or during trial, namely: (a) on December 29, 1998, DBPs assumed
obligations became due and demandable; and (b) considering that
44

FWI became non-operational and non-existent, DBP became

primarily liable to the balance of its assumed obligation, which as of
Union Banks computation after its claimed set-off, amounted to
P1,849,391.87. 45

On November 9, 2005, the RTC issued an Order denying the above-

46

mentioned motion for lack of merit, holding that Union Banks stated
grounds were already addressed by the Court in the January 13,
2004 Decision in G.R. No. 155838. With Union Banks motion for
reconsideration therefrom having been denied, it filed a petition for
certiorari with the CA, docketed as CA-G.R. SP No. 93833.
47

Pending resolution, Union Bank issued Managers Check No. 099-

48

0003192363 dated April 21, 2006 amounting to P52,427,250.00 in

favor of DBP, in satisfaction of the Writ of Execution dated September
6, 2005 Writ of Execution. DBP, however, averred that Union Bank
still has a balance of P756,372.39 representing a portion of the
garnished funds of DBP, which means that said obligation had not
49

been completely extinguished.

The CA Ruling in CA-G.R. SP No. 93833
In a Decision dated November 3, 2009, the CA dismissed Union
50

Banks petition, finding no grave abuse of discretion on the RTCs

part. It affirmed the denial of its motion to affirm legal compensation
considering that: (a) the RTC only implemented the Courts January
13, 2004 Decision in G.R. No. 155838 which by then had already
attained finality; (b) DBP is not a debtor of Union Bank; and (c) there
is neither a demandable nor liquidated debt from DBP to Union
Bank.51

Undaunted, Union Bank moved for reconsideration which was,

however, denied in a Resolution dated February 26, 2010; hence,
52

the instant petition.

The Issue Before the Court
The sole issue for the Courts resolution is whether or not the CA
correctly upheld the denial of Union Banks motion to affirm legal
compensation.
The Courts Ruling
The petition is bereft of merit. Compensation is defined as a mode of
extinguishing obligations whereby two persons in their capacity as
principals are mutual debtors and creditors of each other with respect
to equally liquidated and demandable obligations to which no
retention or controversy has been timely commenced and
communicated by third parties. The requisites therefor are provided
53

under Article 1279 of the Civil Code which reads 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 consist 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 be 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. (Emphases and underscoring supplied)
1awp++i1

The rule on legal compensation is stated in Article 1290 of the Civil

54

Code which provides that "[w]hen all the requisites mentioned in

Article 1279 are present, compensation takes effect by operation of
law, and extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the compensation."
In this case, Union Bank filed a motion to seek affirmation that legal
compensation had taken place in order to effectively offset (a) its own
obligation to return the funds it previously received from DBP as
directed under the September 6, 2005 Writ of Execution with (b)
DBPs assumed obligations under the Assumption Agreement.
However, legal compensation could not have taken place between
these debts for the apparent reason that requisites 3 and 4 under
Article 1279 of the Civil Code are not present. Since DBPs assumed
obligations to Union Bank for remittance of the lease payments are
in the Courts words in its Decision dated January 13, 2004 in G.R.
No. 155838 " contingent on the prior payment thereof by [FW] to
DBP," it cannot be said that both debts are due (requisite 3 of Article
1279 of the Civil Code). Also, in the same ruling, the Court observed
that any deficiency that DBP had to make up (by December 29, 1998
as per the Assumption Agreement) for the full satisfaction of the
assumed obligations " cannot be determined until after the
satisfaction of Foodmasters obligation to DBP." In this regard, it
cannot be concluded that the same debt had already been liquidated,
and thereby became demandable (requisite 4 of Article 1279 of the
Civil Code).
The aforementioned Court decision had already attained finality on
April 30, 2004 and, hence, pursuant to the doctrine of
55

conclusiveness of judgment, the facts and issues actually and directly

resolved therein may not be raised in any future case between the
same parties, even if the latter suit may involve a different cause of
action. Its pertinent portions are hereunder quoted for ready
56

reference: 57

Both the body and the dispositive portion of the [CAs May 27, 1994
Decision in CA-G.R. CV No. 35866] correctly construed the nature of
DBPs liability for the lease payments under the various contracts, to
wit:
x x x Construing these three contracts, especially the "Agreement" x x
x between DBP and Bancom as providing for the payment of DBPs
assumed obligation out of the rentals to be paid to it does not mean
negating DBPs assumption "for its own account" of the P17.0 million
debt x x x. It only means that they provide a mechanism for
discharging [DBPs] liability. This liability subsists, since under the
"Agreement" x x x, DBP is obligated to pay "any balance of the
Assumed Obligations after application of the entire rentals and or the
entire sales proceeds actually received by [Union Bank] on the
Leased Properties not later than December 29, 1998." x x x It only
means that the lease rentals must first be applied to the payment of
the P17 million debt and that [DBP] would have to pay out of its
money only in case of insufficiency of the lease rentals having until
December 29, 1998 to do so. In this sense, it is correct to say that the
means of repayment of the assumed obligation is not limited to the
lease rentals. The monthly installments, however, would still have to
come from the lease rentals since this was stipulated in the
"Agreement."
xxxx
Since, as already stated, the monthly installments for the payment of
the P17 million debt are to be funded from the lease rentals, it follows
that if the lease rentals are not paid, there is nothing for DBP to remit
to [Union Bank], and thus [DBP] should not be considered in default.
It is noteworthy that, as stated in the appealed decision, "as regards
plaintiffs claim for damages against defendant for its alleged
negligence in failing and refusing to enforce a lessors remedies
against Foodmasters Worldwide, Inc., the Court finds no competent
and reliable evidence of such claim."
xxxx
WHEREFORE, the decision appealed from is SET ASIDE and
another one is RENDERED,
(i) Ordering third-party defendant-appellee Foodmasters Worldwide,
Inc. to pay defendant and third-party plaintiff-appellant Development
Bank of the Philippines the sum of P32,441,401.85, representing the
unpaid rentals from August 1981 to June 30, 1987, as well as
P10,000.00 for attorneys fees; and
(ii) Ordering defendant and third-party plaintiff-appellant Development
Bank of the Philippines after having been paid by third-party
defendant-appellee the sum of P32,441,401.85, to remit 30% thereof
to plaintiff-appellee Union Bank of the Philippines.
SO ORDERED.
In other words, both the body and the dispositive portion of the
aforequoted decision acknowledged that DBPs obligation to Union
Bank for remittance of the lease payments is contingent on the prior
payment thereof by Foodmasters to DBP.
A careful reading of the decision shows that the Court of Appeals,
which was affirmed by the Supreme Court, found that only the
balance or the deficiency of the P17 million principal obligation, if any,
would be due and demandable as of December 29, 1998. Naturally,
this deficiency cannot be determined until after the satisfaction of
Foodmasters obligation to DBP, for remittance to Union Bank in the
proportion set out in the 1994 Decision. (Emphases and underscoring
supplied; citations omitted)
xxxx
In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have
not concurred in this case, no legal compensation could have taken
place between the above-stated debts pursuant to Article 1290 of the
Civil Code. Perforce, the petition must be denied, and the denial of
Union Bank s motion to affirm legal compensation sustained.
WHEREFORE, the petition is DENIED. The Decision dated
November 3, 2009 and Resolution dated February 26, 2010 of the
Court of Appeals in CA-G.R. SP No. 93833 are hereby AFFIRMED.
SO ORDERED.

G.R. No. 164985 January 15, 2014

FIRST UNITED CONSTRUCTORS CORPORATION and BLUE
STAR CONSTRUCTION CORPORATION, Petitioners,
vs.
BAYANIHAN AUTOMOTIVE CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the applicability of the legal principles of
recoupment and compensation.
The Case
Under review is the decision promulgated on July 26, 2004, whereby
1

the Court of Appeals CA) affirmed the judgment rendered on May 14

1996 by the Regional Trial Court, Branch 107, in Quezon City
adjudging the petitioners defendants) liable to pay to the respondent
plaintiff) various sums of money and damages. 2

Antecedents
Petitioner First United Constructors Corporation (FUCC) and
petitioner Blue Star Construction Corporation (Blue Star) were
associate construction firms sharing financial resources, equipment
and technical personnel on a case-to-case basis. From May 27, 1992
to July 8, 1992, they ordered six units of dump trucks from the
respondent, a domestic corporation engaged in the business of
importing and reconditioning used Japan-made trucks, and of selling
the trucks to interested buyers who were mostly engaged in the
construction business, to wit:
 TO
WHOM DATE OF
UNIT
DELIVE DELIVERY
RY
Isuzu Dump
FUCC 27 May 1992
Truck
Isuzu Dump
FUCC 27 May 1992
Truck
Isuzu Dump
FUCC 10 June 1992
Truck
Isuzu Dump
FUCC 18 June 1992
Truck
Isuzu Dump
Blue Star 4 July 1992
Truck
Isuzu Dump
FUCC 8 July 1992
Truck
The parties established a good business relationship, with the
respondent extending service and repair work to the units purchased
by the petitioners. The respondent also practiced liberality towards
the petitioners in the latters manner of payment by later on agreeing
to payment on terms for subsequent purchases.
On September 19, 1992, FUCC ordered from the respondent one unit
of Hino Prime Mover that the respondent delivered on the same date.
On September 29, 1992, FUCC again ordered from the respondent
one unit of Isuzu Transit Mixer that was also delivered to the
petitioners. For the two purchases, FUCC partially paid in cash, and
the balance through post-dated checks, as follows:
BANK/CHECK NO. DATE AMOUNT
Pilipinas Bank 23 November P360,000.
18027379 1992 00
Pilipinas Bank 1 December P375,000.
18027384 1992 00
Upon presentment of the checks for payment, the respondent learned
that FUCC had ordered the payment stopped. The respondent
immediately demanded the full settlement of their obligation from the
petitioners, but to no avail. Instead, the petitioners informed the
respondent that they were withholding payment of the checks due to
the breakdown of one of the dump trucks they had earlier purchased
from respondent, specifically the second dump truck delivered on
May 27, 1992.
Due to the refusal to pay, the respondent commenced this action for
collection on April 29, 1993, seeking payment of the unpaid balance
in the amount of P735,000.00 represented by the two checks.
In their answer, the petitioners averred that they had stopped the
payment on the two checks worth P735,000.00 because of the
respondents refusal to repair the second dump truck; and that they
had informed the respondent of the defects in that unit but the
respondent had refused to comply with its warranty, compelling them
to incur expenses for the repair and spare parts. They prayed that the
respondent return the price of the defective dump truck worth
P830,000.00 minus the amounts of their two checks worth
P735,000.00, with 12% per annum interest on the difference of
P90,000.00 from May 1993 until the same is fully paid; that the
respondent should also reimburse them the sum of P247,950.00 as
their expenses for the repair of the dump truck, with 12% per annum
interest from December 16, 1992, the date of demand, until fully paid;
and that the respondent pay exemplary damages as determined to be
just and reasonable but not less than P500,000, and attorneys fees
of P50,000 plus P1,000.00 per court appearance and other litigation
expenses.
It was the position of the respondent that the petitioners were not
legally justified in withholding payment of the unpaid balance of the
purchase price of the Hino Prime Mover and the Isuzu Transit Mixer
due the alleged defects in second dump truck because the purchase
of the two units was an entirely different transaction from the sale of
the dump trucks, the warranties for which having long expired.
Judgment of the RTC
On May 14, 1996, the RTC rendered its judgment, finding the
3

petitioners liable to pay for the unpaid balance of the purchase price
of the Hino Prime Mover and the Isuzu Transit Mixer totaling
P735,000.00 with legal interest and attorneys fees; and declaring the
respondent liable to pay to the petitioners the sum of P71,350.00 as
costs of the repairs incurred by the petitioners. The RTC held that the
petitioners could not avail themselves of legal compensation because
the claims they had set up in the counterclaim were not liquidated
and demandable. The fallo of the judgment states:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants, jointly and severally to pay plaintiff the sum
of P360,000.00 and P375,000.00 with interest at the legal rate of 12%
per annum computed from February 11, 1993, which is the date of
the first extrajudicial demand, until fully paid;
2. Ordering the defendants, jointly and severally, to pay plaintiff the
sum equivalent to 10% of the principal amount due, for attorneys
fees;
3. On the counterclaim, ordering plaintiff to pay defendants the sum
of P71,350.00 with interest at the legal rate of 12% per annum
computed from the date of this decision until fully paid;
4. Ordering plaintiff to pay the defendants attorneys fees equivalent
to 10% of the amount due;
5. No pronouncement as to costs.
SO ORDERED. 4

Decision of the CA
The petitioners appealed, stating that they could justifiably stop the
payment of the checks in the exercise of their right of recoupment
because of the respondents refusal to settle their claim for breach of
warranty as to the purchase of the second dump truck.
In its decision promulgated on July 26, 2004, however, the CA
5

affirmed the judgment of the RTC. It held that the remedy of

recoupment could not be properly invoked by the petitioners because
the transactions were different; that the expenses incurred for the
repair and spare parts of the second dump truck were not a proper
subject of recoupment because they did not arise out of the purchase
of the Hino Prime Mover and the Isuzu Transit Mixer; and that the
petitioners claim could not also be the subject of legal compensation
or set-off, because the debts in a set-off should be liquidated and
demandable.
Issues
The petitioners are now before the Court asserting in their petition for
review on certiorari that the CA erred in:
I
x x x NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO
RECOUPMENT UNDER PAR. (1) OF ART. 1599 OF THE CIVIL
CODE, WHICH PROVIDES [FOR] THE RIGHTS AND REMEDIES
AVAILABLE TO A BUYER AGAINST A SELLERS BREACH OF
WARRANTY.
II
x x x RULING THAT PETITIONERS CANNOT AVAIL OF
COMPENSATION ALLEGEDLY BECAUSE THEIR CLAIMS
AGAINST RESPONDENT ARE NOT LIQUIDATED AND
DEMANDABLE.
III
x x x NOT HOLDING RESPONDENT LIABLE TO PETITIONERS
FOR LEGAL INTEREST COMPUTED FROM THE FIRST
EXTRAJUDICIAL DEMAND, AND FOR ACTUAL EXEMPLARY
DAMAGES. 6

The petitioners submit that they were justified in stopping the

payment of the two checks due to the respondents breach of
warranty by refusing to repair or replace the defective second dump
truck earlier purchased; that the withholding of payments was an
effective exercise of their right of recoupment as allowed by Article
1599(1) of the Civil Code; due to the sellers breach of warranty that
the CAs interpretation (that recoupment in diminution or extinction of
price in case of breach of warranty by the seller should refer to the
reduction or extinction of the price of the same item or unit sold and
not to a different transaction or contract of sale) was not supported by
jurisprudence; that recoupment should not be restrictively interpreted
but should include the concept of compensation or set-off between
two parties who had claims arising from different transactions; and
that the series of purchases and the obligations arising therefrom,
being inter-related, could be considered as a single and ongoing
transaction for all intents and purposes.
The respondent counters that the petitioners could not refuse to pay
the balance of the purchase price of the Hino Prime Mover and the
Isuzu Transit Mixer on the basis of the right of recoupment under
Article 1599 of the Civil Code; that the buyers remedy of recoupment
related only to the same transaction; and that compensation was not
proper because the claims of the petitioners as alleged in their
counterclaim were not liquidated and demandable.
There is no longer any question that the petitioners were liable to the
respondent for the unpaid balance of the purchase price of the Hino
Prime Mover and the Isuzu Transit Mixer. What remain to be resolved
are strictly legal, namely: one, whether or not the petitioners validly
exercised the right of recoupment through the withholding of payment
of the unpaid balance of the purchase price of the Hino Prime Mover
and the Isuzu Transit Mixer; and, two, whether or not the costs of the
repairs and spare parts for the second dump truck delivered to FUCC
on May 27, 1992 could be offset for the petitioners obligations to the
respondent.
Ruling
We affirm the decision of the CA with modification.
1.
Petitioners could not validly resort to recoupment against respondent
Recoupment (reconvencion) is the act of rebating or recouping a part
of a claim upon which one is sued by means of a legal or equitable
right resulting from a counterclaim arising out of the same
transaction. It is the setting up of a demand arising from the same
7

transaction as the plaintiffs claim, to abate or reduce that claim.

The legal basis for recoupment by the buyer is the first paragraph of
Article 1599 of the Civil Code, viz:
Article 1599. Where there is a breach of warranty by the seller, the
buyer may, at his election:
(1) Accept or keep the goods and set up against the seller, the breach
of warranty by way of recoupment in diminution or extinction of the
price;
(2) Accept or keep the goods and maintain an action against the
seller for damages for the breach of warranty;
(3) Refuse to accept the goods, and maintain an action against the
seller for damages for the breach of warranty;
(4) Rescind the contract of sale and refuse to receive the goods or if
the goods have already been received, return them or offer to return
them to the seller and recover the price or any part thereof which has
been paid.
When the buyer has claimed and been granted a remedy in anyone
of these ways, no other remedy can thereafter be granted, without
prejudice to the provisions of the second paragraph of article 1191.
(Emphasis supplied)
xxxx
In its decision, the CA applied the first paragraph of Article 1599 of
the Civil Code to this case, explaining thusly:
Paragraph (1) of Article 1599 of the Civil Code which provides for the
remedy of recoupment in diminution or extinction of price in case of
breach of warranty by the seller should therefore be interpreted as
referring to the reduction or extinction of the price of the same item or
unit sold and not to a different transaction or contract of sale. This is
more logical interpretation of the said article considering that it talks
of breach of warranty with respect to a particular item sold by the
seller. Necessarily, therefore, the buyers remedy should relate to the
same transaction and not to another.
Defendants-appellants act of ordering the payment on the prime
mover and transit mixer stopped was improper considering that the
said sale was a different contract from that of the dump trucks earlier
purchased by defendants-appellants.
The claim of defendants-appellants for breach of warranty, i.e. the
expenses paid for the repair and spare parts of dump truck no. 2 is
therefore not a proper subject of recoupment since it does not arise
out of the contract or transaction sued on or the claim of plaintiff-
appellee for unpaid balances on the last two (2) purchases, i. e. the
prime mover and the transit mixer. 8

The CA was correct. It was improper for petitioners to set up their

claim for repair expenses and other spare parts of the dump truck
against their remaining balance on the price of the prime mover and
the transit mixer they owed to respondent. Recoupment must arise
1avvphi1

out of the contract or transaction upon which the plaintiffs claim is

founded. To be entitled to recoupment, therefore, the claim must
9

arise from the same transaction, i.e., the purchase of the prime mover
and the transit mixer and not to a previous contract involving the
purchase of the dump truck. That there was a series of purchases
made by petitioners could not be considered as a single transaction,
for the records show that the earlier purchase of the six dump trucks
was a separate and distinct transaction from the subsequent
purchase of the Hino Prime Mover and the Isuzu Transit Mixer.
Consequently, the breakdown of one of the dump trucks did not grant
to petitioners the right to stop and withhold payment of their
remaining balance on the last two purchases.
2.
Legal compensation was permissible
Legal compensation takes place when the requirements set forth in
Article 1278 and Article 1279 of the Civil Code are present, to wit:
Article 1278. Compensation shall take place when two persons, in
their own right, are creditors and debtors of each other."
Article 1279. In order that compensation may be proper, it is
necessary:
(1) That each 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 be 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.
As to whether petitioners could avail themselves of compensation,
both the RTC and CA ruled that they could not because the claims of
petitioners against respondent were not liquidated and demandable.
The Court cannot uphold the CA and the RTC.
The RTC already found that petitioners were entitled to the amount of
P71,350.00 stated in their counterclaim, and the CA concurred in the
finding, stating thusly:
It is noteworthy that in the letter of December 16, 1992 (Exh. "1")
defendants were charging plaintiff only for the following items of
repair:
1. Cost of repair and spare P46,800.
parts - 00
2. Cost of repair and spare 24,550.0
parts - 0

P71,350.
00
Said amounts may be considered to have been spent for repairs
covered by the warranty period of three (3) months. While the
invoices (Exhs. "2-B" and "3-A") dated September 26, 1992 and
September 18, 1992, this delay in repairs is attributable to the fact
that when defects were brought to the attention of the plaintiff in the
letter of August 14, 1992 (Exh. "8") which was within the warranty
period, the plaintiff did not respond with the required repairs and
actual repairs were undertaken by defendants. Thereafter, the spare
parts covered by Exhibits "2-B" and "3-A" pertain to the engine, which
was covered by the warranty.
x x x. Defendants in their letter of August 14, 1992 (Exhb. "8")
demanded correction of defects. In their letter of August 22, 1992
(Exh. "9") they demanded replacement. In their letter of August 27,
1992 (Exh. "10"), they demanded replacement/repair. In September,
1992, they undertook repairs themselves (Exhs. "2-B" and "3-A") and
demanded payment for the expenses in their letter of December 16,
1992 (Exh. "1"). All other items of expenses connected with
subsequent breakdowns are no longer chargeable to plaintiff which
granted only a 3-month warranty. x x x 10

Considering that preponderant evidence showing that petitioners had

spent the amount of P71,350.00 for the repairs and spare parts of the
second dump truck within the warranty period of three months
supported the finding of the two lower courts, the Court accepts their
finding. Verily, factual findings of the trial court, when affirmed by the
CA, are conclusive on the Court when supported by the evidence on
record.11

A debt is liquidated when its existence and amount are determined. 12

Accordingly, an unliquidated claim set up as a counterclaim by a

defendant can be set off against the plaintiffs claim from the moment
it is liquidated by judgment. Article 1290 of the Civil Code provides
13

that when all the requisites mentioned in Article 1279 of the Civil
Code are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount. With petitioners
expenses for the repair of the dump truck being already established
and determined with certainty by the lower courts, it follows that legal
compensation could take place because all the requirements were
present. Hence, the amount of P71,350.00 should be set off against
petitioners unpaid obligation of P735,000.00, leaving a balance of
P663,650.00, the amount petitioners still owed to respondent.
We deem it necessary to modify the interest rate imposed by the trial
and appellate courts. The legal interest rate to be imposed from
1wphi1

February 11, 1993, the time of the extrajudicial demand by

respondent, should be 6% per annum in the absence of any
stipulation in writing in accordance with Article 2209 of the Civil Code,
which provides:
Article 2209. If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on July
26, 2004 in all respects subject to the MODIFICATION that petitioners
are ordered, jointly and severally, to pay to respondent the sum of 1
663,650.00, plus interest of 6% per annum computed from February
11, 1993, the date of the first extrajudicial demand, until fully paid;
and ORDERS the petitioners to pay the costs of suit.
SO ORDERED.
G.R. No. 176697 September 10, 2014
CESAR V. AREZA and LOLITA B. AREZA, Petitioners,
vs.
EXPRESS SAVINGS BANK, INC. and MICHAEL POTENCIANO,
Respondnets.
DECISION
PEREZ, J.:
Before this Court is a Petition for Review on Certiorari under Ruic 45
of the Rules of Court, which seeks to reverse the Decision and
1

Resolution dated 29 June 2006 and 12 February 2007 of the Court of

2

Appeals in CAG.R. CV No. 83192. The Court of Appeals affirmed with

modification the 22 April 2004 Resolution of the Regional Trial Court
3

(RTC) of Calamba, Laguna, Branch 92, in Civil Case No. B-5886.

The factual antecedents follow.
Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank
deposits with respondent Express Savings Banks Bian branch: 1)
Savings Account No. 004-01-000185-5 and 2) Special Savings
Account No. 004-02-000092-3.
They were engaged in the business of "buy and sell" of brand new
and second-hand motor vehicles. On 2 May 2000, they received an
order from a certain Gerry Mambuay (Mambuay) for the purchase of
a second-hand Mitsubishi Pajero and a brand-new Honda CRV.
The buyer, Mambuay, paid petitioners with nine (9) Philippine
Veterans Affairs Office (PVAO) checks payable to different payees
and drawn against the Philippine Veterans Bank (drawee), each
valued at Two Hundred Thousand Pesos (P200,000.00) for a total of
One Million Eight Hundred Thousand Pesos (P1,800,000.00).
About this occasion, petitioners claimed that Michael Potenciano
(Potenciano), the branch manager of respondent Express Savings
Bank (the Bank) was present during the transaction and immediately
offered the services of the Bank for the processing and eventual
crediting of the said checks to petitioners account. On the other
4

hand,Potenciano countered that he was prevailed upon to accept the

checks by way of accommodation of petitioners who were valued
clients of the Bank.
5
On 3 May 2000, petitioners deposited the said checks in their savings
account with the Bank. The Bank, inturn, deposited the checks with
its depositary bank, Equitable-PCI Bank, in Bian,Laguna. Equitable-
PCI Bank presented the checks to the drawee, the Philippine
Veterans Bank, which honored the checks.
On 6 May 2000, Potenciano informedpetitioners that the checks they
deposited with the Bank werehonored. He allegedly warned
petitioners that the clearing of the checks pertained only to the
availability of funds and did not mean that the checks were not
infirmed. Thus, the entire amount of P1,800,000.00 was credited to
6

petitioners savings account. Based on this information, petitioners

released the two cars to the buyer.
Sometime in July 2000, the subjectchecks were returned by PVAO to
the drawee on the ground that the amount on the face of the checks
was altered from the original amount of P4,000.00 to P200,000.00.
The drawee returned the checks to Equitable-PCI Bank by way of
Special Clearing Receipts. In August 2000, the Bank was informed by
Equitable-PCI Bank that the drawee dishonored the checks onthe
ground of material alterations. Equitable-PCI Bank initially filed a
protest with the Philippine Clearing House. In February 2001, the
latter ruled in favor of the drawee Philippine Veterans Bank.
Equitable-PCI Bank, in turn, debited the deposit account of the Bank
in the amount of P1,800,000.00.
The Bank insisted that they informed petitioners of said development
in August 2000 by furnishing them copies of the documents given by
its depositary bank. On the other hand, petitioners maintained that
7

the Bank never informed them of these developments.

On 9 March 2001, petitioners issued a check in the amount of
P500,000.00. Said check was dishonored by the Bank for the reason
"Deposit Under Hold." According topetitioners, the Bank unilaterally
and unlawfully put their account with the Bank on hold. On 22 March
2001, petitioners counsel sent a demand letter asking the Bank to
honor their check. The Bank refused to heed their request and
instead, closed the Special Savings Account of the petitioners with a
balance of P1,179,659.69 and transferred said amount to their
savings account. The Bank then withdrew the amount of
P1,800,000.00representing the returned checks from petitioners
savings account.
Acting on the alleged arbitrary and groundless dishonoring of their
checks and the unlawful and unilateral withdrawal from their savings
account, petitioners filed a Complaint for Sum of Money with
Damages against the Bank and Potenciano with the RTC of
Calamba.
On 15 January 2004, the RTC, through Judge Antonio S. Pozas,
ruled in favor of petitioners. The dispositive portion of the Decision
reads:
WHEREFORE, the foregoing considered, the Court orders that
judgment be rendered in favor of plaintiffs and against the defendants
jointly and severally to pay plaintiffs as follows, to wit:
1. P1,800,000.00 representing the amount unlawfully withdrawn by
the defendants from the account of plaintiffs;
2. P500,000.00 as moral damages; and
3. P300,000.00 as attorneys fees. 8

The trial court reduced the issue to whether or not the rights of
petitioners were violated by respondents when the deposits of the
former were debited by respondents without any court order and
without their knowledge and consent. According to the trial court, it is
the depositary bank which should safeguard the right ofthe depositors
over their money. Invoking Article 1977 of the Civil Code, the trial
court stated that the depositary cannot make use of the thing
deposited without the express permission of the depositor. The trial
court also held that respondents should have observed the 24-hour
clearing house rule that checks should be returned within 24-hours
after discovery of the forgery but in no event beyond the period fixed
by law for filing a legal action. In this case, petitioners deposited the
checks in May 2000, and respondents notified them of the problems
on the check three months later or in August 2000. In sum, the trial
court characterized said acts of respondents as attended with bad
faith when they debited the amount of P1,800,000.00 from the
account of petitioners.
Respondents filed a motion for reconsideration while petitioners filed
a motion for execution from the Decision of the RTC on the ground
that respondents motion for reconsideration did not conform with
Section 5, Rule 16 of the Rules of Court; hence, it was a mere scrap
of paper that did not toll the running of the period to appeal.
On 22 April 2004, the RTC, through Pairing Judge Romeo C. De
Leon granted the motion for reconsideration, set aside the Pozas
Decision, and dismissed the complaint. The trial court awarded
respondents their counterclaim of moral and exemplary damages of
P100,000.00 each. The trial court first applied the principle of
liberality when it disregarded the alleged absence of a notice of
hearing in respondents motion for reconsideration. On the merits, the
trial court considered the relationship of the Bank and petitioners with
respect to their savings account deposits as a contract of loan with
the bank as the debtor and petitioners as creditors. As such, Article
1977 of the Civil Code prohibiting the depository from making use of
the thing deposited without the express permission of the depositor is
not applicable. Instead, the trial court applied Article 1980 which
provides that fixed, savings and current deposits ofmoney in banks
and similar institutions shall be governed by the provisions governing
simple loan. The trial court then opined thatthe Bank had all the right
to set-off against petitioners savings deposits the value of their nine
checks that were returned.
On appeal, the Court of Appeals affirmed the ruling of the trial court
but deleted the award of damages. The appellate court made the
following ratiocination:
Any argument as to the notice of hearing has been resolved when the
pairing judge issued the order on February 24, 2004 setting the
hearing on March 26, 2004. A perusal of the notice of hearing shows
that request was addressed to the Clerk of Court and plaintiffs
counsel for hearing to be set on March 26, 2004.
The core issues in this case revolve on whether the appellee bank
had the right to debit the amount of P1,800,000.00 from the
appellants accounts and whether the banks act of debiting was done
"without the plaintiffs knowledge."
We find that the elements of legal compensation are all present in the
case at bar. Hence, applying the case of the Bank of the Philippine
Islands v. Court of Appeals, the obligors bound principally are at the
same time creditors of each other. Appellee bank stands as a debtor
of appellant, a depositor. At the same time, said bank is the creditor of
the appellant with respect to the dishonored treasury warrant checks
which amount were already credited to the account of appellants.
When the appellants had withdrawn the amount of the checks they
deposited and later on said checks were returned, they became
indebted to the appellee bank for the corresponding amount.
It should be noted that [G]erry Mambuay was the appellants walkin
buyer. As sellers, appellants oughtto have exercised due diligence in
assessing his credit or personal background. The 24-hour clearing
house rule is not the one that governs in this case since the nine
checks were discovered by the drawee bank to contain material
alterations.
Appellants merely allege that they were not informed of any
development on the checks returned. However, this Court believes
that the bank and appellants had opportunities to communicate about
the checks considering that several transactions occurred from the
time of alleged return of the checks to the date of the debit.
However, this Court agrees withappellants that they should not pay
moral and exemplary damages to each of the appellees for lack of
basis. The appellants were not shown to have acted in bad faith. 9

Petitioners filed the present petition for review on certiorariraising

both procedural and substantive issues, to wit:
1. Whether or not the Honorable Court of Appeals committed a
reversible error of law and grave abuse of discretion in upholding the
legality and/or propriety of the Motion for Reconsideration filed in
violation of Section 5, Rule 15 ofthe Rules on Civil Procedure;
2. Whether or not the Honorable Court of Appeals committed a grave
abuse of discretion in declaring that the private respondents "had the
right to debit the amount of P1,800,000.00 from the appellants
accounts" and the banks act of debiting was done with the plaintiffs
knowledge. 10

Before proceeding to the substantive issue, we first resolve the

procedural issue raised by petitioners.
Sections 5, Rule 15 of the Rules of Court states:
Section 5. Notice of hearing. The notice of hearing shall be
addressed to all parties concerned, and shall specify the time and
date of the hearing which must not be later than ten (10) days after
the filing of the motion.
Petitioners claim that the notice of hearing was addressed to the
Clerk of Court and not to the adverse party as the rules require.
Petitioners add that the hearing on the motion for reconsideration was
scheduled beyond 10 days from the date of filing.
As held in Maturan v. Araula, the rule requiring that the notice be
11

addressed to the adverse party has beensubstantially complied with

when a copy of the motion for reconsideration was furnished to the
counsel of the adverse party, coupled with the fact that the trial court
acted on said notice of hearing and, as prayed for, issued an order 12

setting the hearing of the motion on 26 March 2004.

We would reiterate later that there is substantial compliance with the
foregoing Rule if a copy of the said motion for reconsideration was
furnished to the counsel of the adverse party.13
Now to the substantive issues to which procedural imperfection must,
in this case, give way.
The central issue is whether the Bank had the right to debit
P1,800,000.00 from petitioners accounts.
On 6 May 2000, the Bank informed petitioners that the subject checks
had been honored. Thus, the amountof P1,800,000.00 was
accordingly credited to petitioners accounts, prompting them to
release the purchased cars to the buyer.
Unknown to petitioners, the Bank deposited the checks in its
depositary bank, Equitable-PCI Bank. Three months had passed
when the Bank was informed by its depositary bank that the drawee
had dishonored the checks on the ground of material alterations.
The return of the checks created a chain of debiting of accounts, the
last loss eventually falling upon the savings account of petitioners
with respondent bank. The trial court inits reconsidered decision and
the appellate court were one in declaring that petitioners should bear
the loss.
We reverse.
The fact that material alteration caused the eventual dishonor of the
checks issued by PVAO is undisputed. In this case, before the
alteration was discovered, the checks were already cleared by the
drawee bank, the Philippine Veterans Bank. Three months had
lapsed before the drawee dishonored the checks and returned them
to Equitable-PCI Bank, the respondents depositary bank. And itwas
not until 10 months later when petitioners accounts were debited. A
question thus arises: What are the liabilities of the drawee, the
intermediary banks, and the petitioners for the altered checks?
LIABILITY OF THE DRAWEE
Section 63 of Act No. 2031 orthe Negotiable Instruments Law
provides that the acceptor, by accepting the instrument, engages that
he will pay it according to the tenor of his acceptance. The acceptor is
a drawee who accepts the bill. In Philippine National Bank v. Court of
Appeals, the payment of the amount of a check implies not only
14

acceptance but also compliance with the drawees obligation.

In case the negotiable instrument isaltered before acceptance, is the
drawee liable for the original or the altered tenor of acceptance?
There are two divergent intepretations proffered by legal analysts.15

The first view is supported by the leading case of National City Bank
ofChicago v. Bank of the Republic. In said case, a certain Andrew
16

Manning stole a draft and substituted his name for that of the original
payee. He offered it as payment to a jeweler in exchange for certain
jewelry. The jeweler deposited the draft to the defendant bank which
collectedthe equivalent amount from the drawee. Upon learning of the
alteration, the drawee sought to recover from the defendant bank the
amount of the draft, as money paid by mistake. The court denied
recovery on the ground that the drawee by accepting admitted the
existence of the payee and his capacity to endorse. Still, in Wells
17

Fargo Bank & Union Trust Co. v. Bank of Italy, the court echoed the
18

courts interpretation in National City Bank of Chicago, in this wise:

We think the construction placed upon the section by the Illinois court
is correct and that it was not the legislative intent that the obligation of
the acceptor should be limited to the tenorof the instrument as drawn
by the maker, as was the rule at common law,but that it should be
enforceable in favor of a holder in due course against the acceptor
according to its tenor at the time of its acceptance or certification.
The foregoing opinion and the Illinois decision which it follows give
effect to the literal words of the Negotiable Instruments Law. As
stated in the Illinois case: "The court must take the act as it is written
and should give to the words their natural and common meaning . . .
ifthe language of the act conflicts with statutes or decisions in force
before its enactment the courts should not give the act a strained
construction in order to make it harmonize with earlier statutes or
decisions." The wording of the act suggests that a change in the
common law was intended. A careful reading thereof, independent of
any common-law influence, requires that the words "according to the
tenor of his acceptance" be construed as referring to the instrument
as it was at the time it came into the hands of the acceptor for
acceptance, for he accepts no other instrument than the one
presented to him the altered form and it alone he engages to
pay. This conclusion is in harmony with the law of England and the
continental countries. It makes for the usefulness and currency of
negotiable paper without seriously endangering accepted banking
practices, for banking institutions can readily protect themselves
against liability on altered instruments either by qualifying their
acceptance or certification or by relying on forgery insurance and
specialpaper which will make alterations obvious. All of the
arguments advanced against the conclusion herein announced seem
highly technical in the face of the practical facts that the drawee bank
has authenticated an instrument in a certain form, and that
commercial policy favors the protection of anyone who, in due
course, changes his position on the faith of that authentication. 19

The second view is that the acceptor/drawee despite the tenor of his
acceptance is liable only to the extent of the bill prior to alteration.
20

This view appears to be in consonance with Section 124 of the

Negotiable Instruments Law which statesthat a material alteration
avoids an instrument except as against an assenting party and
subsequent indorsers, but a holder in due course may enforce
payment according to its original tenor. Thus, when the drawee bank
pays a materially altered check, it violates the terms of the check, as
well as its duty tocharge its clients account only for bona fide
disbursements he had made. If the drawee did not pay according to
the original tenor of the instrument, as directed by the drawer, then it
has no right to claim reimbursement from the drawer, much less, the
right to deduct the erroneous payment it made from the drawers
account which it was expected to treat with utmost fidelity. The
21

drawee, however, still has recourse to recover its loss. It may pass
the liability back to the collecting bank which is what the drawee bank
exactly did in this case. It debited the account of Equitable-PCI Bank
for the altered amount of the checks.
LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK
A depositary bank is the first bank to take an item even though it is
also the payor bank, unless the item is presented for immediate
payment over the counter. It is also the bank to which a check is
22

transferred for deposit in an account at such bank, evenif the check is

physically received and indorsed first by another bank. A collecting
23

bank is defined as any bank handling an item for collection except the
bank on which the check is drawn. 24

When petitioners deposited the check with the Bank, they were
designating the latter as the collecting bank. This is in consonance
with the rule that a negotiable instrument, such as a check, whether a
manager's check or ordinary check, is not legal tender. As such, after
receiving the deposit, under its own rules, the Bank shall credit the
amount in petitioners account or infuse value thereon only after the
drawee bank shall have paid the amount of the check or the check
has been cleared for deposit. 25

The Bank and Equitable-PCI Bank are both depositary and collecting
banks.
A depositary/collecting bank where a check is deposited, and which
endorses the check upon presentment with the drawee bank, is an
endorser. Under Section 66 of the Negotiable Instruments Law, an
endorser warrants "that the instrument is genuine and in all respects
what it purports to be; that he has good title to it; that all prior parties
had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting." It has been repeatedly held that in
check transactions, the depositary/collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that
the party making the presentment has done its duty to ascertain the
genuineness of the endorsements. If any of the warranties made by
26

the depositary/collecting bank turns out to be false, then the drawee

bank may recover from it up to the amount of the check. 27

The law imposes a duty of diligence on the collecting bank to

scrutinize checks deposited with it for the purpose of determining
their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the
law holds it to a high standard of conduct. 28

As collecting banks, the Bank and Equitable-PCI Bank are both liable
for the amount of the materially altered checks. Since Equitable-PCI
Bank is not a party to this case and the Bank allowed its account with
EquitablePCI Bank to be debited, it has the option toseek recourse
against the latter in another forum.
24-HOUR CLEARING RULE
Petitioners faulted the drawee bank for not following the 24-hour
clearing period because it was only in August 2000 that the drawee
bank notified Equitable-PCI that there were material alterations in the
checks.
We do not subscribe to the position taken by petitioners that the
drawee bank was at fault because it did not follow the 24-hour
clearing period which provides that when a drawee bank fails to
return a forged or altered check to the collecting bank within the 24-
hour clearing period, the collecting bank is absolved from liability.
Section 21 of the Philippine Clearing House Rules and Regulations
provides: Sec. 21. Special Return Items Beyond The Reglementary
Clearing Period.- Items which have been the subject of material
alteration or items bearing forged endorsement when such
endorsement is necessary for negotiation shall be returned by direct
presentation or demand to the Presenting Bank and not through the
regular clearing house facilities within the period prescribed by law for
the filing of a legal action by the returning bank/branch, institution or
entity sending the same.
Antonio Viray, in his book Handbook on Bank Deposits, elucidated:
It is clear that the so-called "24-hour" rule has been modified. In the
case of Hongkong & Shanghai vs. Peoples Bank reiterated in
Metropolitan Bank and Trust Co. vs. FNCB, the Supreme Court
strictly enforced the 24-hour rule under which the drawee bank
forever loses the right to claim against presenting/collecting bank if
the check is not returned at the next clearing day orwithin 24 hours.
Apparently, the commercial banks felt strict enforcement of the 24-
hour rule is too harsh and therefore made representations and
obtained modification of the rule, which modification is now
incorporated in the Manual of Regulations. Since the same
commercial banks controlled the Philippine Clearing House
Corporation, incorporating the amended rule in the PCHC Rules
naturally followed.
As the rule now stands, the 24-hour rule is still in force, that is, any
check which should be refused by the drawee bank in accordance
with long standing and accepted banking practices shall be returned
through the PCHC/local clearing office, as the case may be, not later
than the next regular clearing (24-hour). The modification, however, is
that items which have been the subject of material alteration or
bearing forged endorsement may be returned even beyond 24 hours
so long that the same is returned within the prescriptive period fixed
by law. The consensus among lawyers is that the prescriptiveperiod
is ten (10)years because a check or the endorsement thereon is a
written contract. Moreover, the item need not be returned through the
clearing house but by direct presentation to the presenting bank. 29

In short, the 24-hour clearing ruledoes not apply to altered checks.

LIABILITY OF PETITIONERS
The 2008 case of Far East Bank & Trust Company v. Gold Palace
Jewellery Co. is in point. A foreigner purchased several pieces of
30

jewelry from Gold Palace Jewellery using a United Overseas Bank

(Malaysia) issued draft addressed to the Land Bank of the Philippines
(LBP). Gold Palace Jewellery deposited the draft in the companys
account with Far East Bank. Far East Bank presented the draft for
clearing to LBP. The latter cleared the same and Gold Palace
Jewellerys account was credited with the amount stated in the draft.
Consequently, Gold Palace Jewellery released the pieces of jewelries
to the foreigner. Three weeks later, LBP informed Far East Bank that
the amount in the foreign draft had been materially altered from
P300,000.00 to P380,000.00. LBP returnedthe check to Far East
Bank. Far East Bank refunded LBP the P380,000.00 paid by LBP. Far
East Bank initially debited P168,053.36 from Gold Palace Jewellerys
account and demanded the payment of the difference between the
amount in the altered draft and the amount debited from Gold Palace
Jewellery.
However, for the reasons already discussed above, our
pronouncement in the Far East Bank and Trust Companycase that
"the drawee is liable on its payment of the check according to the
tenor of the check at the time of payment, which was the raised
amount" is inapplicable to the factual milieu obtaining herein.
31

We only adopt said decision in so far as it adjudged liability on the

part of the collecting bank, thus:
Thus, considering that, in this case, Gold Palace is protected by
Section 62 of the NIL, its collecting agent, Far East, should not have
debited the money paid by the drawee bank from respondent
company's account. When Gold Palace deposited the check with Far
East, the latter, under the terms of the deposit and the provisions of
the NIL, became an agent of the former for the collection of the
amount in the draft. The subsequent payment by the drawee bank
and the collection of the amount by the collecting bank closed the
transaction insofar as the drawee and the holder of the check or his
agent are concerned, converted the check into a mere voucher, and,
as already discussed, foreclosed the recovery by the drawee of the
amount paid. This closure of the transaction is a matter of course;
otherwise, uncertainty in commercial transactions, delay and
annoyance will arise if a bank at some future time will call on the
payee for the return of the money paid to him on the check.
As the transaction in this case had been closed and the
principalagent relationship between the payee and the collecting bank
had already ceased, the latter in returning the amount to the drawee
bank was already acting on its own and should now be responsible
for its own actions. x x x Likewise, Far East cannot invoke the
warranty of the payee/depositor who indorsed the instrument for
collection to shift the burden it brought upon itself. This is precisely
because the said indorsement is only for purposes of collection
which, under Section 36 of the NIL, is a restrictive indorsement. It did
not in any way transfer the title of the instrument to the collecting
bank. Far East did not own the draft, it merely presented it for
payment. Considering that the warranties of a general indorser as
provided in Section 66 of the NIL are based upon a transfer of title
and are available only to holders in due course, these warranties did
not attach to the indorsement for deposit and collection made by Gold
Palace to Far East. Without any legal right to do so, the collecting
bank, therefore, could not debit respondent's account for the amount
it refunded to the drawee bank.
The foregoing considered, we affirm the ruling of the appellate court
to the extent that Far East could not debit the account of Gold Palace,
and for doing so, it must return what it had erroneously taken.32

Applying the foregoing ratiocination, the Bank cannot debit the

savings account of petitioners. A depositary/collecting bank may
resist or defend against a claim for breach of warranty if the drawer,
the payee, or either the drawee bank or depositary bank was
negligent and such negligence substantially contributed tothe loss
from alteration. In the instant case, no negligence can be attributed to
petitioners. We lend credence to their claim that at the time of the
sales transaction, the Banks branch manager was present and even
offered the Banks services for the processing and eventual crediting
of the checks. True to the branch managers words, the checks were
cleared three days later when deposited by petitioners and the entire
amount ofthe checks was credited to their savings account.
ON LEGAL COMPENSATION
Petitioners insist that the Bank cannotbe considered a creditor of the
petitioners because it should have made a claim of the amount of
P1,800,000.00 from Equitable-PCI Bank, its own depositary bank and
the collecting bank in this case and not from them.
The Bank cannot set-off the amount it paid to Equitable-PCI Bank
with petitioners savings account. Under Art. 1278 of the New Civil
Code, compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. And the requisites for
legal compensation are:
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 consist 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 be 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.
It is well-settled that the relationship of the depositors and the Bank or
similar institution is that of creditor-debtor. Article 1980 of the New
Civil Code provides that fixed, savings and current deposits of money
in banks and similar institutions shall be governed by the provisions
concerning simple loans. The bank is the debtorand the depositor is
the creditor. The depositor lends the bank money and the bank
agrees to pay the depositor on demand. The savings deposit
agreement between the bank and the depositor is the contract that
determines the rights and obligations of the parties. 33

But as previously discussed, petitioners are not liable for the deposit
of the altered checks. The Bank, asthe depositary and collecting bank
ultimately bears the loss. Thus, there being no indebtedness to the
Bank on the part of petitioners, legal compensation cannot take
place. DAMAGES
The Bank incurred a delay in informing petitioners of the checks
dishonor. The Bank was informed of the dishonor by Equitable-PCI
Bank as early as August 2000 but it was only on 7 March 2001 when
the Bank informed petitioners that it will debit from their account the
altered amount. This delay is tantamount to negligence on the part of
the collecting bank which would entitle petitioners to an award for
damages under Article 1170 of the New Civil Code which reads:
Art. 1170. Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
The damages in the form of actual or compensatory damages
represent the amount debited by the Bank from petitioners account.
We delete the award of moral damages. Contrary to the lower courts
finding, there was no showing that the Bank acted fraudulently or in
bad faith. It may have been remiss in its duty to diligently protect the
account of its depositors but its honest but mistaken belief that
petitioners account should be debited is not tantamount to bad faith.
We also delete the award of attorneys fees for it is not a sound public
policy to place a premium on the right to litigate. No damages can
becharged to those who exercise such precious right in good faith,
even if done erroneously. 34

To recap, the drawee bank, Philippine Veterans Bank in this case, is

only liable to the extent of the check prior to alteration. Since
1wphi1

Philippine Veterans Bank paid the altered amount of the check, it may
pass the liability back as it did, to Equitable-PCI Bank,the collecting
bank. The collecting banks, Equitable-PCI Bank and the Bank, are
ultimately liable for the amount of the materially altered check. It
cannot further pass the liability back to the petitioners absent any
showing in the negligence on the part of the petitioners which
substantially contributed to the loss from alteration.
Based on the foregoing, we affirm the Pozasdecision only insofar as it
ordered respondents to jointly and severally pay petitioners
P1,800,000.00, representing the amount withdrawn from the latters
account. We do not conform with said ruling regarding the finding of
bad faith on the part of respondents, as well as its failure toobserve
the 24-hour clearing rule.
WHEREFORE, the petition is GRANTED. The Decision and
Resolution dated 29 June 2006 and 12 February 2007 respectively of
the Court of Appeals in CA-G.R. CV No. 83192 are REVERSED and
SET ASIDE. The 15 January 2004 Decision of the Regional Trial
Court of Calamba City, Branch 92 in Civil Case No. B-5886 rendered
by Judge Antonio S. Pozas is REINSTATEDonly insofar as it ordered
respondents to jointly and severally pay petitioners P1,800,000.00
representing the amount withdrawn from the latters account. The
award of moral damages and attorneys fees are DELETED.
SO ORDERED.

G.R. No. 200602 December 11, 2013

ACE FOODS, INC., Petitioner,
vs.
MICRO PACIFIC TECHNOLOGIES CO., LTD. , Respondent. 1

DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari are the Decision dated
2 3

October 21, 2011 and Resolution dated February 8, 2012 of the

4

Court of Appeals (CA) in CA-G.R. CV No. 89426 which reversed and

set aside the Decision dated February 28, 2007 of the Regional Trial
5

Court of Makati, Branch 148 (RTC) in Civil Case No. 02-1248, holding
petitioner ACE Foods, Inc. (ACE Foods) liable to respondent Micro
Pacific Technologies Co., Ltd. (MTCL) for the payment of Cisco
Routers and Frame Relay Products (subject products) amounting to
P646,464.00 pursuant to a perfected contract of sale.
The Facts
ACE Foods is a domestic corporation engaged in the trading and
 distribution of consumer goods in wholesale and retail bases, while 6

MTCL is one engaged in the supply of computer hardware and

equipment. 7

On September 26, 2001, MTCL sent a letter-proposal for the delivery

8

and sale of the subject products to be installed at various offices of

ACE Foods. Aside from the itemization of the products offered for
sale, the said proposal further provides for the following terms, viz.: 9

TERMS : Thirty (30) days upon delivery

VALIDITY : Prices are based on current dollar rate and subject to
changes without prior notice.
DELIVERY : Immediate delivery for items on stock, otherwise thirty
(30) to forty-five days upon receipt of [Purchase Order]
WARRANTY : One (1) year on parts and services. Accessories not
included in warranty.
On October 29, 2001, ACE Foods accepted MTCLs proposal and
accordingly issued Purchase Order No. 100023 (Purchase Order)
10

for the subject products amounting to P646,464.00 (purchase price).

