Joint and Solidary Obligations and Obli With Penal Clause PDF

CASES FOR JOINT AND SOLIDARY 2016
OBLIGATIONS & Obligations with a Penal

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Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and
the same obligation does not imply that each one of the former has a right to demand, or
that each one of the latter is bound to render, entire compliance with the prestation. There is
a solidary liability only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.
Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 101723 May 11, 2000
INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP. (INIMACO), petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, (Fourth Division) Cebu City, and ENRIQUE
SULIT, SOCORRO MAHINAY, ESMERALDO PEGARIDO, TITA BACUSMO, GINO NIERE,
VIRGINIA BACUS, ROBERTO NEMENZO, DARIO GO, and ROBERTO
ALEGARBES, respondents.
BUENA, J.:
This is a petition for certiorari assailing the Resolution dated September 4, 1991 issued by the
National Labor Relations Commission in RAB-VII-0711-84 on the alleged ground that it committed a
grave abuse of discretion amounting to lack of jurisdiction in upholding the Alias Writ of Execution
issued by the Labor Arbiter which deviated from the dispositive portion of the Decision dated March
10, 1987, thereby holding that the liability of the six respondents in the case below is solidary despite
the absence of the word "solidary" in the dispositive portion of the Decision, when their liability
should merely be joint.
The factual antecedents are undisputed:
In September 1984, private respondent Enrique Sulit, Socorro Mahinay, Esmeraldo Pegarido, Tita
Bacusmo, Gino Niere, Virginia Bacus, Roberto Nemenzo, Dariogo, and Roberto Alegarbes filed a
complaint with the Department of Labor and Employment, Regional Arbitration Branch No. VII in
Cebu City against Filipinas Carbon Mining Corporation, Gerardo Sicat, Antonio Gonzales, Chiu Chin
Gin, Lo Kuan Chin, and petitioner Industrial Management Development Corporation (INIMACO), for
payment of separation pay and unpaid wages.
In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held that:
RESPONSIVE, to all the foregoing, judgment is hereby entered, ordering
respondents Filipinas Carbon and Mining Corp. Gerardo Sicat, Antonio
Obligations and Contracts

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Gonzales/Industrial Management Development Corp. (INIMACO), Chiu Chin Gin and
Lo Kuan Chin, to pay complainants Enrique Sulit, the total award of P82,800.00;
ESMERALDO PEGARIDO the full award of P19,565.00; Roberto Nemenzo the total
sum of P29,623.60 and DARIO GO the total award of P6,599.71, or the total
aggregate award of ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED
EIGHTY-EIGHT PESOS AND 31/100 (P138,588.31) to be deposited with this
Commission within ten (10) days from receipt of this Decision for appropriate
disposition. All other claims are hereby Dismiss (sic) for lack of merit.
SO ORDERED.
Cebu City, Philippines.
10 March 1987. 1
No appeal was filed within the reglementary period thus, the above Decision became final and
executory. On June 16, 1987, the Labor Arbiter issued a writ of execution but it was returned
unsatisfied. On August 26, 1987, the Labor Arbiter issued an Alias Writ of Execution which ordered
thus:
NOW THEREFORE, by virtue of the powers vested in me by law, you are hereby
commanded to proceed to the premises of respondents Antonio Gonzales/Industrial
Management Development Corporation (INIMACO) situated at Barangay Lahug,
Cebu City, in front of La Curacha Restaurant,and/or to Filipinas Carbon and Mining
corporation and Gerardo Sicat at 4th Floor Universal RE-Bldg. 106 Paseo de Roxas,
Legaspi Village, Makati Metro Manila and at Philippine National Bank, Escolta,
Manila respectively, and collect the aggregate award of ONE HUNDRED THIRTYEIGHT THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE
CENTAVOS (P138,588.31) and thereafter turn over said amount to complainants
ENRIQUE SULIT, ESMERALDO PEGARIDO, ROBERTO NEMENZO AND DARIO
GO or to this Office for appropriate disposition. Should you fail to collect the said sum
in cash, you are hereby authorized to cause the satisfaction of the same on the
movable or immovable property(s) of respondents not exempt from execution. You
are to return this writ sixty (6) (sic) days from your receipt hereof, together with your
corresponding report.
You may collect your legal expenses from the respondents as provided for by law.
SO ORDERED. 2
On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of Execution and Set Aside
Decision," 3alleging among others that the alias writ of execution altered and changed the tenor of
the decision by changing the liability of therein respondents from joint to solidary, by the insertion of
the words "AND/OR" between "Antonio Gonzales/Industrial Management Development Corporation
and Filipinas Carbon and Mining Corporation, et al." However, in an order dated September 14,
1987, the Labor Arbiter denied the motion.

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On October 2, 1987, petitioner appealed 4 the Labor Arbiter's Order dated September 14, 1987 to
the respondent NLRC.
The respondent NLRC dismissed the appeal in a Decision 5 dated August 31, 1988, the pertinent
portions of which read:
In matters affecting labor rights and labor justice, we have always adopted the liberal
approach which favors the exercise of labor rights and which is beneficial to labor as
a means to give full meaning and import to the constitutional mandate to afford
protection to labor. Considering the factual circumstances in this case, there is no
doubt in our mind that the respondents herein are called upon to pay, jointly and
severally, the claims of the complainants as was the latters' prayers. Inasmuch as
respondents herein never controverted the claims of the complainants below, there is
no reason why complainants' prayer should not be granted. Further, in line with the
powers granted to the Commission under Article 218 (c) of the Labor code, "to waive
any error, defect or irregularity whether in substance or in form" in a proceeding
before Us, We hold that the Writ of Execution be given due course in all respects.
On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept Payment Of P23,198.05
Representing One Sixth Pro Rata Share of Respondent INIMACO As Full and Final Satisfaction of
Judgment As to Said Respondent." 6 The private respondents opposed the motion. In an
Order 7 dated August 15, 1989, the Labor Arbiter denied the motion ruling thus:
WHEREFORE, responsive to the foregoing respondent INIMACO's Motions are
hereby DENIED. The Sheriff of this Office is order (sic) to accept INIMACO's tender
payment (sic) of the sum of P23,198.05, as partial satisfaction of the judgment and to
proceed with the enforcement of the Alias Writ of Execution of the levied properties,
now issued by this Office, for the full and final satisfaction of the monetary award
granted in the instant case.
SO ORDERED.
Petitioner appealed the above Order of the Labor Arbiter but this was again dismissed by the
respondent NLRC in its Resolution 8 dated September 4, 1991 which held that:
The arguments of respondent on the finality of the dispositive portion of the decision
in this case is beside the point. What is important is that the Commission has ruled
that the Writ of Execution issued by the Labor Arbiter in this case is proper. It is not
really correct to say that said Writ of Execution varied the terms of the judgment. At
most, considering the nature of labor proceedings there was, an ambiguity in said
dispositive portion which was subsequently clarified by the Labor Arbiter and the
Commission in the incidents which were initiated by INIMACO itself. By sheer
technicality and unfounded assertions, INIMACO would now reopen the issue which
was already resolved against it. It is not in keeping with the established rules of
practice and procedure to allow this attempt of INIMACO to delay the final disposition
of this case.
WHEREFORE, in view of all the foregoing, this appeal is DISMISSED and the Order
appealed from is hereby AFFIRMED.

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With double costs against appellant.
Dissatisfied with the foregoing, petitioner filed the instant case, alleging that the respondent NLRC
committed grave abuse of discretion in affirming the Order of the Labor Arbiter dated August 15,
1989, which declared the liability of petitioner to be solidary.
The only issue in this petition is whether petitioner's liability pursuant to the Decision of the Labor
Arbiter dated March 10, 1987, is solidary or not.
Upon careful examination of the pleadings filed by the parties, the Court finds that petitioner
INIMACO's liability is not solidary but merely joint and that the respondent NLRC acted with grave
abuse of discretion in upholding the Labor Arbiter's Alias Writ of Execution and subsequent Orders
to the effect that petitioner's liability is solidary.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation. 9 In a joint obligation each obligor
answers only for a part of the whole liability and to each obligee belongs only a part of the
correlative
rights. 10
Well-entrenched is the rule that solidary obligation cannot lightly be inferred. 11 There is a solidary
liability only when the obligation expressly so states, when the law so provides or when the nature of
the obligation so requires. 12
In the dispositive portion of the Labor Arbiter, the word "solidary" does not appear. The
said fallo expressly states the following respondents therein as liable, namely: Filipinas Carbon and
Mining Corporation, Gerardo Sicat, Antonio Gonzales, Industrial Management Development
Corporation (petitioner INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor can it be inferred
therefrom that the liability of the six (6) respondents in the case below is solidary, thus their liability
should merely be joint.
Moreover, it is already a well-settled doctrine in this jurisdiction that, when it is not provided in a
judgment that the defendants are liable to pay jointly and severally a certain sum of money, none of
them may be compelled to satisfy in full said judgment. In Oriental Commercial Co. vs. Abeto and
Mabanag 1 this Court held:
It is of no consequence that, under the contract of suretyship executed by the parties,
the obligation contracted by the sureties was joint and several in character. The final
judgment, which superseded the action for the enforcement of said contract,
declared the obligation to be merely joint, and the same cannot be executed
otherwise. 14
Granting that the Labor Arbiter has committed a mistake in failing to indicate in the dispositive
portion that the liability of respondents therein is solidary, the correction which is substantial
can no longer be allowed in this case because the judgment has already become final and
executory.

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It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to settlement of
rights of the parties. 15 Once a decision or order becomes final and executory, it is removed from the
power or jurisdiction of the court which rendered it to further alter or amend it. 16 It thereby becomes
immutable and unalterable and any amendment or alteration which substantially affects a final and
executory judgment is null and void for lack of jurisdiction, including the entire proceedings held for
that purpose. 17 An order of execution which varies the tenor of the judgment or exceeds the terms
thereof is a
nullity. 18
None of the parties in the case before the Labor Arbiter appealed the Decision dated March 10,
1987, hence the same became final and executory. It was, therefore, removed from the jurisdiction
of the Labor Arbiter or the NLRC to further alter or amend it. Thus, the proceedings held for the
purpose of amending or altering the dispositive portion of the said decision are null and void for lack
of jurisdiction. Also, the Alias Writ of Execution is null and void because it varied the tenor of the
judgment in that it sought to enforce the final judgment against "Antonio Gonzales/Industrial
Management Development Corp. (INIMACO) and/or Filipinas Carbon and Mining Corp. and Gerardo
Sicat," which makes the liability solidary.
WHEREFORE, the petition is hereby GRANTED. The Resolution dated September 4, 1991 of the
respondent National Labor Relations is hereby declared NULL and VOID. The liability of the
respondents in RAB-VII-0711-84 pursuant to the Decision of the Labor Arbiter dated March 10, 1987
should be, as it is hereby, considered joint and petitioner's payment which has been accepted
considered as full satisfaction of its liability, without prejudice to the enforcement of the award,
against the other five (5) respondents in the said case.
SO ORDERED.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 96405 June 26, 1996

BALDOMERO INCIONG, JR., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
ROMERO, J.:p

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This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the
Regional Trial Court of Misamis Oriental, Branch 18, 1 which disposed of Civil Case No. 10507 for
collection of a sum of money and damages, as follows:
WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily

liable and ordered to pay to the plaintiff Philippine Bank of Communications,
Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00), with
interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per
annum on the total amount due, as liquidated damages or penalty from May 5, 1983
until fully paid; plus 10% of the total amount due for expenses of litigation and
attorney's fees; and to pay the costs.
The counterclaim, as well as the cross claim, are dismissed for lack of merit.
SO ORDERED.
Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed
with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly
and severally liable to private respondent Philippine Bank of Communications, Cagayan de Oro City
branch. The promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation. Consequently, on
November 14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding
payment thereof. 2 On December 11, 1984 private respondent also sent by registered mail a final letter of
demand to Rene C. Naybe. Since both obligors did not respond to the demands made, private
respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against the
three obligors.
On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case.
However, on January 9, 1987, the lower court reconsidered the dismissal order and required the
sheriff to serve the summonses. On January 27, 1987, the lower court dismissed the case against
defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the
summons addressed to petitioner was served as the sheriff learned that defendant Naybe had gone
to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend,
Rudy Campos, who told him that he was a partner of Pio Tio, the branch manager of private
respondent in Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to
him that Rene C. Naybe was interested in the business and would contribute a chainsaw to the
venture. He added that, although Naybe had no money to buy the equipment, Pio Tio had assured
Naybe of the approval of a loan he would make with private respondent. Campos then persuaded
petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but with the
understanding that he would only be a co-maker for the loan of P50,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by
Campos at his office. He affixed his signature thereto but in one copy, he indicated that he bound
himself only for the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that
he was made liable for the amount of P50,000.00.

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In the aforementioned decision of the lower court, it noted that the typewritten figure "-- 50,000 --"
clearly appears directly below the admitted signature of the petitioner in the promissory
note. 3 Hence, the latter's uncorroborated testimony on his limited liability cannot prevail over the
presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court added
that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the promissory
note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower court held that, even
granting that said limited amount had actually been agreed upon, the same would have been merely
collateral between him and Naybe and, therefore, not binding upon the private respondent as creditorbank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor
consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio
Tio denied having participated in the alleged business venture although he knew for a fact that the
falcata logs operation was encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31,
1990, affirmed that of the lower court. His motion for reconsideration of the said decision having
been denied, he filed the instant petition for review on certiorari.
On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of
Court and paragraph 2 of Circular
No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its
questioned decision. 4 His motion for the reconsideration of the denial of his petition was likewise denied
with finality in the Resolution of April 24, 1991. 5 Thereafter, petitioner filed a motion for leave to file a
second motion for reconsideration which, in the Resolution of May 27, 1991, the Court denied. In the
same Resolution, the Court ordered the entry of judgment in this case.6
Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the latter motion, he
asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance
with Circular No. 1-88. Thus, on August 7, 1991, the Court granted his prayer that his petition be
given due course and reinstated the same. 7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the
decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker
in the promissory note. It supports petitioner's allegation that they were induced to sign the
promissory note on the belief that it was only for P5,000.00, adding that it was Campos who caused
the amount of the loan to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court
of Appeals should have declared the promissory note null and void on the following grounds: (a) the
promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b)
the loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00;
(c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or
credit committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f)
petitioner and Judge Pantanosas were not present at the time the loan was released in
contravention of the bank practice, and (g) notices of default are sent simultaneously and separately
but no notice was validly sent to him. 8 Finally, petitioner contends that in signing the promissory note,

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his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the amount of
P5,000.00, the promissory note stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this
Court is not a trier of facts. Having lost the chance to fully ventilate his factual claims below,
petitioner may no longer be accorded the same opportunity in the absence of grave abuse of
discretion on the part of the court below. Had he presented Judge Pantanosas affidavit before the
lower court, it would have strengthened his claim that the promissory note did not reflect the correct
amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with
the formalities prescribed by law but . . . a mere commercial paper which does not bear the signature
of . . . attesting witnesses," parol evidence may "overcome" the contents of the promissory
note. 9 The first paragraph of the parol evidence rule10 states:
When the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents of the
written agreement.
Clearly, the rule does not specify that the written agreement be a public document.
What is required is that the agreement be in writing as the rule is in fact founded on "long experience
that written evidence is so much more certain and accurate than that which rests in fleeting memory
only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to
admit weaker evidence to control and vary the stronger and to show that the
parties intended a different contract from that expressed in the writing signed by them." 11 Thus, for
the parol evidence rule to apply, a written contract need not be in any particular form, or be signed by
both parties. 12 As a general rule, bills, notes and other instruments of a similar nature are not subject to
be varied or contradicted by parol or extrinsic evidence. 13
By alleging fraud in his answer, 14 petitioner was actually in the right direction towards proving that he
and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous
agreement was the inducing and moving cause of the written contract, it may be shown by parol
evidence. 15 However, fraud must be established by clear and convincing evidence, mere preponderance
of evidence, not even being adequate. 16 Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and, expectedly, self-serving testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and
against Pantanosas, his co-maker, constituted a release of his obligation, especially because the
dismissal of the case against Pantanosas was upon the motion of private respondent itself. He cites
as basis for his argument, Article 2080 of the Civil Code which provides that:
The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter.

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It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not
as a guarantor. This is patent even from the first sentence of the promissory note which states as
follows:
Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the
City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY
(P50,000.00) Pesos, Philippine Currency, together with interest . . . at the rate of
SIXTEEN (16) per cent per annum until fully paid.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation. 17 on the other hand, Article 2047 of the
Civil Code states:
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such a case the contract is
called a suretyship. (Emphasis supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor and a fiador
in solidum (surety). The latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted, retains all the other
rights, actions and benefits which pertain to him by reason of the fiansa; while a
solidary co-debtor has no other rights than those bestowed upon him in Section 4,
Chapter 3, Title I, Book IV of the Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate
part of the debt. There is a solidary liability only when the obligation expressly so states, when the
law so provides or when the nature of the obligation so requires. 19
Because the promissory note involved in this case expressly states that the three signatories therein
are jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation. 20 The choice is left to the solidary creditor to determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as
having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned
decision of the Court of Appeals is AFFIRMED. Costs against petitioner.

