Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.

COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofilea & Guingona for private.

DECISION

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein
by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent court,
appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280
certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant
the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of
Issues, Original Records, p. 207; Defendants Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his
purchased of fuel products from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger,
that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute
and submit a notarized Affidavit of Loss, as required by defendant banks procedure, if he desired
replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit
of Loss (Defendants Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were
issued in favor of said depositor (Defendants Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the
amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor
executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others,
that he (de la Cruz) surrenders to defendant bank full control of the indicated time deposits from and
after date of the assignment and further authorizes said bank to pre-terminate, set-off and apply the
said time deposits to the payment of whatever amount or amounts may be due on the loan upon its
maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the
defendant banks Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz
alleging that the same were delivered to herein plaintiff as security for purchases made with Caltex
Philippines, Inc. by said depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendants Exhibit 563) from herein plaintiff
formally informing it of its possession of the CTDs in question and of its decision to pre-terminate the
same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former a copy of
the document evidencing the guarantee agreement with Mr. Angel dela Cruz as well as the details of
Mr. Angel dela Cruz obligation against which plaintiff proposed to apply the time deposits (Defendants
Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiffs demand and claim for payment of the value of
the CTDs in a letter dated February 7, 1983 (Defendants Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on
August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the
matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued
interest and compounded interest therein at 16%per annum, moral and exemplary damages as well as
attorneys fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower courts dismissal of the complaint,
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates
of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not
become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent
provisions of the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding
of the issues involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY,
SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the
rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:

. . . While it may be true that the word bearer appears rather boldly in the CTDs issued, it is important
to note that after the word BEARER stamped on the space provided supposedly for the name of the
depositor, the words has deposited a certain amount follows. The document further provides that the
amount deposited shall be repayable to said depositor on the period indicated. Therefore, the text of
the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be
the bearer but only to the specified person indicated therein, the depositor. In effect, the appellee
bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further
engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties bone
of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco,
Security Banks Branch Manager way back in 1982, testified in open court that the depositor reffered to
in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in
these certificates states that it was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the
amount.

Atty. Calida:
q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the
bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. 9 In the construction of a bill
or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may
be read in the light of surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of
the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide
that the amounts deposited shall be repayable to the depositor. And who, according to the document, is
the depositor? It is the bearer. The documents do not say that the depositor is Angel de la Cruz and
that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable
to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of
presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could
have with facility so expressed that fact in clear and categorical terms in the documents, instead of
having the word BEARER stamped on the space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be
the bearer thereof. Thus, petitioners aforesaid witness merely declared that Angel de la Cruz is the
depositor insofar as the bank is concerned, but obviously other parties not privy to the transaction
between them would not be in a position to know that the depositor is not the bearer stated in the
CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import
of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This
need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law
and calls for the application of the elementary rule that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing
respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer
instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz,
as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to
deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by petitioners own authorized and
responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: . . . These certificates of deposit were negotiated to us by Mr. Angel dela
Cruz to guarantee his purchases of fuel products (Emphasis ours.) 13 This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own acts and representations to
the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has,
by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular
thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioners credit manager
could have easily said so, instead of using the words to guarantee in the letter aforequoted. Besides,
when respondent bank, as defendant in the court below, moved for a bill of particularity
therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel
de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to
it by De la Cruz as payment of the latters alleged indebtedness to it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that
the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now
labors under the presumption that evidence willfully suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Courts pronouncements in Lopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined by their intention, regardless
of what language was used or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was some other intention, it is not a
pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as
a pledge if the debt continues in inexistence and is not discharged by the transfer, and that accordingly
the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect
in such a transaction if they are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent to pledge.

Petitioners insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in such
a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a
holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by
mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of
such security, in the event of non-payment of the principal obligation, must be contractually provided
for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security,
he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by
the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal
rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be
indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and
the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective
against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a
mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge
contract, but a rule of substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code
specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless
it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the
assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of
its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments and
the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that
issue in the lower court. 28

On this matter, we uphold respondent courts finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted
by them to the trial court. 29 The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositors
loan by virtue of the assignment (Annex C).

3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs
and the depositors outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date
provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorneys fees and litigation expenses from each
other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are
properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial
conference all issues of law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32

To accept petitioners suggestion that respondent banks supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent
that the broad ultimate issue of petitioners entitlement to the proceeds of the questioned certificates
can be premised on a multitude of other legal reasons and causes of action, of which respondent banks
supposed negligence is only one. Hence, petitioners submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still
cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying
down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal
that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely
permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of
competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be
not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate
be issued him. (Emphasis ours.)

xxx xxx xxx

The use of the word may in said provision shows that it is not mandatory but discretionary on the part
of the dispossessed owner to apply to the judge or court of competent jurisdiction for the issuance of
a duplicate of the lost instrument. Where the provision reads may, this word shows that it is not
mandatory but discretional. 34 The word may is usually permissive, not mandatory. 35 It is an auxiliary
verb indicating liberty, opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce,
on which petitioner seeks to anchor respondent banks supposed negligence, merely established, on the
one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that
he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon
who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly,
none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.

SO ORDERED.

G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,

vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the
PHILIPPINES, respondents.

DECISION

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals
dated January 29, 1990, 1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness
(CBCI) No. D891, 2 with a face value of P500,000.00, from the Philippine Underwriters Finance
Corporation (Philfinance) to the petitioner Traders Royal Bank (TRB), under a Repurchase
Agreement 3 dated February 4, 1981, and a Detached Assignment 4 dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was
originally filed as a Petition for Mandamus 5 under Rule 65 of the Rules of Court, to compel the Central
Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank
(TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a Detached
Assignment . . ., whereby Filriters, as registered owner, sold, transferred, assigned and delivered unto
Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to Central Bank
Certificates of Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an aggregate
value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);

4. The aforesaid Detached Assignment (Annex A) contains an express authorization executed by the
transferor intended to complete the assignment through the registration of the transfer in the name of
PhilFinance, which authorization is specifically phrased as follows: (Filriters) hereby irrevocably
authorized the said issuer (Central Bank) to transfer the said bond/certificates on the books of its fiscal
agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . ., whereby,
for and in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance
sold, transferred and delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of
P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance from Filriters as
averred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex B), Philfinance agreed to repurchase CBCI
Serial No. D891 (Annex C), at the stipulated price of PESOS: FIVE HUNDRED NINETEEN THOUSAND
THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the
checks it issued in favor of petitioner were dishonored for insufficient funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to
enable the latter to have its title completed and registered in the books of the respondent. And by
means of said Detachment, Philfinance transferred and assigned all, its rights and title in the said CBCI
(Annex C) to petitioner and, furthermore, it did thereby irrevocably authorize the said issuer
(respondent herein) to transfer the said bond/certificate on the books of its fiscal agent. . . .

9. Petitioner presented the CBCI (Annex C), together with the two (2) aforementioned Detached
Assignments (Annexes B and D), to the Securities Servicing Department of the respondent, and
requested the latter to effect the transfer of the CBCI on its books and to issue a new certificate in the
name of petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and continues to do so
notwithstanding petitioners valid and just title over the same and despite repeated demands in writing,
the latest of which is hereto attached as Annex E and made an integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially complied with the
petitioners request for registration, to wit:

No transfer thereof shall be valid unless made at said office (where the Certificate has been registered)
by the registered owner hereof, in person or by his attorney duly authorized in writing, and similarly
noted hereon, and upon payment of a nominal transfer fee which may be required, a new Certificate
shall be issued to the transferee of the registered holder thereof.

and, without a doubt, the Detached Assignments presented to respondent were sufficient
authorizations in writing executed by the registered owner, Filriters, and its transferee, PhilFinance, as
required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a
transfer of ownership over the CBCI and issuing a new certificate to the transferee devolves upon the
respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its
name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank
of the Philippines Motion for Admission of Amended Answer with Counter Claim for
Interpleader 6 thereby calling to fore the respondent Filriters Guaranty Assurance Corporation (Filriters),
the registered owner of the subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities required of respondent as an
insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust fund
doctrine and to the prejudice of policyholders and to all who have present or future claim against
policies issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of Filriters, without any
board resolution, knowledge or consent of the board of directors of Filriters, and without any clearance
or authorization from the Insurance Commissioner, executed a detached assignment purportedly
assigning CBCI No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-
Treasury of Filriters (both of whom were holding the same positions in Philfinance), without any
consideration or benefit redounding to Filriters and to the grave prejudice of Filriters, its policy holders
and all who have present or future claims against its policies, executed similar detached assignment
forms transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the assignment is without the
knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, as
requiring by Article V, Section 3 of CB Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the corporate
act of Filriters and such null and void;

a) The assignment was executed without consideration and for that reason, the assignment is void from
the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the board of directors of
Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under
the Insurance Code for its existence as an insurance company and the pursuit of its business operations.
The assignment of the CBCI is illegal act in the sense of malum in se or malum prohibitum, for anyone to
make, either as corporate or personal act;

d) The transfer of diminution of reserve investments of Filriters is expressly prohibited by law, is

immoral and against public policy;

e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency of
Filriters (and has in fact helped in placing Filriters under conservatorship), an inevitable result known to
the officer who executed assignment.

17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not payable to
bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered owner
as the absolute owner and that the value of the registered certificates shall be payable only to the
registered owner; a sufficient notice to plaintiff that the assignments do not give them the registered
owners right as absolute owner of the CBCIs;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the registered
certificates are payable only to the registered owner (Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a regular
transaction made in the usual of ordinary course of business;

a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the
Insurance Code and its assignment or transfer is expressly prohibited by law. There was no attempt to
get any clearance or authorization from the Insurance Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of its
business;

c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of all or
substantially all of the assets of Filriters, which requires the affirmative action of the stockholders
(Section 40, Corporation [sic] Code. 7

In its Decision 8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the
assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI
by Philfinance in favor of Traders Royal Bank null and void and of no force and effect. The dispositive
portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty Assurance
Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent assignment of
CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void and of no force and
effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to pay
the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;

(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp. The
sum of P10,000 as attorneys fees; and

(d) to pay the costs.

SO ORDERED. 9

The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals
likewise failed. The findings of the fact of the said court are hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of
assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters
Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was still
registered in the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made under a
repurchase agreement dated February 4, 1981, granting Philfinance the right to repurchase the
instrument on or before April 27, 1981. When Philfinance failed to buy back the note on maturity date,
it executed a deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right and the
title to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 in
its name before the Security and Servicing Department of the Central Bank (CB). Central Bank, however,
refused to effect the transfer and registration in view of an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in the
Regional Trial Court of Manila. The suit, however, was subsequently treated by the lower court as a case
of interpleader when CB prayed in its amended answer that Filriters be impleaded as a respondent and
the court adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get a favorable
judgment. TRB now comes to this Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having
acquired the said certificate from Philfinance as a holder in due course, its possession of the same is
thus free for any defect of title of prior parties and from any defense available to prior parties among
themselves, and it may thus, enforce payment of the instrument for the full amount thereof against all
parties liable thereon. 12

In ignoring said argument, the appellate court [ruled] that the CBCI is not a negotiable instrument, since
the instrument clearly stated that it was payable to Filriters, the registered owner, whose name was
inscribed thereon, and that the certificate lacked the words of negotiability which serve as an expression
of consent that the instrument may be transferred by negotiation.

Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made
without consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better
known as the Rules and Regulations Governing Central Bank Certificates of Indebtedness, which
provided that any assignment of registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly authorized in writing.

Petitioners claimed interest has no basis, since it was derived from Philfinance whose interest was
inexistent, having acquired the certificate through simulation. What happened was Philfinance merely
borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf
of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to
act for the latter. For lack of such authority, the assignment did not therefore bind Filriters and violated
as the same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in the
nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of
Internal Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register with the Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.

SO ORDERED. 13

Petitioners present position rests solely on the argument that Philfinance owns 90% of Filriters equity
and the two corporations have identical corporate officers, thus demanding the application of the
doctrine or piercing the veil of corporate fiction, as to give validity to the transfer of the CBCI from
registered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as actual
payment to Filriters. Thus, there is no merit to the lower courts ruling that the transfer of the CBCI from
Filriters to Philfinance was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of if
this Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, the
registered owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to certificates for the creation and
maintenance of a permanent improvement revolving fund, is similar to a bond, (82 Minn. 202). Being
equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a fixed sum
of money. It is usually used for the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:

As worded, the instrument provides a promise to pay Filriters Guaranty Assurance Corporation, the
registered owner hereof. Very clearly, the instrument is payable only to Filriters, the registered owner,
whose name is inscribed thereon. It lacks the words of negotiability which should have served as an
expression of consent that the instrument may be transferred by negotiation. 15

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE
CORPORATION, and to no one else, thus, discounting the petitioners submission that the same is a
negotiable instrument, and that it is a holder in due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom
to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone relating to the
protection of holders in due course, and the freedom of negotiability is the foundation for the
protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of money to a
specified person or entity for a period of time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention
of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of
surrounding circumstance in order to more perfectly understand the intent and meaning of the parties,
yet as they have constituted the writing to be the only outward and visible expression of their meaning,
no other words are to be added to it or substituted in its stead. The duty of the court in such case is to
ascertain, not what the parties may have secretly intended as contradistinguished from what their
words express, but what is the meaning of the words they have used. What the parties meant must be
determined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then is, was the transfer of the
CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law,
so as to entitle TRB to have the CBCI registered in its name with the Central Bank?