Thereafter, or on March 4, 2002, MTCL delivered the said products to
ACE Foods as reflected in Invoice No. 7733 (Invoice Receipt). The
11

fine print of the invoice states, inter alia, that "[t]itle to sold property is
reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until full
compliance of the terms and conditions of above and payment of the
price" (title reservation stipulation). After delivery, the subject
12

products were then installed and configured in ACE Foodss

premises. MTCLs demands against ACE Foods to pay the purchase
price, however, remained unheeded. Instead of paying the purchase
13

price, ACE Foods sent MTCL a Letter dated September 19, 2002,
14

stating that it "ha[s] been returning the [subject products] to [MTCL]

thru [its] sales representative Mr. Mark Anteola who has agreed to
pull out the said [products] but had failed to do so up to now."
Eventually, or on October 16, 2002, ACE Foods lodged a Complaint 15

against MTCL before the RTC, praying that the latter pull out from its
premises the subject products since MTCL breached its "after
delivery services" obligations to it, particularly, to: (a) install and
configure the subject products; (b) submit a cost benefit study to
justify the purchase of the subject products; and (c) train ACE
Foodss technicians on how to use and maintain the subject products.
16
ACE Foods likewise claimed that the subject products MTCL
delivered are defective and not working. 17

For its part, MTCL, in its Answer with Counterclaim, maintained that
18
it had duly complied with its obligations to ACE Foods and that the
subject products were in good working condition when they were
delivered, installed and configured in ACE Foodss premises.
Thereafter, MTCL even conducted a training course for ACE Foodss
representatives/employees; MTCL, however, alleged that there was
actually no agreement as to the purported "after delivery services."
Further, MTCL posited that ACE Foods refused and failed to pay the
purchase price for the subject products despite the latters use of the
same for a period of nine (9) months. As such, MTCL prayed that
ACE Foods be compelled to pay the purchase price, as well as
damages related to the transaction. 19

The RTC Ruling

On February 28, 2007, the RTC rendered a Decision, directing
20

MTCL to remove the subject products from ACE Foodss premises

and pay actual damages and attorney fees in the amounts of
P200,000.00 and P100,000.00, respectively. 21

At the outset, it observed that the agreement between ACE Foods

and MTCL is in the nature of a contract to sell. Its conclusion was
based on the fine print of the Invoice Receipt which expressly
indicated that "title to sold property is reserved in MICROPACIFIC
TECHNOLOGIES CO., LTD. until full compliance of the terms and
conditions of above and payment of the price," noting further that in a
contract to sell, the prospective seller explicitly reserves the transfer
of title to the prospective buyer, and said transfer is conditioned upon
the full payment of the purchase price. Thus, notwithstanding the
22

execution of the Purchase Order and the delivery and installation of

the subject products at the offices of ACE Foods, by express
stipulation stated in the Invoice Receipt issued by MTCL and signed
by ACE Foods, i.e., the title reservation stipulation, it is still the former
who holds title to the products until full payment of the purchase price
therefor. In this relation, it noted that the full payment of the price is a
positive suspensive condition, the non-payment of which prevents the
obligation to sell on the part of the seller/vendor from materializing at
all. Since title remained with MTCL, the RTC therefore directed it to
23

withdraw the subject products from ACE Foodss premises. Also, in

view of the foregoing, the RTC found it unnecessary to delve into the
allegations of breach since the non-happening of the aforesaid
suspensive condition ipso jure prevented the obligation to sell from
arising.24

Dissatisfied, MTCL elevated the matter on appeal. 25

 The CA Ruling
In a Decision dated October 21, 2011, the CA reversed and set aside
26

the RTCs ruling, ordering ACE Foods to pay MTCL the amount of
P646,464.00, plus legal interest at the rate of 6% per annum to be
computed from April 4, 2002, and attorneys fees amounting to
P50,000.00.27

It found that the agreement between the parties is in the nature of a

contract of sale, observing that the said contract had been perfected
from the time ACE Foods sent the Purchase Order to MTCL which, in
turn, delivered the subject products covered by the Invoice Receipt
and subsequently installed and configured them in ACE Foodss
premises. Thus, considering that MTCL had already complied with
28

its obligation, ACE Foodss corresponding obligation arose and was

then duty bound to pay the agreed purchase price within thirty (30)
days from March 5, 2002. In this light, the CA concluded that it was
29

erroneous for ACE Foods not to pay the purchase price therefor,
despite its receipt of the subject products, because its refusal to pay
disregards the very essence of reciprocity in a contract of sale. The
30

CA also dismissed ACE Foodss claim regarding MTCLs failure to

perform its "after delivery services" obligations since the letter-
proposal, Purchase Order and Invoice Receipt do not reflect any
agreement to that effect. 31

Aggrieved, ACE Foods moved for reconsideration which was,

however, denied in a Resolution dated February 8, 2012, hence,
32

this petition.
The Issue Before the Court
The essential issue in this case is whether ACE Foods should pay
MTCL the purchase price for the subject products.
The Courts Ruling
The petition lacks merit.
A contract is what the law defines it to be, taking into consideration its
essential elements, and not what the contracting parties call it. The
33

real nature of a contract may be determined from the express terms

of the written agreement and from the contemporaneous and
subsequent acts of the contracting parties. However, in the
construction or interpretation of an instrument, the intention of the
parties is primordial and is to be pursued. The denomination or
title given by the parties in their contract is not conclusive of the
nature of its contents.
34

The very essence of a contract of sale is the transfer of ownership

 in exchange for a price paid or promised. This may be gleaned
35

from Article 1458 of the Civil Code which defines a contract of sale as
follows:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
A contract of sale may be absolute or conditional. (Emphasis
supplied)
Corollary thereto, a contract of sale is classified as a consensual
contract, which means that the sale is perfected by mere consent.
No particular form is required for its validity. Upon perfection of the
contract, the parties may reciprocally demand performance, i.e., the
vendee may compel transfer of ownership of the object of the sale,
and the vendor may require the vendee to pay the thing sold. 36

In contrast, a contract to sell is defined as a bilateral contract

whereby the prospective seller, while expressly reserving the
ownership of the property despite delivery thereof to the prospective
buyer, binds himself to sell the property exclusively to the prospective
buyer upon fulfillment of the condition agreed upon, i.e., the full
payment of the purchase price. A contract to sell may not even be
considered as a conditional contract of sale where the seller may
likewise reserve title to the property subject of the sale until the
fulfillment of a suspensive condition, because in a conditional contract
of sale, the first element of consent is present, although it is
conditioned upon the happening of a contingent event which may or
may not occur.
37

In this case, the Court concurs with the CA that the parties have
agreed to a contract of sale and not to a contract to sell as adjudged
by the RTC. Bearing in mind its consensual nature, a contract of sale
had been perfected at the precise moment ACE Foods, as evinced by
its act of sending MTCL the Purchase Order, accepted the latters
proposal to sell the subject products in consideration of the purchase
price of P646,464.00. From that point in time, the reciprocal
obligations of the parties i.e., on the one hand, of MTCL to deliver
the said products to ACE Foods, and, on the other hand, of ACE
Foods to pay the purchase price therefor within thirty (30) days from
delivery already arose and consequently may be demanded. Article
1475 of the Civil Code makes this clear:
Art. 1475. The contract of sale is perfected at the moment there is a
 meeting of minds upon the thing which is the object of the contract
and upon the price.
From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the form
of contracts.
At this juncture, the Court must dispel the notion that the stipulation
anent MTCLs reservation of ownership of the subject products as
reflected in the Invoice Receipt, i.e., the title reservation stipulation,
changed the complexion of the transaction from a contract of sale into
a contract to sell. Records are bereft of any showing that the said
stipulation novated the contract of sale between the parties which, to
repeat, already existed at the precise moment ACE Foods accepted
MTCLs proposal. To be sure, novation, in its broad concept, may
either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes
the place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with the
amendatory agreement. In either case, however, novation is never
presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are
too clear and unequivocal to be mistaken. 38

In the present case, it has not been shown that the title reservation
stipulation appearing in the Invoice Receipt had been included or had
subsequently modified or superseded the original agreement of the
parties. The fact that the Invoice Receipt was signed by a
representative of ACE Foods does not, by and of itself, prove animus
novandi since: (a) it was not shown that the signatory was authorized
by ACE Foods (the actual party to the transaction) to novate the
original agreement; (b) the signature only proves that the Invoice
Receipt was received by a representative of ACE Foods to show the
fact of delivery; and (c) as matter of judicial notice, invoices are
generally issued at the consummation stage of the contract and not
its perfection, and have been even treated as documents which are
not actionable per se, although they may prove sufficient delivery. 39

Thus, absent any clear indication that the title reservation stipulation
was actually agreed upon, the Court must deem the same to be a
mere unilateral imposition on the part of MTCL which has no effect on
the nature of the parties original agreement as a contract of sale.
Perforce, the obligations arising thereto, among others, ACE Foodss
obligation to pay the purchase price as well as to accept the
 delivery of the goods, remain enforceable and subsisting.
40
1wphi1

As a final point, it may not be amiss to state that the return of the
subject products pursuant to a rescissory action is neither warranted
41

by ACE Foodss claims of breach either with respect to MTCLs

breach of its purported "after delivery services" obligations or the
defective condition of the products - since such claims were not
adequately proven in this case. The rule is clear: each party must
prove his own affirmative allegation; one who asserts the affirmative
of the issue has the burden of presenting at the trial such amount of
evidence required by law to obtain a favorable judgment, which in
civil cases, is by preponderance of evidence. This, however, ACE
42

Foods failed to observe as regards its allegations of breach. Hence,

the same cannot be sustained.
WHEREFORE, the petition is DENIED. Accordingly, the Decision
dated October 21, 2011 and Resolution dated February 8, 2012 of the
Court of Appeals in CA-G.R. CV No. 89426 are hereby AFFIRMED.
SO ORDERED.

.R. No. 177232 October 11, 2012

RCJ BUS LINES, INCORPORATED, Petitioner,
vs.
MASTER TOURS AND TRAVEL CORPORATION, Respondent.
DECISION
ABAD, J.:
This case is about a prior agreement for the lease of four buses,
claimed to have been novated by a subsequent agreement I~H- their
storage in the former lessee's garage for a fee.
The Facts and the Case
On February 9, 1993 respondent Master Tours and Travel
Corporation (Master Tours) entered into a five-year lease agreement
from February 15, 1993 to February 15, 1998 with petitioner RCJ Bus
Lines, Incorporated (RCJ) covering four Daewoo air-conditioned
buses, described as "presently junked and not operational" for the
lease amount of P 600,000.00, with P 400,000.00 payable upon the
signing of the agreement and P 200,000.00 "payable upon
completion of rehabilitation of the four buses by the lessee." 1 The
agreement was signed by Marciano T. Tan as Master Tours
Executive Vice-President and Rolando Abadilla as RCJs President
and Chairman.
More than four years into the lease or on June 16, 1997 Master Tours
wrote RCJ a letter, demanding the return of the four buses "brought
to your garage at E. Rodriguez Avenue for safekeeping" 2 so Master
Tours could settle its obligation with creditors who wanted to foreclose
on the buses. RCJ did not, however, heed the demand.
On January 16, 1998 Master Tours wrote RCJ a letter, demanding the
return of the buses to it and the payment of the lease fee of P
600,000.00 that had remained unpaid since 1993. On February 2,
1998 RCJ wrote back through counsel that it had no obligation to pay
the lease fee and that it would return the buses only after Master
Tours shall have paid RCJ the storage fees due on them. This
prompted Master Tours to file a collection suit against RCJ before the
Regional Trial Court (RTC) of Manila, Branch 49.
For its defense, RCJ alleged that it had no use for the buses, they
being non-operational, and that the lease agreement had been
modified into a contract of deposit of the buses for which Master
Tours agreed to pay RCJ storage fees of P 4,000.00 a month. To
prove the new agreement, RCJ cited Master Tours letter of June 16,
1997 which acknowledged that the buses were brought to RCJs
garage for "safekeeping."
On November 5, 2001 the RTC rendered judgment, ordering RCJ to
pay Master Tours P 600,000.00 as lease fee with 6% interest per
annum from the date of the filing of the suit and attorneys fees of P
50,000.00 plus costs.
The lower court rejected RCJs defense of novation from a contract of
lease to a contract of deposit, given the absence of proof that Master
Tours gave its consent to such a novation.
On appeal, the Court of Appeals (CA) rendered judgment dated
October 26, 2006,3 entirely affirming the RTC Decision. The CA also
denied petitioners motion for reconsideration in a Resolution dated
March 27, 2007, hence, the present petition for review.
The Issues Presented
The case presents the following issues:
1. Whether or not the CA erred in holding that there had been no
novation in the agreement of the parties from one of lease of the
buses to one of deposit of the same;
2. Assuming absence of novation, whether or not the CA erred in
ruling that RCJ can be held liable for rental fee notwithstanding that
the buses never became operational; and
3. Whether or not the CA erred in affirming the RTCs award of P
 50,000.00 in attorneys fees plus cost of suit against RCJ.
The Courts Rulings
One. Article 1292 of the Civil Code provides that in novation, "it is
imperative that it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible with each
other." And the obligations are incompatible if they cannot stand
together. In such a case, the subsequent obligation supersedes or
novates the first.4
To begin with, the cause in a contract of lease is the enjoyment of the
thing;5 in a contract of deposit, it is the safekeeping of the thing. 6 They
thus create essentially distinct obligations that would result in a
novation only if the parties entered into one after the other concerning
the same subject matter. The turning point in this case, therefore, is
whether or not the parties subsequently entered into an agreement
for the storage of the buses that superseded their prior lease
agreement involving the same buses.
Although the buses were described in the lease agreement as
"junked and not operational," it is clear from the prescribed manner of
payment of the rental fee (P 400,000.00 down and P 200,000.00
upon completion of their rehabilitation) that RCJ would rehabilitate
such buses and use them for its transport business. Now, RCJs
theory is that the parties subsequently changed their minds and
terminated the lease but, rather than have Master Tours get back its
junked buses, RCJ agreed to store them in its garage as a service to
Master Tours subject to payment of storage fees.
Two things militate against RCJs theory.
First, RCJ failed to present any clear proof that it agreed with Master
Tours to abandon the lease of the buses and in its place constitute
RCJ as depositary of the same, providing storage service to Master
Tours for a fee. The only evidence RCJ relied on is Master Tours
letter of June 16, 1997 in which it demanded the return of the four
buses which were placed in RCJs garage for "safekeeping." The
pertinent portion of the letter reads:
This is to follow up our previous discussion with you with regards to
the Five (5) units of Daewoo Airconditioned Motorcoaches, which we
brought to your garage at E. Rodriguez Avenue for safekeeping.
Since we have outstanding loan with BancAsia Finance & Investment
Corporation and BancAsia Capital Corporation that we are unable to
service payment, they have made final demand to us and are in the
process of foreclosing these units. We urgently request from you a
meeting to thresh out matters concerning the pulling of these units by
the financing firms.7
For one thing, the letter does not on its face constitute an agreement.
It contains no contractual stipulations respecting some warehousing
arrangement between the parties concerning the buses. At best, the
letter acknowledges that five Master Tours buses were "brought to
your RCJs garagefor safekeeping." But the idea of RCJ
safekeeping the buses for Master Tours is consistent with their lease
agreement. The lessee of a movable property has an obligation to
"return the thing leased, upon the termination of the lease, just as he
received it."8 This means that RCJ must, as an incident of the lease,
keep the buses safe from injury or harm while these were in its
possession.
For another, it is evident from the tenor of Master Tours letter that
RCJs "safekeeping" was to begin from the time the buses were
delivered at its garage. There is no allegation or evidence that Master
Tours pulled out the buses at some point, signifying the pre-
termination of the lease agreement, then brought them back to RCJs
garage, this time for safekeeping. This circumstance rules out any
notion that an agreement for RCJ to hold the buses for safekeeping
had overtaken the lease agreement.
Second, it did not make sense for Master Tours to pre-terminate its
lease of the junked buses to RCJ, which would earn Master Tours P
600,000.00, in exchange for having to pay RCJ storage fees for
keeping those buses just the same. As pointed out above, the lease
already implied an obligation on RCJs part to safekeep the buses
while they were being rented.
Two. RCJ claims that it cannot be held liable to Master Tours for
rental fee on the buses considering that these never became
operational. The pertinent portions of the lease agreement provide:
Section 1. Lease of AIRCON BUSES The LESSOR hereby agrees
and shall deliver unto the LESSEE the AIRCON BUSES by way of a
long term lease of said buses.
Section 2. Term of Lease The lease of the AIRCON BUSES shall be
for a period of FIVE (5) years to commence on 15 February 1993 and
to end automatically on 15 February 1998. x x x
Section 3. Lease Fee For and in consideration of the lease of the
AIRCON BUSES subject hereof, the lease fee for five years for the
Four (4) units shall be in the amount of PESOS: SIX HUNDRED
THOUSAND (P 600,000.00). The LESSEE agrees to advance the
amount of PESOS: FOUR HUNDRED THOUSAND (P 400,000.00)
payable upon the signing of the Agreement. The remaining balance of
PESOS: TWO HUNDRED THOUSAND (P 200,000.00) will be
payable upon completion of rehabilitation of the 4 buses by the
lessee.9
The Court finds no basis in the above for holding that RCJs
obligation to pay the rents of P 600,000.00 on the buses depended
on the buses being rehabilitated. Apart from delivering the buses to
RCJ, the agreement did not require any further act from Master Tours
as a condition to the exercise of its right to collect the lease fee.
Of course, the lease agreement provided for two payments: P
400,000.00 upon the signing of the agreement and P 200,000.00
upon completion of rehabilitation of the buses. But this provision is
more about the mode of payment rather than about the
extinguishment of the obligation to pay the amounts due. The phrase
"upon completion of rehabilitation" implies an obligation to complete
the rehabilitation which, in this case, wholly depended on work to be
done "by the lessee."
That the buses may have turned out to be unsuitable for use despite
repair cannot prejudice Master Tours. The latter did not hide the
condition of the buses from RCJ. Indeed, the lease agreement
described them as "presently junked and not operational." RCJ knew
what it was getting into and calculated some profit after it shall have
rehabilitated the buses and placed them on the road. That it may
have made a miscalculation cannot exempt it from its obligation to
pay the rents.
But since Master Tours demanded the return of the buses before the
expiration of the contract, RCJ was not yet in default for the payment
of P 200,000.00. There was time left to complete or undertake the
rehabilitation of the buses since the lease was still operative at that
time Master Tours opted to pre-terminate the contract. 10 It is only
equitable to release RCJ from the liability to pay P 200,000.00 since it
was not afforded the balance of the period to perform its obligation to
repair.11 No one should be unduly enriched at the expense of
another.12
Three. RCJ claims that the award of attorneys fees plus cost against
it was unjustified.
Notably, RCJ did not question such award in the appellants brief that
it filed with the CA. RCJ brought it up only through a supplemental
1wphi1

appellants brief that it filed without leave of court three years after the
case was submitted for decision and a month before the CA rendered
its judgment in the case.13
Nonetheless, the Court notes that the RTC Decision awarded
attorneys fees without stating its basis for making such award. The
discretion of the court to award attorney's fees under Article 2208 of
the Civil Code demands factual, legal, and equitable justification. The
court must state the reason for the award of attorney's fees and its
failure to do so makes the award utterly baseless.
As regards the cost of suit, costs ordinarily follow the results of the
suit and shall be allowed to the prevailing party as a matter of
course.14
WHEREFORE, the Court MODIFIES the Court of Appeals Decision
dated October 26, 2006. RCJ Bus Lines, Incorporated is ORDERED
to pay P 400, 000.00 to Master Tours and Travel Corporation with
interest of 6% per annum from the filing of the complaint. The
Regional Trial Courts award of attorneys fees is DELETED for lack
of legal basis.
Costs against the petitioner.
SO ORDERED.

G.R. No. 177498

STOLT-NIELSEN
TRANSPORTATION
Present:
GROUP, INC. AND
CHUNG GAI SHIP
CARPIO, J.,
MANAGEMENT,
Chairperson,
Petitioners,
PEREZ,
SERENO,
REYES, and
PERLAS-BERNABE, JJ.*
Promulgated:
SULPECIO
January 18, 2012
MEDEQUILLO, JR.,
Respondent.

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

DECISION
PEREZ, J.:
Before the Court is a Petition for Review on
Certiorari of the Decision of the First Division of the Court
1 2

of Appeals in CA-G.R. SP No. 91632 dated 31 January

2007, denying the petition for certiorari filed by Stolt-
Nielsen Transportation Group, Inc. and Chung Gai Ship
Management (petitioners) and affirming the Resolution of
the National Labor Relations Commission (NLRC). The
dispositive portion of the assailed decision reads:
WHEREFORE, the petition is hereby
DENIED. Accordingly, the assailed Decision
promulgated on February 28, 2003 and the
Resolution dated July 27, 2005 are AFFIRMED. 3

The facts as gathered by this Court follow:

On 6 March 1995, Sulpecio Madequillo (respondent) filed
a complaint before the Adjudication Office of the
 Philippine Overseas Employment Administration (POEA)
against the petitioners for illegal dismissal under a first
contract and for failure to deploy under a second contract.
In his complaint-affidavit, respondent alleged that:
4

1 On 6 November 1991(First Contract), he was hired by Stolt-

Nielsen Marine Services, Inc on behalf of its principal Chung-Gai
Ship Management of Panama as Third Assistant Engineer on board
the vessel Stolt Aspiration for a period of nine (9) months;

2 He would be paid with a monthly basic salary of $808.00 and a

fixed overtime pay of $404.00 or a total of $1,212.00 per month
during the employment period commencing on 6 November 1991;

3 On 8 November 1991, he joined the vessel MV Stolt Aspiration;

4 On February 1992 or for nearly three (3) months of rendering

service and while the vessel was at Batangas, he was ordered by
the ships master to disembark the vessel and repatriated back to
Manila for no reason or explanation;

5 Upon his return to Manila, he immediately proceeded to the

petitioners office where he was transferred employment with
another vessel named MV Stolt Pride under the same terms and
 conditions of the First Contract;

6 On 23 April 1992, the Second Contract was noted and approved by

the POEA;

7 The POEA, without knowledge that he was not deployed with the
vessel, certified the Second Employment Contract on 18
September 1992.

8 Despite the commencement of the Second Contract on 21 April

1992, petitioners failed to deploy him with the vessel MV Stolt
Pride;
9 He made a follow-up with the petitioner but the same refused to
comply with the Second Employment Contract.

10 On 22 December 1994, he demanded for his passport, seamans

book and other employment documents. However, he was only
allowed to claim the said documents in exchange of his signing a
document;

11 He was constrained to sign the document involuntarily because

without these documents, he could not seek employment from
other agencies.

He prayed for actual, moral and exemplary damages as well

as attorneys fees for his illegal dismissal and in view of the
Petitioners bad faith in not complying with the Second
Contract.
The case was transferred to the Labor Arbiter of the DOLE
upon the effectivity of the Migrant Workers and Overseas
Filipinos Act of 1995.
The parties were required to submit their respective
position papers before the Labor Arbiter. However,
petitioners failed to submit their respective pleadings
despite the opportunity given to them. 5

On 21 July 2000, Labor Arbiter Vicente R. Layawen

rendered a judgment finding that the respondent was
6

constructively dismissed by the petitioners. The dispositive

portion reads:
WHEREFORE, premises considered, judgment is hereby rendered,
declaring the respondents guilty of constructively dismissing the
complainant by not honoring the employment contract.
Accordingly, respondents are hereby ordered jointly and solidarily
to pay complainant the following:

1 $12,537.00 or its peso equivalent at the time of

payment. 7
The Labor Arbiter found the first contract entered into by
and between the complainant and the respondents to have
been novated by the execution of the second contract. In
other words, respondents cannot be held liable for the first
contract but are clearly and definitely liable for the breach
of the second contract. However, he ruled that there was no
8

substantial evidence to grant the prayer for moral and

exemplary damages. 9

The petitioners appealed the adverse decision before the

National Labor Relations Commission assailing that they
were denied due process, that the respondent cannot be
considered as dismissed from employment because he was
not even deployed yet and the monetary award in favor of
the respondent was exorbitant and not in accordance with
law.10

On 28 February 2003, the NLRC affirmed with

modification the Decision of the Labor Arbiter. The
dispositive portion reads:
WHEREFORE, premises considered, the decision under review is
hereby, MODIFIED BY DELETING the award of overtime pay in
the total amount of Three Thousand Six Hundred Thirty Six US
Dollars (US $3,636.00).
In all other respects, the assailed decision so stands as,
AFFIRMED. 11

Before the NLRC, the petitioners assailed that they were

not properly notified of the hearings that were conducted
before the Labor Arbiter. They further alleged that after the
suspension of proceedings before the POEA, the only
notice they received was a copy of the decision of the
Labor Arbiter. 12

The NLRC ruled that records showed that attempts to serve

the various notices of hearing were made on petitioners
counsel on record but these failed on account of their
failure to furnish the Office of the Labor Arbiter a copy of
any notice of change of address. There was also no
evidence that a service of notice of change of address was
served on the POEA. 13

The NLRC upheld the finding of unjustified termination of

contract for failure on the part of the petitioners to present
evidence that would justify their non-deployment of the
respondent. It denied the claim of the petitioners that the
14

monetary award should be limited only to three (3) months

for every year of the unexpired term of the contract. It ruled
that the factual incidents material to the case transpired
within 1991-1992 or before the effectivity of Republic Act
No. 8042 or the Migrant Workers and Overseas Filipinos
Act of 1995 which provides for such limitation.15

However, the NLRC upheld the reduction of the monetary

award with respect to the deletion of the overtime pay due
to the non-deployment of the respondent. 16

The Partial Motion for Reconsideration filed by the

petitioners was denied by the NLRC in its Resolution dated
27 July 2005.17

The petitioners filed a Petition for Certiorari before the

Court of Appeals alleging grave abuse of discretion on the
part of NLRC when it affirmed with modification the ruling
of the Labor Arbiter. They prayed that the Decision and
Resolution promulgated by the NLRC be vacated and
another one be issued dismissing the complaint of the
respondent.
Finding no grave abuse of discretion, the Court of Appeals
AFFIRMED the Decision of the labor tribunal.
The Courts Ruling
The following are the assignment of errors presented before
this Court:
I.
 THE COURT A QUO ERRED IN FINDING THAT THE
SECOND CONTRACT NOVATED THE FIRST CONTRACT.

1 THERE WAS NO NOVATION OF THE FIRST CONTRACT BY

THE SECOND CONTRACT; THE ALLEGATION OF ILLEGAL
DISMISSAL UNDER THE FIRST CONTRACT MUST BE
RESOLVED SEPARATELY FROM THE ALLEGATION OF
FAILURE TO DEPLOY UNDER THE SECOND CONTRACT.

2 THE ALLEGED ILLEGAL DISMISSAL UNDER THE FIRST

CONTRACT TRANSPIRED MORE THAN THREE (3) YEARS
AFTER THE CASE WAS FILED AND THEREFORE HIS CASE
SHOULD HAVE BEEN DISMISSED FOR BEING BARRED BY
PRESCRIPTION.

II.

THE COURT A QUO ERRED IN RULING THAT THERE WAS

CONSTRUCTIVE DISMISSAL UNDER THE SECOND
CONTRACT.

1 IT IS LEGALLY IMPOSSIBLE TO HAVE CONSTRUCTIVE

DISMISSAL WHEN THE EMPLOYMENT HAS NOT YET
COMMENCED.

2 ASSUMING THERE WAS OMISSION UNDER THE SECOND

CONTRACT, PETITIONERS CAN ONLY BE FOUND AS
HAVING FAILED IN DEPLOYING PRIVATE RESPONDENT
BUT WITH VALID REASON.

III.
THE COURT A QUO ERRED IN FAILING TO FIND THAT
EVEN ASSUMING THERE WAS BASIS FOR HOLDING
PETITIONER LIABLE FOR FAILURE TO DEPLOY
RESPONDENT, THE POEA RULES PENALIZES SUCH
OMISSION WITH A MERE REPRIMAND. 18

The petitioners contend that the first employment contract

between them and the private respondent is different from
and independent of the second contract subsequently
executed upon repatriation of respondent to Manila.
We do not agree.
Novation is the extinguishment of an obligation by
the substitution or change of the obligation by a subsequent
one which extinguishes or modifies the first, either by
changing the object or principal conditions, or, by
substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. In
order for novation to take place, the concurrence of the
following requisites is indispensable:
1. There must be a previous valid obligation,
2. There must be an agreement of the parties concerned to a
new contract,

3. There must be the extinguishment of the old contract,

and
4. There must be the validity of the new contract. 19

In its ruling, the Labor Arbiter clarified that novation had

set in between the first and second contract. To quote:
xxx [T]his office would like to make it clear that the first contract
entered into by and between the complainant and the respondents
is deemed to have been novated by the execution of the second
contract. In other words, respondents cannot be held liable for the
first contract but are clearly and definitely liable for the breach of
the second contract. 20

This ruling was later affirmed by the Court of

Appeals in its decision ruling that:
Guided by the foregoing legal precepts, it is evident that novation
took place in this particular case. The parties impliedly
extinguished the first contract by agreeing to enter into the second
contract to placate Medequillo, Jr. who was unexpectedly
dismissed and repatriated to Manila. The second contract would
not have been necessary if the petitioners abided by the terms and
conditions of Madequillo, Jr.s employment under the first
contract. The records also reveal that the 2nd contract extinguished
the first contract by changing its object or principal. These
contracts were for overseas employment aboard different vessels.
The first contract was for employment aboard the MV Stolt
Aspiration while the second contract involved working in another
vessel, the MV Stolt Pride. Petitioners and Madequillo, Jr.
accepted the terms and conditions of the second contract. Contrary
to petitioners assertion, the first contract was a previous valid
contract since it had not yet been terminated at the time of
Medequillo, Jr.s repatriation to Manila. The legality of his
dismissal had not yet been resolved with finality. Undoubtedly, he
was still employed under the first contract when he negotiated with
petitioners on the second contract. As such, the NLRC correctly
ruled that petitioners could only be held liable under the second
contract.
21

We concur with the finding that there was a novation of the

first employment contract.
We reiterate once more and emphasize the ruling in
Reyes v. National Labor Relations Commission, to wit:22

x x x [F]indings of quasi-judicial bodies like the NLRC,

and affirmed by the Court of Appeals in due course,
are conclusive on this Court, which is not a trier of
facts.

xxxx
x x x Findings of fact of administrative agencies and
quasi-judicial bodies, which have acquired
expertise because their jurisdiction is confined to
specific matters, are generally accorded not only
respect, but finality when affirmed by the Court
of Appeals. Such findings deserve full respect and,
without justifiable reason, ought not to be altered,
modified or reversed.(Emphasis supplied) 23

With the finding that respondent was still employed under

the first contract when he negotiated with petitioners on the
second contract, novation became an unavoidable
24

conclusion.
Equally settled is the rule that factual findings of labor
officials, who are deemed to have acquired expertise in
matters within their jurisdiction, are generally accorded not
only respect but even finality by the courts when supported
by substantial evidence, i.e., the amount of relevant
evidence which a reasonable mind might accept as
adequate to justify a conclusion. But these findings are not
25

infallible. When there is a showing that they were arrived at

arbitrarily or in disregard of the evidence on record, they
may be examined by the courts. In this case, there was no
26

showing of any arbitrariness on the part of the lower courts

in their findings of facts. Hence, we follow the settled rule.
We need not dwell on the issue of prescription. It was
settled by the Court of Appeals with its ruling that recovery
of damages under the first contract was already time-
barred. Thus:
Accordingly, the prescriptive period of three (3) years within
which Medequillo Jr. may initiate money claims under the 1st
contract commenced on the date of his repatriation. xxx The start
of the three (3) year prescriptive period must therefore be reckoned
on February 1992, which by Medequillo Jr.s own admission was
the date of his repatriation to Manila. It was at this point in time
that Medequillo Jr.s cause of action already accrued under the first
contract. He had until February 1995 to pursue a case for illegal
dismissal and damages arising from the 1st contract. With the filing
of his Complaint-Affidavit on March 6, 1995, which was clearly
beyond the prescriptive period, the cause of action under the 1st
contract was already time-barred. 27

The issue that proceeds from the fact of novation is

the consequence of the non-deployment of respondent.
The petitioners argue that under the POEA Contract,
actual deployment of the seafarer is a suspensive condition
for the commencement of the employment. We agree with28

petitioners on such point. However, even without actual

deployment, the perfected contract gives rise to obligations
on the part of petitioners.
A contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to
give something or to render some service. The contracting
29
parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or
public policy.30

The POEA Standard Employment Contract provides

that employment shall commence upon the actual
departure of the seafarer from the airport or seaport in the
port of hire. We adhere to the terms and conditions of the
31

contract so as to credit the valid prior stipulations of the

parties before the controversy started. Else, the obligatory
force of every contract will be useless. Parties are bound
not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according
to their nature, may be in keeping with good faith, usage
and law.32

Thus, even if by the standard contract employment

commences only upon actual departure of the seafarer,
this does not mean that the seafarer has no remedy in case
of non-deployment without any valid reason.
Parenthetically, the contention of the petitioners of the
alleged poor performance of respondent while on board the
first ship MV Stolt Aspiration cannot be sustained to
justify the non-deployment, for no evidence to prove the
same was presented. 33

We rule that distinction must be made between the

perfection of the employment contract and the
commencement of the employer-employee relationship.
The perfection of the contract, which in this case coincided
with the date of execution thereof, occurred when petitioner
and respondent agreed on the object and the cause, as well
as the rest of the terms and conditions therein. The
commencement of the employer-employee relationship, as
earlier discussed, would have taken place had petitioner
been actually deployed from the point of hire. Thus, even
before the start of any employer-employee relationship,
contemporaneous with the perfection of the employment
contract was the birth of certain rights and obligations, the
breach of which may give rise to a cause of action against
the erring party. Thus, if the reverse had happened, that is
the seafarer failed or refused to be deployed as agreed
upon, he would be liable for damages. 34

Further, we do not agree with the contention of the

petitioners that the penalty is a mere reprimand.
The POEA Rules and Regulations Governing
Overseas Employment dated 31 May 1991 provides for the
35

consequence and penalty against in case of non-deployment

of the seafarer without any valid reason. It reads:
Section 4. Workers Deployment. An agency shall
deploy its recruits within the deployment period as
indicated below:

xxx
b. Thirty (30) calendar days from the date of processing by
the administration of the employment contracts of
seafarers.

Failure of the agency to deploy a worker within the prescribed

period without valid reasons shall be a cause for suspension or
cancellation of license or fine. In addition, the agency shall
return all documents at no cost to the worker.(Emphasis and
underscoring supplied)

The appellate court correctly ruled that the penalty of

reprimand provided under Rule IV, Part VI of the POEA
36

Rules and Regulations Governing the Recruitment and

Employment of Land-based Overseas Workers is not
applicable in this case. The breach of contract happened on
February 1992 and the law applicable at that time was the
1991 POEA Rules and Regulations Governing Overseas
Employment. The penalty for non-deployment as discussed
is suspension or cancellation of license or fine.
 Now, the question to be dealt with is how will the
seafarer be compensated by reason of the unreasonable
non-deployment of the petitioners?
The POEA Rules Governing the Recruitment and
Employment of Seafarers do not provide for the award of
damages to be given in favor of the employees. The claim
provided by the same law refers to a valid contractual claim
for compensation or benefits arising from employer-
employee relationship or for any personal injury, illness or
death at levels provided for within the terms and conditions
of employment of seafarers. However, the absence of the
POEA Rules with regard to the payment of damages to the
affected seafarer does not mean that the seafarer is
precluded from claiming the same. The sanctions provided
for non-deployment do not end with the suspension or
cancellation of license or fine and the return of all
documents at no cost to the worker. As earlier discussed,
they do not forfend a seafarer from instituting an action for
damages against the employer or agency which has failed
to deploy him. 37

We thus decree the application of Section 10 of

Republic Act No. 8042 (Migrant Workers Act) which
provides for money claims by reason of a contract
involving Filipino workers for overseas deployment. The
law provides:
Sec. 10. Money Claims. Notwithstanding any provision of
law to the contrary, the Labor Arbiters of the
National Labor Relations Commission (NLRC)
 shall have the original and exclusive jurisdiction to
hear and decide, within ninety (90) calendar days
after the filing of the complaint, the claims arising
out of an employer-employee relationship or by
virtue of any law or contract involving Filipino
workers for overseas deployment including claims
for actual, moral, exemplary and other forms of
damages. x x x (Underscoring supplied)

Following the law, the claim is still cognizable by

the labor arbiters of the NLRC under the second phrase of
the provision.
Applying the rules on actual damages, Article 2199
of the New Civil Code provides that one is entitled to an
adequate compensation only for such pecuniary loss
suffered by him as he has duly proved. Respondent is thus
liable to pay petitioner actual damages in the form of the
loss of nine (9) months worth of salary as provided in the
contract. This is but proper because of the non-deployment
38

of respondent without just cause.

WHEREFORE, the appeal is DENIED. The 31
January 2007 Decision of the Court of Appeals in CA-G.R.
SP. No. 91632 is hereby AFFIRMED. The Petitioners are
hereby ordered to pay Sulpecio Medequillo, Jr., the award
of actual damages equivalent to his salary for nine (9)
months as provided by the Second Employment Contract.
SO ORDERED.

UNITED PULP AND PAPER CO., G.R. No. 171750

INC.,
Petitioner, Present:

CORONA, CJ,
VELASCO, JR., J., Chair
ABAD,
- versus MENDOZA, and
PERLAS-BERNABE, JJ.

ACROPOLIS CENTRAL Promulgated:

GUARANTY CORPORATION,
Respondent. January 25, 2012

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

DECISION

MENDOZA, J.:
 This is a petition for review under Rule 45 praying
for the annulment of the November 17, 2005 Decision [if !
supportFootnotes][1][endif]
and the March 2, 2006 Resolution [if !
supportFootnotes][2][endif]
of the Court of Appeals (CA) in CA-G.R.
SP No. 89135 entitled Acropolis Central Guaranty
Corporation (formerly known as the Philippine Pryce
Assurance Corp.) v. Hon. Oscar B. Pimentel, as Presiding
Judge, RTC of Makati City, Branch 148 (RTC), and
United Pulp and Paper Co., Inc.
The Facts
On May 14, 2002, United Pulp and Paper Co., Inc.
(UPPC) filed a civil case for collection of the amount of
P42,844,353.14 against Unibox Packaging Corporation
(Unibox) and Vicente Ortega (Ortega) before the
Regional Trial Court of Makati, Branch 148 (RTC).[if !
supportFootnotes][3][endif]
UPPC also prayed for a Writ of
Preliminary Attachment against the properties of Unibox
and Ortega for the reason that the latter were on the verge
of insolvency and were transferring assets in fraud of
creditors.[if !supportFootnotes][4][endif] On August 29, 2002, the RTC
issued the Writ of Attachment[if !supportFootnotes][5][endif] after
UPPC posted a bond in the same amount of its claim. By
virtue of the said writ, several properties and assets of
Unibox and Ortega were attached.[if !supportFootnotes][6][endif]

On October 10, 2002, Unibox and Ortega filed their

Motion for the Discharge of Attachment,[if !supportFootnotes][7]
[endif]
praying that they be allowed to file a counter-bond in
the amount of P42,844,353.14 and that the writ of
preliminary attachment be discharged after the filing of
such bond. Although this was opposed by UPPC, the
RTC, in its Order dated October 25, 2002, granted the
said motion for the discharge of the writ of attachment
subject to the condition that Unibox and Ortega file a
counter-bond.[if !supportFootnotes][8][endif] Thus, on November 21,
2002, respondent Acropolis Central Guaranty Corporation
(Acropolis) issued the Defendants Bond for Dissolution of
Attachment[if !supportFootnotes][9][endif] in the amount of
P42,844,353.14 in favor of Unibox.

Not satisfied with the counter-bond issued by

Acropolis, UPPC filed its Manifestation and Motion to
Discharge the Counter-Bond[if !supportFootnotes][10][endif] dated
November 27, 2002, claiming that Acropolis was among
those insurance companies whose licenses were set to be
cancelled due to their failure to put up the minimum
amount of capitalization required by law. For that reason,
UPPC prayed for the discharge of the counter-bond and
the reinstatement of the attachment. In its December 10,
2002 Order,[if !supportFootnotes][11][endif] the RTC denied UPPCs
Motion to Discharge Counter-Bond and, instead,
approved and admitted the counter-bond posted by
Acropolis. Accordingly, it ordered the sheriff to cause the
lifting of the attachment on the properties of Unibox and
Ortega.

On September 29, 2003, Unibox, Ortega and UPPC

executed a compromise agreement,[if !supportFootnotes][12][endif]
wherein Unibox and Ortega acknowledged their
obligation to UPPC in the amount of P35,089,544.00 as
of August 31, 2003, inclusive of the principal and the
accrued interest, and bound themselves to pay the said
amount in accordance with a schedule of payments agreed
upon by the parties. Consequently, the RTC promulgated
its Judgment[if !supportFootnotes][13][endif] dated October 2, 2003
approving the compromise agreement.

For failure of Unibox and Ortega to pay the

required amounts for the months of May and June 2004
despite demand by UPPC, the latter filed its Motion for
Execution[if !supportFootnotes][14][endif] to satisfy the remaining
unpaid balance. In the July 30, 2004 Order,[if !supportFootnotes][15]
[endif]
the RTC acted favorably on the said motion and, on
August 4, 2004, it issued the requested Writ of Execution.
[if !supportFootnotes][16][endif]

The sheriff then proceeded to enforce the Writ of

Execution. It was discovered, however, that Unibox had
already ceased its business operation and all of its assets
had been foreclosed by its creditor bank. Moreover, the
responses of the selected banks which were served with
notices of garnishment indicated that Unibox and Ortega
no longer had funds available for garnishment. The sheriff
also proceeded to the residence of Ortega to serve the writ
but he was denied entry to the premises. Despite his
efforts, the sheriff reported in his November 4, 2008
Partial Return[if !supportFootnotes][17][endif] that there was no
satisfaction of the remaining unpaid balance by Unibox
and Ortega.

On the basis of the said return, UPPC filed its

Motion to Order Surety to Pay Amount of Counter-Bond [if
!supportFootnotes][18][endif]
directed at Acropolis. On November 30,
2004, the RTC issued its Order[if !supportFootnotes][19][endif]
granting the motion and ordering Acropolis to comply
with the terms of its counter-bond and pay UPPC the
unpaid balance of the judgment in the amount of
P27,048,568.78 with interest of 12% per annum from
default.

Thereafter, on December 13, 2004, Acropolis filed

its Manifestation and Very Urgent Motion for
Reconsideration,[if !supportFootnotes][20][endif] arguing that it could
not be made to pay the amount of the counter-bond
because it did not receive a demand for payment from
UPPC. Furthermore, it reasoned that its obligation had
been discharged by virtue of the novation of its obligation
pursuant to the compromise agreement executed by
UPPC, Unibox and Ortega. The motion, which was set for
hearing on December 17, 2004, was received by the RTC
and UPPC only on December 20, 2004.[if !supportFootnotes][21]
[endif]
In the Order dated February 22, 2005, the RTC
denied the motion for reconsideration for lack of merit
and for having been filed three days after the date set for
the hearing on the said motion.[if !supportFootnotes][22][endif]

Aggrieved, Acropolis filed a petition for certiorari

before the CA with a prayer for the issuance of a
Temporary Restraining Order and Writ of Preliminary
Injunction.[if !supportFootnotes][23][endif] On November 17, 2005,
the CA rendered its Decision[if !supportFootnotes][24][endif] granting
the petition, reversing the February 22, 2005 Order of the
RTC, and absolving and relieving Acropolis of its liability
to honor and pay the amount of its counter-attachment
bond. In arriving at said disposition, the CA stated that,
firstly, Acropolis was able to comply with the three-day
notice rule because the motion it filed was sent by
registered mail on December 13, 2004, four days prior to
the hearing set for December 17, 2004; [if !supportFootnotes][25][endif]
secondly, UPPC failed to comply with the following
requirements for recovery of a judgment creditor from the
surety on the counter-bond in accordance with Section 17,
Rule 57 of the Rules of Court, to wit: (1) demand made
by creditor on the surety, (2) notice to surety and (3)
summary hearing as to his liability for the judgment under
the counter-bond;[if !supportFootnotes][26][endif] and, thirdly, the
failure of UPPC to include Acropolis in the compromise
agreement was fatal to its case.[if !supportFootnotes][27][endif]

UPPC then filed a motion for reconsideration but it

was denied by the CA in its Resolution dated March 1,
2006.[if !supportFootnotes][28][endif]

Hence, this petition.

The Issues
For the allowance of its petition, UPPC raises the
following

GROUNDS
I.
The Court of Appeals erred in not holding
respondent liable on its counter-attachment bond
which it posted before the trial court inasmuch as:

A. The requisites for recovering upon the

respondent-surety were clearly complied with by
petitioner and the trial court, inasmuch as prior
demand and notice in writing was made upon
respondent, by personal service, of petitioners
motion to order respondent surety to pay the
amount of its counter-attachment bond, and a
hearing thereon was held for the purpose of
determining the liability of the respondent-surety.
B. The terms of respondents counter-attachment
bond are clear, and unequivocally provide that
respondent as surety shall jointly and solidarily
bind itself with defendants to secure and pay any
judgment that petitioner may recover in the action.
Hence, such being the terms of the bond, in
accordance with fair insurance practices,
respondent cannot, and should not be allowed to,
evade its liability to pay on its counter-attachment
bond posted by it before the trial court.
II.
The Court of Appeals erred in holding that the trial
court gravely abused its discretion in denying
respondents manifestation and motion for
reconsideration considering that the said motion
failed to comply with the three (3)-day notice rule
under Section 4, Rule 15 of the Rules of Court, and
that it had lacked substantial merit to warrant a
reversal of the trial courts previous order.[if !
supportFootnotes][29][endif]

Simply put, the issues to be dealt with in this case

are as follows:

[if !supportLists](1) [endif]Whether

UPPC failed to make
the required demand and notice upon Acropolis; and
[if !supportLists](2) [endif]Whether
the execution of the
compromise agreement between UPPC and Unibox and
Ortega was tantamount to a novation which had the effect
of releasing Acropolis from its obligation under the
counter-attachment bond.

The Courts Ruling

UPPC complied with the twin requirements of notice and

demand

On the recovery upon the counter-bond, the Court

finds merit in the arguments of the petitioner.
UPPC argues that it complied with the requirement
of demanding payment from Acropolis by notifying it, in
writing and by personal service, of the hearing held on
UPPCs Motion to Order Respondent-Surety to Pay the
Bond.[if !supportFootnotes][30][endif] Moreover, it points out that the
terms of the counter-attachment bond are clear in that
Acropolis, as surety, shall jointly and solidarily bind itself
with Unibox and Ortega to secure the payment of any
judgment that UPPC may recover in the action. [if !
supportFootnotes][31][endif]

Section 17, Rule 57 of the Rules of Court sets forth the

procedure for the recovery from a surety on a counter-
bond:
Sec. 17. Recovery upon the counter-
bond. When the judgment has become
executory, the surety or sureties on any
counter-bond given pursuant to the provisions
of this Rule to secure the payment of the
judgment shall become charged on such
counter-bond and bound to pay the judgment
obligee upon demand the amount due under
the judgment, which amount may be recovered
from such surety or sureties after notice and
summary hearing on the same action.

From a reading of the abovequoted provision, it is evident

that a surety on a counter-bond given to secure the
payment of a judgment becomes liable for the payment of
the amount due upon: (1) demand made upon the surety;
and (2) notice and summary hearing on the same action.
After a careful scrutiny of the records of the case, the
Court is of the view that UPPC indeed complied with
these twin requirements.

This Court has consistently held that the filing of a

complaint constitutes a judicial demand.[if !supportFootnotes][32]
[endif]
Accordingly, the filing by UPPC of the Motion to
Order Surety to Pay Amount of Counter-Bond was
already a demand upon Acropolis, as surety, for the
payment of the amount due, pursuant to the terms of the
bond. In said bond, Acropolis bound itself in the sum of
42,844,353.14 to secure the payment of any judgment
that UPPC might recover against Unibox and Ortega. [if !
supportFootnotes][33][endif]

Furthermore, an examination of the records reveals that

the motion was filed by UPPC on November 11, 2004 and
was set for hearing on November 19, 2004.[if !supportFootnotes]
[34][endif]
Acropolis was duly notified of the hearing and it
was personally served a copy of the motion on November
11, 2004,[if !supportFootnotes][35][endif] contrary to its claim that it
did not receive a copy of the motion.

On November 19, 2004, the case was reset for hearing on

November 30, 2004. The minutes of the hearing on both
dates show that only the counsel for UPPC was present.
Thus, Acropolis was given the opportunity to defend
itself. That it chose to ignore its day in court is no longer
the fault of the RTC and of UPPC. It cannot now invoke
the alleged lack of notice and hearing when, undeniably,
both requirements were met by UPPC.