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SO ORDERED.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 151953
June 29, 2007
SALVADOR P. ESCAO and MARIO M. SILOS, petitioner,

vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are not under obligation to reimburse
respondent, a claim that can be easily debunked. The more perplexing question is whether this
obligation to repay is solidary, as contended by respondent and the lower courts, or merely joint as
argued by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines (PDCP)1 entered into a loan
agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to
Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms and
conditions.2 On the same day, three stockholders-officers of Falcon, namely: respondent Rafael
Ortigas, Jr. (Ortigas), George A. Scholey and George T. Scholey executed an Assumption of
Solidary Liability whereby they agreed "to assume in [their] individual capacity, solidary liability with
[Falcon] for the due and punctual payment" of the loan contracted by Falcon with PDCP.3 In the
meantime, two separate guaranties were executed to guarantee the payment of the same loan by
other stockholders and officers of Falcon, acting in their personal and individual capacities. One
Guaranty4 was executed by petitioner Salvador Escao (Escao), while the other5 by petitioner Mario
M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J.
Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M.
Matti (Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the
heirs of then already deceased George T. Scholey assigned their shares of stock in Falcon to
Escao, Silos and Matti.6 Part of the consideration that induced the sale of stock was a desire by
Ortigas, et al., to relieve themselves of all liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan with PDCP. Thus, an Undertaking
dated 11 June 1982 was executed by the concerned parties,7 namely: with Escao, Silos and Matti
identified in the document as "SURETIES," on one hand, and Ortigas, Inductivo and the Scholeys as
"OBLIGORS," on the other. The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release
OBLIGORS from their said guarantees [sic], SURETIES hereby irrevocably agree and undertake to
10

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assume all of OBLIGORs said guarantees [sic] to PDCP and PAIC under the following terms and
conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the payment
of FALCONs obligations with it, any of [the] OBLIGORS shall immediately inform SURETIES thereof
so that the latter can timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS for
collection of said loans and/or credit facilities, SURETIES agree to defend OBLIGORS at their own
expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief in respect to any of the claims of PDCP and/or
PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount to PDCP
and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar
days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from
FALCON arising out of, or in connection with, their said guarantees[sic].8
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It
would also execute a Deed of Chattel Mortgage over its personal properties to further secure the
loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel
mortgage, there remained a subsisting deficiency of P5,031,004.07, which Falcon did not satisfy
despite demand.9
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money
with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio and
Inductivo. The case was docketed as Civil Case No. 89-5128. For his part, Ortigas filed together with
his answer a cross-claim against his co-defendants Falcon, Escao and Silos, and also manifested
his intent to file a third-party complaint against the Scholeys and Matti.10 The cross-claim lodged
against Escao and Silos was predicated on the 1982 Undertaking, wherein they agreed to assume
the liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms
with PDCP was Escao, who in December of 1993, entered into a compromise agreement whereby
he agreed to pay the bankP1,000,000.00. In exchange, PDCP waived or assigned in favor of
Escao one-third (1/3) of its entire claim in the complaint against all of the other defendants in the
case.11 The compromise agreement was approved by the RTC in a Judgment12 dated 6 January
1994.
Then on 24 February 1994, Ortigas entered into his own compromise agreement13 with PDCP,
allegedly without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay
PDCP P1,300,000.00 as "full satisfaction of the PDCPs claim against Ortigas,"14 in exchange for
PDCPs release of Ortigas from any liability or claim arising from the Falcon loan agreement, and a
renunciation of its claims against Ortigas.
11

Clause
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to
pay P500,000.00 in exchange for PDCPs waiver of its claims against him.15
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao, Silos
and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti
and Silos,16 while he maintained his cross-claim against Escao. In 1995, Ortigas filed a motion for
Summary Judgment in his favor against Escao, Silos and Matti. On 5 October 1995, the RTC
issued the Summary Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and
severally, the amount of P1,300,000.00, as well as P20,000.00 in attorneys fees.17 The trial court
ratiocinated that none of the third-party defendants disputed the 1982 Undertaking, and that "the
mere denials of defendants with respect to non-compliance of Ortigas of the terms and conditions of
the Undertaking, unaccompanied by any substantial fact which would be admissible in evidence at a
hearing, are not sufficient to raise genuine issues of fact necessary to defeat a motion for summary
judgment, even if such facts were raised in the pleadings."18 In an Order dated 7 March 1996, the
trial court denied the motion for reconsideration of the Summary Judgment and awarded Ortigas
legal interest of 12% per annum to be computed from 28 February 1994.19
From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals. Escao
and Silos appealed jointly while Matti appealed by his lonesome. In a Decision20 dated 23 January
2002, the Court of Appeals dismissed the appeals and affirmed the Summary Judgment. The
appellate court found that the RTC did not err in rendering the summary judgment since the three
appellants did not effectively deny their execution of the 1982 Undertaking. The special defenses
that were raised, "payment and excussion," were characterized by the Court of Appeals as
"appear[ing] to be merely sham in the light of the pleadings and supporting documents and
affidavits."21 Thus, it was concluded that there was no genuine issue that would still require the rigors
of trial, and that the appealed judgment was decided on the bases of the undisputed and established
facts of the case.
Hence, the present petition for review filed by Escao and Silos.22 Two main issues are raised. First,
petitioners dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document
which they do not disavow and have in fact annexed to their petition. Second, on the assumption
that they are liable to Ortigas under the 1982 Undertaking, petitioners argue that they are jointly
liable only, and not solidarily. Further assuming that they are liable, petitioners also submit that they
are not liable for interest and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their memorandum before the
Court, the appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section
3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if the pleadings,
supporting affidavits, depositions and admissions on file show that, except as to the amount of
damages, there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law. Petitioner have not attempted to demonstrate before us that there
existed a genuine issue as to any material fact that would preclude summary judgment. Thus, we
affirm with ease the common rulings of the lower courts that summary judgment is an appropriate
recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held liable to Ortigas on
the basis of the 1982 Undertaking in this Summary Judgment. An examination of the document
reveals several clauses that make it clear that the agreement was brought forth by the desire of
Ortigas, Inductivo and the Scholeys to be released from their liability under the loan agreement
12

Clause
which release was, in turn, part of the consideration for the assignment of their shares in Falcon to
petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself with Falcon for
the payment of the loan with PDCP, and that "amongst the consideration for OBLIGORS and/or their
principals aforesaid selling is SURETIES relieving OBLIGORS of any and all liability arising from
their said joint and several undertakings with FALCON."23 Most crucial is the clause in Paragraph 3
of the Undertaking wherein petitioners "irrevocably agree and undertake to assume all of
OBLIGORs said guarantees [sic] to PDCP x x x under the following terms and conditions."24
At the same time, it is clear that the assumption by petitioners of Ortigass "guarantees" [sic] to
PDCP is governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of
Paragraph 3. First, upon receipt by "any of OBLIGORS" of any demand from PDCP for the payment
of Falcons obligations with it, "any of OBLIGORS" was to immediately inform "SURETIES" thereof
so that the latter can timely take appropriate measures. Second, should "any and/or all of
OBLIGORS" be impleaded by PDCP in a suit for collection of its loan, "SURETIES agree[d] to
defend OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity, subrogation or other relief"25 in respect to
any of the claims of PDCP. Third, if any of the "OBLIGORS is for any reason made to pay any
amount to [PDCP], SURETIES [were to] reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment."26
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not "made to pay"
PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount
of P1.3 Million as an amicable settlement of the claims posed by the bank against him. However, the
subject clause in paragraph 3(c) actually reads "[i]n the event that any of OBLIGORS is for any
reason made to pay any amount to PDCP x x x"27 As pointed out by Ortigas, the phrase "for any
reason" reasonably includes any extra-judicial settlement of obligation such as what Ortigas had
undertaken to pay to PDCP, as it is indeed obvious that the phrase was incorporated in the clause to
render the eventual payment adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had the Undertaking made clear that
the right of Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as
a consequence of a final and executory judgment. On the contrary, the clear intent of the
Undertaking was for petitioners and Matti to relieve the burden on Ortigas and his fellow
"OBLIGORS" as soon as possible, and not only after Ortigas had been subjected to a final and
executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause PDCP x x x to within
a reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x x"28 In the
event that Ortigas and his fellow "OBLIGORS" could not be released from their guaranties,
paragraph 2 commits petitioners and Matti to cause the Board of Directors of Falcon to make a call
on its stockholders for the payment of their unpaid subscriptions and to pledge or assign such
payments to Ortigas, et al., as security for whatever amounts the latter may be held liable under their
guaranties. In addition, paragraph 1 also makes clear that nothing in the Undertaking "shall prevent
OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for the release of
their said guarantees [sic]."29
There is no argument to support petitioners position on the import of the phrase "made to pay" in the
Undertaking, other than an unduly literalist reading that is clearly inconsistent with the thrust of the
document. Under the Civil Code, the various stipulations of a contract shall be interpreted together,
13

Clause
attributing to the doubtful ones that sense which may result from all of them taken jointly.30 Likewise
applicable is the provision that if some stipulation of any contract should admit of several meanings,
it shall be understood as bearing
that import which is most adequate to render it effectual.31 As a means to effect the general intent of
the document to relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners,
that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in paragraph
3, as they claim. Following the general assertion in the petition that Ortigas violated the terms of the
Undertaking, petitioners add that Ortigas "paid PDCP BANK the amount of P1.3 million without
petitioners ESCANO and SILOSs knowledge and consent."32 Paragraph 3(a) of the Undertaking
does impose a requirement that any of the "OBLIGORS" shall immediately inform "SURETIES" if
they received any demand for payment of FALCONs obligations to PDCP, but that requirement is
reasoned "so that the [SURETIES] can timely take appropriate measures"33 presumably to settle the
obligation without having to burden the "OBLIGORS." This notice requirement in paragraph 3(a) is
markedly way off from the suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under the 1982 Undertaking to notify
them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas
had, in his answer, denied any liability to PDCP and had alleged that he signed the Assumption of
Solidary Liability not in his personal capacity, but as an officer of Falcon. However, such position,
according to petitioners, could not be justified since Ortigas later voluntarily paid PDCP the amount
of P1.3 Million. Such circumstances, according to petitioners, amounted to estoppel on the part of
Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The Partial
Compromise Agreement between PDCP and Ortigas expressly stipulated that Ortigass offer to pay
PDCP was conditioned "without [Ortigass] admitting liability to plaintiff PDCP Banks complaint, and
to terminate and dismiss the said case as against Ortigas solely."34 Petitioners profess it is
"unthinkable" for Ortigas to have voluntarily paid PDCP without admitting his liability,35 yet such
contention based on assumption cannot supersede the literal terms of the Partial Compromise
Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned
his obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial
claim against Ortigas notwithstanding the Undertaking he executed with petitioners. Not being a
party to such Undertaking, PDCP was not precluded by a contract from pursuing its claim against
Ortigas based on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a
settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that
"nothing herein shall prevent OBLIGORS, or any one of them, from themselves negotiating with
PDCP x x x for the release of their said guarantees [sic]."36 Simply put, the Undertaking did not bar
Ortigas from pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas from
recovering from petitioners whatever amount he may have paid PDCP through his own settlement.
14

Clause
The stipulation that if Ortigas was "for any reason made to pay any amount to PDCP[,] x x x
SURETIES shall reimburse OBLIGORS for said amount/s within seven (7) calendar days from such
payment"37 makes it clear that petitioners remain liable to reimburse Ortigas for the sums he paid
PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the
assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming that
the Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil Code,
which states in part that "[t]here is a solidary liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the
Undertaking, as the language used in the agreement "clearly shows that it is a surety
agreement"38 between the obligors (Ortigas group) and the sureties (Escao group). Ortigas points
out that the Undertaking uses the word "SURETIES" although the document, in describing the
parties. It is further contended that the principal objective of the parties in executing the Undertaking
cannot be attained unless petitioners are solidarily liable "because the total loan obligation can not
be paid or settled to free or release the OBLIGORS if one or any of the SURETIES default from their
obligation in the Undertaking."39
In case, there is a concurrence of two or more creditors or of two or more debtors in one and the
same obligation, Article 1207 of the Civil Code states that among them, "[t]here is a solidary liability
only when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity." Article 1210 supplies further caution against the broad interpretation of solidarity by
providing: "The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility."
These Civil Code provisions establish that in case of concurrence of two or more creditors or of two
or more debtors in one and the same obligation, and in the absence of express and indubitable
terms characterizing the obligation as solidary, the presumption is that the obligation is only joint. It
thus becomes incumbent upon the party alleging that the obligation is indeed solidary in character to
prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners agreed "to bind
themselves jointly and severally" in their obligations to the Ortigas group, or any such terms to that
effect. Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas,
as the party alleging that the obligation is in fact solidary, bears the burden to overcome the
presumption of jointness of obligations. We rule and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the
Undertaking as "SURETIES", a term repeated no less than thirteen (13) times in the document.
Ortigas claims that such manner of identification sufficiently establishes that the obligation of
petitioners to him was joint and solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:
15

Clause
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship. [Emphasis
supplied]40
As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with
the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the
existence of a principal contract. It appears that Ortigass argument rests solely on the solidary
nature of the obligation of the surety under Article 2047. In tandem with the nomenclature
"SURETIES" accorded to petitioners and Matti in the Undertaking, however, this argument can only
be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place.
That clearly is not the case here, notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation of segregate identity from the obligation between
the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch
as the latter is vested with the right to proceed against the former to collect the credit in lieu of
proceeding against the principal debtor for the same obligation.41 At the same time, there is also a
legal tie created between the surety and the principal debtor to which the creditor is not privy or party
to. The moment the surety fully answers to the creditor for the obligation created by the principal
debtor, such obligation is extinguished.42 At the same time, the surety may seek reimbursement from
the principal debtor for the amount paid, for the surety does in fact "become subrogated to all the
rights and remedies of the creditor."43
Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary
obligations to suretyship contracts.44 Article 1217 of the Civil Code thus comes into play, recognizing
the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of
the one who paid (i.e., the surety).45However, a significant distinction still lies between a joint and
several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can
compel any one of the joint and several debtors or the surety alone to answer for the entirety of the
principal debt. The difference lies in the respective faculties of the joint and several debtor and the
surety to seek reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the
second paragraph does not become a solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the
liability he assumes to pay the debt before the property of the principal debtor has been exhausted,
retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a
solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I,
Book IV of the Civil Code.
16

Clause
The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The
civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil
law relationship existing between the co-debtors liable in solidum is similar to the common law
suretyship.46
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who
effected the payment to the creditor "may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made." Such solidary debtor will not
be able to recover from the co-debtors the full amount already paid to the creditor, because the right
to recovery extends only to the proportional share of the other co-debtors, and not as to the
particular proportional share of the solidary debtor who already paid. In contrast, even as the surety
is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has
the right to recover the full amount paid, and not just any proportional share, from the principal
debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits
which pertain to the surety by reason of the subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find the right under Article
2066 of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must be
indemnified by the latter," such indemnity comprising of, among others, "the total amount of the
debt."47 Further, Article 2067 of the Civil Code likewise establishes that "[t]he guarantor who pays is
subrogated by virtue thereof to all the rights which the creditor had against the debtor."48
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions
should not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on
joint and several obligations should apply to sureties. We reject that argument, and instead adopt Dr.
Tolentinos observation that "[t]he reference in the second paragraph of [Article 2047] to the
provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does
not mean that suretyship is withdrawn from the applicable provisions governing guaranty."49 For if
that were not the implication, there would be no material difference between the surety as defined
under Article 2047 and the joint and several debtors, for both classes of obligors would be governed
by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These
rights granted to the surety who pays materially differ from those granted under Article 1217 to the
solidary debtor who pays, since the "indemnification" that pertains to the latter extends "only [to] the
share which corresponds to each [co-debtor]." It is for this reason that the Court cannot accord the
conclusion that because petitioners are identified in the Undertaking as "SURETIES," they are
consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring
joint liability, the Court would have to be satisfied that among the petitioners and Matti, there is one
or some of them who stand as the principal debtor to Ortigas and another as surety who has the
right to full reimbursement from the principal debtor or debtors. No suggestion is made by the parties
that such is the case, and certainly the Undertaking is not revelatory of such intention. If the Court
were to give full fruition to the use of the term "sureties" as conclusive indication of the existence of a
surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the necessary
17

Clause
implication would be to lay down a corresponding set of rights and obligations as between the
"SURETIES" which petitioners and Matti did not clearly intend.
It is not impossible that as between Escao, Silos and Matti, there was an agreement whereby in the
event that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of
them was to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from
the other two obligors. In such case, there would have been, in fact, a surety agreement which
evinces a solidary obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does
not appear on the record. More consequentially, no such intention is reflected in the Undertaking
itself, the very document that creates the conditional obligation that petitioners and Matti reimburse
Ortigas should he be made to pay PDCP. The mere utilization of the term "SURETIES" could not
work to such effect, especially as it does not appear who exactly is the principal debtor whose
obligation is "assured" or "guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires "solidary obligation of the
Sureties," since the Undertaking expressly seeks to "reliev[e] obligors of any and all liability arising
from their said joint and several undertaking with [F]alcon," and for the "sureties" to "irrevocably
agree and undertake to assume all of obligors said guarantees to PDCP."50 We do not doubt that a
finding of solidary liability among the petitioners works to the benefit of Ortigas in the facilitation of
these goals, yet the Undertaking itself contains no stipulation or clause that establishes petitioners
obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by themselves
establish that the nature of the obligation requires solidarity. Even if the liability of petitioners and
Matti were adjudged as merely joint, the full relief and reimbursement of Ortigas arising from his
payment to PDCP would still be accomplished through the complete execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since the Undertaking contained
no such stipulation for attorneys fees, and that the situation did not fall under the instances under
Article 2208 of the Civil Code where attorneys fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being
impleaded in the suit filed by PDCP. The Undertaking was precisely executed as a means to obtain
the release of Ortigas and the Scholeys from their previous obligations as sureties of Falcon,
especially considering that they were already divesting their shares in the corporation. Specific
provisions in the Undertaking obligate petitioners to work for the release of Ortigas from his surety
agreements with Falcon. Specific provisions likewise mandate the immediate repayment of Ortigas
should he still be made to pay PDCP by reason of the guaranty agreements from which he was
ostensibly to be released through the efforts of petitioners. None of these provisions were complied
with by petitioners, and Article 2208(2) precisely allows for the recovery of attorneys fees "[w]hen
the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest."
Finally, petitioners claim that they should not be liable for interest since the Undertaking does not
contain any stipulation for interest, and assuming that they are liable, that the rate of interest should
not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals51 set forth the rules with
respect to the manner of computing legal interest:
18

