NOVATION entities into a single loan FOURTH: The Honorable

of P1.0 Million was a Court of Appeals erred in

G.R. No. 118585 September 14, 1995 mere restructuring and not declaring as null and
did not effect a novation void the extra-judicial
AJAX MARKETING & DEVELOPMENT of the loan as to foreclosure undertaken
CORPORATION, ANTONIO TAN, ELISA extinguish the accessory by Metrobank on the
TAN, TAN YEE, and SPS. MARCIAL mortgage contracts. property of Sps. Marcial
SEE and LILIAN TAN, petitioners, See and Lilian Tan.
2

vs. SECOND: The

HON. COURT OF APPEALS, Honorable Court of The facts as found by public
METROPOLITAN BANK AND TRUST Appeals erred in not respondent Court of Appeals are
COMPANY, and THE SHERIFF OF holding that the as follows:
MANILA, respondents. consolidated loan of P1.0
Million was not It is not disputed that
FRANCISCO, J.: accompanied by the Ylang-Ylang
execution of a new REM, Merchandising Company,
as was done by the Bank a partnership between
In its March 30, 1994 decision, public
in the earlier three (3) Angelita Rodriguez and
respondent Court of Appeals affirmed the
loans, and hence, was, to Antonio Tan, obtained a
trial court's judgment upholding the
all legal intents/purposes, loan in the amount of
validity of the extra-judicial foreclosure of
unsecured. P250,000.00 from the
the real estate property of petitioners —
spouses Marcial See and Lilian Tan, Metropolitan Bank and
located at Paco District, Manila covered THIRD: The Honorable Trust Company, and to
by TCT 105233, by private respondent Court of Appeals erred in secure payment of the
Metropolitan Bank and Trust Company holding that the inclusion same, spouses Marcial
(Metrobank). Petitioners' motion for
1 in the extra-judicial See and Lilian Tan
reconsideration was denied; hence, this foreclosure of the constituted a real estate
petition for review on certiorari raising admittedly unsecured mortgage in favor of said
the following assignments of errors: loan of P970,000.00 is a bank over their property
mere error that does not in the District of Paco,
invalidated said Manila, covered by TCT
FIRST: The Honorable
foreclosure, contrary to No. 105233 of the
Court of Appeals erred in
the pronouncement in C Registry of Deeds of
holding that the
& C Commercial Manila. The mortgage
consolidation of the three
Corp. vs. PNB, 175 was annotated at the
(3) loans granted
SCRA 1. back of the title.
separately to three
Subsequently, after the
partnership had changed
its name to Ajax
Marketing Company
albeit without changing
its composition, it
obtained a loan in the
sum of P150,000.00 from
Metropolitan Bank and
Trust Company. Again to
secure the loan, spouses
Marcial See and Lilian
Tan executed in favor of
said bank a second real
estate mortgage over the
same property. As in the
first instance, the
mortgage was duly
annotated at the back of
TCT No. 105233.
On February 19, 1979,
the partnership (Ajax
Marketing Company) was
converted into a
corporation denominated
as Ajax Marketing and
Development
Corporation, with the
original partners (Angelita
Rodriguez and Antonio
Tan) as incorporators and
three (3) additional
incorporators, namely,
Elisa Tan, the wife of
Antonio Tan, and Jose
San Diego and Tessie
San Diego. Ajax
Marketing and
Development Corporation
obtained from
Metropolitan Bank and
Trust Company a loan of
P600,000.00, the
payment of which was
secured by another real
estate mortgage
executed by spouses
Marcial See and Lilian
Tan in favor of said bank
over the same realty
located in the District of
Paco, Manila. Again, the
third real estate mortgage
was annotated at the
back of TCT No. 105233.
In December 1980, the
three (3) loans with an
aggregate amount of
P1,000,000.00 were re-
structured and
consolidated into one (1)
loan and Ajax Marketing
and Development
Corporation, represented
by Antonio Tan as Board
Chairman/President and
in his personal capacity
as solidary co-obligor,
and Elisa Tan as Vice-
President/Treasurer and
in her personal capacity
as solidary co-obligor, executed
a Promissory Note (PN) No. BDS-
3605.3
In their interrelated first and second
assignment of errors, petitioners argue
that a novation occurred when their three
(3) loans, which are all secured by the
same real estate property covered by
TCT No. 105233 were consolidated into
a single loan of P1 million under
Promissory Note No. BDS-3605, thereby
extinguishing their monetary obligations
and releasing the mortgaged property
from liability.
Basic principles on novation need to be
stressed at the outset. Novation is the
extinguishment of an obligation by the
substitution or change of the obligation
by a subsequent one which extinguishes
or modifies the first, either by changing
the object or principal conditions, or by
substituting another in place of the
debtor, or by subrogating a third person
in the rights of the creditor. Novation,
4
unlike other modes of extinction of
obligations, is a juridical act with a dual
function, namely, it extinguishes an
obligation and creates a new one in lieu
of the old. It can be objective, subjective,
or mixed. Objective novation occurs
when there is a change of the object or
principal conditions of an existing
obligation while subjective novation
occurs when there is a change of either
the person of the debtor, or of the
creditor in an existing obligation. When
5
the change of the object or principal
conditions of an obligation occurs at the
same time with the change of either in
the person of the debtor or creditor a secured by: (x) "real estate", which
11
Advances
mixed novation occurs. 6
strongly negate petitioners' asseveration in
that the consolidation of the three loans 150,000.0
The well settled rule is that novation is effected the discharge of the mortgaged 0
never presumed. Novation will not be
7 real estate property. Otherwise, there
allowed unless it is clearly shown by would be no sense placing these current
express agreement, or by acts of equal material provisions. Moreover; the real account
import. Thus, to effect an objective estate mortgages contained this 250,000.0
novation it is imperative that the new common provision, to wit: 0
obligation expressly declare that the old
obligation is thereby extinguished, or that That for and in and to secure the
the new obligation be on every point consideration of credit payment of the same and
incompatible with the new one. In the
8
accommodations those that may hereafter
same vein, to effect a subjective novation obtained from the be obtained including the
by a change in the person of the debtor it MORTGAGEE renewals or extension
is necessary that the old debtor be (Metropolitan Bank and thereof.
released expressly from the obligation, Trust Company), by the
and the third person or new debtor MORTGAGOR and/or xxx xxx xxx
assumes his place in the relation. There
9
AJAX MKTG. DEV.
is no novation without such release as CORP./AJAX
the principal of all of
the third person who has assumed the MARKETING
which is hereby fixed at
debtor's obligation becomes merely a co- COMPANY/YLANG-
(P600,000.00/
debtor or surety.
10
YLANG
P150,000.00/
MERCHANDISING
P250,000.00) . . .as well
The attendant facts herein do not make a COMPANY detailed as
as those that the
case of novation. There is nothing in the follows:
MORTGAGEE may have
records to show the unequivocal intent of previously extended or
the parties to novate the three loan Nature may later extend to the
agreements through the execution of PN Date MORTGAGOR, including
No. BDS-3065. The provisions of PN No. Granted interest and expenses or
BDS-3065 yield no indication of the Due Date any other obligation
extinguishment of, or an incompatibility Amount owing to the
with, the three loan agreements secured or Line MORTGAGEE, whether
by the real estate mortgages over TCT direct or indirect, principal
No. 105233. On its face, PN No. BDS- Loans or secondary, as appears
3065 has these words typewritten: and/or P in the accounts, books
"secured by REM" and "9. 600,000.0 and records of the
COLLATERAL. This is wholly/partly 0 MORTGAGEE, the
MORTGAGOR hereby The foregoing shows that they were expressly released from their
transfer and convey by petitioners agreed to apply the obligations, did not make petitioner
way of mortgage unto the real estate property to secure AJAX, with its new corporate personality,
MORTGAGEE, its obligations that they may a third person or new debtor within the
successors or assigns, thereafter obtain including their context of a subjective novation. If at all,
the parcels of land which renewals or extensions with the petitioner AJAX only became a co-debtor
are described in the list principals fixed at P600,000.00, or surety. Without express release of the
inserted on page three of P150,000.00, and P250,000.00 debtor from the obligation, any third party
this document and/or which when added have an who may thereafter assume the
appended hereto, aggregate sum of P1.0 million. obligation shall be considered merely as
together with all the PN No. BDS-3605 merely co-debtor or surety. Novation arising
buildings and restructured and renewed the from a purported change in the person of
improvements now three previous loans to the debtor must be clear and express
existing or which may expediently make the loans because, to repeat, it is never presumed.
hereafter be erected or current. There was no change in Clearly then, from the aforediscussed
constructed thereon, of the object of the prior obligations. points, neither objective nor subjective
which the MORTGAGOR The consolidation of the three novation occurred here.
declares that he/it is the loans, contrary to petitioners'
absolute owner free from contention, did not release the Anent the third assigned error,
all liens and mortgaged real estate property petitioners posit that the extra-judicial
encumbrances. However, from any liability because the foreclosure is invalid as it included two
if the MORTGAGOR mortgage annotations at the back unsecured loans: one, the consolidated
shall pay to the of TCT No. 105233, in fact, all loan of P1.0 million under PN BDS No.