No novation despite compromise agreement; Acropolis

still liable under the terms of the counter-bond

UPPC argues that the undertaking of Acropolis is

to secure any judgment rendered by the RTC in its favor.
It points out that because of the posting of the counter-
bond by Acropolis and the dissolution of the writ of
preliminary attachment against Unibox and Ortega, UPPC
lost its security against the latter two who had gone
bankrupt.[if !supportFootnotes][36][endif] It cites the cases of Guerrero
v. Court of Appeals[if !supportFootnotes][37][endif] and Martinez v.
Cavives[if !supportFootnotes][38][endif] to support its position that the
execution of a compromise agreement between the parties
and the subsequent rendition of a judgment based on the
said compromise agreement does not release the surety
from its obligation nor does it novate the obligation.[if !
supportFootnotes][39][endif]

Acropolis, on the other hand, contends that it was

not a party to the compromise agreement. Neither was it
aware of the execution of such an agreement which
contains an acknowledgment of liability on the part of
Unibox and Ortega that was prejudicial to it as the surety.
Accordingly, it cannot be bound by the judgment issued
based on the said agreement.[if !supportFootnotes][40][endif] Acropolis
also questions the applicability of Guerrero and draws
attention to the fact that in said case, the compromise
agreement specifically stipulated that the surety shall
continue to be liable, unlike in the case at bench where
the compromise agreement made no mention of its
obligation to UPPC.[if !supportFootnotes][41][endif]

On this issue, the Court finds for UPPC also.

The terms of the Bond for Dissolution of Attachment

issued by Unibox and Acropolis in favor of UPPC are
clear and leave no room for ambiguity:

WHEREAS, the Honorable Court in the

above-entitled case issued on _____ an Order
dissolving / lifting partially the writ of
attachment levied upon the defendant/s
personal property, upon the filing of a
counterbond by the defendants in the sun of
PESOS FORTY TWO MILLION EIGHT
HUNDRED FORTY FOUR THOUSAND
THREE HUNDRED FIFTY THREE AND
14/100 ONLY (P 42,844,353.14) Philippine
Currency.

NOW, THEREFORE, we UNIBOX

PACKAGING CORP. as Principal and
PHILIPPINE PRYCE ASSURANCE CORP., a
corporation duly organized and existing under
and by virtue of the laws of the Philippines, as
Surety, in consideration of the dissolution of
said attachment, hereby jointly and severally
bind ourselves in the sum of FORTY TWO
MILLION EIGHT HUNDRED FORTY FOUR
 THOUSAND THREE HUNDRED FIFTY
THREE AND 14/100 ONLY (P 42,844,353.14)
Philippine Currency, in favor of the plaintiff to
secure the payment of any judgment that the
plaintiff may recover against the defendants in
this action.[if !supportFootnotes][42][endif] [Emphasis and
underscoring supplied]

Based on the foregoing, Acropolis voluntarily bound itself

with Unibox to be solidarily liable to answer for ANY
judgment which UPPC may recover from Unibox in its
civil case for collection. Its counter-bond was issued in
consideration of the dissolution of the writ of attachment
on the properties of Unibox and Ortega. The counter-bond
then replaced the properties to ensure recovery by UPPC
from Unibox and Ortega. It would be the height of
injustice to allow Acropolis to evade its obligation to
UPPC, especially after the latter has already secured a
favorable judgment.

This issue is not novel. In the case of Luzon Steel

Corporation v. Sia,[if !supportFootnotes][43][endif] Luzon Steel
Corporation sued Metal Manufacturing of the Philippines
and Jose Sia for breach of contract and damages. A writ of
preliminary attachment was issued against the properties
of the defendants therein but the attachment was lifted
upon the filing of a counter-bond issued by Sia, as
principal, and Times Surety & Insurance Co., as surety.
Later, the plaintiff and the defendants entered into a
compromise agreement whereby Sia agreed to settle the
plaintiffs claim. The lower court rendered a judgment in
accordance with the terms of the compromise. Because
the defendants failed to comply with the same, the
plaintiff obtained a writ of execution against Sia and the
surety on the counter-bond. The surety moved to quash
the writ of execution on the ground that it was not a party
to the compromise and that the writ was issued without
giving the surety notice and hearing. Thus, the court set
aside the writ of execution and cancelled the counter-
bond. On appeal, this Court, speaking through the learned
Justice J.B.L. Reyes, discussed the nature of the liability
of a surety on a counter-bond:

Main issues posed are (1) whether the

judgment upon the compromise discharged
the surety from its obligation under its
attachment counterbond and (2) whether the
writ of execution could be issued against the
surety without previous exhaustion of the
debtor's properties.

Both questions can be solved by bearing

in mind that we are dealing with
a counterbond filed to discharge a levy on
attachment. Rule 57, section 12, specifies that
an attachment may be discharged upon the
making of a cash deposit or filing a
counterbond in an amount equal to the value
of the property attached as determined by the
judge; that upon the filing of the counterbond
the property attached ... shall be delivered to
the party making the deposit or giving the
counterbond, or the person appearing on his
behalf, the deposit or counterbond aforesaid
standing in place of the property so released.

The italicized expressions constitute the

key to the entire problem. Whether the
judgment be rendered after trial on the merits
or upon compromise, such judgment
undoubtedly may be made effective upon the
property released; and since the counterbond
merely stands in the place of such property,
there is no reason why the judgment should not
be made effective against the counterbond
regardless of the manner how the judgment was
obtained.

xxx

As declared by us in Mercado v.
Macapayag, 69 Phil. 403, 405-406, in passing
 upon the liability of counter sureties in
replevin who bound themselves to answer
solidarily for the obligations of the defendants
to the plaintiffs in a fixed amount of 912.04,
to secure payment of the amount that said
plaintiff be adjudged to recover from the
defendants,

the liability of the sureties was fixed and conditioned on the

finality of the judgment rendered regardless of whether the
decision was based on the consent of the parties or on the
merits. A judgment entered on a stipulation is nonetheless a
judgment of the court because consented to by the parties.[if !
supportFootnotes][44][endif]

[Emphases and underscoring supplied]

The argument of Acropolis that its obligation under

the counter-bond was novated by the compromise
agreement is, thus, untenable. In order for novation to
extinguish its obligation, Acropolis must be able to show
that there is an incompatibility between the compromise
agreement and the terms of the counter-bond, as required
by Article 1292 of the Civil Code, which provides that:

Art. 1292. In order that an obligation

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

Nothing in the compromise agreement indicates, or

even hints at, releasing Acropolis from its obligation to
pay UPPC after the latter has obtained a favorable
judgment. Clearly, there is no incompatibility between the
compromise agreement and the counter-bond. Neither can
novation be presumed in this case. As explained in Dugo
v. Lopena:[if !supportFootnotes][45][endif]

Novation by presumption has never

been favored. To be sustained, it need be
established that the old and new contracts are
incompatible in all points, or that the will to
novate appears by express agreement of the
parties or in acts of similar import. [if !
supportFootnotes][46][endif]

All things considered, Acropolis, as surety under the

terms of the counter-bond it issued, should be held liable
for the payment of the unpaid balance due to UPPC.

Three-day notice rule, not a hard and fast rule

Although this issue has been obviated by our

disposition of the two main issues, the Court would like
to point out that the three-day notice requirement is not a
hard and fast rule and substantial compliance is allowed.

Pertinently, Section 4, Rule 15 of the Rules of

Court reads:
Sec. 4. Hearing of motion. Except for motions which
the court may act upon without prejudicing the
rights of the adverse party, every written
motion shall be set for hearing by the
applicant.

Every written motion required to be heard and the

notice of the hearing thereof shall be served in
such a manner as to insure its receipt by the
other party at least three (3) days before the
date of hearing, unless the court for good cause
sets the hearing on shorter notice. [Emphasis
supplied]

The law is clear that it intends for the other party to

receive a copy of the written motion at least three days
before the date set for its hearing. The purpose of the
three (3)-day notice requirement, which was established
not for the benefit of the movant but rather for the adverse
party, is to avoid surprises upon the latter and to grant it
sufficient time to study the motion and to enable it to
meet the arguments interposed therein.[if !supportFootnotes][47][endif]
In Preysler, Jr. v. Manila Southcoast Development
Corporation,[if !supportFootnotes][48][endif] the Court restated the
ruling that the date of the hearing should be at least three
days after receipt of the notice of hearing by the other
parties.

It is not, however, a hard and fast rule. Where a

party has been given the opportunity to be heard, the time
to study the motion and oppose it, there is compliance
with the rule. This was the ruling in the case of Jehan
Shipping Corporation v. National Food Authority,[if !
supportFootnotes][49][endif]
where it was written:

Purpose Behind the

Notice Requirement

This Court has indeed held time and

time again that, under Sections 4 and 5 of Rule
15 of the Rules of Court, mandatory is the
notice requirement in a motion, which is
rendered defective by failure to comply with
the requirement. As a rule, a motion without a
notice of hearing is considered pro forma and
does not affect the reglementary period for the
appeal or the filing of the requisite pleading.
 As an integral component of procedural
due process, the three-day notice required by
the Rules is not intended for the benefit of the
movant. Rather, the requirement is for the
purpose of avoiding surprises that may be
sprung upon the adverse party, who must be
given time to study and meet the arguments in
the motion before a resolution by the court.
Principles of natural justice demand that the
right of a party should not be affected without
giving it an opportunity to be heard.

The test is the presence of the opportunity to be heard, as well

as to have time to study the motion and meaningfully oppose or
controvert the grounds upon which it is based. Considering the
circumstances of the present case, we believe that the
requirements of procedural due process were substantially
complied with, and that the compliance justified a departure
from a literal application of the rule on notice of hearing. [if !
supportFootnotes][50][endif]
[Emphasis supplied]

In the case at bench, the RTC gave UPPC sufficient time

to file its comment on the motion. On January 14, 2005,
UPPC filed its Opposition to the motion, discussing the
issues raised by Acropolis in its motion. Thus, UPPCs
right to due process was not violated because it was
afforded the chance to argue its position.

WHEREFORE, the petition is GRANTED. The

November 17, 2005 Decision and the March 1, 2006
Resolution of the Court of Appeals, in CA-G.R. SP No.
89135, are hereby REVERSED and SET ASIDE. The
November 30, 2004 Order of the Regional Trial Court,
Branch 148, Makati City, ordering Acropolis to comply
with the terms of its counter-bond and pay UPPC the
unpaid balance of the judgment in the amount of
P27,048,568.78 with interest of 12% per annum from
default is REINSTATED.

CRESENCIO C. MILLA, G.R. No. 188726

Petitioner,
Present:

CARPIO, J.,
- versus - Chairperson,
PEREZ,
SERENO,
REYES, and
PERLAS-BERNABE, JJ.
PEOPLE OF THE PHILIPPINES
and MARKET PURSUITS, INC. Promulgated:
represented by CARLO V. LOPEZ,
Respondents. January 25, 2012

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

DECISION
SERENO, J.:
This is a Petition for Certiorari assailing the 22
April 2009 Decision[if !supportFootnotes][1][endif] and 8 July 2009
Resolution[if !supportFootnotes][2][endif] of the Court of Appeals,
affirming the Decision of the trial court finding petitioner
Cresencio C. Milla (Milla) guilty of two counts of estafa
through falsification of public documents.
Respondent Carlo Lopez (Lopez) was the Financial
Officer of private respondent, Market Pursuits, Inc.
(MPI). In March 2003, Milla represented himself as a real
estate developer from Ines Anderson Development
Corporation, which was engaged in selling business
properties in Makati, and offered to sell MPI a property
therein located. For this purpose, heshowed Lopez a
photocopy of Transfer Certificate of Title (TCT) No.
216445 registered in the name of spouses Farley and
Jocelyn Handog (Sps. Handog), as well as a Special
Power of Attorney purportedly executed by the spouses in
favor of Milla.[if !supportFootnotes][3][endif] Lopez verified with the
Registry of Deeds of Makati and confirmed that the
property was indeed registered under the names of Sps.
Handog. Since Lopez was convinced by Millas authority,
MPI purchased the property for P2 million, issuing
Security Bank and Trust Co. (SBTC) Check No. 154670
in the amount of P1.6 million. After receiving the check,
Milla gave Lopez (1) a notarized Deed of Absolute Sale
dated 25 March 2003 executed by Sps. Handog in favor
of MPI and (2) an original Owners Duplicate Copy of
TCT No. 216445.[if !supportFootnotes][4][endif]
Milla then gave Regino Acosta (Acosta), Lopezs
partner, a copy of the new Certificate of Title to the
property, TCT No. 218777, registered in the name of
MPI. Thereafter, it tendered in favor of Milla SBTC
Check No. 15467111 in the amount of P400,000 as
payment for the balance.[if !supportFootnotes][5][endif]
Milla turned over TCT No. 218777 to Acosta, but
did not furnish the latter with the receipts for the transfer
taxes and other costs incurred in the transfer of the
property. This failure to turn over the receipts prompted
Lopez to check with the Register of Deeds, where he
discovered that (1) the Certificate of Title given to them
by Milla could not be found therein; (2) there was no
transfer of the property from Sps. Handog to MPI; and (3)
TCT No. 218777 was registered in the name of a certain
Matilde M. Tolentino.[if !supportFootnotes][6][endif]
Consequently, Lopez demanded the return of the
amount of P2 million from Milla, who then issued
Equitable PCI Check Nos. 188954 and 188955 dated 20
and 23 May 2003, respectively, in the amount of P1
million each. However, these checks were dishonored for
having been drawn against insufficient funds. When Milla
ignored the demand letter sent by Lopez, the latter, by
virtue of the authority vested in him by the MPI Board of
Directors, filed a Complaint against the former on 4
August 2003. On 27 and 29 October 2003, two
Informations for Estafa Thru Falsification of Public
Documents were filed against Milla and were raffled to
the Regional Trial Court, National Capital Judicial
Region, Makati City, Branch 146 (RTC Br. 146). [if !
supportFootnotes][7][endif]
Milla was accused of having committed
estafa through the falsification of the notarized Deed of
Absolute Sale and TCT No. 218777 purportedly issued by
the Register of Deeds of Makati, viz:

CRIMINAL CASE NO. 034167

That on or about the 25th day of March 2003,

in the City of Makati, Philippines and within the
jurisdiction of this Honorable Court, the above-
named accused, a private individual, did then and
there, wilfully, unlawfully and feloniously falsify a
document denomindated as Deed of Absolute Sale,
duly notarized by Atty. Lope M. Velasco, a Notary
Public for and in the City of Makati, denominated
as Doc. No. 297, Page No. 61, Book No. 69, Series
of 2003 in his Notarial Register, hence, a public
document, by causing it to appear that the registered
owners of the property covered by TCT No. 216445
have sold their land to complainant Market Pursuits,
Inc. when in truth and in fact the said Deed of
Absolute Sale was not executed by the owners
thereof and after the document was falsified,
accused, with intent to defraud complainant Market
Pursuits, Inc. presented the falsified Deed of Sale to
complainant, herein represented by Carlo V. Lopez,
and complainant believing in the genuineness of the
Deed of Absolute Sale paid accused the amount of
P1,600,000.00 as partial payment for the property,
to the damage and prejudice of complainant in the
aforementioned amount of P1,600,000.00
 CONTRARY TO LAW.

CRIMINAL CASE NO. 034168

That on or about the 3rd day of April 2003, in the City of

Makati, Philippines and within the jurisdiction of
this Honorable Court, the above-named accused, a
private individual, did then and there wilfully,
unlawfully and feloniously falsify a document
denominated as Transfer Certificate of Title No.
218777 purportedly issued by the Register of Deeds
of Makati City, hence, a public document, by
causing it to appear that the lot covered by TCT No.
218777 was already registered in the name of
complainant Market Pursuits, Inc., herein
represented by Carlo V. Lopez, when in truth and in
fact, as said accused well knew that the Register of
Deeds of Makati did not issue TCT No. 218777 in
the name of Market Pursuits Inc., and after the
document was falsified, accused with intent to
defraud complainant and complainant believing in
the genuineness of Transfer Certificate of Title No.
218777 paid accused the amount of P400,000.00, to
the damage and prejudice of complainant in the
aforementioned amount of P4000,000.00 (sic).
 CONTRARY TO LAW.[if !supportFootnotes][8]
[endif]

After the prosecution rested its case, Milla filed,

with leave of court, his Demurrer to Evidence.[if !
supportFootnotes][9][endif]
In its Order dated 26 January 2006, RTC
Br. 146 denied the demurrer and ordered him to present
evidence, but he failed to do so despite having been
granted ample opportunity.[if !supportFootnotes][10][endif] Though the
court considered his right to present evidence to have
been consequently waived, it nevertheless allowed him to
file a memorandum.[if !supportFootnotes][11][endif]
In its Joint Decision dated 28 November 2006,[if !
supportFootnotes][12][endif]
RTC Br. 146 found Milla guilty beyond
reasonable doubt of two counts of estafa through
falsification of public documents, thus:

WHEREFORE, judgment is rendered

finding the accused Cresencio Milla guilty beyond
reasonable doubt of two (2) counts of estafa through
falsification of public documents. Applying the
indeterminate sentence law and considering that the
amount involved is more than P22,000,00 this Court
should apply the provision that an additional one (1)
year should be imposed for every ten thousand
(P10,000.00) pesos in excess of P22,000.00, thus,
this Court is constrained to impose the
Indeterminate (sic) penalty of four (4) years, two (2)
months one (1) day of prision correccional as
minimum to twenty (20) years of reclusion temporal
 as maximum for each count.

Accused is adjudged to be civilly liable to

the private complainant and is ordered pay (sic)
complainant the total amount of TWO MILLION
(P2,000,000.00) PESOS with legal rate of interest
from the filing of the Information until the same is
fully paid and to pay the costs. He is further ordered
to pay attorneys fees equivalent to ten (10%) of the
total amount due as and for attorneys fees. A lien on
the monetary award is constituted in favor of the
government, the private complainant not having
paid the required docket fee prior to the filing of the
Information.

SO ORDERED.[if !supportFootnotes][13][endif]

On appeal, the Court of Appeals, in the assailed

Decision dated 22 April 2009, affirmed the findings of the
trial court.[if !supportFootnotes][14][endif] In its assailed Resolution
dated 8 July 2009, it also denied Millas subsequent
Motion for Reconsideration.[if !supportFootnotes][15][endif]
In the instant Petition, Milla alleges that the
Decision and the Resolution of the Court of Appeals were
not in accordance with law and jurisprudence. He raises
the following issues:
 [if !supportLists]I. [endif]Whether the case
should be reopened on the ground of negligence of
counsel;
[if !supportLists]II. [endif]Whether the principle
of novation is applicable;
[if !supportLists]III. [endif]Whether the principle
of simple loan is applicable;
[if !supportLists]IV. [endif]Whether the
Secretarys Certificate presented by the prosecution is
admissible in evidence;
[if !supportLists]V. [endif]Whether the supposed
inconsistent statements of prosecution witnesses cast a
doubt on the guilt of petitioner.[if !supportFootnotes][16][endif]
In its Comment, MPI argues that (1) Milla was not
deprived of due process on the ground of gross
negligence of counsel; (2) under the Revised Penal Code,
novation is not one of the grounds for the extinction of
criminal liability for estafa; and (3) factual findings of the
trial court, when affirmed by the Court of Appeals, are
final and conclusive.[if !supportFootnotes][17][endif]
On the other hand, in its Comment, the Office of the
Solicitor General contends that (1) Milla was accorded
due process of law; (2) the elements of the crime charged
against him were established during trial; (3) novation is
not a ground for extinction of criminal liability for estafa;
(4) the money received by Milla from Lopez was not in
the nature of a simple loan or cash advance; and (5)
Lopez was duly authorized by MPI to institute the action.
[if !supportFootnotes][18][endif]

In his Consolidated Reply, Milla reiterates that the

negligence of his former counsel warrants a reopening of
the case, wherein he can present evidence to prove that
his transaction with MPI was in the nature of a simple
loan.[if !supportFootnotes][19][endif]
In the disposition of this case, the following issues must
be resolved:
[if !supportLists]I. [endif]Whether the negligence of
counsel deprived Milla of due process of law
[if !supportLists]II. [endif]Whether the principle of
novation can exculpate Milla from criminal liability
[if !supportLists]III. [endif]Whether the factual findings
of the trial court, as affirmed by the appellate court,
should be reviewed on appeal
We resolve to deny the Petition.

Milla was not

deprived of due
process.
Milla argues that the negligence of his former counsel,
Atty. Manuel V. Mendoza (Atty. Mendoza), deprived him
of due process. Specifically, he states that after the
prosecution had rested its case, Atty. Mendoza filed a
Demurrer to Evidence, and that the former was never
advised by the latter of the demurrer. Thus, Milla was
purportedly surprised to discover that RTC Br. 146 had
already rendered judgment finding him guilty, and that it
had issued a warrant for his arrest. Atty. Mendoza filed an
Omnibus Motion for Leave to File Motion for New Trial,
which Milla claims to have been denied by the trial court
for being an inappropriate remedy, thus, demonstrating
his counsels negligence. These contentions cannot be
given any merit.
The general rule is that the mistake of a counsel binds the
client, and it is only in instances wherein the negligence is
so gross or palpable that courts must step in to grant relief
to the aggrieved client.[if !supportFootnotes][20][endif] In this case,
Milla was able to file a Demurrer to Evidence, and upon
the trial courts denial thereof, was allowed to present
evidence.[if !supportFootnotes][21][endif] Because of his failure to do
so, RTC Br. 146 was justified in considering that he had
waived his right thereto. Nevertheless, the trial court still
allowed him to submit a memorandum in the interest of
justice. Further, contrary to his assertion that RTC Br. 146
denied the Motion to Recall Warrant of Arrest thereafter
filed by his former counsel, a reading of the 2 August
2007 Order of RTC Br. 146 reveals that it partially denied
the Omnibus Motion for New Trial and Recall of Warrant
of Arrest, but granted the Motion for Leave of Court to
Avail of Remedies under the Rules of Court, allowing
him to file an appeal and lifting his warrant of arrest.[if !
supportFootnotes][22][endif]

It can be gleaned from the foregoing circumstances that

Milla was given opportunities to defend his case and was
granted concomitant reliefs. Thus, it cannot be said that
the mistake and negligence of his former counsel were so
gross and palpable to have deprived him of due process.

The principle of
novation cannot
be applied to the
case at bar.

Milla contends that his issuance of Equitable PCI Check

Nos. 188954 and 188955 before the institution of the
criminal complaint against him novated his obligation to
MPI, thereby enabling him to avoid any incipient criminal
liability and converting his obligation into a purely civil
one. This argument does not persuade.
The principles of novation cannot apply to the present
case as to extinguish his criminal liability. Milla cites
People v. Nery[if !supportFootnotes][23][endif] to support his

contention that his issuance of the Equitable PCI checks

prior to the filing of the criminal complaint averted his
incipient criminal liability. However, it must be clarified
that mere payment of an obligation before the institution
of a criminal complaint does not, on its own, constitute
novation that may prevent criminal liability. This Courts
ruling in Nery in fact warned:

It may be observed in this regard that

novation is not one of the means recognized by the
Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only
be to either prevent the rise of criminal liability or
to cast doubt on the true nature of the original
petition, whether or not it was such that its breach
would not give rise to penal responsibility, as when
money loaned is made to appear as a deposit, or
other similar disguise is resorted to (cf. Abeto vs.
People, 90 Phil. 581; Villareal, 27 Phil. 481).
 Even in Civil Law the acceptance of
partial payments, without further change in the
original relation between the complainant and
the accused, can not produce novation. For the
latter to exist, there must be proof of intent to
extinguish the original relationship, and such
intent can not be inferred from the mere
acceptance of payments on account of what is
totally due. Much less can it be said that the
acceptance of partial satisfaction can effect the
nullification of a criminal liability that is fully
matured, and already in the process of enforcement.
Thus, this Court has ruled that the offended partys
acceptance of a promissory note for all or part of
the amount misapplied does not obliterate the
criminal offense (Camus vs. Court of Appeals, 48
Off. Gaz. 3898).[if !supportFootnotes][24][endif] (Emphasis
supplied.)

Further, in Quinto v. People,[if !supportFootnotes][25][endif] this Court

exhaustively explained the concept of novation in relation
to incipient criminal liability, viz:

Novation is never presumed, and

the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or
 by their acts that are too clear and unequivocal to be
mistaken.

The extinguishment of the old obligation by

the new one is a necessary element of novation
which may be effected either expressly or
impliedly. The term expressly means that the
contracting parties incontrovertibly disclose that
their object in executing the new contract is to
extinguish the old one. Upon the other hand, no
specific form is required for an implied
novation, and all that is prescribed by law would be
an incompatibility between the two contracts.
While there is really no hard and fast rule to
determine what might constitute to be a
sufficient change that can bring about novation,
the touchstone for contrariety, however, would
be an irreconcilable incompatibility between the
old and the new obligations.

There are two ways which could indicate, in fine, the

presence of novation and thereby produce the effect
of extinguishing an obligation by another which
substitutes the same. The first is when novation has
been explicitly stated and declared in unequivocal
terms. The second is when the old and the new
obligations are incompatible on every point. The
test of incompatibility is whether or not the two
obligations can stand together, each one having
its independent existence. If they cannot, they
are incompatible and the latter obligation
novates the first. Corollarily, changes that breed
incompatibility must be essential in nature and
not merely accidental. The incompatibility must
take place in any of the essential elements of the
obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient
to extinguish the original obligation.

The changes alluded to by petitioner

consists only in the manner of payment. There
was really no substitution of debtors since private
complainant merely acquiesced to the payment but
did not give her consent to enter into a new
contract. The appellate court observed:

xxx xxx xxx

 The acceptance by
complainant of partial payment
tendered by the buyer, Leonor
Camacho, does not evince the
intention of the complainant to
have their agreement novated. It
was simply necessitated by the fact
that, at that time, Camacho had
substantial accounts payable to
complainant, and because of the
fact that appellant made herself
scarce to complainant. (TSN, April
15, 1981, 31-32) Thus, to obviate
the situation where complainant
would end up with nothing, she
was forced to receive the tender of
Camacho. Moreover, it is to be
noted that the aforesaid payment was
for the purchase, not of the jewelry
subject of this case, but of some
other jewelry subject of a previous
transaction. (Ibid. June 8, 1981, 10-
11)

xxx xxx xxx

 Art. 315 of the Revised Penal Code defines
estafa and penalizes any person who shall defraud
another by misappropriating or converting, to the
prejudice of another, money, goods, or any other
personal property received by the offender in trust
or on commission, or for administration, or under
any other obligation involving the duty to make
delivery of or to return the same, even though such
obligation be totally or partially guaranteed by a
bond; or by denying having received such money,
goods, or other property. It is axiomatic that the
gravamen of the offense is the appropriation or
conversion of money or property received to the
prejudice of the owner. The terms convert and
misappropriate have been held to connote an act of
using or disposing of anothers property as if it were
ones own or devoting it to a purpose or use different
from that agreed upon. The phrase, to
misappropriate to ones own use has been said to
include not only conversion to ones personal
advantage, but also every attempt to dispose of the
property of another without right. Verily, the sale of
the pieces of jewelry on installments (sic) in
contravention of the explicit terms of the authority
granted to her in Exhibit A (supra) is deemed to be
one of conversion. Thus, neither the theory of delay
in the fulfillment of commission nor that of
novation posed by petitioner, can avoid the incipient
criminal liability. In People vs. Nery, this Court
held:
 xxx xxx xxx

The criminal liability for estafa already

committed is then not affected by the subsequent
novation of contract, for it is a public offense
which must be prosecuted and punished by the
State in its own conation. (Emphasis supplied.)[if !
supportFootnotes][26][endif]

In the case at bar, the acceptance by MPI of the Equitable

PCI checks tendered by Milla could not have novated the
original transaction, as the checks were only intended to
secure the return of the P2 million the former had already
given him. Even then, these checks bounced and were
thus unable to satisfy his liability. Moreover, the estafa
involved here was not for simple misappropriation or
conversion, but was committed through Millas
falsification of public documents, the liability for which
cannot be extinguished by mere novation.

The Court of
Appeals was
correct in
affirming the trial
courts finding of
guilt.

Finally, Milla assails the factual findings of the trial court.

Suffice it to say that factual findings of the trial court,
especially when affirmed by the appellate court, are
binding on and accorded great respect by this Court. [if !
supportFootnotes][27][endif]

There was no reversible error on the part of the Court of

Appeals when it affirmed the finding of the trial court that
Milla was guilty beyond reasonable doubt of the offense
of estafa through falsification of public documents. The
prosecution was able to prove the existence of all the
elements of the crime charged. The relevant provisions of
the Revised Penal Code read:

Art. 172. Falsification by private individual

and use of falsified documents. The penalty of
prision correccional in its medium and maximum
periods and a fine of not more than 5,000 shall be
imposed upon:

[if !supportLists]1. [endif]Any private individual who shall

commit any of the falsification enumerated in the next preceding
article in any public or official document or letter of exchange or
any other kind of commercial document

xxx xxx xxx

Art. 315. Swindling (estafa). Any person

who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:

xxx xxx xxx

2. By means of any of the following false

pretenses or fraudulent acts executed prior to or
simultaneously with the commission of the fraud:
 (a) By using a fictitious name, or falsely
pretending to possess power, influence,
qualifications, property, credit, agency, business or
imaginary transactions; or by means of other similar
deceits.

xxx xxx xxx

It was proven during trial that Milla misrepresented

himself to have the authority to sell the subject property,
and it was precisely this misrepresentation that prompted
MPI to purchase it. Because of its reliance on his
authority and on the falsified Deed of Absolute Sale and
TCT No. 218777, MPI parted with its money in the
amount of P2 million, which has not been returned until
now despite Millas allegation of novation. Clearly, he is
guilty beyond reasonable doubt of estafa through
falsification of public documents.
WHEREFORE, we resolve to DENY the Petition. The
assailed Decision and Resolution of the Court of Appeals
are hereby AFFIRMED.
SO ORDERED.

MALAYAN INSURANCE CO., INC., G.R. No. 194320

Petitioner,
 Present:

- versus - VELASCO, JR., J.,

Chairperson,
PERALTA,
RODELIO ALBERTO and MENDOZA,
ENRICO ALBERTO REYES, REYES,* and
Respondents. PERLAS-BERNABE, JJ.

Promulgated:

February 1, 2012
x--------------------------------------------------------------------
---------------------x

DECISION

VELASCO, JR., J.:

The Case

Before Us is a Petition for Review on Certiorari

under Rule 45, seeking to reverse and set aside the July
28, 2010 Decision[if !supportFootnotes][1][endif] of the Court of
Appeals (CA) and its October 29, 2010 Resolution [if !
supportFootnotes][2][endif]
denying the motion for reconsideration
filed by petitioner Malayan Insurance Co., Inc. (Malayan
Insurance). The July 28, 2010 CA Decision reversed and
set aside the Decision[if !supportFootnotes][3][endif] dated February 2,
2009 of the Regional Trial Court, Branch 51 in Manila.

The Facts

At around 5 oclock in the morning of December

17, 1995, an accident occurred at the corner of EDSA and
Ayala Avenue, Makati City, involving four (4) vehicles, to
wit: (1) a Nissan Bus operated by Aladdin Transit with
plate number NYS 381; (2) an Isuzu Tanker with plate
number PLR 684; (3) a Fuzo Cargo Truck with plate
number PDL 297; and (4) a Mitsubishi Galant with plate
number TLM 732.[if !supportFootnotes][4][endif]

Based on the Police Report issued by the on-the-

spot investigator, Senior Police Officer 1 Alfredo M.
Dungga (SPO1 Dungga), the Isuzu Tanker was in front of
the Mitsubishi Galant with the Nissan Bus on their right
side shortly before the vehicular incident. All three (3)
vehicles were at a halt along EDSA facing the south
direction when the Fuzo Cargo Truck simultaneously
bumped the rear portion of the Mitsubishi Galant and the
rear left portion of the Nissan Bus. Due to the strong
impact, these two vehicles were shoved forward and the
front left portion of the Mitsubishi Galant rammed into
the rear right portion of the Isuzu Tanker.[if !supportFootnotes][5]
[endif]

Previously, particularly on December 15, 1994,

Malayan Insurance issued Car Insurance Policy No. PV-
025-00220 in favor of First Malayan Leasing and Finance
Corporation (the assured), insuring the aforementioned
Mitsubishi Galant against third party liability, own
damage and theft, among others. Having insured the
vehicle against such risks, Malayan Insurance claimed in
its Complaint dated October 18, 1999 that it paid the
damages sustained by the assured amounting to PhP
700,000.[if !supportFootnotes][6][endif]

Maintaining that it has been subrogated to the

rights and interests of the assured by operation of law
upon its payment to the latter, Malayan Insurance sent
several demand letters to respondents Rodelio Alberto
(Alberto) and Enrico Alberto Reyes (Reyes), the
registered owner and the driver, respectively, of the Fuzo
Cargo Truck, requiring them to pay the amount it had paid
to the assured. When respondents refused to settle their
liability, Malayan Insurance was constrained to file a
complaint for damages for gross negligence against
respondents.[if !supportFootnotes][7][endif]

In their Answer, respondents asserted that they

cannot be held liable for the vehicular accident, since its
proximate cause was the reckless driving of the Nissan
Bus driver. They alleged that the speeding bus, coming
from the service road of EDSA, maneuvered its way
towards the middle lane without due regard to Reyes right
of way. When the Nissan Bus abruptly stopped, Reyes
stepped hard on the brakes but the braking action could
not cope with the inertia and failed to gain sufficient
traction. As a consequence, the Fuzo Cargo Truck hit the
rear end of the Mitsubishi Galant, which, in turn, hit the
rear end of the vehicle in front of it. The Nissan Bus, on
the other hand, sideswiped the Fuzo Cargo Truck, causing
damage to the latter in the amount of PhP 20,000.
Respondents also controverted the results of the Police
Report, asserting that it was based solely on the biased
narration of the Nissan Bus driver.[if !supportFootnotes][8][endif]

After the termination of the pre-trial proceedings,

trial ensued. Malayan Insurance presented the testimony
of its lone witness, a motor car claim adjuster, who
attested that he processed the insurance claim of the
assured and verified the documents submitted to him.
Respondents, on the other hand, failed to present any
evidence.

In its Decision dated February 2, 2009, the trial

court, in Civil Case No. 99-95885, ruled in favor of
Malayan Insurance and declared respondents liable for
damages. The dispositive portion reads:

WHEREFORE, judgment is hereby

rendered in favor of the plaintiff against defendants
jointly and severally to pay plaintiff the following:

1. The amount of P700,000.00 with legal interest

from the time of the filing of the
complaint;
 2. Attorneys fees of P10,000.00 and;

3. Cost of suit.

SO ORDERED.[if !supportFootnotes][9][endif]

Dissatisfied, respondents filed an appeal with the

CA, docketed as CA-G.R. CV No. 93112. In its Decision
dated July 28, 2010, the CA reversed and set aside the
Decision of the trial court and ruled in favor of
respondents, disposing:

WHEREFORE, the foregoing considered, the instant appeal is

hereby GRANTED and the assailed Decision dated 2 February
2009 REVERSED and SET ASIDE. The Complaint dated 18
October 1999 is hereby DISMISSED for lack of merit. No costs.

SO ORDERED.[if !supportFootnotes][10][endif]
 The CA held that the evidence on record has failed
to establish not only negligence on the part of
respondents, but also compliance with the other requisites
and the consequent right of Malayan Insurance to
subrogation.[if !supportFootnotes][11][endif] It noted that the police
report, which has been made part of the records of the
trial court, was not properly identified by the police
officer who conducted the on-the-spot investigation of the
subject collision. It, thus, held that an appellate court, as a
reviewing body, cannot rightly appreciate firsthand the
genuineness of an unverified and unidentified document,
much less accord it evidentiary value.[if !supportFootnotes][12][endif]

Subsequently, Malayan Insurance filed its Motion

for Reconsideration, arguing that a police report is a
prima facie evidence of the facts stated in it. And
inasmuch as they never questioned the presentation of the
report in evidence, respondents are deemed to have
waived their right to question its authenticity and due
execution.[if !supportFootnotes][13][endif]
In its Resolution dated October 29, 2010, the CA
denied the motion for reconsideration. Hence, Malayan
Insurance filed the instant petition.

The Issues

In its Memorandum[if !supportFootnotes][14][endif] dated June

27, 2011, Malayan Insurance raises the following issues
for Our consideration:
 I

WHETHER THE CA ERRED IN REFUSING

ADMISSIBILITY OF THE POLICE REPORT
SINCE THE POLICE INVESTIGATOR WHO
PREPARED THE SAME DID NOT ACTUALLY
TESTIFY IN COURT THEREON.

II

WHETHER THE SUBROGATION OF MALAYAN

INSURANCE IS IMPAIRED AND/OR
DEFICIENT.

On the other hand, respondents submit the

following issues in its Memorandum[if !supportFootnotes][15][endif]
dated July 7, 2011:
 I

WHETHER THE CA IS CORRECT IN DISMISSING

THE COMPLAINT FOR FAILURE OF
MALAYAN INSURANCE TO OVERCOME THE
BURDEN OF PROOF REQUIRED TO
ESTABLISH THE NEGLIGENCE OF
RESPONDENTS.

II

WHETHER THE PIECES OF EVIDENCE PRESENTED

BY MALAYAN INSURANCE ARE SUFFICIENT
TO CLAIM FOR THE AMOUNT OF DAMAGES.

III

WHETHER THE SUBROGATION OF MALAYAN

 INSURANCE HAS PASSED COMPLIANCE AND
REQUISITES AS PROVIDED UNDER
PERTINENT LAWS.

Essentially, the issues boil down to the following:

(1) the admissibility of the police report; (2) the
sufficiency of the evidence to support a claim for gross
negligence; and (3) the validity of subrogation in the
instant case.
Our Ruling

The petition has merit.

Admissibility of the Police Report

Malayan Insurance contends that, even without the

presentation of the police investigator who prepared the
police report, said report is still admissible in evidence,
especially since respondents failed to make a timely
objection to its presentation in evidence.[if !supportFootnotes][16]
[endif]
Respondents counter that since the police report was
never confirmed by the investigating police officer, it
cannot be considered as part of the evidence on record. [if !
supportFootnotes][17][endif]

Indeed, under the rules of evidence, a witness can

testify only to those facts which the witness knows of his
or her personal knowledge, that is, which are derived
from the witness own perception.[if !supportFootnotes][18][endif]
Concomitantly, a witness may not testify on matters
which he or she merely learned from others either because
said witness was told or read or heard those matters. [if !
supportFootnotes][19][endif]
Such testimony is considered hearsay
and may not be received as proof of the truth of what the
witness has learned. This is known as the hearsay rule. [if !
supportFootnotes][20][endif]

As discussed in D.M. Consunji, Inc. v. CA,[if !

supportFootnotes][21][endif]
Hearsay is not limited to oral testimony
or statements; the general rule that excludes hearsay as
evidence applies to written, as well as oral statements.

There are several exceptions to the hearsay rule

under the Rules of Court, among which are entries in
official records.[if !supportFootnotes][22][endif] Section 44, Rule 130
provides:
Entries in official records made in the
performance of his duty by a public officer of the
 Philippines, or by a person in the performance of a
duty specially enjoined by law are prima facie
evidence of the facts therein stated.

In Alvarez v. PICOP Resources,[if !supportFootnotes][23][endif]

this Court reiterated the requisites for the admissibility in
evidence, as an exception to the hearsay rule of entries in
official records, thus: (a) that the entry was made by a
public officer or by another person specially enjoined by
law to do so; (b) that it was made by the public officer in
the performance of his or her duties, or by such other
person in the performance of a duty specially enjoined by
law; and (c) that the public officer or other person had
sufficient knowledge of the facts by him or her stated,
which must have been acquired by the public officer or
other person personally or through official information.

Notably, the presentation of the police report itself

is admissible as an exception to the hearsay rule even if
the police investigator who prepared it was not presented
in court, as long as the above requisites could be
adequately proved.[if !supportFootnotes][24][endif]
 Here, there is no dispute that SPO1 Dungga, the
on-the-spot investigator, prepared the report, and he did
so in the performance of his duty. However, what is not
clear is whether SPO1 Dungga had sufficient personal
knowledge of the facts contained in his report. Thus, the
third requisite is lacking.

Respondents failed to make a timely objection to

the police reports presentation in evidence; thus, they are
deemed to have waived their right to do so.[if !supportFootnotes]
[25][endif]
As a result, the police report is still admissible in
evidence.
Sufficiency of Evidence

Malayan Insurance contends that since Reyes, the

driver of the Fuzo Cargo truck, bumped the rear of the
Mitsubishi Galant, he is presumed to be negligent unless
proved otherwise. It further contends that respondents
failed to present any evidence to overturn the presumption
of negligence.[if !supportFootnotes][26][endif] Contrarily, respondents
claim that since Malayan Insurance did not present any
witness who shall affirm any negligent act of Reyes in
driving the Fuzo Cargo truck before and after the
incident, there is no evidence which would show
negligence on the part of respondents.[if !supportFootnotes][27][endif]
 We agree with Malayan Insurance. Even if We
consider the inadmissibility of the police report in
evidence, still, respondents cannot evade liability by
virtue of the res ipsa loquitur doctrine. The D.M.
Consunji, Inc. case is quite elucidating:

Petitioners contention, however, loses

relevance in the face of the application of res ipsa
loquitur by the CA. The effect of the doctrine is to
warrant a presumption or inference that the mere
fall of the elevator was a result of the person having
charge of the instrumentality was negligent. As a
rule of evidence, the doctrine of res ipsa loquitur is
peculiar to the law of negligence which recognizes
that prima facie negligence may be established
without direct proof and furnishes a substitute for
specific proof of negligence.

The concept of res ipsa loquitur has been

explained in this wise:
 While negligence is not ordinarily
inferred or presumed, and while the mere
happening of an accident or injury will not
generally give rise to an inference or
presumption that it was due to negligence on
defendants part, under the doctrine of res
ipsa loquitur, which means, literally, the
thing or transaction speaks for itself, or in
one jurisdiction, that the thing or
instrumentality speaks for itself, the facts or
circumstances accompanying an injury may
be such as to raise a presumption, or at least
permit an inference of negligence on the part
of the defendant, or some other person who
is charged with negligence.

x x x where it is shown that the thing

or instrumentality which caused the injury
complained of was under the control or
management of the defendant, and that the
occurrence resulting in the injury was such
as in the ordinary course of things would not
happen if those who had its control or
management used proper care, there is
sufficient evidence, or, as sometimes stated,
reasonable evidence, in the absence of
explanation by the defendant, that the injury
 arose from or was caused by the defendants
want of care.

One of the theoretical bases for the doctrine

is its necessity, i.e., that necessary evidence is
absent or not available.

The res ipsa loquitur doctrine is

based in part upon the theory that the
defendant in charge of the instrumentality
which causes the injury either knows the
cause of the accident or has the best
opportunity of ascertaining it and that the
plaintiff has no such knowledge, and
therefore is compelled to allege negligence
in general terms and to rely upon the proof
of the happening of the accident in order to
establish negligence. The inference which
the doctrine permits is grounded upon the
fact that the chief evidence of the true cause,
whether culpable or innocent, is practically
accessible to the defendant but inaccessible
to the injured person.

It has been said that the doctrine of

res ipsa loquitur furnishes a bridge by which
a plaintiff, without knowledge of the cause,
reaches over to defendant who knows or
should know the cause, for any explanation
of care exercised by the defendant in respect
of the matter of which the plaintiff
complains. The res ipsa loquitur doctrine,
another court has said, is a rule of necessity,
in that it proceeds on the theory that under
the peculiar circumstances in which the
doctrine is applicable, it is within the power
of the defendant to show that there was no
negligence on his part, and direct proof of
defendants negligence is beyond plaintiffs
power. Accordingly, some courts add to the
three prerequisites for the application of the
res ipsa loquitur doctrine the further
requirement that for the res ipsa loquitur
doctrine to apply, it must appear that the
injured party had no knowledge or means of
knowledge as to the cause of the accident, or
that the party to be charged with negligence
has superior knowledge or opportunity for
explanation of the accident.
 The CA held that all the requisites of res
ipsa loquitur are present in the case at bar:

There is no dispute that appellees

husband fell down from the 14th floor of a
building to the basement while he was
working with appellants construction
project, resulting to his death. The
construction site is within the exclusive
control and management of appellant. It has
a safety engineer, a project superintendent, a
carpenter leadman and others who are in
complete control of the situation therein.
The circumstances of any accident that
would occur therein are peculiarly within the
knowledge of the appellant or its employees.
On the other hand, the appellee is not in a
position to know what caused the accident.
Res ipsa loquitur is a rule of necessity and it
applies where evidence is absent or not
readily available, provided the following
requisites are present: (1) the accident was
of a kind which does not ordinarily occur
unless someone is negligent; (2) the
instrumentality or agency which caused the
injury was under the exclusive control of the
person charged with negligence; and (3) the
injury suffered must not have been due to
any voluntary action or contribution on the
part of the person injured. x x x.

No worker is going to fall from the

14th floor of a building to the basement
while performing work in a construction site
unless someone is negligent[;] thus, the first
requisite for the application of the rule of res
ipsa loquitur is present. As explained earlier,
the construction site with all its
paraphernalia and human resources that
likely caused the injury is under the
exclusive control and management of
appellant[;] thus[,] the second requisite is
also present. No contributory negligence
was attributed to the appellees deceased
husband[;] thus[,] the last requisite is also
present. All the requisites for the application
of the rule of res ipsa loquitur are present,
thus a reasonable presumption or inference
of appellants negligence arises. x x x.
 Petitioner does not dispute the existence of
the requisites for the application of res ipsa
loquitur, but argues that the presumption or
inference that it was negligent did not arise since it
proved that it exercised due care to avoid the
accident which befell respondents husband.

Petitioner apparently misapprehends the

procedural effect of the doctrine. As stated earlier,
the defendants negligence is presumed or inferred
when the plaintiff establishes the requisites for the
application of res ipsa loquitur. Once the plaintiff
makes out a prima facie case of all the elements, the
burden then shifts to defendant to explain. The
presumption or inference may be rebutted or
overcome by other evidence and, under appropriate
circumstances a disputable presumption, such as
that of due care or innocence, may outweigh the
inference. It is not for the defendant to explain or
prove its defense to prevent the presumption or
inference from arising. Evidence by the defendant
of say, due care, comes into play only after the
circumstances for the application of the doctrine has
been established.[if !supportFootnotes][28][endif]
 In the case at bar, aside from the statement in the
police report, none of the parties disputes the fact that the
Fuzo Cargo Truck hit the rear end of the Mitsubishi
Galant, which, in turn, hit the rear end of the vehicle in
front of it. Respondents, however, point to the reckless
driving of the Nissan Bus driver as the proximate cause of
the collision, which allegation is totally unsupported by
any evidence on record. And assuming that this allegation
is, indeed, true, it is astonishing that respondents never
even bothered to file a cross-claim against the owner or
driver of the Nissan Bus.

What is at once evident from the instant case,

however, is the presence of all the requisites for the
application of the rule of res ipsa loquitur. To reiterate,
res ipsa loquitur is a rule of necessity which applies
where evidence is absent or not readily available. As
explained in D.M. Consunji, Inc., it is partly based upon
the theory that the defendant in charge of the
instrumentality which causes the injury either knows the
cause of the accident or has the best opportunity of
ascertaining it and that the plaintiff has no such
knowledge, and, therefore, is compelled to allege
negligence in general terms and to rely upon the proof of
the happening of the accident in order to establish
negligence.

As mentioned above, the requisites for the

application of the res ipsa loquitur rule are the following:
(1) the accident was of a kind which does not ordinarily
occur unless someone is negligent; (2) the instrumentality
or agency which caused the injury was under the
exclusive control of the person charged with negligence;
and (3) the injury suffered must not have been due to any
voluntary action or contribution on the part of the person
injured.[if !supportFootnotes][29][endif]

In the instant case, the Fuzo Cargo Truck would not

have had hit the rear end of the Mitsubishi Galant unless
someone is negligent. Also, the Fuzo Cargo Truck was
under the exclusive control of its driver, Reyes. Even if
respondents avert liability by putting the blame on the
Nissan Bus driver, still, this allegation was self-serving
and totally unfounded. Finally, no contributory negligence
was attributed to the driver of the Mitsubishi Galant.
Consequently, all the requisites for the application of the
doctrine of res ipsa loquitur are present, thereby creating
a reasonable presumption of negligence on the part of
respondents.

It is worth mentioning that just like any other

disputable presumptions or inferences, the presumption of
negligence may be rebutted or overcome by other
evidence to the contrary. It is unfortunate, however, that
respondents failed to present any evidence before the trial
court. Thus, the presumption of negligence remains.
Consequently, the CA erred in dismissing the complaint
for Malayan Insurances adverted failure to prove
negligence on the part of respondents.
Validity of Subrogation
 Malayan Insurance contends that there was a valid
subrogation in the instant case, as evidenced by the claim
check voucher[if !supportFootnotes][30][endif] and the Release of
Claim and Subrogation Receipt[if !supportFootnotes][31][endif]
presented by it before the trial court. Respondents,
however, claim that the documents presented by Malayan
Insurance do not indicate certain important details that
would show proper subrogation.

As noted by Malayan Insurance, respondents had

all the opportunity, but failed to object to the presentation
of its evidence. Thus, and as We have mentioned earlier,
respondents are deemed to have waived their right to
make an objection. As this Court held in Asian
Construction and Development Corporation v. COMFAC
Corporation:

The rule is that failure to object to the

offered evidence renders it admissible, and the
court cannot, on its own, disregard such
evidence. We note that ASIAKONSTRUCTs
counsel of record before the trial court, Atty.
Bernard Dy, who actively participated in the initial
stages of the case stopped attending the hearings
when COMFAC was about to end its presentation.
Thus, ASIAKONSTRUCT could not object to
COMFACs offer of evidence nor present evidence
in its defense; ASIAKONSTRUCT was deemed by
the trial court to have waived its chance to do so.
 Note also that when a party desires the
court to reject the evidence offered, it must so
state in the form of a timely objection and it
cannot raise the objection to the evidence for the
first time on appeal. Because of a partys failure
to timely object, the evidence becomes part of the
evidence in the case. Thereafter, all the parties
are considered bound by any outcome arising
from the offer of evidence properly presented.[if !
supportFootnotes][32][endif]
(Emphasis supplied.)