Clause
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.52
Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the
rate of interest thereon shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand. The interest rate imposed by the RTC is thus proper. However, the
computation should be reckoned from judicial or extrajudicial demand. Per records, there is no
indication that Ortigas made any extrajudicial demand to petitioners and Matti after he paid PDCP,
but on 14 March 1994, Ortigas made a judicial demand when he filed a Third-Party Complaint
praying that petitioners and Matti be made to reimburse him for the payments made to PDCP. It is
the filing of this Third Party Complaint on 14 March 1994 that should be considered as the date of
judicial demand from which the computation of interest should be reckoned.53 Since the RTC held
that interest should be computed from 28 February 1994, the appropriate redefinition should be
made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court dated 5
October 1995 is modified by declaring that petitioners and Joseph M. Matti are only jointly liable, not
jointly and severally, to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order of
the Regional Trial Court dated 7 March 1996 is MODIFIED in that the legal interest of 12% per
annum on the amount of P1,300,000.00 is to be computed from 14 March 1994, the date of judicial
demand, and not from 28 February 1994 as directed in the Order of the lower court. The assailed
rulings are affirmed in all other respects. Costs against petitioners.
19

Clause
SO ORDERED.
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-55138 September 28, 1984
ERNESTO V. RONQUILLO, petitioner,
vs.
HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents.
Gloria A. Fortun for petitioner.
Roselino Reyes Isler for respondents.
CUEVAS, J.:
This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals (now the
Intermediate Appellate Court) in CA-G.R. No. SP-10573, entitled "Ernesto V. Ronquillo versus the
Hon. Florellana Castro-Bartolome, etc." and the Order of said court dated August 20, 1980, denying
petitioner's motion for reconsideration of the above resolution.
Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the then
Court of First Instance of Rizal (now the Regional Trial Court), Branch XV filed by private respondent
Antonio P. So, on July 23, 1979, for the collection of the sum of P17,498.98 plus attorney's fees and
costs. The other defendants were Offshore Catertrade Inc., Johnny Tan and Pilar Tan. The amount
of P117,498.98 sought to be collected represents the value of the checks issued by said defendants
in payment for foodstuffs delivered to and received by them. The said checks were dishonored by
the drawee bank.
On December 13, 1979, the lower court rendered its Decision 1 based on the compromise agreement submitted by
the parties, the pertinent portion of which reads as follows:
1. Plaintiff agrees to reduce its total claim of P117,498-95 to only P11,000 .00 and
defendants agree to acknowledge the validity of such claim and further bind
themselves to initially pay out of the total indebtedness of P10,000.00 the amount of
P55,000.00 on or before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of six months from
January 1980, or before June 30, 1980; (Emphasis supplied)
xxx xxx xxx
20

Clause
4. That both parties agree that failure on the part of either party to comply with the
foregoing terms and conditions, the innocent party will be entitled to an execution of
the decision based on this compromise agreement and the defaulting party agrees
and hold themselves to reimburse the innocent party for attorney's fees, execution
fees and other fees related with the execution.
xxx xxx xxx
On December 26, 1979, herein private respondent (then plaintiff filed a Motion for Execution on the
ground that defendants failed to make the initial payment of P55,000.00 on or before December 24,
1979 as provided in the Decision. Said motion for execution was opposed by herein petitioner (as
one of the defendants) contending that his inability to make the payment was due to private
respondent's own act of making himself scarce and inaccessible on December 24, 1979. Petitioner
then prayed that private respondent be ordered to accept his payment in the amount of
P13,750.00. 2
During the hearing of the Motion for Execution and the Opposition thereto on January 16, 1980,
petitioner, as one of the four defendants, tendered the amount of P13,750.00, as his prorata share in
the P55,000.00 initial payment. Another defendant, Pilar P. Tan, offered to pay the same amount.
Because private respondent refused to accept their payments, demanding from them the full initial
installment of P 55,000.00, petitioner and Pilar Tan instead deposited the said amount with the Clerk
of Court. The amount deposited was subsequently withdrawn by private respondent. 3
On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution for
the balance of the initial amount payable, against the other two defendants, Offshore Catertrade Inc.
and Johnny Tan 4 who did not pay their shares.
On January 22, 1980, private respondent moved for the reconsideration and/or modification of the
aforesaid Order of execution and prayed instead for the "execution of the decision in its entirety
against all defendants, jointly and severally." 5 Petitioner opposed the said motion arguing that under
the decision of the lower court being executed which has already become final, the liability of the four (4)
defendants was not expressly declared to be solidary, consequently each defendant is obliged to pay only
his own pro-rata or 1/4 of the amount due and payable.
On March 17, 1980, the lower court issued an Order reading as follows:
ORDER
Regardless of whatever the compromise agreement has intended the payment
whether jointly or individually, or jointly and severally, the fact is that only P27,500.00
has been paid. There appears to be a non-payment in accordance with the
compromise agreement of the amount of P27,500.00 on or before December 24,
1979. The parties are reminded that the payment is condition sine qua non to the
lifting of the preliminary attachment and the execution of an affidavit of desistance.
WHEREFORE, let writ of execution issue as prayed for
21

Clause
On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same was
set for hearing on March 25,1980.
Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the
satisfaction of the sum of P82,500.00 as against the properties of the defendants (including
petitioner), "singly or jointly hable." 6
On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's sale, for
the sale of certain furnitures and appliances found in petitioner's residence to satisfy the sum of
P82,500.00. The public sale was scheduled for April 2, 1980 at 10:00 a.m. 7
Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which was
set for hearing on March 25, 1980, was upon motion of private respondent reset to April 2, 1980 at
8:30 a.m. Realizing the actual threat to property rights poised by the re-setting of the hearing of s
motion for reconsideration for April 2, 1980 at 8:30 a.m. such that if his motion for reconsideration
would be denied he would have no more time to obtain a writ from the appellate court to stop the
scheduled public sale of his personal properties at 10:00 a.m. of the same day, April 2, 1980,
petitioner filed on March 26, 1980 a petition for certiorari and prohibition with the then Court of
Appeals (CA-G.R. No. SP-10573), praying at the same time for the issuance of a restraining order to
stop the public sale. He raised the question of the validity of the order of execution, the writ of
execution and the notice of public sale of his properties to satisfy fully the entire unpaid obligation
payable by all of the four (4) defendants, when the lower court's decision based on the compromise
agreement did not specifically state the liability of the four (4) defendants to be solidary.
On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the scheduled
public sale in that same day did not proceed in view of the pendency of a certiorari proceeding
before the then Court of Appeals.
On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as
follows:
This Court, however, finds the present petition to have been filed prematurely. The
rule is that before a petition for certiorari can be brought against an order of a lower
court, all remedies available in that court must first be exhausted. In the case at bar,
herein petitioner filed a petition without waiting for a resolution of the Court on the
motion for reconsideration, which could have been favorable to the petitioner. The
fact that the hearing of the motion for reconsideration had been reset on the same
day the public sale was to take place is of no moment since the motion for
reconsideration of the Order of March 17, 1980 having been seasonably filed, the
scheduled public sale should be suspended. Moreover, when the defendants,
including herein petitioner, defaulted in their obligation based on the compromise
agreement, private respondent had become entitled to move for an execution of the
decision based on the said agreement.
WHEREFORE, the instant petition for certiorari and prohibition with preliminary
injunction is hereby denied due course. The restraining order issued in our resolution
dated April 9, 1980 is hereby lifted without pronouncement as to costs.
SO ORDERED.
22

Clause
Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the lower
court had already denied the motion referred to and consequently, the legal issues being raised in
the petition were already "ripe" for determination. 8 The said motion was however denied by the Court
of Appeals in its Resolution dated August 20, 1980.
Hence, this petition for review, petitioner contending that the Court of Appeals erred in
(a) declaring as premature, and in denying due course to the petition to restrain implementation of a
writ of execution issued at variance with the final decision of the lower court filed barely four (4) days
before the scheduled public sale of the attached movable properties;
(b) denying reconsideration of the Resolution of June 30, 1980, which declared as premature the
filing of the petition, although there is proof on record that as of April 2, 1980, the motion referred to
was already denied by the lower court and there was no more motion pending therein;
(c) failing to resolve the legal issues raised in the petition and in not declaring the liabilities of the
defendants, under the final decision of the lower court, to be only joint;
(d) not holding the lower court's order of execution dated March 17, 1980, the writ of execution and
the notice of sheriff's sale, executing the lower court's decision against "all defendants, singly and
jointly", to be at variance with the lower court's final decision which did not provide for solidary
obligation; and
(e) not declaring as invalid and unlawful the threatened execution, as against the properties of
petitioner who had paid his pro-rata share of the adjudged obligation, of the total unpaid amount
payable by his joint co-defendants.
The foregoing assigned errors maybe synthesized into the more important issues of
1. Was the filing of a petition for certiorari before the then Court of Appeals against the Order of
Execution issued by the lower court, dated March 17, 1980, proper, despite the pendency of a
motion for reconsideration of the same questioned Order?
2. What is the nature of the liability of the defendants (including petitioner), was it merely joint, or
was it several or solidary?
Anent the first issue raised, suffice it to state that while as a general rule, a motion for
reconsideration should precede recourse to certiorari in order to give the trial court an opportunity to
correct the error that it may have committed, the said rule is not absolutes 9 and may be dispensed
with in instances where the filing of a motion for reconsideration would serve no useful purpose, such as
when the motion for reconsideration would raise the same point stated in the motion 10 or where the error is
patent for the order is void 11 or where the relief is extremely urgent, as in cases where execution had already been ordered 12 where the
issue raised is one purely of law. 13
In the case at bar, the records show that not only was a writ of execution issued but petitioner's
properties were already scheduled to be sold at public auction on April 2, 1980 at 10:00 a.m. The
records likewise show that petitioner's motion for reconsideration of the questioned Order of
Execution was filed on March 17, 1980 and was set for hearing on March 25, 1980 at 8:30 a.m., but
upon motion of private respondent, the hearing was reset to April 2, 1980 at 8:30 a.m., the very
23

Clause
same clay when petitioner's properties were to be sold at public auction. Needless to state that
under the circumstances, petitioner was faced with imminent danger of his properties being
immediately sold the moment his motion for reconsideration is denied. Plainly, urgency prompted
recourse to the Court of Appeals and the adequate and speedy remedy for petitioner under the
situation was to file a petition for certiorari with prayer for restraining order to stop the sale. For him
to wait until after the hearing of the motion for reconsideration on April 2, 1980 before taking
recourse to the appellate court may already be too late since without a restraining order, the public
sale can proceed at 10:00 that morning. In fact, the said motion was already denied by the lower
court in its order dated April 2, 1980 and were it not for the pendency of the petition with the Court of
Appeals and the restraining order issued thereafter, the public sale scheduled that very same
morning could have proceeded.
The other issue raised refers to the nature of the liability of petitioner, as one of the defendants in
Civil Case No. 33958, that is whether or not he is liable jointly or solidarily.
In this regard, Article 1207 and 1208 of the Civil Code provides
Art. 1207. The concurrence of two or more debtors in one and the same obligation
does not imply that each one of the former has a right to demand, or that each one of
the latter is bound to render, entire compliance with the prestation. Then is a solidary
liability only when the obligation expressly so states, or when the law or the nature of
the obligation requires solidarity.
Art. 1208. If from the law,or the nature or the wording of the obligation to which the
preceding article refers the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors and
debtors, the credits or debts being considered distinct from one another, subject to
the Rules of Court governing the multiplicity of quits.
The decision of the lower court based on the parties' compromise agreement, provides:
1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and
defendants agree to acknowledge the validity of such claim and further bind
themselves to initially pay out of the total indebtedness of P110,000.00, the amount
of P5,000.00 on or before December 24, 1979, the balance of P55,000.00,
defendants individually and jointly agree to pay within a period of six months from
January 1980 or before June 30, 1980. (Emphasis supply)
Clearly then, by the express term of the compromise agreement and the decision based upon it, the
defendants obligated themselves to pay their obligation "individually and jointly".
The term "individually" has the same meaning as "collectively", "separately", "distinctively",
respectively or "severally". An agreement to be "individually liable" undoubtedly creates a several
obligation, 14 and a "several obligation is one by which one individual binds himself to perform the whole obligation. 15
In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or separadamente or in the promissory note is an
express statement making each of the persons who signed it individually liable for the payment of the fun amount of the obligation contained
therein." Likewise inUn Pak Leung vs. Negorra 17 We held that "in the absence of a finding of facts that the defendants made themselves
individually hable for the debt incurred they are each liable only for one-half of said amount
24

Clause
The obligation in the case at bar being described as "individually and jointly", the same is therefore
enforceable against one of the numerous obligors.
IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby DISMISSED.
Cost against petitioner.
SO ORDERED.
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 109648
November 22, 2001
PH CREDIT CORPORATION, petitioner,

vs.
COURT OF APPEALS and CARLOS M. FARRALES, respondents.
PANGANIBAN, J.:
When there is a conflict between the dispositive portion or fallo of a decision and the opinion of the
court contained in the text or body of the judgment, the former prevails over the latter. An order of
execution is based on the disposition, not on the body, of the decision.
The Case
Before us is a Petition for Review under Rule 451 of the Rules of Court, assailing the October 28,
1992 Decision2and the April 6, 1993 Resolution3 of the Court of Appeals (CA) in CA-GR SP Nos.
23324 and 25714. The dispositive portion of the said Decision reads as follows:
"WHEREFORE, judgment is hereby rendered DISMISSING: a) CA-G.R. SP No 23324, for
being moot and academic, and b) CA-G.R. SP No. 25714, for lack of merit."4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The facts of the case are summarized by the Court of Appeals in this wise:
"These two cases have been consolidated because they involve the same parties and/or
related questions of [f]act and/or law.
xxx
xxx
xxx
"I. CA-G.R. SP NO. 23324
25

Clause
"PH Credit Corp., filed a case against Pacific Lloyd Corp., Carlos Farrales, Thomas H. Van
Sebille and Federico C. Lim, for [a] sum of money. The case was docketed as Civil Case No.
83-17751 before the Regional Trial Court, Branch 51, Manila. After service of summons upon
the defendants, they failed to file their answer within the reglementary period, hence they
were declared in default. PH Credit Corp., was then allowed to present its evidence ex-parte.
"On January 31, 1984, a decision was rendered, the dispositive portion of which reads as
follows:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff PH Credit
Corporation and against defendants Pacific Lloyd Corporation, Thomas H. Van
Sebille, Carlos M. Farrales, and Federico C. Lim, ordering the latter to pay the
former, the following:
'A) The sum of P118,814.49 with interest of 18% per annum, starting December 20,
1982 until fully paid;
'B) Surcharge of 16% per annum from December 20, 1982;
'C) Penalty Charge of 2% per month from December 20, 1982, computed on interest
and principal compounded;
'D) Attorney's fees in an amount equivalent to 25% of the total sum due; and
'E) Costs of suit.
'SO ORDERED.'
"After the aforesaid decision has become final and executory, a Writ of Execution was issued
and consequently implemented by the assigned Deputy Sheriff. Personal and real properties
of defendant Carlos M. Farrales were levied and sold at public auction wherein PH Credit
Corp. was the highest bidder. The personal properties were sold on August 2, 1984 at
P18,900.00 while the real properties were sold on June 21, 1989 for P1,294,726.00.
"On July 27, 1990, a motion for the issuance of a writ of possession was filed and on
October 12, 1990, the same was granted. The writ of possession itself was issued on
October 26, 1990. Said order and writ of possession are now the subject of this petition.
"Petitioner claims that she, as a third-party claimant with the court below, filed an 'Urgent
Motion for Reconsideration and/or to Suspend the Order dated October 12, 1990', but
without acting there[on], respondent Judge issued the writ of possession on October 26,
1990. She claims that the actuations of respondent Judge was tainted with grave abuse of
discretion.
"We deem it unnecessary to pass upon the issue raised in view of the supervening event
which had rendered the same moot and academic.
@lawphil.net
26

Clause
"It appears that on January 31, 1991, respondent Judge issued an order considering the
assailed Order dated October 12, 1990 as well as the writ of possession issued on October
26, 1990 as 'of no force and effect.'
@lawphil.net
"The purpose of the petition is precisely to have the aforesaid order and writ of possession
declared null and void, but the same had already been declared 'of no force and effect' by
the respondent Judge. It is a well-settled rule that courts will not determine a moot question
or abstract proposition nor express an opinion in a case in which no practical relief can be
granted.
"II. CA-G.R. SP NO. 25714
"Petitioner claims that the respondent Judge's Order dated January 31, 1991 was tainted
with grave abuse of discretion based on the following grounds:
"1. Respondent Judge refused to consider as waived private respondent's objection that his
obligation in the January 31, 1984 decision was merely joint and not solidary with the
defendants therein. According to petitioner, private respondent assailed the levy on
execution twice in 1984 and once in 1985 but not once did the latter even mention therein
that his obligation was joint for failure of the dispositive portion of the decision to indicate that
it was solidary. Thus, private respondent must be deemed to have waived that objection,
petitioner concludes.
"2. The redemption period after the auction sale of the properties had long lapsed so much
[so] that the purchaser therein became the absolute owner thereof. Thus, respondent Judge
allegedly abused his discretion in setting aside the auction sale after the redemption period
had expired.
"3. Respondent Judge erred in applying the presumption of a joint obligation in the face of
the conclusion of fact and law contained in the decision showing that the obligation is
solidary."5 (Citations omitted)
@lawphil.net
Ruling of the Court of Appeals