The following are the appellate courts pronouncements on the matter:

Clearly shown in the record is the fact that Philfinances title over CBCI No. D891 is defective since it
acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the
transfer was for value received, there was really no consideration involved. What happened was
Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central Bank
Circular No. 769, series of 1980, otherwise known as the Rules and Regulations Governing Central Bank
Certificates of Indebtedness, under which the note was issued. Published in the Official Gazette on
November 19, 1980, Section 3 thereof provides that any assignment of registered certificates shall not
be valid unless made . . . by the registered owner thereof in person or by his representative duly
authorized in writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf
of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to
act for the latter. For lack of such authority, the assignment did not therefore bind Filriters and violated
at the same time Central Bank Circular No. 769 which has the force and effect of a law, resulting in the
nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of
Internal Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register with the Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent
Filriters and Philfinance, though separate corporate entities on paper, have used their corporate fiction
to defraud TRB into purchasing the subject CBCI, which purchase now is refused registration by the
Central Bank.

Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the same corporate officers, if
the principle of piercing the veil of corporate entity were to be applied in this case, then TRBs payment
to Philfinance for the CBCI purchased by it could just as well be considered a payment to Filriters, the
registered owner of the CBCI as to bar the latter from claiming, as it has, that it never received any
payment for that CBCI sold and that said CBCI was sold without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merely
borrowed by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinances) financing
operations, if it were to be consistent therewith, on the issued raised by TRB that there was a piercing a
veil of corporate entity, the Court of Appeals should have ruled that such veil of corporate entity was, in
fact, pierced, and the payment by TRB to Philfinance should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable
remedy, and may be awarded only in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or
business conduit of a person. 18

Piercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished one
corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this,
the court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or
crime was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the
interests of innocent third persons dealing with the corporate entity which the law aims to protect by
this doctrine.

The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence
on the contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the
identity of one shall be maintained as to the other, there is nothing else which could lead the court
under circumstance to disregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a
juridical personality separate from its stockholders and from other corporations may be
disregarded, 19 in the absence of such grounds, the general rule must upheld. The fact that Filfinance
owns majority shares in Filriters is not by itself a ground to disregard the independent corporate status
of Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of
itself a sufficient reason for disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it
acquired the subject certificate of indebtedness from Philfinance.

On its face the subject certificates states that it is registered in the name of Filriters. This should have
put the petitioner on notice, and prompted it to inquire from Filriters as to Philfinances title over the
same or its authority to assign the certificate. As it is, there is no showing to the effect that petitioner
had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the
certificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is registered in the owners name at any office
of the Bank or any agency duly authorized by the Bank, and such registration is noted hereon. After such
registration no transfer thereof shall be valid unless made at said office (where the Certificates has been
registered) by the registered owner hereof, in person, or by his attorney, duly authorized in writing and
similarly noted hereon and upon payment of a nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the registered owner thereof. The bank or any agency
duly authorized by the Bank may deem and treat the bearer of this Certificate, or if this Certificate is
registered as herein authorized, the person in whose name the same is registered as the absolute owner
of this Certificate, for the purpose of receiving payment hereof, or on account hereof, and for all other
purpose whether or not this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require
Philfinance to submit such an authorization from Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-
owner was disposing of the registered CBCI owned by another entity was a good reason for petitioner to
verify of inquire as to the title Philfinance to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and
Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which provides
that:

Sec. 3. Assignment of Registered Certificates. Assignment of registered certificates shall not be valid
unless made at the office where the same have been issued and registered or at the Securities Servicing
Department, Central Bank of the Philippines, and by the registered owner thereof, in person or by his
representative, duly authorized in writing. For this purpose, the transferee may be designated as the
representative of the registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation liable. 22 This is only
fair, as everyone 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. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for
all intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had
signed the deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did
not have the necessary written authorization from the Board of Directors of Filriters to act for the latter.
As it is, the sale from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there
was no consideration for the same. This is fatal to the petitioners cause, for then, Philfinance had no
title over the subject certificate to convey the Traders Royal Bank. Nemo potest nisi quod de jure
potest no man can do anything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves,
which are required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia,
Manager-in-Charge of respondent Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face value of
P5000,000.00 subject of this case?

A Yes, sir.
Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the Insurance Commission sometime in
early 1981 and this CBCI No. 891 was among the CBCIs that were found to be missing.

Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No. 891 before
1981?

A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal reserve of
the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal reserves under Section 213 of the
Insurance Code equivalent to 40 percent of the premiums receipt and further, the Insurance
Commission requires this reserve to be invested preferably in government securities or government
binds. This is how this CBCI came to be purchased by the company.

It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus,
the anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said
corporation, not without the approval of its Board of Directors, and the maintenance of the required
reserve fund.

Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the
claimed interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is
hereby AFFIRMED.

SO ORDERED.

G.R. No. L-7271 August 30, 1957

PHILIPPINE NATIONAL BANK, plaintiff-appellant,

vs.

JOSE ZULUETA, defendant-appellee.

Natalio M. Balboa and Ramon B. de los Reyes for appellant.

Lorenzo F. Miravite for appellee.

BENGZON, J.:

In the Manila court of first instance, the Philippine National Bank sued the defendant upon a letter of
credit and a draft for the amount of $14,449.15. Although willing to pay the equivalent in pesos of the
draft, plus bank charges, the defendant objected to the 17% excise tax imposed by Republic Act No. 601
which the Bank tried to collect. Both documents, he contended, had been issued and had matured
before the approval of said Act, therefore the excise tax should not be charged.

After the trial, the court rendered judgment exempting defendant from the 17% excise tax; but ordered
him to deliver to plaintiff the sum of P37,622.11 plus daily interest of P3.9938 on P29,154.55 beginning
from January 9, 1953.

The plaintiff appealed, insisting on the right to collect 17% excise or exchange tax. This is the only issue
between the parties now.

For a statement of the facts we may quote from plaintiff's brief. "On October 26, 1948, Defendant-
Appellee applied for a commercial letter of credit with Plaintiff-Appellant, Philippine National Bank
(Manila) and was granted L/C No. 35171 (Exhibit "B") on November 6, 1948, in favor of Otis Elevator Co.,
260 Eleventh Avenue, New York City, U.S.A., for $14,449.15 for the purchase of an electric passenger
elevator; on May 17, 1949, and under the said letter of credit (Exhibit "B"), Otis Elevator Co. drew a 90
day sight draft for $14,449.15 (Exhibit "A") which draft was duly presented to and accepted by
Defendant-Appellee on July 6, 1949. Said acceptance matured on October 4, 1949. Upon Defendant-
Appellee's signing a 90 day trust receipt (Exhibit "C") on June 3, 1949, Plaintiff-Appellant released to
Defendant-Appellee the covering documents of the shipment. In the meantime, debit advice (Exhibit
"G") was received from Plaintiff-Appellant's New York Agency to the effect that it advanced or paid the
draft (Exhibit "A") to Otis Elevator Co. on May 17, 1949, and charged Plaintiff-Appellant the sum of
$14,467.21 representing the face value of the draft (Exhibit "A") plus $18.06 as 1/8 of 1% commission.
After the maturity date (October 4, 1949) Plaintiff-Appellant presented the draft to Defendant-Appellee
for payment but the latter failed, neglected and refused to pay.

During its special session in January, 1951, Congress passed House Bill No. 1513, now Republic Act No.
601, approved on March 28, 1951, imposing a 17% special excise tax (otherwise known as foreign
exchange tax) on the value in Philippine peso of foreign exchange sold by the Central Bank of the
Philippines or its authorized agents. Plaintiff-appellant, as any other commercial bank in the Philippines,
is an authorized agent of the Central Bank of the Philippines.

On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or statements of collection
(Exhibits "D" and "D-1") to Defendant-Appellee but the latter failed and refused to effect payment
thereof. In those statements, the sum of P4,955.74 was included representing the 17% special excise tax
on the peso value of the draft for US $14,449.15 (Exhibit "A"), . . . .

Defendant's application for a letter of credit party read as follows:

Please arrange by cable for the establishment of an Irrevocable Letter of Credit on New York in favor of
Otis Elevator Co., 260 Eleventh Avenue, New York City for account of Ho. Jose C. Zulueta for the sum of
FOURTEEN THOUSAND FOUR HUNDRED FORTY-NINE AND 15/100 ($14,449.15) DOLLARS against drawn
at NINETY DAYS accompanied by shipping documents covering of One COMPLETE ELECTRIC PASSENGER
ELEVATOR . . .

Drafts must be drawn and presented or negotiated not later than May 31, 1949.

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in Philippine Currency, the
equivalent of the above amount or such portion thereof as may be drawn or paid upon the faith of said
credit, together with your usual charges, and I/we authorize you and your respective correspondents to
pay or to accept drafts under this credit, . . .

And the draft issued thereunder (Exhibit A) was negotiable and addressed to herein defendant as the
drawee.

From plaintiff's statement of its position it is not clear whether recovery is demanded upon the letter of
credit, or upon the draft Exhibit A. Plaintiff may, undoubtedly, proceed on either cause of action. (See
Art. 571 Code of Commerce; Sec. 51 Negotiable Instruments Law.)
Had the plaintiff elected to recover on said letter of credit, then it would meet with the doctrines in
Araneta vs. Philippine National Bank, 95 Phil., 160, 50 Off. Gaz., (11) 5350), According to the majority
opinion in that case, plaintiff should receive the equivalent in pesos, on May 17, 1949, of what the New
York Agency paid to Otis Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the minority
opinion, the equivalent in pesos of the same amount of dollars on October 4, 1949. No. 17% tax on both
dates. In converting dollars into pesos, no 17% exchange tax would be imposable, since it was created
only in March 1951. The plaintiff knows the case, for it was a party to it; and anticipating, in this appeal,
the obvious conclusions, it insists not so much on the letter of credit, as on the bill of exchange Exhibit
A1 . As stated before, such draft was drawn by Otis Elevator Co. in New York. It was addressed to
defendant as drawee, who is due course accepted it. There is no, question that upon accepting it,
defendant became a party primarily liable2; and the holder (Philippine National Bank) may sue him,
even if there had been no presentation for payment on the day of maturity. (Sec. 70 Negotiable
Instruments Law.)

Admittedly, defendant's responsibility is for $14,449.15 due in Manila on October 4, 1949 (plus bank
fees). He is under obligation to deliver such amount in pesos as were the equivalent of $14,449.15. At
what rate of exchange? The rate prevailing on the day of issuance, day of acceptance, day of maturity,
the day suit is filed, or that prevailing on the day judgment is rendered requiring him to pay? Herein lies
the center of the controversy. Appellant will win this appeal only if the rate on the last days above
mentioned is held to be the legal rate.

The document is negotiable and is governed by the Negotiable Instruments Law. But this statute does
not certain any express provision on the question. We know the draft is a foreign bill of exchange,
because, drawn in New York, it is payable here. (See. 129 Negotiable Instruments Law.) We also know
that although the amount payable is expressed in dollars not current money here it is still
negotiable, for it may be discharged with pesos of equivalent amount3. The problem arises when we try
to determine the "equivalent amount", because the rate of exchange fluctuates from day to day.

There are decisions in America to the effect that, "the rate of exchange in effect at the time the bill
should have been paid" controls. (11 C.J.S. p. 264.)

Such decisions agree with the provisions of the Bills of Exchange Act of England4 and could be taken as
enunciating the correct principle, inasmuch as our Negotiable Instruments Law, practically copied the
American Uniform Negotiable Instruments Law which in turn was based largely on the Bills of Exchange
Act of England of 1882. In fact we practically followed this rule in Westminster Bank vs. K. Nassor, 58
Phil. 855.
There is one decision applying the rate of exchange at the time judgment is entered. (11 C. J. S. p.264.)5

This decision however seems not to have taken into account the Bills of Exchange Act above mentioned.
And we have rejected its view in the Westminster case, supra. Furthermore it related to a bill expressly
made payable in a foreign currency which is not the case here. And the theory would probably
produce undesirable effects upon commercial documents, for it would make the amount uncertain, the
parties to the bill not being able to foresee the day judgment would be rendered.6

But the appellant argues, the defendant had promised to pay $14,419.15 in dollars; therefore he must
be ordered to pay the sum in dollars at current rates plus 17%.

The argument rests on a wrong premise. Defendant had not promised to pay in dollars. He agreed to
pay the equivalent of $14,419.15 dollars, in Philippine currency 7.

But if we admit that defendant had agreed to pay in dollars, then we have to apply Republic Act No. 529
and say that his obligation "shall be discharged in Philippine currency measured at the prevailing rates of
exchange at the time the obligation was incurred."

Now then, Zulueta's obligation having been incurred8 before the creation of the 17% tax, it may not be
validly burdened with such tax, because the law imposing it could not be deemed to have impaired
obligations already existing at the time of its approval..