Bearing in mind that the claim check voucher and

the Release of Claim and Subrogation Receipt presented
by Malayan Insurance are already part of the evidence on
record, and since it is not disputed that the insurance
company, indeed, paid PhP 700,000 to the assured, then
there is a valid subrogation in the case at bar. As
explained in Keppel Cebu Shipyard, Inc. v. Pioneer
Insurance and Surety Corporation:
 Subrogation is the substitution of one person
by another with reference to a lawful claim or right,
so that he who is substituted succeeds to the rights
of the other in relation to a debt or claim, including
its remedies or securities. The principle covers a
situation wherein an insurer has paid a loss under an
insurance policy is entitled to all the rights and
remedies belonging to the insured against a third
party with respect to any loss covered by the policy.
It contemplates full substitution such that it places
the party subrogated in the shoes of the creditor, and
he may use all means that the creditor could employ
to enforce payment.

We have held that payment by the insurer to

the insured operates as an equitable assignment to
the insurer of all the remedies that the insured may
have against the third party whose negligence or
wrongful act caused the loss. The right of
subrogation is not dependent upon, nor does it grow
out of, any privity of contract. It accrues simply
upon payment by the insurance company of the
insurance claim. The doctrine of subrogation has its
roots in equity. It is designed to promote and to
accomplish justice; and is the mode that equity
adopts to compel the ultimate payment of a debt by
one who, in justice, equity, and good conscience,
ought to pay.[if !supportFootnotes][33][endif]
 Considering the above ruling, it is only but proper
that Malayan Insurance be subrogated to the rights of the
assured.

WHEREFORE, the petition is hereby GRANTED. The

CAs July 28, 2010 Decision and October 29, 2010
Resolution in CA-G.R. CV No. 93112 are hereby
REVERSED and SET ASIDE. The Decision dated
February 2, 2009 issued by the trial court in Civil Case
No. 99-95885 is hereby REINSTATED.

No pronouncement as to cost.

SO ORDERED.

HEIRS OF SERVANDO G.R. No. 159709

FRANCO,
Petitioners, Present:

LEONARDO-DE CASTRO,
Acting Chairperson,
- versus - BERSAMIN,
DEL CASTILLO,
VILLARAMA, JR, and
PERLAS-BERNABE, JJ.

SPOUSES VERONICA AND Promulgated:

DANILO GONZALES,
 Respondents. June 27, 2012
x--------------------------------------------------------------------
---------------------x

DECISION

BERSAMIN, J.:

There is novation when there is an irreconcilable

incompatibility between the old and the new obligations.
There is no novation in case of only slight modifications;
hence, the old obligation prevails.

The petitioners challenge the decision promulgated on

March 19, 2003,[if !supportFootnotes][1][endif] whereby the Court of
Appeals (CA) upheld the issuance of a writ of execution
by the Regional Trial Court (RTC), Branch 16, in
Malolos, Bulacan.

Antecedents

The Court adopts the following summary of the

antecedents rendered by the Court in Medel v. Court of
Appeals,[if !supportFootnotes][2][endif] the case from which this case
originated, to wit:
 On November 7, 1985, Servando Franco and
Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales
(hereafter Veronica), who was engaged in the
money lending business under the name Gonzales
Credit Enterprises, in the amount of P50,000.00,
payable in two months. Veronica gave only the
amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one
month at 6% per month. Servado and Leticia
executed a promissory note for P50,000.00, to
evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia

obtained from Veronica another loan in the amount
of P90,000.00, payable in two months, at 6%
interest per month. They executed a promissory
note to evidence the loan, maturing on January 19,
1986. They received only P84,000.00, out of the
proceeds of the loan.

On maturity of the two promissory notes, the

borrowers failed to pay the indebtedness.
 On June 11, 1986, Servando and Leticia
secured from Veronica still another loan in the
amount of P300,000.00, maturing in one month,
secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who
issued a special power of attorney in favor of
Leticia Medel, authorizing her to execute the
mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the sum
of P300,000.00, after a month, or on July 11, 1986.
However, only the sum of P275,000.00, was given
to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel

failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with

the latter's husband, Dr. Rafael Medel, consolidated
all their previous unpaid loans totaling P440,000.00,
and sought from Veronica another loan in the
amount of P60,000.00, bringing their indebtedness
 to a total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading as
follows:

Baliwag,BulacanJuly23,1986

MaturityDateAugust23,1986

P500,000.00

 FOR VALUE RECEIVED, I/WE

jointlyandseverallypromisetopaytothe
order of VERONICA R. GONZALES
doing business in the business style of
GONZALES CREDIT ENTERPRISES,
Filipino,oflegalage,marriedtoDaniloG.
Gonzales, Jr., of Baliwag Bulacan, the
sum of PESOS ........ FIVE HUNDRED
THOUSAND ..... (P500,000.00)
PhilippineCurrency with interest thereon
at the rate of 5.5 PER CENT per month
plus 2% service charge per annum from
date hereof until fully paid according to
the amortization schedule contained
herein.(Underscoringsupplied)

Payment will be made in full at the

maturitydate.

ShouldI/WEfailtopayanyamortizationorportionhereofwhen
due,alltheotherinstallmentstogetherwithallinterestaccrued
shallimmediatelybedueandpayableandI/WEherebyagreeto
payanadditionalamountequivalenttoonepercent(1%)per
monthoftheamountdueanddemandableaspenaltychargesinthe
formofliquidateddamagesuntilfullypaid;andthefurthersumof
TWENTYFIVEPERCENT(25%)thereofinfull,without
deductionsasAttorney'sFeewhetheractuallyincurredornot,of
thetotalamountdueanddemandable,exclusiveofcostsand
judicialorextrajudicialexpenses.(Underscoringsupplied)

I,WEfurtheragreethatintheevent
the present rate of interest on loan is
increasedbylawortheCentralBankof
thePhilippines,theholdershallhavethe
optiontoapplyandcollecttheincreased
interest charges without notice although
the original interest have already been
collected wholly or partially unless the
contraryisrequiredbylaw.

It is also a special condition of this

contractthatthepartieshereinagreethat
the amount ofpesoobligation underthis
agreementisbasedonthepresentvalueof
peso, and if there be any change in the
value thereof, due to extraordinary
inflationordeflation,oranyothercauseor
reason, then the pesoobligation herein
contractedshallbeadjustedinaccordance
withthevalueofthepesothenprevailing
atthetimeofthecompletefulfillmentof
obligation.

Demand and notice of dishonor

waived. Holder may accept partial
paymentsandgrantrenewalsofthisnote
orextensionofpayments,reservingrights
against each and all indorsers and all
partiestothisnote.

INCASEOFJUDICIALExecutionof
this obligation, or any part of it, the
debtorswaiveallhis/theirrightsunderthe
provisionsofSection12,Rule39,ofthe
RevisedRulesofCourt.
 On maturity of the loan, the borrowers failed
to pay the indebtedness of P500,000.00, plus
interests and penalties, evidenced by the above-
quoted promissory note.

On February 20, 1990, Veronica R. Gonzales,

joined by her husband Danilo G. Gonzales, filed
with the Regional Trial Court of Bulacan, Branch
16, at Malolos, Bulacan, a complaint for collection
of the full amount of the loan including interests
and other charges.

In his answer to the complaint filed with the

trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the
plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the
sum of P500,000.00, and actually received the
amount and benefited therefrom; that the loan was
secured by a real estate mortgage executed in favor
of the plaintiffs, and that he (Servando Franco)
signed the promissory note only as a witness.
 In their separate answer filed on April
10,1990, defendants Leticia and Rafael Medel
alleged that the loan was the transaction of Leticia
Yaptinchay, who executed a mortgage in favor of
the plaintiffs over a parcel of real estate situated in
San Juan, Batangas; that the interest rate is
excessive at 5.5% per month with additional service
charge of 2% per annum, and penalty charge of 1%
per month; that the stipulation for attorney's fees of
25% of the amount due is unconscionable, illegal
and excessive, and that substantial payments made
were applied to interest, penalties and other charges.

After due trial, the lower court declared that

the due execution and genuineness of the four
promissory notes had been duly proved, and ruled
that although the Usury Law had been repealed, the
interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the
conscience". Hence, the trial court applied "the
provision of the New [Civil] Code" that the "legal
rate of interest for loan or forbearance of money,
goods or credit is 12% per annum."
 Accordingly, on December 9, 1991, the trial
court rendered judgment, the dispositive portion of
which reads as follows:

WHEREFORE,premises considered,
judgmentisherebyrendered,asfollows:

1.Ordering the defendants Servando

Franco and Leticia Medel, jointly and
severally,topayplaintiffstheamountof
P47,000.00plus12%interestper annum
from November 7, 1985 and 1% per
monthaspenalty,untiltheentireamount
ispaidinfull.

 2.Ordering the defendants Servando
FrancoandLeticiaY.Medeltoplaintiffs,
jointly and severally the amount of
P84,000.00with12%interestperannum
and 1% per cent per month as penalty
from November 19,1985 until the whole
amountisfullypaid;

3.Orderingthedefendantstopaythe
plaintiffs,jointlyandseverally,theamount
of P285,000.00 plus 12% interest per
annumand1%permonthaspenaltyfrom
July11,1986,untilthewholeamountis
fullypaid;

4.Ordering the defendants to pay

plaintiffs,jointlyandseverally,theamount
ofP50,000.00asattorney'sfees;


5.All counterclaims are hereby

dismissed.

Withcostsagainstthedefendants.

In due time, both plaintiffs and defendants

appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued

that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that
governs the parties. They further argued that
Circular No. 416 of the Central Bank prescribing
 the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies
only in the absence of a stipulation on interest rate,
but not when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-

appellants' contention. It ruled that the Usury Law
having become legally inexistent with the
promulgation by the Central Bank in 1982 of
Circular No. 905, the lender and borrower could
agree on any interest that may be charged on the
loan. The Court of Appeals further held that "the
imposition of an additional amount equivalent to
1% per month of the amount due and demandable
as penalty charges in the form of liquidated
damages until fully paid was allowed by law.

Accordingly, on March 21, 1997, the Court of

Appeals promulgated it decision reversing that of
the Regional Trial Court, disposing as follows:

WHEREFORE,theappealedjudgment
isherebyMODIFIEDsuchthatdefendants
areherebyorderedtopaytheplaintiffsthe
sumofP500,000.00,plus5.5%permonth
interestand2%servicechargeperannum
effectiveJuly23,1986,plus1%permonth
ofthetotalamountdueanddemandableas
penaltychargeseffectiveAugust24,1986,
untiltheentireamountisfullypaid.

The award to the plaintiffs of

P50,000.00asattorney'sfeesisaffirmed.
Andsoistheimpositionofcostsagainst
thedefendants.

SOORDERED.
 On April 15, 1997, defendants-appellants filed
a motion for reconsideration of the said decision.
By resolution dated November 25, 1997, the Court
of Appeals denied the motion.[if !supportFootnotes][3][endif]

On review, the Court in Medel v. Court of Appeals

struck down as void the stipulation on the interest for
being iniquitous or unconscionable, and revived the
judgment of the RTC rendered on December 9, 1991, viz:

WHEREFORE, the Court hereby REVERSES and SETS ASIDE

the decision of the Court of Appeals promulgated on March 21,
1997, and its resolution dated November 25, 1997. Instead, we
render judgment REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial Court of Bulacan, Branch
16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the
same parties.

No pronouncement as to costs in this instance.

 SO ORDERED.[if !supportFootnotes][4][endif]

Upon the finality of the decision in Medel v. Court

of Appeals, the respondents moved for execution.[if !
supportFootnotes][5][endif]
Servando Franco opposed,[if !supportFootnotes][6][endif]
claiming that he and the respondents had agreed to fix the
entire obligation at P775,000.00.[if !supportFootnotes][7][endif]
According to Servando, their agreement, which was
allegedly embodied in a receipt dated February 5, 1992, [if !
supportFootnotes][8][endif]
whereby he made an initial payment of
P400,000.00 and promised to pay the balance of
P375,000.00 on February 29, 1992, superseded the July
23, 1986 promissory note.

The RTC granted the motion for execution over

Servandos opposition, thus:

There is no doubt that the decision dated December 9, 1991 had

already been affirmed and had already become final and executory.
Thus, in accordance with Sec. 1 of Rule 39 of the 1997 Rules of
Civil Procedure, execution shall issue as a matter of right. It has
likewise been ruled that a judgment which has acquired finality
becomes immutable and unalterable and hence may no longer be
modified at any respect except only to correct clerical errors or
mistakes (Korean Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In
this respect, the decision deserves to be respected.
 The argument about the modification of the
contract or non-participation of defendant Servando
Franco in the proceedings on appeal on the alleged
belief that the payment he made had already
absolved him from liability is of no moment.
Primarily, the decision was for him and Leticia
Medel to pay the plaintiffs jointly and severally the
amounts stated in the Decision. In other words, the
liability of the defendants thereunder is solidary.
Based on this aspect alone, the new defense raised
by defendant Franco is unavailing.

WHEREFORE, in the light of all the

foregoing, the Court hereby grants the Motion for
Execution of Judgment.
 Accordingly, let a writ of execution be issued
for implementation by the Deputy Sheriff of this
Court.

SO ORDERED.[if !supportFootnotes][9][endif]

On March 8, 2001, the RTC issued the writ of execution.

[if !supportFootnotes][10][endif]

Servando moved for reconsideration,[if !supportFootnotes][11]

[endif]
but the RTC denied his motion.[if !supportFootnotes][12][endif]

On March 19, 2003, the CA affirmed the RTC through its

assailed decision, ruling that the execution was proper
because of Servandos failure to comply with the terms of
the compromise agreement, stating:[if !supportFootnotes][13][endif]

Petitioner cannot deny the fact that there was no full compliance
with the tenor of the compromise agreement. Private respondents
on their part did not disregard the payments made by the petitioner.
They even offered that whatever payments made by petitioner, it
can be deducted from the principal obligation including interest.
However, private respondents posit that the payments made cannot
alter, modify or revoke the decision of the Supreme Court in the
instant case.
 In the case of Prudence Realty and
Development Corporation vs. Court of Appeals, the
Supreme Court ruled that:

When the terms of the compromise

judgment is violated, the aggrieved party must
move for its execution, not its invalidation.

It is clear from the aforementioned

jurisprudence that even if there is a compromise
agreement and the terms have been violated, the
aggrieved party, such as the private respondents, has
the right to move for the issuance of a writ of
execution of the final judgment subject of the
compromise agreement.
 Moreover, under the circumstances of this
case, petitioner does not stand to suffer any harm or
prejudice for the simple reason that what has been
asked by private respondents to be the subject of a
writ of execution is only the balance of petitioners
obligation after deducting the payments made on
the basis of the compromise agreement.

WHEREFORE, premises considered, the

instant petition is hereby DENIED DUE COURSE
and consequently DISMISSED for lack of merit.

SO ORDERED.
His motion for reconsideration having been denied,[if !
supportFootnotes][14][endif]
Servando appealed. He was eventually
substituted by his heirs, now the petitioners herein, on
account of his intervening death. The substitution was
pursuant to the resolution dated June 15, 2005.[if !supportFootnotes]
[15][endif]

Issue

The petitioners submit that the CA erred in ruling that:

I
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE
REGIONAL TRIAL COURT OF MALOLOS, BULACAN WAS
NOT NOVATED BY THE COMPROMISE AGREEMENT
BETWEEN THE PARTIES ON 5 FEBRUARY 1992.

II

THE LIABILITY OF THE PETITIONER TO

RESPONDENTS SHOULD BE BASED ON THE
DECEMBER 1991 DECISION OF BRANCH 16
OF THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN AND NOT ON THE
COMPROMISE AGREEMENT EXECUTED IN
 1992.

The petitioners insist that the RTC could not validly

enforce a judgment based on a promissory note that had
been already novated; that the promissory note had been
impliedly novated when the principal obligation of
P500,000.00 had been fixed at P750,000.00, and the
maturity date had been extended from August 23, 1986 to
February 29, 1992.

In contrast, the respondents aver that the petitioners seek

to alter, modify or revoke the final and executory decision
of the Court; that novation did not take place because
there was no complete incompatibility between the
promissory note and the memorandum receipt; that
Servandos previous payment would be deducted from the
total liability of the debtors based on the RTCs decision.

Issue

Was there a novation of the August 23, 1986

promissory note when respondent Veronica Gonzales
issued the February 5, 1992 receipt?

Ruling

The petition lacks merits.

I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt

To buttress their claim of novation, the petitioners rely on

the receipt issued on February 5, 1992 by respondent
Veronica whereby Servandos obligation was fixed at
P750,000.00. They insist that even the maturity date was
extended until February 29, 1992. Such changes, they
assert, were incompatible with those of the original
agreement under the promissory note.

The petitioners assertion is wrong.

A novation arises when there is a substitution of an

obligation by a subsequent one that extinguishes the first,
either by changing the object or the principal conditions,
or by substituting the person of the debtor, or by
subrogating a third person in the rights of the creditor.[if !
supportFootnotes][16][endif]
For a valid novation to take place, there
must be, therefore: (a) a previous valid obligation; (b) an
agreement of the parties to make a new contract; (c) an
extinguishment of the old contract; and (d) a valid new
contract.[if !supportFootnotes][17][endif] In short, the new obligation
extinguishes the prior agreement only when the
substitution is unequivocally declared, or the old and the
new obligations are incompatible on every point. A
compromise of a final judgment operates as a novation of
the judgment obligation upon compliance with either of
these two conditions.[if !supportFootnotes][18][endif]

The receipt dated February 5, 1992, excerpted below, did

not create a new obligation incompatible with the old one
under the promissory note, viz:

February 5, 1992

Received from SERVANDO FRANCO BPI

Managers Check No. 001700 in the amount of
P400,00.00 as partial payment of loan. Balance of
P375,000.00 to be paid on or before FEBRUARY
29, 1992. In case of default an interest will be
charged as stipulated in the promissory note subject
of this case.

(Sgd)

V. Gonzalez[if !supportFootnotes][19][endif]

To be clear, novation is not presumed. This means that the

parties to a contract should expressly agree to abrogate
the old contract in favor of a new one. In the absence of
the express agreement, the old and the new obligations
must be incompatible on every point.[if !supportFootnotes][20][endif]
According to California Bus Lines, Inc. v. State
Investment House, Inc.:[if !supportFootnotes][21][endif]

The extinguishment of the old obligation by the new one is a

necessary element of novation which may be effected either
expressly or impliedly. The term expressly means that the
contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the
other hand, no specific form is required for an implied novation,
and all that is prescribed by law would be an incompatibility
between the two contracts. While there is really no hard and fast
rule to determine what might constitute to be a sufficient change
that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the
old and the new obligations.

There is incompatibility when the two obligations cannot

stand together, each one having its independent existence.
If the two obligations cannot stand together, the latter
obligation novates the first.[if !supportFootnotes][22][endif] Changes that
breed incompatibility must be essential in nature and not
merely accidental. The incompatibility must affect any of
the essential elements of the obligation, such as its object,
cause or principal conditions thereof; otherwise, the
change is merely modificatory in nature and insufficient
to extinguish the original obligation.[if !supportFootnotes][23][endif]

In light of the foregoing, the issuance of the receipt

created no new obligation. Instead, the respondents only
thereby recognized the original obligation by stating in
the receipt that the P400,000.00 was partial payment of
loan and by referring to the promissory note subject of the
case in imposing the interest. The loan mentioned in the
receipt was still the same loan involving the P500,000.00
extended to Servando. Advertence to the interest
stipulated in the promissory note indicated that the
contract still subsisted, not replaced and extinguished, as
the petitioners claim.

The receipt dated February 5, 1992 was only the proof of

Servandos payment of his obligation as confirmed by the
decision of the RTC. It did not establish the novation of
his agreement with the respondents. Indeed, the Court has
ruled that an obligation to pay a sum of money is not
novated by an instrument that expressly recognizes the
old, or changes only the terms of payment, or adds other
obligations not incompatible with the old ones, or the new
contract merely supplements the old one.[if !supportFootnotes][24][endif]
A new contract that is a mere reiteration, acknowledgment
or ratification of the old contract with slight modifications
or alterations as to the cause or object or principal
conditions can stand together with the former one, and
there can be no incompatibility between them. [if !supportFootnotes]
[25][endif]
Moreover, a creditors acceptance of payment after
demand does not operate as a modification of the original
contract.[if !supportFootnotes][26][endif]

Worth noting is that Servandos liability was joint and

solidary with his co-debtors. In a solidary obligation, the
creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously.[if !supportFootnotes]
[27][endif]
The choice to determine against whom the
collection is enforced belongs to the creditor until the
obligation is fully satisfied.[if !supportFootnotes][28][endif] Thus, the
obligation was being enforced against Servando, who, in
order to escape liability, should have presented evidence
to prove that his obligation had already been cancelled by
the new obligation or that another debtor had assumed his
place. In case of change in the person of the debtor, the
substitution must be clear and express,[if !supportFootnotes][29][endif]
and made with the consent of the creditor.[if !supportFootnotes][30]
[endif]
Yet, these circumstances did not obtain herein,
proving precisely that Servando remained a solidary
debtor against whom the entire or part of the obligation
might be enforced.

Lastly, the extension of the maturity date did not

constitute a novation of the previous agreement. It is
settled that an extension of the term or period of the
maturity date does not result in novation.[if !supportFootnotes][31][endif]

II
Total liability to be reduced by P400,000.00

The petitioners argue that Servandos remaining liability

amounted to only P375,000.00, the balance indicated in
the February 5, 1992 receipt. Accordingly, the balance
was not yet due because the respondents did not yet make
a demand for payment.

The petitioners cannot be upheld.

The balance of P375,000.00 was premised on the taking

place of a novation. However, as found now, novation did
not take place. Accordingly, Servandos obligation, being
solidary, remained to be that decreed in the December 9,
1991 decision of the RTC, inclusive of interests, less the
amount of P400,000.00 that was meanwhile paid by him.

WHEREFORE, the Court AFFIRMS the decision of the

Court of Appeals promulgated on March 19, 2003;
ORDERS the Regional Trial Court, Branch 16, in
Malolos, Bulacan to proceed with the execution based on
its decision rendered on December 9, 1991, deducting the
amount of P400,000.00 already paid by the late Servando
Franco; and DIRECTS the petitioners to pay the costs of
suit.

SO ORDERED.

G.R. No. 174665 September 18, 2013

PHILIPPINE RECLAMATION AUTHORITY (Formerly known as the
PUBLIC ESTATES AUTHORITY), Petitioner,
vs.
ROMAGO, INCORPORATED, Respondent.
x-----------------------x
G.R. No. 175221
ROMAGO, INCORPORATED, Petitioner,
vs.
PHILIPPINE RECLAMATION AUTHORITY (Formerly known as the
PUBLIC ESTATES AUTHORITY), Respondent.
DECISION
ABAD, J.:
These cases pertain to the defense of novation by virtue of the
debtors assignment to a third party of its contractual liability to the
creditor.
The Facts and the Case
In order to convert former military reservations and installations to
productive use and raise funds out of the sale of portions of the
countrys military camps,1 in 1992 Congress enacted Republic Act
7227,2 creating the Bases Conversion and Development Authority
(BCDA). Pursuant to this law, the President issued Executive Order
40,3 Series of 1992, setting aside portions of Fort Bonifacio in Taguig,
Metro Manila, for the Heritage Park Project, aimed at converting a
105-hectare land into a world class memorial park for the purpose of
generating funds for the BCDA.4
On August 9, 1993 the BCDA entered into a Memorandum of
Agreement5 (MOA) with the Philippine Reclamation Authority
(PRA),formerly the Public Estates Authority, designating it as the
Project Manager. On September 9, 1994 the BCDA, PRA, and the
Philippine National Bank (PNB) executed a Pool Formation Trust
Agreement (PFTA)6 under which BCDA, as project owner, was to
issue Heritage Park Investment Certificates that would evidence the
holders right to the perpetual use and care of specific interment plots.
The PFTA designated PRA as Project Manager, tasked with the
physical development of the park. The PNB was to act as trustee for
the Heritage Park securitization.7
After public bidding, the PRA awarded the outdoor electrical and
lighting works for the park to respondent Romago, Inc. (Romago) with
which it entered into a Construction Agreement on March 18, 1996 for
the contract price of P176,326,794.10.8 On receipt of the PRAs notice
to proceed,9 Romago immediately began construction works.10
Meanwhile, the parties to the PFTA organized the Heritage Park
Management Corporation (HPMC) to take over the management of
the project.11 On February 24, 2000 the Chairman of HPMC Board of
Trustees, Mr. Rogelio L. Singson, sent a notice of termination of
management to then PRA General Manager Carlos P. Doble with a
demand for the turnover of the park to HPMC.12 The letter reads:
Pursuant to Article 11 of the Pool Formation Trust Agreement(PFTA),
the certificate holders of the Heritage Park Management Corporation
(HPMC) duly elected its Board of Trustees at the 03 January2000
meeting held at the BCDA Corporate Center. Attached is a copy of
the Secretarys Certificate attesting to said election of the HPMC
Board of Trustees.
Section 11.07 of the PFTA provides that upon the election of the
Board of Trustees, the PNB shall turnover to the Board all its
functions and responsibilities, and all documents in its custody,
including all Heritage Park Accounts, except the General Fund, which
will go to BCDA. Upon such turnover and upon the complete and
faithful performance by PNB and [PRA] of their respective obligations
under this Agreement, the respective obligations of [PRA] and PNB
under this Agreement shall be deemed terminated.
[PRA] shall turnover to the Board of Trustees all the documents and
equipment it has in its possession relating to the Project and the
Park, including the computer hardware and software pertaining to the
geographical information system of the Park."
Pursuant to the foregoing provision, we hereby formally advise you of
the termination of [PRAs] obligations, duties and responsibilities as
Project Manager under the PFTA, effective upon receipt of this letter.
We also formally request for [PRA] to turn over, within fifteen (15)
days from receipt of this letter, the documents and equipment relating
to the Heritage Park Project, including the computer hardware and
software in [PRAs] possession pertaining to the geographical
information system of the Park.13
The PRA lost no time in informing Romago of the consequent
termination of its services. Thus, it wrote Romago a letter 14 on March
13,2000:
As a consequence of the assumption of functions, duties and
responsibilities by the Heritage Park Management Corporation, as
provided for under the provisions of the Pool Formation Trust
Agreement, we are constrained to assign the Electrical Works
contract entered with you on March 18, 1996 including all
supplemental agreements relative thereto, effective March 18, 2000
in favor of the Heritage Park Management Corporation. The formal
turnover on March 17, 2000 by[PRA] to the Heritage Park
Management Corporation of all its obligations, duties and
responsibilities, and all documents relating to the Heritage Park
Project, was made pursuant to the attached letter of the Chairman of
HPMC Board of Trustees, Mr. Rogelio L. Singson to the [PRA],
received by us on March 02, 2000.
By virtue of this assignment, all the contractual functions,
responsibilities and liabilities, if any, as well as any cause of action for
or against [PRA] shall hereafter accrue to and devolve upon the
assignee hereof.
Please be guided accordingly.15
Because the HPMC refused to recognize the PRAs contract with it,
on March 17, 2004 Romago filed with the Construction Industry
Arbitration Commission (CIAC) a complaint,16 docketed as CIAC Case
18-2004,seeking to collect its claims totaling P24,467,621.64, plus
interest from the PRA, HPMC, and Rosehills Memorial Management
(Phils.), Inc. (RMMI). Romago claimed that it won the bidding for the
construction of the electrical and lighting facilities at the Heritage Park
for P181,779,800.0017 but PRA deducted 3% from the bid amount,
reducing the contract price toP176,326,794.10.18
Because of problems encountered with illegal settlers, only around
60of the 105-hectare park was delivered to Romago for lighting work,
reducing the contract price to P101,083,636.16.19 But this amount
was adjusted to P109,330,032.81 due to PRA variation orders. 20
Although Romago completed 96.15% of the works, it claimed that the
PRA paid it onlyP82,929,577.22 instead of the P105,120,826.50 due
it.21 Romago also claimed that it should be reimbursed the
P9,336,054.15 retention money that it posted since its services had
already been terminated and since it had substantially completed the
Heritage Park Project.22
Romago also sought payment of the additional costs and expenses
that it incurred by reason of PRAs delays in turning over the project
area, in delivering the owner-supplied equipment, and in solving the
security problems at the work site. These included price escalation of
materials and supplies, at P857,799.10; and extended overhead
costs, at P10,051,870.61.23 And, for mobilizations costs that it spent
preparing for works on the entire105-hectare project area, Romago
sought additional payment of P7,524,315.79 plus interest of
P517,923.74 from April 12, 1999 to May 31,1999 or a total of
P8,042,239.53. It also claimed proportionate refund of P2,327,107.97
out of the 3% discount applied to its original bid 24 and P420,944.02 in
damages for the unceremonious termination of its services. 25
Romago admitted, however, owing the PRA P15,475,835.42 in
unrecouped prepaid materials and P12,286,795.12 in unrecouped
down payment.26
In its answer, the PRA denied liability, claiming that it entered into the
construction agreement with Romago after its approval by the
Heritage Park Executive Committee, the policy-making and governing
body of the Heritage Park Project. The PRA merely processed and
recommended payment of all the works done. The money came from
the projects Construction and Development Fund that PRA did not
control. PNB acted as trustee of the fund under the PFTA. Since
these funds had all been turned over to the HPMC when the latter
came into being, Romago should not address its claims to PRA. 27
Rather than answer the complaint, the HPMC and RMMI moved to
dismiss it, claiming that CIAC had no jurisdiction over them since they
never agreed to arbitration.28 Additionally, the HPMC said that the
PRAs turnover of the Heritage Park project to it did not amount to
assignment of the PRAs liabilities under the construction agreement.
Further, its termination of the PRAs authority over the project carried
with it the termination of any Construction Agreement that the PRA
entered into.
For its part, RMMI averred that it was merely the undertaker at the
Heritage Park, tasked with providing services for embalming, burial,
cremation, and other activities for the care of the dead. 29
On July 22, 2004 the CIAC issued an order dropping RMMI as
respondent but denying the HPMCs motion to dismiss the case
against it.30 The HPMC elevated the CIAC order to the Court of
Appeals (CA) by special civil action of certiorari and prohibition in CA-
G.R. SP 86342.
Meantime, after due proceedings, on October 22, 2004 the CIAC
rendered a decision,31 holding the PRA and the HPMC jointly and
severally liable to Romago for the following amounts:
The unpaid balance of the 96.15%
accomplishment ---------------------------------------------------------------
Interest from 15 May 2002 to 31
January 2004 at 6% per annum --------------------------------------------
Plus:
1.1.1 Retention Charges ----------------
1.1.2 Price Escalation -------------------
1.1.3 Damages for Closure of Area --
1.1.4 Reimbursement for Pro-rata
discount ----------------------------
1.1.5 Damages for Stoppage of Works
Sub-Total -------
Less:
Unrecouped prepaid materials and
unrecouped downpayment --------------------------------------------------

Plus:
Additional 6% interest from February 1, 2004
to August 31, 2004 on the P15,280,012.35 -----------------------------
Costs of Arbitration:
Filing Fee -------------------
Administrative Fee -------
Arbitrators Fees ----------
ADF -------------------------

Not satisfied with the CIAC decision, the PRA filed a petition for
review of the same with the CA in CA-G.R. SP 88059.
Meantime on February 18, 2005 the CA rendered a Decision in CA-
G.R. SP 86342, dismissing Romagos complaint before the CIAC
against the HPMC on the ground that the latter did not have an
arbitration agreement with Romago.33
On December 20, 2005 the CA rendered a Decision 34 in CA-G.R.
SP88059, the main case, finding that the unpaid accomplishment of
Romago should be reduced from P22,191,249.33 to P18,641,208.89,
and that interests on the damages awarded to Romago arising from
the reduction in project area and on its unpaid accomplishment from
May 15, 2002 to January 31, 2004 should be deleted, therefore
entitling it to actual damages in the amount of P8,935,673.8635 plus
interest from February 1, 2004 to August 31, 2004 and the costs of
arbitration.
The CA rejected the PRAs argument that it can no longer be held
liable to Romago after turning over and assigning the project,
including all its duties and obligations relating to it, to the HPMC.
Romago was not a party to the PFTA and it did not give consent to
the PRAs supposed assignment of its obligations to the HPMC.
The PRA and Romago separately moved for reconsideration of the
decision but the CA denied both motions in its August 24,
2006Resolution.36 Undeterred, both parties filed separate petitions for
review before this Court in G.R. 174665 for the PRA and in G.R.
175221 for Romago.
The Issues Presented
These consolidated cases present the following issues:
1. Whether or not the CA erred in holding the PRA still liable to
Romago under the Construction Agreement despite the subsequent
turnover of the Heritage Park Project to the HPMC; and
2. Whether or not the CA erred in reducing the CIAC award for actual
damages to Romago to just P8,935,673.86.
The Rulings of the Court
The PRA claims that its liability under its contract with Romago had
been extinguished by novation when it assigned all its obligations to
the HPMC pursuant to the provisions of the PFTA. The PRA insists
that the CA erroneously applied to the case the 2001 ruling of the
Court in Public Estates Authority v. Uy37 that also involved the
Heritage Park Project. Uy dealt only with the PRA and the HPMC
came into the picture only after the case has been filed. Here, while
Romago first dealt with the PRA, it eventually dealt with the HPMC
before the construction company can finish the contracted works,
evidencing novation of parties.
In novation, a subsequent obligation extinguishes a previous one
through substitution either by changing the object or principal
conditions, by substituting another in place of the debtor, or by
subrogating a third person into the rights of the creditor.38 Novation
requires (a) the existence of a previous valid obligation; (b) the
agreement of all parties to the new contract; (c) the extinguishment of
the old contract; and (d) the validity of the new one. 39
There cannot be novation in this case since the proposed substituted
parties did not agree to the PRAs supposed assignment of its
obligations under the contract for the electrical and light works at
Heritage Park to the HPMC. The latter definitely and clearly rejected
the PRAs assignment of its liability under that contract to the HPMC.
Romago tried to follow up its claims with the HPMC, not because of
any new contract it entered into with the latter, but simply because the
PRA told it that the HPMC would henceforth assume the PRAs
liability under its contract with Romago.
1wphi1

Besides, Section 11.07 of the PFTA makes it clear that the

termination of the PRAs obligations is conditioned upon the turnover
of documents, equipment, computer hardware and software on the
geographical information system of the Park; and the completion and
faithful performance of its respective duties and responsibilities under
the PFTA. More importantly, Section 11.07 did not say that the HPMC
shall, thereafter, assume the PRAs obligations. On the contrary,
Section 7.01 of the PFTA recognizes that contracts that the PRA
entered into in its own name and makes it liable for the same. Thus:
Section 7.01. Liability of BCDA and [PRA]. BCDA and [PRA]shall be
liable in accordance herewith only to the extent of the obligations
specifically undertaken by BCDA and [PRA] herein and any other
documents or agreements relating to the Project, and in which they
are parties.40
Romago claims that the CA award should be increased
toP13,598,139.24 based on the detailed account of expenses and
cash payments as of December 31, 2005 that it submitted. But the
Court cannot agree. Engineer J. R. Milan testified that Romago
received P86,479,617.61 out of P105,120,826.50 worth of work that it
accomplished, thereby leaving a deficiency of only P18,641,208.89.
Thus:
ATTY. S.B. GARCIA:
Mr. Witness, from the time you became the Project Manager of
Heritage Park Project up to the time it turned over its responsibilities
to HPMC, can you recall how much [PRA] already paid to Romago?
You can refer to any documents we have now with you for
recollection.
ENGR. J.R. MILLAN:
Based on progress Report No. 50, which was submitted by the
Managing Consultant of Robert Espiritu, the accomplishment as of
February 29, 2000, the amount disbursed as of Billing no. 14A
isP86,479,617.61.
ATTY. S.B. GARCIA:
What document again are you referring to, Mr. Witness?
ENGR. J.R. MILLAN:This is a Progress Report dated March 8, 2000
addressed to the [Philippine Reclamation Authority], Progress Report
No. 50 submitted by Mr. Roberto Espiritu.
ATTY. S.B. GARCIA: And the one where the P86,479,617.61, the
document which reflects that amount, that is what the document?
ENGR. J.R. MILLAN:
This is the attachment to the accomplishment of Romago kasi the
Managing Consultant who made the report, they were the ones
computing the accomplishments of the contractors. All the contractors
in the project, bale ito yong report nila . For Romago, ito yong report
niya as of February29, 2000.
ATTY. S.B. GARCIA:
Your Honor, please, may I request that this accomplishment report as
February 29, 2000 for outdoor electrical and lighting works be marked
as our exhibit "R-2-10."41
Had the above testimony been untrue, Romago should have refuted
the same considering that it had every opportunity to do so. On the
contrary, it even adopted the same document as its own exhibit. 42 In
effect, Romago conceded the correctness of the PRAs valuation of
the balance due it.
In keeping with this Courts ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals,43 the Court deems it proper to impose legal interest
of 6% per annum on the amount finally adjudged, reckoned from
October 22,2004, the date the CIAC rendered judgment until the
same is wholly satisfied.44
WHEREFORE , the Court AFFIRMS the Decision dated December
20, 2005 and Resolution dated August 24, 2006 of the Court of
Appeals in CA-G.R. SP 88059 with MODIFICATION , directing the
Philippine Reclamation Authority to pay Romago in addition to the
P8,935,673.86award of actual damages, legal interest of 6% per
annum from October 22,2004 until the judgment against it is wholly
paid; and the costs of arbitration in the amount of P396,608.73.
SO ORDERED.