The Court of Appeals affirmed the trial court's ruling declaring null and void (a) the auction sale of
Respondent Ferrales' real property and (b) the Writ of Possession issued in consequence thereof. It
held that, pursuant to the January 31, 1984 Decision of the trial court, the liability of Farrales was
merely joint and not solidary. Consequently, there was no legal basis for levying and selling Farrales'
real and personal properties in order to satisfy the whole obligation.
Hence, this Petition.6
The Issues
In its Memorandum,7 petitioner submits the following issues for our consideration:
"I
27

Clause
Whether or not the Court of Appeals disregarded the basic policy of avoiding multiplicity of motions.
"II
Whether or not the Court of Appeals erred when it disregarded the body of the decision and
concluded that the obligation was merely a joint obligation due to the failure of the dispositive portion
of the decision dated 31 January 1984 to state that the obligation was joint and solidary.
"III
Whether or not the Court of Appeals disregarded the policy of upholding executions."8
The Courts Ruling
The Petition is devoid of merit.
First Issue:
Omnibus Motion Rule
Petitioner contends that because private respondent did not question the joint and solidary nature of
his liability in his (a) Motion to Quash Levy Execution9 dated August 23, 1984, (b) Urgent Motion to
Order Sheriff to Suspend Sale on Execution10 dated December 3, 1984, and (c) Motion to Declare
Certificate of Sale Null and Void11 dated January 9, 1985, he cannot now raise it as an objection.
Petitioner argues that the "Omnibus Motion Rule" bars private respondent's belated objection. We do
not agree.
The Omnibus Motion Rule is found in Section 8 of Rule 15 of the Rules of Court, which we quote:
"Subject to the provisions of section 1 of Rule 9, a motion attacking a pleading, order,
judgment, or proceeding shall include all objections then available, and all objections not so
included shall be deemed waived. (8a)"
As an aid to the proper understanding of this case, we should at the outset point out that the
objections of private respondent contained in his Omnibus Motion12 dated November 5, 1990 were
directed at the proceedings and the orders issued after the auction sale of his real property covered
by TCT No. 82531. In his Omnibus Motion, he asked for the recall and quashal of the Writ of
Possession issued on October 26, 1990; the annulment of the June 21, 1989 auction sale of the said
real property and the recomputation of his liability to petitioner.
However, the three (3) Motions that petitioner referred to above were clearly directed against the
execution of private respondent's personal properties. A perusal of these Motions will show that at
the time, his objections were directed at the acts of execution against his personal properties.
In his Motion to Quash Levy Execution,13 private respondent pointed to the properties of herein
moving defendant x x x located at his residence at No. 17, Bunker Hill St., New Manila, Quezon City,
per the Notice of Levy and Sale,"14 and asked for the quashal and setting aside of such Notice. He
was thus referring to the levy on his personal properties. By the same token, in his Urgent Motion to
Order Sheriff to Suspend Sale on Execution,15 he referred to a copy of a sheriff's notice of sale dated
28

Clause
November 22, 1984,"16 which in turn alluded to the sale of his levied personal properties. Similarly, in
his Motion to Declare Certificate of Sale Null and Void,17he once again assailed the sale at public
auction of his personal properties. It is thus clear that up to that point, he was questioning the levy
and sale of his personal properties. He could not have known at the time that he would be made to
answer for the entire liability, which he and his co-respondents were adjudged to pay petitioner by
reason of the trial court's judgment of January 31, 1984.
After private respondent realized that he was being made to answer on the entire liability as
a solidary debtor, he filed his Omnibus Motion questioning the Writ of Possession and all incident
orders and proceedings relevant thereto. This realization dawned on him, because his real property
was levied and sold despite the previous sale of his personal property. Only at this point was he in a
position to assert his objections to the auction sale of his real property and to put up the defense of
joint liability among all the respondents.
The Rules of Court requires that all available objections to a judgment or proceeding must be set up
in an Omnibus Motion assailing it; otherwise, they are deemed waived. In the case at bar, the
objection of private respondent to his solidary liability became available to him, only after his real
property was sold at public auction. At the time his personal properties were levied and sold, it was
not evident to him that he was being held solely liable for the monetary judgment rendered against
him and his co-respondents. That was why his objections then did not include those he asserted
when his solidary liability became evident.
Prior to his Omnibus Motion, he was not yet being made to pay for the entire obligation. Thus, his
objection to his being made solidarily liable with the other respondents was not yet available to him
at the time he filed the Motions referred to by petitioner. Not being available, these objections could
not have been deemed waived when he filed his three earlier Motions, which pertained to matters
different from those covered by his Omnibus Motion;
True, the Omnibus Motion Rule requires the movant to raise all available exceptions in a single
opportunity to avoid multiple piecemeal objections.18 But to apply that statutory norm, the objections
must have been available to the party at the time the Motion was filed.
Second Issue:
Basis of Private Respondent's Liability
Petitioner argues that the CA erred in disregarding the text of the January 31, 1984 Decision of the
trial court. In concluding that the obligation was merely joint, the CA was allegedly mistaken in
relying on the failure of the dispositive portion of the Decision to state that the obligation was
solidary.
We are not impressed. A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of the whole obligation
from any or all of the debtors. On the other hand, a joint obligation is one in which each debtors is
liable only for a proportionate part of the debt, and the creditor is entitled to demand only a
proportionate part of the credit from each debtor.19 The well-entrenched rule is that solidary
obligations cannot be inferred lightly. They must be positively and clearly expressed.20 A liability is
solidary "only when the obligation expressly so states, when the law so provides or when the nature
of the obligation so requires."21 Article 1207 of the Civil Code explains the nature of solidary
obligations in this wise.
29

Clause
"ARTICLE 1207. The concurrence of two or more creditors or of two or more debtors in one
and the same obligation does not imply that each one of the former has a right to demand, or
that each one of the latter is bound to render, entire compliance with the prestations. There is
a solidary liability only when the obligation expressly so states, or when the law or the nature
of the obligation requires solidarity."
In the dispositive portion of the January 31, 1984 Decision of the trial court, the word solidary neither
appears nor can it be inferred therefrom. The fallo merely stated that the following respondents were
liable: Pacific Lloyd Corporation, Thomas H. Van Sebille, Carlos M. Farrales and Federico C. Lim.
Under the circumstances, the liability is joint, as provided by the Civil Code, which we quote:
"ARTICLE 1208. If from the law, or the nature or the wording of the obligations to which the
preceding article refers[,] the contrary does not appear, the credit or debt shall be presumed
to be divided into as many equal shares as there are creditors or debtors x x x"22
We should stress that respondent's obligation is based on the judgment rendered by the trial court.
The dispositive portion or the fallo is its decisive resolution and is thus the subject of execution. The
other parts of the decision may be resorted to in order to determine the ratio decidendi for the
disposition. Where there is a conflict between the dispositive part and the opinion of the court
contained in the text or body of the decision, the former must prevail over the latter on the theory that
the dispositive portion is the final order, while the opinion is merely a statement ordering
nothing23 Hence the execution must conform with that which is ordained or decreed in the dispositive
portion of the decision.
Petitioner maintains that the Court of Appeals improper and incorrectly disregarded the body of the
trial court's Decision, which clearly stated as follows:
"To support the Promissory Note, a Continuing Suretyship Agreement was executed by the
defendants, Federico C. Lim, Carlos M. Farrales and Thomas H. Van Sebille, in favor of the
plaintiff corporation, to the effect that if Pacific Lloyd Corporation cannot pay the amount
loaned by plaintiff to said corporation, then Federico C. Lim, Carlos M. Farrales and Thomas
H. Van Sebille will hold themselves jointly and severally together with defendant Pacific Lloyd
Corporation to answer for the payment of said obligation."24
As early as 1934 in Oriental Commercial Co. v. Abeto and Mabanag,25 this Court has already
answered such argument in this wise:
"It is of no consequence that, under the written contract of suretyship executed by the
parties, the obligation contracted by the sureties was joint and several in character. The final
judgment, which superseded the action brought for the enforcement of said contract,
declared the obligation to be merely joint, and the same cannot be executed otherwise."26
The same reasoning was recently adopted by this Court in Industrial Management International
Development Corp. v. NLRC,27 promulgated on May 11, 2000.
Doctrinally, the basis of execution is the January 31, 1984 Decision rendered by the trial court, not
the "written contract of suretyship" executed by the parties. As correctly observed by the trial judge:
30

Clause
"x x x [W]hat was stated in the body of the decision of January 31, 1984 [was] only part of
the narration of facts made by the Judge[,] and the dispositive portion is to prevail."28
The only exception when the body of a decision prevails over the fallo is when the inevitable
conclusion from the former is that there was a glaring error in the latter, in which case the body of
the decision will prevail.29 In this instance, there was no clear declaration in the body of the January
31, 1984 Decision to warrant a conclusion that there was an error in the fallo. Nowhere in the former
can we find a definite declaration of the trial court that, indeed, respondent's liability was solidary. If
petitioner had doubted this point, it should have filed a motion for reconsideration before the finality
of the Decision of the trial court.
Third Issue:
The Policy of Upholding Executions
Petitioner argues "that the issue of whether or not the judgment debt should be construed as joint or
solidary can only affect the determination of the existence or absence of an excess in the proceeds
of the sale."30 He further maintains that private respondent's interests are protected anyway even if
all his properties are sold, because "any excess in the proceeds of the sale over the judgment and
accruing costs must be delivered to the judgment debtor."31
We cannot accept these arguments. What can be sold on execution is limited by the Rules of Court,
as follows:
"When there is more property of the judgment obligor than is sufficient to satisfy the
judgment and lawful fees, he (sheriff) must sell only so much of the personal or real property
as is sufficient to satisfy the judgment and lawful fees."32
A writ of execution is void when issued for a sum greater than that which is warranted by the
judgment or for the original amount it states despite partial payment thereof. The exact amount due
cannot be left to the determination of the sheriff.33
Petitioner finally insists that it is "futile for private respondent to contest the sale in execution
conducted in the case at bar because of the general policy of the law to sustain execution sales."34
Simple logic dictates that a general policy to sustain execution sales does not guarantee that they
will be upheld at every instance. Petitioner itself quotes grounds for setting aside such sales: a
resulting injury or prejudice, fraud, mistake or irregularity.35
Being made to pay for an obligation in its entirety when one's liability is merely for a portion is a
sufficient ground to contest an execution sale. It would be the height of inequity if we allow judgment
obligors to shoulder entire monetary judgments when their legal liabilities are limited only to their
proportionate shares in the entire obligation.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
31

Clause
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 144413
July 30, 2004
REPUBLIC GLASS CORPORATION and GERVEL, INC, petitioners,

vs.
LAWRENCE C. QUA, respondent.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the 6 March 2000 Decision2 and the 26 July 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 54737. The Court of Appeals set aside the
Order3 of 3 May 1996 of the Regional Trial Court of Makati, Branch 63 ("RTC-Branch 63"), in Civil
Case No. 88-2643 and reinstated the Decision4 of 12 January 1996 in respondents favor.
The Facts
Petitioners Republic Glass Corporation ("RGC") and Gervel, Inc. ("Gervel") together with respondent
Lawrence C. Qua ("Qua") were stockholders of Ladtek, Inc. ("Ladtek"). Ladtek obtained loans from
Metropolitan Bank and Trust Company ("Metrobank")5 and Private Development Corporation of the
Philippines6 ("PDCP") with RGC, Gervel and Qua as sureties. Among themselves, RGC, Gervel and
Qua executed Agreements for Contribution, Indemnity and Pledge of Shares of Stocks
("Agreements").7
The Agreements all state that in case of default in the payment of Ladteks loans, the parties would
reimburse each other the proportionate share of any sum that any might pay to the creditors.8 Thus,
a common provision appears in the Agreements:
RGC, GERVEL and QUA each covenant that each will respectively reimburse the party
made to pay the Lenders to the extent and subject to the limitations set forth herein, all sums
of money which the party made to pay the Lenders shall pay or become liable to pay by
reason of any of the foregoing, and will make such payments within five (5) days from the
date that the party made to pay the Lenders gives written notice to the parties hereto that it
32

Clause
shall have become liable therefor and has advised the Lenders of its willingness to pay
whether or not it shall have already paid out such sum or any part thereof to the Lenders or
to the persons entitled thereto. (Emphasis supplied)
Under the same Agreements, Qua pledged 1,892,360 common shares of stock of General Milling
Corporation ("GMC") in favor of RGC and Gervel. The pledged shares of stock served as security for
the payment of any sum which RGC and Gervel may be held liable under the Agreements.
Ladtek defaulted on its loan obligations to Metrobank and PDCP. Hence, Metrobank filed a collection
case against Ladtek, RGC, Gervel and Qua docketed as Civil Case No. 8364 ("Collection Case No.
8364") which was raffled to the Regional Trial Court of Makati, Branch 149 ("RTC-Branch 149").
During the pendency of Collection Case No. 8364, RGC and Gervel paid Metrobank P7 million.
Later, Metrobank executed a waiver and quitclaim dated 7 September 1988 in favor of RGC and
Gervel. Based on this waiver and quitclaim,9 Metrobank, RGC and Gervel filed on 16 September
1988 a joint motion to dismiss Collection Case No. 8364 against RGC and Gervel. Accordingly,
RTC-Branch 149 dismissed the case against RGC and Gervel, leaving Ladtek and Qua as
defendants.10
In a letter dated 7 November 1988, RGC and Gervels counsel, Atty. Antonio C. Pastelero,
demanded that Qua pay P3,860,646, or 42.22% of P8,730,543.55,11 as reimbursement of the total
amount RGC and Gervel paid to Metrobank and PDCP. Qua refused to reimburse the amount to
RGC and Gervel. Subsequently, RGC and Gervel furnished Qua with notices of foreclosure of Quas
pledged shares.
Qua filed a complaint for injunction and damages with application for a temporary restraining order,
docketed as Civil Case No. 88-2643 ("Foreclosure Case No. 88-2643"), with RTC-Branch 63 to
prevent RGC and Gervel from foreclosing the pledged shares. Although it issued a temporary
restraining order on 9 December 1988, RTC-Branch 63 denied on 2 January 1989 Quas "Urgent
Petition to Suspend Foreclosure Sale." RGC and Gervel eventually foreclosed all the pledged shares
of stock at public auction. Thus, Quas application for the issuance of a preliminary injunction
became moot.12
Trial in Foreclosure Case No. 88-2643 ensued. RGC and Gervel offered Quas Motion to
Dismiss13 in Collection Case No. 8364 as basis for the foreclosure of Quas pledged shares. Quas
Motion to Dismiss states:
8. The foregoing facts show that the payment of defendants Republic Glass
Corporation and Gervel, Inc. was for the entire obligation covered by the Continuing
Surety Agreements which were Annexes "B" and "C" of the Complaint, and that the same
naturally redound[ed] to the benefit of defendant Qua herein, as provided for by law,
specifically Article 1217 of the Civil Code, which states that:
xxx
10. It is very clear that the payment of defendants Republic Glass Corporation and Gervel,
Inc. was much more than the amount stipulated in the Continuing Surety Agreement which is
the basis for the action against them and defendant Qua, which was just SIX MILLION TWO
HUNDRED [THOUSAND] PESOS (P6,200,000.00), hence, logically the said alleged
obligation must now be considered as fully paid and extinguished.
33

Clause
RGC and Gervel likewise offered as evidence in Foreclosure Case No. 88-2643 the Order
dismissing Collection Case No. 8364,14 which RTC-Branch 149 subsequently reversed on
Metrobanks motion for reconsideration. Thus, RTC-Branch 149 reinstated Collection Case No. 8364
against Qua.
On 12 January 1996, RTC-Branch 63 rendered a Decision in Foreclosure Case No. 88-2643 ("12
January 1996 Decision") ordering RGC and Gervel to return the foreclosed shares of stock to Qua.
The dispositive portion of the 12 January 1996 Decision reads:
WHEREFORE, premises considered, this Court hereby renders judgment ordering
defendants jointly and severally liable to return to plaintiff the 1,892,360 shares of common
stock of General Milling Corporation which they foreclosed on December 9, 1988, or should
the return of these shares be no longer possible then to pay to plaintiff the amount of
P3,860,646.00 with interest at 6% per annum from December 9, 1988 until fully paid and to
pay plaintiff P100,000.00 as and for attorneys fees. The costs will be for defendants
account.
SO ORDERED.15
However, on RGC and Gervels Motion for Reconsideration, RTC-Branch 63 issued its Order of 3
May 1996 ("3 May 1996 Order") reconsidering and setting aside the 12 January 1996 Decision. The
3 May 1996 Order states:
After a thorough review of the records of the case, and an evaluation of the evidence
adduced by the parties as well as their contentions, the issues to be resolved boil down to
the following:
1. Whether or not the parties obligation to reimburse, under the Indemnity
Agreements was premised on the payment by any of them of the entire obligation;
2. Whether or not there is basis to plaintiffs apprehension that he would be made to
pay twice for the single obligation; and
3. Whether or not plaintiff was benefited by the payments made by defendants.
Regarding the first issue, a closer scrutiny of the pertinent provisions of the Indemnity
Agreements executed by the parties would not reveal any significant indication that the
parties liabilities are indeed premised on the payment by any of them of the entire obligation.
These agreements clearly provide that the parties obligation to reimburse accrues upon
mere advice that one of them has paid or will so pay the obligation. It is not specified whether
the payment is for the entire obligation or not.
Accordingly, the Court stands corrected in this regard. The obvious conclusion that can be
seen now is that payment of the entire obligation is not a condition sine qua non for
the paying party to demand reimbursement. The parties have expressly contracted that
each will reimburse whoever is made to pay the obligation whether entirely or just a portion
thereof.
34