MORTGAGEE, its remained uncancelled, thus 3605, and two, the P970,000.00 loan
successors or assigns, indicating the continuing under PN BDS No. 3583 subsequently
the obligation secured by subsistence of the real estate extended by Metrobank.
this mortgage when due, mortgages.
together with interest, An action to foreclose a mortgage is
and shall keep and Neither can it be validly contended that usually limited to the amount mentioned
perform all and singular there was a change, or substitution in the in the mortgage, but where on the four
the covenants and persons of either the creditor corners of the mortgage contracts, as in
agreements herein (Metrobank) or more specifically the this case, the intent of the contracting
contained for the debtors (petitioners) upon the parties is manifest that the mortgaged
MORTGAGOR to keep consolidation of the loans in PN No. BDS property shall also answer for future
and perform, then the 3605. The bare fact of petitioners' loans or advancements then the same is
mortgage shall be void; conversion from a partnership to a not improper as it is valid and binding
otherwise, it shall remain corporation, without sufficient evidence, between the parties. For merely
13

in full force and effect.

12
either testimonial or documentary, that consolidating and expediently making
current the three previous loans, the loan
of P1.0 million under PN BDS No. 3605,
secured by the real estate property, was
correctly included in the foreclosure's bid
price. The inclusion of the unsecured
loan of P970,000.00 under PN BDS NO.
3583, however, was found to be
improper by public respondent which
ruling we shall not disturb for
Metrobank's failure to appeal therefrom.
Nonetheless, the inclusion of PN BDS
No. 3583 in the bid price did not
invalidate the foreclosure proceedings.
As correctly pointed out by the Court of
Appeals, the proceeds of the auction
sale should be applied to the obligation
pertaining to PN BDS No. 3605 only, plus
interests, expenses and other charges
accruing thereto. It is Metrobank's duty
as mortgagee to return the surplus in the
selling price to the mortgagors.14
Lastly, petitioners cite as supporting
authority C & C Commercial
Corp. v. Philippine National Bank where
15
this Court enjoined the foreclosure
proceedings for including unsecured
obligations. Petitioners' reliance on the C
& C Commercial Corp. v. Philippine
National Bank case is misplaced. In that
case, the foreclosure sale included
previously incurred unsecured
obligations in favor of PNB which were
not in the contemplation of the mortgage
contract, whereas in the instant case, the
mortgages were one in providing that the
mortgaged real estate property shall also
secure future advancements or loans, as
well as renewals or extensions of the
same.
Prescinding from the above discussions,
the fourth assignment of error obviously
needs no further discussion.
WHEREFORE, the decision appealed
from is hereby AFFIRMED in toto.
G.R. No. 178591, March 29,
2017
SM SYSTEMS CORPORATION
(FORMERLY SPRINGSUN
MANAGEMENT SYSTEMS
CORPORATION), Petitioner, v. OS
CAR CAMERINO, EFREN
CAMERINO, CORNELIO
MANTILE, DOMINGO ENRIQUEZ
AND HEIRS OF NOLASCO DEL
ROSARIO, Respondents.
DECISION
REYES, J.:
1
For review in the instant petition is
the Decision2 rendered on October
23, 2006 and Resolution3 issued on
June 29, 2007 by the Court of
Appeals (CA) in CA-G.R. SP No.
92994. The CA dismissed the
Petition for Certiorari4 filed by the
herein petitioner, SM Systems
Corporation (SMS), formerly
Springsun Management Systems
Corporation, seeking to set aside
the Orders issued by the Regional
Trial Court (RTC) of Muntinlupa
City, Branch 2565 on September 7,
20056 and December 16, 20057 in
Civil Case No. 95-020, a complaint
for redemption involving three
parcels of agricultural land located
in Muntinlupa City. Through the two
orders, the RTC invalidated the
compromise agreement entered
into by and between SMS and four
of the herein respondents, Efren
Camerino (Efren), Cornelio Mantile
(Cornelio), Domingo Enriquez
(Domingo) and the Heirs of Nolasco
del Rosario (Nolasco).8 The RTC
also denied SMS' motions (a) to
hold in abeyance the execution of
the decision allowing redemption;
(b) to quash the writ of execution;
and (c) for Honorable Judge Alberto
L. Lerma (Judge Lerma) to inhibit
himself from further issuing orders.
Facts and Issues
In the Resolution9 dated July 26,
2010, the Court summarized the
facts and issues of the case as
follows:
Victoria Homes, Inc. (Victoria
Homes) was the registered owner
of three (3) lots (subject lots),
covered by Transfer Certificate of
Title (TCT) Nos. (289237) S-6135,
S-72244, and (289236) S-35855,
with an area of 109,451 square
meters, 73,849 sq m, and 109,452
sq m, respectively.10 These lots are
situated in Barrio Bagbagan,
Muntinlupa, Rizal (now Barangay
Tunasan, Muntinlupa City, Metro
Manila).
Since 1967, respondents [Oscar],
[Efren], [Cornelio], [Domingo] and
[Nolasco] (herein represented by
his heirs) were farmers-tenants of
Victoria Homes, cultivating and
planting rice and corn on the lots.
On February 9, 1983 and July 12,
1983, Victoria Homes, without
notifying [the farmers], sold the
subject lots to Springsun
Management Systems Corporation
(Springsun), the predecessor-in-
interest of [SMS]. The Deeds of
Sale were registered with the
Registry of Deeds of Rizal.
Accordingly, TCT Nos. (289237) S-
6135, (289236) S-35855, and S-
72244 in the name of Victoria
Homes were cancelled and, in lieu
thereof, TCT Nos. 120541, 120542,
and 123872 were issued in the
name of Springsun. Springsun
subsequently mortgaged the
subject lots to Banco Filipino
Savings and Mortgage Bank (Banco
Filipino) as security for its various
loans amounting to
P11,545,000.00. When Springsun
failed to pay its loans, the
mortgage was foreclosed extra-
judicially. At the public auction sale,
the lots were sold to Banco Filipino,
being the highest bidder, but they
were eventually redeemed by
Springsun.
On March 7, 1995, [the farmers]
filed with the [RTC], Branch 256,
Muntinlupa City, a complaint
against Springsun and Banco
Filipino for Prohibition/Certiorari,
Reconveyance/Redemption,
Damages, Injunction with
Preliminary Injunction and
Temporary Restraining Order or,
simply, an action for Redemption.
On January 25, 2002, the RTC
rendered a decision in favor of [the
farmers], authorizing them to
redeem the subject lots from
Springsun for the total price of
P9,790,612.00. On appeal to the
CA, the appellate court affirmed the
RTC decision with a modification on
the award of attorney's fees.
Aggrieved, Springsun elevated the
matter to this Court via a petition
for review on certiorari. The case
was docketed as G.R. No. 161029.
On January 19, 2005, we affirmed
the CA Decision. With the denial of
Springsun's motion for
reconsideration, the same became
final and executory; accordingly, an
entry of judgment was made. [The
farmers] thus moved for the
execution of the Decision.