G.R. No. 181163 July 24, 2013

ASIAN TERMINALS, INC., Petitioner,
vs.
PHILAM INSURANCE CO., INC. (now Chartis Philippines
Insurance, Inc.), Respondent.
x-----------------------x
G.R. No. 181262
PHILAM INSURANCE CO., INC. (now Chartis Philippines
Insurance, Inc.), Petitioner,
vs.
WESTWIND SHIPPING CORPORATION and ASIAN TERMINALS,
INC., Respondents.
x-----------------------x
G.R. No. 181319
WESTWIND SHIPPING CORPORATION, Petitioner,
vs.
PHILAM INSURANCE CO., INC. (now Chartis Philippines
Insurance, Inc.) and ASIAN TERMINALS, INC., Respondents.
DECISION
VILLARAMA, JR., J.:
Before us are three consolidated petitions for review on certiorari
assailing the Decision1 dated October 15, 2007 and the Resolution 2
dated January 11, 2008 of the Court of Appeals (CA) which affirmed
with modification the Decision3 of the Regional Trial Court (RTC) of
Makati City, Branch 148, in Civil Case No. 96-062. The RTC had
ordered Westwind Shipping Corporation (Westwind) and Asian
Terminals, Inc. (ATI) to pay, jointly and severally, Philam Insurance
Co., Inc. (Philam) the sum of P633,957.15, with interest at 12% per
annum from the date of judicial demand and P158,989.28 as
attorneys fees.
The facts of the case follow:
On April 15, 1995, Nichimen Corporation shipped to Universal Motors
Corporation (Universal Motors) 219 packages containing 120 units of
brand new Nissan Pickup Truck Double Cab 4x2 model, without
engine, tires and batteries, on board the vessel S/S "Calayan Iris"
from Japan to Manila. The shipment, which had a declared value of
US$81,368 or P29,400,000, was insured with Philam against all risks
under Marine Policy No. 708-8006717-4.4
The carrying vessel arrived at the port of Manila on April 20, 1995,
and when the shipment was unloaded by the staff of ATI, it was found
that the package marked as 03-245-42K/1 was in bad order.5 The
Turn Over Survey of Bad Order Cargoes6 dated April 21, 1995
identified two packages, labeled 03-245-42K/1 and 03/237/7CK/2, as
being dented and broken. Thereafter, the cargoes were stored for
temporary safekeeping inside CFS Warehouse in Pier No. 5.
On May 11, 1995, the shipment was withdrawn by R.F. Revilla
Customs Brokerage, Inc., the authorized broker of Universal Motors,
and delivered to the latters warehouse in Mandaluyong City. Upon
the request7 of Universal Motors, a bad order survey was conducted
on the cargoes and it was found that one Frame Axle Sub without
LWR was deeply dented on the buffle plate while six Frame Assembly
with Bush were deformed and misaligned.8 Owing to the extent of the
damage to said cargoes, Universal Motors declared them a total loss.
On August 4, 1995, Universal Motors filed a formal claim for damages
in the amount of P643,963.84 against Westwind,9 ATI10 and R.F.
Revilla Customs Brokerage, Inc.11 When Universal Motors demands
remained unheeded, it sought reparation from and was compensated
in the sum of P633,957.15 by Philam. Accordingly, Universal Motors
issued a Subrogation Receipt12 dated November 15, 1995 in favor of
Philam.
On January 18, 1996, Philam, as subrogee of Universal Motors, filed
a Complaint13 for damages against Westwind, ATI and R.F. Revilla
Customs Brokerage, Inc. before the RTC of Makati City, Branch 148.
On September 24, 1999, the RTC rendered judgment in favor of
Philam and ordered Westwind and ATI to pay Philam, jointly and
severally, the sum of P633,957.15 with interest at the rate of 12% per
annum, P158,989.28 by way of attorneys fees and expenses of
litigation.
The court a quo ruled that there was sufficient evidence to establish
the respective participation of Westwind and ATI in the discharge of
and consequent damage to the shipment. It found that the subject
cargoes were compressed while being hoisted using a cable that was
too short and taut.
The trial court observed that while the staff of ATI undertook the
physical unloading of the cargoes from the carrying vessel,
Westwinds duty officer exercised full supervision and control
throughout the process. It held Westwind vicariously liable for failing
to prove that it exercised extraordinary diligence in the supervision of
the ATI stevedores who unloaded the cargoes from the vessel.
However, the court absolved R.F. Revilla Customs Brokerage, Inc.
from liability in light of its finding that the cargoes had been damaged
before delivery to the consignee.
The trial court acknowledged the subrogation between Philam and
Universal Motors on the strength of the Subrogation Receipt dated
November 15, 1995. It likewise upheld Philams claim for the value of
the alleged damaged vehicle parts contained in Case Nos. 03-245-
42K/1 and 03-245-51K or specifically for "7 pieces of Frame Axle Sub
Without Lower and Frame Assembly with Bush."14
Westwind filed a Motion for Reconsideration15 which was, however,
denied in an Order16 dated October 26, 2000.
On appeal, the CA affirmed with modification the ruling of the RTC. In
a Decision dated October 15, 2007, the appellate court directed
Westwind and ATI to pay Philam, jointly and severally, the amount of
P190,684.48 with interest at the rate of 12% per annum until fully
paid, attorneys fees of P47,671 and litigation expenses.
The CA stressed that Philam may not modify its allegations by
claiming in its Appellees Brief17 that the six pieces of Frame Assembly
with Bush, which were purportedly damaged, were also inside Case
No. 03-245-42K/1. The CA noted that in its Complaint, Philam alleged
that "one (1) pc. FRAME AXLE SUB W/O LWR from Case No. 03-
245-42K/1 was completely deformed and misaligned, and six (6)
other pcs. of FRAME ASSEMBLY WITH BUSH from Case No. 03-
245-51K were likewise completely deformed and misaligned." 18
The appellate court accordingly affirmed Westwind and ATIs joint and
solidary liability for the damage to only one (1) unit of Frame Axle Sub
without Lower inside Case No. 03-245-42K/1. It also noted that when
said cargo sustained damage, it was not yet in the custody of the
consignee or the person who had the right to receive it. The CA
pointed out that Westwinds duty to observe extraordinary diligence in
the care of the cargoes subsisted during unloading thereof by ATIs
personnel since the former exercised full control and supervision over
the discharging operation.
Similarly, the appellate court held ATI liable for the negligence of its
employees who carried out the offloading of cargoes from the ship to
the pier. As regards the extent of ATIs liability, the CA ruled that ATI
cannot limit its liability to P5,000 per damaged package. It explained
that Section 7.0119 of the Contract for Cargo Handling Services20 does
not apply in this case since ATI was not yet in custody and control of
the cargoes when the Frame Axle Sub without Lower suffered
damage.
Citing Belgian Overseas Chartering and Shipping N.V. v. Philippine
First Insurance Co., Inc.,21 the appellate court also held that Philams
action for damages had not prescribed notwithstanding the absence
of a notice of claim.
All the parties moved for reconsideration, but their motions were
denied in a Resolution dated January 11, 2008. Thus, they each filed
a petition for review on certiorari which were consolidated together by
this Court considering that all three petitions assail the same CA
decision and resolution and involve the same parties.
Essentially, the issues posed by petitioner ATI in G.R. No. 181163,
petitioner Philam in G.R. No. 181262 and petitioner Westwind in G.R.
No. 181319 can be summed up into and resolved by addressing
three questions: (1) Has Philams action for damages prescribed? (2)
Who between Westwind and ATI should be held liable for the
damaged cargoes? and (3) What is the extent of their liability?
Petitioners Arguments
G.R. No. 181163
Petitioner ATI disowns liability for the damage to the Frame Axle Sub
without Lower inside Case No. 03-245-42K/1. It shifts the blame to
Westwind, whom it charges with negligence in the supervision of the
stevedores who unloaded the cargoes. ATI admits that the damage
could have been averted had Westwind observed extraordinary
diligence in handling the goods. Even so, ATI suspects that Case No.
03-245-42K/1 is "weak and defective"22 considering that it alone
sustained damage out of the 219 packages.
Notwithstanding, petitioner ATI submits that, at most, it can be held
liable to pay only P5,000 per package pursuant to its Contract for
Cargo Handling Services. ATI maintains that it was not properly
notified of the actual value of the cargoes prior to their discharge from
the vessel.
G.R. No. 181262
Petitioner Philam supports the CA in holding both Westwind and ATI
liable for the deformed and misaligned Frame Axle Sub without Lower
inside Case No. 03-245-42K/1. It, however, faults the appellate court
for disallowing its claim for the value of six Chassis Frame Assembly
which were likewise supposedly inside Case Nos. 03-245-51K and
03-245-42K/1. As to the latter container, Philam anchors its claim on
the results of the Inspection/Survey Report23 of Chartered Adjusters,
Inc., which the court received without objection from Westwind and
ATI. Petitioner believes that with the offer and consequent admission
of evidence to the effect that Case No. 03-245-42K/1 contains six
pieces of dented Chassis Frame Assembly, Philams claim thereon
should be treated, in all respects, as if it has been raised in the
pleadings. Thus, Philam insists on the reinstatement of the trial
courts award in its favor for the payment of P633,957.15 plus legal
interest, P158,989.28 as attorneys fees and costs.
G.R. No. 181319
Petitioner Westwind denies joint liability with ATI for the value of the
deformed Frame Axle Sub without Lower in Case No. 03-245-42K/1.
Westwind argues that the evidence shows that ATI was already in
actual custody of said case when the Frame Axle Sub without Lower
inside it was misaligned from being compressed by the tight cable
used to unload it. Accordingly, Westwind ceased to have
responsibility over the cargoes as provided in paragraph 4 of the Bill
of Lading which provides that the responsibility of the carrier shall
cease when the goods are taken into the custody of the arrastre.
Westwind contends that sole liability for the damage rests on ATI
since it was the latters stevedores who operated the ships gear to
unload the cargoes. Westwind reasons that ATI is an independent
company, over whose employees and operations it does not exercise
control. Moreover, it was ATIs employees who selected and used the
wrong cable to lift the box containing the cargo which was damaged.
Westwind likewise believes that ATI is bound by its acceptance of the
goods in good order despite a finding that Case No. 03-245-42K/1
was partly torn and crumpled on one side. Westwind also notes that
the discovery that a piece of Frame Axle Sub without Lower was
completely deformed and misaligned came only on May 12, 1995 or
22 days after the cargoes were turned over to ATI and after the same
had been hauled by R.F. Revilla Customs Brokerage, Inc.
Westwind further argues that the CA erred in holding it liable
considering that Philams cause of action has prescribed since the
latter filed a formal claim with it only on August 17, 1995 or four
months after the cargoes arrived on April 20, 1995. Westwind
stresses that according to the provisions of clause 20, paragraph 2 24
of the Bill of Lading as well as Article 36625 of the Code of Commerce,
the consignee had until April 20, 1995 within which to make a claim
considering the readily apparent nature of the damage, or until April
27, 1995 at the latest, if it is assumed that the damage is not readily
apparent.
Lastly, petitioner Westwind contests the imposition of 12% interest on
the award of damages to Philam reckoned from the time of
extrajudicial demand. Westwind asserts that, at most, it can only be
charged with 6% interest since the damages claimed by Philam does
not constitute a loan or forbearance of money.
The Courts Ruling
The three consolidated petitions before us call for a determination of
who between ATI and Westwind is liable for the damage suffered by
the subject cargo and to what extent. However, the resolution of the
issues raised by the present petitions is predicated on the
appreciation of factual issues which is beyond the scope of a petition
for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended. It is settled that in petitions for review on
certiorari, only questions of law may be put in issue. Questions of fact
cannot be entertained.26
There is a question of law if the issue raised is capable of being
resolved without need of reviewing the probative value of the
evidence. The resolution of the issue must rest solely on what the law
provides on the given set of circumstances. Once it is clear that the
issue invites a review of the evidence presented, the question posed
is one of fact. If the query requires a re-evaluation of the credibility of
witnesses, or the existence or relevance of surrounding
circumstances and their relation to each other, the issue in that query
is factual.27
In the present petitions, the resolution of the question as to who
between Westwind and ATI should be liable for the damages to the
cargo and to what extent would have this Court pass upon the
evidence on record. But while it is not our duty to review, examine
and evaluate or weigh all over again the probative value of the
evidence presented,28 the Court may nonetheless resolve questions
of fact when the case falls under any of the following exceptions:
(1) when the findings are grounded entirely on speculation, surmises,
or conjectures; (2) when the inference made is manifestly mistaken,
absurd, or impossible; (3) when there is grave abuse of discretion; (4)
when the judgment is based on a misapprehension of facts; (5) when
the findings of fact are conflicting; (6) when in making its findings the
Court of Appeals went beyond the issues of the case, or its findings
are contrary to the admissions of both the appellant and the appellee;
(7) when the findings are contrary to those of the trial court; (8) when
the findings are conclusions without citation of specific evidence on
which they are based; (9) when the facts set forth in the petition as
well as in the petitioners main and reply briefs are not disputed by
the respondent; and (10) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence
on record.29
In the cases at bar, the fifth and seventh exceptions apply. While the
CA affirmed the joint liability of ATI and Westwind, it held them liable
only for the value of one unit of Frame Axle Sub without Lower inside
Case No. 03-245-42K/1. The appellate court disallowed the award of
damages for the six pieces of Frame Assembly with Bush, which
petitioner Philam alleged, for the first time in its Appellees Brief, to be
likewise inside Case No. 03-245-42K/1. Lastly, the CA reduced the
award of attorneys fees to P47,671.
Foremost, the Court holds that petitioner Philam has adequately
established the basis of its claim against petitioners ATI and
Westwind. Philam, as insurer, was subrogated to the rights of the
consignee, Universal Motors Corporation, pursuant to the
Subrogation Receipt executed by the latter in favor of the former. The
right of subrogation accrues simply upon payment by the insurance
company of the insurance claim.30 Petitioner Philams action finds
support in Article 2207 of the Civil Code, which provides as follows:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. x
x x.
In their respective comments31 to Philams Formal Offer of Evidence,32
petitioners ATI and Westwind objected to the admission of Marine
Certificate No. 708-8006717-4 and the Subrogation Receipt as
documentary exhibits "B" and "P," respectively. Petitioner Westwind
objects to the admission of both documents for being hearsay as they
were not authenticated by the persons who executed them. For the
same reason, petitioner ATI assails the admissibility of the
Subrogation Receipt. As regards Marine Certificate No. 708-8006717-
4, ATI makes issue of the fact that the same was issued only on April
27, 1995 or 12 days after the shipment was loaded on and
transported via S/S "Calayan Iris."
The nature of documents as either public or private determines how
the documents may be presented as evidence in court. Public
documents, as enumerated under Section 19,33 Rule 132 of the Rules
of Court, are self-authenticating and require no further authentication
in order to be presented as evidence in court. 34
In contrast, a private document is any other writing, deed or
instrument executed by a private person without the intervention of a
notary or other person legally authorized by which some disposition
or agreement is proved or set forth. Lacking the official or sovereign
character of a public document, or the solemnities prescribed by law,
a private document requires authentication35 in the manner prescribed
under Section 20, Rule 132 of the Rules:
SEC. 20. Proof of private document. Before any private document
offered as authentic is received in evidence, its due execution and
authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of
the maker.
Any other private document need only be identified as that which it is
claimed to be.
The requirement of authentication of a private document is excused
only in four instances, specifically: (a) when the document is an
ancient one within the context of Section 21, 36 Rule 132 of the Rules;
(b) when the genuineness and authenticity of the actionable
document have not been specifically denied under oath by the
adverse party; (c) when the genuineness and authenticity of the
document have been admitted; or (d) when the document is not being
offered as genuine.37
Indubitably, Marine Certificate No. 708-8006717-4 and the
Subrogation Receipt are private documents which Philam and the
consignee, respectively, issue in the pursuit of their business. Since
none of the exceptions to the requirement of authentication of a
private document obtains in these cases, said documents may not be
admitted in evidence for Philam without being properly authenticated.
Contrary to the contention of petitioners ATI and Westwind, however,
Philam presented its claims officer, Ricardo Ongchangco, Jr. to testify
on the execution of the Subrogation Receipt, as follows:
ATTY. PALACIOS
Q How were you able to get hold of this subrogation receipt?
A Because I personally delivered the claim check to consignee and
have them receive the said check.
Q I see. Therefore, what you are saying is that you personally
delivered the claim check of Universal Motors Corporation to that
company and you have the subrogation receipt signed by them
personally?
A Yes, sir.
Q And it was signed in your presence?
A Yes, sir.38
Indeed, all that the Rules require to establish the authenticity of a
document is the testimony of a person who saw the document
executed or written. Thus, the trial court did not err in admitting the
Subrogation Receipt in evidence despite petitioners ATI and
Westwinds objections that it was not authenticated by the person
who signed it.
However, the same cannot be said about Marine Certificate No. 708-
8006717-4 which Ongchangcho, Jr. merely identified in court. There
is nothing in Ongchangco, Jr.s testimony which indicates that he saw
Philams authorized representative sign said document, thus:
ATTY. PALACIOS
Q Now, I am presenting to you a copy of this marine certificate 708-
8006717-4 issued by Philam Insurance Company, Inc. to Universal
Motors Corporation on April 15, 1995. Will you tell us what relation
does it have to that policy risk claim mentioned in that letter?
A This is a photocopy of the said policy issued by the consignee
Universal Motors Corporation.
ATTY. PALACIOS
I see. May I request, if Your Honor please, that this marine risk policy
of the plaintiff as submitted by claimant Universal Motors Corporation
be marked as Exhibit B.
COURT
Mark it.39
As regards the issuance of Marine Certificate No. 708-8006717-4
after the fact of loss occurred, suffice it to say that said document
simply certifies the existence of an open insurance policy in favor of
the consignee. Hence, the reference to an "Open Policy Number
9595093" in said certificate. The Court finds it completely absurd to
suppose that any insurance company, of sound business practice,
would assume a loss that has already been realized, when the
profitability of its business rests precisely on the non-happening of the
risk insured against.
Yet, even with the exclusion of Marine Certificate No. 708-8006717-4,
the Subrogation Receipt, on its own, is adequate proof that petitioner
Philam paid the consignees claim on the damaged goods. Petitioners
ATI and Westwind failed to offer any evidence to controvert the same.
In Malayan Insurance Co., Inc. v. Alberto,40 the Court explained the
effect of payment by the insurer of the insurance claim in this wise:
We have held that payment by the insurer to the insured operates as
an equitable assignment to the insurer of all the remedies that the
insured may have against the third party whose negligence or
wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract. It
accrues simply upon payment by the insurance company of the
insurance claim. The doctrine of subrogation has its roots in equity. It
is designed to promote and accomplish justice; and is the mode that
equity adopts to compel the ultimate payment of a debt by one who,
in justice, equity, and good conscience, ought to pay.41
Neither do we find support in petitioner Westwinds contention that
Philams right of action has prescribed.
The Carriage of Goods by Sea Act (COGSA) or Public Act No. 521 of
the 74th US Congress, was accepted to be made applicable to all
contracts for the carriage of goods by sea to and from Philippine ports
in foreign trade by virtue of Commonwealth Act (C.A.) No. 65. 42
Section 1 of C.A. No. 65 states:
Section 1. That the provisions of Public Act Numbered Five hundred
and twenty-one of the Seventy-fourth Congress of the United States,
approved on April sixteenth, nineteen hundred and thirty-six, be
accepted, as it is hereby accepted to be made applicable to all
contracts for the carriage of goods by sea to and from Philippine ports
in foreign trade: Provided, That nothing in the Act shall be construed
as repealing any existing provision of the Code of Commerce which is
now in force, or as limiting its application.
The prescriptive period for filing an action for the loss or damage of
the goods under the COGSA is found in paragraph (6), Section 3,
thus:
(6) Unless notice of loss or damage and the general nature of such
loss or damage be given in writing to the carrier or his agent at the
port of discharge before or at the time of the removal of the goods
into the custody of the person entitled to delivery thereof under the
contract of carriage, such removal shall be prima facie evidence of
the delivery by the carrier of the goods as described in the bill of
lading. If the loss or damage is not apparent, the notice must be given
within three days of the delivery.
Said notice of loss or damage maybe endorsed upon the receipt for
the goods given by the person taking delivery thereof.
The notice in writing need not be given if the state of the goods has at
the time of their receipt been the subject of joint survey or inspection.
In any event the carrier and the ship shall be discharged from all
liability in respect of loss or damage unless suit is brought within one
year after delivery of the goods or the date when the goods should
have been delivered: Provided, That if a notice of loss or damage,
either apparent or concealed, is not given as provided for in this
section, that fact shall not affect or prejudice the right of the shipper to
bring suit within one year after the delivery of the goods or the date
when the goods should have been delivered.
In the Bill of Lading43 dated April 15, 1995, Rizal Commercial Banking
Corporation (RCBC) is indicated as the consignee while Universal
Motors is listed as the notify party. These designations are in line with
the subject shipment being covered by Letter of Credit No. I501054,
which RCBC issued upon the request of Universal Motors.
A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses
to part with his goods before he is paid, and a buyer, who wants to
have control of his goods before paying. 44 However, letters of credit
are employed by the parties desiring to enter into commercial
transactions, not for the benefit of the issuing bank but mainly for the
benefit of the parties to the original transaction, 45 in these cases,
Nichimen Corporation as the seller and Universal Motors as the
buyer. Hence, the latter, as the buyer of the Nissan CKD parts, should
be regarded as the person entitled to delivery of the goods.
Accordingly, for purposes of reckoning when notice of loss or damage
should be given to the carrier or its agent, the date of delivery to
Universal Motors is controlling.
S/S "Calayan Iris" arrived at the port of Manila on April 20, 1995, and
the subject cargoes were discharged to the custody of ATI the next
day. The goods were then withdrawn from the CFS Warehouse on
May 11, 1995 and the last of the packages delivered to Universal
Motors on May 17, 1995. Prior to this, the latter filed a Request for
Bad Order Survey46 on May 12,1995 following a joint inspection
where it was discovered that six pieces of Chassis Frame Assembly
from two bundles were deformed and one Front Axle Sub without
Lower from a steel case was dented. Yet, it was not until August 4,
1995 that Universal Motors filed a formal claim for damages against
petitioner Westwind.
Even so, we have held in Insurance Company of North America v.
Asian Terminals, Inc. that a request for, and the result of a bad order
examination, done within the reglementary period for furnishing notice
of loss or damage to the carrier or its agent, serves the purpose of a
claim. A claim is required to be filed within the reglementary period to
afford the carrier or depositary reasonable opportunity and facilities to
check the validity of the claims while facts are still fresh in the minds
of the persons who took part in the transaction and documents are
still available.47 Here, Universal Motors filed a request for bad order
survey on May 12, 1995, even before all the packages could be
unloaded to its warehouse.
Moreover, paragraph (6), Section 3 of the COGSA clearly states that
failure to comply with the notice requirement shall not affect or
prejudice the right of the shipper to bring suit within one year after
delivery of the goods. Petitioner Philam, as subrogee of Universal
Motors, filed the Complaint for damages on January 18, 1996, just
eight months after all the packages were delivered to its possession
on May 17, 1995. Evidently, petitioner Philams action against
petitioners Westwind and ATI was seasonably filed.
This brings us to the question that must be resolved in these
consolidated petitions. Who between Westwind and ATI should be
liable for the damage to the cargo?
It is undisputed that Steel Case No. 03-245-42K/1 was partly torn and
crumpled on one side while it was being unloaded from the carrying
vessel. The damage to said container was noted in the Bad Order
Cargo Receipt48 dated April 20, 1995 and Turn Over Survey of Bad
Order Cargoes dated April 21, 1995. The Turn Over Survey of Bad
Order Cargoes indicates that said steel case was not opened at the
time of survey and was accepted by the arrastre in good order.
Meanwhile, the Bad Order Cargo Receipt bore a notation "B.O. not
yet t/over to ATI." On the basis of these documents, petitioner ATI
claims that the contents of Steel Case No. 03-245-42K/1 were
damaged while in the custody of petitioner Westwind.
We agree.
Common carriers, from the nature of their business and for reasons
of public policy, are bound to observe extraordinary diligence in the
vigilance over the goods transported by them. Subject to certain
exceptions enumerated under Article 173449 of the Civil Code,
common carriers are responsible for the loss, destruction, or
deterioration of the goods. The extraordinary responsibility of the
common carrier lasts from the time the goods are unconditionally
placed in the possession of, and received by the carrier for
transportation until the same are delivered, actually or constructively,
by the carrier to the consignee, or to the person who has a right to
receive them.50
The court a quo, however, found both petitioners Westwind and ATI,
jointly and severally, liable for the damage to the cargo. It observed
that while the staff of ATI undertook the physical unloading of the
cargoes from the carrying vessel, Westwinds duty officer exercised
full supervision and control over the entire process. The appellate
court affirmed the solidary liability of Westwind and ATI, but only for
the damage to one Frame Axle Sub without Lower.
Upon a careful review of the records, the Court finds no reason to
deviate from the finding that petitioners Westwind and ATI are
concurrently accountable for the damage to the content of Steel Case
No. 03-245-42K/1.
Section 251 of the COGSA provides that under every contract of
carriage of goods by the sea, the carrier in relation to the loading,
handling, stowage, carriage, custody, care and discharge of such
goods, shall be subject to the responsibilities and liabilities and
entitled to the rights and immunities set forth in the Act. Section 3 (2) 52
thereof then states that among the carriers responsibilities are to
properly load, handle, stow, carry, keep, care for and discharge the
goods carried.53
At the trial, Westwinds Operation Assistant, Menandro G. Ramirez,
testified on the presence of a ship officer to supervise the unloading
of the subject cargoes.
ATTY. LLAMAS
Q Having been present during the entire discharging operation, do
you remember who else were present at that time?
A Our surveyor and our checker the foreman of ATI.
Q Were there officials of the ship present also?
A Yes, sir there was an officer of the vessel on duty at that time. 54
xxxx
Q Who selected the cable slink to be used?
A ATI Operation.
Q Are you aware of how they made that selection?
A Before the vessel arrived we issued a manifesto of the storage plan
informing the ATI of what type of cargo and equipment will be
utilitized in discharging the cargo.55
xxxx
Q You testified that it was the ATI foremen who select the cable slink
to be used in discharging, is that correct?
A Yes sir, because they are the one who select the slink and they
know the kind of cargoes because they inspected it before the
discharge of said cargo.
Q Are you aware that the ship captain is consulted in the selection of
the cable sling?
A Because the ship captain knows for a fact the equipment being
utilized in the discharge of the cargoes because before the ship leave
the port of Japan the crew already utilized the proper equipment fitted
to the cargo.56 (Emphasis supplied.)
It is settled in maritime law jurisprudence that cargoes while being
unloaded generally remain under the custody of the carrier.57 The
Damage Survey Report58 of the survey conducted by Phil. Navtech
Services, Inc. from April 20-21, 1995 reveals that Case No. 03-245-
42K/1 was damaged by ATI stevedores due to overtightening of a
cable sling hold during discharge from the vessels hatch to the pier.
Since the damage to the cargo was incurred during the discharge of
the shipment and while under the supervision of the carrier, the latter
is liable for the damage caused to the cargo.
This is not to say, however, that petitioner ATI is without liability for
the damaged cargo.
The functions of an arrastre operator involve the handling of cargo
deposited on the wharf or between the establishment of the
consignee or shipper and the ships tackle. Being the custodian of the
goods discharged from a vessel, an arrastre operators duty is to take
good care of the goods and to turn them over to the party entitled to
their possession.59
Handling cargo is mainly the arrastre operators principal work so its
drivers/operators or employees should observe the standards and
measures necessary to prevent losses and damage to shipments
under its custody.60
While it is true that an arrastre operator and a carrier may not be held
solidarily liable at all times,61 the facts of these cases show that apart
from ATIs stevedores being directly in charge of the physical
unloading of the cargo, its foreman picked the cable sling that was
used to hoist the packages for transfer to the dock. Moreover, the fact
that 218 of the 219 packages were unloaded with the same sling
unharmed is telling of the inadequate care with which ATIs stevedore
handled and discharged Case No. 03-245-42K/1.
With respect to petitioners ATI and Westwinds liability, we agree with
the CA that the same should be confined to the value of the one piece
Frame Axle Sub without Lower.
In the Bad Order Inspection Report62 prepared by Universal Motors,
the latter referred to Case No. 03-245-42K/1 as the source of said
Frame Axle Sub without Lower which suffered a deep dent on its
buffle plate. Yet, it identified Case No. 03-245-51K as the container
which bore the six pieces Frame Assembly with Bush. Thus, in
Philams Complaint, it alleged that "the entire shipment showed one
(1) pc. FRAME AXLE SUB W/O LWR from Case No. 03-245-42K/1
was completely deformed and misaligned, and six (6) other pcs. of
FRAME ASSEMBLY WITH BUSH from Case No. 03-245-51K were
likewise completely deformed and misaligned." 63 Philam later claimed
in its Appellees Brief that the six pieces of Frame Assembly with
Bush were also inside the damaged Case No. 03-245-42K/1.
However, there is nothing in the records to show conclusively that the
six Frame Assembly with Bush were likewise contained in and
damaged inside Case No. 03-245-42K/1. In the Inspection Survey
Report of Chartered Adjusters, Inc., it mentioned six pieces of chassis
frame assembly with deformed body mounting bracket. However, it
merely noted the same as coming from two bundles with no
identifying marks.
Lastly, we agree with petitioner Westwind that the CA erred in
imposing an interest rate of 12% on the award of damages. Under
Article 2209 of the Civil Code, when an obligation not constituting a
loan or forbearance of money is breached, an interest on the amount
of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum.64 In the similar case of Belgian Overseas
Chartering and Shipping NV v. Philippine First Insurance Co., lnc., 65
the Court reduced the rate of interest on the damages awarded to the
carrier therein to 6% from the time of the filing of the complaint until
the finality of the decision.
WHEREFORE, the Court AFFIRMS with MODIFICATION the
Decision dated October 15,2007 and the Resolution dated January
11, 2008 of the Court of Appeals in CA-G.R. CV No. 69284 in that the
interest rate on the award of P190,684.48 is reduced to 6% per
annum from the date of extrajudicial demand, until fully paid.
With costs against the petitioners in G.R. No. 181163 and G.R. No.
181319, respectively.
SO ORDERED.
G.R. No. 180144 September 24, 2014
LEONARDO BOGNOT, Petitioner,
vs.
RRI LENDING CORPORATION, represented by its General
Manager, DARIO J. BERNARDEZ, Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari filed by
1

Leonardo Bognot (petitioner) assailing the March 28, 2007 decision 2

and the October 15, 2007 resolution of the Court of Appeals (CA) in
3

CA-G.R. CV No. 66915.

Background Facts
RRI Lending Corporation (respondent) is an entity engaged in the
business of lending money to its borrowers within Metro Manila. It is
duly represented by its General Manager, Mr. Dario J. Bernardez
(Bernardez).
Sometime in September 1996, the petitioner and his younger brother,
Rolando A. Bognot (collectively referred to as the "Bognot siblings"),
applied for and obtained a loan of Five Hundred Thousand Pesos
(P500,000.00) from the respondent, payable on November 30, 1996. 4

The loan was evidenced by a promissory note and was secured by a

post dated check dated November 30, 1996.
5

Evidence on record shows that the petitioner renewed the loan

several times on a monthly basis. He paid a renewal fee of
P54,600.00 for each renewal, issued a new post-dated checkas
security, and executed and/or renewed the promissory note
previouslyissued. The respondent on the other hand, cancelled and
returned to the petitioner the post-dated checks issued prior to their
renewal.
Sometime in March 1997, the petitioner applied for another loan
renewal. He again executed as principal and signed Promissory Note
No. 97-035 payable on April 1, 1997; his co-maker was again
6

Rolando. As security for the loan, the petitioner also issued BPI
Check No. 0595236, post dated to April 1, 1997.
7 8

Subsequently, the loan was again renewed on a monthly basis (until

June 30, 1997), as shown by the Official Receipt No. 797 dated May
9

5, 1997, and the Disclosure Statement dated May 30, 1997 duly
signed by Bernardez. The petitioner purportedly paid the renewal
fees and issued a post-dated check dated June 30, 1997 as security.
As had been done in the past, the respondent superimposed the date
"June 30, 1997" on the upper right portion of Promissory Note No. 97-
035 to make it appear that it would mature on the said date.
Several days before the loans maturity, Rolandos wife, Julieta
Bognot (Mrs. Bognot), went to the respondents office and applied for
another renewal of the loan. She issued in favor of the respondent
Promissory Note No. 97-051, and International Bank Exchange (IBE)
Check No. 00012522, dated July 30, 1997, in the amount of
P54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan documents for
the Bognot siblings signatures and replacement, Mrs. Bognot asked
the respondents clerk to release to her the promissory note, the
disclosure statement, and the check dated July 30, 1997. Mrs.
Bognot, however, never returned these documents nor issued a new
post-dated check. Consequently, the respondent sent the petitioner
follow-up letters demanding payment of the loan, plus interest and
penalty charges. These demands went unheeded.
On November 27, 1997, the respondent, through Bernardez, filed a
complaint for sum of money before the Regional Trial Court (RTC)
against the Bognot siblings. The respondent mainly alleged that the
loan renewal payable on June 30, 1997 which the Bognot siblings
applied for remained unpaid; that before June30, 1997, Mrs. Bognot
applied for another loan extension and issued IBE Check No.
00012522 as payment for the renewal fee; that Mrs. Bognot
convinced the respondents clerk to release to her the promissory
note and the other loan documents; that since Mrs. Bognot never
issued any replacement check, no loanextension took place and the
loan, originally payable on June 30, 1997, became due on this date;
and despite repeated demands, the Bognot siblings failed to pay their
joint and solidary obligation.
Summons were served on the Bognotsiblings. However, only the
petitioner filed his answer.
In his Answer, the petitioner claimed that the complaint states no
10

cause of action because the respondents claim had been paid,

waived, abandoned or otherwise extinguished. He denied being a
party to any loan application and/or renewal in May 1997. He also
denied having issued the BPI check post-dated to June 30, 1997, as
well as the promissory note dated June 30, 1997, claiming that this
note had been tampered. He claimed that the one (1) month loan
contracted by Rolando and his wife in November 1996 which was
lastly renewed in March 1997 had already been fully paid and
extinguished in April 1997.
11

Trial on the merits thereafter ensued.

The Regional Trial Court Ruling
In a decision dated January 17, 2000,the RTC ruled in the
12

respondents favor and ordered the Bognot siblings to pay the

amount of the loan, plus interest and penalty charges. It considered
the wordings of the promissory note and found that the loan they
contracted was joint and solidary. It also noted that the petitioner
signed the promissory note as a principal (and not merely as a
guarantor), while Rolando was the co-maker. It brushed the
petitioners defense of full payment aside, ruling that the respondent
had successfully proven, by preponderance of evidence, the
nonpayment of the loan. The trial court said:
Records likewise reveal that while he claims that the obligation had
been fully paid in his Answer, he did not, in order to protect his right
filed (sic) a cross-claim against his co-defendant Rolando Bognot
despite the fact that the latter did not file any responsive pleading.
In fine, defendants are liable solidarily to plaintiff and must pay the
loan of P500,000.00 plus 5% interest monthly as well as 10% monthly
penalty charges from the filing of the complaint on December 3, 1997
until fully paid. As plaintiff was constrained to engage the services of
counsel in order to protect his right,defendants are directed to pay the
former jointly and severally the amount of P50,000.00 as and by way
of attorneys fee.
The petitioner appealed the decision to the Court of Appeals.
The Court of Appeals Ruling
In its decision dated March 28, 2007, the CA affirmed the RTCs
findings. It found the petitioners defense of payment untenable and
unsupported by clear and convincing evidence. It observed that the
petitioner did not present any evidence showing that the check dated
June 30, 1997 had, in fact, been encashed by the respondent and the
proceeds applied to the loan, or any official receipt evidencing the
payment of the loan. It further stated that the only document relied
uponby the petitioner to substantiate his defense was the April 1,
1997 checkhe issued which was cancelled and returned to him by the
respondent.
The CA, however, noted the respondents established policy of
cancelling and returning the post-dated checks previously issued, as
well as the subsequent loan renewals applied for by the petitioner, as
manifested by the official receipts under his name. The CA thus ruled
that the petitioner failed to discharge the burden of proving payment.
The petitioner moved for the reconsideration of the decision, but the
CA denied his motion in its resolution of October 15, 2007, hence, the
present recourse to us pursuant toRule 45 of the Rules of Court.
The Petition
The petitioner submits that the CA erred in holding him solidarily
liable with Rolando and his wife. Heclaimed that based on the legal
presumption provided by Article 1271 of the Civil Code, his 13

obligation had been discharged by virtue of his possession of the

post-dated check (stamped "CANCELLED") that evidenced his
indebtedness. He argued that it was Mrs. Bognot who subsequently
assumed the obligation by renewing the loan, paying the fees and
charges, and issuing a check. Thus, there is an entirely new
obligation whose payment is her sole responsibility.
The petitioner also argued that as a result of the alteration of the
promissory note without his consent (e.g., the superimposition of the
date "June 30, 1997" on the upper right portion of Promissory Note
No. 97-035 to make it appear that it would mature on this date), the
respondent can no longer collect on the tampered note, let alone,
hold him solidarily liable with Rolando for the payment of the loan. He
maintained that even without the proof of payment, the material
alteration of the promissory note is sufficient to extinguish his liability.
Lastly, he claimed that he had been released from his indebtedness
by novation when Mrs. Bognot renewed the loan and assumed the
indebtedness.
The Case for the Respondents
The respondent submits that the issues the petitioner raised hinge on
the appreciation of the adduced evidence and of the factual lower
courts findings that, as a rule, are notreviewable by this Court.
The Issues
The case presents to us the following issues:
1. Whether the CA committed a reversible error in holding the
petitioner solidarily liable with Rolando;
2. Whether the petitioner is relieved from liability by reason of the
material alteration in the promissory note; and
3. Whether the parties obligation was extinguished by: (i) payment;
and (ii) novation by substitution of debtors.
Our Ruling
We find the petition partly meritorious.
As a rule, the Courts jurisdiction in a Rule 45 petition is limited to the
review of pure questions of law. Appreciation of evidence and inquiry
14

on the correctness of the appellate court's factual findings are not the
functions of this Court; we are not a trier of facts.
15

A question of law exists when the doubt or dispute relates to the

application of the law on given facts. On the other hand, a question of
fact exists when the doubt or dispute relates to the truth or falsity of
the parties factual allegations.
16

As the respondent correctly pointedout, the petitioners allegations

are factual issuesthat are not proper for the petition he filed. In the
absence of compelling reasons, the Court cannot re-examine, review
or re-evaluate the evidence and the lower courts factual conclusions.
This is especially true when the CA affirmed the lower courts
findings, as in this case. Since the CAs findings of facts affirmed
those of the trial court, they are binding on this Court, rendering any
further factual review unnecessary.
If only to lay the issues raised - both factual and legal to rest, we
shall proceed to discuss their merits and demerits.
No Evidence Was Presented to Establish the Fact of Payment
Jurisprudence tells us that one who pleads payment has the burden
of proving it; the burden rests on the defendant to prove payment,
17

rather than on the plaintiff to prove non-payment. Indeed, once the

18

existence of an indebtedness is duly established by evidence, the

burden of showing with legal certainty that the obligation has been
discharged by payment rests on the debtor. 19

In the present case, the petitioner failed to satisfactorily prove that his
obligation had already been extinguished by payment. As the CA
correctly noted, the petitioner failed to present any evidence that the
respondent had in fact encashed his check and applied the proceeds
to the payment of the loan. Neither did he present official receipts
evidencing payment, nor any proof that the check had been
dishonored.
We note that the petitioner merely relied on the respondents
cancellation and return to him of the check dated April 1, 1997. The
evidence shows that this check was issued to secure the
indebtedness. The acts imputed on the respondent, standing alone,
do not constitute sufficient evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides:
xxxx
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the fault
of the creditor they have been impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v. Spouses Royeca: 20

Settled is the rule that payment must be made in legal tender. A

check is not legal tender and, therefore, cannot constitute a valid
tender of payment. Since a negotiable instrument is only a substitute
for money and not money, the delivery of such an instrument does
not, by itself, operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by
commercial document is actually realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a legal
presumption of renunciation of action (in cases where a private
document evidencing a credit was voluntarily returned by the creditor
to the debtor), this presumption is merely prima facieand is not
conclusive; the presumption loses efficacy when faced with evidence
to the contrary.
Moreover, the cited provision merely raises a presumption, not of
payment, but of the renunciation of the credit where more convincing
evidence would be required than what normally would be called for to
prove payment. Thus, reliance by the petitioner on the legal
21

presumption to prove payment is misplaced.

To reiterate, no cash payment was proven by the petitioner. The
cancellation and return of the check dated April 1, 1997, simply
established his renewal of the loan not the fact of payment.
Furthermore, it has been established during trial, through repeated
acts, that the respondent cancelled and surrendered the post-dated
check previously issued whenever the loan is renewed. We trace
whatwould amount to a practice under the facts of this case, to the
following testimonial exchanges:
Civil Case No. 97-0572
TSN December 14, 1998, Page 13.
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal
fee is charged to the debtor which he or she must pay before a
renewal is allowed. I show you Exhibit "3" official receipt of plaintiff
dated July 3, 1997, would this be your official receipt which you
issued to your client which they make renewal of the loan?
A: Yes, sir.
xxx xxx xxx
Q: And naturally when a loan has been renewed, the old one which is
replaced by the renewal has already been cancelled, is that correct?
A: Yes, sir.
Q: It is also true to say that all promissory notes and all postdated
checks covered by the old loan which have been the subject of the
renewal are deemed cancelled and replaced is that correct?
A: Yes, sir. xxx
22

Civil Case No. 97-0572

TSN November 27, 1998, Page 27.
Q: What happened to the check that Mr. Bognot issued?
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a new check, sir.
Q: Do you have a copy of the checks?
A: We returned the check upon renewing the loan. 23

In light of these exchanges, wefind that the petitioner failed to

discharge his burden ofproving payment.
The Alteration of the Promissory Note
Did Not Relieve the Petitioner From Liability
We now come to the issue of material alteration. The petitioner raised
as defense the alleged material alteration of Promissory Note No. 97-
035 as basis to claim release from his loan. He alleged that the
respondents superimposition of the due date "June 30, 1997" on the
promissory note without his consent effectively relieved him of
liability.
We find this defense untenable.
Although the respondent did not dispute the fact of alteration, he
nevertheless denied that the alteration was done without the
petitioners consent. The parties Pre-Trial Order dated November 3,
1998 states that:
24

xxx There being no possibility of a possible compromise agreement,

stipulations, admissions, and denials were made, to wit:
FOR DEFENDANT LEONARDO BOGNOT
13. That the promissory note subject of this case marked as Annex
"A" of the complaint was originally dated April 1, 1997 with a
superimposed rubber stamp mark "June 30, 1997" to which the
plaintiff admitted the superimposition.
14. The superimposition was done without the knowledge, consent or
prior consultation with Leonardo Bognot which was denied by
plaintiff." (Emphasis supplied)
25

Significantly, the respondent also admitted in the Pre-Trial Order that

part of its company practice is to rubber stamp, or make a
superimposition through a rubber stamp, the old promissory note
which has been renewed to make it appear that there is a new loan
obligation. The petitioner did not rebut this statement. To our mind,
the failure to rebut is tantamount to an admission of the respondents
allegations:
"22. That it is the practice of plaintiff to just rubber stamp or make
superimposition through a rubber stamp on old promissory note
which has been renewed to make it appear that there is a new loan
obligation to which the plaintiff admitted." (Emphasis Supplied). 26

Even assuming that the note had indeed been tampered without the
petitioners consent, the latter cannot totally avoid payment of his
obligation to the respondent based on the contract of loan.
Based on the records, the Bognot Siblings had applied for and were
granted a loan of P500,000.00 by the respondent. The loan was
evidenced by a promissory note and secured by a post-dated check 27

dated November 30, 1996. In fact, the petitioner himself admitted his
loan application was evidenced by the Promissory Note dated April 1,
1997. This loan was renewed several times by the petitioner, after
28

paying the renewal fees, as shown by the Official Receipt Nos. 797 29

and 587 dated May 5 and July 3, 1997, respectively. These official
30

receipts were issued in the name of the petitioner. Although the

petitioner had insisted that the loan had been extinguished, no other
evidence was presented to prove payment other than the cancelled
and returnedpost-dated check.
Under this evidentiary situation, the petitioner cannot validly deny his
obligation and liability to the respondent solely on the ground that the
Promissory Note in question was tampered. Notably, the existence of
the obligation, as well as its subsequent renewals, have been duly
established by: first, the petitioners application for the loan; second,
his admission that the loan had been obtained from the respondent;
third, the post-dated checks issued by the petitioner to secure the
loan; fourth, the testimony of Mr. Bernardez on the grant, renewal and
non-payment of the loan; fifth, proof of non-payment of the loan; sixth,
the loan renewals; and seventh, the approval and receipt of the loan
renewals.
In Guinsatao v. Court of Appeals, this Court pointed out that while a
31

promissory note is evidence of an indebtedness, it is not the only

evidence, for the existence of the obligation can be proven by other
documentary evidence such as a written memorandum signed by the
parties. In Pacheco v. Court of Appeals, this Court likewise expressly
32
recognized that a check constitutes anevidence of indebtedness and
is a veritable proof of an obligation. It canbe used in lieu of and for the
same purpose as a promissory note and can therefore be presented
to establish the existence of indebtedness. 33

In the present petition, we find that the totality of the evidence on

record sufficiently established the existence of the petitioners
indebtedness (and liability) based on the contract ofloan. Even with
the tampered promissory note, we hold that the petitioner can still be
held liable for the unpaid loan.
The Petitioners BelatedClaim of Novation by Substitution May no
Longer be Entertained
It has not escaped the Courts attention that the petitioner raised the
argument that the obligation had been extinguished by novation. The
petitioner never raised this issue before the lower courts.
It is a settled principle of law thatno issue may be raised on appeal
unless it has been brought before the lower tribunal for its
consideration. Matters neither alleged in the pleadingsnor raised
34

during the proceedings below cannot be ventilated for the first time on
appeal before the Supreme Court. 35

In any event, we find no merit in the defense of novation as we

discuss at length below. Novation cannot be presumed and must be
clearly and unequivocably proven.
Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in place
of the old one, or by subrogating a third person to the rights of the
creditor.
36

Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists insubstituting a new debtor in the
place of the originalone, may be made even without the knowledge or
against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in
Articles 1236 and 1237."
To give novation legal effect, the original debtor must be expressly
released from the obligation, and the new debtor must assume the
original debtors place in the contractual relationship. Depending on
who took the initiative, novation by substitution of debtor has two
forms substitution by expromision and substitution by delegacion.
The difference between these two was explained in Garcia v.
Llamas: 37

"In expromision, the initiative for the change does not come from --
and may even be made without the knowledge of -- the debtor, since
it consists of a third persons assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person
who consents to the substitution and assumes the obligation; thus,
the consent of these three persons are necessary."
In both cases, the original debtor must be released from the
obligation; otherwise, there can be no valid novation. Furthermore,
38

novation by substitution of debtor must alwaysbe made with the

consent of the creditor.
39

The petitioner contends thatnovation took place through a substitution

of debtors when Mrs. Bognot renewed the loan and assumed the
debt. He alleged that Mrs. Bognot assumed the obligation by paying
the renewal fees and charges, and by executing a new promissory
note. He further claimed that she issued her own check to cover the
40

renewal fees, which fact, according to the petitioner, was done with
the respondents consent.
Contrary to the petitioners contention, Mrs. Bognot did not substitute
the petitioner as debtor. She merely attempted to renew the original
loan by executing a new promissory note and check. The purported
41

one month renewal of the loan, however, did not push through, as
Mrs. Bognot did not return the documents or issue a new post dated
check. Since the loan was not renewed for another month, the
originaldue date, June 30,1997, continued to stand.
More importantly, the respondent never agreed to release the
petitioner from his obligation. That the respondent initially allowed
Mrs. Bognot to bring home the promissory note, disclosure statement
and the petitioners previous check dated June 30, 1997, does not
ipso factoresult in novation. Neither will this acquiescence constitute
an implied acceptance of the substitution of the debtor.
In order to give novation legal effect, the creditor should consent to
the substitution of a new debtor. Novation must be clearly and
unequivocally shown, and cannot be presumed.
Since the petitioner failed to show thatthe respondent assented to the
substitution, no valid novation took place with the effect of releasing
the petitioner from his obligation to the respondent.
Moreover, in the absence of showing that Mrs. Bognot and the
respondent had agreed to release the petitioner, the respondent can
still enforce the payment of the obligation against the original debtor.
Mere acquiescence to the renewal of the loan, when there is clearly
no agreement to release the petitioner from his responsibility, does
not constitute novation.
The Nature of the Petitioners Liability
On the nature of the petitioners liability, we rule however, that the CA
erred in holding the petitioner solidarily liable with Rolando.
A solidary obligation is one in which each of the debtors is liable for
the entire obligation, and each of the creditors is entitled to demand
the satisfaction of the whole obligation from any or all of the debtors.42

There is solidary liability when the obligation expressly so states,

when the law so provides, or when the nature of the obligation so
requires. Thus, when the obligor undertakes to be "jointly and
43

severally" liable, the obligation is solidary,

In this case, both the RTC and the CA found the petitioner solidarily
liable with Rolando based on Promissory Note No. 97-035 dated
June 30, 1997. Under the promissory note, the Bognot Siblings
defined the parameters of their obligation as follows:
"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay
to READY RESOURCES INVESTORS RRI LENDING CORPO. or
Order, its office at Paranaque, M.M. the principal sum of Five
Hundred Thousand PESOS (P500,000.00), PhilippineCurrency, with
interest thereon at the rate of Five percent (5%) per month/annum,
payable in One Installment (01) equal daily/weekly/semi-
monthly/monthly of PESOS Five Hundred Thousand Pesos
(P500,000.00), first installment to become due on June 30, 1997.
xxx" (Emphasis Ours).
44

Although the phrase "jointly and severally" in the promissory note

clearly and unmistakably provided for the solidary liability of the
parties, we note and stress that the promissory note is merely a
photocopyof the original, which was never produced.
Under the best evidence rule, whenthe subject of inquiry is the
contents of a document, no evidence isadmissible other than the
original document itself except in the instances mentioned in Section
3, Rule 130 of the Revised Rules of Court. 45

The records show that the respondenthad the custody of the original
promissory note dated April 1, 1997, with a superimposed rubber
stamp mark "June 30, 1997", and that it had been given every
opportunity to present it. The respondent even admitted during pre-
trial that it could not present the original promissory note because it is
in the custody of its cashier who is stranded in Bicol. Since the
46

respondent never produced the original of the promissory note, much

less offered to produce it, the photocopy of the promissory note
cannot be admitted as evidence. Other than the promissory note in
question, the respondent has not presented any other evidence to
support a finding of solidary liability. As we earlier noted, both lower
courts completely relied on the note when they found the Bognot
siblingssolidarily liable.
The well-entrenched rule is that solidary obligation cannot be inferred
lightly. It must be positively and clearly expressed and cannot be
presumed. 47

In view of the inadmissibility of the promissory note, and in the

absence of evidence showing that the petitioner had bound himself
solidarily with Rolando for the payment of the loan, we cannot but
conclude that the obligation to pay is only joint. 48

The 5% Monthly Interest Stipulated in the Promissory Note is

Unconscionable and Should be Equitably Reduced
Finally, on the issue of interest, while we agree with the CA that the
petitioner is liable to the respondentfor the unpaid loan, we find the
imposition of the 5% monthly interest to be excessive, iniquitous,
unconscionable and exorbitant, and hence, contrary to morals and
jurisprudence. Although parties to a loan agreement have wide
latitude to stipulate on the applicable interest rate under Central Bank
Circular No. 905 s. 1982 (which suspended the Usury Law ceiling on
interest effective January 1, 1983), we stress that unconscionable
interest rates may still be declared illegal.49

In several cases, we haveruled that stipulations authorizing iniquitous

or unconscionable interests are contrary to morals and are illegal. In
Medel v. Court of Appeals, we annulled a stipulated 5.5% per month
50

or 66% per annum interest on a P500,000.00 loan, and a 6% per

month or 72% per annum interest on a P60,000.00 loan, respectively,
for being excessive, iniquitous, unconscionableand exorbitant. 1wphi1

We reiterated this ruling in Chua v. Timan, where we held that the

51

stipulated interest rates of 3% per month and higher are excessive,

iniquitous, unconscionable and exorbitant, and must therefore be
reduced to 12% per annum.
Applying these cited rulings, we now accordingly hold that the
stipulated interest rate of 5% per month, (or 60% per annum) in the
promissory note is excessive, unconscionable, contrary to morals and
is thus illegal. It is void ab initiofor violating Article 1306 of the Civil
52

Code. We accordingly find it equitable to reduce the interest rate

1wphi1

from 5% per month to 1% per month or 12% per annum in line with
the prevailing jurisprudence.
WHEREFORE, premises considered, the Decision dated March 28,
2007 of the Court of Appeals in CA-G.R. CV No. 66915 is hereby
AFFIRMED with MODIFICATION, as follows:
1. The petitioner Leonardo A. Bognotand his brother, Rolando A.
Bognot are JOINTLY LIABLE to pay the sum of P500,000.00 plus
12% interest per annum from December 3, 1997 until fully paid.
2. The rest of the Court of Appeals' dispositions are hereby
AFFIRMED.
Costs against petitioner Leonardo A. Bognot.
SO ORDERED.

G.R. No. 162826 October 14, 2013

NARCISO DEGAOS, Petitioner,
1

vs.
PEOPLE OF THE PHILIPPINES, Respondent.
DECISION
BERSAMIN, J.:
Novation is not a mode of extinguishing criminal liability under the
penal laws of the country. Only the. State may validly waive the
criminal action against an accused. Novation is relevant only to
determine if the parties have meanwhile altered the nature of the
obligation prior to the commencement of the criminal prosecution in
order to prevent the incipient criminal liability of the accused.
Antecedents
In an amended information dated March 23, 1994, the Office of the
Provincial Prosecutor of Bulacan charged Brigida D. Luz, alias Aida
Luz, and Narciso Degaos in the Regional Trial Court in Malolos,
Bulacan with estafa under Article 315 paragraph 1 b) of the Revised
Penal Code, allegedly committed as follows:
That on or about the 27th day of April, 1987 until July 20, 1987, in the
municipality of Meycauayan, province of Bulacan, Philippines, and
within the jurisdiction of this Honorable Court, the above-named
accused conspiring, confederating and helping one another, received
from Spouses Atty. Jose Bordador and Lydia Bordador gold and
pieces of jewelry worth P438,702.00, under express obligation to sell
the same on commission and remit the proceeds thereof or return the
unsold gold and pieces of jewelry, but the said accused, once in
possession of the said merchandise and far from complying with their
aforesaid obligation, inspite of repeated demands for compliance
therewith, did then and there willfully, unlawfully and feloniously, with
intent of gain and grave abuse of confidence misapply,
misappropriate and convert to their own use and benefit the said
merchandise and/or the proceeds thereof, to the damage and
prejudice of said Sps. Atty. Jose Bordador and Lydia Bordador in the
said amount of P438,702.00.
Contrary to law.2
The decision of the Court of Appeals (CA) summarized the evidence
of the parties as follows:
Prior to the institution of the instant case, a separate civil action for
the recovery of sum of money was filed on June 25, 1990 by the
private complainants spouses Jose and Lydia Bordador against
accused Brigida D. Luz alias Aida D. Luz and Narciso Degaos. In an
amended complaint dated November 29, 1993, Ernesto Luz, husband
of Brigida Luz, was impleaded as party defendant. The case
docketed as Civil Case No. 412-M-90 was raffled to Branch 15, RTC
of Malolos, Bulacan. On June 23, 1995, the said court found Narciso
Degaos liable and ordered him to pay the sum of P725,463,98 as
actual and consequential damages plus interest and attorneys fees
in the amount of P10,000.00. On the other hand, Brigida Luz alias
Aida Luz was ordered to pay the amount of P21,483.00, representing
interest on her personal loan. The case against Ernesto Luz was
dismissed for insufficiency of evidence. Both parties appealed to the
Court of Appeals. On July 9, 1997, this Court affirmed the aforesaid
decision. On further appeal, the Supreme Court on December 15,
1997 sustained the Court of Appeals. Sometime in 1994, while the
said civil case was pending, the private complainants instituted the
present case against the accused.
EVIDENCE FOR THE PROSECUTION
The prosecution evidence consists of the testimonies of the private
complainants-spouses, Jose and Lydia Bordador.
Private complainant Lydia Bordador, a jeweler, testified that accused
Narciso Degaos and Brigida/Aida Luz are brother and sister. She
knew them because they are the relatives of her husband and their
Kumpadre/kumadre. Brigida/Aida Luz was the one who gave
instructions to Narciso Degaos to get gold and jewelry from Lydia for
them to sell. Lydia came to know Narciso Degaos because the latter
frequently visited their house selling religious articles and books.
While in their house, Narciso Degaos saw her counting pieces of
jewelry and he asked her if he could show the said pieces of jewelry
to his sister, Brigida/Aida Luz, to which she agreed. Thereafter,
Narciso Degaos returned the jewelry and Aida/Brigida Luz called her
to ask if she could trust Narciso Degaos to get the pieces of jewelry
from her for Aida/Brigida Luz to sell. Lydia agreed on the condition
that if they could not pay it in cash, they should pay it after one month
or return the unsold jewelry within the said period. She delivered the
said jewelry starting sometime in 1986 as evidenced by several
documents entitled "Katibayan at Kasunduan", the earliest of which is
dated March 16, 1986. Everytime Narciso Degaos got jewelry from
her, he signed the receipts in her presence. They were able to pay
only up to a certain point. However, receipt nos. 614 to 745 dated
from April 27, 1987 up to July 20, 1987 (Exhs. "A"-"O") were no
longer paid and the accused failed to return the jewelry covered by
such receipts. Despite oral and written demands, the accused failed
and refused to pay and return the subject jewelry. As of October
1998, the total obligation of the accused amounted to P725,000.00.
Private complainant Atty. Jose Bordador corroborated the testimony
of his wife, Lydia. He confirmed that their usual business practice with
the accused was for Narciso Degaos to receive the jewelry and gold
items for and in behalf of Brigida/Aida Luz and for Narciso Degaos
to sign the "Kasunduan at Katibayan" receipts while Brigida/Aida Luz
will pay for the price later on. The subject items were usually given to
Narciso Degaos only upon instruction from Brigida/Aida Luz through
telephone calls or letters. For the last one year, the "Kasunduan at
Katibayan" receipts were signed in his presence. Said business
arrangement went on for quite sometime since Narciso Degaos and
Brigida/Aida Luz had been paying religiously. When the accused
defaulted in their payment, they sent demand letters. It was the
accuseds sister, Julie dela Rosa, who responded, seeking an
extension of time for the accused to settle their obligation.
EVIDENCE FOR THE DEFENSE
The defense presented accused Brigida/Aida Luz, who testified that
she started transacting business of selling gold bars and jewelry with
the private complainants sometime in 1986 through her brother,
Narciso Degaos. It was the usual business practice for Narciso
Degaos to get the gold bars and pieces of jewelry from the private
complainants after she placed orders through telephone calls to the
private complainants, although sometimes she personally went to the
private complainants house to get the said items. The gold bars and
pieces of jewelry delivered to her by Narciso Degaos were usually
accompanied by a pink receipt which she would sign and after which
she would make the payments to the private complainants through
Narciso Degaos, which payments are in the form of postdated
checks usually with a thirty-day period. In return, the private
complainants would give the original white receipts to Narciso
Degaos for him to sign. Thereafter, as soon as the postdated checks
were honored by the drawee bank, the said white receipts were
stamped "paid" by Lydia Bordador, after which the same would be
delivered to her by Narciso Degaos.
On September 2, 1987, she sent a letter to private complainant Lydia
Bordador requesting for an accounting of her indebtedness. Lydia
Bordador made an accounting which contained the amount of
P122,673.00 as principal and P21,483.00 as interest. Thereafter, she
paid the principal amount through checks. She did not pay the
interest because the same was allegedly excessive. In 1998, private
complainant Atty. Jose Bordador brought a ledger to her and asked
her to sign the same. The said ledger contains a list of her supposed
indebtedness to the private complainants. She refused to sign the
same because the contents thereof are not her indebtedness but that
of his brother, Narciso Degaos. She even asked the private
complainants why they gave so many pieces of jewelry and gold bars
to Narciso Degaos without her permission, and told them that she
has no participation in the transactions covered by the subject
"Kasunduan at Katibayan" receipts.
Co-accused Narciso Degaos testified that he came to know the
private complainants when he went to the latters house in 1986 to
sell some Bible books. Two days later he returned to their house and
was initially given a gold bracelet and necklace to sell. He was able to
sell the same and paid the private complainants with the proceeds
thereof. Since then he started conducting similar business
transactions with the private complainants. Said transactions are
usually covered by receipts denominated as "Kasunduan at
Katibayan". All the "Kasunduan at Katibayan" receipts were issued by
the private complainants and was signed by him. The phrase "for
Brigida Luz" and for "Evely Aquino" were written on the receipts so
that in case he fails to pay for the items covered therein, the private
complainants would have someone to collect from. He categorically
admitted that he is the only one who was indebted to the private
complainants and out of his indebtedness, he already made partial
payments in the amount of P53,307.00. Included in the said partial
payments is the amount of P20,000.00 which was contributed by his
brothers and sisters who helped him and which amount was delivered
by Brigida Luz to the private complainants.3
Ruling of the RTC
On June 23, 1999, the RTC found Degaos guilty as charged but
acquitted Luz for insufficiency of evidence, imposing on Degaos
twenty years of reclusion temporal, viz:
WHEREFORE, judgment is hereby rendered as follows:
1. finding accused Narciso Degaos GUILTY beyond reasonable
doubt of the crime of estafa penalized under Article 315, Subsection
1, paragraph (b) of the Revised Penal code and hereby sentences
him to suffer the penalty of TWENTY YEARS (20) of reclusion
temporal;
2. finding accused Brigida Luz NOT GUILTY and is hereby
ACQUITTED on the ground of insufficiency of evidence.
SO ORDERED.4
Decision of the CA
On appeal, Degaos assailed his conviction upon the following
grounds, to wit:
I
THE HONORABLE COURT A QUO ERRED IN NOT FINDING THAT
THE AGREEMENT BETWEEN THE PRIVATE COMPLAINANT
LYDIA BORDADOR AND THE ACCUSED WAS ONE OF SALE ON
CREDIT.
II
THE HONORABLE COURT A QUO ERRED IN NOT FINDING THAT
NOVATION HAD CONVERTED THE LIABILITY OF THE ACCUSED
INTO A CIVIL ONE.
III
THE HONORABLE COURT ERRED IN NOT APPLYING THE
INDETERMINATE SENTENCE LAW.5
On September 23, 2003, however, the CA affirmed the conviction of
Degaos but modified the prescribed penalty,6 thusly:
WHEREFORE, the appealed Decision finding the accused-appellant
Narciso Degaos guilty beyond reasonable doubt of the crime of
Estafa under Article 315 (1) par. b of the Revised Penal code is
hereby AFFIRMED with the modification that the accused-appellant is
sentenced to suffer an indeterminate penalty of imprisonment of four
(4) years and two (2) months of prision correccional in its medium
period, as the minimum, to twenty (20) years of reclusion temporal as
maximum .
SO ORDERED.7
Issues
Hence, Degaos has appealed, again submitting that:
I.
THE HONORABLE COURT A QUO ERRED IN NOT FINDING THAT
THE AGREEMENT BETWEEN THE PRIVATE COMPLAINANT
LYDIA BORDADOR AND THE ACCUSED WAS ONE OF SALE ON
CREDIT;
II.
THE HONORABLE COURT A QUO ERRED IN NOT FINDING THAT
NOVATION HAD CONVERTED THE LIABILITY OF THE ACCUSED
INTO A CIVIL ONE.8
Ruling
The appeal lacks merit.
I.
Transaction was an agency, not a sale on credit
Degaos contends that his agreement with the complainants relative
to the items of jewelry and gold subject of the amended information
as embodied in the relevant Kasunduan at Katibayan was a sale on
credit, not a consignment to sell on commission basis.
The contention of Degaos is devoid of factual and legal bases.
The text and tenor of the relevant Kasunduan at Katibayan follow:
KASUNDUAN AT KATIBAYAN
xxxx
Akong nakalagda sa ibaba nito ay nagpapatunay na tinanggap ko kay
Ginang LYDIA BORDADOR ng Calvario, Meycauayan, Bulacan ang
mga hiyas (jewelries) [sic] na natatala sa ibaba nito upang ipagbili ko
sa kapakanan ng nasabing Ginang. Ang pagbibilhan ko sa nasabing
mga hiyas ay aking ibibigay sa nasabing Ginang, sa loob ng
__________ araw at ang hindi mabili ay aking isasauli sa kanya sa
loob din ng nasabing taning na panahon sa mabuting kalagayan
katulad ng aking tanggapin. Ang bilang kabayaran o pabuya sa akin
ay ano mang halaga na aking mapalabis na mga halagang nakatala
sa ibaba nito. Ako ay walang karapatang magpautang o kaya ay
magpalako sa ibang tao ng nasabing mga hiyas. 9
xxxx
Based on the express terms and tenor of the Kasunduan at
Katibayan , Degaos received and accepted the items under the
obligation to sell them in behalf of the complainants ("ang mga hiyas
(jewelries) na natatala sa ibaba nito upang ipagbili ko sa kapakanan
ng nasabing Ginang"), and he would be compensated with the
overprice as his commission ("Ang bilang kabayaran o pabuya sa
akin ay ano mang halaga na aking mapalabis na mga halagang
nakatala sa ibaba nito."). Plainly, the transaction was a consignment
under the obligation to account for the proceeds of sale, or to return
the unsold items. As such, he was the agent of the complainants in
the sale to others of the items listed in the Kasunduan at Katibayan.
In contrast, according the first paragraph of Article 1458 of the Civil
Code, one of the contracting parties in a contract of sale obligates
himself to transfer the ownership of and to deliver a determinate
thing, while the other party obligates himself to pay therefor a price
certain in money or its equivalent. Contrary to the contention of
Degaos, there was no sale on credit to him because the ownership
of the items did not pass to him.
II.
Novation did not transpire as to prevent
the incipient criminal liability from arising
Degaos claims that his partial payments to the complainants
novated his contract with them from agency to loan, thereby
converting his liability from criminal to civil. He insists that his failure
to complete his payments prior to the filing of the complaint-affidavit
by the complainants notwithstanding, the fact that the complainants
later required him to make a formal proposal before the barangay
authorities on the payment of the balance of his outstanding
obligations confirmed that novation had occurred.
The CA rejected the claim of Degaos, opining as follows:
Likewise untenable is the accused-appellants argument that novation
took place when the private complainants accepted his partial
payments before the criminal information was filed in court and
therefore, his criminal liability was extinguished.
Novation is not one of the grounds prescribed by the Revised Penal
Code for the extinguishment of criminal liability. It is well settled that
1wphi1