The plaintiff's theory seems to be that in remitting dollars to its New York Agency, after it collects from
the defendant, it has to pay for the said excise tax.9 The trial judge expressed the belief that such
amount had been remitted before the enactment of Republic Act 601, because considering the practice
of banks of replenishing their agencies abroad with necessary funds, he deemed it improbable that the
Manila Office of the Bank in two years had not reimburse its New York Agency for the amount
advanced on account of the draft Exhibit A. This belief most probably accorded with reality; because as
early as May 17, 1949 (Exhibit G) the New York Agency had "charged" the amount of this draft against
the account of the Manila office there, which means the Agency had reimbursed itself the amount of
the draft out of the funds of the Manila Office then in its possession (in New York) or coming to its
possession afterwards. And it is unbelievable that in two years the Manila office never had in New York
sufficient funds to effect the reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on October 17, 1952, (Exhibit D)
enumerated these charges:

To your acceptance amounting to

$14,449.15

Plus: Remitter's Commission

18.06

$14,567.21

Converted at 3/4 %

P29,151.43

5% int. 5/17/49-10/19/52-1251 da.

4,995.68

P34,147.11
 10% comm. on $14,449.15

2,911.51

Documentary stamps

8.70

Air Mail

2.00

17% Excise Tax on P29,151.43

4,955.74

Other charges

3.00

From the above it may be deduced that the amount of the draft had been remitted or paid to the New
York Agency in May 1949, for the reason that Zulueta is charged with remitter's commission" and 5%
interest on the amount of the draft (and such commission) beginning from May 17, 1949. This
necessarily impllies that in accordance with Exhibit G, the New York Agency had been reimbursed of the
draft's amount (or such amount was remitted) on May 17, 1949.10 Now, in May 1949 no 17% exchange
tax was payable upon such remittance; and the Manila office did not pay it. Therefore Zulueta should
not pay it too.
In view of the foregoing the judgment will be affirmed, with costs against appellant. So ordered.

Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails on questions of law a
decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its
resolution dated October 17, 1985, denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its program of logging
activities for the year 1978 the opening of additional roads, and simultaneous logging operations along
the route of said roads, in its logging concession area at Baganga, Manay, and Caraga, Davao Oriental.
For this purpose, it needed two (2) additional units of tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of Manila,
through its sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"), a
corporation dealing in tractors and other heavy equipment business, offered to sell to petitioner-
corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n., May 28, 1980,
p. 44) and to determine the capability of the "Used" tractors being offered, petitioner-corporation
requested the seller-assignor to inspect the job site. After conducting said inspection, the seller-assignor
assured petitioner-corporation that the "Used" Allis Crawler Tractors which were being offered were fit
for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and
availability of parts. (t.s.n., May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-
corporation through petitioners Wee and Vergara, president and vice- president, respectively, agreed to
purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down
payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors (Exh. "3-A").
At the same time, the deed of sale with chattel mortgage with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the
seller-assignor, by means of a deed of assignment (E exh. " 1 "), assigned its rights and interest in the
chattel mortgage in favor of the respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to the
petitioner-corporation's job site and as agreed, the seller-assignor stationed its own mechanics to
supervise the operations of the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and
after another nine (9) days, the other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the fact that the
tractors broke down and requested for the seller-assignor's usual prompt attention under the warranty
(E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-assignor sent to
the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-
D," and "6-E"), but the tractors did not come out to be what they should be after the repairs were
undertaken because the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous logging operations of
petitioner-corporation were delayed and petitioner Vergara advised the seller-assignor that the
payments of the installments as listed in the promissory note would likewise be delayed until the seller-
assignor completely fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the seller-assignor
to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds
were to be given to the respondent and the excess, if any, to be divided between the seller-assignor and
petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation and despite several
follow-up calls, the seller-assignor did nothing with regard to the request, until the complaint in this case
was filed by the respondent against the petitioners, the corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery of the principal sum
of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71),
accrued interest of One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the rate of twelve (12%) percent per
annum, attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1)
and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the complaint and asking the
trial court to order the respondent to pay the petitioners damages in an amount at the sound discretion
of the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos
(P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and further relief as
would be just under the premises.

In a decision dated April 20, 1981, the trial court rendered the following judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and personal capacities the principal
sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN
PESOS & 86/100 (P151,618.,86) as of August 15, 1979 and accruing interest thereafter at the rate of 12%
per annum;

2. ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of the
principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed by the
petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the following
errors:

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY
OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A HOLDER IN DUE COURSE OF
THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision affirming in totothe
decision of the trial court. The pertinent portions of the decision are as follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are of the considered opinion
that aside from the fact that no provision of warranty appears or is provided in the Deed of Sale of the
tractors and even admitting that in a contract of sale unless a contrary intention appears, there is an
implied warranty, the defense of breach of warranty, if there is any, as in this case, does not lie in favor
of the appellants and against the plaintiff-appellee who is the assignee of the promissory note and a
holder of the same in due course. Warranty lies in this case only between Industrial Products Marketing
and Consolidated Plywood Industries, Inc. The plaintiff-appellant herein upon application by appellant
corporation granted financing for the purchase of the questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to appellants either to withdraw from
the contract and/or demand a proportionate reduction of the price with damages in either case (Art.
1567, New Civil Code). We now come to the issue as to whether the plaintiff-appellee is a holder in due
course of the promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing corporation engaged in
financing and receivable discounting extending credit facilities to consumers and industrial, commercial
or agricultural enterprises by discounting or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable instrument which was
discounted or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 (Exh. "A") considering
the following. it is in writing and signed by the maker; it contains an unconditional promise to pay a
certain sum of money payable at a fixed or determinable future time; it is payable to order (Sec. 1, NIL);
the promissory note was negotiated when it was transferred and delivered by IPM to the appellee and
duly endorsed to the latter (Sec. 30, NIL); it was taken in the conditions that the note was complete and
regular upon its face before the same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without notice of any infirmity or defect in
the title of IPM (Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the instrument free
from any defect of title of prior parties and free from defenses available to prior parties among
themselves and may enforce payment of the instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they would pay the note according to its tenor,
and admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL).

In view of the essential elements found in the questioned promissory note, We opine that the same is
legally and conclusively enforceable against the defendants-appellants.

WHEREFORE, finding the decision appealed from according to law and evidence, We find the appeal
without merit and thus affirm the decision in toto. With costs against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by the
Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of which was received by
the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER
THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT
PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS
WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY
NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF THE
RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE
REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision dated July 17, 1985, as well
as the resolution dated October 17, 1985 and dismissing the complaint but granting petitioners'
counterclaims before the court of origin.

On the other hand, the respondent corporation in its comment to the petition filed on February 20,
1986, contended that the petition was filed out of time; that the promissory note is a negotiable
instrument and respondent a holder in due course; that respondent is not liable for any breach of
warranty; and finally, that the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a negotiable instrument so as
to bar completely all the available defenses of the petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant petition to have been
filed on time because the petitioners' motion for reconsideration actually raised new issues. It cannot,
therefore, be considered pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day warranty because the
findings of the trial court, adopted by the respondent appellate court, that "14 days after delivery, the
first tractor broke down and 9 days, thereafter, the second tractor became inoperable" are sustained by
the records. The petitioner was clearly a victim of a warranty not honored by the maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold
may have, should they render it unfit for the use for which it is intended, or should they diminish its
fitness for such use to such an extent that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the
goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for
which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge judgment
(whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

xxx xxx xxx

ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be
annexed by the usage of trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold even
though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the
hidden faults or defects in the thing sold. (Emphasis supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty against the petitioner. This
liability as a general rule, extends to the corporation to whom it assigned its rights and interests unless
the assignee is a holder in due course of the promissory note in question, assuming the note is
negotiable, in which case the latter's rights are based on the negotiable instrument and assuming
further that the petitioner's defenses may not prevail against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the petitioner-
corporation notified the seller-assignor's sister company, AG & P, about the breakdown based on the
seller-assignor's express 90-day warranty, with which the latter complied by sending its mechanics.
However, due to the seller-assignor's delay and its failure to comply with its warranty, the tractors
became totally unserviceable and useless for the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the seller-
assignor.

Articles 1191 and 1567 of the Civil Code provide that:

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.

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with damages in
either case. (Emphasis supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with the seller-assignor,
necessarily can no longer sue the seller-assignor except by way of counterclaim if the seller-assignor
sues it because of the rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:

In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for adjudgement before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch
its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered
when the law itself requires that he should exercise due diligence to minimize its own damages (Civil
Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a negotiable
instrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS
& 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of the month thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory
note "must be payable to order or bearer, " it cannot be denied that the promissory note in question is
not a negotiable instrument.

The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words of
negotiable, must be payable to 'order' or 'bearer'. These words serve as an expression of consent that
the instrument may be transferred. This consent is indispensable since a maker assumes greater risk
under a negotiable instrument than under a non-negotiable one. ...

xxx xxx xxx

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn payable to
the order of a specified person or to him or his order. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to order. There must always
be a specified person named in the instrument. It means that the bill or note is to be paid to the person
designated in the instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of the
person designated in the instrument and will thus be open to all defenses available against the latter."
(Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, page 38).
(Emphasis supplied)

Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that
the respondent can never be a holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all defenses available to it as against the
seller-assignor Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-assignor when it was sued by
the respondent-assignee because the petitioner's defenses apply to both or either of either of
them. Actually, the records show that even the respondent itself admitted to being a mere assignee of
the promissory note in question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is being assigned is the Deed of Sale with Chattel
Mortgage with the promissory note which is as testified to by the witness was indorsed? (Counsel for
Plaintiff nodding his head.) Then we have no further questions on cross,

COURT:

You confirm his manifestation? You are nodding your head? Do you confirm that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction between two persons; what is
assigned are rights, the rights of the mortgagee were assigned to the IFC Leasing & Acceptance
Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage were assigned; . . . you want to
make a distinction, one is an assignment of mortgage right and the other one is indorsement of the
promissory note. What counsel for defendants wants is that you stipulate that it is contained in one
single transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in question is a negotiable
instrument, the respondent cannot be a holder in due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on installment of the tractors,
there was an arrangement between the seller-assignor, Industrial Products Marketing, and the
respondent whereby the latter would pay the seller-assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the respondent which acquired the right to collect the price
from the buyer, herein petitioner Consolidated Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of
Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the
sale on installment of the tractors were all executed on the same day by and among the buyer, which is
herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial
Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the
respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price
was not unconditional, and that it was subject to the condition that the tractors -sold were not
defective. The respondent knew that when the tractors turned out to be defective, it would be subject
to the defense of failure of consideration and cannot recover the purchase price from the petitioners.
Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which
took the same with actual knowledge of the foregoing facts so that its action in taking the instrument
amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses
which the petitioners may raise against the seller-assignor. Any other interpretation would be most
inequitous to the unfortunate buyer who is not only saddled with two useless tractors but must also
face a lawsuit from the assignee for the entire purchase price and all its incidents without being able to
raise valid defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact,
which would justify its act of taking the promissory note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. A holder in due course is a holder who has
taken the instrument under the following conditions:

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect
in the title of the person negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated
must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in
taking the instrument amounts to bad faith. (Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith
as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price.
Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full
price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with
interest. With the increasing frequency of installment buying in this country, it is most probable that the
tendency of the courts in the United States to protect the buyer against the finance company will , the
finance company will be subject to the defense of failure of consideration and cannot recover the
purchase price from the buyer. As against the argument that such a rule would seriously affect "a certain
mode of transacting business adopted throughout the State," a court in one case stated:

It may be that our holding here will require some changes in business methods and will impose a greater
burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-should have some
protection somewhere along the line. We believe the finance company is better able to bear the risk of
the dealer's insolvency than the buyer and in a far better position to protect his interests against
unscrupulous and insolvent dealers. . . .

If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule
which win afford public protection to the general buying public against unscrupulous dealers in personal
property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos,
Notes and Selected Cases on Negotiable Instruments Law, Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d 766)
involving similar facts, it was held that in a very real sense, the finance company was a moving force in
the transaction from its very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be regarded as a holder in due
course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note is negotiable, the
respondent, a financing company which actively participated in the sale on installment of the subject
two Allis Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the
respondent's rights under the promissory note involved in this case are subject to all defenses that the
petitioners have against the seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder other than a holder in due course,
a negotiable instrument is subject to the same defenses as if it were non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and
respondent appellate court erred in holding the promissory note in question to be negotiable. Such a
ruling does not only violate the law and applicable jurisprudence, but would result in unjust enrichment
on the part of both the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no obstacle for the respondent to file a civil Suit and
litigate its claims against the seller- assignor in the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17,
1985, as well as its resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The
complaint against the petitioner before the trial court is DISMISSED.

SO ORDERED.
G.R. No. L-2516 September 25, 1950

ANG TEK LIAN, petitioner,

vs.

THE COURT OF APPEALS, respondent.

DECISION

BENGZON, J.:

For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First Instance of
Manila. The Court of Appeals affirmed the verdict.

It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16, 1946,
the check Exhibit A upon the China Banking Corporation for the sum of P4,000, payable to the order of
cash. He delivered it to Lee Hua Hong in exchange for money which the latter handed in the act. On
November 18, 1946, the next business day, the check was presented by Lee Hua Hong to the drawee
bank for payment, but it was dishonored for insufficiency of funds, the balance of the deposit of Ang Tek
Lian on both dates being P335 only.