Clause
On the second issue, plaintiffs apprehension that he would be made to pay twice for the
single obligation is unfounded. Under the above-mentioned Indemnity Agreements, in the
event that the creditors are able to collect from him, he has the right to ask defendants to pay
their proportionate share, in the same way defendants had collected from the plaintiff, by
foreclosing his pledged shares of stock, his proportionate share, after they had made
payments. From all indications, the provisions of the Indemnity Agreements have remained
binding between the parties.
On the third issue, there is merit to defendants assertion that plaintiff has benefited from the
payments made by defendants. As alleged by defendants, and this has not been denied
by plaintiff, in Civil Case No. 8364 filed before Branch 149 of this Court, where the
creditors were enforcing the parties liabilities as sureties, plaintiff succeeded in
having the case dismissed by arguing that defendants payments [were] for the entire
obligation, hence, the obligation should be considered fully paid and extinguished.
With the dismissal of the case, the indications are that the creditors are no longer running
after plaintiff to enforce his liabilities as surety of Ladtek.
Whether or not the surety agreements signed by the parties and the creditors were novated
is not material in this controversy. The fact is that there was payment of the obligation.
Hence, the Indemnity Agreements govern.
In the final analysis, defendants payments gave rise to plaintiffs obligation to reimburse the
former. Having failed to do so, upon demand, defendants were justified in foreclosing the
pledged shares of stocks.
xxx
WHEREFORE, premises considered, the decision dated January 12, 1996 is reconsidered
and set aside. The above-entitled complaint against defendants is DISMISSED.
Likewise, defendants counterclaim is also dismissed.
SO ORDERED.16 (Emphasis supplied)
Qua filed a motion for reconsideration of the 3 May 1996 Order which RTC-Branch 63 denied.
Aggrieved, Qua appealed to the Court of Appeals. During the pendency of the appeal, Qua filed a
Manifestation17with the Court of Appeals attaching the Decision18 of 21 November 1996 rendered in
Collection Case No. 8364. The dispositive portion of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering defendants
Ladtek, Inc. and Lawrence C. Qua:
1. To pay, jointly and severally, the plaintiff the amount of P44,552,738.34 as of October 31,
1987 plus the stipulated interest of 30.73% per annum and penalty charges of 12% per
annum from November 1, 1987 until the whole amount is fully paid, less P7,000,000.00 paid
by defendants Republic Glass Corporation and Gervel, Inc., but the liability of defendant
Lawrence C. Qua should be limited only to P5,000,000.00 and P1,200,000.00, the
35

Clause
amount stated in the Continuing Suretyship dated June 15, 1983, Exh. "D" and
Continuing Suretyship dated December 14, 1981, Exh. "D-1", respectively, plus the
stipulated interest and expenses incurred by the plaintiff.
2. To pay, jointly and severally, the plaintiff an amount equivalent to ten (10%) percent of the
total amount due as and by way of attorneys fees;
3. To pay the cost of suit.
The Counterclaims of the defendants Ladtek, Inc. and Lawrence C. Qua against the plaintiff
are hereby dismissed.
Likewise, the cross-claims of the defendants are dismissed.
SO ORDERED.19 (Emphasis supplied)
On 6 March 2000, the Court of Appeals rendered the questioned Decision setting aside the 3 May
1996 Order of RTC-Branch 63 and reinstating the 12 January 1996 Decision ordering RGC and
Gervel to return the foreclosed shares of stock to Qua.20
Hence, this petition.
The Ruling of the Court of Appeals
In reversing the 3 May 1996 Order and reinstating the 12 January 1996 Decision, the appellate court
quoted the RTC-Branch 63s 12 January 1996 Decision:
The liability of each party under the indemnity agreements therefore is premised on the
payment by any of them of the entire obligation. Without such payment, there would be no
corresponding share to reimburse. Payment of the entire obligation naturally redounds to the
benefit of the other solidary debtors who must then reimburse the paying co-debtors to the
extent of his corresponding share.
In the case at bar, Republic Glass and Gervel made partial payments only, and so they did
not extinguish the entire obligation. But Republic Glass and Gervel nevertheless obtained
quitclaims in their favor and so they ceased to be solidarily liable with plaintiff for the balance
of the debt (Exhs. "D", "E", and "I"). Plaintiff thus became solely liable for the unpaid portion
of the debt even as he is being held liable for reimbursement on the said portion.
What happened therefore, was that Metrobank and PDCP in effect enforced the Suretyship
Agreements jointly as against plaintiff and defendants. Consequently, the solidary obligation
under the Suretyship Agreements was novated by the substantial modification of its principal
conditions. xxx The resulting change was from one with three solidary debtors to one in
which Lawrence Qua became the sole solidary co-debtor of Ladtek.
Defendants cannot simply pay off a portion of the debt and then absolve themselves from
any further liability when the obligation has not been totally extinguished.
36

Clause
xxx
In the final reckoning, this Court finds that the foreclosure and sale of the shares pledged by
plaintiff was totally unjustified and without basis because the obligation secured by the
underlying pledge had been extinguished by novation. xxx21
The Court of Appeals further held that there was an implied novation or substantial incompatibility in
the suretys mode or manner of payment from one for the entire obligation to one merely of
proportionate share. The appellate court ruled that RGC and Gervels payment to the creditors only
amounted to their proportionate shares of the obligation, considering the following evidence:
The letter of the Republic to the appellant, Exhibit "G", dated June 25, 1987, which
mentioned the letter from PDCP confirming its willingness to release the joint and solidary
obligation of the Republic and Gervel subject to some terms and conditions, one of which is
the appellants acceptable repayment plan of his "pro-rata share"; and the letter of PDCP to
the Republic, Exhibit "H", mentioning full payment of the "pro rata share" of the Republic and
Gervel, and the need of the appellant to submit an acceptable repayment plan covering his
"pro-rata share", the release from solidary liability by PDCP, Exhibit "J", mentioning full
payment by the Republic and Gervel of their "pro rata share" in the loan, as solidary obligors,
subject however to the terms and conditions of the hold out agreement; and the nonpayment in full of the loan, subject of the May 10, 1984 Promissory Note, except the 7 million
payment by both Republic and Gervel, as mentioned in the Decision (Case No. 8364,
Metrobank vs. Ladtek, et al). Precisely, Ladtek and the appellant, in said Decision were
directed to pay Metrobank the balance of P9,560,798, supposedly due and unpaid.
Thus, the payment did not extinguish the entire obligation and did not benefit Qua. Accordingly, RGC
and Gervel cannot demand reimbursement. The Court of Appeals also held that Qua even became
solely answerable for the unpaid balance of the obligations by virtue of the quitclaims executed by
Metrobank and PDCP in favor of RGC and Gervel. RGC and Gervel ceased to be solidarily liable for
Ladteks loan obligations.22
The Issues
RGC and Gervel raise the following issues for resolution:
I.
WHETHER THE PRINCIPLE OF ESTOPPEL APPLIES TO QUAS JUDICIAL
STATEMENTS THAT RGC AND GERVEL PAID THE ENTIRE OBLIGATION.
II.
WHETHER PAYMENT OF THE ENTIRE OBLIGATION IS A CONDITION SINE QUA
NON FOR RGC AND GERVEL TO DEMAND REIMBURSEMENT FROM QUA UNDER THE
INDEMNITY AGREEMENTS EXECUTED BY THEM AFTER RGC AND GERVEL PAID
METROBANK UNDER THE SURETY AGREEMENT.
III.
37

Clause
ASSUMING ARGUENDO THAT THERE WAS NOVATION OF THE SURETY
AGREEMENTS SIGNED BY THE PARTIES AND THE CREDITORS, WHETHER THE
NOVATION IS MATERIAL IN THIS CASE.23
The Courts Ruling
We deny the petition.
Whether Qua was in estoppel
RGC and Gervel contend that Qua is in estoppel for making conflicting statements in two different
and separate cases. Qua cannot now claim that the payment made to Metrobank was not for
the entire obligation because of his Motion to Dismiss Collection Case No. 8364 where he stated
that RGC and Gervels payment was for theentire obligation.
The essential elements of estoppel in pais are considered in relation to the party to be estopped, and
to the party invoking the estoppel in his favor. On the party to be estopped, such party (1) commits
conduct amounting tofalse representation or concealment of material facts or at least calculated to
convey the impression that the facts are inconsistent with those which the party subsequently
attempts to assert; (2) has the intent, or at least expectation that his conduct shall at least influence
the other party; and (3) has knowledge, actual or constructive, of the real facts. On the party
claiming the estoppel, such party (1) has lack of knowledge and of the means of knowledge of the
truth on the facts in question; (2) has relied, in good faith, on the conduct or statements of the party
to be estopped; (3) has acted or refrained from acting based on such conduct or statements as to
change the position or status of the party claiming the estoppel, to his injury, detriment or prejudice.24
In this case, the essential elements of estoppel are inexistent.
While Quas statements in Collection Case No. 8364 conflict with his statements in Foreclosure
Case No. 88-2643, RGC and Gervel miserably failed to show that Qua, in making those statements,
intended to falsely represent or conceal the material facts. Both parties undeniably know the real
facts.
Nothing in the records shows that RGC and Gervel relied on Quas statements in Collection Case
No. 8364 such that they changed their position or status, to their injury, detriment or prejudice. RGC
and Gervel repeatedly point out that it was the presiding judge25 in Collection Case No. 8364 who
relied on Quas statements in Collection Case No. 8364. RGC and Gervel claim that Qua
"deliberately led the Presiding Judge to believe" that their payment to Metrobank was for the entire
obligation. As a result, the presiding judge ordered the dismissal of Collection Case No. 8364
against Qua.26
RGC and Gervel further invoke Section 4 of Rule 129 of the Rules of Court to support their stance:
Sec. 4. Judicial admissions. An admission, verbal or written, made by a party in the course
of the proceedings in the same case, does not require proof. The admission may be
contradicted only by showing that it was made through palpable mistake or that no such
admission was made.
38

Clause
A party may make judicial admissions in (a) the pleadings filed by the parties, (b) during the trial
either by verbal or written manifestations or stipulations, or (c) in other stages of the judicial
proceeding.27
The elements of judicial admissions are absent in this case. Qua made conflicting statements in
Collection Case No. 8364 and in Foreclosure Case No. 88-2643, and not in the "same case" as
required in Section 4 of Rule 129. To constitute judicial admission, the admission must be made in
the same case in which it is offered. If made in another case or in another court, the fact of such
admission must be proved as in the case of any other fact, although if made in a judicial proceeding
it is entitled to greater weight.28
RGC and Gervel introduced Quas Motion to Dismiss and the Order dismissing Collection Case No.
8364 to prove Quas claim that the payment was for the entire obligation. Qua does not deny making
such statement but explained that he "honestly believed and pleaded in the lower court and in CAG.R. CV No. 58550 that the entire debt was fully extinguished when the petitioners paid P7 million to
Metrobank."29
We find Quas explanation substantiated by the evidence on record. As stated in the Agreements,
Ladteks original loan from Metrobank was only P6.2 million. Therefore, Qua reasonably believed
that RGC and Gervels P7 million payment to Metrobank pertained to the entire obligation. However,
subsequent facts indisputably show that RGC and Gervels payment was not for the entire
obligation. RTC-Branch 149 reinstated Collection Case No. 8364 against Qua and ruled in
Metrobanks favor, ordering Qua to pay P6.2 million.
Whether payment of the entire obligation is an essential condition for reimbursement
RGC and Gervel assail the Court of Appeals ruling that the parties liabilities under the Agreements
depend on the full payment of the obligation. RGC and Gervel insist that it is not an essential
condition that the entire obligation must first be paid before they can seek reimbursement from Qua.
RGC and Gervel contend that Qua should pay 42.22% of any amount which they paid or would pay
Metrobank and PDCP.
RGC and Gervels contention is partly meritorious.
Payment of the entire obligation by one or some of the solidary debtors results in a corresponding
obligation of the other debtors to reimburse the paying debtor.30 However, we agree with RGC and
Gervels contention that in this case payment of the entire obligation is not an essential condition
before they can seek reimbursement from Qua. The words of the Agreements are clear.
RGC, GERVEL and QUA each covenant that each will respectively reimburse the party
made to pay the Lenders to the extent and subject to the limitations set forth herein, all
sums of money which the party made to pay the Lenders shall pay or become liable to
pay by reason of any of the foregoing, and will make such payments within five (5) days from
the date that the party made to pay the Lenders gives written notice to the parties hereto that
it shall have become liable therefor and has advised the Lenders of its willingness to pay
whether or not it shall have already paid out such sum or any part thereof to the Lenders or
to the persons entitled thereto. (Emphasis supplied)
39

Clause
The Agreements are contracts of indemnity not only against actual loss but against liability as well.
In Associated Insurance & Surety Co., Inc. v. Chua,31 we distinguished between a contract of
indemnity against loss and a contract of indemnity against liability, thus:32
The agreement here sued upon is not only one of indemnity against loss but of indemnity
against liability. While the first does not render the indemnitor liable until the person to be
indemnified makes payment or sustains loss, the second becomes operative as soon as
the liability of the person indemnified arises irrespective of whether or not he has
suffered actual loss. (Emphasis supplied)
Therefore, whether the solidary debtor has paid the creditor, the other solidary debtors should
indemnify the former once his liability becomes absolute. However, in this case, the liability of RGC,
Gervel and Qua became absolute simultaneously when Ladtek defaulted in its loan payment. As a
result, RGC, Gervel and Qua all became directly liable at the same time to Metrobank and PDCP.
Thus, RGC and Gervel cannot automatically claim for indemnity from Qua because Qua himself is
liable directly to Metrobank and PDCP.
If we allow RGC and Gervel to collect from Qua his proportionate share, then Qua would pay much
more than his stipulated liability under the Agreements. In addition to the P3,860,646 claimed by
RGC and Gervel, Qua would have to pay his liability of P6.2 million to Metrobank and more than P1
million to PDCP. Since Qua would surely exceed his proportionate share, he would then recover
from RGC and Gervel the excess payment. This situation is absurd and circuitous.
Contrary to RGC and Gervels claim, payment of any amount will not automatically result in
reimbursement. If a solidary debtor pays the obligation in part, he can recover reimbursement from
the co-debtors only in so far as his payment exceeded his share in the obligation.33 This is precisely
because if a solidary debtor pays an amount equal to his proportionate share in the obligation, then
he in effect pays only what is due from him. If the debtor pays less than his share in the obligation,
he cannot demand reimbursement because his payment is less than his actual debt.
To determine whether RGC and Gervel have a right to reimbursement, it is indispensable to
ascertain the total obligation of the parties. At this point, it becomes necessary to consider the
decision in Collection Case No. 8364 on the parties obligation to Metrobank. To repeat, Metrobank
filed Collection Case No. 8364 against Ladtek, RGC, Gervel and Qua to collect Ladteks unpaid
loan.
RGC and Gervel assail the Court of Appeals consideration of the decision in Collection Case No.
836434 because Qua did not offer the decision in evidence during the trial in Foreclosure Case No.
88-2643 subject of this petition. RTC-Branch 6235 rendered the decision in Collection Case No. 8364
on 21 November 1996 while Qua filed his Notice of Appeal of the 3 May 1996 Order on 19 June
1996. Qua could not have possibly offered in evidence the decision in Collection Case No. 8364
because RTC-Branch 62 rendered the decision only after Qua elevated the present case to the
Court of Appeals. Hence, Qua submitted the decision in Collection Case No. 8364 during the
pendency of the appeal of Foreclosure Case No. 88-2643 in the Court of Appeals.
As found by RTC-Branch 62, RGC, Gervel and Quas total obligation was P14,200,854.37 as of 31
October 1987.36 During the pendency of Collection Case No. 8364, RGC and Gervel paid Metrobank
P7 million. Because of the payment, Metrobank executed a quitclaim37 in favor of RGC and Gervel.
By virtue of Metrobanks quitclaim, RTC-Branch 62 dismissed Collection Case No. 8364 against
40