criminal liability for estafa is not affected by compromise or novation

of contract, for it is a public offense which must be prosecuted and
punished by the Government on its own motion even though
complete reparation should have been made of the damage suffered
by the offended party. A criminal offense is committed against the
People and the offended party may not waive or extinguish the
criminal liability that the law imposes for the commission of the
offense. The criminal liability for estafa already committed is not
affected by the subsequent novation of the contract. 10
We sustain the CA.
Degaos claim was again factually unwarranted and legally devoid of
basis, because the partial payments he made and his purported
agreement to pay the remaining obligations did not equate to a
novation of the original contractual relationship of agency to one of
sale. As we see it, he misunderstands the nature and the role of
novation in a criminal prosecution.
Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one that terminates the
first, either by (a) changing the object or principal conditions; or (b)
substituting the person of the debtor; or (c) subrogating a third person
in the rights of the creditor. In order that an obligation may be
extinguished by another that substitutes the former, it is imperative
that the extinguishment be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with
each other.11 Obviously, in case of only slight modifications, the old
obligation still prevails.12
The Court has further pointed out in Quinto v. People: 13
Novation is never presumed, and the animus novandi, whether totally
or partially, must appear by express agreement of the parties, or by
their acts that are too clear and unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is necessary
element of novation which may be effected either expressly or
impliedly. The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new
contract is to extinguish the old one. Upon the other hand, no specific
form is required for an implied novation, and all that is prescribed by
law would be an incompatibility between the two contracts. While
there is really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the
touchstone for contrarity, however would be an irreconcilable
incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of
novation and thereby produce the effect of extinguishing an obligation
by another which substitutes the same. The firs t is when novation
has been explicitly stated and declared in unequivocal terms. The
second is when the old and the new obligations are incompatible on
every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter
obligation novates the first. Corollarily, changes that breed
incompatibility must be essential in nature and not merely accidental.
The incompatibility must take place in any of the essential elements
of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in nature
and insufficient to extinguish the original obligation.
The changes alluded to by petitioner consists only in the manner of
payment. There was really no substitution of debtors since private
1wphi1

complainant merely acquiesced to the payment but did not give her
consent to enter into a new contract.14 x x x
The legal effects of novation on criminal liability were explained by
the Court, through Justice J.B.L. Reyes, in People v. Nery,15 viz:
The novation theory may perhaps apply prior to the filing of the
criminal information in court by the state prosecutors because up to
that time the original trust relation may be converted by the parties
into an ordinary creditor-debtor situation, thereby placing the
complainant in estoppel to insist on the original trust. But after the
justice authorities have taken cognizance of the crime and instituted
action in court, the offended party may no longer divest the
prosecution of its power to exact the criminal liability, as distinguished
from the civil. The crime being an offense against the state, only the
latter can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898;
People vs. Velasco, 42 Phil. 76; U.S. vs. Montaes, 8 Phil. 620).
It may be observed in this regard that novation is not one of the
means recognized by the Penal Code whereby criminal liability can
be extinguished; hence, the role of novation may only be to either
prevent the rise of criminal liability or to cast doubt on the true nature
of the original basic transaction, whether or not it was such that its
breach would not give rise to penal responsibility, as when money
loaned is made to appear as a deposit, or other similar disguise is
resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27
Phil. 481).
Even in Civil Law the acceptance of partial payments, without further
change in the original relation between the complainant and the
accused, can not produce novation. For the latter to exist, there must
be proof of intent to extinguish the original relationship, and such
intent can not be inferred from the mere acceptance of payments on
account of what is totally due. Much less can it be said that the
acceptance of partial satisfaction can effect the nullification of a
criminal liability that is fully matured, and already in the process of
enforcement. Thus, this Court has ruled that the offended partys
acceptance of a promissory note for all or part of the amount
misapplied does not obliterate the criminal offense (Camus vs. Court
of Appeals, 48 Off. Gaz. 3898).
Novation is not a ground under the law to extinguish criminal liability.
Article 89 (on total extinguishment)16 and Article 94 (on partial
extinguishrnent)17 of the Revised Penal Code list down the various
grounds for the extinguishment of criminal liability. Not being included
in the list, novation is limited in its effect only to the civil aspect of the
liability, and, for that reason, is not an efficient defense in estafa. This
is because only the State may validly waive the criminal action
against an accused.18 The role of novation may only be either to
prevent the rise of criminal liability, or to cast doubt on the true nature
of the original basic transaction, whether or not it was such that the
breach of the obligation would not give rise to penal responsibility, as
when money loaned is made to appear as a deposit, or other similar
disguise is resorted to.19
Although the novation of a contract of agency to make it one of sale
may relieve an offender from an incipient criminal liability, that did not
happen here, for the partial payments and the proposal to pay the
balance the accused made during the barangay proceedings were
not at all incompatible with Degafios liability under the agency that
had already attached. Rather than converting the agency to sale,
therefore, he even thereby confirmed his liability as the sales agent of
the complainants.
VHEREFORE, the Court AFFIRMS the decision of the Court of
Appeals promulgated on September 23, 2003; and ORDERS
petitioner to pay the costs of suit.
SO ORDERED.

G.R. No. 206806 June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS,
Petitioners,
vs.
DAN T. LIM, doing business under the name and style of
QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES,
Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish
an obligation. It cannot be presumed and may be implied only if the
old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari assailing the Court of
1

Appeals decision in CA-G.R. CV No. 95709, which stemmed from a

2

complaint filed in the Regional Trial Court of Valenzuela City, Branch

3

171, for collection of sum of money.

The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons,
and other raw materials, under the name Quality Paper and Plastic
Products, Enterprises, to factories engaged in the paper mill
business. From February 2007 to March 2007, he delivered scrap
4

papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc.

(Arco Pulp and Paper) through its Chief Executive Officer and
President, Candida A. Santos. The parties allegedly agreed that Arco
5

Pulp and Paper would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products of equivalent value.
6

Dan T. Lim alleged that when he delivered the raw materials, Arco
Pulp and Paper issued a post-dated check dated April 18, 2007 in 7

the amount of 1,487,766.68 as partial payment, with the assurance

that the check would not bounce. When he deposited the check on
8

April 18, 2007, it was dishonored for being drawn against a closed
account.9

On the same day, Arco Pulp and Paper and a certain Eric Sy
executed a memorandum of agreement where Arco Pulp and Paper
10

bound themselves to deliver their finished products to Megapack

Container Corporation, owned by Eric Sy, for his account. According
to the memorandum, the raw materials would be supplied by Dan T.
Lim, through his company, Quality Paper and Plastic Products. The
memorandum of agreement reads as follows:
Per meeting held at ARCO, April 18, 2007, it has been mutually
agreed between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO
will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at
the price of P18.50 per kg. to Megapack Container for Mr. Eric Sys
account. Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used
for the production of the above Test Liners will be supplied by Quality
Paper & Plastic Products Ent., total of 600 Metric Tons at P6.50 per
kg. (price subject to change per advance notice). Quantity of Local
OCC delivery will be based on the quantity of Test Liner delivered to
Megapack Container Corp. based on the above production
schedule. 11

On May 5, 2007, Dan T.Lim sent a letter to Arco Pulp and Paper
12

demanding payment of the amount of 7,220,968.31, but no payment

was made to him. 13

Dan T. Lim filed a complaint for collection of sum of money with

14

prayer for attachment with the Regional Trial Court, Branch 171,
Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer but failed to have its representatives attend the pre-trial
15

hearing. Hence, the trial court allowed Dan T. Lim to present his
evidence ex parte. 16

On September 19, 2008, the trial court rendered a judgment in favor

of Arco Pulp and Paper and dismissed the complaint, holding that
when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished
Arco Pulp and Papers obligation to Dan T. Lim. 17

Dan T. Lim appealed the judgment with the Court of Appeals.

18

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

On January 11, 2013, the Court of Appeals rendered a decision

20 21

reversing and setting aside the judgment dated September 19, 2008
and ordering Arco Pulp and Paper to jointly and severally pay Dan T.
Lim the amount of P7,220,968.31 with interest at 12% per annum
from the time of demand; P50,000.00 moral damages; P50,000.00
exemplary damages; and P50,000.00 attorneys fees. 22

The appellate court ruled that the facts and circumstances in this
case clearly showed the existence of an alternative obligation. It also 23

ruled that Dan T. Lim was entitled to damages and attorneys fees
due to the bad faith exhibited by Arco Pulp and Paper in not honoring
its undertaking. 24

Its motion for reconsideration having been denied, Arco Pulp and
25 26

Paper and its President and Chief Executive Officer, Candida A.

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

Respondent, on the other hand, argues that the Court of Appeals was
correct in ruling that there was no proper novation in this case. He
argues that the Court of Appeals was correct in ordering the payment
of 7,220,968.31 with damages since the debt of petitioners remains
unpaid. He also argues that the Court of Appeals was correct in
28

holding petitioners solidarily liable since petitioner Candida A. Santos

was "the prime mover for such outstanding corporate liability." In
29

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

A rejoinder was submitted by respondent, but it was noted without

action in view of A.M. No. 99-2-04-SC dated November 21, 2000. 31

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

1. Whether the obligation between the parties was extinguished by
novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and
Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorneys fees
can be awarded
The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the
Civil Code, which states:
Article 1199. A person alternatively bound by different prestations
shall completely perform one of them.
The creditor cannot be compelled to receive part of one and part of
the other undertaking.
"In an alternative obligation, there is more than one object, and the
fulfillment of one is sufficient, determined by the choice of the debtor
who generally has the right of election." The right of election is
32

extinguished when the party who may exercise that option

categorically and unequivocally makes his or her choice known. 33

The choice of the debtor must also be communicated to the creditor

who must receive notice of it since: The object of this notice is to give
the creditor . . . opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice shall the
election take legal effect when consented by the creditor, or if
impugned by the latter, when declared proper by a competent court. 34

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

The appellate court, therefore, correctly identified the obligation

between the parties as an alternative obligation, whereby petitioner
Arco Pulp and Paper, after receiving the raw materials from
respondent, would either pay him the price of the raw materials or, in
the alternative, deliver to him the finished products of equivalent
value.
When petitioner Arco Pulp and Paper tendered a check to respondent
in partial payment for the scrap papers, they exercised their option to
pay the price. Respondents receipt of the check and his subsequent
act of depositing it constituted his notice of petitioner Arco Pulp and
Papers option to pay.
This choice was also shown by the terms of the memorandum of
agreement, which was executed on the same day. The memorandum
declared in clear terms that the delivery of petitioner Arco Pulp and
Papers finished products would be to a third person, thereby
extinguishing the option to deliver the finished products of equivalent
value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the
memorandum of agreement constituted a novation of the contract
between the parties. When petitioner Arco Pulp and Paper opted
instead to deliver the finished products to a third person, it did not
novate the original obligation between the parties.
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Article 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other. (1204)
Article 1293. Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the consent
of the creditor. Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there
is a substitution of objects or debtors or when there is subrogation of
the creditor. It occurs only when the new contract declares so "in
unequivocal terms" or that "the old and the new obligations be on
every point incompatible with each other." 36

Novation was extensively discussed by this court in Garcia v.

Llamas: 37

Novation is a mode of extinguishing an obligation by changing its

objects or principal obligations, by substituting a new debtor in place
of the old one, or by subrogating a third person to the rights of the
creditor. Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge
or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in
articles 1236 and 1237."
In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from and may even be
made without the knowledge of the debtor, since it consists of a
third persons assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person
who consents to the substitution and assumes the obligation; thus,
the consent of these three persons are necessary. Both modes of
substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when
an old obligation is terminated by the creation of a new one that takes
the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the
amendatory agreement. Whether extinctive or modificatory, novation
is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person
of the debtor or subrogating a third person to the rights of the creditor,
an act known as subjective or personal novation. For novation to take
place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible
with the old one on every point. The test of incompatibility is whether
the two obligations can stand together, each one with its own
independent existence. (Emphasis supplied)
38

Because novation requires that it be clear and unequivocal, it is never

presumed, thus:
In the civil law setting, novatio is literally construed as to make new.
So it is deeply rooted in the Roman Law jurisprudence, the principle
novatio non praesumitur that novation is never presumed.At
bottom, for novation tobe a jural reality, its animus must be ever
present, debitum pro debito basically extinguishing the old
obligation for the new one. (Emphasis supplied) There is nothing in
39

the memorandum of agreement that states that with its execution, the
obligation of petitioner Arco Pulp and Paper to respondent would be
extinguished. It also does not state that Eric Sy somehow substituted
petitioner Arco Pulp and Paper as respondents debtor. It merely
shows that petitioner Arco Pulp and Paper opted to deliver the
finished products to a third person instead.
The consent of the creditor must also be secured for the novation to
be valid:
Novation must be expressly consented to. Moreover, the conflicting
intention and acts of the parties underscore the absence of any
express disclosure or circumstances with which to deduce a clear
and unequivocal intent by the parties to novate the old agreement. 40

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

If the memorandum of agreement was intended to novate the original

agreement between the parties, respondent must have first agreed to
the substitution of Eric Sy as his new debtor. The memorandum of
agreement must also state in clear and unequivocal terms that it has
replaced the original obligation of petitioner Arco Pulp and Paper to
respondent. Neither of these circumstances is present in this case.
Petitioner Arco Pulp and Papers act of tendering partial payment to
respondent also conflicts with their alleged intent to pass on their
obligation to Eric Sy. When respondent sent his letter of demand to
petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the
former neither acknowledged nor consented to the latter as his new
debtor. These acts, when taken together, clearly show that novation
did not take place. Since there was no novation, petitioner Arco Pulp
and Papers obligation to respondent remains valid and existing.
Petitioner Arco Pulp and Paper, therefore, must still pay respondent
the full amount of P7,220,968.31.
Petitioners are liable for
damages
Under Article 2220 of the Civil Code, moral damages may be
awarded in case of breach of contract where the breach is due to
fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for
awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies
to breaches of contract where the defendant acted fraudulently or in
bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the
party claiming it proved that the breach was due to fraud or bad faith.
As this court stated:
Moral damages are not recoverable simply because a contract has
been breached. They are recoverable only if the party from whom it is
claimed acted fraudulently or in bad faith or in wanton disregard of his
contractual obligations. The breach must be wanton, reckless,
malicious or in bad faith, and oppressive or abusive. 42

Further, the following requisites must be proven for the recovery of

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

Here, the injury suffered by respondent is the loss of P7,220,968.31

from his business. This has remained unpaid since 2007. This injury
undoubtedly was caused by petitioner Arco Pulp and Papers act of
refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco
Pulp and Paper not only issued an unfunded check but also entered
into a contract with a third person in an effort to evade its liability. This
proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that
moral damages may be awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and
analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32,
34, and 35.
Breaches of contract done in bad faith, however, are not specified
within this enumeration. When a party breaches a contract, he or she
goes against Article 19 of the Civil Code, which states: Article 19.
Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Persons who have the right to enter into contractual relations must
exercise that right with honesty and good faith. Failure to do so
results in an abuse of that right, which may become the basis of an
action for damages. Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human
relations. By itself, it is not the basis of an actionable tort. Article 19
describes the degree of care required so that an actionable tort may
arise when it is alleged together with Article 20 or Article 21.44

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

Article 20. Every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for the same.
Article 21.Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
To be actionable, Article 20 requires a violation of law, while Article 21
only concerns with lawful acts that are contrary to morals, good
customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It
allows recovery should the act have been willful or negligent. Willful
may refer to the intention to do the act and the desire to achieve the
outcome which is considered by the plaintiff in tort action as injurious.
Negligence may refer to a situation where the act was consciously
done but without intending the result which the plaintiff considers as
injurious.
Article 21, on the other hand, concerns injuries that may be caused
by acts which are not necessarily proscribed by law. This article
requires that the act be willful, that is, that there was an intention to
do the act and a desire to achieve the outcome. In cases under
Article 21, the legal issues revolve around whether such outcome
should be considered a legal injury on the part of the plaintiff or
whether the commission of the act was done in violation of the
standards of care required in Article 19. 45

When parties act in bad faith and do not faithfully comply with their
obligations under contract, they run the risk of violating Article 1159 of
the Civil Code:
Article 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith.
Article 2219, therefore, is not an exhaustive list of the instances
where moral damages may be recovered since it only specifies,
among others, Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the act is not only
contrary to morals, good customs, and public policy; it is also a
violation of Article 1159. Breaches of contract become the basis of
moral damages, not only under Article 2220, but also under Articles
19 and 20 in relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of
the contract. Article 2220 requires that the breach be done
fraudulently or in bad faith. In Adriano v. Lasala: 46

To recover moral damages in an action for breach of contract, the

breach must be palpably wanton, reckless and malicious, in bad faith,
oppressive, or abusive. Hence, the person claiming bad faith must
prove its existence by clear and convincing evidence for the law
always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It
imports a dishonest purpose or some moral obliquity and conscious
doing of a wrong, a breach of known duty through some motive or
interest or ill will that partakes of the nature of fraud. It is, therefore, a
question of intention, which can be inferred from ones conduct and/or
contemporaneous statements. (Emphasis supplied)
47

Since a finding of bad faith is generally premised on the intent of the

doer, it requires an examination of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial
payment of its obligation to respondent, it was presumably with the
knowledge that it was being drawn against a closed account. Worse,
it attempted to shift their obligations to a third person without the
consent of respondent.
Petitioner Arco Pulp and Papers actions clearly show "a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest or ill will that
partakes of the nature of fraud." Moral damages may, therefore, be
48

awarded.
Exemplary damages may also be awarded. Under the Civil Code,
exemplary damages are due in the following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award
exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of
right; the court will decide whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not
be proven, the plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may consider
the question of whether or not exemplary damages should be
awarded.
In Tankeh v. Development Bank of the Philippines, we stated that:
49

The purpose of exemplary damages is to serve as a deterrent to

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

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

(1) they may be imposed by way of example in addition to
compensatory damages, and only after the claimant's right to them
has been established;
(2) that they cannot be recovered as a matter of right, their
determination depending upon the amount of compensatory damages
that may be awarded to the claimant; and
(3) the act must be accompanied by bad faith or done in a wanton,
fraudulent, oppressive or malevolent manner. 51

Business owners must always be forthright in their dealings. They

cannot be allowed to renege on their obligations, considering that
these obligations were freely entered into by them. Exemplary
damages may also be awarded in this case to serve as a deterrent to
those who use fraudulent means to evade their liabilities.
Since the award of exemplary damages is proper, attorneys fees and
cost of the suit may also be recovered.
Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and
expenses of litigation, other than judicial costs, cannot be recovered,
except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation
Petitioners argue that the finding of solidary liability was erroneous
since no evidence was adduced to prove that the transaction was
also a personal undertaking of petitioner Santos. We disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank, we stated
52

that:
Basic is the rule in corporation law that a corporation is a juridical
entity which is vested with a legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the
corporation, acting through its directors, officers and employees, are
its sole liabilities. A director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is
used as a means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention of statutes,
or to confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally
liable for corporate obligations, however, the following requisites must
concur: (1) the complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the
circumstances that would warrant the piercing of the veil of corporate
fiction is a question of fact which cannot be the subject of a petition
for review on certiorari under Rule 45, this Court can take cognizance
of factual issues if the findings of the lower court are not supported by
the evidence on record or are based on a misapprehension of facts. 53

(Emphasis supplied)
As a general rule, directors, officers, or employees of a corporation
cannot be held personally liable for obligations incurred by the
corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is
guilty of negligence or bad faith, and (2) such negligence or bad faith
was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her
capacity as the President and Chief Executive Officer of Arco Pulp
and Paper. She also issued the check in partial payment of petitioner
corporations obligations to respondent on behalf of petitioner Arco
Pulp and Paper. This is clear on the face of the check bearing the
account name, "Arco Pulp & Paper, Co., Inc." Any obligation arising
54

from these acts would not, ordinarily, be petitioner Santos personal

undertaking for which she would be solidarily liable with petitioner
Arco Pulp and Paper.
We find, however, that the corporate veil must be pierced. In Livesey
v. Binswanger Philippines: 55

Piercing the veil of corporate fiction is an equitable doctrine

developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful purposes.
Under the doctrine, the corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes, such
as to evade a just and due obligation, or to justify a wrong, to shield
or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case,
the fiction will be disregarded and the individuals composing it and
the two corporations will be treated as identical. (Emphasis supplied)
56

According to the Court of Appeals, petitioner Santos was solidarily

liable with petitioner Arco Pulp and Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners]
when they unjustifiably refused to honor their undertaking in favor of
the [respondent]. After the check in the amount of 1,487,766.68
issued by [petitioner] Santos was dishonored for being drawn against
a closed account, [petitioner] corporation denied any privity with
[respondent]. These acts prompted the [respondent] to avail of the
remedies provided by law in order to protect his rights. 57

We agree with the Court of Appeals. Petitioner Santos cannot be

allowed to hide behind the corporate veil. When petitioner Arco Pulp
1wphi1

and Papers obligation to respondent became due and demandable,

she not only issued an unfunded check but also contracted with a
third party in an effort to shift petitioner Arco Pulp and Papers liability.
She unjustifiably refused to honor petitioner corporations obligations
to respondent. These acts clearly amount to bad faith. In this
instance, the corporate veil may be pierced, and petitioner Santos
may be held solidarily liable with petitioner Arco Pulp and Paper.
The rate of interest due on
the obligation must be
reduced in view of Nacar v.
Gallery Frames 58

In view, however, of the promulgation by this court of the decision

dated August 13, 2013 in Nacar v. Gallery Frames, the rate of
59

interest due on the obligation must be modified from 12% per annum
to 6% per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping
v. Court of Appeals, and we have laid down the following guidelines
60

with regard to the rate of legal interest:

To recapitulate and for future guidance, the guidelines laid down in
the case of Eastern Shipping Linesare accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of
a sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed
therein. (Emphasis supplied; citations omitted.)
61

According to these guidelines, the interest due on the obligation of

P7,220,968.31 should now be at 6% per annum, computed from May
5, 2007, when respondent sent his letter of demand to petitioners.
This interest shall continue to be due from the finality of this decision
until its full satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-
G.R. CV No. 95709 is AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are
hereby ordered solidarily to pay respondent Dan T. Lim the amount of
P7,220,968.31 with interest of 6% per annum at the time of demand
until finality of judgment and its full satisfaction, with moral damages
in the amount of P50,000.00, exemplary damages in the amount of
P50,000.00, and attorney's fees in the amount of P50,000.00.
SO ORDERED.
G.R. No. 167519, January 14, 2015
THE WELLEX GROUP, INC., Petitioner, v. U-LAND AIRLINES, CO.,
 LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of
1

Court. The Wellex Group, Inc. (Wellex) prays that the Decision 2 dated
July 30, 2004 of the Court of Appeals in CA-G.R. CV No. 74850 be
reversed and set aside.3

The Court of Appeals affirmed the Decision 4 of the Regional Trial Court,
Branch 62 of Makati City in Civil Case No. 99-1407. The Regional Trial
Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (U-
Land) and ordered the rescission of the Memorandum of Agreement 5
between Wellex and U-Land.6

Wellex is a corporation established under Philippine law and it

maintains airline operations in the Philippines. 7 It owns shares of stock
in several corporations including Air Philippines International
Corporation (APIC), Philippine Estates Corporation (PEC), and Express
Savings Bank (ESB).8 Wellex alleges that it owns all shares of stock of
Air Philippines Corporation (APC).9

U-Land Airlines Co. Ltd. (U-Land) is a corporation duly organized and

existing under the laws of Taiwan, registered to do business . . . in the
Philippines.10 It is engaged in the business of air transportation in
Taiwan and in other Asian countries.11

On May 16, 1998, Wellex and U-Land entered into a Memorandum of

Agreement12 (First Memorandum of Agreement) to expand their
respective airline operations in Asia.13

Terms of the First Memorandum of Agreement

The preambular clauses of the First Memorandum of Agreement state:

WHEREAS, U-LAND is engaged in the business of airline transportation

in Taiwan, Philippines and/or in other countries in the Asian region, and
desires to expand its operation and increase its market share by,
among others, pursuing a long-term involvement in the growing
Philippine airline industry;

WHEREAS, WELLEX, on the other hand, has current airline operation in

the Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latters subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in
the Asian regional markets, a Memorandum of Agreement on ______,
a certified copy of which is attached hereto as Annex A and is hereby
made an integral part hereof, which sets forth, among others, the
basis for WELLEXs present ownership of shares in Air Philippines
International Corporation.

WHEREAS, the parties recognize the opportunity to develop a long-

term profitable relationship by combining such of their respective
resources in an expanded airline operation as well as in property
development and in other allied business activities in the Philippines,
and desire to set forth herein the basic premises and their
understanding with respect to their joint cooperation and
undertakings.14

In the First Memorandum of Agreement, Wellex and U-Land agreed to

develop a long-term business relationship through the creation of joint
interest in airline operations and property development projects in the
Philippines.15 This long-term business relationship would be
implemented through the following transactions, stated in Section 1 of
the First Memorandum of Agreement:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR

PHILIPPINES INTERNATIONAL CORPORATION (APIC) equivalent to at
least 35% of the outstanding capital stock of APIC, but in any case,
not less than 1,050,000,000 shares . . . [;]

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE

ESTATES CORPORATION (PEC) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares . . . [;]

(c) U-LAND shall enter into a joint development agreement with PEC . .
. [; and]

(d) U-LAND shall be given the option to acquire from WELLEX shares of
stock of EXPRESS SAVINGS BANK (ESB) up to 40% of the
outstanding capital stock of ESB . . . under terms to be mutually
agreed.16

I. Acquisition of APIC and PEC shares

The First Memorandum of Agreement stated that within 40 days from

its execution date, Wellex and U-Land would execute a share purchase
agreement covering U-Lands acquisition of the shares of stock of both
APIC (APIC shares) and PEC (PEC shares).17 In this share purchase
agreement, U-Land would purchase from Wellex its APIC shares and
PEC shares.18

Wellex and U-Land agreed to an initial purchase price of P0.30 per

share of APIC and P0.65 per share of PEC. However, they likewise
agreed that the final price of the shares of stock would be reflected in
the actual share purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC
shares would be paid upon the execution of the share purchase
agreement and Wellexs delivery of the stock certificates covering the
shares of stock. The transfer of APIC shares and PEC shares to U-Land
was conditioned on the full remittance of the final purchase price as
reflected in the share purchase agreement. Further, the transfer was
conditioned on the approval of the Securities and Exchange
Commission of the issuance of the shares of stock and the approval by
the Taiwanese government of U-Lands acquisition of these shares of
stock.20

Thus, Section 2 of the First Memorandum of Agreement reads:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
date hereof (unless extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase Agreement (SHPA) covering
the acquisition by U-LAND of the APIC Shares and PEC Shares
(collectively, the Subject Shares). Without prejudice to any
subsequent agreement between the parties, the purchase price for the
APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS
(P0.30) per share and that for the PEC Shares at SIXTY FIVE
CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA
shall be paid in full upon execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be
provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND

provided that: (i) the purchase price reflected in the SHPA has been
fully paid; (ii) the Philippine Securities & Exchange Commission (SEC)
shall have approved the issuance of the Subject Shares; and (iii) any
required approval by the Taiwanese government of the acquisition by
U-LAND of the Subject Shares shall likewise have been obtained.21

II. Operation and management of APIC/PEC/APC

U-Land was entitled to a proportionate representation in the Board of

Directors of APIC and PEC in accordance with Philippine law.22
Operational control of APIC and APC would be exercised jointly by
Wellex and U-Land on the basis of mutual agreement and
consultations.23 The parties intended that U-Land would gain primary
control and responsibility for the international operations of APC. 24
Wellex manifested that APC is a subsidiary of APIC in the second
preambular clause of the First Memorandum of Agreement. 25
Section 3 of the First Memorandum of Agreement reads:

3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a

proportionate representation in the Board of Directors of APIC and PEC
in accordance with Philippine law. For this purpose, WELLEX shall cause
the resignation of its nominated Directors in APIC and PEC to
accommodate U-LANDs pro rata number of Directors. Subject to
applicable Philippine law and regulations, operational control of APIC
and Air Philippines Corporation (APC) shall be lodged jointly to
WELLEX and U-LAND on the basis of mutual agreement and
consultations. Further, U-LAND may second technical and other
consultants into APIC and/or APC with the view to increasing service,
productivity and efficiency, identifying and implementing profit-service
opportunities, developing technical capability and resources, and
installing adequate safety systems and procedures. In addition, U-
LAND shall arrange for the lease by APC of at least three (3) aircrafts
owned by U-LAND under such terms as the parties shall mutually
agree upon. It is the intent of the parties that U-LAND shall have
primary control and responsibility for APCs international operations. 26

III. Entering into and funding a joint development agreement

Wellex and U-Land also agreed to enter into a joint development

agreement simultaneous with the execution of the share purchase
agreement. The joint development agreement shall cover housing and
other real estate development projects. 27

U-Land agreed to remit the sum of US$3 million not later than May 22,
1998. This sum was to serve as initial funding for the development
projects that Wellex and U-Land were to undertake pursuant to the
joint development agreement. In exchange for the US$3 million,
Wellex would deliver stock certificates covering 57,000,000 PEC shares
to U-Land.28

The execution of a joint development agreement was also conditioned

on the execution of a share purchase agreement.29

Section 4 of the First Memorandum of Agreement reads:

4. Joint Development Agreement with PEC. Simultaneous with the

execution of the SHPA, U-LAND and PEC shall execute a joint
development agreement (JDA) to pursue property development
projects in the Philippines. The JDA shall cover specific housing and
other real estate development projects as the parties shall agree. All
profits derived from the projects covered by the JDA shall be shared
equally between U-LAND and PEC. U-LAND shall, not later than May
22, 1998, remit the sum of US$3.0 million as initial funding for the
aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance
with Section 9 below.30

In case of conflict between the provisions of the First Memorandum of

Agreement and the provisions of the share purchase agreement or its
implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated
otherwise or the context of any agreement between the parties would
reveal a different intent.31 Thus, in Section 6 of the First Memorandum
of Agreement:

6. Primacy of Agreement. It is agreed that in case of conflict

between the provisions of this Agreement and those of the SHPA and
the implementing agreements of the SHPA, the provisions of this
Agreement shall prevail, unless the parties specifically state otherwise,
or the context clearly reveal a contrary intent.32

Finally, Wellex and U-Land agreed that if they were unable to agree on
the terms of the share purchase agreement and the joint development
agreement within 40 days from signing, then the First Memorandum of
Agreement would cease to be effective.33

In case no agreements were executed, the parties would be released

from their respective undertakings, except that Wellex would be
required to refund within three (3) days the US$3 million given as
initial funding by U-Land for the development projects. If Wellex was
unable to refund the US$3 million to U-Land, U-Land would have the
right to recover on the 57,000,000 PEC shares that would be delivered
to it.34 Section 9 of the First Memorandum of Agreement reads:

9. Validity. - In the event the parties are unable to agree on the terms
of the SHPA and/or the JDA within forty (40) days from date hereof (or
such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from
their respective undertakings herein, except that WELLEX shall refund
the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the
57,000,000 PEC shares delivered to U-LAND under Section 4. 35

The First Memorandum of Agreement was signed by Wellex Chairman

and President William T. Gatchalian (Mr. Gatchalian) and U-Land
Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998.36

Annex A or the Second Memorandum of Agreement

Attached and made an integral part of the First Memorandum of

Agreement was Annex A, as stated in the second preambular clause.
It is a document denoted as a Memorandum of Agreement entered
into by Wellex, APIC, and APC.37

The Second Memorandum of Agreement states:

This Memorandum of Agreement, made and executed this ___th day of

______ at Makati City, by and between:

THE WELLEX GROUP, INC., a corporation duly organized and

existing under the laws of the Philippines, with offices at 22F Citibank
Tower, 8741 Paseo de Roxas, Makati City (hereinafter referred to as
TWGI),

AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly

FORUM PACIFIC, INC.), likewise a corporation duly organized and
existing under the laws of the Philippines, with offices at 8F Rufino
Towers, Ayala Avenue, Makati City (hereinafter referred to as APIC),

- and -

AIR PHILIPPINES CORPORATION, corporation duly organized and

existing under the laws of the Philippines, with offices at Multinational
Building, Ayala Avenue, Makati City (hereinafter referred to as APC).

W I T N E S S E T H: That -

WHEREAS, TWGI is the registered and beneficial owner, or has

otherwise acquired _____ (illegible in rollo) rights to the entire issued
and outstanding capital stock (the APC SHARES) of AIR PHILIPPINES
CORPORATION (APC) and has made stockholder advances to APC for
the _____ (illegible in rollo) of aircraft, equipment and for working
capital used in the latters operations (the _____ (illegible in rollo)
ADVANCES).

WHEREAS, APIC desires to obtain full ownership and control of APC,

including all of _____ (illegible in rollo) assets, franchise, goodwill and
operations, and for this purpose has offered to acquire the _____
(illegible in rollo) SHARES of TWGI in APC, including the APC
ADVANCES due to TWGI from APC, with _____ (illegible in rollo) of
acquiring all the assets, franchise, goodwill and operations of APC; and
TWGI has _____ (illegible in rollo) to the same in consideration of the
conveyance by APIC to TWGI of certain investments, _____ (illegible
in rollo) issuance of TWGI of shares of stock of APIC in exchange for
said APC SHARES and the _____ (illegible in rollo) ADVANCES, as
more particularly described hereunder.

NOW, THEREFORE, the parties agree as follows:

1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange

for the _____ (illegible in rollo) by APIC to TWGI of investment shares
of APIC in Express Bank, PetroChemical _____ (illegible in rollo) of
Asia Pacific, Republic Resources & Development Corporation and
Philippine _____ (illegible in rollo) Corporation (the APIC
INVESTMENTS).

2. TWGI likewise agrees to transfer the APC SHARES to APIC in

exchange solely _____ (illegible in rollo) the issuance by APIC of One
Billion Seven Hundred Ninety Seven Million Eight Hundred Fifty Seven
Thousand Three Hundred Sixty Four (1,797,857,364) shares of its
capital stock of a _____ (illegible in rollo) value of P1.00 per share (the
APIC SHARES), taken from the currently authorized but _____
(illegible in rollo) shares of the capital stock of APIC, as well as from
the increase in the authorized capital _____ (illegible in rollo) of APIC
from P2.0 billion to P3.5 billion.

3. It is the basic understanding of the parties hereto that the transfer

of the APC _____ (illegible in rollo) as well as the APC ADVANCES to
APIC shall be intended to enable APIC to obtain _____ (illegible in
rollo) and control of APC, including all of APCs assets, franchise,
goodwill and _____ (illegible in rollo).

4. Unless the parties agree otherwise, the effectivity of this

Agreement and transfers _____ (illegible in rollo) APC ADVANCES in
exchange for the APIC INVESTMENTS, and the transfer of the _____
(illegible in rollo) SHARES in exchange for the issuance of new APIC
SHARES, shall be subject to _____ (illegible in rollo) due diligence as
the parties shall see fit, and the condition subsequent that the _____
(illegible in rollo) for increase in the authorized capital stock of the
APIC from P2.0 billion to P3.5 _____ (illegible in rollo) shall have been
approved by the Securities and Exchange Commission.

IN WITNESS WHEREOF, the parties have caused these presents to be

signed on the date _____ (illegible in rollo) first above written.38
(Emphasis supplied)

This Second Memorandum of Agreement was allegedly incorporated

into the First Memorandum of Agreement as a disclosure to [U-Land]
[that] . . . [Wellex] was still in the process of acquiring and
consolidating its title to shares of stock of APIC.39 It included the
terms of a share swap whereby [Wellex] agreed to transfer to APIC its
shareholdings and advances to APC in exchange for the issuance by
APIC of shares of stock to [Wellex].40

The Second Memorandum of Agreement was signed by Mr. Gatchalian,

APIC President Salud,41 and APC President Augustus C. Paiso.42 It was
not dated, and no place was indicated as the place of signing. 43 It was
not notarized either, and no other witnesses signed the document. 44
The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were
not able to enter into any share purchase agreement although drafts
were exchanged between the two.

Despite the absence of a share purchase agreement, U-Land remitted

to Wellex a total of US$7,499,945.00.46 These were made in varying
amounts and through the issuance of post-dated checks. 47 The dates of
remittances were the following:

Date Amount (in US$)

June 30, 1998 990,000.00
July 2, 1998 990,000.00
20,000.00
July 30, 1998 990,000.00
490,000.00
490,000.00
August 1, 1998 990,000.00
490,000.00
490,000.00
August 3, 1998 990,000.00
70,000.00
September 25, 1998 399,972.50
99, 972.50
Total US$7,499,945.0048

Wellex acknowledged the receipt of these remittances in a confirmation

letter addressed to U-Land dated September 30, 1998. 49

According to Wellex, the parties agreed to enter into a security

arrangement. If the sale of the shares of stock failed to push through,
the partial payments or remittances U-Land made were to be secured
by these shares of stock and parcels of land.50 This meant that U-Land
could recover the amount it paid to Wellex by selling these shares of
stock and land titles or using them to generate income.

Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land

stock certificates representing 60,770,000 PEC shares and 72,601,000
APIC shares.51 These were delivered to U-Land on July 1, 1998,
September 1, 1998, and October 1, 1998. 52

In addition, Wellex delivered to U-Land Transfer Certificates of Title

(TCT) Nos. T-216769, T-216771, T-228231, T-228227, T-211250, and
T-216775 covering properties owned by Westland Pacific Properties
Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910,
T-120250, T-1114398, and T-120772 covering properties owned by
Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land received a
letter from Wellex, indicating a list of stock certificates that the latter
was giving to the former by way of security.55

Despite these transactions, Wellex and U-Land still failed to enter into
the share purchase agreement and the joint development agreement.

In the letter56 dated July 22, 1999, 10 months57 after the last formal
communication between the two parties, U-Land, through counsel,
demanded the return of the US$7,499,945.00. 58 This letter was sent 14
months after the signing of the First Memorandum of Agreement.

Counsel for U-Land claimed that [Wellex] ha[d] unjustifiably refused

to enter into the. . . Share Purchase Agreement.59 As far as U-Land
was concerned, the First Memorandum of Agreement was no longer in
effect, pursuant to Section 9.60 As such, U-Land offered to return all
the stock certificates covering APIC shares and PEC shares as well as
the titles to real property given by Wellex as security for the amount
remitted by U-Land.61

Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-

Lands claims. Counsel for Wellex stated that the two parties carried
out several negotiations that included finalizing the terms of the share
purchase agreement and the terms of the joint development
agreement. Wellex asserted that under the joint development
agreement, U-Land agreed to remit the sum of US$3 million by May
22, 1998 as initial funding for the development projects. 63

Wellex further asserted that it conducted extended discussions with U-

Land in the hope of arriving at the final terms of the agreement
despite the failure of the remittance of the US$3 million on May 22,
1998.64 That remittance pursuant to the joint development agreement
would have demonstrated [U-Lands] good faith in finalizing the
agreements.65

Wellex averred that, [s]ave for a few items, [Wellex and U-Land]
virtually agreed on the terms of both [the share purchase agreement
and the joint development agreement.]66 Wellex believed that the
parties had already gone beyond the intent stage of the [First
Memorandum of Agreement] and [had already] effected partial
implementation of an over-all agreement.67 U-Land even delivered a
total of 12 post-dated checks to Wellex as payment for the APIC shares
and PEC shares.68 [Wellex] on the other hand, had [already] delivered
to [U-Land] certificates of stock of APEC [sic] and PEC as well as
various land titles to cover actual remittances.69 Wellex alleged that
the agreements were not finalized because U-Land was forced to
suspend operations because of financial problems spawned by the
regional economic turmoil.70
Thus, Wellex maintained that the inability of the parties to execute
the [share purchase agreement] and the [joint development
agreement] principally arose from problems at [U-Lands] side, and not
due to [Wellexs] unjustified refusal to enter into [the] [share
purchase agreement][.]71

On July 30, 1999, U-Land filed a Complaint72 praying for rescission of

the First Memorandum of Agreement and damages against Wellex and
for the issuance of a Writ of Preliminary Attachment.73 From U-Lands
point of view, its primary reason for purchasing APIC shares from
Wellex was APICs majority ownership of shares of stock in APC (APC
shares).74 After verification with the Securities and Exchange
Commission, U-Land discovered that APIC did not own a single share
of stock in APC.75 U-Land alleged that it repeatedly requested that the
parties enter into the share purchase agreement. 76 U-Land attached
the demand letter dated July 22, 1999 to the Complaint. 77 However,
the 40-day period lapsed, and no share purchase agreement was
finalized.78

U-Land alleged that, as of the date of filing of the Complaint, Wellex

still refused to return the amount of US$7,499,945.00 while refusing to
enter into the share purchase agreement.79 U-Land stated that it was
induced by Wellex to enter into and execute the First Memorandum of
Agreement, as well as release the amount of US$7,499,945.00. 80

In its Answer with Compulsory Counterclaim, 81 Wellex countered that

U-Land had no cause of action.82 Wellex maintained that under the First
Memorandum of Agreement, the parties agreed to enter into a share
purchase agreement and a joint development agreement. 83 Wellex
alleged that to bring the share purchase agreement to fruition, it would
have to acquire the corresponding shares in APIC.84 It claimed that U-
Land was fully aware that the former still ha[d] to consolidate its title
over these shares.85 This was the reason for Wellexs attachment of
the Second Memorandum of Agreement to the First Memorandum of
Agreement. Wellex attached the Second Memorandum of Agreement
as evidence to refute U-Lands claim of misrepresentation.86

Wellex further alleged that U-Land breached the First Memorandum of

Agreement since the payment for the shares was to begin during the
40-day period, which began on May 16, 1998. 87 In addition, U-Land
failed to remit the US$3 million by May 22, 1998 that would serve as
initial funding for the development projects.88 Wellex claimed that the
remittance of the US$3 million on May 22, 1998 was a mandatory
obligation on the part of U-Land.89

Wellex averred that it presented draft versions of the share purchase

agreement, which were never finalized.90 Thus, it believed that there
was an implied extension of the 40-day period within which to enter
into the share purchase agreement and the joint development
agreement since U-Land began remitting sums of money in partial
payment for the purchase of the shares of stock.91

In its counterclaim against U-Land, Wellex alleged that it had already

set in motion building and development of real estate projects on four
(4) major sites in Cavite, Iloilo, and Davao. It started initial
construction on the basis of its agreement with U-Land to pursue real
estate development projects.92

Wellex claims that, had the development projects pushed through, the
parties would have shared equally in the profits of these projects. 93
These projects would have yielded an income of P2,404,948,000.00, as
per the study Wellex conducted, which was duly recognized by U-
Land.94 Half of that amount, P1,202,474,000.00, would have
redounded to Wellex.95 Wellex, thus, prayed for the rescission of the
First Memorandum of Agreement and the payment of P1,202,474,000
in damages for loss of profit.96 It prayed for the payment of moral
damages, exemplary damages, attorneys fees, and costs of suit. 97

In its Reply,98 U-Land denied that there was an extension of the 40-day
period within which to enter into the share purchase agreement and
the joint development agreement. It also denied requesting for an
extension of the 40-day period. It further raised that there was no
provision in the First Memorandum of Agreement that required it to
remit payments for Wellexs shares of stock in APIC and PEC within the
40-day period. Rather, the remittances were supposed to begin upon
the execution of the share purchase agreement.99

As for the remittance of the US$3 million, U-Land stated that the
issuance of this amount on May 22, 1998 was supposed to be
simultaneously made with Wellexs delivery of the stock certificates for
57,000,000 PEC shares. These stock certificates were not delivered on
that date.100

With regard to the drafting of the share purchase agreement, U-Land

denied that it was Wellex that presented versions of the agreement. U-
Land averred that it was its own counsel who drafted versions of the
share purchase agreement and the joint development agreement,
which Wellex refused to sign.101

U-Land specifically denied that it had any knowledge prior to or during

the execution of the First Memorandum of Agreement that Wellex still
had to consolidate its title over its shares in APIC. U-Land averred
that it relied on Wellexs representation that it was a majority owner of
APIC shares and that APIC owned a majority of APC shares.102

Moreover, U-Land denied any knowledge of the initial steps that Wellex
undertook to pursue the development projects and denied any
awareness of a study conducted by Wellex regarding the potential
profit of these projects.103

The case proceeded to trial.