The Court of Appeals believed the version of Lee Huan Hong who testified that on November 16, 1946,
appellant went to his (complainants) office, at 1217 Herran, Paco, Manila, and asked him to exchange
Exhibit A which he (appellant) then brought with him with cash alleging that he needed badly the
sum of P4,000 represented by the check, but could not withdraw it from the bank, it being then already
closed; that in view of this request and relying upon appellants assurance that he had sufficient funds in
the bank to meet Exhibit A, and because they used to borrow money from each other, even before the
war, and appellant owns a hotel and restaurant known as the North Bay Hotel, said complainant
delivered to him, on the same date, the sum of P4,000 in cash; that despite repeated efforts to notify
him that the check had been dishonored by the bank, appellant could not be located any-where, until he
was summoned in the City Fiscals Office in view of the complaint for estafa filed in connection
therewith; and that appellant has not paid as yet the amount of the check, or any part thereof.

Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision is
whether under the facts found, estafa had been accomplished.

Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed By
post-dating a check, or issuing such check in payment of an obligation the offender knowing that at the
time he had no funds in the bank, or the funds deposited by him in the bank were not sufficient to cover
the amount of the check, and without informing the payee of such circumstances.
We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection, it
must be stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing
either a postdated check or an ordinary check to accomplish the deceit.

It is argued, however, that as the check had been made payable to cash and had not been endorsed by
Ang Tek Lian, the defendant is not guilty of the offense charged. Based on the proposition that by
uniform practice of all banks in the Philippines a check so drawn is invariably dishonored, the following
line of reasoning is advanced in support of the argument:

. . . When, therefore, he (the offended party) accepted the check (Exhibit A) from the appellant, he did
so with full knowledge that it would be dishonored upon presentment. In that sense, the appellant could
not be said to have acted fraudulently because the complainant, in so accepting the check as it was
drawn, must be considered, by every rational consideration, to have done so fully aware of the risk he
was running thereby. (Brief for the appellant, p. 11.)

We are not aware of the uniformity of such practice. Instances have undoubtedly occurred wherein the
Bank required the indorsement of the drawer before honoring a check payable to cash. But cases
there are too, where no such requirement had been made. It depends upon the circumstances of each
transaction.

Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of cash is a
check payable to bearer, and the bank may pay it to the person presenting it for payment without the
drawers indorsement.

A check payable to the order of cash is a bearer instrument, Bacal vs. National City Bank of New
York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. Da Beck Plate Glass Co. (1907), 54 Misc., 537;
104 N. Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App.,
1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.

Where a check is made payable to the order of cash, the word cash does not purport to be the name
of any person, and hence the instrument is payable to bearer. The drawee bank need not obtain any
indorsement of the check, but may pay it to the person presenting it without any indorsement. . . .
(Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p. 494.)

Of course, if the bank is not sure of the bearers identity or financial solvency, it has the right to demand
identification and/or assurance against possible complications, for instance, (a) forgery of drawers
signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable, etc. The bank
may therefore require, for its protection, that the indorsement of the drawer or of some other person
known to it be obtained. But where the Bank is satisfied of the identity and/or the economic standing
of the bearer who tenders the check for collection, it will pay the instrument without further question;
and it would incur no liability to the drawer in thus acting.

A check payable to bearer is authority for payment to the holder. Where a check is in the ordinary
form, and is payable to bearer, so that no indorsement is required, a bank, to which it is presented for
payment, need not have the holder identified, and is not negligent in failing to do so. . . . (Michie
on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)

. . . Consequently, a drawee bank to which a bearer check is presented for payment need not
necessarily have the holder identified and ordinarily may not be charged with negligence in failing to do
so. See Opinions 6C:2 and 6C:3. If the bank has no reasonable cause for suspecting any irregularity, it
will be protected in paying a bearer check, no matter what facts unknown to it may have occurred prior
to the presentment. 1 Morse, Banks and Banking, sec. 393.

Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is entirely
reasonable for the bank to insist that the holder give satisfactory proof of his identity . . .. (Patons
Digest, Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally unconnected
with its dishonor. The Court of Appeals declared that it was returned unsatisfied because the drawer
had insufficient funds not because the drawers indorsement was lacking.

WHEREFORE, there being no question as to the correctness of the penalty imposed on the appellant,
the writ of certiorari is DENIED and the decision of the Court of Appeals is hereby AFFIRMED, with costs.

G.R. No. L-14883 July 31, 1963

NARCISA BUENCAMINO, AMADA DE LEON-ERAA, ENCARNACION DE LEON and BIENVENIDO B.

ERAA, petitioners-appellants,
vs.
C. HERNANDEZ, as City Treasurer of Quezon City,
JAIME HERNANDEZ, as Secretary of Finance and
LAND TENURE ADMINISTRATION, respondents-appellees.

N. S. Sison for petitioners-appellants.

Revilla, Lustre and Agloro for respondents-appellees.

REGALA, J.:

This is an appeal from the order of the Quezon City Court of First Instance, Judge Nicasio Yatco,
presiding, dismissing the petition for mandamus filed by the herein petitioners to compel the
respondent City Treasurer of Quezon City to accept Government negotiable land certificates as payment
for land taxes.

The respondent City Treasurer accepts the following statement of facts set forth in the petitioners' brief:

On May 11, 1957, the Land Tenure Administration, LTA for short, purchased from the petitioners Narcisa
Buencamino, Amada de Leon-Eraa, and Encarnacion de Leon, and other members of the de Leon family
their hacienda in Talavera, Nueva Ecija for a total consideration of P2,746,000.00. For the purpose, a
Memorandum Agreement was executed on the said date which expressly declared that the LTA was
purchasing the hacienda upon petition of the tenants thereof in accordance with Republic Act No. 1400,
otherwise known as the Land Reform Act of 1955.

The parties to the sale agreed that of the full price of P2,746,000.00, 50% or P1,373,000.00 was to be
paid in cash and the balance in negotiable land certificates. Below is a reproduction of one such
negotiable land certificate typical of and identical to all the other issued by the LTA to the petitioners.

AMOUNT: P10,000.00

NEGOTIABLE LAND CERTIFICATE

THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES

is indebted unto the

BEARER

in the sum of TEN THOUSAND PESOS. This certificate is issued in accordance with the provisions of
Section 9, Republic Act No. 1400, entitled "AN ACT DEFINING A LAND TENURE POLICY, PROVIDING FOR
AN INSTRUMENTALITY TO CARRY OUT THE POLICY, AND APPROPRIATING FUNDS FOR ITS
IMPLEMENTATION", approved September 9, 1955, and is due and payable to BEARER on demand and
upon presentation at the Central Bank of the Philippines without interest, if presented for payment
within five years from the date of issue; with interest at the rate of 4 per centum per annum, if
presented for payment after five years from the date of issue; with interest at the rate of 4- per
centum per annum, if presented for payment after ten years from the date of issue; and, with interest at
the rate of 5 per centum per annum, if presented for payment after fifteen years from the date of issue.
Both principal and interest are payable by the Treasurer of the Philippines, through the Central Bank of
the Philippines, in legal tender currency of the Philippines.

This land certificate is part of the total negotiable land certificates issued and limited to the aggregate
principal sum of SIXTY MILLION PESOS a year, to be issued during the first two years from September 9,
1955 when Republic Act No. 1400 was approved, and P30 million each year during the succeeding years,
for the purchase of private agricultural lands for resale at cost to bona-fide tenants or occupants, or, in
the case of estates abandoned by the owners for the last five years, to private individuals who will work
the lands themselves and who are qualified to acquire or own lands, but who do not own more than six
hectares of lands in the Philippines.

Manila, Philippines, August 9, 1957.

Encashment of this certificate may not be made until after five (5) years from the date of execution of
the Deed of Sale of Hacienda de Leon, pursuant to the conditions under Paragraph "b" of the
Memorandum Agreement executed between the Land Tenure Administration and the owners of
Hacienda de Leon on May 11, 1957, acknowledged before Marcelo Lagramada, Notary Public for Manila,
as Doc. No. 324, Page 66, Book No. 6, Series of 1957.
(Sgd.) JUAN CAIZARES
Registrar of the Central
Bank of the Philippines

(Sgd.) CARLOS P. GARCIA

President of the Phil.

(Sgd.) VICENTE GELLA

Treasurer of the Phil.

Date of issue: August 9, 1957

Recorded: Illegible
Examined: Illegible

The condition in the certificate regarding its encashment only after the lapse of five years from the date
of execution of the Deed of Sale of Hacienda de Leon was adopted or taken from the Memorandum
Agreement of May 11, 1957 first mentioned above and which was subsequently ratified by the Cabinet
and the President. As stipulated in the said document, the condition reads:

B. That the mode of payment shall be 50% in cash and 50% in negotiable land certificates except that
the encashment of the said negotiable land certificate may not be made until after five (5) years from
the date of the execution of the deed of sale with the payments of the corresponding interest, said
negotiable land certificate may be applied and used for all the purposes authorized by Republic Act No.
1400 and other pertinent laws on the matter within the said period of five (5) years; (page 3,
Memorandum Agreement).1wph1.t

Subsequently, this stipulation was incorporated and clarified in the Absolute Deed of Sale executed to
formalize the terms contained in the Memorandum Agreement. Under the deed of sale, dated July 31,
1957, the above condition was

That the VENDORS shall not, however, within five (5) years, present for encashment the negotiable land
certificates amounting to ONE MILLION THREE HUNDRED SEVENTY THREE THOUSAND PESOS
(P1,373,000.00) but nevertheless, shall be authorized to use the same for payment of land taxes or
obligations due and payable in favor of the Government and such other uses or purposes provided for
by Section 10 of Republic Act No. 1400 within the said period of five (5) years from this date. (page 4,
Absolute Deed of Sale)

Doubtless, therefore, the aforecited provisions of the Memorandum Agreement and the Absolute Deed
of Sale in relation to the condition in the negotiable land certificate were mere implementation of
Section 10 of Republic Act No. 1400, which provided:

Sec. 10. Uses of certificates. Negotiable land certificates maybe used by the holder thereof for any of
the following purposes:
xxx xxx xxx

(3) Payment of all tax obligations of the holder thereof, or of any debt or monetary obligation of the
holder to the Government or any of its instrumentalities or agencies, including the Rehabilitation
Finance Corporation and the Philippine National Bank; Provided, however, That payment of
indebtedness shall not be less than twenty per centum of the total indebtedness of the debtor; and .

xxx xxx xxx

Availing themselves of what they considered was their contractual and statutory rights under the
certificate, the petitioners presented two of them to the respondent City Treasurer in payment of
certain 1957 realty tax obligations to Quezon City. The respondent Treasurer refused to accept the same
and claimed that as per the opinion rendered by the Secretary of Finance, it was discretionary on his
part, the respondent Treasurer, to accept or reject the said certificates. And, invoking his discretion in
the premises, the respondent Treasurer explained that he could not accept the certificates offered as
Quezon City was then in great need of funds.

The petitioners were thus obliged to settle in cash the 1957 tax obligation aforementioned.
Subsequently, however, the petitioners tendered once more the same certificates in payment of their
1958 realty taxes and the respondent Treasurer similarly rejected the tender. As a result, the petitioners
filed the instant mandamusproceedings with the Court of First Instance of Quezon City.

To the above petition, the LTA filed a timely answer sustaining the petitioners' stand. The Secretary of
Finance, represented by the Solicitor General, also filed an answer, which argued that he was not a
necessary party to the case as he was not the officer with the duty of collecting taxes.

The respondent Treasurer did not file an answer. Instead, represented by the City Attorney's Office, he
filed a Motion to Dismiss on the ground that the petition filed to state a cause of action.

The Motion to Dismiss discussed various arguments for the position of the respondent that he could not
be compelled to accept the certificates. In effect, however, they resolve themselves into the single
question of whether or not the said certificates where drawn payable on demand as required by Section
9 of Republic Act 1400.

The respondent Treasurer contends that the certificates in question were not issued strictly in
accordance with the provisions of Republic Act No. 1400 because while Section 9 of that Act inquires
that "negotiable land certificates shall be issued in denominations of one thousand pesos or multiples of
one thousand pesos and shall be payable to bearer on demand . . ., " the ones issue to the petitioners
were payable to bearer not on demand but, only upon the expiration of the five-year period there in
specified.

On the other hand, the petitioners contend that although the certificates issued could not really be
encashed within the period therein mentioned, they could, however, still be used for the settlement of
tax liabilities at any time after their issue in accordance with Section 10 of the same Act. The petitioners
maintain that the 5-year restriction against encashment referred merely and exclusively to the time
when the certificates may be converted to cash and not anymore to the utility of the said instruments as
substitutes for tax obligations.

The court a quo sustained the position of the respondent Treasurer and dismissed the suit
for mandamus. Thus, this appeal.

Although the issue raised by the instant appeal has already been rendered moot, by time, it is the sense
of this Court that a brief discussion of the point of controversy will favor the best interest of justice as
well as of the parties hereto.

We hold the refusal of the respondent Treasurer to accept the land certificates to be legally justified.
They failed to comply with the requirements of Republic Act No. 1400.

Under the above-mentioned law, the land certificates "shall be payable to bearer on demand." (Section
9) The one issued, however, were payable to bearer only after the lapse of five years from a given
period. Obviously then, the requirement that they should be payable on demand was not met since an
instrument payable on demand is one which (a) is expressed to be payable on demand, or at sight, or on
presentation; or (b) expresses no time for payment (Sec. 7, Negotiable Instruments Law) The 5-year
period within which the certificates could not be encashed was an expression of the time for payment
contrary to paragraph (b) of the last law cited.