Clause
RGC and Gervel, leaving Ladtek and Qua as defendants. Considering that RGC and Gervel paid
only P7 million out of the total obligation of P14,200,854.37, which payment was less than RGC and
Gervels combined shares in the obligation,38 it was clearly partial payment. Moreover, if it were full
payment, then the obligation would have been extinguished. Metrobank would have also released
Qua from his obligation.
RGC and Gervel also made partial payment to PDCP. Proof of this is the Release from Solidary
Liability that PDCP executed in RGC and Gervels favor which stated that their payment of
P1,730,543.55 served as "full payment of their corresponding proportionate share" in Ladteks
foreign currency loan.39 Moreover, PDCP filed a collection case against Qua alone, docketed as Civil
Case No. 2259, in the Regional Trial Court of Makati, Branch 150.40
Since they only made partial payments, RGC and Gervel should clearly and convincingly show that
their payments to Metrobank and PDCP exceeded their proportionate shares in the obligations
before they can seek reimbursement from Qua. This RGC and Gervel failed to do. RGC and Gervel,
in fact, never claimed that their payments exceeded their shares in the obligations. Consequently,
RGC and Gervel cannot validly seek reimbursement from Qua.
Whether there was novation of the Agreements
RGC and Gervel contend that there was no novation of the Agreements. RGC and Gervel further
contend that any novation of the Agreements is immaterial to this case. RGC and Gervel disagreed
with the Court of Appeals on the effect of the "implied novation" which supposedly transpired in this
case. The Court of Appeals found that "there was an implied novation or substantial incompatibility in
the mode or manner of payment by the surety from the entire obligation, to one merely of
proportionate share." RGC and Gervel claim that if it is true that an implied novation occurred, then
the effect "would be to release respondent (Qua) as the entire obligation is considered extinguished
by operation of law." Thus, Qua should now reimburse RGC and Gervel his proportionate share
under the surety agreements.
Novation extinguishes an obligation by (1) changing its object or principal conditions; (2) substituting
the person of the debtor; and (3) subrogating a third person in the rights of the creditor. Article 1292
of the Civil Code clearly provides that in order that an obligation may be extinguished by another
which substitutes the same, it should be declared in unequivocal terms, or that the old and new
obligations be on every point incompatible with each other.41 Novation may either be extinctive or
modificatory. Novation is extinctive when an old obligation is terminated by the creation of a new
obligation that takes the place of the former. Novation is merely modificatory when the old obligation
subsists to the extent it remains compatible with the amendatory agreement.42
We find that there was no novation of the Agreements. The parties did not constitute a new
obligation to substitute the Agreements. The terms and conditions of the Agreements remain the
same. There was also no showing of complete incompatibility in the manner of payment of the
parties obligations. Contrary to the Court of Appeals ruling, the mode or manner of payment by the
parties did not change from one for the entire obligation to one merely of proportionate share. The
creditors, namely Metrobank and PDCP, merely proceeded against RGC and Gervel for their
proportionate shares only.43 This preference is within the creditors discretion which did not
necessarily affect the nature of the obligations as well as the terms and conditions of the
Agreements. A creditor may choose to proceed only against some and not all of the solidary debtors.
41

Clause
The creditor may also choose to collect part of the debt from some of the solidary debtors, and the
remaining debt from the other solidary debtors.
In sum, RGC and Gervel have no legal basis to seek reimbursement from Qua. Consequently, RGC
and Gervel cannot validly foreclose the pledge of Quas GMC shares of stock which secured his
obligation to reimburse.44Therefore, the foreclosure of the pledged shares of stock has no leg to
stand on.
WHEREFORE, we DENY the petition. The Decision dated 6 March 2000 of the Court of Appeals in
CA-G.R. CV No. 54737 is AFFIRMED. Costs against petitioners.
SO ORDERED.
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 159709
June 27, 2012
HEIRS OF SERVANDO FRANCO, Petitioners,

vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents.
DECISION
BERSAMIN, J.:
There is novation when there is an irreconcilable incompatibility between the old and the new
obligations. There is no novation in case of only slight modifications; hence, the old obligation
prevails.
The petitioners challenge the decision promulgated on March 19, 2003,1 whereby the Court of
Appeals (CA) upheld the issuance of a writ of execution by the Regional Trial Court (RTC), Branch
16, in Malolos, Bulacan.
Antecedents
The Court adopts the following summary of the antecedents rendered by the Court in Medel v. Court
of Appeals,2the case from which this case originated, to wit:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
42

Clause
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount
of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note
to evidence the loan, maturing on January 19, 1986. They received only P84,000.00, out of the
proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount
of P300,000.00, maturing in one month, secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia
Medel, authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in
favor of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only
the sum of P275,000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all
their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the
amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R.
GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino,
of legal age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE
HUNDRED THOUSAND ..... (P500,000.00) Philippine
Currency with interest thereon at the rate of 5.5PER CENT per month plus 2% service charge per an
num from date hereof until fully paid according to the amortization schedule contained herein.
(Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the other installments
together with all interest accrued shall immediately be due and payable and I/WE hereby agree to
pay
an additional amount equivalent to one per cent (1%) per month of the amount due anddemandable
as penalty charges in the form of liquidated damages until fully paid; and the
furthersum of TWENTY FIVE PER CENT (25%) thereof in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due and
demandable, exclusive of costs and judicial or extra judicial expenses. (Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan is increased by law or the
Central Bank of the Philippines, the holder shall have the option to apply and collect the increased
43

Clause
interest charges without notice although the original interest have already been collected wholly or
partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the amount of pesoobligation under this agreement is based on the present value of peso, and if there be any change in
the value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the
peso-obligation herein contracted shall be adjusted in accordance with the value of the peso then
prevailing at the time of the complete fulfillment of obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of
this note or extension of payments, reserving rights against each and all indorsers and all parties to
this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their
rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court."
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests
and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with
the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the
full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged
that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel
who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and
benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the
plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that the
loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs
over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at
5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per
month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable, illegal
and excessive, and that substantial payments made were applied to interest, penalties and other
charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate
of interest for loan or forbearance of money, goods or credit is 12% per annum."
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which
reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
44

Clause
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1%
per month as penalty, until the entire amount is paid in full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally
the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from
November 19,1985 until the whole amount is fully paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00
plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole
amount is fully paid;
"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as
attorney's fees;
"5. All counterclaims are hereby dismissed.
"With costs against the defendants."
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular
No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods
or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not
when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law
having become legally inexistent with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and borrower could agree on any interest that may be charged on the loan". The
Court of Appeals further held that "the imposition of an additional amount equivalent to 1% per
month of the amount due and demandable as penalty charges in the form of liquidated damages
until fully paid was allowed by law".
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of the
Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby
ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service
charge per annum effective July 23, 1986, plus 1% per month of the total amount due and
demandable as penalty charges effective August 24, 1986, until the entire amount is fully paid.
"The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition of
costs against the defendants.
"SO ORDERED."
45

Clause
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By
resolution dated November 25, 1997, the Court of Appeals denied the motion.3
On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the interest
for being iniquitous or unconscionable, and revived the judgment of the RTC rendered on December
9, 1991, viz:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial
Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same
parties.
No pronouncement as to costs in this instance.
SO ORDERED.4
Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for
execution.5 Servando Franco opposed,6 claiming that he and the respondents had agreed to fix the
entire obligation at P775,000.00.7According to Servando, their agreement, which was allegedly
embodied in a receipt dated February 5, 1992,8whereby he made an initial payment of P400,000.00
and promised to pay the balance of P375,000.00 on February 29, 1992, superseded the July 23,
1986 promissory note.
The RTC granted the motion for execution over Servandos opposition, thus:
There is no doubt that the decision dated December 9, 1991 had already been affirmed and had
already become final and executory. Thus, in accordance with Sec. 1 of Rule 39 of the 1997 Rules
of Civil Procedure, execution shall issue as a matter of right. It has likewise been ruled that a
judgment which has acquired finality becomes immutable and unalterable and hence may no longer
be modified at any respect except only to correct clerical errors or mistakes (Korean Airlines Co. Ltd.
vs. C.A., 247 SCRA 599). In this respect, the decision deserves to be respected.
The argument about the modification of the contract or non-participation of defendant Servando
Franco in the proceedings on appeal on the alleged belief that the payment he made had already
absolved him from liability is of no moment. Primarily, the decision was for him and Leticia Medel to
pay the plaintiffs jointly and severally the amounts stated in the Decision. In other words, the liability
of the defendants thereunder is solidary. Based on this aspect alone, the new defense raised by
defendant Franco is unavailing.
WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for Execution of
Judgment.
Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriff of this Court.
SO ORDERED.9
On March 8, 2001, the RTC issued the writ of execution.10
46

Clause
Servando moved for reconsideration,11 but the RTC denied his motion.12
On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that the execution
was proper because of Servandos failure to comply with the terms of the compromise agreement,
stating:13
Petitioner cannot deny the fact that there was no full compliance with the tenor of the compromise
agreement. Private respondents on their part did not disregard the payments made by the petitioner.
They even offered that whatever payments made by petitioner, it can be deducted from the principal
obligation including interest. However, private respondents posit that the payments made cannot
alter, modify or revoke the decision of the Supreme Court in the instant case.
In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the Supreme
Court ruled that:
"When the terms of the compromise judgment is violated, the aggrieved party must move for its
execution, not its invalidation."
It is clear from the aforementioned jurisprudence that even if there is a compromise agreement and
the terms have been violated, the aggrieved party, such as the private respondents, has the right to
move for the issuance of a writ of execution of the final judgment subject of the compromise
agreement.
Moreover, under the circumstances of this case, petitioner does not stand to suffer any harm or
prejudice for the simple reason that what has been asked by private respondents to be the subject of
a writ of execution is only the balance of petitioners obligation after deducting the payments made
on the basis of the compromise agreement.
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE and
consequently DISMISSED for lack of merit.
SO ORDERED.
His motion for reconsideration having been denied,14 Servando appealed. He was eventually
substituted by his heirs, now the petitioners herein, on account of his intervening death. The
substitution was pursuant to the resolution dated June 15, 2005.15
Issue
The petitioners submit that the CA erred in ruling that:
I
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT
OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE AGREEMENT
BETWEEN THE PARTIES ON 5 FEBRUARY 1992.
II
47

Clause
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON THE
DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN AND NOT ON THE COMPROMISE AGREEMENT EXECUTED IN
1992.
The petitioners insist that the RTC could not validly enforce a judgment based on a promissory note
that had been already novated; that the promissory note had been impliedly novated when the
principal obligation ofP500,000.00 had been fixed at P750,000.00, and the maturity date had been
extended from August 23, 1986 to February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final and
executory decision of the Court; that novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum receipt; that Servandos previous
payment would be deducted from the total liability of the debtors based on the RTCs decision.
Issue
Was there a novation of the August 23, 1986 promissory note when respondent Veronica Gonzales
issued the February 5, 1992 receipt?
Ruling
The petition lacks merits.
I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt issued on February 5, 1992 by
respondent Veronica whereby Servandos obligation was fixed at P750,000.00. They insist that even
the maturity date was extended until February 29, 1992. Such changes, they assert, were
incompatible with those of the original agreement under the promissory note.
The petitioners assertion is wrong.
A novation arises when there is a substitution of an obligation by a subsequent one that extinguishes
the first, either by changing the object or the principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the creditor.16 For a valid novation to take
place, there must be, therefore: (a) a previous valid obligation; (b) an agreement of the parties to
make a new contract; (c) an extinguishment of the old contract; and (d) a valid new contract.17 In
short, the new obligation extinguishes the prior agreement only when the substitution is
unequivocally declared, or the old and the new obligations are incompatible on every point. A
compromise of a final judgment operates as a novation of the judgment obligation upon compliance
with either of these two conditions.18
48

Clause
The receipt dated February 5, 1992, excerpted below, did not create a new obligation incompatible
with the old one under the promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Managers Check No. 001700 in the amount
of P400,00.00 as partial payment of loan. Balance of P375,000.00 to be paid on or before
FEBRUARY 29, 1992. In case of default an interest will be charged as stipulated in the promissory
note subject of this case.
(Sgd)
V. Gonzalez19
To be clear, novation is not presumed. This means that the parties to a contract should expressly
agree to abrogate the old contract in favor of a new one. In the absence of the express agreement,
the old and the new obligations must be incompatible on every point.20 According to California Bus
Lines, Inc. v. State Investment House, Inc.:21
The extinguishment of the old obligation by the new one is a necessary element of novation which
may be effected either expressly or impliedly. The term "expressly" means that the contracting
parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old
one. Upon the other hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts. While there is really no
hard and fast rule to determine what might constitute to be a sufficient change that can bring about
novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between
the old and the new obligations.
1wphi1
There is incompatibility when the two obligations cannot stand together, each one having its
independent existence. If the two obligations cannot stand together, the latter obligation novates the
first.22 Changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must affect any of the essential elements of the obligation, such as its object, cause
or principal conditions thereof; otherwise, the change is merely modificatory in nature and insufficient
to extinguish the original obligation.23
In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the
respondents only thereby recognized the original obligation by stating in the receipt that
the P400,000.00 was "partial payment of loan" and by referring to "the promissory note subject of the
case in imposing the interest." The loan mentioned in the receipt was still the same loan involving
the P500,000.00 extended to Servando. Advertence to the interest stipulated in the promissory note
indicated that the contract still subsisted, not replaced and extinguished, as the petitioners claim.
The receipt dated February 5, 1992 was only the proof of Servandos payment of his obligation as
confirmed by the decision of the RTC. It did not establish the novation of his agreement with the
respondents. Indeed, the Court has ruled that an obligation to pay a sum of money is not novated by
an instrument that expressly recognizes the old, or changes only the terms of payment, or adds
other obligations not incompatible with the old ones, or the new contract merely supplements the old
one.24 A new contract that is a mere reiteration, acknowledgment or ratification of the old contract
with slight modifications or alterations as to the cause or object or principal conditions can stand
together with the former one, and there can be no incompatibility between them.25Moreover, a
49

Clause
creditors acceptance of payment after demand does not operate as a modification of the original
contract.26
Worth noting is that Servandos liability was joint and solidary with his co-debtors. In a solidary
obligation, the creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously.27 The choice to determine against whom the collection is enforced belongs to the
creditor until the obligation is fully satisfied.28Thus, the obligation was being enforced against
Servando, who, in order to escape liability, should have presented evidence to prove that his
obligation had already been cancelled by the new obligation or that another debtor had assumed his
place. In case of change in the person of the debtor, the substitution must be clear and
express,29 and made with the consent of the creditor.30 Yet, these circumstances did not obtain
herein, proving precisely that Servando remained a solidary debtor against whom the entire or part
of the obligation might be enforced.
Lastly, the extension of the maturity date did not constitute a novation of the previous agreement. It
is settled that an extension of the term or period of the maturity date does not result in novation.31
II
Total liability to be reduced by P400,000.00
The petitioners argue that Servandos remaining liability amounted to only P375,000.00, the balance
indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet due because the
respondents did not yet make a demand for payment.
The petitioners cannot be upheld.
The balance of P375,000.00 was premised on the taking place of a novation. However, as found
now, novation did not take place. Accordingly, Servandos obligation, being solidary, remained to be
that decreed in the December 9, 1991 decision of the RTC, inclusive of interests, less the amount
of P400,000.00 that was meanwhile paid by him.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on March 19,
2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with the
execution based on its decision rendered on December 9, 1991, deducting the amount
of P400,000.00 already paid by the late Servando Franco; and DIRECTS the petitioners to pay the
costs of suit.
SO ORDERED.
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-28046 May 16, 1983
50

Clause
PHILIPPINE NATIONAL BANK, plaintiff-appellant,
vs.
INDEPENDENT PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN FAJARDO,
CEFERINO VALENCIA, MOISES CARANDANG, LUCIANO CASTILLO, AURELIO VALENCIA,
LAURO LEVISTE, GAVINO GONZALES, LOPE GEVANA and BONIFACIO
LAUREANA, defendants-appellees.
Basa, Ilao, del Rosario Diaz for plaintiff-appellant.
Laurel Law Office for Dimayuga.
Tomas Yumol for Fajardo, defendant-appellee.
PLANA, J.:
Appeal by the Philippine National Bank (PNB) from the Order of the defunct Court of First Instance
of Manila (Branch XX) in its Civil Case No. 46741 dismissing PNB's complaint against several
solidary debtors for the collection of a sum of money on the ground that one of the defendants
(Ceferino Valencia) died during the pendency of the case (i.e., after the plaintiff had presented its
evidence) and therefore the complaint, being a money claim based on contract, should be
prosecuted in the testate or intestate proceeding for the settlement of the estate of the deceased
defendant pursuant to Section 6 of Rule 86 of the Rules of Court which reads:
SEC. 6. Solidary obligation of decedent. the obligation of the decedent is solidary
with another debtor, the claim shall be filed against the decedent as if he were the
only debtor, without prejudice to the right of the estate to recover contribution from
the other debtor. In a joint obligation of the decedent, the claim shall be confined to
the portion belonging to him.
The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of
its solidary debtors under Article 1216 of the Civil Code
ART. 1216. The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall not
be an obstacle to those which may subsequently be directed against the others, so
long as the debt has not been fully collected.
The sole issue thus raised is whether in an action for collection of a sum of money based on contract
against all the solidary debtors, the death of one defendant deprives the court of jurisdiction to
proceed with the case against the surviving defendants.
It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek
satisfaction of his credit from one, some or all of his solidary debtors, as he deems fit or convenient
for the protection of his interests; and if, after instituting a collection suit based on contract against
some or all of them and, during its pendency, one of the defendants dies, the court retains
51

Clause
jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants.
Thus in Manila Surety & Fidelity Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897, this Court ruled:
Construing Section 698 of the Code of Civil Procedure from whence the aforequoted
provision (Sec. 6, Rule 86) was taken, this Court held that where two persons are
bound in solidum for the same debt and one of them dies, the whole indebtedness
can be proved against the estate of the latter, the decedent's liability being absolute
and primary; and if the claim is not presented within the time provided by the rules,
the same will be barred as against the estate. It is evident from the foregoing that
Section 6 of Rule 87 (now Rule 86) provides the procedure should the creditor desire
to go against the deceased debtor, but there is certainly nothing in the said provision
making compliance with such procedure a condition precedent before an ordinary
action against the surviving solidary debtors, should the creditor choose to demand
payment from the latter, could be entertained to the extent that failure to observe the
same would deprive the court jurisdiction to take cognizance of the action against the
surviving debtors. Upon the other hand, the Civil Code expressly allows the creditor
to proceed against any one of the solidary debtors or some or all of them
simultaneously. There is, therefore, nothing improper in the creditor's filing of an
action against the surviving solidary debtors alone, instead of instituting a proceeding
for the settlement of the estate of the deceased debtor wherein his claim could be
filed.
Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice
Makasiar, reiterated the doctrine.
A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court
reveals that nothing therein prevents a creditor from proceeding
against the surviving solidary debtors. Said provision merely sets up
the procedure in enforcing collection in case a creditor chooses to
pursue his claim against the estate of the deceased solidary, debtor.
It is crystal clear that Article 1216 of the New Civil Code is the
applicable provision in this matter. Said provision gives the creditor
the right to 'proceed against anyone of the solidary debtors or some
or all of them simultaneously.' The choice is undoubtedly left to the
solidary, creditor to determine against whom he will enforce
collection. In case of the death of one of the solidary debtors, he (the
creditor) may, if he so chooses, proceed against the surviving
solidary debtors without necessity of filing a claim in the estate of the
deceased debtors. It is not mandatory for him to have the case
dismissed against the surviving debtors and file its claim in the estate
of the deceased solidary debtor . . .
As correctly argued by petitioner, if Section 6, Rule 86 of the Revised
Rules of Court were applied literally, Article 1216 of the New Civil
Code would, in effect, be repealed since under the Rules of Court,
petitioner has no choice but to proceed against the estate of Manuel
Barredo only. Obviously, this provision diminishes the Bank's right
under the New Civil, Code to proceed against any one, some or all of
52