[SMS] instituted an action for
Annulment of Judgment with prayer
for the issuance of a Temporary
Restraining Order before the CA,
docketed as CA-G.R. SP No. 90931.
[SMS] sought the annulment of the
RTC decision allowing [the farmers]
to redeem the subject property.
[SMS] argued that it was deprived
of the opportunity to present its
case on the ground of fraud,
manipulations and machinations of
[the farmers]. It further claimed
that the Department of Agrarian
Reform, not the RTC, had
jurisdiction over the redemption
case. The CA, however, dismissed
the petition on October 20, 2005.
Its motion for reconsideration was
also denied for lack of merit. The
matter was elevated to this
Court via a petition for review
on certiorari in G.R. No. 171754,
but the same was denied on June
28, 2006. After the denial of its
motion for reconsideration, the
Decision became final and
executory; and an entry of
judgment was subsequently made.
Meanwhile, on December 18, 2003;
[the farmers] executed an
Irrevocable Power of Attorney in
favor of Mariano Nocom (Nocom),
authorizing him, among other
things, to comply with our January
19, 2005 Decision by paying the
redemption price to Springsun
and/or to the court. [The farmers],
however, challenged the power of
attorney in an action for revocation
with the RTC. In a summary
judgment, the RTC annulled the
Irrevocable Power of Attorney for
being contrary to law and public
policy. The RTC explained that the
power of attorney was a disguised
conveyance of the statutory right of
redemption that is prohibited under
Republic Act No. 3844. The CA
affirmed the RTC decision.
However, this Court, in G.R. No.
182984, set aside the CA Decision
and concluded that the RTC erred in
rendering the summary judgment.
The Court thus remanded the case
to the RTC for proper proceedings
and proper disposition, according to
the rudiments of a regular trial on
the merits and not through an
abbreviated termination of the case
by summary judgment.
On August 4, 2005, as [SMS]
refused to accept the redemption
amount of P9,790,612.00, plus
P147,059.18 as commission, [the
farmers] deposited the said
amounts, duly evidenced by official
receipts,11 with the RTC. The RTC
further granted [the farmers']
motion for execution and,
consequently, TCT Nos. 120542,
120541, and 123872 in the name of
[SMS] were cancelled and TCT Nos.
15895, 15896, and 15897 were
issued in the names of [the
farmers]. It also ordered that the
"Irrevocable Power of Attorney,"
executed on December 18, 2003 by
[the farmers] in favor of Nocom, be
annotated in the memorandum of
encumbrances of TCT Nos. 15895,
15896, and 15897.
On August 20, 2005, [SMS] and
[the farmers] (except [Oscar])
executed a document, denominated
as Kasunduan,12 wherein the latter
agreed to receive P300,000.00 each
from the former, as compromise
settlement. [SMS] then filed a
Motion to Hold Execution in
Abeyance on the Ground of
Supervening Event.
On September 7, 2005, the RTC
denied [SMS'] motion, thus:
WHEREFORE, in view of the
foregoing, [SMS'] Motion to Hold in
Abeyance Execution on Ground of
Supervening Event is denied and
the Kasunduan separately entered
into by [Efren, Cornelio, Domingo
and the Heirs of Nolasco] are
hereby disapproved.
SO ORDERED.
Aggrieved by the aforesaid Order
and the denial of its motion for
reconsideration, [SMS] elevated the
matter to the CA. On May 8, 2006,
counsel for [the farmers] moved
that they be excused from filing the
required comment, considering that
only [Oscar] was impleaded as
private respondent in the amended
petition; and also because [the
farmers] already
transferred pendente lite their
contingent rights over the case in
favor of Nocom. Nocom, in turn,
filed a Motion for Leave of Court to
Admit Attached Comment to the
Petition.
On October 23, 2006, the appellate
court rendered the assailed
Decision, finding [SMS] guilty of
forum shopping. The CA concluded
that the present case was
substantially similar to G.R. No.
171754. It further held that the
compromise agreement could not denied the Motion to
novate the Court's earlier Decision [I]nhibit filed by
in G.R. No. 161029 because only [SMS] despite Judge
four out of five parties executed the Lerma's clear showing
agreement. of partiality for the
other party.
Undaunted, [SMS] comes before us
in this petition for review 5. Whether or not there
on certiorari, raising the following is forum-
issues: shopping.13 (Citations
omitted)
1. Whether or not
the Kasunduan effecti In the same Resolution dated July
vely novated the 26, 2010, contrary to the CA's
judgment obligation. conclusion, the Court had resolved
that SMS is not guilty of forum
2. Whether or not the shopping for reasons stated below:
[CA should have
ruled] on the Motion It is true that after the finality of
to Expunge the this Court's Decision in G.R. No.
Comment of Mariano 161029 dated January 19, 2005,
Nocom filed by [SMS]. [SMS] instituted and filed various
petitions and motions which
3. Whether or not essentially prevented the execution
Mariano Nocom of the aforesaid Decision. Yet, we
should be allowed to do not agree with the CA that the
participate in the instant case is dismissible because
instant case on the it earlier filed an action for
basis of the null and annulment of judgment that
void Irrevocable involved substantially the same set
Power of Attorney. of facts, issues, and reliefs sought.
While [SMS'] goal in filing the
4. Whether or not the instant case is the same as that in
(sic) there is grave G.R. No. 171754 (which stemmed
abuse of discretion from the petition for annulment of
when Judge Lerma judgment), that is to prevent the
execution of the January 19, 2005
Decision, still, there is no forum
shopping.
In the action for annulment of
judgment, [SMS] sought the
nullification of the January 19, 2005
Decision on the ground that it was
deprived of its opportunity to
present its case and that the RTC
had no jurisdiction to decide the
case. While in the instant case,
[SMS] prays that the execution of
the January 19, 2005 Decision be
held in abeyance in view of the
compromise agreement entered
into by [SMS] and four [of the
farmers, namely, Efren, Cornelio,
Domingo and the Heirs of Nolasco].
In short, the issue threshed out in
the annulment case was the validity
of the 2005 Decision, while in this
case, the issue is focused on the
effect of the compromise
agreement entered into after the
finality of the Decision sought to be
executed. Clearly, therefore, there
is no identity of issues in the two
cases.14
In the light of the foregoing, the
Court declared that a further review
of the herein assailed decision and
resolution is in order. However, the
Court were unable to fully dispose
of all the issues raised considering
the pendency then of Civil Case No.
05-172, the petition filed by the
farmers before the RTC of
Muntinlupa City, Branch 203, to
challenge the Irrevocable Power of
Attorney (IPA)15 issued to Mariano
Nocom (Nocom). This Circumstance
acquires greater significance as
Nocom, in his own behalf, to the
exclusion of the farmers, and on
the basis of the IPA, has filed
before this Court a Comment16 and
a Memorandum17 to the instant
petition. Hence, in the same
Resolution dated July 26, 2010, the
Court held in abeyance the
proceedings herein until Civil Case
No. 05-172 shall have been
terminated.18
Civil Case No. 05-172 was
thereafter re-raffled to RTC of
Muntinlupa City, Branch 256,
following the voluntary inhibition
from further hearing the case of the
then Presiding Judge of Branch 203,
Myra B. Quiambao.19
On September 20, 2011, the then
Acting Presiding Judge of Branch
256, Leandro C. Catalo, issued an
Order20 dismissing the case on
account of the farmers' withdrawal
of their petition against Nocom.
Necessarily, SMS' complaint-in-
intervention was also dismissed and
its motion for reconsideration was
denied through the Order21 issued
by the RTC on April 3, 2012.
With Civil Case No. 05-172 now
terminated, the Court can proceed
to dispose of the four unresolved
issues for consideration.