The petitioners maintain, as already indicated above, that although the questioned certificates may not
really be payable on demand, they may nevertheless be used for the payment of realty obligations to
the Government because of Section 10 of Republic Act No. 1400. As expressed by the petitioners, "as to
Government agencies and instrumentalities, the certificate is payable to bearer on demand during that
first five-year period."

There is no merit in the above assertion. It is a conclusion unsupported by any provision of law. While
Section 10 of Republic Act No. 1400 expressly authorizes the use of the said certificates for the
"payment of all tax obligations of the holder thereof," the said section can only have meant such
certificates as were issued strictly in accordance with Section 9 of the same Act, i.e., that the instrument
is payable on demand. And, as discussed above, the certificates issued were not payable on demand,
then the benefits of Section 10 cannot be properly invoked.

IN VIEW OF ALL THE FOREGOING, the order appealed from is hereby affirmed, with costs against the
appellants.

G.R. No. L-18103 June 8, 1922

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.
Antonio Gonzalez for appellant.
Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc Donough and Johnson; Julian
Wolfson; Ross and Lawrence; Francis B. Mahoney, and Jose A. Espiritu, amici curiae.

MALCOLM, J.:

The question of first impression raised in this case concerns the validity in this jurisdiction of a provision
in a promissory note whereby in case the same is not paid at maturity, the maker authorizes any
attorney to appear and confess judgment thereon for the principal amount, with interest, costs, and
attorney's fees, and waives all errors, rights to inquisition, and appeal, and all property exceptions.

On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-Products Company, Inc.,
executed and delivered to the Philippine National Bank, a written instrument reading as follows:

RENEWAL.
P61,000.00

MANILA, P.I., May 8, 1920.

On demand after date we promise to pay to the order of the Philippine National Bank sixty-one
thousand only pesos at Philippine National Bank, Manila, P.I.

Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands, in
case this note be not paid at maturity, to appear in my name and confess judgment for the above sum
with interest, cost of suit and attorney's fees of ten (10) per cent for collection, a release of all errors
and waiver of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real
or personal, from levy or sale. Value received. No. ____ Due ____

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO,

Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,

Treasurer

The Manila Oil Refining and By-Products Company, Inc. failed to pay the promissory note on demand.
The Philippine National Bank brought action in the Court of First Instance of Manila, to recover P61,000,
the amount of the note, together with interest and costs. Mr. Elias N. Rector, an attorney associated
with the Philippine National Bank, entered his appearance in representation of the defendant, and filed
a motion confessing judgment. The defendant, however, in a sworn declaration, objected strongly to the
unsolicited representation of attorney Recto. Later, attorney Antonio Gonzalez appeared for the
defendant and filed a demurrer, and when this was overruled, presented an answer. The trial judge
rendered judgment on the motion of attorney Recto in the terms of the complaint.

The foregoing facts, and appellant's three assignments of error, raise squarely the question which was
suggested in the beginning of this opinion. In view of the importance of the subject to the business
community, the advice of prominent attorneys-at-law with banking connections, was solicited. These
members of the bar responded promptly to the request of the court, and their memoranda have proved
highly useful in the solution of the question. It is to the credit of the bar that although the sanction of
judgement notes in the Philippines might prove of immediate value to clients, every one of the
attorneys has looked upon the matter in a big way, with the result that out of their independent
investigations has come a practically unanimous protest against the recognition in this jurisdiction of
judgment notes.1

Neither the Code of Civil Procedure nor any other remedial statute expressly or tacitly recognizes a
confession of judgment commonly called a judgment note. On the contrary, the provisions of the Code
of Civil Procedure, in relation to constitutional safeguards relating to the right to take a man's property
only after a day in court and after due process of law, contemplate that all defendants shall have an
opportunity to be heard. Further, the provisions of the Code of Civil Procedure pertaining to counter
claims argue against judgment notes, especially as the Code provides that in case the defendant or his
assignee omits to set up a counterclaim, he cannot afterwards maintain an action against the plaintiff
therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law, namely, that the validity and
fulfillment of contracts cannot be left to the will of one of the contracting parties (Civil Code, art. 1356),
constitutes another indication of fundamental legal purposes.

The attorney for the appellee contends that the Negotiable Instruments Law (Act No. 2031) expressly
recognizes judgment notes, and that they are enforcible under the regular procedure. The Negotiable
Instruments Law, in section 5, provides that "The negotiable character of an instrument otherwise
negotiable is not affected by a provision which ". . . (b) Authorizes a confession of judgment if the
instrument be not paid at maturity." We do not believe, however, that this provision of law can be taken
to sanction judgments by confession, because it is a portion of a uniform law which merely provides
that, in jurisdiction where judgment notes are recognized, such clauses shall not affect the negotiable
character of the instrument. Moreover, the same section of the Negotiable Instruments. Law concludes
with these words: "But nothing in this section shall validate any provision or stipulation otherwise
illegal."

The court is thus put in the position of having to determine the validity in the absence of statute of a
provision in a note authorizing an attorney to appear and confess judgment against the maker. This
situation, in reality, has its advantages for it permits us to reach that solution which is best grounded in
the solid principles of the law, and which will best advance the public interest.

The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of
time a warrant of attorney to confess judgement became a familiar common law security. At common
law, there were two kinds of judgments by confession; the one a judgment by cognovit actionem, and
the other by confession relicta verificatione. A number of jurisdictions in the United States have
accepted the common law view of judgments by confession, while still other jurisdictions have refused
to sanction them. In some States, statutes have been passed which have either expressly authorized
confession of judgment on warrant of attorney, without antecedent process, or have forbidden
judgments of this character. In the absence of statute, there is a conflict of authority as to the validity of
a warrant of attorney for the confession of judgement. The weight of opinion is that, unless authorized
by statute, warrants of attorney to confess judgment are void, as against public policy.

Possibly the leading case on the subject is First National Bank of Kansas City vs. White ([1909], 220 Mo.,
717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep., 612). The record in this case discloses that on
October 4, 1990, the defendant executed and delivered to the plaintiff an obligation in which the
defendant authorized any attorney-at-law to appear for him in an action on the note at any time after
the note became due in any court of record in the State of Missouri, or elsewhere, to waive the issuing
and service of process, and to confess judgement in favor of the First National Bank of Kansas City for
the amount that might then be due thereon, with interest at the rate therein mentioned and the costs
of suit, together with an attorney's fee of 10 per cent and also to waive and release all errors in said
proceedings and judgment, and all proceedings, appeals, or writs of error thereon. Plaintiff filed a
petition in the Circuit Court to which was attached the above-mentioned instrument. An attorney
named Denham appeared pursuant to the authority given by the note sued on, entered the appearance
of the defendant, and consented that judgement be rendered in favor of the plaintiff as prayed in the
petition. After the Circuit Court had entered a judgement, the defendants, through counsel, appeared
specially and filed a motion to set it aside. The Supreme Court of Missouri, speaking through Mr. Justice
Graves, in part said:

But going beyond the mere technical question in our preceding paragraph discussed, we come to a
question urged which goes to the very root of this case, and whilst new and novel in this state, we do
not feel that the case should be disposed of without discussing and passing upon that question.

xxx xxx xxx

And if this instrument be considered as security for a debt, as it was by the common law, it has never so
found recognition in this state. The policy of our law has been against such hidden securities for debt.
Our Recorder's Act is such that instruments intended as security for debt should find a place in the
public records, and if not, they have often been viewed with suspicion, and their bona fides often
questioned.

Nor do we thing that the policy of our law is such as to thus place a debtor in the absolute power of his
creditor. The field for fraud is too far enlarged by such an instrument. Oppression and tyranny would
follow the footsteps of such a diversion in the way of security for debt. Such instruments procured by
duress could shortly be placed in judgment in a foreign court and much distress result therefrom.

Again, under the law the right to appeal to this court or some other appellate court is granted to all
persons against whom an adverse judgment is rendered, and this statutory right is by the instrument
stricken down. True it is that such right is not claimed in this case, but it is a part of the bond and we
hardly know why this pound of flesh has not been demanded. Courts guard with jealous eye any
contract innovations upon their jurisdiction. The instrument before us, considered in the light of a
contract, actually reduces the courts to mere clerks to enter and record the judgment called for therein.
By our statute (Rev. St. 1899, sec. 645) a party to a written instrument of this character has the right to
show a failure of consideration, but this right is brushed to the wind by this instrument and the
jurisdiction of the court to hear that controversy is by the whose object is to oust the jurisdiction of the
courts are contrary to public policy and will not be enforced. Thus it is held that any stipulation between
parties to a contract distinguishing between the different courts of the country is contrary to public
policy. The principle has also been applied to a stipulation in a contract that a party who breaks it may
not be sued, to an agreement designating a person to be sued for its breach who is nowise liable and
prohibiting action against any but him, to a provision in a lease that the landlord shall have the right to
take immediate judgment against the tenant in case of a default on his part, without giving the notice
and demand for possession and filing the complaint required by statute, to a by-law of a benefit
association that the decisions of its officers on claim shall be final and conclusive, and to many other
agreements of a similar tendency. In some courts, any agreement as to the time for suing different from
time allowed by the statute of limitations within which suit shall be brought or the right to sue be barred
is held void.

xxx xxx xxx

We shall not pursue this question further. This contract, in so far as it goes beyond the usual provisions
of a note, is void as against the public policy of the state, as such public policy is found expressed in our
laws and decisions. Such agreements are iniquitous to the uttermost and should be promptly
condemned by the courts, until such time as they may receive express statutory recognition, as they
have in some states.

xxx xxx xxx

From what has been said, it follows that the Circuit Court never had jurisdiction of the defendant, and
the judgement is reversed.

The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N. S.], 956; 75 S.E., 65; Ann.
Cas. [1914-A], 640), is another well-considered authority. The notes referred to in the record contained
waiver of presentment and protest, homestead and exemption rights real and personal, and other
rights, and also the following material provision: "And we do hereby empower and authorize the said A.
B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any Court of Record to appear for
us and in our name to confess judgement against us and in favor of said A. B. Farquhar Co., Limited, for
the above named sum with costs of suit and release of all errors and without stay of execution after the
maturity of this note." The Supreme Court of West Virginia, on consideration of the validity of the
judgment note above described, speaking through Mr. Justice Miller, in part said:

As both sides agree the question presented is one of first impression in this State. We have no statutes,
as has Pennsylvania and many other states, regulating the subject. In the decision we are called upon to
render, we must have recourse to the rules and principles of the common law, in force here, and to our
statute law, applicable, and to such judicial decisions and practices in Virginia, in force at the time of the
separation, as are properly binding on us. It is pertinent to remark in this connection, that after nearly
fifty years of judicial history this question, strong evidence, we think, that such notes, if at all, have
never been in very general use in this commonwealth. And in most states where they are current the
use of them has grown up under statutes authorizing them, and regulating the practice of employing
them in commercial transactions.

xxx xxx xxx

It is contended, however, that the old legal maxim, qui facit per alium, facit per se, is as applicable here
as in other cases. We do not think so. Strong reasons exist, as we have shown, for denying its
application, when holders of contracts of this character seek the aid of the courts and of their execution
process to enforce them, defendant having had no day in court or opportunity to be heard. We need not
say in this case that a debtor may not, by proper power of attorney duly executed, authorize another to
appear in court, and by proper endorsement upon the writ waive service of process, and confess
judgement. But we do not wish to be understood as approving or intending to countenance the practice
employing in this state commercial paper of the character here involved. Such paper has heretofore had
little if any currency here. If the practice is adopted into this state it ought to be, we think, by act of the
Legislature, with all proper safeguards thrown around it, to prevent fraud and imposition. The policy of
our law is, that no man shall suffer judgment at the hands of our courts without proper process and a
day to be heard. To give currency to such paper by judicial pronouncement would be to open the door
to fraud and imposition, and to subject the people to wrongs and injuries not heretofore contemplated.
This we are unwilling to do.

A case typical of those authorities which lend support to judgment notes is First National Bank of Las
Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme Court of New Mexico, in a per curiam decision, in
part, said:

In some of the states the judgments upon warrants of attorney are condemned as being against public
policy. (Farquhar and Co. vs. Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914
A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep.,
612; 16 Ann. Cas., 889, are examples of such holding.) By just what course of reasoning it can be said by
the courts that such judgments are against public policy we are unable to understand. It was a practice
from time immemorial at common law, and the common law comes down to us sanctioned as justified
by the reason and experience of English-speaking peoples. If conditions have arisen in this country which
make the application of the common law undesirable, it is for the Legislature to so announce, and to
prohibit the taking of judgments can be declared as against the public policy of the state. We are aware
that the argument against them is that they enable the unconscionable creditor to take advantage of
the necessities of the poor debtor and cut him off from his ordinary day in court. On the other hand, it
may be said in their favor that it frequently enables a debtor to obtain money which he could by no
possibility otherwise obtain. It strengthens his credit, and may be most highly beneficial to him at times.
In some of the states there judgments have been condemned by statute and of course in that case are
not allowed.
Our conclusion in this case is that a warrant of attorney given as security to a creditor accompanying a
promissory note confers a valid power, and authorizes a confession of judgment in any court of
competent jurisdiction in an action to be brought upon said note; that our cognovit statute does not
cover the same field as that occupied by the common-law practice of taking judgments upon warrant of
attorney, and does not impliedly or otherwise abrogate such practice; and that the practice of taking
judgments upon warrants of attorney as it was pursued in this case is not against any public policy of the
state, as declared by its laws.