U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief
Executive Officer, as its sole witness.104 Mr. Tseng testified that
[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan invited
[U-Land] to join in the operation of his airline company[.]105 U-Land
did not accept the offer at that time.106 During the first quarter of 1998,
Mr. Gatchalian went to Taiwan and invited [U-Land] to invest in Air
Philippines[.]107 This time, U-Land alleged that subsequent meetings
were held where Mr. Gatchalian, representing Wellex, claimed
ownership of a majority of the shares of APIC and ownership by APIC
of a majority of the shares of [APC,] a domestic carrier in the
Philippines.108 Wellex, through Mr. Gatchalian, offered to sell to U-Land
PEC shares as well.109

According to Mr. Tseng, the parties agreed to enter into the First
Memorandum of Agreement after their second meeting. 110 Mr. Tseng
testified that under this memorandum of agreement, the parties would
enter into a share purchase agreement within forty (40) days from its
execution which [would] put into effect the sale of the shares [of
stock] of APIC and PEC[.]111 However, the [s]hare [p]urchase
[a]greement was not executed within the forty-day period despite the
draft . . . given [by U-Land to Wellex].112

Mr. Tseng further testified that it was only after the lapse of the 40-day
period that U-Land discovered that Wellex needed money for the
transfer of APC shares to APIC. This allegedly shocked U-Land since
under the First Memorandum of Agreement, APIC was supposed to
own a majority of APC shares. Thus, U-Land remitted to Wellex a total
of US$7,499,945.00 because of its intent to become involved in the
aviation business in the Philippines. These remittances were confirmed
by Wellex through a confirmation letter. Despite the remittance of this
amount, no share purchase agreement was entered into by the
parties.113

Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice
President of Wellex. She admitted her knowledge of the First
Memorandum of Agreement as she was involved in its drafting. She
testified that the First Memorandum of Agreement made reference,
under its second preambular clause, to the Second Memorandum of
Agreement entered into by Wellex, APIC, and APC. She testified that
under the First Memorandum of Agreement, U-Lands purchase of APIC
shares and PEC shares from Wellex would take place within 40 days,
with the execution of a share purchase agreement. 114
According to Ms. Ting, after the 40-day period lapsed, U-Land
Chairman Mr. Wang requested sometime in June of 1998 for an
extension for the execution of the share purchase agreement and the
remittance of the US$3 million. As proof that Mr. Wang made this
request, Ms. Ting testified that Mr. Wang sent several post-dated
checks to cover the payment of the APIC shares and PEC shares and
the initial funding of US$3 million for the joint development
agreement. She testified that Mr. Wang presented a draft of the share
purchase agreement, which Wellex rejected. Wellex drafted a new
version of the share purchase agreement.115 However, the share
purchase agreement was not executed because during the period of
negotiation, Wellex learned from other sources that U-Land
encountered difficulties starting October of 1998.116 Ms. Ting admitted
that U-Land made the remittances to Wellex in the amount of
US$7,499,945.00.117

Ms. Ting testified that U-Land was supposed to make an initial

payment of US$19 million under the First Memorandum of Agreement.
However, U-Land only paid US$7,499,945.00. The total payments
should have amounted to US$41 million.118

Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a
meeting to thresh out the problems of the First Memorandum of
Agreement, but U-Land did not reply. Instead, Wellex only received
communication from U-Land regarding their subsequent negotiations
through the latters demand letter dated July 22, 1999. In response,
Wellex wrote to U-Land requesting another meeting to discuss the
demands. However, U-Land already filed the Complaint for rescission
and caused the attachment against the properties of Wellex, causing
embarrassment to Wellex.119

In the Decision dated April 10, 2001, the Regional Trial Court of Makati
City held that rescission of the First Memorandum of Agreement was
proper:

The first issue must be resolved in the negative. Preponderance of

evidence leans in favor of plaintiff that it is entitled to the issuance of
the writ of preliminary attachment. Plaintiffs evidence establishes the
facts that it is engaged in the airline business in Taiwan, was
approached by defendant, through its Chairman William Gatchalian,
and was invited by the latter to invest in an airline business in the
Philippines, Air Philippines Corporation (APC); that plaintiff became
interested in the invitation of defendant; that during the negotiations
between plaintiff and defendant, defendant induced plaintiff to buy
shares in Air Philippines International Corporation (APIC) since it owns
majority of the shares of APC; that defendant also induced plaintiff to
buy shares of APIC in Philippine Estates Corporation (PEC); that the
negotiations between plaintiff and defendant culminated into the
parties executing a MOA (Exhs. C to C-3, also Exh. 1); that in the
second Whereas clause of the MOA, defendant represented that it
has a current airline operation through its majority-owned subsidiary
APIC, that under the MOA, the parties were supposed to enter into a
Share Purchase Agreement (SPA) within forty (40) days from May 16,
1998, the date the MOA in order to effect the transfer of APIC and PEC
shares of defendant to plaintiff; that plaintiff learned from defendant
that APIC does not actually own a single share in APC; that plaintiff
verified with the Securities and Exchange Commission (SEC), by
obtaining a General Information Sheet therefrom (Exh. C-
Attachment); that APIC does not in fact own APC; that defendant
induced plaintiff to still remit its investment to defendant, which
plaintiff did as admitted by defendant per its Confirmation Letter (Exh.
D) in order that APC shares could be transferred to APIC; that
plaintiff remitted a total of US$7,499,945.00 to defendant; and that
during the forty-day period stipulated in the MOA and even after the
lapse of the said period, defendant has not entered into the SPA, nor
has defendant caused the transfer of APC shares to APIC.

In the second Whereas clause of the MOA (Exh. C), defendants

misrepresentation that APIC owns APC is made clear, as follows:
WHEREAS, WELLEX, on the other hand, has current airline operation
in the Philippines through its majority-owned subsidiary Air Philippines
International Corporation (Exh. C) and the latters subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its
operation in the Asian regional markets; x x x (Second Whereas of
Exh. C)
On the other hand, defendants evidence failed to disprove plaintiffs
evidence. The testimony of defendants sole witness Elvira Ting, that
plaintiff knew at the time of the signing of the MOA that APIC does not
own a majority of the shares of APC because another Memorandum of
Agreement was attached to the MOA (Exh 1) pertaining to the
purchase of APC shares by APIC is unavailing. The second Whereas
clause of the MOA leaves no room for interpretation. . . . The second
MOA purportedly attached as Annex A of this MOA merely enlightens
the parties on the manner by which APIC acquired the shares of APC.
Besides, . . . the second MOA was not a certified copy and did not
contain a marking that it is an Annex A when it was supposed to be
an Annex A and a certified copy per the MOA between plaintiff and
defendant. As can be also gathered from her testimony, Ms. Ting does
not have personal knowledge that plaintiff was not informed that APIC
did not own shares of APC during the negotiations as she was not
present during the negotiations between plaintiff and defendants
William Gatchalian. Her participation in the agreement between the
parties [was] merely limited to the preparation of the documents to be
signed. Ms. Ting testified, as follows:
Q During the negotiation, you did not know anything about that?
A I was not involved in the negotiation, sir.

Q And you are just making your statement that U-Land knew about
the intended transfer of shares from APC to APIC because of this
WHEREAS CLAUSE and the Annex to this Memorandum of Agreement?

A Yes, it was part of the contract.

(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendants fraud in the performance of its obligation under the MOA is
further revealed when Ms. Ting testified on cross-examination that
notwithstanding the remittances made by plaintiff in the total amountn
[sic] of US$7,499, 945.00 to partially defray the cost of transferring
APC shares to APIC even as of the year 2000, as follows:

Q Ms. Ting, can you please tell the Court if you know who owns
shares of Air Philippines Corporation at this time?

A Air Philippines Corporation right now is own [sic] by Wellex Group

and certain individual.

Q How much shares of Air Philippines Corporation is owned by Wellex

Group?

A Around twenty...at this moment around twenty five percent (25%).

Q Can you tell us if you know who are the other owners of the shares
of Air Philippines?

A There are several individual owners, I cannot recall the names.

Q Could [sic] you know if Air Philippines Intl. Corporation is one of the
owners?

A As of this moment, no sir.

(lbid, p. 16)

That defendant represented to plaintiff that it needed the remittances

of plaintiff, even if no SPA was executed yet between the parties, to
effect the transfer of APC shares to APIC is admitted by its same
witness also in this wise:

Q You said that remittances were made to the Wellex Group,

Incorporated by plaintiff for the period from June 1998 to September
1998[,] is that correct?

A Yes, Sir.
Q During all these times, that remittances were made in the total
amount of more than seven million dollars, did you ever know if
plaintiff asked for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of AIR
PHILIPPINES CORPORATION?

A There were queries on the matter.

Q And what was your answer to those queries, Madam Witness?

A We informed them that the decision was still in the process.

Q Even up to the time that plaintiff U-Land stopped the remittances

sometime in September 1998 you have not effected the transfer of
shares of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
INTERNATIONCAL [sic] CORPORATION[,] am I correct?

A APC to APIC, well at that time its still in the process.

Q In fact, Madam Witness, is it not correct for me to say that one of

the reasons why U-Land Incorporated was convinced to remit the
amounts of money totalling seven million dollars plus, was that your
company said that it needed funds to effect these transfers, is that
correct?

A Yes, sir.

(lbid, pp. 25-29)

As the evidence adduced by the parties stand, plaintiff has established

the fact that it had made remittances in the total amount of
US$7,499,945.00 to defendant in order that defendant will make good
its representation that APC is a subsidiary of APIC. The said
remittances are admitted by defendant.

Notwithstanding the said remittances, APIC does not own a single

share of APC. On the other hand, defendant could not even
satisfactorily substantiate its claim that at least it had the intention to
cause the transfer of APC shares to APIC. [D]efendant obviously did
not enter into the stipulated SPA because it did not have the shares of
APC transferred to APIC despite its representations. Under the
circumstances, it is clear that defendant fraudulently violated the
provisions of the MOA.120 (Emphasis supplied)

On appeal, the Court of Appeals affirmed the ruling of the Regional

Trial Court.121 In its July 30, 2004 Decision, the Court of Appeals held
that the Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the
latter itself asked for the rescission of the MOA. Thus, in effect, it prays
for the return of what has been given or paid under the MOA, as the
law creates said obligation to return the things which were the object
of the contract, and the same could be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
The law says:
Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
Appellant, therefore, cannot ask for rescission of the MOA and yet
refuse to return what has been paid to it. Further, appellants claim
that the lower court erred in ruling for the rescission of the MOA is
absurd and ridiculous because rescission thereof is prayed for by the
former. . . .

This Court agrees with the lower court that appellee is the injured
party in this case, and therefore is entitled to rescission, because the
rescission referred to here is predicated on the breach of faith by the
appellant which breach is violative of the reciprocity between the
parties. It is noted that appellee has partly complied with its own
obligation, while the appellant has not. It is, therefore, the right of the
injured party to ask for rescission because the guilty party cannot ask
for rescission.

The lower court . . . correctly ruled that:

. . . This Court agrees with plaintiff that defendants
misrepresentations regarding APICs not owning shares in APC vitiates
its consent to the MOA. Defendants continued misrepresentation that
it will cause the transfer of APC shares in APIC inducing plaintiff to
remit money despite the lapse of the stipulated forty day period,
further establishes plaintiffs right to have the MOA rescinded.

Section 9 of the MOA itself provides that in the event of the non-
execution of an SPA within the 40 day period, or within the extensions
thereof, the payments made by plaintiff shall be returned to it, to wit:

9 Validity.- In the event that the parties are unable to agree on the
terms of the SHPA and/or JDA within forty (40) days from the date
hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties
released from their respective undertakings herein, except that
WELLEX shall refund the US$3.0 million under Section 4 within three
(3) days therefrom, otherwise U-LAND shall have the right to recover
the 57,000,000 PEC shares delivered to U-LAND under Section 4.
Clearly, the parties were not able to agree on the terms of the SPA
within and even after the lapse of the stipulated 40 day period. There
being no SPA entered into by and between the plaintiff and defendant,
defendants return of the remittances [of] plaintiff in the total amount
of US$7,499,945 is only proper, in the same vein, plaintiff should
return to defendant the titles and certificates of stock given to it by
defendant.122 (Citations omitted)

Hence, this Petition was filed.

Petitioners Arguments

Petitioner Wellex argues that contrary to the finding of the Court of

Appeals, respondent U-Land was not entitled to rescission because the
latter itself violated the First Memorandum of Agreement. Petitioner
Wellex states that respondent U-Land was actually bound to pay
US$17.5 million for all of APIC shares and PEC shares under the First
Memorandum of Agreement and the US$3 million to pursue the
development projects under the joint development agreement. In sum,
respondent U-Land was liable to petitioner Wellex for the total amount
of US$20.5 million. Neither the Court of Appeals nor the Regional Trial
Court made any mention of the legal effect of respondent U-Lands
failure to pay the full purchase price.123

On the share purchase agreement, petitioner Wellex asserts that its

obligation to deliver the totality of the shares of stock would become
demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of
stock was a suspensive condition for the execution of the share
purchase agreement and delivery of the shares of stock. Petitioner
Wellex argues that the use of the term upon in Section 2 of the First
Memorandum of Agreement clearly provides that the full payment of
the purchase price must be given simultaneously or concurrent
with the execution of the share purchase agreement.125

Petitioner Wellex raises that the Court of Appeals erred in saying that
the rescission of the First Memorandum of Agreement was proper
because petitioner Wellex itself asked for this in its Answer before the
trial court.126 It asserts that there can be no rescission of a non-
existent obligation, such as [one] whose suspensive condition has not
yet happened[,]127 as held in Padilla v. Spouses Paredes.128 Citing
Villaflor v. Court of Appeals129 and Spouses Agustin v. Court of
Appeals,130 it argues that the vendor. . . has no obligation to deliver
the thing sold. . . if the buyer. . . fails to fully pay the price as required
by the contract.131 In this case, petitioner Wellex maintains that
respondent U-Lands remittance of US$7,499,945.00 constituted mere
partial performance of a reciprocal obligation.132 Thus, respondent U-
Land was not entitled to rescission. The nature of this reciprocal
obligation requires both parties simultaneous fulfillment of the totality
of their reciprocal obligations and not only partial performance on the
part of the allegedly injured party.

As to the finding of misrepresentations, petitioner Wellex raises that a

seller may sell a thing not yet belonging to him at the time of the
transaction, provided that he will become the owner at the time of
delivery so that he can transfer ownership to the buyer. Contrary to the
finding of the lower courts, petitioner Wellex was obliged to be the
owner of the shares only when the time came to deliver these to
respondent U-Land and not during the perfection of the contract
itself.133

Finally, petitioner Wellex argues that respondent U-Land could have

recovered through the securities given to the latter.134 Petitioner Wellex
invokes Suria v. Intermediate Appellate Court,135 which held that an
action for rescission is not a principal action that is retaliatory in
character [under Article 1191 of the Civil Code, but] a subsidiary one
which. . . is available only in the absence of any other legal remedy
[under Article 1384 of the Civil Code].136

Respondents Arguments

Respondent U-Land argues that it was the execution of the share

purchase agreement that would result in its purchase of the APIC
shares and PEC shares.137 It was not the full remittance of the purchase
price of the shares of stock as indicated in the First Memorandum of
Agreement, as alleged by petitioner Wellex.138 Respondent U-Land
asserts that the First Memorandum of Agreement provides that the
exact number of APIC shares and PEC shares to be purchased under
the share purchase agreement and the final price of these shares were
not yet determined by the parties.139

Respondent U-Land reiterates that it was petitioner Wellex that

requested for the remittances amounting to US$7,499,945.00 to
facilitate APICs purchase of APC shares.140 Thus, it was petitioner
Wellexs refusal to enter into the share purchase agreement that led to
respondent U-Land demanding rescission of the First Memorandum of
Agreement and the return of the US$7,499,945.00. 141 Respondent U-
Land further argues before this court that petitioner Wellex failed to
present evidence as to how the money was spent, stating that Ms. Ting
admitted that the Second Memorandum of Agreement was not
consummated at any time.142

Respondent U-Land raises that petitioner Wellex was guilty of fraud by

making it appear that APC was a subsidiary of APIC.143 It reiterates
that, as an airline company, its primary reason for entering into the
First Memorandum of Agreement was to acquire management of APC,
another airline company.144 Under Article 1191 of the Civil Code,
respondent U-Land, as the injured party, was entitled to rescission due
to the fatal misrepresentations committed by petitioner Wellex.145

Respondent U-Land further asserts that the shareholdings in APIC and

APC were never in question.146 Rather, it was petitioner Wellexs
misrepresentation that APIC was a majority shareholder of APC that
compelled it to enter into the agreement. 147

As for Suria, respondent U-land avers that this case was inapplicable
because the pertinent provision in Suria was not Article 1191 but
rescission under Article 1383 of the Civil Code.148 The rescission
referred to in Article 1191 referred to resolution of a contract due to
a breach of a mutual obligation, while Article 1384 spoke of
rescission because of lesion and damage.149 Thus, the rescission that
is relevant to the present case is that of Article 1191, which involves
breach in a reciprocal obligation. It is, in fact, resolution, and not
rescission as a result of fraud or lesion, as found in Articles 1381,
1383, and 1384 of the Civil Code.150

The Issue

The question presented in this case is whether the Court of Appeals

erred in affirming the Decision of the Regional Trial Court that granted
the rescission of the First Memorandum of Agreement prayed for by U-
Land.

The Petition must be denied.

The requirement of a share purchase agreement

The Civil Code provisions on the interpretation of contracts are

controlling to this case, particularly Article 1370, which reads:

ART. 1370. If the terms of a contract are clear and leave no doubt
upon the intention of the contracting parties, the literal meaning of its
stipulations shall control.

If the words appear to be contrary to the evident intention of the

parties, the latter shall prevail over the former.

In Norton Resources and Development Corporation v. All Asia Bank

Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the
first paragraph of Article 1370 of the Civil Code: [i]f the terms of a
contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.
This provision is akin to the plain meaning rule applied by
Pennsylvania courts, which assumes that the intent of the parties to an
instrument is embodied in the writing itself, and when the words are
clear and unambiguous the intent is to be discovered only from the
express language of the agreement. It also resembles the four
corners rule, a principle which allows courts in some cases to search
beneath the semantic surface for clues to meaning. A court's purpose
in examining a contract is to interpret the intent of the contracting
parties, as objectively manifested by them. The process of interpreting
a contract requires the court to make a preliminary inquiry as to
whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative
interpretations. Where the written terms of the contract are not
ambiguous and can only be read one way, the court will interpret the
contract as a matter of law. If the contract is determined to be
ambiguous, then the interpretation of the contract is left to the court,
to resolve the ambiguity in the light of the intrinsic evidence. 152
(Emphasis supplied)

As held in Norton, this court must first determine whether a provision

or stipulation contained in a contract is ambiguous. Absent any
ambiguity, the provision on its face will be read as it is written and
treated as the binding law of the parties to the contract.

The parties have differing interpretations of the terms of the First

Memorandum of Agreement. Petitioner Wellex even admits that the
facts of the case are fairly undisputed [and that] [i]t is only the parties
respective [understanding] of these facts that are not in harmony.153

The second preambular clause of the First Memorandum of Agreement

reads:

WHEREAS, WELLEX, on the other hand, has current airline operation in

the Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latters subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in
the Asian regional markets; a Memorandum of Agreement on ______,
a certified copy of which is attached hereto as Annex A and is hereby
made an integral part hereof, which sets forth, among others, the
basis for WELLEXs present ownership of shares in Air Philippines
International Corporation.154 (Emphasis supplied)

Section 1 of the First Memorandum of Agreement reads:

I. Basic Agreement. - The parties agree to develop a long-term
business relationship initially through the creation of joint interest in
airline operations as well as in property development projects in the
Philippines to be implemented as follows:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR

PHILIPPINES INTERNATIONAL CORPORATION (APIC) equivalent to at
least 35% of the outstanding capital stock of APIC, but in any case,
not less than 1,050,000,000 shares (the APIC Shares).

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE

ESTATES CORPORATION (PEC) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the PEC Shares).

(c) U-LAND shall enter into a joint development agreement with PEC to
jointly pursue property development projects in the Philippines.

(d) U-LAND shall be given the option to acquire from WELLEX shares of
stock of EXPRESS SAVINGS BANK (ESB) up to 40% of the
outstanding capital stock of ESB (the ESB Shares) under terms to be
mutually agreed.155

The First Memorandum of Agreement contained the following

stipulations regarding the share purchase agreement:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
date hereof (unless extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase Agreement (SHPA) covering
the acquisition by U-LAND of the APIC Shares and PEC Shares
(collectively, the Subject Shares). Without prejudice to any
subsequent agreement between the parties, the purchase price for the
APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS
(P0.30) per share and that for the PEC Shares at SIXTY FIVE
CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA
shall be paid in full upon execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be
provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND

provided that: (i) the purchase price reflected in the SHPA has been
fully paid; (ii) the Philippine Securities & Exchange Commission (SEC)
shall have approved the issuance of the Subject Shares; and (iii) any
required approval by the Taiwanese government of the acquisition by
U-LAND of the Subject Shares shall likewise have been obtained.156
(Emphasis supplied)

As for the joint development agreement, the First Memorandum of

Agreement contained the following stipulation:

4. Joint Development Agreement with PEC. Simultaneous with the

execution of the SHPA, U-LAND and PEC shall execute a joint
development agreement (JDA) to pursue property development
projects in the Philippines. The JDA shall cover specific housing and
other real estate development projects as the parties shall agree. All
profits derived from the projects covered by the JDA shall be shared
equally between U-LAND and PEC. U-LAND shall, not later than May
22, 1998, remit the sum of US$3.0 million as initial funding for the
aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance
with Section 9 below.157 (Emphasis provided)

Finally, the parties included the following stipulation in case of a failure

to agree on the terms of the share purchase agreement or the joint
development agreement:

9. Validity. - In the event the parties are unable to agree on the terms
of the SHPA and/or the JDA within forty (40) days from date hereof (or
such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from
their respective undertakings herein, except that WELLEX shall refund
the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the
57,000,000 PEC shares delivered to U-LAND under Section 4. 158

Section 2 of the First Memorandum of Agreement clearly provides that

the execution of a share purchase agreement containing mutually
agreeable terms and conditions must first be accomplished by the
parties before respondent U-Land purchases any of the shares owned
by petitioner Wellex. A perusal of the stipulation on its face allows for
no other interpretation.

The need for a share purchase agreement to be entered into before

payment of the full purchase price can further be discerned from the
other stipulations of the First Memorandum of Agreement.

In Section 1, the parties agreed to enter into a joint business venture,

through entering into two (2) agreements: a share purchase
agreement and a joint development agreement. However, Section 1
provides that in the share purchase agreement, U-LAND shall acquire
from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION (APIC) equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less than 1,050,000,000
shares (the APIC Shares).159

As for the PEC shares, Section 1 provides that respondent U-Land shall
purchase from petitioner Wellex shares of stock of PHILIPPINE
ESTATES CORPORATION (PEC) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the PEC Shares).160

The use of the terms at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares and at
least 35% of the outstanding capital stock of PEC, but in any case, not
less than 490,000,000 shares means that the parties had yet to agree
on the number of shares of stock to be purchased.

The need to execute a share purchase agreement before payment of

the purchase price of the shares is further shown by the clause,
[w]ithout prejudice to any subsequent agreement between the
parties, the purchase price for the APIC Shares to be reflected in the
[share purchase agreement] shall be... P0.30 per share and that for
the PEC Shares at... P0.65 per share.161 This phrase clearly shows that
the final price of the shares of stock was to be reflected in the share
purchase agreement. There being no share purchase agreement
executed, respondent U-Land was under no obligation to begin
payment or remittance of the purchase price of the shares of stock.

Petitioner Wellex argues that the use of upon in Section 2162 of the
First Memorandum of Agreement means that respondent U-Land must
pay the purchase price of the shares of stock in its entirety when they
are transferred. This argument has no merit.

Article 1373 of the Civil Code provides:

ART. 1373. If some stipulation of any contract should admit of several

meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.

It is necessary for the parties to first agree on the final purchase price
and the number of shares of stock to be purchased before respondent
U-Land is obligated to pay or remit the entirety of the purchase price.
Thus, petitioner Wellexs argument cannot be sustained since the
parties to the First Memorandum of Agreement were clearly unable to
agree on all the terms concerning the share purchase agreement. It
would be absurd for petitioner Wellex to expect payment when
respondent U-Land did not yet agree to the final amount to be paid for
the totality of an indeterminate number of shares of stock.

The third paragraph of Section 2163 provides that the transfer of the
Subject Shares shall take place upon the fulfillment of certain
conditions, such as full payment of the purchase price as reflected in
the [share purchase agreement]. The transfer of the shares of stock is
different from the execution of the share purchase agreement. The
transfer of the shares of stock requires full payment of the final
purchase price. However, that final purchase price must be reflected in
the share purchase agreement. The execution of the share purchase
agreement will require the existence of a final agreement.

In its Answer with counterclaim before the trial court, petitioner Wellex
argued that the payment of the shares of stock was to begin within the
40-day period. Petitioner Wellexs claim is not in any of the stipulations
of the contract. Its subsequent claim that respondent U-Land was
actually required to remit a total of US$20.5 million is likewise bereft
of basis since there was no final purchase price of the shares of stock
that was agreed upon, due to the failure of the parties to execute a
share purchase agreement. In addition, the parties had yet to agree on
the final number of APIC shares and PEC shares that respondent U-
Land would acquire from petitioner Wellex.

Therefore, the understanding of the parties captured in the First

Memorandum of Agreement was to continue their negotiation to
determine the price and number of the shares to be purchased. Had it
been otherwise, the specific number or percentage of shares and its
price should already have been provided clearly and unambiguously.
Thus, they agreed to a 40-day period of negotiation.

Section 9 of the First Memorandum of Agreement explicitly provides

that:

In the event the parties are unable to agree on the terms of the SHPA
and/or the JDA within forty (40) days from date hereof (or such period
as the parties shall mutually agree), this Memorandum of Agreement
shall cease to be effective and the parties released from their
respective undertakings herein . . .164

The First Memorandum of Agreement was, thus, an agreement to

enter into a share purchase agreement. The share purchase agreement
should have been executed by the parties within 40 days from May 16,
1998, the date of the signing of the First Memorandum of Agreement.

When the 40-day period provided for in Section 9 lapsed, the efficacy
of the First Memorandum of Agreement ceased. The parties were
released from their respective undertakings. Thus, from June 25,
1998, the date when the 40-day period lapsed, the parties were no
longer obliged to negotiate with each other in order to enter into a
share purchase agreement.

However, Section 9 provides for another period within which the

parties could still be required to negotiate. The clause or such period
as the parties shall mutually agree means that the parties should
agree on a period within which to continue negotiations for the
execution of an agreement. This means that after the 40-day period,
the parties were still allowed to negotiate, provided that they could
mutually agree on a new period of negotiation.

Based on the records and the findings of the lower courts, the parties
were never able to arrive at a specific period within which they would
bind themselves to enter into an agreement. There being no other
period specified, the parties were no longer under any obligation to
negotiate and enter into a share purchase agreement. Section 9 clearly
freed them from this undertaking.

II

There was no express or implied

novation of the First Memorandum
of Agreement

The subsequent acts of the parties after the 40-day period were,
therefore, independent of the First Memorandum of Agreement.

In its Appellants Brief before the Court of Appeals, petitioner Wellex

mentioned that there was an implied partial objective or real
novation165 of the First Memorandum of Agreement. Petititoner did not
raise this argument of novation before this court. In Gayos v. Gayos,166
this court held that it is a cherished rule of procedure that a court
should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future
litigation[.]167

Articles 1291 and 1292 of the Civil Code provides how obligations may
be modified:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

Article 1292. In order that an obligation may be extinguished by

another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other.
In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept
of novation:

Novation extinguishes an obligation between two parties when there is

a substitution of objects or debtors or when there is subrogation of the
creditor. It occurs only when the new contract declares so in
unequivocal terms or that the old and the new obligations be on
every point incompatible with each other.
....

For novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new

obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible
with the old one on every point. The test of incompatibility is whether
the two obligations can stand together, each one with its own
independent existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never
presumed, thus:

I
n the civil law setting, novatio is literally construed as to make new. So
it is deeply rooted in the Roman Law jurisprudence, the principle
novatio non praesumitur that novation is never presumed. At
bottom, for novation to be a jural reality, its animus must be ever
present, debitum pro debito basically extinguishing the old
obligation for the new one.169 (Emphasis from the original omitted,
citations omitted)

Applying Arco, it is clear that there was no novation of the original

obligation.

After the 40-day period, the parties did not enter into any subsequent
written agreement that was couched in unequivocal terms. The
transaction of the First Memorandum of Agreement involved large
amounts of money from both parties. The parties sought to participate
in the air travel industry, which has always been highly regulated and
subject to the strictest commercial scrutiny. Both parties admitted that
their counsels participated in the crafting and execution of the First
Memorandum of Agreement as well as in the efforts to enter into the
share purchase agreement. Any subsequent agreement would be
expected to be clearly agreed upon with their counsels assistance and
in writing, as well.

Given these circumstances, there was no express novation.

There was also no implied novation of the original obligation. In Quinto

v. People:170

[N]o specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two
contracts. While there is really no hard and fast rule to determine what
might constitute to be a sufficient change that can bring about
novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.

....

. . . The test of incompatibility is whether or not the two obligations

can stand together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates the
first. Corollarily, changes that breed incompatibility must be essential
in nature and not merely accidental. The incompatibility must take
place in any of the essential elements of the obligation, such as its
object, cause or principal conditions thereof; otherwise, the change
would be merely modificatory in nature and insufficient to extinguish
the original obligation.171 (Citations omitted)

There was no incompatibility between the original terms of the First

Memorandum of Agreement and the remittances made by respondent
U-Land for the shares of stock. These remittances were actually made
with the view that both parties would subsequently enter into a share
purchase agreement. It is clear that there was no subsequent
agreement inconsistent with the provisions of the First Memorandum of
Agreement.

Thus, no implied novation took place. In previous cases, 172 this court
has consistently ruled that presumed novation or implied novation is
not deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis
Central Guaranty Corporation:173

Neither can novation be presumed in this case. As explained in Dugo

v. Lopena:

Novation by presumption has never been favored. To be sustained, it

need be established that the old and new contracts are incompatible in
all points, or that the will to novate appears by express agreement of
the parties or in acts of similar import.174 (Emphasis supplied)

There being no novation of the First Memorandum of Agreement,

respondent U-Land is entitled to the return of the amount it remitted
to petitioner Wellex. Petitioner Wellex is likewise entitled to the return
of the certificates of shares of stock and titles of land it delivered to
respondent U-Land. This is simply an enforcement of Section 9 of the
First Memorandum of Agreement. Pursuant to Section 9, only the
execution of a final share purchase agreement within either of the
periods contemplated by this stipulation will justify the parties
retention of what they received or would receive from each other.

III

Applying Article 1185 of the Civil

Code, the parties are obligated to
return to each other all they have
received

Article 1185 of the Civil Code provides that:

ART. 1185. The condition that some event will not happen at a
determinate time shall render the obligation effective from the moment
the time indicated has elapsed, or if it has become evident that the
event cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at

such time as may have probably been contemplated, bearing in mind
the nature of the obligation.

Article 1185 provides that if an obligation is conditioned on the non-

occurrence of a particular event at a determinate time, that obligation
arises (a) at the lapse of the indicated time, or (b) if it has become
evident that the event cannot occur.

Petitioner Wellex and respondent U-Land bound themselves to

negotiate with each other within a 40-day period to enter into a share
purchase agreement. If no share purchase agreement was entered
into, both parties would be freed from their respective undertakings.

It is the non-occurrence or non-execution of the share purchase

agreement that would give rise to the obligation to both parties to free
each other from their respective undertakings. This includes returning
to each other all that they received in pursuit of entering into the share
purchase agreement.

At the lapse of the 40-day period, the parties failed to enter into a
share purchase agreement. This lapse is the first circumstance
provided for in Article 1185 that gives rise to the obligation. Applying
Article 1185, the parties were then obligated to return to each other all
that they had received in order to be freed from their respective
undertakings.

However, the parties continued their negotiations after the lapse of the
40-day period. They made subsequent transactions with the intention
to enter into the share purchase agreement. Despite that, they still
failed to enter into a share purchase agreement. Communication
between the parties ceased, and no further transactions took place.

It became evident that, once again, the parties would not enter into
the share purchase agreement. This is the second circumstance
provided for in Article 1185. Thus, the obligation to free each other
from their respective undertakings remained.

As such, petitioner Wellex is obligated to return the remittances made

by respondent U-Land, in the same way that respondent U-Land is
obligated to return the certificates of shares of stock and the land titles
to petitioner Wellex.

IV

Respondent U-Land is praying for

rescission or resolution under Article
1191, and not rescission under Article
1381

The arguments of the parties generally rest on the propriety of the

rescission of the First Memorandum of Agreement. This requires a
clarification of rescission under Article 1191, and rescission under
Article 1381 of the Civil Code.

Article 1191 of the Civil Code provides:

ART. 1191. The power to rescind obligations is implied in reciprocal

ones, in case one of the obligors should not comply with what is
incumbent upon him.

The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and
1388 and the Mortgage Law.

Articles 1380 and 1381, on the other hand, provide an enumeration of

rescissible contracts:

ART. 1380. Contracts validly agreed upon may be rescinded in the

cases established by law.

ART. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter

suffer the lesion stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in

any other manner collect the claims due them;

(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and approval of
the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to

rescission.

Article 1383 expressly provides for the subsidiary nature of rescission:

ART. 1383. The action for rescission is subsidiary; it cannot be

instituted except when the party suffering damage has no other legal
means to obtain reparation for the same.

Rescission itself, however, is defined by Article 1385:

ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.

In this case, indemnity for damages may be demanded from the

person causing the loss.
Gotesco Properties v. Fajardo175 categorically stated that Article 1385 is
applicable to Article 1191:

At this juncture, it is noteworthy to point out that rescission does not

merely terminate the contract and release the parties from further
obligations to each other, but abrogates the contract from its inception
and restores the parties to their original positions as if no contract has
been made. Consequently, mutual restitution, which entails the return
of the benefits that each party may have received as a result of the
contract, is thus required. To be sure, it has been settled that the
effects of rescission as provided for in Article 1385 of the Code are
equally applicable to cases under Article 1191, to wit:

xxxx

Mutual restitution is required in cases involving rescission

under Article 1191. This means bringing the parties back to their
original status prior to the inception of the contract. Article 1385 of the
Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things
which were the object of the contract, together with their
fruits, and the price with its interest; consequently, it can be
carried out only when he who demands rescission can return
whatever he may be obligated to restore.

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.

In this case, indemnity for damages may be demanded from the

person causing the loss.

This Court has consistently ruled that this provision applies to

rescission under Article 1191:

[S]ince Article 1385 of the Civil Code expressly and clearly states that
rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest, the Court finds no justification to sustain petitioners position
that said Article 1385 does not apply to rescission under Article 1191.
x x x176 (Emphasis from the original, citations omitted)

Rescission, as defined by Article 1385, mandates that the parties must

return to each other everything that they may have received as a
result of the contract. This pertains to rescission or resolution under
Article 1191, as well as the provisions governing all forms of rescissible
contracts.
For Article 1191 to be applicable, however, there must be reciprocal
prestations as distinguished from mutual obligations between or
among the parties. A prestation is the object of an obligation, and it is
the conduct required by the parties to do or not to do, or to give. 177
Parties may be mutually obligated to each other, but the prestations of
these obligations are not necessarily reciprocal. The reciprocal
prestations must necessarily emanate from the same cause that gave
rise to the existence of the contract. This distinction is best illustrated
by an established authority in civil law, the late Arturo Tolentino:

This article applies only to reciprocal obligations. It has no application

to every case where two persons are mutually debtor and creditor of
each other. There must be reciprocity between them. Both relations
must arise from the same cause, such that one obligation is correlative
to the other. Thus, a person may be the debtor of another by reason of
an agency, and his creditor by reason of a loan. They are mutually
obligated, but the obligations are not reciprocal. Reciprocity arises
from identity of cause, and necessarily the two obligations are created
at the same time.178 (Citation omitted)

Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the

cause in perfecting the existence of an obligation:

An obligation is a juridical necessity to give, to do or not to do (Art.

1156, Civil Code). The obligation is constituted upon the concurrence
of the essential elements thereof, viz: (a) The vinculum juris or
juridical tie which is the efficient cause established by the various
sources of obligations (law, contracts, quasi-contracts, delicts and
quasi-delicts); (b) the object which is the prestation or conduct,
required to be observed (to give, to do or not to do); and (c) the
subject-persons who, viewed from the demandability of the obligation,
are the active (obligee) and the passive (obligor) subjects. 180

The cause is the vinculum juris or juridical tie that essentially binds the
parties to the obligation. This linkage between the parties is a binding
relation that is the result of their bilateral actions, which gave rise to
the existence of the contract.

The failure of one of the parties to comply with its reciprocal prestation
allows the wronged party to seek the remedy of Article 1191. The
wronged party is entitled to rescission or resolution under Article 1191,
and even the payment of damages. It is a principal action precisely
because it is a violation of the original reciprocal prestation.

Article 1381 and Article 1383, on the other hand, pertain to rescission
where creditors or even third persons not privy to the contract can file
an action due to lesion or damage as a result of the contract. In Ong
v. Court of Appeals,181 this court defined rescission:

Rescission, as contemplated in Articles 1380, et seq., of the New Civil

Code, is a remedy granted by law to the contracting parties and even
to third persons, to secure the reparation of damages caused to them
by a contract, even if this should be valid, by restoration of things to
their condition at the moment prior to the celebration of the contract.
It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone.182 (Citations omitted)

Ong elaborated on the confusion between rescission or resolution

under Article 1191 and rescission under Article 1381:

On the other hand, Article 1191 of the New Civil Code refers to
rescission applicable to reciprocal obligations. Reciprocal obligations
are those which arise from the same cause, and in which each party is
a debtor and a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to be performed
simultaneously such that the performance of one is conditioned upon
the simultaneous fulfillment of the other. Rescission of reciprocal
obligations under Article 1191 of the New Civil Code should be
distinguished from rescission of contracts under Article 1383. Although
both presuppose contracts validly entered into and subsisting and both
require mutual restitution when proper, they are not entirely identical.

While Article 1191 uses the term rescission, the original term which
was used in the old Civil Code, from which the article was based, was
resolution. Resolution is a principal action which is based on breach
of a party, while rescission under Article 1383 is a subsidiary action
limited to cases of rescission for lesion under Article 1381 of the New
Civil Code, which expressly enumerates the following rescissible
contracts:

Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one fourth of the value of
the things which are the object thereof;

Those agreed upon in representation of absentees, if the latter suffer

the lesion stated in the preceding number;

Those undertaken in fraud of creditors when the latter cannot in any

manner collect the claims due them;

Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority; [and]

All other contracts specially declared by law to be subject to

rescission.183 (Citations omitted)

When a party seeks the relief of rescission as provided in Article 1381,

there is no need for reciprocal prestations to exist between or among
the parties. All that is required is that the contract should be among
those enumerated in Article 1381 for the contract to be considered
rescissible. Unlike Article 1191, rescission under Article 1381 must be a
subsidiary action because of Article 1383.

Contrary to petitioner Wellexs argument, this is not rescission under

Article 1381 of the Civil Code. This case does not involve prejudicial
transactions affecting guardians, absentees, or fraud of creditors.
Article 1381(3) pertains in particular to a series of fraudulent actions
on the part of the debtor who is in the process of transferring or
alienating property that can be used to satisfy the obligation of the
debtor to the creditor. There is no allegation of fraud for purposes of
evading obligations to other creditors. The actions of the parties
involving the terms of the First Memorandum of Agreement do not fall
under any of the enumerated contracts that may be subject of
rescission.

Further, respondent U-Land is pursuing rescission or resolution under

Article 1191, which is a principal action. Justice J.B.L. Reyes
concurring opinion in the landmark case of Universal Food Corporation
v. Court of Appeals184 gave a definitive explanation on the principal
character of resolution under Article 1191 and the subsidiary nature of
actions under Article 1381:

The rescission on account of breach of stipulations is not predicated on

injury to economic interests of the party plaintiff but on the breach of
faith by the defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his. As expressed in the old
Latin aphorism: Non servanti fidem, non est fides servanda. Hence,
the reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic

prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison detre as well as the measure of the
right to rescind. Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesin enumerated in
Article 1381 of the Civil Code of the Philippines, and does not apply to
cases under Article 1191.185

Rescission or resolution under Article 1191, therefore, is a principal

action that is immediately available to the party at the time that the
reciprocal prestation was breached. Article 1383 mandating that
rescission be deemed a subsidiary action cannot be applicable to
rescission or resolution under Article 1191.

Thus, respondent U-Land correctly sought the principal relief of

rescission or resolution under Article 1191. The obligations of the
parties gave rise to reciprocal prestations, which arose from the same
cause: the desire of both parties to enter into a share purchase
agreement that would allow both parties to expand their respective
airline operations in the Philippines and other neighboring countries.

The jurisprudence relied upon by

petitioner Wellex is not applicable

The cases that petitioner Wellex cited to advance its arguments against
respondent U-Lands right to rescission are not in point.

Suria v. Intermediate Appellate Court is not applicable. In that case,

this court specifically stated that the parties entered into a contract of
sale, and their reciprocal obligations had already been fulfilled: 186

There is no dispute that the parties entered into a contract of sale as

distinguished from a contract to sell.

By the contract of sale, the vendor obligates himself to transfer the

ownership of and to deliver a determinate thing to the buyer, who in
turn, is obligated to pay a price certain in money or its equivalent (Art.
1458, Civil Code). From the respondents own arguments, we
note that they have fully complied with their part of the
reciprocal obligation. As a matter of fact, they have already
parted with the title as evidenced by the transfer certificate of
title in the petitioners name as of June 27, 1975.

The buyer, in turn, fulfilled his end of the bargain when he executed
the deed of mortgage. The payments on an installment basis secured
by the execution of a mortgage took the place of a cash payment. In
other words, the relationship between the parties is no longer one of
buyer and seller because the contract of sale has been perfected and
consummated. It is already one of a mortgagor and a mortgagee. In
consideration of the petitioners promise to pay on installment basis
the sum they owe the respondents, the latter have accepted the
mortgage as security for the obligation.
The situation in this case is, therefore, different from that envisioned in
the cited opinion of Justice J.B.L. Reyes. The petitioners breach of
obligations is not with respect to the perfected contract of sale but in
the obligations created by the mortgage contract. The remedy of
rescission is not a principal action retaliatory in character but becomes
a subsidiary one which by law is available only in the absence of any
other legal remedy. (Art. 1384, Civil Code).

Foreclosure here is not only a remedy accorded by law but, as earlier

stated, is a specific provision found in the contract between the
parties.187 (Emphasis supplied)

In Suria, this court clearly applied rescission under Article 1384 and
not rescission or resolution under Article 1191. In addition, the First
Memorandum of Agreement is not a contract to sell shares of stock. It
is an agreement to negotiate with the view of entering into a share
purchase agreement.

Villaflor v. Court of Appeals is not applicable either. In Villaflor, this

court held that non-payment of consideration of contracts only gave
rise to the right to sue for collection, but this non-payment cannot
serve as proof of a simulated contract. 188 The case did not rule that the
vendor has no obligation to deliver the thing sold if the buyer fails to
fully pay the price required by the contract. In Villaflor:

Petitioner insists that nonpayment of the consideration in the contracts

proves their simulation. We disagree. Nonpayment, at most, gives him
only the right to sue for collection. Generally, in a contract of sale,
payment of the price is a resolutory condition and the remedy of the
seller is to exact fulfillment or, in case of a substantial breach, to
rescind the contract under Article 1191 of the Civil Code. However,
failure to pay is not even a breach, but merely an event which
prevents the vendors obligation to convey title from acquiring binding
force.189 (Citations omitted)

This courts statement in Villaflor regarding rescission under Article

1191 was a mere obiter dictum. In Land Bank of the Philippines v.
Suntay,190 this court discussed the nature of an obiter dictum:

An obiter dictum has been defined as an opinion expressed by a court

upon some question of law that is not necessary in the determination
of the case before the court. It is a remark made, or opinion
expressed, by a judge, in his decision upon a cause by the way, that is,
incidentally or collaterally, and not directly upon the question before
him, or upon a point not necessarily involved in the determination of
the cause, or introduced by way of illustration, or analogy or
argument. It does not embody the resolution or determination of the
court, and is made without argument, or full consideration of the point.
It lacks the force of an adjudication, being a mere expression of an
opinion with no binding force for purposes of res judicata.191 (Citations
omitted)

Petitioner Wellexs reliance on Padilla v. Spouses Paredes and Spouses

Agustin v. Court of Appeals is also misplaced. In these cases, this court
held that there can be no rescission for an obligation that is non-
existent, considering that the suspensive condition that will give rise to
the obligation has not yet happened. This is based on an allegation
that the contract involved is a contract to sell. In a contract to sell, the
failure of the buyer to pay renders the contract without effect. A
suspensive condition is one whose non-fulfillment prevents the
existence of the obligation.192 Payment of the purchase price, therefore,
constitutes a suspensive condition in a contract to sell. Thus, this court
held that non-remittance of the full price allowed the seller to withhold
the transfer of the thing to be sold.

In this case, the First Memorandum of Agreement is not a contract to

sell. Entering into the share purchase agreement or the joint
development agreement remained a stipulation that the parties
themselves agreed to pursue in the First Memorandum of Agreement.

Based on the First Memorandum of Agreement, the execution of the

share purchase agreement was necessary to put into effect respondent
U-Lands purchase of the shares of stock. This is the stipulation
indicated in this memorandum of agreement. There was no suspensive
condition of full payment of the purchase price needed to execute
either the share purchase agreement or the joint development
agreement. Upon the execution of the share purchase, the obligation
of petitioner Wellex to transfer the shares of stock and of respondent
U-Land to pay the price of these shares would have arisen.

Enforcement of Section 9 of the First Memorandum of Agreement has

the same effect as rescission or resolution under Article 1191 of the
Civil Code. The parties are obligated to return to each other all that
they may have received as a result of the breach by petitioner Wellex
of the reciprocal obligation. Therefore, the Court of Appeals did not err
in affirming the rescission granted by the trial court.

VI

Petitioner Wellex was not guilty of

fraud but of violating Article 1159
of the Civil Code

In the issuance of the Writ of Preliminary Attachment, the lower court

found that petitioner Wellex committed fraud by inducing respondent
U-Land to purchase APIC shares and PEC shares and by leading the
latter to believe that APC was a subsidiary of APIC.

Determining the existence of fraud is not necessary in an action for

rescission or resolution under Article 1191. The existence of fraud must
be established if the rescission prayed for is the rescission under
Article 1381.

However, the existence of fraud is a question that the parties have

raised before this court. To settle this question with finality, this court
will examine the established facts and determine whether petitioner
Wellex indeed defrauded respondent U-Land.

In Tankeh v. Development Bank of the Philippines,193 this court

enumerated the relevant provisions of the Civil Code on fraud:

Fraud is defined in Article 1338 of the Civil Code as:

x x x fraud when, through insidious words or machinations of one of
the contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to.
This is followed by the articles which provide legal examples and
illustrations of fraud.
....

Art. 1340. The usual exaggerations in trade, when the other party had
an opportunity to know the facts, are not in themselves fraudulent. (n)

Art. 1341. A mere expression of an opinion does not signify fraud,

unless made by an expert and the other party has relied on the
formers special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate

consent, unless such misrepresentation has created substantial
mistake and the same is mutual. (n)

Art. 1343. Misrepresentation made in good faith is not fraudulent but

may constitute error. (n)

The distinction between fraud as a ground for rendering a contract

voidable or as basis for an award of damages is provided in Article
1344:

In order that fraud may make a contract voidable, it should be serious

and should not have been employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages.

(1270)194
Tankeh further discussed the degree of evidence needed to prove the
existence of fraud:

[T]he standard of proof required is clear and convincing evidence. This

standard of proof is derived from American common law. It is less than
proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability
is higher than that of an ordinary civil case. Civil cases only require a
preponderance of evidence to meet the required burden of proof.
However, when fraud is alleged in an ordinary civil case involving
contractual relations, an entirely different standard of proof needs to
be satisfied. The imputation of fraud in a civil case requires the
presentation of clear and convincing evidence. Mere allegations will not
suffice to sustain the existence of fraud. The burden of evidence rests
on the part of the plaintiff or the party alleging fraud. The quantum of
evidence is such that fraud must be clearly and convincingly shown. 195

To support its allegation of fraud, Mr. Tseng, respondent U-Lands

witness before the trial court, testified that Mr. Gatchalian approached
respondent U-Land on two (2) separate meetings to propose entering
into an agreement for joint airline operations in the Philippines. Thus,
the parties entered into the First Memorandum of Agreement.
Respondent U-Land primarily anchors its allegation of fraud against
petitioner Wellex on the existence of the second preambular clause of
the First Memorandum of Agreement.

In its Appellants Brief before the Court of Appeals, petitioner Wellex

admitted that [t]he amount of US$7,499,945.00 was remitted for the
purchase of APIC and PEC shares.196 In that brief, it argued that the
parties were already in the process of partially executing the First
Memorandum of Agreement.

As held in Tankeh, there must be clear and convincing evidence of

fraud. Based on the established facts, respondent U-Land was unable
to clearly convince this court of the existence of fraud.