The Parties' Arguments
In support of the petition, SMS
claims that the IPA issued in 2003
by the farmers in Nocom's favor
effected a transfer of lands acquired
under the agrarian reform program
breaching both laws and public
policy. Thus, notwithstanding the
execution of the IPA, Nocom has no
interest over the three parcels of
land. Consequently, Nocom cannot
step into the shoes of the farmers
as a party to the case, hence, the
pleadings he filed should be
expunged from the records.22
SMS likewise alleges that
the Kasunduan it executed with
each of the four farmers complied
with the requisites and principles of
contracts, therefore, valid despite
having been entered into after the
finality of the judgment in the
redemption case. Further, the
amount of P300,000.00 paid to
each of the four farmers was not
unconscionable for being way above
the sum of P25,000.00 originally
demanded from SMS. Besides,
there was an eventual admission of
the lack of legitimate tenancy or
agricultural leasehold relationship
between the parties.23
The farmers did not file a comment
to the petition. In their stead,
Nocom, representing himself as
transferee pendente lite of the
farmers' claimed rights of
redemption, argues that the
petition is fatally defective for
failure to implead him as an
indispensable party. As early as
2003, he had paid the farmers a
total sum of P2,500,000.00. Thus,
when SMS executed
the Kasunduan with four of the
farmers in 2005, the latter had
nothing more to waive, and the
judgment in the redemption case
had also become final.24
Ruling of the Court
There is merit in the instant
petition.
It bears noting that on October 12,
2010, albeit in a case unrelated to
the instant petition, the Court had
found Judge Lerma guilty of gross
misconduct and he was meted a
penalty of dismissal from
service.25 Hence, one of the issues
for the court's consideration, to wit,
the alleged partiality of Judge
Lerma and his refusal to inhibit
himself from further issuing orders
relative to Civil Case No. 95-020 is
rendered moot.
Nocom cannot rightfully
substitute
the farmers as a party to the
case.
While Civil Case No. 05-172 had
already been dismissed due to the
withdrawal by the farmers
themselves of their petition to
revoke the IPA before the RTC, the
Court still finds Nocom to be
without the legal personality to
substitute the former as a party in
the redemption case.
It is settled that the provisions of
existing laws are read into contracts
and deemed a part thereof.26
Section 62 of Republic Act (R.A.)
No. 384427 clearly provides:
Sec. 62. Limitation on Land Rights.
—Except in case of hereditary
succession by one heir,
landholdings acquired under this
Code may not be resold,
mortgaged, encumbered, or
transferred until after the lapse of
ten years from the date of full
payment and acquisition and after
such ten-year period, any transfer,
sale or disposition may be made
only in favor of persons qualified to
acquire economic family-size farm
units in accordance with the
provisions of this Code x x x.
Tayag v. Lacson28 unequivocally
emphasizes the prohibition on the
transfer of the right of redemption
acquired pursuant to agrarian
laws, viz.:
Under Section 22 of [R.A. No.
6657],29 beneficiaries under P.D.
No. 2730 who have culpably sold,
disposed of, or abandoned their
land, are disqualified from
becoming beneficiaries.
xxxx
Under Section 12 of the law, if the
property was sold to a third person
without the knowledge of the
tenants thereon, the latter shall
have the right to redeem the same
at a reasonable price and
consideration. By assigning their
rights and interests on the
landholding under the deeds of
assignment in favor of the
petitioner, the defendants-tenants
thereby waived, in favor of the
petitioner, who is not a beneficiary
under Section 22 of [R.A.] No.
6657, their rights of preemption or
redemption under [R.A.] No. 3844.
The defendants-tenants would then
have to vacate the property in favor
of the petitioner upon full payment
of the purchase price. Instead of
acquiring ownership of the portions
of the landholding respectively
[tilled] by them, the defendants-
tenants would again become
landless for a measly sum of
P50.00 per square meter. The
petitioner's scheme is subversive,
not only of public policy, but also of
the letter and spirit of the agrarian
laws. That the scheme of the
petitioner had yet to take effect in
the future or ten years hence is not
a justification. The respondents
may well argue that the agrarian
laws had been violated by the
defendants-tenants and the
petitioner by the mere execution of
the deeds of assignment. In fact,
the petitioner has implemented the
deeds by paying the defendants-
tenants amounts of money and
even sought their immediate
implementation by setting a
meeting with the defendants-
tenants. x x x.31
In the case before this Court, the
IPA issued by the farmers conferred
upon Nocom the rights to "sell,
assign, transfer, dispose of,
mortgage and alienate" the subject
three parcels of land and "procure
the necessary transfer certificate of
titles in his name as the absolute
owner of said properties:"32 The
said IPA is nothing less but a
conveyance of the rights of the
farmers to Nocom, hence, invalid
for being an affront against
agrarian laws. Section 62 of R.A.
No. 3844 explicitly states that a
transfer of the rights over
agricultural leasehold acquired by a
farmer can only be done after the
lapse of 10 years reckoned from full
payment or acquisition thereof, and
only in favor of a person, who is
qualified to be a beneficiary under
agrarian laws. Both requisites are
absent in the instant case. When
the IPA was executed on December
18, 2003, ownership over the
landholdings had not even been
conferred upon the farmers and
there is nothing on the records
showing that Nocom is qualified to
be a beneficiary under agrarian
laws. Perforce, Nocom cannot step
into the shoes of the farmers as a
party to the case.
Be that as it may, in the interest of
justice and to be able to
write finis to the instant case, the
Court will not expunge Nocom's
pleadings but consider them as
having been filed by an intervenor.
Section 1 of Rule 19 of the 1997
Rules of Civil Procedure states:
Section 1. Who may intervene. – A
person who has a legal interest in
the matter in litigation, or in the
success of either of the parties, or
an interest against both, or is so
situated as to be adversely affected
by a distribution or other
disposition of property in the
custody of the court or of an officer
thereof may, with leave of court, be
allowed to intervene in the action.
The court shall consider whether or
not the intervention will unduly
delay or prejudice the adjudication
of the rights of the original parties,
and whether or not the intervenor's
rights may be fully protected in a
separate proceeding.
Although Nocom cannot properly
substitute as a party to the case, it
is not disputed that he supplied the
amount of P9,790,612.00, plus
P147,059.18 commission deposited
by the farmers to the RTC to
redeem the three parcels of land
from SMS. That is where his
interest lies. Nocom is entitled to be
reimbursed for those amounts, and
this is the only reason why the
Court is allowing his intervention.
In sum, the Court finds the
conveyance of the farmers' rights
made in Nocom's favor to be
unlawful. Notwithstanding the
dismissal of the petition to nullify
the IPA upon the instance of the
farmers themselves, Nocom cannot
rightfully substitute them as a party
to this case.
The compromise
agreements
executed by and
between SMS and
four of the
farmers are valid,
thus, a novation
of the judgment in
the redemption
case.
In invalidating the compromise
agreements, the RTC explained that
at the time of their execution, the
judgment in the redemption case
was already final, thus, there were
no more proceedings to suspend.
Further, the amount of
P300,000.00 paid by SMS to each
of the four farmers was
unconscionable.33
On the other hand, the CA, in ruling
that the Kasunduan executed by
SMS with each of the four farmers
did not novate the judgment
obligation, ratiocinated that:
[T]he right of redemption in favor
of [the farmers] is one which must
be exercised in full, if it is to be
exercised at all. [The farmers] must
be able to subrogate themselves in
the place of and to the exclusion of
[SMS]. Since such right is one
which cannot be exercised partially,
it follows that [SMS'] obligation to
allow them to exercise the said
right cannot also be performed
severally. Because the right granted
is incapable of dissection into
component parts, the obligation
imposed by the said judgment upon
[SMS] is also indivisible. In
obligations to do, as in that
prescribed in the final judgment in
Civil Case No. 95-020, indivisibility
is also presumed.34
"A compromise is a contract
whereby the parties, by making
reciprocal concessions, avoid a
litigation or put an end to one
already commenced."35
Compromise is a form of amicable
settlement that is not only allowed,
but also encouraged in civil cases.
Contracting parties may establish
such stipulations, clauses, terms,
and conditions as they deem
convenient, provided that these are
not contrary to law, morals, good
customs, public order, or public
policy.36
Rights may be waived through a
compromise agreement,
notwithstanding a final judgment
that has already settled the rights
of the contracting parties. To be
binding, the compromise must be
shown to have been voluntarily,
freely and intelligently executed by
the parties, who had full knowledge
of the judgment.37
The Court, in its Resolution dated
July 26, 2010, stated that:
Once a case is terminated by final
judgment, the rights of the parties
are settled; hence, a compromise
agreement is no longer necessary.