With reference to the conclusiveness of the decisions here mentioned, it may be said that they are
based on the practice of the English-American common law, and that the doctrines of the common law
are binding upon Philippine courts only in so far as they are founded on sound principles applicable to
local conditions.

Judgments by confession as appeared at common law were considered an amicable, easy, and cheap
way to settle and secure debts. They are a quick remedy and serve to save the court's time. They also
save the time and money of the litigants and the government the expenses that a long litigation entails.
In one sense, instruments of this character may be considered as special agreements, with power to
enter up judgments on them, binding the parties to the result as they themselves viewed it.

On the other hand, are disadvantages to the commercial world which outweigh the considerations just
mentioned. Such warrants of attorney are void as against public policy, because they enlarge the field
for fraud, because under these instruments the promissor bargains away his right to a day in court, and
because the effect of the instrument is to strike down the right of appeal accorded by statute. The
recognition of such a form of obligation would bring about a complete reorganization of commercial
customs and practices, with reference to short-term obligations. It can readily be seen that judgement
notes, instead of resulting to the advantage of commercial life in the Philippines might be the source of
abuse and oppression, and make the courts involuntary parties thereto. If the bank has a meritorious
case, the judgement is ultimately certain in the courts.

We are of the opinion that warrants of attorney to confess judgment are not authorized nor
contemplated by our law. We are further of the opinion that provisions in notes authorizing attorneys to
appear and confess judgments against makers should not be recognized in this jurisdiction by
implication and should only be considered as valid when given express legislative sanction.

The judgment appealed from is set aside, and the case is remanded to the lower court for further
proceedings in accordance with this decision. Without special finding as to costs in this instance, it is so
ordered.

Araullo, C.J., Avancea, Villamor, Ostrand, Johns and Romualdez, JJ., concur.
G.R. No. L-10221 February 28, 1958

Intestate of Luther Young and Pacita Young, spouses. PACIFICA JIMENEZ, petitioner-appellee,
vs.
DR. JOSE BUCOY, administrator-appellant.

Frank W. Brady and Pablo C. de Guia, Jr. for appellee.

E. A. Beltran for appellant.

BENGZON, J.:

In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively, Pacifica
Jimenez presented for payment four promissory notes signed by Pacita for different amounts totalling
twenty-one thousand pesos (P21,000).

Acknowledging receipt by Pacita during the Japanese occupation, in the currency then prevailing, the
administrator manifested willingness to pay provided adjustment of the sums be made in line with the
Ballantyne schedule.

The claimant objected to the adjustment insisting on full payment in accordance with the notes.

Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales, Judge, held that the notes
should be paid in the currency prevailing after the war, and that consequently plaintiff was entitled to
recover P21,000 plus attorneys fees for the sum of P2,000.

Hence this appeal.

Executed in the month of August 1944, the first promissory note read as follows:

Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos payable six
months after the war, without interest.

The other three notes were couched in the same terms, except as to amounts and dates.

There can be no serious question that the notes were promises to pay "six months after the war," the
amounts mentioned.

But the important question, which obviously compelled the administrator to appeal, is whether the
amounts should be paid, peso for peso, or whether a reduction should be made in accordance with the
well-known Ballantyne schedule.

This matter of payment of loans contracted during the Japanese occupation has received our attention
in many litigations after the liberation. The gist of our adjudications, in so far as material here, is that if
the loan should be paid during the Japanese occupation, the Ballantyne schedule should apply with
corresponding reduction of the amount.1 However, if the loan was expressly agreed to be payable only
after the war or after liberation, or became payable after those dates, no reduction could be effected,
and peso-for-peso payment shall be ordered in Philippine currency.2
The Ballantyne Conversion Table does not apply where the monetary obligation, under the contract, was
not payable during the Japanese occupation but until after one year counted for the date of ratification
of the Treaty of Peace concluding the Greater East Asia War. (Arellano vs. De Domingo, 101 Phil., 902.)

When a monetary obligation is contracted during the Japanese occupation, to be discharged after the
war, the payment should be made in Philippine Currency. (Kare et al. vs. Imperial et al., 102 Phil., 173.)

Now then, as in the case before us, the debtor undertook to pay "six months after the war," peso for
peso payment is indicated.

The Ang Lam3 case cited by appellant is not controlling, because the loan therein given could have been
repaid during the Japanese occupation. Dated December 26, 1944, it was payable within one year.
Payment could therefore have been made during January 1945. The notes here in question were
payable only after the war.

The appellant administrator calls attention to the fact that the notes contained no express promise to
pay a specified amount. We declare the point to be without merit. In accordance with doctrines on the
matter, the note herein-above quoted amounted in effect to "a promise to pay ten thousand pesos six
months after the war, without interest." And so of the other notes.

"An acknowledgment may become a promise by the addition of words by which a promise of payment is
naturally implied, such as, "payable," "payable" on a given day, "payable on demand," "paid . . . when
called for," . . . (10 Corpus Juris Secundum p. 523.)

"To constitute a good promissory note, no precise words of contract are necessary, provided they
amount, in legal effect, to a promise to pay. In other words, if over and above the mere
acknowledgment of the debt there may be collected from the words used a promise to pay it, the
instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills, 10, 11,
and cases cited . . . "Due A. B. $325, payable on demand," or, "I acknowledge myself to be indebted to A
in $109, to be paid on demand, for value received," or, "I O. U. $85 to be paid on May 5th," are held to
be promissory notes, significance being given to words of payment as indicating a promise to pay." 1
Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.)

Another argument of appellant is that as the deceased Luther Young did not sign these notes, his estate
is not liable for the same. This defense, however, was not interposed in the lower court. There the only
issue related to the amount to be amount, considering that the money had been received in Japanese
money. It is now unfair to put up this new defense, because had it been raised in the court below,
appellees could have proved, what they now alleged that Pacita contracted the obligation to support
and maintain herself, her son and her husband (then concentrated at Santo Tomas University) during
the hard days of the occupation.

It is now settled practice that on appeal a change of theory is not permitted.

In order that a question may be raised on appeal, it is essential that it be within the issues made by the
parties in their pleadings. Consequently, when a party deliberately adopts a certain theory, and the case
is tried and decided upon that theory in the court below, he will not be permitted to change his theory
on appeal because, to permit him to do so, would be unfair to the adverse party. (Rules of Court by
Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424; American Express
Company vs. Natividad, 46 Phil., 207; San Agustin vs. Barrios, 68 Phil., 475, 480; Toribio vs. Dacasa, 55
Phil., 461.)

Appellant's last assignment of error concerns attorneys fees. He says there was no reason for making
this and exception to the general rule that attorney's fees are not recoverable in the absence of
stipulation.

Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in this case if
defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid, just and
demandable claim" or "where the court deems it just and equitable that attorney's fees be recovered"
(Article 2208 Civil Code). These are if applicable some of the exceptions to the general rule that in
the absence of stipulation no attorney's fees shall be awarded.

The trial court did not explain why it ordered payment of counsel fees. Needless to say, it is desirable
that the decision should state the reason why such award is made bearing in mind that it must
necessarily rest on an exceptional situation. Unless of course the text of the decision plainly shows the
case to fall into one of the exceptions, for instance "in actions for legal support," when exemplary
damages are awarded," etc. In the case at bar, defendant could not obviously be held to have acted in
gross and evident bad faith." He did not deny the debt, and merely pleaded for adjustment, invoking
decisions he thought to be controlling. If the trial judge considered it "just and equitable" to require
payment of attorney's fees because the defense adjustment under Ballantyne schedule proved to
be untenable in view of this Court's applicable rulings, it would be error to uphold his view. Otherwise,
every time a defendant loses, attorney's fees would follow as a matter of course. Under the article
above cited, even a clearly untenable defense would be no ground for awarding attorney's fees unless it
amounted to "gross and evident bad faith."

Plaintiff's attorneys attempt to sustain the award on the ground of defendant's refusal to accept her
offer, before the suit, to take P5,000 in full settlement of her claim. We do not think this is tenable,
defendant's attitude being merely a consequence of his line of defense, which though erroneous does
not amount to "gross and evident bad faith." For one thing, there is a point raised by defendant, which
so far as we are informed, has not been directly passed upon in this jurisdiction: the notes contained no
express promise to pay a definite amount.

There being no circumstance making it reasonable and just to require defendant to pay attorney's fees,
the last assignment of error must be upheld.

Wherefore, in view of the foregoing considerations, the appealed decision is affirmed, except as to the
attorney's fees which are hereby disapproved. So ordered.

Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. Endencia and Felix,
JJ., concur.
G.R. No. L-27782 July 31, 1970

OCTAVIO A. KALALO, plaintiff-appellee,

vs.

ALFREDO J. LUZ, defendant-appellant.

Amelia K. del Rosario for plaintiff-appellee.

Pelaez, Jalandoni & Jamir for defendant-appellant.

DECISION

ZALDIVAR, J.:

Appeal from the decision, dated, February 10, 1967, of the Court of First Instance of Rizal (Branch V,
Quezon City) in its Civil Case No. Q-6561.

On November 17, 1959, plaintiff-appellee Octavio A. Kalalo (hereinafter referred to as appellee), a

licensed civil engineer doing business under the firm name of O. A. Kalalo and Associates, entered into
an agreement (Exhibit A ) 1 with defendant-appellant Alfredo J . Luz (hereinafter referred to
as appellant), a licensed architect, doing business under firm name of A. J. Luz and Associates, whereby
the former was to render engineering design services to the latter for fees, as stipulated in the
agreement. The services included design computation and sketches, contract drawing and technical
specifications of all engineering phases of the project designed by O. A. Kalalo and Associates bill of
quantities and cost estimate, and consultation and advice during construction relative to the work. The
fees agreed upon were percentages of the architects fee, to wit: structural engineering, 12-%;
electrical engineering, 2-%. The agreement was subsequently supplemented by a clarification to
letter-proposal which provided, among other things, that the schedule of engineering fees in this
agreement does not cover the following: D. Foundation soil exploration, testing and evaluation; E.
Projects that are principally engineering works such as industrial plants, and O. A. Kalalo and
Associates reserve the right to increase fees on projects ,which cost less than P100,000 . 2 Pursuant to
said agreement, appellee rendered engineering services to appellant in the following projects:

(a) Fil-American Life Insurance Building at Legaspi City;

(b) Fil-American Life Insurance Building at Iloilo City;

(c) General Milling Corporation Flour Mill at Opon Cebu;

(d) Menzi Building at Ayala Blvd., Makati, Rizal;

(e) International Rice Research Institute, Research center Los Baos, Laguna;
(f) Aurelias Building at Mabini, Ermita, Manila;

(g) Far East Banks Office at Fil-American Life Insurance Building at Isaac Peral Ermita, Manila;

(h) Arthur Youngs residence at Forbes Park, Makati, Rizal;

(i) L & S Building at Dewey Blvd., Manila; and

(j) Stanvac Refinery Service Building at Limay, Bataan.

On December 11, 1961, appellee sent to appellant a statement of account (Exhibit 1), 3 to which was
attached an itemized statement of defendant-appellants account (Exh. 1-A), according to which the
total engineering fee asked by appellee for services rendered amounted to P116,565.00 from which sum
was to be deducted the previous payments made in the amount of P57,000.00, thus leaving a balance
due in the amount of P59,565.00.

On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to
appellant. amounted to P10,861.08 instead of the amount claimed by the appellee. On June 14, 1962
appellant sent appellee a check for said amount, which appellee refused to accept as full payment of the
balance of the fees due him.

On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action. In the
first cause of action, appellee alleged that for services rendered in connection with the different projects
therein mentioned there was due him fees in sum s consisting of $28,000 (U.S.) and P100,204.46,
excluding interests, of which sums only P69,323.21 had been paid, thus leaving unpaid the $28,000.00
and the balance of P30,881.25. In the second cause of action, appellee claimed P17,000.00 as
consequential and moral damages; in the third cause of action claimed P55,000.00 as moral damages,
attorneys fees and expenses of litigation; and in the fourth cause of action he claimed P25,000.00 as
actual damages, and also for attorneys fees and expenses of litigation.

In his answer, appellant admitted that appellee rendered engineering services, as alleged in the first
cause of action, but averred that some of appellees services were not in accordance with the
agreement and appellees claims were not justified by the services actually rendered, and that the
aggregate amount actually due to appellee was only P80,336.29, of which P69,475.21 had already been
paid, thus leaving a balance of only P10,861.08. Appellant denied liability for any damage claimed by
appellee to have suffered, as alleged in the second, third and fourth causes of action. Appellant also set
up affirmative and special defenses, alleging that appellee had no cause of action, that appellee was in
estoppel because of certain acts, representations, admissions and/or silence, which led appellant to
believe certain facts to exist and to act upon said facts, that appellees claim regarding the Menzi project
was premature because appellant had not yet been paid for said project, and that appellees services
were not complete or were performed in violation of the agreement and/or otherwise unsatisfactory.
Appellant also set up a counterclaim for actual and moral damages for such amount as the court may
deem fair to assess, and for attorneys fees of P10,000.00.
Inasmuch as the pleadings showed that the appellees right to certain fees for services rendered was not
denied, the only question being the assessment of the proper fees and the balance due to appellee after
deducting the admitted payments made by appellant, the trial court, upon agreement of the parties,
authorized the case to be heard before a Commissioner. The Commissioner rendered a report which, in
resume, states that the amount due to appellee was $28,000.00 (U.S.) as his fee in the International
Research Institute Project which was twenty percent (20%) of the $140,000.00 that was paid to
appellant, and P51,539.91 for the other projects, less the sum of P69,475.46 which was already paid by
the appellant. The Commissioner also recommended the payment to appellee of the sum of P5,000.00
as attorneys fees.