Clause
the solidary debtors. Such a construction is not sanctioned by the
principle, which is too well settled to require citation, that a
substantive law cannot be amended by a procedural rule. Otherwise
stared, Section 6, Rule 86 of the Revised Rules of Court cannot be
made to prevail over Article 1216 of the New Civil Code, the former
being merely procedural, while the latter, substantive.
WHEREFORE the appealed order of dismissal of the court a quo in its Civil Case No. 46741 is
hereby set aside in respect of the surviving defendants; and the case is remanded to the
corresponding Regional Trial Court for proceedings. proceedings. No costs.
SO ORDERED.
OBLIGATIONS WITH A PENAL CLAUSE

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 157480
May 6, 2005
PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioners,

vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an
agreement is terminated, it is deemed valid at inception. Prior to termination, the contract binds the
parties, who are thus obliged to observe its provisions. However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their status quo ante. Hence, there is mutual restitution of
benefits received. The consequences of termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not contrary to law, morals, good customs, public
order or public policy, they shall be respected by courts. The judiciary is not authorized to make or
modify contracts; neither may it rescue parties from disadvantageous stipulations. Courts, however,
are empowered to reduce iniquitous or unconscionable liquidated damages, indemnities and
penalties agreed upon by the parties.
The Case
53

Clause
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the May 22, 2002
Decision2 of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
Resolution3 denying petitioners Motion for Reconsideration. The assailed Decision disposed thus:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil
Case No. 93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering
[Respondent] Philippine Amusement and Gaming Corporation to pay [Petitioner] Pryce
Properties Corporation the total amount ofP687,289.50 as actual damages representing the
accrued rentals for the quarter September to November 1993 with interest and penalty at the
rate of two percent (2%) per month from date of filing of the complaint until the amount shall
have been fully paid, and the sum of P50,000.00 as attorneys fees; (2) In Civil Case No. 9368337, the appealed decision is REVERSED and SET ASIDE and a new judgment is
rendered ordering [Petitioner] Pryce Properties Corporation to reimburse [Respondent]
Philippine Amusement and Gaming Corporation the amount of P687,289.50 representing the
advanced rental deposits, which amount may be compensated by [Petitioner] Pryce
Properties Corporation with its award in Civil Case No. 93-68266 in the equal amount
of P687,289.50."4
The Facts
According to the CA, the facts are as follows:
"Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC
for brevity) made representations with the Philippine Amusement and Gaming Corporation
(PAGCOR) on the possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro
City. [A] series of negotiations followed. PAGCOR representatives went to Cagayan de Oro
City to determine the pulse of the people whether the presence of a casino would be
welcomed by the residents. Some local government officials showed keen interest in the
casino operation and expressed the view that possible problems were surmountable. Their
negotiations culminated with PPCs counter-letter proposal dated October 14, 1992.
"On November 11, 1992, the parties executed a Contract of Lease x x x involving the
ballroom of the Hotel for a period of three (3) years starting December 1, 1992 and until
November 30, 1995. On November 13, 1992, they executed an addendum to the contract x x
x which included a lease of an additional 1000 square meters of the hotel grounds as living
quarters and playground of the casino personnel. PAGCOR advertised the start of their
casino operations on December 18, 1992.
"Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed
Resolution No. 2295 x x x dated November 19, 1990 declaring as a matter of policy to
prohibit and/or not to allow the establishment of a gambling casino in Cagayan de Oro City.
Resolution No. 2673 x x x dated October 19, 1992 (or a month before the contract of lease
was executed) was subsequently passed reiterating with vigor and vehemence the policy of
the City under Resolution No. 2295, series of 1990, banning casinos in Cagayan de Oro City.
On December 7, 1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted
Ordinance No. 3353 x x x prohibiting the issuance of business permits and canceling existing
business permits to any establishment for using, or allowing to be used, its premises or any
portion thereof for the operation of a casino.
54

Clause
"In the afternoon of December 18, 1992 and just hours before the actual formal opening of
casino operations, a public rally in front of the hotel was staged by some local officials,
residents and religious leaders. Barricades were placed [which] prevented some casino
personnel and hotel guests from entering and exiting from the Hotel. PAGCOR was
constrained to suspend casino operations because of the rally. An agreement between PPC
and PAGCOR, on one hand, and representatives of the rallyists, on the other, eventually
ended the rally on the 20th of December, 1992.
"On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang
Panlungsod of Cagayan de Oro City, prohibiting the operation of casinos and providing for
penalty for violation thereof. On January 7, 1993, PPC filed a Petition for Prohibition with
Preliminary Injunction x x x against then public respondent Cagayan de Oro City and/or
Mayor Pablo P. Magtajas x x x before the Court of Appeals, docketed as CA G.R. SP No.
29851 praying inter alia, for the declaration of unconstitutionality of Ordinance No. 3353.
PAGCOR intervened in said petition and further assailed Ordinance No. 4475-93 as being
violative of the non-impairment of contracts and equal protection clauses. On March 31,
1993, the Court of Appeals promulgated its decision x x x, the dispositive portion of which
reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 337593 are hereby DECLARED UNCONSTITUTIONAL and VOID and the respondents
and all other persons acting under their authority and in their behalf are
PERMANENTLY ENJOINED from enforcing those ordinances.
SO ORDERED.
"Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the
case to the Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July
20, 1994 x x x, the Supreme Court denied the petition and affirmed the decision of the Court
of Appeals.
"In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which,
however, another public rally was held. Casino operations continued for some time, but were
later on indefinitely suspended due to the incessant demonstrations. Per verbal advice x x x
from the Office of the President of the Philippines, PAGCOR decided to stop its casino
operations in Cagayan de Oro City. PAGCOR stopped its casino operations in the hotel prior
to September, 1993. In two Statements of Account dated September 1, 1993 x x x, PPC
apprised PAGCOR of its outstanding account for the quarter September 1 to November 30,
1993. PPC sent PAGCOR another Letter dated September 3, 1993 x x x as a follow-up to
the parties earlier conference. PPC sent PAGCOR another Letter dated September 15,
1993 x x x stating its Board of Directors decision to collect the full rentals in case of pretermination of the lease.
"PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not
amenable to the payment of the full rentals citing as reasons unforeseen legal and other
circumstances which prevented it from complying with its obligations. PAGCOR further
stated that it had no other alternative but to pre-terminate the lease agreement due to the
relentless and vehement opposition to their casino operations. In a letter dated October 12,
1993 x x x, PAGCOR asked PPC to refund the total of P1,437,582.25 representing the
55

Clause
reimbursable rental deposits and expenses for the permanent improvement of the Hotels
parking lot. In a letter dated November 5, 1993 x x x, PAGCOR formally demanded from
PPC the payment of its claim for reimbursement.
"On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court
of Manila docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed
a case for sum of money in the Regional Trial Court of Manila docketed as Civil Case No.
93-68337.
"In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the
contract of lease due to PAGCORs continuing breach of the contract and further stated that
it was exercising its rights under the contract of lease pursuant to Article 20 (a) and (c)
thereof.
"On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266,
which the trial court admitted in an Order dated February 11, 1994. In an Order dated April
27, 1994, Civil Case No. 93-68377 was ordered consolidated with Civil Case No. 93-68266.
These cases were jointly tried by the court a quo. On August 17, 1995, the court a quo
promulgated its decision. Both parties appealed."5
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award
actual and moral damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the
courts ruling that the 2 percent penalty was to be imposed from the date of the promulgation of the
Decision, not from the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule that the Contract of
Lease had already been terminated as early as September 21, 1993, or at the latest, on October 14,
1993, when PPC received PAGCORs letter dated October 12, 1993. The gaming corporation added
that the trial court erred in 1) failing to consider that PPC was entitled to avail itself of the provisions
of Article XX only when PPC was the party terminating the Contract; 2) not finding that there were
valid, justifiable and good reasons for terminating the Contract; and 3) dismissing the Complaint of
PAGCOR in Civil Case No. 93-68337 for lack of merit, and not finding PPC liable for the
reimbursement of PAGCORS cash deposits and of the value of improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination of the Contract of
Lease was unjustified. The appellate court explained that public demonstrations and rallies could not
be considered as fortuitous events that would exempt the gaming corporation from complying with
the latters contractual obligations. Therefore, the Contract continued to be effective until PPC
elected to terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had
the right to ask for (1) rescission of the Contract and indemnification for damages; or (2) only
indemnification plus the continuation of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.
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Clause
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC
correctly exercised the option to terminate the lease agreement. Previously, the Contract remained
effective, and PPC could collect the accrued rentals. However, from the time it terminated the
Contract on November 25, 1993, PPC could no longer demand payment of the remaining rentals as
part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR
had acted in gross or evident bad faith in failing to pay the rentals from September to November
1993. Such failure was shown especially by the fact that PPC still had in hand three (3) months
advance rental deposits of PAGCOR. The former could have simply applied this deposit to the
unpaid rentals, as provided in the Contract. Neither did PPC adequately show that its reputation had
been besmirched or the hotels goodwill eroded by the establishment of the casino and the public
protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR
had not presented official receipts to prove the latters alleged expenses. The appellate court,
however, upheld the trial courts award to PPC of P50,000 attorneys fees.
Hence this Petition.6
Issues
In their Memorandum, petitioner raised the following issues:
"MAIN ISSUE:
"Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that
Pryce was not entitled to future rentals or lease payments for the unexpired period of the
Contract of Lease between Pryce and PAGCOR?
"Sub-Issues:
"1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the
right of PRYCE to terminate the Contract for cause and to moreover collect rentals from
PAGCOR corresponding to the remaining term of the lease valid and binding?
"2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract,
PRYCE having rescinded the Contract of Lease?
"3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited
by PAGCOR support its position that PRYCE was not entitled to future rentals?
"4. Would the collection by PRYCE of future rentals not give rise to unjust enrichment?
"5. Could we not have harmonized Article 1659 of the Civil Code and Article 20 of the
Contract of Lease?
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Clause
"6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts,
particularly in the PRYCE-PAGCOR Contract of Lease?"7
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it argues
thattermination, as defined under the Contract, is different from the remedy of rescission prescribed
under Article 1659 of the Civil Code. On the other hand, PAGCOR contends, as the CA ruled, that
Article 1659 of the Civil Code governs; hence, PPC is allegedly no longer entitled to future rentals,
because it chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that "obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith."8 In deference to the
rights of the parties, the law9allows them to enter into stipulations, clauses, terms and conditions they
may deem convenient; that is, as long as these are not contrary to law, morals, good customs, public
order or public policy. Likewise, it is settled that if the terms of the contract clearly express the
intention of the contracting parties, the literal meaning of the stipulations would be controlling.10
In this case, Article XX of the parties Contract of Lease provides in part as follows:
"XX. BREACH OR DEFAULT
"a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained
shall be deemed essential conditions of this contract, and in the event of default or breach of
any of such terms, conditions and/or covenants, or should the LESSEE become bankrupt, or
insolvent, or compounds with his creditors,the LESSOR shall have the right to terminate and
cancel this contract by giving them fifteen (15 days) prior notice delivered at the leased
premises or posted on the main door thereof. Upon such termination or cancellation, the
LESSOR may forthwith lock the premises and exclude the LESSEE therefrom, forcefully or
otherwise, without incurring any civil or criminal liability. During the fifteen (15) days notice,
the LESSEE may prevent the termination of lease by curing the events or causes of
termination or cancellation of the lease.
"b) x x x x x x x x x
"c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding
to the remaining term of the lease as well as for any and all damages, actual or
consequential resulting from such default and termination of this contract.
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Clause
"d) x x x x x x x x x." (Italics supplied)
The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to
terminate and cancel the Contract in the event of a default or breach by the lessee; and 2) to make
PAGCOR fully liable for rentals for the remaining term of the lease, despite the exercise of such right
to terminate. Plainly, the parties have voluntarily bound themselves to require strict compliance with
the provisions of the Contract by stipulating that a default or breach, among others, shall give the
lessee the termination option, coupled with the lessors liability for rentals for the remaining term of
the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public order
or public policy. Neither is there anything objectionable about the inclusion in the Contract of
mandatory provisions concerning the rights and obligations of the parties.11 Being the primary law
between the parties, it governs the adjudication of their rights and obligations. A court has no
alternative but to enforce the contractual stipulations in the manner they have been agreed upon and
written.12 It is well to recall that courts, be they trial or appellate, have no power to make or modify
contracts.13 Neither can they save parties from disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for "termination plus the full payment
of future rentals" under the provisions of the Contract, rather than just rescission under Article 1659
of the Civil Code. This Court is not unmindful of the fact that termination and rescission are terms
that have been used loosely and interchangeably in the past. But distinctions ought to be made,
especially in this controversy, in which the terms mean differently and lead to equally different
consequences.
The term "rescission" is found in 1) Article 119114 of the Civil Code, the general provision on
rescission of reciprocal obligations; 2) Article 1659,15 which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the lessor and the lessee in contracts of lease are
concerned; and 3) Article 138016 with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,17 Justice J. B. L. Reyes differentiated
rescission under Article 1191 from that under Article 1381 et seq. as follows:
"x x x. The rescission on account of breach of stipulations is not predicated on injury to
economic interests of the party plaintiff but on the breach of faith by the defendant, that
violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191
may be scanned without disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his obligations to the defendant.
This rescission is a principal action retaliatory in character, it being unjust that a party be held
bound to fulfill his promises when the other violates his. As expressed in the old Latin
aphorism: Non servanti fidem, non est fides servanda. Hence, the reparation of damages
for the breach is purely secondary.
"On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action
is subordinated to the existence of that prejudice, because it is the raison detre as well as
the measure of the right to rescind. x x x."18
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Clause
Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil
Code, and that the term became the basis for rescission under Article 1191 (and, conformably, also
Article 1659).19
Now, as to the distinction between termination (or cancellation) and rescission (more
properly, resolution),Huibonhoa v. CA20 held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial enforcement of a lease contract. Thus,
the remedy was not rescission, but termination or cancellation, of the contract. The Court explained:
"x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate the
contract because they sought its partial enforcement in praying for rental arrearages. There
is a distinction in law between cancellation of a contract and its rescission. To rescind is to
declare a contract void in its inception and to put an end to it as though it never were. It is not
merely to terminate it and release parties from further obligations to each other but to
abrogate it from the beginning and restore the parties to relative positions which they would
have occupied had no contract ever been made.
"x x x. The termination or cancellation of a contract would necessarily entail enforcement of
its terms prior to the declaration of its cancellation in the same way that before a lessee is
ejected under a lease contract, he has to fulfill his obligations thereunder that had accrued
prior to his ejectment. However, termination of a contract need not undergo judicial
intervention. x x x."21 (Italics supplied)
Rescission has likewise been defined as the "unmaking of a contract, or its undoing from the
beginning, and not merely its termination." Rescission may be effected by both parties by mutual
agreement; or unilaterally by one of them declaring a rescission of contract without the consent of
the other, if a legally sufficient ground exists or if a decree of rescission is applied for before the
courts.22 On the other hand, termination refers to an "end in time or existence; a close, cessation or
conclusion." With respect to a lease or contract, it means an ending, usually before the end of the
anticipated term of such lease or contract, that may be effected by mutual agreement or by one party
exercising one of its remedies as a consequence of the default of the other.23
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to
their original situation prior to the inception of the contract.24 Applying this principle to this case, it
means that PPC would re-acquire possession of the leased premises, and PAGCOR would get back
the rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation; neither is
the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply
with their contractual obligations. Only after the contract has been cancelled will they be released
from their obligations.
In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease
Contract from the beginning. This fact was evident when it first sought to collect the accrued rentals
from September to November 1993 because, as previously stated, it actually demanded the
enforcement of the Lease Contract prior to termination. Any intent to rescind was not shown, even
when it abrogated the Contract on November 25, 1993, because such abrogation was not
the rescission provided for under Article 1659.
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Clause
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto25 is inapplicable, because the remedy
resorted to by the lessors in that case was rescission, not termination. The rights and obligations of
the parties in Rios were governed by Article 1659 of the Civil Code; hence, the Court held that the
damages to which the lessor was entitled could not have extended to the lessees liability for future
rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of
anothers property after the termination of a contract. We stress that by abrogating the Contract in
the present case, PPC released PAGCOR from the latters future obligations, which included the
payment of rentals. To grant that right to the former is to unjustly enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest
from a reading of the mandatory provision under subparagraph (a) in conjunction with subparagraph
(c) of the Contract. A penal clause is "an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing on the debtor a special
prestation (generally consisting in the payment of a sum of money) in case the obligation is not
fulfilled or is irregularly or inadequately fulfilled."26
Quite common in lease contracts, this clause functions to strengthen the coercive force of the
obligation and to provide, in effect, for what could be the liquidated damages resulting from a
breach.27 There is nothing immoral or illegal in such indemnity/penalty clause, absent any showing
that it was forced upon or fraudulently foisted on the obligor.28
In obligations with a penal clause, the general rule is that the penalty serves as a substitute for the
indemnity for damages and the payment of interests in case of noncompliance; that is, if there is no
stipulation to the contrary,29 in which case proof of actual damages is not necessary for the penalty
to be demanded.30 There are exceptions to the aforementioned rule, however, as enumerated in
paragraph 1 of Article 1226 of the Civil Code: 1) when there is a stipulation to the contrary, 2) when
the obligor is sued for refusal to pay the agreed penalty, and 3) when the obligor is guilty of fraud. In
these cases, the purpose of the penalty is obviously to punish the obligor for the breach. Hence, the
obligee can recover from the former not only the penalty, but also other damages resulting from the
nonfulfillment of the principal obligation. 31
In the present case, the first exception applies because Article XX (c) provides that, aside from the
payment of the rentals corresponding to the remaining term of the lease, the lessee shall also be
liable "for any and all damages, actual or consequential, resulting from such default and termination
of this contract." Having entered into the Contract voluntarily and with full knowledge of its
provisions, PAGCOR must be held bound to its obligations. It cannot evade further liability for
liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts.32 This
power is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:
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Clause
"Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
"Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable."
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of
the courts. To be considered in fixing the amount of penalty are factors such as -- but not limited to -the type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach and
its consequences; the supervening realities; the standing and relationship of the parties; and the
like.33
In this case, PAGCORs breach was occasioned by events that, although not fortuitous in law, were
in fact real and pressing. From the CAs factual findings, which are not contested by either party, we
find that PAGCOR conducted a series of negotiations and consultations before entering into the
Contract. It did so not only with the PPC, but also with local government officials, who assured it that
the problems were surmountable. Likewise, PAGCOR took pains to contest the ordinances34 before
the courts, which consequently declared them unconstitutional. On top of these developments, the
gaming corporation was advised by the Office of the President to stop the games in Cagayan de Oro
City, prompting the former to cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino operations had to be suspended
for days on end since their start in December 1992; and indefinitely from July 15, 1993, upon the
advice of the Office of President, until the formal cessation of operations in September 1993.
Needless to say, these interruptions and stoppages meant that PAGCOR suffered a tremendous
loss of expected revenues, not to mention the fact that it had fully operated under the Contract only
for a limited time.
While petitioners right to a stipulated penalty is affirmed, we consider the claim for future rentals to
the tune ofP7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under
the circumstances, the advanced rental deposits in the sum of P687,289.50 should be sufficient
penalty for respondents breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are
hereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to pay
petitioner the additional amount ofP687,289.50 as penalty, which may be set off or applied against
the formers advanced rental deposits. Meanwhile, the CAs award to petitioner of actual damages
representing the accrued rentals for September to November 1993 -- with interest and penalty at the
rate of two percent (2%) per month, from the date of filing of the Complaint until the amount shall
have been fully paid -- as well as the P50,000 award for attorneys fees, isAFFIRMED. No costs.
SO ORDERED.
SUPREME COURT
Manila
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Clause
SECOND DIVISION
G.R. No. 73345. April 7, 1993.