Though it may not be prudent to do
so, we have seen in a number of
cases that parties still considered
and had, in fact, executed such
agreement. To be sure, the parties
may execute a compromise
agreement even after the
finality of the decision. A
reciprocal concession inherent in a
compromise agreement assures
benefits for the contracting parties.
For the defeated litigant, obvious is
the advantage of a compromise
after final judgment as the liability
decreed by the judgment may be
reduced. As to the prevailing party,
it assures receipt of payment
because litigants are sometimes
deprived of their winnings because
of unscrupulous mechanisms meant
to delay or evade the execution of a
final judgment.38 (Citations omitted
and emphasis ours)
There is no justification to disallow
a compromise agreement, solely
because it was entered into after
final judgment. The validity of the
agreement is determined by
compliance with the requisites and
principles of contracts, not by when
it was entered into. As provided by
the law on contracts, a valid
compromise must have the
following elements: (1) the consent
of the parties to the compromise;
(2) an object certain that is the
subject matter of the compromise;
and (3) the cause of the obligation
that is established.39
In the course of the proceedings of
the instant case, the farmers
themselves raised no challenge
relative to the existence of the
elements of a valid contract. The
execution of the compromise
agreements between SMS and four
of the farmers is an undisputed
fact. There are likewise no claims of
vitiated consent and no proof that
the agreements were "rescissible,
voidable, unenforceable, or
void."40 Moreover, the Court does
not find the amount of P300,000.00
paid to each of the four farmers as
unconscionable especially in the
light of Efren's subsequent
declaration that they tilled the land
on their own initiative, without
procuring anybody's permission,
and sans a harvest sharing
agreement.41
Anent the CA's ruling on the
indivisibility of the exercise of the
right of redemption, the Court finds
the same to be without legal
mooring.
Section 12 of R.A. No. 3844
originally provided:
Sec. 12. Lessee's Right of
Redemption. -In case the
landholding is sold to a third person
without the knowledge of the
agricultural lessee, the latter shall
have the right to redeem the same
at a reasonable price and
consideration. Provided, That the
entire landholding sold must be
redeemed: Provided, further, That
where there are two or more
agricultural lessees, each shall be
entitled to said right of redemption
only to the extent of the area
actually cultivated by him. The right
of redemption under this Section
may be exercised within two (2)
years from the registration of the
sale and shall have priority over
any other right of legal redemption.
(Emphasis ours and italics in the
original)
However, in view of its amendment
by Section 12 of R.A. No. 6389,42 it
now reads as follows:
Sec. 12. Lessee's Right of
Redemption. – In case the
landholding is sold to a third person
without the knowledge of the
agricultural lessee, the latter shall
have the right to redeem the same
at a reasonable price and
consideration: Provided, that
where there are two or more
agricultural lessees, each shall
be entitled to said right of
redemption only to the extent of
the area actually cultivated by
him. The right of redemption under
this Section may be exercised
within one hundred and eighty days
from notice in writing which shall be
served by the vendee on all lessees
affected and the Department of
Agrarian Reform upon the
registration of the sale, and shall
have priority over any other right of
redemption. The redemption price
shall be the reasonable price of the
land at the time of the sale.
Upon the filing of the corresponding
petition or request (to redeem) with
the department or corresponding
case in court by the agricultural
lessee or lessees, the said period of
one hundred and eighty days shall
cease to run.
Any petition or request for
redemption shall be resolved within
sixty days from filing thereof;
otherwise the said period shall start
to run again.
x x x x (Emphasis and underlining
ours)
Considering the foregoing, it is
logical to conclude that the right of
redemption can be exercised
separately by each of the farmers in
proportion to the area of the
agricultural land they cultivated.
Thus, the non-participation of Oscar
will not affect the validity of the
compromise agreements executed
by SMS with four of the farmers.
Lastly, it is indispensable to inquire
if the law or public policy disallows
the four farmers from executing
waivers of their redemption rights.
In Planters Development Bank v.
Garcia,43 the Court discussed as
follows the rights of the
landowners vis-á-vis those of
tenants or agricultural lessees in
cases of sale of the landholdings: .
As an owner, Carolina has the right
to dispose of the property without
other limitations than those
established by law. This attribute of
ownership is impliedly recognized in
Sections 10, 11 and 12 of [R.A.]
No. 3844, where the law allows the
agricultural lessor to sell the
landholding, with or without the
knowledge of the agricultural lessee
and at the same time recognizes
the right of preemption and
redemption of the agricultural
lessee. Thus, the existence of
tenancy rights of agricultural lessee
cannot affect nor derogate from the
right of the agricultural lessor as
owner to dispose of the property.
The only right of the agricultural
lessee or his successor in interest is
the right of preemption and/or
redemption.44 (Italics in the
original)
While the right of redemption is
available to the farmers, it need not
be exercised and can be waived.
There is no law disallowing such
waiver and it is not within the
contemplation of transfers
prohibited by Section 62 of R.A. No.
3844.
The Court, thus, finds no
compelling grounds to invalidate
the compromise agreements.
In Heirs of Servando Franco v.
Spouses Gonzales,45 the Court
discussed novation in this wise:
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.
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. 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.46(Citations omitted)
In the case at bar, SMS' obligation
to allow redemption of the three
parcels of land was superseded by
the terms of the compromise
agreements executed with the four
farmers. SMS' new obligation
consisted of the payment of
P300,000.00 each to the four
farmers who, in turn, waived their
redemption rights. Novation, thus,
arose as the old obligation became
incompatible with the new.
The Court also notes that Oscar,
the farmer who did not execute a
compromise agreement with SMS,
filed before the RTC a Manifestation
and Motion,47 dated September 15,
2006, indicating that "he has no
plans, as he is in no financial
position, to exercise the right of
redemption"48 granted to him.
Considering that the judgment
obligation had been novated due to
the execution of valid compromise
agreements, and in the light of
Oscar's manifestation of his
disinterest in exercising his right of
redemption, the writ of execution
issued by the RTC on August 22,
2005 in Civil Case No. 95-020,
should thus be quashed.
IN VIEW OF THE FOREGOING,
the Decision and Resolution of the
Court Appeals, dated October 23,
2006 and June 29, 2007,
respectively, in CA-G.R. SP No.
92994, are SET ASIDE. The writ of
execution issued on August 22,
2005 by the Regional Trial Court of
Muntinlupa City, Branch 256, in
Civil Case No. 95-020 is
hereby QUASHED. Transfer
Certificate of Title Nos. 15895,
15896, and 15897 in the names of
Oscar Camerino, Efren Camerino,
Cornelio Mantile, Domingo Enriquez
and Nolasco del Rosario are
hereby CANCELLED, and TCT Nos.
120541, 120542, and 123872 in
the name of Springsun
Management Systems Corporation,
the predecessor of the petitioner
herein, SM Systems Corporation,
are REINSTATED. The trial court is
further directed to RETURN to the
intervenor, Mariano Nocom, the
amounts of P9,790,612.00 and
P147,059.18 consigned by him as
redemption price and commission,
respectively.
SO ORDERED.
G.R. No. L-47369
JOSEPH COCHINGYAN, JR. and JOSE
K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE
COMPANY, INC., respondent.
FELICIANO, J.:
This case was certified to us by the
Court of Appeals in its resolution dated
11 November 1977 as one involving only
questions of law and, therefore, falling
within the exclusive appellate jurisdiction
of this Court under Section 17, Republic
Act 296, as amended.