Respondent U-Land had every reasonable opportunity to ascertain

whether APC was indeed a subsidiary of APIC. This is a multimillion
dollar transaction, and both parties admitted that the share purchase
agreement underwent several draft creations. Both parties admitted
the participation of their respective counsels in the drafting of the First
Memorandum of Agreement. Respondent U-Land had every
opportunity to ascertain the ownership of the shares of stock.

Respondent U-Land itself admitted that it was not contesting petitioner

Wellexs ownership of the APIC shares or APC shares; hence, it was not
contesting the existence of the Second Memorandum of Agreement.
Upon becoming aware of petitioner Wellexs representations concerning
APICs ownership or control of APC as a subsidiary, respondent U-Land
continued to make remittances totalling the amount sought to be
rescinded. It had the option to opt out of negotiations after the lapse
of the 40-day period. However, it proceeded to make the remittances
to petitioner Wellex and proceed with negotiations.

Respondent U-Land was not defrauded by petitioner Wellex to agree to

the First Memorandum of Agreement. To constitute fraud under Article
1338, the words and machinations must have been so insidious or
deceptive that the party induced to enter into the contract would not
have agreed to be bound by its terms if that party had an opportunity
to be aware of the truth.197

Respondent U-Land was already aware that APC was not a subsidiary
of APIC after the 40-day period. Still, it agreed to be bound by the
First Memorandum of Agreement by making the remittances from June
30 to September 25, 1998.198 Thus, petitioner Wellexs failure to inform
respondent U-Land that APC was not a subsidiary of APIC when the
First Memorandum of Agreement was being executed did not constitute
fraud.

However, the absence of fraud does not mean that petitioner Wellex is
free of culpability. By failing to inform respondent U-Land that APC was
not yet a subsidiary of APIC at the time of the execution of the First
Memorandum of Agreement, petitioner Wellex violated Article 1159 of
the Civil Code. Article 1159 reads:

ART. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good
faith.

In Ochoa v. Apeta,199 this court defined good faith:

Good faith is an intangible and abstract quality with no technical

meaning or statutory definition, and it encompasses, among other
things, an honest belief, the absence of malice and the absence of
design to defraud or to seek an unconscionable advantage. It implies
honesty of intention, and freedom from knowledge of circumstances
which ought to put the holder upon inquiry. The essence of good faith
lies in an honest belief in the validity of ones right, ignorance of a
superior claim and absence of intention to overreach another.200
(Citations omitted)

It was incumbent upon petitioner Wellex to negotiate the terms of the

pending share purchase agreement in good faith. This duty included
providing a full disclosure of the nature of the ownership of APIC in
APC. Unilaterally compelling respondent U-Land to remit money to
finalize the transactions indicated in the Second Memorandum of
Agreement cannot constitute good faith.

The absence of fraud in a transaction does not mean that rescission

under Article 1191 is not proper. This case is not an action to declare
the First Memorandum of Agreement null and void due to fraud at the
inception of the contract or dolo causante. This case is not an action
for fraud based on Article 1381 of the Civil Code. Rescission or
resolution under Article 1191 is predicated on the failure of one of the
parties in a reciprocal obligation to fulfill the prestation as required by
that obligation. It is not based on vitiation of consent through
fraudulent misrepresentations.

VII

Respondent U-Land was not bound

to pay the US$3 million under the
joint development agreement

The alleged failure of respondent U-Land to pay the amount of US$3

million to petitioner Wellex does not justify the actions of the latter in
refusing to return the US$7,499,945.00.

Article 1374 of the Civil Code provides that:

ART. 1374. The various stipulations of a contract shall be interpreted

together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.

The execution of the joint development agreement was contingent on

the execution of the share purchase agreement. This is provided for in
Section 4 of the First Memorandum of Agreement, which stated that
the execution of the two agreements is [s]imultaneous.201 Thus, the
failure of the share purchase agreements execution would necessarily
mean the failure of the joint development agreements execution.

Section 9 of the First Memorandum of Agreement provides that should

the parties fail to execute the agreement, they would be released from
their mutual obligations. Had respondent U-Land paid the US$3 million
and petitioner Wellex delivered the 57,000,000 PEC shares for the
purpose of the joint development agreement, they would have been
obligated to return these to each other.

Section 4 and Section 9 of the First Memorandum of Agreement must

be interpreted together. Since the parties were unable to agree on a
final share purchase agreement and there was no exchange of money
or shares of stock due to the continuing negotiations, respondent U-
Land was no longer obliged to provide the money for the real estate
development projects. The payment of the US$3 million was for
pursuing the real estate development projects under the joint
development agreement. There being no joint development
agreement, the obligation to deliver the US$3 million and the delivery
of the PEC shares for that purpose were no longer incumbent upon the
parties.

VIII

Respondent U-Land was not

obligated to exhaust the securities
given by petitioner Wellex

Contrary to petitioner Wellexs assertion, there is no obligation on the

part of respondent U-Land to exhaust the securities given by
petitioner Wellex. No such meeting of the minds to create a guarantee
or surety or any other form of security exists. The principal obligation
is not a loan or an obligation subject to the conditions of sureties or
guarantors under the Civil Code. Thus, there is no need to exhaust the
securities given to respondent U-Land, and there is no need for a legal
condition where respondent U-Land should pursue other remedies.

Neither petitioner Wellex nor respondent U-Land stated that there was
already a transfer of ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the delivery of the shares of
stock and the land titles were not in the nature of a pledge or
mortgage.202 It received the certificates of shares of stock and the land
titles with an understanding that the parties would subsequently enter
a share purchase agreement. There being no share purchase
agreement, respondent U-Land is obligated to return the certificates of
shares of stock and the land titles to petitioner Wellex.

The parties are bound by the 40-day period provided for in the First
Memorandum of Agreement. Adherence by the parties to Section 9 of
the First Memorandum of Agreement has the same effect as the
rescission or resolution prayed for and granted by the trial court.

Informal acts are prone to ambiguous legal interpretation. This will be

based on the say-so of each party and is a fragile setting for good
business transactions. It will contribute to the unpredictability of the
market as it would provide courts with extraordinary expectations to
determine the business actors intentions. The parties appear to be
responsible businessmen who know that their expectations and
obligations should be clearly articulated between them. They have the
resources to engage legal representation. Indeed, they have reduced
their agreement in writing.

Petitioner Wellex now wants this court to define obligations that do not
appear in these instruments. We cannot do so. This court cannot
interfere in the bargains, good or bad, entered into by the parties. Our
duty is to affirm legal expectations, not to guarantee good business
judgments.

WHEREFORE, the petition is DENIED. The Decision of the Regional

Trial Court in Civil Case No. 99-1407 and the Decision of the Court of
Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs against
petitioner The Wellex Group, Inc.

SO ORDERED.

G.R. No. 169407, March 25, 2015

BANK OF THE PHILIPPINE ISLANDS, Petitioner, v. AMADOR DOMINGO,
Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court, filed by petitioner Bank of the Philippine Islands (BPI), seeking the reversal and
setting aside of the Decision 1 dated July 11, 2005 and Resolution 2 dated August 19, 2005
of the Court of Appeals in CA-G.R. SP No. 88836.

The Petition arose from the following facts:

On September 27, 1993, respondent Amador Domingo (Amador) and his wife, the late
Mercy Maryden Domingo (Mercy),3 (collectively referred to as the spouses Domingo)
executed a Promissory Note4 in favor of Makati Auto Center, Inc. in the sum of
P629,856.00, payable in 48 successive monthly installments in the amount of
P13,122.00 each. They simultaneously executed a Deed of Chattel Mortgage 5 over a
1993 Mazda 323 (subject vehicle) to secure the payment of their Promissory Note.
Makati Auto Center, Inc. then assigned, ceded, and transferred all its rights and interests
over the said Promissory Note and chattel mortgage to Far East Bank and Trust Company
(FEBTC).

On April 7, 2000, the Securities and Exchange Commission (SEC) approved and issued
the Certificate of Filing of the Articles of Merger and Plan of Merger executed on January
20, 2000 by and between BPI, the surviving corporation, and FEBTC, the absorbed
corporation. By virtue of said merger, all the assets and liabilities of FEBTC were
transferred to and absorbed by BPI.6

The spouses Domingo defaulted when they failed to pay 21 monthly installments that
had fallen due consecutively from January 15, 1996 to September 15, 1997. BPI, being
the surviving corporation after the merger, demanded that the spouses Domingo pay the
balance of the Promissory Note including accrued late payment charges/interests or to
return the possession of the subject vehicle for the purpose of foreclosure in accordance
with the undertaking stated in the chattel mortgage. When the spouses Domingo still
failed to comply with its demands, BPI filed on November 14, 2000 a Complaint 7 for
Replevin and Damages (or in the alternative, for the collection of sum of money, interest
and other charges, and attorney's fees) which was raffled to the Metropolitan Trial Court
(MeTC) of Manila, Branch 9, and docketed as Civil Case No. 168949-CV. BPI included a
John Doe as defendant because at the time of filing of the Complaint, BPI was already
aware that the subject vehicle was in the possession of a third person but did not yet
know the identity of said person.

In their Answer,8 the spouses Domingo raised the following affirmative defenses: chanroblesvirtuallawlibrary

4. [BPI] has no cause of action against the [spouses Domingo].

5. The Honorable Court has no jurisdiction over this case,

6. As per the allegations in the complaint, JOHN DOE is an indispensable party to this
case so with his whereabouts unknown, service by publication should first be made
before proceeding with the trial of this case;

7. Defendant Maryden Domingo once obtained a car loan from Far East Bank and Trust
Company but the car was later sold to Carmelita S. Gonzales with the bank's conformity
and the buyer subsequently assumed payment of the balance of the mortgaged loan.
During trial, the prosecution presented as witness Vicente Magpusao, a former employee
of FEBTC and now an Account Analyst of BPI. His testimony was summed up by the MeTC
as follows:
chanroblesvirtuallawlibrary

Vicente Magpusao, [BPI's] Account Analyst and formerly connected with Far East Bank
and Trust Company testified that on September 27, 1993, [the spouses Domingo] for
consideration executed and delivered to Makati Auto Center, Inc. a Promissory Note in
the sum of P629,856.00 payable in monthly installments in accordance with the schedule
of payment indicated in said Promissory Note. In order to secure the payment of the
obligation, the [spouses Domingo] executed in favor of said Makati Auto Center, Inc. on
the same date a Chattel Mortgage over one (1) unit of 1993 Mazda (323) with Motor No.
B6-270146 and with Serial No. BG1062M9100287. With notice to [the spouses
Domingo], said Makati Auto Center, Inc. assigned to Far East Bank and Trust Co. the
Chattel Mortgage as shown by the Deed of Assignment executed by [Makati Auto Center,
Inc.]. Far East Bank and Trust Co. on the other hand, has been merged with and/or
absorbed by herein plaintiff [BPI]. The [spouses Domingo] defaulted in complying with
the terms and conditions of the Promissory Note with Chattel Mortgage by failing to pay
twenty[-one] (21) successive installments which fell due on January 15, 1996 up to
September 15, 1997. [BPI] sent a demand letter [to] defendant Mercy Domingo thru
registered mail demanding payment of the whole balance of the Promissory Note plus
the stipulated interest and other charges or return to [BPI] the possession of the above-
described motor vehicle. There were some negotiations made by the [spouses Domingo]
to their In House Legal Assistant but the same did not materialize. Based on the
Statement of Account dated October 31, 2000, [the spouses Domingo have] an
outstanding balance of P275,562.00 exclusive of interest and other charges.

On cross-examination, the witness explained that the first time he came to handle [the
spouses Domingo's] account was in 1997. Despite the fact that he was not yet employed
with the bank in 1993, he knew exactly what happened in this particular transaction
because of his experience in auto financing. He also has an access [to] the Promissory
Note, Chattel Mortgage and other records of payment made by the bank. Based on the
records, the [spouses Domingo] issued several postdated checks but not for the entire
term. There were payments made from October 30, 199[3] up to September 14, 1994.
He was not the one who received payments for the auto finance. If there were receipts
issued, they will only ride for the account of Mrs. Domingo. He was not sure if these
receipts are kept in the warehouse or probably disposed of by the bank since the
transaction was made in 1997. They already have a computer records of all payments
made by their client. Based on the subsidiary ledger, there were three (3) checks that
bounced and these are payments from the new buyer. They only have one (1) photocopy
of these checks in the amount of P325,431.60 while the other two (2) are missing. He
was not aware who owns Cargo and Hardware Corporation but the check was issued by a
certain Miss Gonzales. The witness further testified that anyone can pay the monthly
amortization as long as the payment is for the account of Maryden Domingo. They
cannot include Carmelita Gonzales as one of the defendants in this case because they
don't have a document executed by the latter in behalf of Far East Bank and Trust Co.
The bank did not approve the Deed of Sale with Assumption of Mortgage.

Witness further testified that he found the photocopy of the Deed of Sale in the records
of Maryden Domingo. The Promissory Note and Chattel Mortgage were executed by the
defendants Maryden and Amador Domingo. There was no assumption of obligation of the
[spouses Domingo]. Witness however admitted that Far East Bank did not turn over to
[BPI] all the records pertaining to the account of the [spouses Domingo]. 9 (Citations
omitted.)
Amador himself testified for the defense. The MeTC provided the following summary of
Amador's testimony: chanroblesvirtuallawlibrary

For his defense, defendant Amador Domingo testified that his wife and co-defendant
Mercy Maryden Domingo died on November 27, 2003. He admitted that his wife bought a
car and was mortgaged to Far East Bank and Trust Company. He identified the Chattel
Mortgage and the Promissory Note he executed together with his wife. In connection
with the execution of this Promissory Note, he recalled that his wife issued forty-eight
(48) checks. The twelve (12) checks were cleared by the bank and his wife was able to
obtain a discount for prompt payments up to October 1994. While they were still paying
for the car, Carmelita Gonzales got interested to buy the car and is willing to assume the
mortgage. After furnishing the bank [with] the Deed of Sale duly notarized, Carmelita
Gonzales subsequently issued a check payable to Far East Bank and Trust Company and
the remaining postdated checks were returned to them. Based on the application of
payment prepared by [BPI's] witness, Carmelita Gonzales made payments from
November 14, 1995 to December 1995. Aside from these payments on May 19, 1997,
Carmelita Gonzales issued a check to Far East Bank in the amount of P385,431.60. In
1996, he received a phone call from a certain Marvin Orence asking for their assistance
to locate the car which Carmelita Gonzales bought from them. His lawyer went to Land
Transportation Office for assistance. From the time Ms. Gonzales started to pay, they
never received any demand letter from Far East Bank. Thereafter, on February 29, 1997,
they received a demand letter from Espino Law Office [on] behalf of [FEBTC]. His lawyer
made a reply on March 31, 1997 stating therein that the motor vehicle for which the loan
was obtained had been sold to Carmelita Gonzales as of July 5, 1994 with the knowledge
and approval of their client. After three years, they received another demand letter dated
October 31, 2000 from Labaguis Law Office. His lawyer made the same reply on March 7,
2000 and another letter on November 24, 2000.
Witness further testified that this malicious complaint probably triggered the early
demise of his wife who has a high blood pressure. His wife died of aneurism. As
damages, he is asking for the amount of P200,000.00 as moral damages, P75,000.00 as
attorney's fees and P5,000.00 appearance fee.

On cross-examination, witness elaborates that when his wife presented to Far East Bank
the Deed of Sale with Assumption of Mortgage, the bank made no objection and returned
all their postdated checks. His wife was the one who deal[t] with Carmelita Gonzales but
he always provide[d] assistance with respect to paper works. Aside from the aforesaid
Deed of Sale, there is no other document which shows the conformity of the bank. They
were only verbally assured by Mr. Orence that their papers are in order.10 cralawla wlibrary

On June 10, 2004, the MeTC rendered a Decision in favor of BPI as the bank was able to
establish by preponderance of evidence a valid cause of action against the spouses
Domingo. According to the MeTC, novation is never presumed and must be clearly shown
by express agreement or by acts of equal import. To effect a subjective novation by a
change in the person of the debtor, it is necessary that the old debtor be released
expressly from the obligation and the third person or new debtor assumes his place.
Without such release, there is no novation and the third person who assumes the
debtor's obligation merely becomes a co-debtor or surety. The MeTC found Amador's
bare testimony as insufficient evidence to prove that he and his wife Mercy had been
expressly released from their obligations and that Carmelita Gonzales (Carmelita)
assumed their place as the new debtor within the context of subjective novation; and if
at all, Carmelita only became the spouses Domingo's co-debtor or surety. While finding
that BPI was entitled to the reliefs prayed for, the MeTC made no adjudication as to the
entitlement of the bank to the Writ of Replevin, and instead awarded monetary reliefs as
were just and equitable. The dispositive portion of the MeTC decision reads: chanroble svirtuallawlibrary

WHEREFORE, premises considered, judgment is hereby rendered in favor of [BPI],

ordering defendant Amador Domingo:
To pay [BPI] the sum of P275,562.00 plus interest thereon at the rate of 36% per annum
from November 15, 2000 until fully paid;

To pay [BPI] the sum equivalent to 25% of the total amount due as atorney's fees; and

To pay the costs of suit.11

Acting on Amador's Motion for Reconsideration, the MeTC issued an Order 12 dated
September 6, 2004 affirming its earlier judgment but reducing the attorney's fees
awarded, thus: chanroble svirtuallawlibrary

WHEREFORE, premises considered the Decision of this Court dated June 10, 2014
stands, subject to the modification that the attorney's fees of twenty-five percent (25%)
is ordered reduced to ten percent (10%) of the total amount due. 13cralawla wlibrary

Dissatisfied, Amador appealed his case before the Regional Trial Court (RTC) of Manila,
Branch 26, wherein it was docketed as Civil Case No. 04-111100. In its Decision dated
February 10, 2005, the RTC held that in novation, consent of the creditor to the
substitution of the debtor need not be by express agreement, it can be merely implied.
The consent is not required to be in any specific or particular form; the only requirement
being that it must be given by the creditor in one way or another. To the RTC, the
following circumstances demonstrated the implied consent of BPI to the novation: (1)
BPI had knowledge of the Deed of Sale and Assumption of Mortgage executed between
Mercy and Carmelita, but did not interpose any objection to the same; and (2) BPI
(through FEBTC) returned the personal checks of the spouses Domingo and accepted the
payments made by Carmelita. The RTC also noted that BPI made a demand for payment
upon the spouses Domingo only after 30 months from the time Carmelita assumed
payments for the installments due. The RTC reasoned that if the spouses Domingo truly
remained as debtors, BPI would not have wasted time in demanding payments from
them. Ultimately, the RTC decreed: chanroblesvirtuallawlibrary

WHEREFORE, premises considered, the judgment appealed from is hereby reversed. The
complaint filed by [BPI] before [MeTC] Branch 9, Manila, is hereby DISMISSED and
ordering [BPI] to pay defendant/appellant Amador Domingo the following, to wit:

a) One Hundred Thousand (P100,000.00) Pesos as moral damages;

b) Fifty Thousand (P50,000.00) Pesos as exemplary damages;

c) Fifty Thousand (P50,000.00) Pesos as attorney's fees;

d) Twenty-Five Thousand (P25,000.00) [Pesos] as litigation expenses;

e) Costs of this suit.14

cralawla wlibrary

Aggrieved by the foregoing RTC judgment, BPI filed a Petition for Review with the Court
of Appeals, docketed as CA-G.R. SP No. 88836. The Court of Appeals promulgated its
Decision on July 11, 2005, affirming the finding of the RTC that novation took place. The
Court of Appeals, relying on the declaration in Babst v. Court of Appeals15 that consent of
the creditor to the substitution of debtors need not always be express and may be
inferred from the acts of the creditor, ruled that: chanroble svirtuallawlibrary

In this case, there is no doubt that FEBTC had the intention to release private respondent
[Amador] and his wife from the obligation when the latter sold the subject vehicle to
[Carmelita]. This intention can be inferred from the following acts of FEBTC: 1) it
returned the postdated checks issued by private respondent [Amador's] wife in favor of
FEBTC; 2) it accepted the payments made by [Carmelita]; 3) it did not interpose any
objection despite knowledge of the existence of the Deed of Sale with Assumption of
Mortgage; and 4) it did not demand payment from private respondent [Amador] and his
wife for thirty (30) long months.

xxxx

As correctly found by the RTC, the testimony of private respondent [Amador] as regards
the return of the said checks to them by FEBTC was not rebutted by petitioner BPI.

If indeed the said checks were not returned to private respondent [Amador's] wife, the
least thing that petitioner BPI or FEBTC could have done was to deposit them. Should the
checks thereafter bounce, then petitioner BPI or FEBTC could have filed a separate case
against private respondent [Amador's] wife. This was never done by petitioner BPI or
FEBTC. Hence, it is safe to conclude that the said checks were indeed returned to private
respondent [Amador's] wife.16 cralawlawlibrary

The Court of Appeals rejected the other arguments of BPI: chanroblesvirtuallawlibrary

Petitioner BPI further argues that as regards the payment made by the alleged new
debtor, Carmelita Gonzales, it appears that the only payment made by her was a PNB
Check No. 00190322 dated May 19, 1997 which was dishonored due to Account Closed.

Careful scrutiny of the records of the case reveals otherwise. As found by the MeTC in its
decision dated June 10, 2004, Carmelita Gonzales made several payments on the said
loan obligation, as testified to by witness Vicente Magpusao, petitioner BPFs Account
Analyst, thus:chanroble svirtuallawlibrary

xxx. Based on the subsidiary leger, (Exhibit "2"), there were three (3) checks that
bounced and these are payments from the new buyer. They only have one (1) photocopy
of these checks in the amount of P325,431.60 (Exhibit 4) while the other two are
missing. He was not aware who owns Cargo and Hardware Corporation but the check
was issued by a certain Miss Gonzales. xxx.
xxxx

Petitioner BPI further argues that it was not its obligation to interpose any objection to
the Deed of Sale with Assumption of Mortgage. Rather it should be the vendee,
[Carmelita], who should secure the approval and consent of petitioner BPI to the Deed of
Sale.

This argument is untenable.

The Deed of Sale with Assumption of Mortgage between private respondent [Amador's]
wife and [Carmelita] was executed way back on July 5, 1994. The check that was issued
by [Carmelita] was dated May 19, 1997. The position of petitioner BPI is not possible
because when the Deed of Sale with Assumption of Mortgage was executed and the said
check was issued, private respondent [Amador's] wife and [Carmelita] were still dealing
with FEBTC, considering the fact that the merger of petitioner BPI and FEBTC was
formalized on April 10, 2000.

Nevertheless, FEBTC interposed no objection to the Deed of Sale with Assumption of

Mortgage, hence, it consented to it.

From the foregoing, it is clear that novation took place so that private respondent
Domingo is no longer the debtor of petitioner BPI.17 (Citations omitted.)
The Court of Appeals, however, deleted the damages awarded to Amador for the
following reasons: chanroblesvirtuallawlibrary

As to the second issue, petitioner BPI argues that the RTC awarded moral and exemplary
damages and attorney's fees to respondent [Amador] only in the dispositive portion of
the assailed decision without any basis in fact and in law.

This Court finds the argument tenable.

In the case of Solid Homes, Inc. vs. Court of Appeals, it was held that: chanroble svirtuallawlibrary

"It is basic that the claim for actual, moral and punitive damages as well as exemplary
damages and attorney's fees must each be independently identified and justified."
Furthermore, Section 14, paragraph 1 of Article VIII, of the 1987 Constitution lays down
the standard in rendering decisions, to wit: it must be express therein clearly and
distinctly the facts and law on which it is based.
Perusal of the assailed decision reveals that the award of moral and exemplary damages
as well as attorney's fees and litigation expenses were only touched in the dispositive
portion, which is in clear disregard of the established rules laid down by the Constitution
and existing jurisprudence. Therefore, their deletion is in order.

As regards the award of litigation expenses and costs of the suit, the same should also
be deleted considering that "no premium should be placed on the right to litigate." 18
(Citations omitted.)
The Court of Appeals ultimately adjudged: chanroblesvirtuallawlibrary

WHEREFORE, premises considered, the assailed decision dated February 10, 2005 of
the Regional Trial Court, Branch 26, Manila in Civil Case No. 04-111100 is hereby
AFFIRMED with MODIFICATION in that the award of moral and exemplary damages
as well as attorney's fees, litigation expenses and costs of suit, is hereby deleted. 19 cralawlawlibrary

In its Resolution dated August 19, 2005, the Court of Appeals denied the Motion for
Partial Reconsideration of BPI.

BPI comes to this Court via the present Petition for Review/Appeal by Certiorari raising
the sole issue of whether or not there had been a novation of the loan obligation with
chattel mortgage of the spouses Domingo to BPI so that the spouses Domingo were
released from said obligation and Carmelita was substituted as debtor.

The Court answers in the negative and grants the Petition.

In De Cortes v. Venturanza,20 the Court discussed some principles and jurisprudence

underlying the concept and nature of novation as a mode of extinguishing obligations: chanroblesvirtuallawlibrary

According to Manresa, novation is the extinguishment of an obligation by the substitution

or change of the obligation by a subsequent one which extinguishes or modifies the first,
either by changing the object or principal conditions, or by substituting the person of the
debtor, or by subrogating a third person to the rights of the creditor (8 Manresa 428,
cited in IV Civil Code of the Philippines by Tolentino 1962 ed., p. 352). Unlike other
modes of extinction of obligations, novation is a juridical act with a dual function - it
extinguishes an obligation and creates a new one in lieu of the old.

Article 1293 of the New Civil Code provides: chanroblesvirtuallawlibrary

"Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor." (emphasis supplied)
Under this provision, there are two forms of novation by substituting the person of the
debtor, and they are: (1) expromision and (2) delegacion. In the former, the initiative for
the change does not come from the debtor and may even be made without his
knowledge, since it consists in a third person assuming the obligation. As such, it
logically requires the consent of the third person and the creditor. In the latter, the
debtor offers and the creditor accepts a third person who consents to the
substitution and assumes the obligation, so that the intervention and the
consent of these three persons are necessary (8 Manresa 436-437, cited in IV Civil
Code of the Philippines by Tolentino, 1962 ed., p. 360). In these two modes of
substitution, the consent of the creditor is an indispensable requirement (Garcia
vs. Khu Yek Chiong, 65 Phil. 466, 468). (Emphases supplied.)
The Court also emphasized in De Cortes the indispensability of the creditor's consent to
the novation, whether expromision or delegacion, given that the "substitution of one
debtor for another may delay or prevent the fulfillment of the obligation by reason of the
financial inability or insolvency of the new debtor; hence, the creditor should agree to
accept the substitution in order that it may be binding on him." 21

Both the RTC and the Court of Appeals found that there was novation by delegacion in
the case at bar. The Deed of Sale with Assumption of Mortgage was executed between
Mercy (representing herself and her husband Amador) and Carmelita, thus, their consent
to the substitution as debtors and third person, respectively, are deemed undisputed. It
is the existence of the consent of BPI (or its absorbed corporation FEBTC) as creditor
that is being challenged herein.

As a general rule, since novation implies a waiver of the right the creditor had before the
novation, such waiver must be express.22 The Court explained the rationale for the rule in
Testate Estate of Lazaro Mota v. Serra23: chanroblesvirtuallawlibrary

It should be noted that in order to give novation its legal effect, the law requires that the
creditor should consent to the substitution of a new debtor. This consent must be given
expressly for the reason that, since novation extinguishes the personality of the first
debtor who is to be substituted by a new one, it implies on the part of the creditor a
waiver of the right that he had before the novation, which waiver must be express under
the principle that renuntiatio non praesumitor, recognized by the law in declaring that a
waiver of right may not be performed unless the will to waive is indisputably shown by
him who holds the right.
However, in Asia Banking Corporation v. Elser,24 the Court qualified thus: chanroblesvirtuallawlibrary

The aforecited article 1205 [now 1293] of the Civil Code does not state that the
creditor's consent to the substitution of the new debtor for the old be express, or given
at the time of the substitution, and the Supreme Court of Spain, in its judgment of June
16, 1908, construing said article, laid down the doctrine that "article 1205 of the Civil
Code does not mean or require that the creditor's consent to the change of debtors must
be given simultaneously with the debtor's consent to the substitution; its evident
purpose being to preserve the creditor's full right, it is sufficient that the latter's consent
be given at any time and in any form whatever, while the agreement of the debtors
subsists." The same rule is stated in the Enciclopedia Juridica Espaola, volume 23, page
503, which reads: "The rule that this kind of novation, like all others, must be express, is
not absolute; for the existence of the consent may well be inferred from the acts of the
creditor, since volition may as well be expressed by deeds as by words." The
understanding between Henry W. Elser and the principal director of Yangco, Rosenstock
& Co., Inc., with respect to Luis R. Yangco's stock in said corporation, and the acts of the
board of directors after Henry W. Elser had acquired said shares, in substituting the latter
for Luis R. Yangco, are a clear and unmistakable expression of its consent. When this
court said in the case of Estate of Mota vs. Serra (47 Phil., 464), that the creditor's
express consent is necessary in order that there may be a novation of a contract by the
substitution of debtors, it did not wish to convey the impression that the word "express"
was to be given an unqualified meaning, as indicated in the authorities or cases, both
Spanish and American, cited in said decision.
Hence, based on the aforequoted ruling in Asia Banking, the existence of the creditor's
consent may also be inferred from the creditor's acts, but such acts still need to be "a
clear and unmistakable expression of [the creditor's] consent." 25

In Ajax Marketing and Development Corporation v. Court of Appeals,26 the Court further
clarified that:
chanroble svirtuallawlibrary

The well settled rule is that novation is never presumed. Novation will not be allowed
unless it is clearly shown by express agreement, or by acts of equal import. Thus, to
effect an objective novation it is imperative that the new obligation expressly declare
that the old obligation is thereby extinguished, or that the new obligation be on every
point incompatible with the new one. In the same vein, to effect a subjective novation by
a change in the person of the debtor it is necessary that the old debtor be released
expressly from the obligation, and the third person or new debtor assumes his place in
the relation. There is no novation without such release as the third person who has
assumed the debtor's obligation becomes merely a co-debtor or surety. (Citations
omitted.)
The determination of the existence of the consent of BPI to the substitution of debtors, in
accordance with the standards set in the preceding jurisprudence, is a question of fact
because it requires the Court to review the evidence on record. It is an established rule
that the jurisdiction of the Court in cases brought before it from the Court of Appeals via
a petition for review on certiorari under Rule 45 of the Rules of Court is generally limited
to reviewing errors of law as the former is not a trier of facts. Thus, the findings of fact
of the Court of Appeals are conclusive and binding upon the Court in the latter's exercise
of its power to review for it is not the function of the Court to analyze or weigh evidence
all over again.27 However, several of the recognized exceptions28 to this rule are present in
the instant case that justify a factual review, i.e., the inference is manifestly mistaken,
the judgment is based on misapprehension of facts, and the findings of the Court of
Appeals and the RTC are contrary to those of the MeTC.

The burden of establishing a novation is on the party who asserts its existence. 29
Contrary to the findings of the Court of Appeals and the RTC, Amador failed to discharge
such burden as he was unable to present proof of the clear and unmistakable consent of
BPI to the substitution of debtors.

Irrefragably, there is no express consent of BPI to the substitution of debtors. The Court
of Appeals and the RTC inferred the consent of BPI from the following facts: (1) BPI had
a copy of the Deed of Sale and Assumption of Mortgage executed between Mercy and
Carmelita in its file, indicating its knowledge of said agreement, and still it did not
interpose any objection to the same; (2) BPI (through FEBTC) returned the spouses
Domingo's checks and accepted Carmelita's payments; and (3) BPI did not demand any
payment from the spouses Domingo not until 30 months after Carmelita assumed the
payment of balance on the Promissory Note.

The Court disagrees with the inferences made by the Court of Appeals and the RTC.

First, that BPI (or FEBTC) had a copy of the Deed of Sale and Assumption of Mortgage
executed between Mercy and Carmelita in its file does not mean that it had consented to
the same. The very Deed itself states: chanroblesvirtuallawlibrary

That the VENDEE [Carmelita] assumes as he/she had assumed to pay the aforecited
mortgage in accordance with the original terms and conditions of said mortgage, and the
parties hereto [Mercy and Carmelita] have agreed to seek the conformity of the
MORTGAGEE [FEBTC].30 cralawla wlibrary

This brings the Court back to the original question of whether there is proof of the
conformity of BPI.

The Court notes that the documents of BPI concerning the car loan and chattel mortgage
are still in the name of the spouses Domingo. No new promissory note or chattel
mortgage had been executed between BPI (or FEBTC) and Carmelita. Even the account
itself is still in the names of the spouses Domingo.

The absence of objection on the part of BPI (or FEBTC) cannot be presumed as consent.
Jurisprudence requires presentation of proof of consent, not mere absence of objection.
Amador cannot rely on Babst which involved a different factual milieu. Relevant portions
of the Court's ruling in Babst are reproduced below: chanroble svirtuallawlibrary

In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI
to register its objection to the take-over by DBP of ELISCON's assets, at the creditors'
meeting held in June 1981 and thereafter, it is deemed to have consented to the
substitution of DBP for ELISCON as debtor.

We find merit in the argument. Indeed, there exist clear indications that BPI was aware
of the assumption by DBP of the obligations of ELISCON. In fact, BPI admits that
"[T]he Development Blank of the Philippines (DBP), for a time, had proposed a formula
for the settlement of Eliscon's past obligations to its creditors, including the plaintiff
[BPI], but the formula was expressly rejected by the plaintiff as not acceptable (long
before the filing of the complaint at bar)."
The Court of Appeals held that even if the account officer who attended the June 1981
creditors' meeting had expressed consent to the assumption by DBP of ELISCON's debts,
such consent would not bind BPI for lack of a specific authority therefor. In its petition,
ELISCON counters that the mere presence of the account officer at the meeting
necessarily meant that he was authorized to represent BPI in that creditors' meeting.
Moreover, BPI did not object to the substitution of debtors, although it objected to the
payment formula submitted by DBP.

Indeed, the authority granted by BPI to its account officer to attend the creditors'
meeting was an authority to represent the bank, such that when he failed to object to
the substitution of debtors, he did so on behalf of and for the bank. Even granting
arguendo that the said account officer was not so empowered, BPI could have
subsequently registered its objection to the substitution, especially after it had already
learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its
failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's
obligations. As repeatedly pointed out by ELISCON and MULTI, BPI's objection was to the
proposed payment formula, not to the substitution itself.31 cralawla wlibrary

In Babst, there was a clear opportunity for BPI, as creditor therein, to o ject to the
substitution of debtors given that its representative attended a creditor's meeting, during
which, said representative already objected to the proposed payment formula made by
DBP, as the new debtor. Hence, the silence of BPI during the same meeting as to the
matter of substitution of debtors could already be interpreted as its acquiescence to the
same. In contrast, there was no clear opportunity for BPI (or FEBTC) to have expressed
its objection to the substitution of debtors in the case at bar.

Second, the consent of BPI to the substitution of debtors cannot be deduced from its
acceptance of payments from Carmelita, absent proof of its clear and unmistakable
consent to release the spouses Domingo from their obligation. Since the spouses
Domingo remained as debtors of BPI, together with Carmelita, the fact that BPI
demanded payment from the spouses Dokningo 30 months after accepting payment
from Carmelita is insignificant.

The acceptance by a creditor of payments from a third person, who has assumed the
obligation, will result merely to the addition of debtors and not novation. The creditor
may therefore enforce the obligation against both debtors. 32 As the Court pronounced in
Magdalena Estates, Inc. v. Rodriguez,33 "[t]he mere fact that the creditor receives a
guaranty or accepts payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall be released from
responsibility, does not constitute a novation, and the creditor can still enforce the
obligation against the original debtor." The Court reiterated in Quinto v. People34 that
"[n]ot too uncommon is when a stranger to a contract agrees to assume an obligation;
and while this may have the effect of adding to the number of persons liable, it does not
necessarily imply the extinguishment of the liability of the first debtor. Neither would the
fact alone that the creditor receives guaranty or accepts payments from a third person
who has agreed to assume the obligation, constitute an extinctive novation absent an
agreement that the first debtor shall be released from responsibility."

Absent proof that BPI gave its clear and unmistakable consent to release the spouses
Domingo from the obligation to pay the car loan, Carmelita is simply considered an
additional debtor. Consequently, BPI can still enforce the obligation against the spouses
Domingo even 30 months after it had started accepting payments from Carmelita.

And third, there is no sufficient or competent evidence to establish the return of the
checks to the spouses Domingo and the assurance made by FEBTC that the spouses
Domingo were already released from their obligation.

During his direct examination, Amador testified as follows: chanroblesvirtuallawlibrary

Atty. Rivera:

1. Q. Do you remember who was this person who became interested to buy this car?
A. Carmelita S. Gonzales, Sir.

2. Q. What did you tell Mrs. Gonzales when she expressed interest in buying this car,
this Mazda vehicle?
A. We told her that the car was mortgaged and she told us that she is willing to
assume the mortgage, Sir.

3. Q. With that willingness, what happened next on the part of Mrs. Gonzales to
assume the mortgage?
A. My wife and Mrs. Gonzales went to Far East Bank and Trust Company and she
 informed the bank that somebody is interested in buying the car and assume the
mortgage and the bank informed her that the bank is agreeable and with no
objection.

Atty. Objection, your Honor. May we object to the answer of the witness, it would be
Ganitano hearsay. The witness testified that it was his wife and the would-be buyer who
: went to the bank.

Atty. Then, we are just offering it as part of the narration not necessarily to prove the
Rivera: truth of the statement, your Honor.

Court: The witness may continue.

Atty. So, after that meeting with the bank occurred, what happened next in connection
Rivera: with this intention of Mrs. Gonzales to purchase the car?

Witness: After furnishing the bank with the Deed of Absolute Sale duly notarized, [Ms.]
Carmelita Gonzales subsequently issued a check payable to Far East Bank and
Trust Company, Sir.

Atty.
Rivera:

1. Q. How about the postdated checks that your wife issued to Far East Bank and Trust
Company?
A. The remaining postdated checks were returned to us, Sir.

2. Q. Do you remember what were those postdated checks that were returned by the
bank?
A. Those were the checks we issued in advance, Sir.

3. Q. What were the dates of these checks?

A. October 30, 1994 to 1997, Sir.

xxxx

Atty.
Rivera:

1. Q. Aside from this evidence that you have enumerated, were you able to talk to any
representative from Far East Bank relative to the approval of the change in the
personality of the debtor from your wife to...
A. As I remember, sometime in 1996, I received a call from a certain Marvin Orence
asking for our assistance to locate the car that Mrs. Carmelita Gonzales bought
from us and informed us that we have nothing to worry except that we provide
them assistance to locate the car and I informed our lawyer, Atty. Rivera, about
this and Atty. Rivera went to the Land Transportation Office for assistance. 35
Amador continued to testify on cross-examination, thus: chanroblesvirtuallawlibrary
CROSS EXAMINATION BY ATTY. GANITANO

1. Q.. You testified that out of the 48 checks you paid to Far East Bank & Trust
Company, only 12 checks were made good. What happened to the 36 checks?
A. When my wife brought the transaction to Far East Bank and presented the Deed
of Absolute Sale, the bank have no objection to the sale of the car and
afterwards, the bank returned all the postdated checks prepared by my wife that
was in the possession of the bank, Sir.

1. Q. Do you have with you those 36 checks that were allegedly returned by Far East
Bank?
A. AThese checks have already been discarded, Sir.

2. Q. So, you cannot present those 36 checks anymore?

A. No, Sir.

3. Q. Who was the alleged buyer of the mortgaged car again?

Witness: Carmelita S. Gonzales, Sir.

Atty.
Ganitano
:

1. Q. To whom did this Carmelita Gonzales transacted with respect to the sale of
mortgaged vehicle?
A. To my wife, Mercy Maryden Domingo, Sir.

2. Q. Not with you, Mr. Witness?

A. Well, I always provide assistance to my wife with regards to paper works, Sir.

3. Q. Q When was this Deed of Sale executed, was it before when your wife and the
buyer went to the bank or after they went to the bank?
A. A I think it was simultaneous, Sir.

4. Q. When you say "simultaneous", Mr. Witness, I'm showing to you this Deed of Sale
with Assumption of Mortgage and you said it was with the conformity of the
bank. Will you please tell us in this Deed of Sale with Assumption of Mortgage if
you could find any entry which indicate that the bank agreed to the sale with
assumption of mortgage?

Witness: None, Sir.

Atty. Aside from this Deed of Sale with Assumption of Mortgage, do you have any
Ganitano document which shows that the bank indeed conformed to the sale of the
: mortgaged vehicle with assumption of mortgage?

Witness: We were verbally assured that our papers are in order, Sir.
Atty. So, there is no document, Mr. Witness, it was only made orally?
Ganitano
:

Witness: Yes, Sir, we were verbally assured that our papers are in order.

Atty.
Ganitano
:

1. Q. Were you present when your wife and the would be buyer went to the bank?
A. No, Sir.

2. Q. How did you know that there was an assurance from the bank?
A. I received a phone call from Mr. Oronce. I asked about the transaction and he
told me that there is nothing to worry because our documents or papers were in
order, Sir.

3. Q. Do I get you right, Mr. Witness, that the confirmation was only through phone
call?
A. It was Mr. Oronce who called me, Sir.

4. Q. I'm just asking what was the means of communication, was it only thru phone
call?
A. Yes, Sir, thru phone call. I think twice or three times.

Atty. We would like to manifest, your Honor, as early as 1997, just to stress this point,
Rivera: as early as March 1997, the name of Marvin Oronce...

Atty. The witness is under cross, your Honor.

Ganitano
:

Court: You just ask that in re-direct, counsel.

Atty. Yes, you Honor.36

Rivera:
Amador admitted that it was his wife Mercy, together with Carmelita, who directly
transacted with FEBTC regarding the sale of the subject vehicle to and assumption of
mortgage by Carmelita. Amador had no personal knpwledge of what had happened when
Mercy and Carmelita went to the bank so his testimony on the matter was hearsay,
which, if not excluded, deserves no credence.

The Court explained in Da Jose v. Angeles37 that: chanroble svirtuallawlibrary

Evidence is hearsay when its probative force depends on the competency and credibility
of some persons other than the witness by whom it is sought to be produced. The
exclusion of hearsay evidence is anchored on three reasons: (1) absence of cross-
examination; (2) absence of demeanor evidence; and (3) absence of oath. Basic under
the rules of evidence is that a witness can only testify on facts within his or her personal
knowledge. This personal knowledge is a substantive prerequisite in accepting
testimonial evidence establishing the truth of a disputed fact, x x x. (Citations omitted.)
The Court of Appeals and the RTC substantively based their finding that BPI (or FEBTC)
consented to the substitution of debtors on the return of the checks to the spouses
Domingo, but the proof of the issuance of the checks, their delivery to the bank, and the
return of the checks flimsily consists of Amador's unsubstantiated testimony. Amador
recounted that the postdated checks which he and Mercy executed in favor of FEBTC
were returned to them, however, he failed to provide the details surrounding the return.
Amador only stated that when Mercy provided FEBTC with a copy of the Deed of Sale and
Assumption of Mortgage, the bank returned the checks to them "subsequently" or
"afterwards." Amador did not say how the checks were returned and to whom. The
checks were not presented during the trial since according to Amador, they were already
"discarded," although once more, any other detail surrounding the discarding of the
checks is sorely lacking. Aside from Amador's bare testimony, no other supporting
evidence of the return of the checks to the spouses Domingo was submitted during trial.
For the foregoing reasons, the Court accords little weight and credence to Amador's
testimony on the return of the checks.

It is worthy to stress that Amador, as the party asserting novation, bears the burden of
proving its existence. Amador cannot simply rely on the failure of BPI to produce the
checks if these were not actually returned to the spouses Domingo. There is simply not
enough evidence to establish the prima facie existence of novation to shift the burden of
evidence to BPI to controvert the same.

The verbal assurances purportedly given by a Mr. Marvin Orence or Oronce

(Orence/Oronce) of FEBTC to Amador over the telephone that the spouses Domingo's
documents were in order do not constitute the clear and unmistakable consent of the
bank to the substitution of debtors. Once again, except for Amador's bare testimony,
there is no other evidence of such telephone conversations taking place and the subject
of such telephone conversations. In addition, Mr. Orence/Oronce's identity, position at
FEBTC, and authority to represent and bind the bank, were not even clearly established.

The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera (Rivera), counsel for the
spouses Domingo, addressed to Atty. Cresenciano L. Espino, counsel for FEBTC, does not
serve as supporting evidence for Amador's testimony regarding the return of the checks
and the verbal assurances given by Mr. Orence/Oronce. The contents of such letter are
rriere hearsay because the events stated therein did not personally happen to Aity.
Rivera or in his presence, and he merely relied on what his clients, the spouses Domingo,
told him.

The Court is therefore convinced that there is no novation by delegacion in this case and
Amador remains a debtor of BPI. The Court reinstates the MeTC judgment ordering
Amador to pay for the P275,562.00 lance on the Promissory Note, 10% attorney's fees,
and costs of suit; but modifies the rate of interest imposed and the date when such
interest began to run.
In Ruiz v. Court of Appeals,38 the Court equitably reduced the interest te of 3% per
month or 36% per annum stipulated in the promissory notes jrein to 1% per month or
12% per annum, based on the following ratiocination: chanroblesvirtuallawlibrary

We affirm the ruling of the appellate court, striking down as invalid the 10%
compounded monthly interest, the 10% surcharge per month stipulated in the
promissory notes dated May 23, 1995 and December 1, 1995, and the 1% compounded
monthly interest stipulated in the promissory note dated April 21, 1995. The legal rate of
interest of 12% per annum shall apply after the maturity dates of the notes until full
payment of the entire amount due. Also, the only permissible rate of surcharge is 1%
per month, without compounding. We also uphold the award of the appellate court of
attorney's fees, the amount of which having been reasonably reduced from the stipulated
25% (in the March 22, 1995 promissory note) and 10% (in the other three promissory
notes) of the entire amount due, to a fixed amount of P50,000.00. However, we
equitably reduce the 3% per month or 36% per annum interest present in all four (4)
promissory notes to 1% per month or 12% per annum interest.

The foregoing rates of interests and surcharges are in accord with Medel vs. Court of
Appeals, Garcia vs. Court of Appeals, Bautista vs. Pilar Development Corporation, and
the recent case of Spouses Solangon vs. Salazar. This Court invalidated a stipulated
5.5% per month or 66% per annum interest on a P500,000.00 loan in Medel and a 6%
per month or 72% per annum interest on a P60,000.00 loan in Solangon for being
excessive, iniquitous, unconscionable and exorbitant. In both cases, we reduced the
interest rate to 12% per annum. We held that while the Usury Law has been suspended
by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a
loan agreement have been given wide latitude to agree on any interest rate, still
stipulated interest rates are illegal if they are unconscionable. Nothing in the said circular
grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets. On the other hand, in
Bautista vs. Pilar Development Corp., this Court upheld the validity of a 21% per annum
interest on a P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the
agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan. It is
on the basis of these cases that we reduce the 36% per annum interest to 12%. An
interest of 12% per annum is deemed fair and reasonable. While it is true that this Court
invalidated a much higher interest rate of 66% per annum in Medel and 72% in
Solangon it has sustained the validity of a much lower interest rate of 21% in Bautista
and 24% in Garcia. We still find the 36% per annum interest rate in the case at bar to be
substantially greater than those upheld by this Court in the two (2) aforecited cases.
(Citations omitted.)
On the strength of the foregoing jurisprudence, the Court likewise finds the interest rate
of 3% per month or 36% per annum stipulated in the Promissory Note herein for the
balance of P275,562.00 as excessive, iniquitous, unconscionable, and exorbitant.
Following the guidelines set forth in Eastern Shipping Lines, Inc. v. Court of Appeals39
and Nacar v. Gallery Frames,40 the Court imposes instead legal interest in the following
rates: (1) legal interest of 12% per annum from date of extrajudicial demand on January
29, 1997 until June 30, 2013; and (2) legal interest of 6% per annum from July 1, 2013
until fully paid.

Incidentally, Amador passed away on June 5, 2010 during the pendency of the instant
petition, and is survived by his children, namely: Joann D. Moya, Annabelle G. Domingo,
Cristina G. Domingo, Amador G. Domingo, Jr., Gloria Maryden D. Macatangay, Dante
Amador G. Domingo, Gregory Amador A. Domingo, and Ina Joy A. Domingo. 41 To prevent
future litigation in the enforcement of the award, the Court clarifies that Amador's heirs
are not personally responsible for the debts of their predecessor. The extent of liability of
Amador's heirs to BPI is limited to the value of the estate which they inherited from
Amador. In this jurisdiction, "it is the estate or mass of the property left by the decedent,
instead of the heirs directly, that becomes vested and charged with his rights and
obligations which survive after his death."42 To rule otherwise would unduly deprive
Amador's heirs of their properties. cralawred

WHEREFORE, in view of the foregoing, the Petition is GRANTED. The Decision dated
July 11, 2005 and Resolution dated August 19, 2005 of the Court of Appeals in CA-G.R.
SP No. 88836, affirming with modification the Decision dated February 10, 2005 of the
RTC of Manila, Branch 26 in Civil Case No. 04-111100, is REVERSED and SET ASIDE.
The Decision dated June 10, 2004 and Order dated September 6, 2004 of the MeTC of
Manila, Branch 9 in Civil Case No. 168949-CV, is REINSTATED with MODIFICATIONS.
The heirs of respondent Amador Domingo are ORDERED to pay petitioner Bank of the
Philippine Islands the following:

(1) the P275,562.00 balance on the Promissory Note, plus legal interest of 12% from
January 29, 1997 to June 30, 2013 and 6% from July 1, 2013 until fully paid; (2)
attorney's fees of 10%; and (3) costs of suit. However, the liability of Amador Domingo's
heirs is limited to the value of the inheritance they received from the deceased.

SO ORDERED. chanroble svirtuallawlibrary