SOCIAL SECURITY SYSTEM, petitioner,
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U. ALBERTO, ROSITA U.
ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ SANTIAGO, in her capacity as Register of
Deeds for the Province of Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro
Manila District IV, Makati, Metro Manila and the INTERMEDIATE APPELLATE COURT,
respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
DECISION
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate Court
affirming in toto the decision of the former Court of First Instance of Rizal, Seventh Judicial District,
Branch XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed a complaint in the Court of
First Instance of Rizal against Moonwalk Development & Housing Corporation, Moonwalk for short,
alleging that the former had committed an error in failing to compute the 12% interest due on
delayed payments on the loan of Moonwalk resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the principal loan agreement in the
amount of P7,053.77 and, also in not reflecting in its statement or account an unpaid balance on the
said penalties for delayed payments in the amount of P7,517,178.21 as of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the opportunity to ascertain
the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial conference, the court issued an order giving
both parties thirty (30) days within which to submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed the submission by the parties on
September 19, 1980 of the following stipulation of Facts:
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Clause
"1. On October 6, 1971, plaintiff approved the application of defendant Moonwalk for an interim loan
in the amount of THIRTY MILLION PESOS (P30,000,000.00) for the purpose of developing and
constructing a housing project in the provinces of Rizal and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December 18, 1973 Annex `D'
providing for restructuring of the payment of the released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First Mortgage substituted Associated
Construction and Surveys Corporation, Philippine Model Homes Development Corporation, Mariano
Z. Velarde and Eusebio T. Ramos, as solidary obligors;
"5. On July 23, 1974, after considering additional releases in the amount of P2,659,700.00, made to
defendant Moonwalk, defendant Moonwalk delivered to the plaintiff a promissory note for TWELVE
MILLION TWO HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS
(P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said Rosita U. Alberto and Rosita
U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by Moonwalk in the amount of
P15,004,905.74 were based on the Statement of Account, Annex "F" prepared by plaintiff SSS for
defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H'
on October 9, 1979 and October 11, 1979 respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it committed an honest mistake in releasing
defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told plaintiff that it had completely paid
its obligations to SSS;
"10. The genuineness and due execution of the documents marked as Annex (sic) 'A' to 'O'
inclusive, of the Complaint and the letter dated December 21, 1979 of the defendant's counsel to the
plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that the
obligation was already extinguished by the payment by Moonwalk of its indebtedness to SSS and by
the latter's act of cancelling the real estate mortgages executed in its favor by defendant Moonwalk.
The Motion for Reconsideration filed by SSS with the trial court was likewise dismissed by the latter.
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Clause
These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc. still
liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation extinguished?" 3
As We have stated earlier, the respondent Court held that Moonwalk's obligation was extinguished
and affirmed the trial court.
Hence, this Petition wherein SSS raises the following grounds for review:
"First, in concluding that the penalties due from Moonwalk are "deemed waived and/or barred," the
appellate court disregarded the basic tenet that waiver of a right must be express, made in a clear
and unequivocal manner. There is no evidence in the case at bar to show that SSS made a clear,
positive waiver of the penalties, made with full knowledge of the circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and SSS, being a mere trustee,
cannot perform acts affecting the same, including condonation of penalties, that would diminish
property rights of the owners and beneficiaries thereof. (United Christian Missionary Society v.
Social Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not inequitable.
Fourth, it ignored the principle that equity will cancel a release on the ground of mistake of fact." 4
The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the negative. It
reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-appellant states in its Brief, what
is sought to be recovered in this case is not the 12% interest on the loan but the 12% penalty for
failure to pay on time the amortization. What is sought to be enforced therefore is the penal clause of
the contract entered into between the parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a special presentation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled" (3 Castan 8th Ed. p. 118).
Now an accessory obligation has been defined as that attached to a principal obligation in order to
complete the same or take its place in the case of breach (4 Puig Pea Part 1 p. 76). Note therefore
that an accessory obligation is dependent for its existence on the existence of a principal obligation.
A principal obligation may exist without an accessory obligation but an accessory obligation cannot
exist without a principal obligation. For example, the contract of mortgage is an accessory obligation
to enforce the performance of the main obligation of indebtedness. An indebtedness can exist
without the mortgage but a mortgage cannot exist without the indebtedness, which is the principal
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Clause
obligation. In the present case, the principal obligation is the loan between the parties. The
accessory obligation of a penal clause is to enforce the main obligation of payment of the loan. If
therefore the principal obligation does not exist the penalty being accessory cannot exist.
Now then when is the penalty demandable? A penalty is demandable in case of non performance or
late performance of the main obligation. In other words in order that the penalty may arise there
must be a breach of the obligation either by total or partial non fulfillment or there is non fulfillment in
point of time which is called mora or delay. The debtor therefore violates the obligation in point of
time if there is mora or delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the principal obligation was still
subsisting, although there were late amortizations there was no demand made by the creditor,
plaintiff-appellant for the payment of the penalty. Therefore up to the time of the letter of plaintiffappellant there was no demand for the payment of the penalty, hence the debtor was no in mora in
the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of account (Exhibit F) showing
the total obligation of Moonwalk as P15,004,905.74, and forthwith demanded payment from
defendant-appellee. Because of the demand for payment, Moonwalk made several payments on
September 29, October 9 and 19, 1979 respectively, all in all totalling P15,004,905.74 which was a
complete payment of its obligation as stated in Exhibit F. Because of this payment the obligation of
Moonwalk was considered extinguished, and pursuant to said extinguishment, the real estate
mortgages given by Moonwalk were released on October 9, 1979 and October 10, 1979 (Exhibits G
and H). For all purposes therefore the principal obligation of defendant-appellee was deemed
extinguished as well as the accessory obligation of real estate mortgage; and that is the reason for
the release of all the Real Estate Mortgages on October 9 and 10, 1979 respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also an accessory obligation
must also be deemed extinguished considering that the principal obligation was considered
extinguished, and the penal clause being an accessory obligation. That being the case, the demand
for payment of the penal clause made by plaintiff-appellant in its demand letter dated November 28,
1979 and its follow up letter dated December 17, 1979 (which parenthetically are the only demands
for payment of the penalties) are therefore ineffective as there was nothing to demand. It would be
otherwise, if the demand for the payment of the penalty was made prior to the extinguishment of the
obligation because then the obligation of Moonwalk would consist of: 1) the principal obligation 2)
the interest of 12% on the principal obligation and 3) the penalty of 12% for late payment for after
demand, Moonwalk would be in mora and therefore liable for the penalty.
Let it be emphasized that at the time of the demand made in the letters of November 28, 1979 and
December 17, 1979 as far as the penalty is concerned, the defendant-appellee was not in default
since there was no mora prior to the demand. That being the case, therefore, the demand made
after the extinguishment of the principal obligation which carried with it the extinguishment of the
penal clause being merely an accessory obligation, was an exercise in futility.
3. At the time of the payment made of the full obligation on October 10, 1979 together with the 12%
interest by defendant-appellee Moonwalk, its obligation was extinguished. It being extinguished,
there was no more need for the penal clause. Now, it is to be noted that penalty at anytime can be
modified by the Court. Even substantial performance under Art. 1234 authorizes the Court to
consider it as complete performance minus damages. Now, Art, 1229 Civil Code of the Philippines
provides:
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Clause
"ART. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable."
If the penalty can be reduced after the principal obligation has been partly or irregularly complied
with by the debtor, which is nonetheless a breach of the obligation, with more reason the penal
clause is not demandable when full obligation has been complied with since in that case there is no
breach of the obligation. In the present case, there has been as yet no demand for payment of the
penalty at the time of the extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.
Let Us emphasize that the obligation of defendant-appellee was fully complied with by the debtor,
that is, the amount loaned together with the 12% interest has been fully paid by the appellee. That
being so, there is no basis for demanding the penal clause since the obligation has been
extinguished. Here there has been a waiver of the penal clause as it was not demanded before the
full obligation was fully paid and extinguished. Again, emphasis must be made on the fact that
plaintiff-appellant has not lost anything under the contract since in got back in full the amount loan
(sic) as well as the interest thereof. The same thing would have happened if the obligation was paid
on time, for then the penal clause, under the terms of the contract would not apply. Payment of the
penalty does not mean gain or loss of plaintiff-appellant since it is merely for the purpose of
enforcing the performance of the main obligation has been fully complied with and extinguished, the
penal clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We, however, advance the following
reasons for the denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of breach. 6 It has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the event of breach. 7 From the foregoing, it is
clear that a penal clause is intended to prevent the obligor from defaulting in the performance of his
obligation. Thus, if there should be default, the penalty may be enforced. One commentator of the
Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code?
We must make a distinction between a positive and a negative obligation. With regard to obligations
which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence,
the necessity of demand by the debtor unless the same is excused . . ." 8
67

Clause
When does delay arise? Under the Civil Code, delay begins from the time the obligee judicially or
extrajudicially demands from the obligor the performance of the obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."
There are only three instances when demand is not necessary to render the obligor in default. These
are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it appears that the designation of
the time when the thing is to be delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When the demand would be useless, as when the obligor has rendered it beyond his power to
perform." 9
This case does not fall within any of the established exceptions. Hence, despite the provision in the
promissory note that "(a)ll amortization payments shall be made every first five (5) days of the
calendar month until the principal and interest on the loan or any portion thereof actually released
has been fully paid," 10 petitioner is not excused from making a demand. It has been established
that at the time of payment of the full obligation, private respondent Moonwalk has long been
delinquent in meeting its monthly arrears and in paying the full amount of the loan itself as the
obligation matured sometime in January, 1977. But mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default ". . . is different from mere delay in the
grammatical sense, because it involves the beginning of a special condition or status which has its
own peculiar effects or results." 11 In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that
the debtor delays performance; and (3) that the creditor requires the performance judicially and
extrajudicially. 12 Default generally begins from the moment the creditor demands the performance
of the obligation. 13
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated penalty
upon the failure of Moonwalk to meet its monthly amortization. What the complaint itself showed was
that SSS tried to enforce the obligation sometime in September, 1977 by foreclosing the real estate
mortgages executed by Moonwalk in favor of SSS. But this foreclosure did not push through upon
Moonwalk's requests and promises to pay in full. The next demand for payment happened on
October 1, 1979 when SSS issued a Statement of Account to Moonwalk. And in accordance with
said statement, Moonwalk paid its loan in full. What is clear, therefore, is that Moonwalk was never
in default because SSS never compelled performance. Though it tried to foreclose the mortgages,
SSS itself desisted from doing so upon the entreaties of Moonwalk. If the Statement of Account
could properly be considered as demand for payment, the demand was complied with on time.
Hence, no delay occurred and there was, therefore, no occasion when the penalty became
demandable and enforceable. Since there was no default in the performance of the main obligation
payment of the loan SSS was never entitled to recover any penalty, not at the time it made the
Statement of Account and certainly, not after the extinguishment of the principal obligation because
then, all the more that SSS had no reason to ask for the penalties. Thus, there could never be any
68

Clause
occasion for waiver or even mistake in the application for payment because there was nothing for
SSS to waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds it held
were trust funds and as trustee, the petitioner could not perform acts affecting the funds that would
diminish property rights of the owners and beneficiaries thereof. To support its claim, SSS cited the
case of United Christian Missionary Society v. Social Security Commission. 14
We looked into the case and found out that it is not applicable to the present case as it dealt not with
the right of the SSS to collect penalties which were provided for in contracts which it entered into but
with its right to collect premiums and its duty to collect the penalty for delayed payment or nonpayment of premiums. The Supreme Court, in that case, stated:
"No discretion or alternative is granted respondent Commission in the enforcement of the law's
mandate that the employer who fails to comply with his legal obligation to remit the premiums to the
System within the prescribed period shall pay a penalty of three (3%) per month. The prescribed
penalty is evidently of a punitive character, provided by the legislature to assure that employers do
not take lightly the State's exercise of the police power in the implementation of the Republic's
declared policy "to develop, establish gradually and perfect a social security system which shall be
suitable to the needs of the people throughout the Philippines and (to) provide protection to
employers against the hazards of disability, sickness, old age and death . . ."
Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:
"Note that the above case refers to the condonation of the penalty for the non remittance of the
premium which is provided for by Section 22(a) of the Social Security Act . . . In other words, what
was sought to be condoned was the penalty provided for by law for non remittance of premium for
coverage under the Social Security Act.
The case at bar does not refer to any penalty provided for by law nor does it refer to the non
remittance of premium. The case at bar refers to a contract of loan entered into between plaintiff and
defendant Moonwalk Development and Housing Corporation. Note, therefore, that no provision of
law is involved in this case, nor is there any penalty imposed by law nor a case about non-remittance
of premium required by law. The present case refers to a contract of loan payable in installments not
provided for by law but by agreement of the parties. Therefore, the ratio decidendi of the case of
United Christian Missionary Society vs. Social Security Commission which plaintiff-appellant relies is
not applicable in this case; clearly, the Social Security Commission, which is a creature of the Social
Security Act cannot condone a mandatory provision of law providing for the payment of premiums
and for penalties for non remittance. The life of the Social Security Act is in the premiums because
these are the funds from which the Social Security Act gets the money for its purposes and the nonremittance of the premiums is penalized not by the Social Security Commission but by law.
xxx xxx xxx
It is admitted that when a government created corporation enters into a contract with private party
concerning a loan, it descends to the level of a private person. Hence, the rules on contract
applicable to private parties are applicable to it. The argument therefore that the Social Security
Commission cannot waive or condone the penalties which was applied in the United Christian
Missionary Society cannot apply in this case. First, because what was not paid were installments on
69

Clause
a loan but premiums required by law to be paid by the parties covered by the Social Security Act.
Secondly, what is sought to be condoned or waived are penalties not imposed by law for failure to
remit premiums required by law, but a penalty for non payment provided for by the agreement of the
parties in the contract between them . . ." 15
WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
respondent court is AFFIRMED. LLpr
SO ORDERED.
70

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CASES FOR JOINT AND SOLIDARY 2016

OBLIGATIONS & Obligations with a Penal

Republic of the Philippines

Obligations and Contracts

CASES FOR JOINT AND SOLIDARY 2016

Obligations and Contracts

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Obligations and Contracts

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G.R. No. 96405 June 26, 1996

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WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily

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June 29, 2007

SALVADOR P. ESCAO and MARIO M. SILOS, petitioner,

Obligations and Contracts

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Obligations and Contracts

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Obligations and Contracts

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Obligations and Contracts

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Obligations and Contracts

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Obligations and Contracts

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Obligations and Contracts

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Obligations and Contracts

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November 22, 2001

PH CREDIT CORPORATION, petitioner,

"I. CA-G.R. SP NO. 23324

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