In November 1963, Pacific Agricultural
Suppliers, Inc. (PAGRICO) applied for
and was granted an increase in its line of
credit from P400,000.00 to P800,000.00
(the "Principal Obligation"), with the
Philippine National Bank (PNB). To
secure PNB's approval, PAGRICO had
to give a good and sufficient bond in the
amount of P400,000.00, representing the
increment in its line of credit, to secure
its faithful compliance with the terms and
conditions under which its line of credit
was increased. In compliance with this
requirement, PAGRICO submitted Surety
Bond No. 4765, issued by the
respondent R & B Surety and Insurance
Co., Inc. (R & B Surety") in the specified
amount in favor of the PNB. Under the
terms of the Surety Bond, PAGRICO and
R & B Surety bound themselves jointly
and severally to comply with the "terms
and conditions of the advance line [of
credit] established by the [PNB]." PNB
had the right under the Surety Bond to
proceed directly against R & B Surety
"without the necessity of first exhausting
the assets" of the principal obligor,
PAGRICO. The Surety Bond also
provided that R & B Surety's liability was
not to be limited to the principal sum of
P400,000.00, but would also include
"accrued interest" on the said amount
"plus all expenses, charges or other legal
costs incident to collection of the
obligation [of R & B Surety]" under the
Surety Bond.
In consideration of R & B Surety's
issuance of the Surety Bond, two
Identical indemnity agreements were
entered into with R & B Surety: (a) one
agreement dated 23 December 1963
was executed by the Catholic Church
Mart (CCM) and by petitioner Joseph
Cochingyan, Jr, the latter signed not only
as President of CCM but also in his
personal and individual capacity; and (b)
another agreement dated 24 December
1963 was executed by PAGRICO, Pacific
Copra Export Inc. (PACOCO), Jose K.
Villanueva and Liu Tua Ben Mr.
Villanueva signed both as Manager of
PAGRICO and in his personal and
individual capacity; Mr. Liu signed both
as President of PACOCO and in his
individual and personal capacity.
Under both indemnity agreements, the
indemnitors bound themselves jointly
and severally to R & B Surety to pay an
annual premium of P5,103.05 and "for
the faithful compliance of the terms and
conditions set forth in said SURETY
BOND for a period beginning ... until the
same is CANCELLED and/or
DISCHARGED." The Indemnity
Agreements further provided:
(b) INDEMNITY: — TO indemnify
the SURETY COMPANY for any
damage, prejudice, loss, costs,
payments, advances and
expenses of whatever kind and
nature, including [of] attorney's
fees, which the CORPORATION
may, at any time, become liable
for, sustain or incur as
consequence of having executed
the above mentioned Bond, its
renewals, extensions or
substitutions and said attorney's
fees [shall] not be less than
twenty [20%] per cent of the total
amount claimed by the
CORPORATION in each action,
the same to be due, demandable
and payable, irrespective of
whether the case is settled
judicially or extrajudicially and
whether the amount has been
actually paid or not;
(c) MATURITY OF OUR
OBLIGATIONS AS
CONTRACTED HEREWITH: —
The said indemnities will be paid
to the CORPORATION as soon
as demand is received from the
Creditor or upon receipt of Court
order or as soon as it becomes
liable to make payment of any
sum under the terms of the
above-mentioned Bond, its
renewals, extensions,
modifications or substitutions,
whether the said sum or sums or
part thereof, have been actually
paid or not.
We authorize the SURETY
COMPANY, to accept in any case
and at its entire discretion, from
any of us, payments on account
of the pending obligations, and to
grant extension to any of us, to
liquidate said obligations, without
necessity of previous knowledge
of [or] consent from the other
obligors.
xxx xxx xxx
(e) INCONTESTABILITY OF
PAYMENTS MADE BY THE
COMPANY. — Any payment or
disbursement made by the
SURETY COMPANY on account
of the above-mentioned Bonds,
its renewals, extensions or
substitutions, either in the belief
that the SURETY COMPANY
was obligate[d] to make such
payment or in the belief that said
payment was necessary in order
to avoid greater losses or
obligations for which the
SURETY COMPANY might be
liable by virtue of the terms of the
above-mentioned Bond, its
renewals, extensions or
substitutions, shall be final and
will not be disputed by the
undersigned, who jointly and
severally bind themselves to
indemnify the SURETY
COMPANY of any and all such
payments as stated in the
preceding clauses.
xxx xxx xxx
When PAGRICO failed to comply with its
Principal Obligation to the PNB, the PNB
demanded payment from R & B Surety
of the sum of P400,000.00, the full
amount of the Principal Obligation. R & B
Surety made a series of payments to
PNB by virtue of that demand totalling
P70,000.00 evidenced by detailed
vouchers and receipts.
R & B Surety in turn sent formal demand
letters to petitioners Joseph Cochingyan,
Jr. and Jose K. Villanueva for
reimbursement of the payments made by
it to the PNB and for a discharge of its
liability to the PNB under the Surety
Bond. When petitioners failed to heed its
demands, R & B Surety brought suit
against Joseph Cochingyan, Jr., Jose K.
Villanueva and Liu Tua Ben in the Court
of First Instance of Manila, praying
principally that judgment be rendered:
b. Ordering defendants to pay
jointly and severally, unto the
plaintiff, the sum of P20,412.20
representing the unpaid
premiums for Surety Bond No.
4765 from 1965 up to 1968, and
the additional amount of
P5,103.05 yearly until the Surety
Bond No. 4765 is discharged,
with interest thereon at the rate
of 12% per annum; [and]
c. Ordering the defendants to pay
jointly and severally, unto the
plaintiff the sum of P400,000.00
representing the total amount of
the Surety Bond No. 4765 with
interest thereon at the rate of
12% per annum on the amount of
P70,000.00 which had been paid
to the Phil. National Bank
already, the interest to begin from
the month of September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his
answer maintained that the Indemnity
Agreement he executed in favor of R & B
Surety: (i) did not express the true intent
of the parties thereto in that he had been
asked by R & B Surety to execute the
Indemnity Agreement merely in order to
make it appear that R & B Surety had
complied with the requirements of the
PNB that credit lines be secured; (ii) was
executed so that R & B Surety could
show that it was complying with the
regulations of the Insurance Commission
concerning bonding companies; (iii) that
R & B Surety had assured him that the
execution of the agreement was a mere
formality and that he was to be
considered a stranger to the transaction
between the PNB and R & B Surety; and
(iv) that R & B Surety was estopped from
enforcing the Indemnity Agreement as
against him.
Petitioner Jose K. Villanueva claimed in
his answer that. (i) he had executed the
Indemnity Agreement in favor of R & B
Surety only "for accommodation
purposes" and that it did not express
their true intention; (ii) that the Principal
Obligation of PAGRICO to the PNB
secured by the Surety Bond had already
been assumed by CCM by virtue of a
Trust Agreement entered into with the
PNB, where CCM represented by
Joseph Cochingyan, Jr. undertook to pay
the Principal Obligation of PAGRICO to
the PNB; (iii) that his obligation under the
Indemnity Agreement was thereby
extinguished by novation arising from the
change of debtor under the Principal
Obligation; and (iv) that the filing of the
complaint was premature, considering
that R & B Surety filed the case against
him as indemnitor although the PNB had
not yet proceeded against R & B Surety
to enforce the latter's liability under the
Surety Bond.
Petitioner Cochingyan, however, did not
present any evidence at all to support his
asserted defenses. Petitioner Villanueva
did not submit any evidence either on his
"accommodation" defense. The trial court
was therefore constrained to decide the
case on the basis alone of the terms of
the Trust Agreement and other
documents submitted in evidence.
In due time, the Court of First Instance of
Manila, Branch 24 rendered a decision
1
in favor of R & B Surety, the dispositive
portion of which reads as follows;
Premises considered, judgment
is hereby rendered: (a) ordering
the defendants Joseph
Cochingyan, Jr. and Jose K.
Villanueva to pay, jointly and
severally, unto the plaintiff the
sum of 400,000,00, representing
the total amount of their liability
on Surety Bond No. 4765, and
interest at the rate of 6% per
annum on the following amounts:
On P14,000.00 from September
27, 1966;
On P4,000.00 from November
28, 1966;
On P4,000.00 from December
14, 1966;
On P4,000.00 from January 19,
1967;
On P8,000.00 from February 13,
1967;
On P4,000.00 from March 6,
1967;
On P8,000.00 from June 24,
1967;
On P8,000. 00 from September
14, 1967;
On P8,000.00 from November
28, 1967; and
On P8,000. 00 from February 26,
1968
until full payment; (b) ordering
said defendants to pay, jointly
and severally, unto the plaintiff
the sum of P20,412.00 as the
unpaid premiums for Surety
Bond No. 4765, with legal
interest thereon from the filing of
plaintiff's complaint on August 1,
1968 until fully paid, and the
further sum of P4,000.00 as and
for attorney's fees and expenses
of litigation which this Court
deems just and equitable.