At the hearing on the Report of the Commissioner, the respective counsel of the parties manifested to
the court that they had no objection to the findings of fact of the Commissioner contained in the Report,
and they agreed that the said Report posed only two legal issues, namely: (1) whether under the facts
stated in the Report, the doctrine of estoppel would apply; and (2) whether the recommendation in the
Report that the payment of the amount. due to the plaintiff in dollars was legally permissible, and if not,
at what rate of exchange it should be paid in pesos. After the parties had submitted their respective
memorandum on said issues, the trial court rendered its decision dated February 10, 1967, the
dispositive portion of which reads as follows:

WHEREFORE, judgment is rendered in favor of plaintiff and against the defendant, by ordering the
defendant to pay plaintiff the sum of P51,539.91 and $28,000.00, the latter to be converted into the
Philippine currency on the basis of the current rate of exchange at the time of the payment of this
judgment, as certified to by the Central Bank of the Philippines, from which shall be deducted the sum
of P69,475.46, which the defendant had paid the plaintiff, and the legal rate of interest thereon from
the filing of the complaint in the case until fully paid for; by ordering the defendant to pay to plaintiff
the further sum of P8,000.00 by way of attorneys fees which the Court finds to be reasonable in the
premises, with costs against the defendant. The counterclaim of the defendant is ordered dismissed.

From the decision, this appeal was brought, directly to this Court, raising only questions of law.

During the pendency of this appeal, appellee filed a petition for the issuance of a writ of attachment
under Section 1 (f) of Rule 57 of the Rules of Court upon the ground that appellant is presently residing
in Canada as a permanent resident thereof. On June 3, 1969, this Court resolved, upon appellees
posting a bond of P10,000.00, to issue the writ of attachment, and ordered the Provincial Sheriff of Rizal
to attach the estate, real and personal, of appellant Alfredo J. Luz within the province, to the value of
not less than P140,000.00.

The appellant made the following assignments of errors:

I. The lower court erred in not declaring and holding that plaintiff-appellees letter dated December 11,
1961 (Exhibit 1) and the statement of account (Exhibit 1-A) therein enclosed, had the effect,
cumulatively or alternatively, of placing plaintiff-appellee in estoppel from thereafter modifying the
representations made in said exhibits, or of making plaintiff-appellee otherwise bound by said
representations, or of being of decisive weight in determining the true intent of the parties as to the
nature and extent of the engineering services rendered and/or the amount of fees due.

II. The lower court erred in declaring and holding that the balance owing from defendant-appellant to
plaintiff-appellee on the IRRI Project should be paid on the basis of the rate of exchange of the U.S.
dollar to the Philippine peso at the time of payment of judgment. .

III. The lower court erred in not declaring and holding that the aggregate amount of the balance due
from defendant-appellant to plaintiff-appellee is only P15,792.05.

IV. The lower court erred in awarding attorneys fees in the sum of P8,000.00, despite the
commissioners finding, which plaintiff-appellee has accepted and has not questioned, that said fee be
only P5,000.00; and

V. The lower court erred in not granting defendant-appellant relief on his counter-claim.

1. In support of his first assignment of error appellant argues that in Exhibit 1-A, which is a statement of
accounts dated December 11, 1961, sent by appellee to appellant, appellee specified the various
projects for which he claimed engineering fees, the precise amount due on each particular engineering
service rendered on each of the various projects, and the total of his claims; that such a statement
barred appellee from asserting any claim contrary to what was stated therein, or from taking any
position different from what he asserted therein with respect to the nature of the engineering services
rendered; and consequently the trial court could not award fees in excess of what was stated in said
statement of accounts. Appellant argues that for estoppel to apply it is not necessary, contrary to the
ruling of the trial court, that the appellant should haveactuallyrelied on the representation, but that it is
sufficient that the representations were intended to make the defendant act there on; that
assuming arguendo that Exhibit 1-A did not put appellee in estoppel, the said Exhibit 1-A nevertheless
constituted a formal admission that would be binding on appellee under the law on evidence, and would
not only belie any inconsistent claim but also would discredit any evidence adduced by appellee in
support of any claim inconsistent with what appears therein; that, moreover, Exhibit 1-A, being a
statement of account, establishes prima facie the accuracy and correctness of the items stated therein
and its correctness can no longer be impeached except for fraud or mistake; that Exhibit 1-A
furthermore, constitutes appellees own interpretation of the contract between him and appellant, and
hence, is conclusive against him.

On the other hand, appellee admits that Exhibit 1-A itemized the services rendered by him in the various
construction projects of appellant and that the total engineering fees charged therein was P116,565.00,
but maintains that he was not in estoppel: first, because when he prepared Exhibit 1-A he was laboring
under an innocent mistake, as found by the trial court; second, because appellant was not ignorant of
the services actually rendered by appellee and the fees due to the latter under the original agreement,
Exhibit A.

We find merit in the stand of appellee.

The statement of accounts (Exh. 1-A) could not estop appellee, because appellant did not rely thereon
as found by the Commissioner, from whose Report we read:

While it is true that plaintiff vacillated in his claim, yet, defendant did not in any way rely or believe in
the different claims asserted by the plaintiff and instead insisted on a claim that plaintiff was only
entitled to P10,861.08 as per a separate resume of fees he sent to the plaintiff on May 18, 1962 (See
Exhibit 6). 4

The foregoing finding of the Commissioner, not disputed by appellant, was adopted by the trial court in
its decision. Under article 1431 of the Civil Code, in order that estoppel may apply the person, to whom
representations have been made and who claims the estoppel in his favor must have relied or acted on
such representations. Said article provides:

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.

An essential element of estoppel is that the person invoking it has been influenced and has relied on the
representations or conduct of the person sought to be estopped, and this element is wanting in the
instant case. In Cristobal vs. Gomez, 5 this Court held that no estoppel based on a document can be
invoked by one who has not been mislead by the false statements contained therein. And in Republic of
the Philippines vs. Garcia, et al., 6 this Court ruled that there is no estoppel when the statement or action
invoked as its basis did not mislead the adverse party-Estoppel has been characterized as harsh or
odious and not favored in law. 7 When misapplied, estoppel becomes a most effective weapon to
accomplish an injustice, inasmuch as it shuts a mans mouth from speaking the truth and debars the
truth in a particular case. 8 Estoppel cannot be sustained by mere argument or doubtful inference: it
must be clearly proved in all its essential elements by clear, convincing and satisfactory evidence. 9 No
party should be precluded from making out his case according to its truth unless by force of some
positive principle of law, and, consequently, estoppel in pains must be applied strictly and should not be
enforced unless substantiated in every particular. 10

The essential elements of estoppel in pais may be considered in relation to the party sought to be
estopped, and in relation to the party invoking the estoppel in his favor. As related to the party to be
estopped, the essential elements are: (1) conduct amounting to false representation or concealment of
material facts or at least calculated to convey the impression that the facts are otherwise than, and
inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least
expectation that his conduct shall be acted upon by, or at least influence, the other party; and (3)
knowledge, actual or constructive, of the real facts. As related to the party claiming the estoppel, the
essential elements are (1) lack of knowledge and of the means of knowledge of the truth as the facts in
questions; (2) (reliance, in good faith, upon the conduct or statements of the party to be estopped; (3)
action or inaction based thereon of such character as To change the position or status of the party
claiming the estoppel, to his injury, detriment or prejudice. 11

The first essential element in relation to the party sought to be estopped does not obtain in the instant
case, for, as appears in the Report of the Commissioner, appellee testified that when he wrote Exhibit 1
and prepared Exhibit 1-A, he had not yet consulted the services of his counsel and it was only upon
advice of counsel that the terms of the contract were interpreted to him resulting in his subsequent
letters to the defendant demanding payments of his fees pursuant to the contract Exhibit A. 12 This
finding of the Commissioner was adopted by the trial court. 13 It is established , therefore, that Exhibit 1-
A was written by appellee through ignorance or mistake. Anent this matter, it has been held that if an
act, conduct or misrepresentation of the party sought to be estopped is due to ignorance founded on
innocent mistake, estoppel will not arise. 14 Regarding the essential elements of estoppel in relation to
the party claiming the estoppel, the first element does not obtain in the instant case, for it cannot be
said that appellant did not know, or at least did not have the means of knowing, the services rendered
to him by appellee and the fees due thereon as provided in Exhibit A. The second element is also
wanting, for, as adverted to, appellant did not rely on Exhibit 1-A but consistently denied the accounts
stated therein. Neither does the third element obtain, for appellant did not act on the basis of the
representations in Exhibit 1-A, and there was no change in his position, to his own injury or prejudice.

Appellant, however, insists that if Exhibit 1-A did not put appellee in estoppel, it at least constituted an
admission binding upon the latter. In this connection, it cannot be gainsaid that Exhibit 1-A is not a
judicial admission. Statements which are not estoppels nor judicial admissions have no quality of
conclusiveness, and an opponent. whose admissions have been offered against him may offer any
evidence which serves as an explanation for his former assertion of what he now denies as a fact. This
may involve the showing of a mistake. Accordingly, in Oas vs. Roa, 16 it was held that when a party to a
suit has made an admission of any fact pertinent to the issue involved, the admission can be received
against him; but such an admission is not conclusive against him, and he is entitled to present evidence
to overcome the effect of the admission. Appellee did explain, and the trial court concluded, that Exhibit
1-A was based on either his ignorance or innocent mistake and he, therefore, is not bound by it.

Appellant further contends that Exhibit 1-A being a statement of account, establishes prima facie the
accuracy and correctness of the items stated therein. If prima facie, as contended by appellant, then it is
not absolutely conclusive upon the parties. An account stated may be impeached for fraud, mistake or
error. In American Decisions, Vol. 62, p. 95, cited as authority by appellant himself. We read thus:

An account stated or settled is a mere admission that the account is correct. It is not an estoppel. The
account is still open to impeachment for mistakes or errors. Its effect is to establish, prima facie, the
accuracy of the items without other proof; and the party seeking to impeach it is bound to show
affirmatively the mistake or error alleged. The force of the admission and the strength of the evidence
necessary to overcome it will depend upon the circumstances of the case.

In the instant case, it is Our view that the ignorance mistake that attended the writing of Exhibit 1-A by
appellee was sufficient to overcome the prima facie evidence of correctness and accuracy of said Exhibit
1-A.

Appellant also urges that Exhibit 1-A constitutes appellees own interpretation of the contract, and is,
therefore, conclusive against him. Although the practical construction of the contract by one party,
evidenced by his words or acts, can be used against him in behalf of the other party, 17 yet, if one of the
parties carelessly makes a wrong interpretation of the words of his contract, or performs more than the
contract requires (as reasonably interpreted independently of his performance), as happened in the
instant case, he should be entitled to a restitutionary remedy, instead of being bound to continue to his
erroneous interpretation or his erroneous performance and the other party should not be permitted to
profit by such mistake unless he can establish an estoppel by proving a material change of position
made in good faith. The rule as to practical construction does not nullify the equitable rules with respect
to performance by mistake.18 In the instant case, it has been shown that Exhibit 1-A was written
through mistake by appellee and that the latter is not estopped by it. Hence, even if said Exhibit 1-A be
considered as practical construction of the contract by appellee, he cannot be bound by such erroneous
interpretation. It has been held that if by mistake the parties followed a practice in violation of the
terms of the agreement, the court should not perpetuate the error. 19

2. In support of the second assignment of error, that the lower court erred in holding that the balance
from appellant on the IRRI project should be paid on the basis of the rate of exchange of the U.S. dollar
to the Philippine peso at the time of payment of the judgment, appellant contends: first, that the official
rate at the time appellant received his architects fees for the IRRI project, and correspondingly his
obligation to appellees fee on August 25, 1961, was P2.00 to $1.00, and cites in support thereof Section
1612 of the Revised Administrative Code, Section 48 of Republic Act 265 and Section 6 of
Commonwealth Act No. 699; second, that the lower courts conclusion that the rate of exchange to be
applied in the conversion of the $28,000.00 is the current rate of exchange at the time the judgment
shall be satisfied was based solely on a mere presumption of the trial court that the defendant did not
convert, there being no showing to that effect, the dollars into Philippine currency at the official rate,
when the legal presumption should be that the dollars were converted at the official rate of $1.00 to
P2.00 because on August 25, 1961, when the IRRI project became due and payable, foreign exchange
controls were in full force and effect, andpartial decontrolwas effected only afterwards, during the
Macapagal administration; third, that the other ground advanced by the lower court for its ruling, to wit,
that appellant committed a breach of his obligation to turn over to the appellee the engineering fees
received in U.S. dollars for the IRRI project, cannot be upheld, because there was no such breach, as
proven by the fact that appellee never claimed in Exhibit 1-A that he should be paid in dollars; and there
was no provision in the basic contract (Exh. A) that he should be paid in dollars; and, finally, even if
there were such provision, it would have no binding effect under the provision of Republic Act 529; that,
moreover, it cannot really be said that no payment was made on that account for appellant had already
paid P57,000.00 to appellee, and under Article 125 of the Civil Code, said payment could be said to have
been applied to the fees due from the IRRI project, this project being the biggest and this debt being the
most onerous.