There being no showing the
summons was duly served upon
the defendant Liu Tua Ben who
has filed no answer in this case,
plaintiff's complaint is hereby
dismissed as against defendant
Liu Tua Ben without prejudice.
Costs against the defendants
Joseph Cochingyan, Jr. and Jose
K. Villanueva.
Not satisfied with the decision of the trial
court, the petitioners took this appeal to
the Court of Appeals which, as already
noted, certified the case to us as one
raising only questions of law.
The issues we must confront in this
appeal are:
1. whether or not the Trust Agreement
had extinguished, by novation, the
obligation of R & B Surety to the PNB
under the Surety Bond which, in turn,
extinguished the obligations of the
petitioners under the Indemnity
Agreements;
2. whether the Trust Agreement
extended the term of the Surety Bond so
as to release petitioners from their
obligation as indemnitors thereof as they
did not give their consent to the
execution of the Trust Agreement; and
3. whether or not the filing of this
complaint was premature since the PNB
had not yet filed a suit against R & B
Surety for the forfeiture of its Surety
Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by
both petitioners in their separate briefs,
was executed on 28 December 1965
(two years after the Surety Bond and the
Indemnity Agreements were executed)
between: (1) Jose and Susana
Cochingyan, Sr., doing business under
the name and style of the Catholic
Church Mart, represented by Joseph
Cochingyan, Jr., as Trustor[s]; (2) Tomas
Besa, a PNB official, as Trustee; and (3)
the PNB as beneficiary. The Trust
Agreement provided, in pertinent part, as
follows:
WHEREAS, the TRUSTOR has
guaranteed a bond in the amount
of P400,000.00 issued by the R
& B Surety and Insurance Co. (R
& B) at the instance of Pacific
Agricultural Suppliers, Inc.
(PAGRICO) on December 21,
1963, in favor of the
BENEFICIARY in connection
with the application of PAGRICO
for an advance line of
P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has
also guaranteed a bond issued
by the Consolacion Insurance &
Surety Co., Inc.
(CONSOLACION) in the amount
of P900,000.00 in favor of the
BENEFICIARY to secure certain
credit facilities extended by the
BENEFICIARY to the Pacific
Copra Export Co., Inc.
(PACOCO);
WHEREAS, the PAGRICO and
the PACOCO have defaulted in
the payment of their respective
obligations in favor of the
BENEFICIARY guaranteed by
the bonds issued by the R & B
and the
CONSOLACION, respectively,
and by reason of said default,
the BENEFICIARY has
demanded compliance by the R
& B and the CONSOLACION of
their respective obligations under
the aforesaid bonds;
WHEREAS, the TRUSTOR is,
therefore, bound to comply with
CONSOLACION, respectively
and in order to forestall
impending suits by the
BENEFICIARY against said
companies, he is willing as he
hereby agrees to pay the
obligations of said companies in
favor of the BENEFICIARY in the
total amount of
P1,300,000 without interest from
the net profits arising from the
procurement of reparations
consumer goods made thru the
allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes
and appoints Atty. TOMAS BESA
as TRUSTEE for the purpose of
paying to the BENEFICIARY
Philippine National Bank in the
manner stated hereunder, the
obligations of the R & B under
the R & B Bond No. G-4765 for
P400,000.00 dated December
23, 1963, and of the
CONSOLACION under The
Consolacion Bond No. G-5938 of
June 3, 1964 for P900,000.00 or
the total amount of
P1,300,000.00 without interest
from the net profits arising from
the procurement of reparations
There is no question that the Surety
consumer goods under the
Bond has not been cancelled or fully
Memorandum of Settlement and
discharged by payment of the Principal
xxx xxx xxx
6. THE BENEFICIARY agrees to
hold in abeyance any action to
enforce its claims against R & B
and CONSOLACION, subject of
the bond mentioned above. In
the meantime that this TRUST
AGREEMENT is being
implemented, the BENEFICIARY
hereby agrees to forthwith
reinstate the R & B and the
CONSOLACION as among the
companies duly accredited to do
business with the BENEFICIARY
and its branches, unless said
companies have been blacklisted
for reasons other than those
relating to the obligations subject
of the herein TRUST
AGREEMENT;
xxx xxx xxx
9. This agreement shall not in
any manner release the R & B
and CONSOLACION from their
respective liabilities under the
bonds mentioned above.
(emphasis supplied)
2

his obligation under the Deeds of Assignment of February

indemnity agreements
aforementioned executed by him
in favor of R & B and the
Obligation. Unless, therefore, the Surety
2, 1959 through the allocation of
Bond has been extinguished by another
WARVETS;
means, it must still subsist. And so must
the supporting Indemnity Agreements. 3
We are unable to sustain petitioners'
claim that the Surety Bond and their
respective obligations under the
Indemnity Agreements were
extinguished by novation brought about
by the subsequent execution of the Trust
Agreement.
Novation is the extinguishment of an
obligation by the substitution or change
of the obligation by a subsequent one
which terminates it, either by changing
its object or principal conditions, or by
substituting a new debtor in place of the
old one, or by subrogating a third person
to the rights of the creditor. Novation
4
through a change of the object or
principal conditions of an existing
obligation is referred to as objective (or
real) novation. Novation by the change of
either the person of the debtor or of the
creditor is described as subjective (or
personal) novation. Novation may also
be both objective and subjective (mixed)
at the same time. In both objective and
subjective novation, a dual purpose is
achieved-an obligation is extinguished
and a new one is created in lieu thereof.
If objective novation is to take place, it is
imperative that the new obligation
expressly declare that the old obligation
is thereby extinguished, or that the new
obligation be on every point incompatible
with the old one. Novation is never
6
presumed: it must be established either
by the discharge of the old debt by the
express terms of the new agreement, or
by the acts of the parties whose intention
to dissolve the old obligation as a
consideration of the emergence of the
new one must be clearly discernible. 7
Again, if subjective novation by a change
in the person of the debtor is to occur, it
is not enough that the juridical relation
between the parties to the original
contract is extended to a third person. It
is essential that the old debtor be
released from the obligation, and the
third person or new debtor take his place
in the new relation. If the old debtor is
not released, no novation occurs and the
third person who has assumed the
obligation of the debtor becomes merely
a co-debtor or surety or a co-surety. 8
Applying the above principles to the
instant case, it is at once evident that the
Trust Agreement does not expressly
terminate the obligation of R & B Surety
under the Surety Bond. On the contrary,
the Trust Agreement expressly provides
for the continuing subsistence of that
obligation by stipulating that "[the Trust
5
Agreement] shall not in any manner
release" R & B Surety from its obligation
under the Surety Bond.
Neither can the petitioners anchor their
defense on implied novation. Absent an
unequivocal declaration of
extinguishment of a pre-existing
obligation, a showing of complete
incompatibility between the old and the
new obligation (and nothing else) would
sustain a finding of novation by
implication. But where, as in this case,
9
the parties to the new obligation
expressly recognize the continuing
existence and validity of the old one,
where, in other words, the parties
expressly negated the lapsing of the old
obligation, there can be no novation. The
issue of implied novation is not reached
at all.
What the trust agreement did was, at
most, merely to bring in another person
or persons-the Trustor[s]-to assume the
same obligation that R & B Surety was
bound to perform under the Surety Bond.
It is not unusual in business for a
stranger to a contract to assume
obligations thereunder; a contract of
suretyship or guarantee is the classical
example. The precise legal effect is the
increase of the number of persons liable
to the obligee, and not the
extinguishment of the liability of the first
debtor. Thus, in Magdalena Estates vs.
10
Rodriguez, we held that:
11
[t]he mere fact that the creditor
receives a guaranty or accepts
payments from a third person
who has agreed to assume the
obligation, when there is no
agreement that the first debtor
shall be released from
responsibility, does not constitute
a novation, and the creditor can
still enforce the obligation against
the original debtor.