In refutation of appellants argument in support of the second assignment of error, appellee argues that
notwithstanding Republic Act 529, appellant can be compelled to pay the appellee in dollars in view of
the fact that appellant received his fees in dollars, and appellees fee is 20% of appellants fees; and that
if said amount is be converted into Philippine Currency, the rate of exchange should be that at the time
of the execution of the judgment. 20
We have taken note of the fact that on August 25, 1961, the date when appellant said his obligation to
pay appellees fees became due, there was two rates of exchange, to wit: the preferred rate of P2.00 to
$1.00, and the free market rate. It was so provided in Circular No. 121 of the Central Bank of the
Philippines, dated March 2, 1961. amending an earlier Circular No. 117, and in force until January 21,
1962 when it was amended by Circular No. 133, thus:

1. All foreign exchange receipts shall be surrendered to the Central Bank of those authorized to deal in
foreign exchange as follows:

Percentage of Total to be surrendered at

Preferred: Free Market Rate: Rate:

(a) Export Proceeds, U.S. Government Expenditures invisibles other than those specifically mentioned
below. 25 75

(b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of Veterans and Filipino
Citizens; and Personal Expenses of Diplomatic Per personnel 100 21

The amount of $140,000.00 received by appellant foil the International Rice Research Institute project is
not within the scope of sub-paragraph (a) of paragraph No. 1 of Circular No. 121. Appellant has not
shown that 25% of said amount had to be surrendered to the Central Bank at the preferred rate because
it was either export proceeds, or U.S. Government expenditures, or invisibles not included in sub-
paragraph (b). Hence, it cannot be said that the trial court erred in presuming that appellant converted
said amount at the free market rate. It is hard to believe that a person possessing dollars would
exchange his dollars at the preferred rate of P2.00 to $1.00, when he is not obligated to do so, rather
than at the free market rate which is much higher. A person is presumed to take ordinary care of his
concerns, and that the ordinary course of business has been
followed. 22

Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of
$28,000.00. Appellee, however, cannot oblige the appellant to pay him in dollars, even if appellant
himself had received his fee for the IRRI project in dollars. This payment in dollars is prohibited by
Republic Act 529 which was enacted on June 16, 1950. Said act provides as follows:

SECTION 1. Every provision contained in, or made with respect to, any obligation which provision
purports to give the obligee the right to require payment in gold or in a particular kind of coin or
currency other than Philippine currency or in an amount of money of the Philippines measured thereby,
be as it is hereby declared against public policy, and null, void and of no effect, and no such provision
shall be contained in, or made with respect to, any obligation hereafter incurred. Every obligation
heretofore or here after incurred, whether or not any such provision as to payment is contained therein
or made with respect thereto, shall be discharged upon payment in any coin or currency which at the
time of payment is legal tender for public and private debts: Provided, That, ( a) if the obligation was
incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency
other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing
rate of exchange at the time the obligation was incurred, (b) except in case of a loan made in a foreign
currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at
the time of the stipulated date of payment shall prevail. All coin and currency, including Central Bank
notes, heretofore or hereafter issued and declared by the Government of the Philippines shall be legal
tender for all debts, public and private.

Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the
enactment of the Act and require payment in a particular kind of coin or currency other than the
Philippine currency the same shall be discharged in Philippine currency measured at the prevailing rate
of exchange at the time the obligation was incurred. As We have adverted to, Republic Act 529 was
enacted on June 16, 1950. In the case now before Us the obligation of appellant to pay appellee the 20%
of $140,000.00, or the sum of $28,000.00, accrued on August 25, 1961, or after the enactment of
Republic Act 529. It follows that the provision of Republic Act 529 which requires payment at the
prevailing rate of exchange when the obligation was incurred cannot be applied. Republic Act 529 does
not provide for the rate of exchange for the payment of obligation incurred after the enactment of said
Act. The logical Conclusion, therefore, is that the rate of exchange should be that prevailing at the time
of payment. This view finds support in the ruling of this Court in the case of Engel vs. Velasco &
Co. 23 where this Court held that even if the obligation assumed by the defendant was to pay the plaintiff
a sum of money expressed in American currency, the indemnity to be allowed should be expressed in
Philippine currency at the rate of exchange at the time of judgment rather than at the rate of exchange
prevailing on the date of defendants breach. This is also the ruling of American court as follows:

The value in domestic money of a payment made in foreign money is fixed with respect to the rate of
exchange at the time of payment. (70 CJS p. 228)

According to the weight of authority the amount of recovery depends upon the current rate of
exchange, and not the par value of the particular money involved. (48 C.J. 605-606)

The value in domestic money of a payment made in foreign money is fixed in reference to the rate of
exchange at the time of such payment. (48 C.J. 605)

It is Our considered view, therefore, that appellant should pay the appellee the equivalent in pesos of
the $28,000.00 at the free market rate of exchange at the time of payment. And so the trial court did
not err when it held that herein appellant should pay appellee $28,000.00 to be converted into the
Philippine currency on the basis of the current rate of exchange at the time of payment of this
judgment, as certified to by the Central Bank of the Philippines, . 24

Appellant also contends that the P57,000.00 that he had paid to appellee should have been applied to
the due to the latter on the IRRI project because such debt was the most onerous to appellant. This
contention is untenable. The Commissioner who was authorized by the trial court to receive evidence in
this case, however, reports that the appellee had not been paid for the account of the $28,000.00 which
represents the fees of appellee equivalent to 20% of the $140,000.00 that the appellant received as fee
for the IRRI project. This is a finding of fact by the Commissioner which was adopted by the trial court.
The parties in this case have agreed that they do not question the finding of fact of the Commissioner.
Thus, in the decision appealed from the lower court says:

At the hearing on the Report of the Commissioner on February 15, 1966, the counsels for both parties
manifested to the court that they have no objection to the findings of facts of the Commissioner in his
report; and agreed that the said report only poses two (2)legal issues, namely: (1) whether under the
facts stated in the Report, the doctrine of estoppel will apply; and (2) whether the recommendation in
the Report that the payment of amount due to the plaintiff in dollars is permissible under the law, and,
if not, at what rate of exchange should it be paid in pesos (Philippine currency) . 25

In the Commissioners report, it is spetifically recommended that the appellant be ordered to pay the
plaintiff the sum of $28,000. 00 or its equivalent as the fee of the plaintiff under Exhibit A on the IRRI
project. It is clear from this report of the Commissioner that no payment for the account of this
$28,000.00 had been made. Indeed, it is not shown in the record that the peso equivalent of the
$28,000.00 had been fixed or agreed upon by the parties at the different times when the appellant had
made partial payments to the appellee.

3. In his third assignment of error, appellant contends that the lower court erred in not declaring that
the aggregate amount due from him to appellee is only P15,792.05. Appellant questions the propriety or
correctness of most of the items of fees that were found by the Commissioner to be due to appellee for
services rendered. We believe that it is too late for the appellant to question the propriety or
correctness of those items in the present appeal. The record shows that after the Commissioner had
submitted his report the lower court, on February 15, 1966, issued the following order:

When this case was called for hearing today on the report of the Commissioner, the counsels of the
parties manifested that they have no objection to the findings of facts in the report. However, the report
poses only legal issues, namely: (1) whether under the facts stated in the report, the doctrine of
estoppel will apply; and (2) whether the recommendation in the report that the alleged payment of the
defendant be made in dollars is permissible by law and, if not, in what rate it should be paid in pesos
(Philippine Currency). For the purpose of resolving these issues the parties prayed that they be allowed
to file their respective memoranda which will aid the court in the determination of said issues. 26

In consonance with the afore-quoted order of the trial court, the appellant submitted his memorandum
which opens with the following statements:

As previously manifested, this Memorandum shall be confined to:

(a) the finding in the Commissioners Report that defendants defense of estoppel will not lie (pp. 17-18,
Report); and

(b) the recommendation in the Commissioners Report that defendant be ordered to pay plaintiff the
sum of $28,000.00 (U.S.) or its equivalent as the fee of the plaintiff under Exhibit A in the IRRI project.

More specifically this Memorandum proposes to demonstrate the affirmative of three legal
issues posed, namely:
First: Whether or not plaintiffs letter dated December 11, 1961 (Exhibit I) and/or Statement of
Account (Exhibit 1-A) therein enclosed has the effect of placing plaintiff in estoppel from thereafter
modifying the representations made in said letter and Statement of Account or of making plaintiff
otherwise bound thereby; or of being decisive or great weight in determining the true intent of the
parties as to the amount of the engineering fees owing from defendant to plaintiff;

Second: Whether or not defendant can be compelled to pay whatever balance is owing to plaintiff on
the IRRI (International Rice and Research Institute) project in United States dollars; and

Third: Whether or not in case the ruling of this Honorable Court be that defendant cannot be compelled
to pay plaintiff in United States dollars, the dollar-to-peso convertion rate for determining the peso
equivalent of whatever balance is owing to plaintiff in connection with the IRRI project should be the 2
to 1 official rate and not any other rate. 27

It is clear, therefore, that what was submitted by appellant to the lower court for resolution did not
include the question of correctness or propriety of the amounts due to appellee in connection with the
different projects for which the appellee had rendered engineering services. Only legal questions, as
above enumerated, were submitted to the trial court for resolution. So much so, that the lower court in
another portion of its decision said, as follows:

The objections to the Commissioners Report embodied in defendants memorandum of objections,

dated March 18, 1966, cannot likewise be entertained by the Court because at the hearing of the
Commissioners Report the parties had expressly manifested that they had no objection to the findings
of facts embodied therein.

We, therefore hold that the third assignment of error of the appellant has no merit.

4. In his fourth assignment of error, appellant questions the award by the lower court of P8,000.00 for
attorneys fees. Appellant argues that the Commissioner, in his report, fixed the sum of P5,000.00 as
just and reasonable attorneys fees, to which amount appellee did not interpose any objection, and by
not so objecting he is bound by said finding; and that, moreover, the lower court gave no reason in its
decision for increasing the amount to P8,000.00.

Appellee contends that while the parties had not objected to the findings of the Commissioner, the
assessment of attorneys fees is always subject to the courts appraisal, and in increasing the
recommended fees from P5,000.00 to P8,000.00 the trial court must have taken into consideration
certain circumstances which warrant the award of P8,000.00 for attorneys fees.

We believe that the trial court committed no error in this connection. Section 12 of Rule 33 of the Rules
of Court, on which the fourth assignment of error is presumably based, provides that when the parties
stipulate that a commissioners findings of fact shall be final, only questions of law arising from the facts
mentioned in the report shall thereafter be considered. Consequently, an agreement by the parties to
abide by the findings of fact of the commissioner is equivalent to an agreement of facts binding upon
them which the court cannot disregard. The question, therefore, is whether or not the estimate of the
reasonable fees stated in the report of the Commissioner is a finding of fact.

The report of the Commissioner on this matter reads as follows:

As regards attorneys fees, under the provisions of Art 2208, par (11), the same may be awarded, and
considering the number of hearings held in this case, the nature of the case (taking into account the
technical nature of the case and the voluminous exhibits offered in evidence), as well as the way the
case was handled by counsel, it is believed, subject to the Courts appraisal of the matter, that the sum
of P5,000.00 is just and reasonable as attorneys fees. 28

It is thus seen that the estimate made by the Commissioner was an expression of belief, or an opinion.
An opinion is different from a fact. The generally recognized distinction between a statement of fact
and an expression of opinion is that whatever is susceptible of exact knowledge is a matter of fact,
while that not susceptible of exact knowledge is generally regarded as an expression of opinion. 29 It has
also been said that the word fact, as employed in the legal sense includes those conclusions reached
by the trior from shifting testimony, weighing evidence, and passing on the credit of the witnesses, and
it does not denote those inferences drawn by the trial court from the facts ascertained and settled by
it. 30 In the case at bar, the estimate made by the Commissioner of the attorneys fees was an inference
from the facts ascertained by him, and is, therefore, not a finding of facts. The trial court was,
consequently, not bound by that estimate, in spite of the manifestation of the parties that they had no
objection to the findings of facts of the Commissioner in his report. Moreover, under Section 11 of Rule
33 of the Rules of Court, the court may adopt, modify, or reject the report of the commissioner, in
whole or in part, and hence, it was within the trial courts authority to increase the recommended
attorneys fees of P5,000.00 to P8,000.00. It is a settled rule that the amount of attorneys fees is
addressed to the sound discretion of the court. 31

It is true, as appellant contends, that the trial court did not state in the decision the reasons for
increasing the attorneys fees. The trial court, however, had adopted the report of the Commissioner,
and in adopting the report the trial court is deemed to have adopted the reasons given by the
Commissioner in awarding attorneys fees, as stated in the above-quoted portion of the report. Based
on the reasons stated in the report, the trial court must have considered that the reasonable attorneys
fees should be P8,000.00. Considering that the judgment against the appellant would amount to more
than P100,000.00, We believe that the award of P8,000.00 for attorneys fees is reasonable.

5. In his fifth assignment of error appellant urges that he is entitled to relief on his counterclaim. In
view of what We have stated in connection with the preceding four assignments of error, We do
not consider it necessary to dwell any further on this assignment of error.

WHEREFORE, the decision appealed from is AFFIRMED, with costs against the defendant-appellant. It
is SO ORDERED.