In the present case, we note that the
Trustor under the Trust Agreement, the
CCM, was already previously bound to R
& B Surety under its Indemnity
Agreement. Under the Trust Agreement,
the Trustor also became directly liable to
the PNB. So far as the PNB was
concerned, the effect of the Trust
Agreement was that where there had
been only two, there would now
be three obligors directly and solidarily
bound in favor of the PNB: PAGRICO, R
& B Surety and the Trustor. And the PNB
could proceed against any of the three,
in any order or sequence. Clearly, PNB
never intended to release, and never did
release, R & B Surety. Thus, R & B
Surety, which was not a party to the Trust
Agreement, could not have intended to
release any of its own indemnitors simply
because one of those indemnitors, the
Trustor under the Trust Agreement,
became also directly liable to the PNB.
2. We turn to the contention of petitioner
Jose K. Villanueva that his obligation as
indemnitor under the 24 December 1963
Indemnity Agreement with R & B Surety
was extinguished when the PNB agreed
in the Trust Agreement "to hold in
abeyance any action to enforce its
claims against R & B Surety .
The Indemnity Agreement speaks of the
several indemnitors "apply[ing] jointly
and severally (in solidum) to the R & B
Surety] — to become SURETY upon a
SURETY BOND demanded by and in
favor of [PNB] in the sum of
[P400,000.00] for the faithful compliance
of the terms and conditions set forth in
said SURETY BOND — ." This part of
the Agreement suggests that the
indemnitors (including the petitioners)
would become co-sureties on the
Security Bond in favor of PNB. The
record, however, is bereft of any
indication that the petitioners-indemnitors
ever in fact became co-sureties of R & B
Surety vis-a-vis the PNB. The petitioners,
so far as the record goes, remained
simply indemnitors bound to R & B
Surety but not to PNB, such that PNB
could not have directly demanded
payment of the Principal Obligation from
the petitioners. Thus, we do not see how
Article 2079 of the Civil Code-which
provides in part that "[a]n extension
granted to the debtor by the creditor
without the consent of the guarantor
extinguishes the guaranty" could apply in
the instant case.
The petitioner-indemnitors are, as, it
were, second-tier parties so far as the
PNB was concerned and any extension
of time granted by PNB to any of the
first-tier obligators (PAGRICO, R &B
Surety and the trustors[s]) could not
prejudice the second-tier parties.
There is no other reason why petitioner
Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement
"to hold in abeyance any action to
enforce its claims" against R & B Surety
did not extend the maturity of R & B
Surety's obligation under the Surety
Bond. The Principal Obligation had in
fact already matured, along with that of R
&B Surety, by the time the Trust
Agreement was entered into. Petitioner's
Obligation had in fact already matured,
for those obligations were to amture "as
soon as [R & B Surety] became liable to
make payment of any sum under the
terms of the [Surety Bond] — whether
the said sum or sums or part thereof
have been actually paid or not." Thus,
the situation was that precisely
envisaged in Article 2079:
[t]he mere failure on the part of
the creditor to demand payment
after the debt has become
due does not of itself constitute
any extension of the referred to
herein.(emphasis supplied)
The theory behind Article 2079 is that an
extension of time given to the principal
debtor by the creditor without the surety
of his right to pay the creditor and to be
immediately subrogated to the creditor's
remedies against the principal debtor
upon the original maturity date. The
surety is said to be entitled to protect
himself against the principal debtor upon
the orginal maturity date. The surety is
said to be entitled to protect himself
against the contingency of the principal
debtor or the indemnitors becoming
insolvent during the extended period.
The underlying rationale is not present in
the instant case. As this Court has held,
merely delay or negligence in
proceeding against the principal
will not discharge a surety unless
there is between the creditor and
the principal debtor a valid and
binding agreement therefor, one
which tends to prejudice [the
surety] or to deprive it of the
power of obtaining indemnity by
presenting a legal objection for
the time, to the prosecution of an
action on the original security.
12
In the instant case, there was nothing to
prevent the petitioners from tendering
payment, if they were so minded, to PNB
of the matured obligation on behalf of R
& B Surety and thereupon becoming
subrogated to such remedies as R & B
Surety may have against PAGRICO.
3. The last issue can be disposed of
quicjly, Clauses (b) and (c) of the
Indemnity Agreements (quoted above)
allow R & B Surety to recover from
petitioners even before R & B Surety
shall have paid the PNB. We have
previously held similar indemnity clauses
to be enforceable and not violative of any
public policy.13
The petitioners lose sight of the fact that
the Indemnity Agreements are contracts
of indemnification not only against actual
loss but against liability as well. While
14
in a contract of indemnity against loss as
indemnitor will not be liable until the
person to be indemnified makes
payment or sustains loss, in a contract of
indemnity against liability, as in this case,
the indemnitor's liability arises as soon
as the liability of the person to be
indemnified has arisen without regard to
whether or not he has suffered actual
loss. Accordingly, R & B Surety was
15
entitled to proceed against petitioners
not only for the partial payments already
made but for the full amount owed by
PAGRICO to the PNB.
Summarizing, we hold that :
(1) The Surety Bond was not novated by
the Trust Agreement. Both agreements
can co-exist. The Trust Agreement
merely furnished to PNB another party
obligor to the Principal Obligation in
addition to PAGRICO and R & B Surety.
(2) The undertaking of the PNB to 'hold
in abeyance any action to enforce its
claim" against R & B Surety did not
amount to an "extension granted to the
debtor" without petitioner's consent so as
to release petitioner's from their
undertaking as indemnitors of R & B
Surety under the INdemnity Agreements;
and
(3) Petitioner's are indemnitors of R & B
Surety against both payments to and
liability for payments to the PNB. The
present suit is therefore not premature
despite the fact that the PNB has not
instituted any action against R & B
Surety for the collection of its matured
obligation under the Surety Bond.
WHEREFORE, the petitioner's appeal is
DENIED for the lack of merit and the
decision of the trial court is AFFIRMED in
toto. Costs against the petitioners.
SO ORDERED.
G.R. No. 79642 July 5, 1993
BROADWAY CENTRUM
CONDOMINIUM
CORPORATION, petitioner,
vs.
TROPICAL HUT FOOD MARKET, INC.
and THE HONORABLE COURT OF
APPEALS, respondents.
Gozon, Berenguer, Fernandez &
Defensor Law Offices for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc
& Delos Angeles Law Office for
respondent.
FELICIANO, J.:
Petitioner Broadway Centrum
Condominium Corporation ("Broadway")
and private respondent Tropical Hut
Food Market. Inc. ("Tropical") executed
an 28 November 1980 a contract of during the next three (3) P17,246,103.00 in 1981, while
lease. Broadway, as lessor, agreed to years from February 1, "[Tropical's] gross profit, rate [was] only
lease a 3,042.19 square meter portion of 1984 to February 1, 10%." Tropical went on to say that the
the Broadway Centrum Commercial 1987, and ONE rental specified in that contract had been
Complex for a period of ten (10) years, HUNDRED SIXTY FIVE "based merely on [Tropical's) projections
commencing from 1 February 1981 and THOUSAND PESOS that [Tropical] could reach an average
expiring on 1 February 1991, "renewable (P165,000.00) per month sale of P120,000.00 a day;" however,
for a like period upon the mutual during the last four (4) Tropical's total sales projection for 1982
agreement of both parties." The rental years from February 1, was only P23,000,000.00. This would
provision of this contract reads as 1967 to February 1, mean again a rental rate of 6.08% of
follows: 1991. sales "which is too high for Tropical Hut-
Broadway considering that the present
3. BASIC RENTAL ON The first basic monthly rental rates of other Tropical branches
LEASED PREMISES — rental shall be paid in are even below the normal rate of 1.5%
LESSEE agrees to pay advance to the LESSOR on sales." Accordingly. Tropical made the
LESSOR a basic monthly on or before December 1, following proposal to Broadway:
rental on the leased 1980. Succeeding basic
promises in the amount monthly rentals starting [Tropical] would therefore
of ONE HUNDRED March, 1981 be paid by propose to reduce the
TWENTY THOUSAND LESSEE to LESSOR, present monthly rental to
PESOS (P120,000.00) without the necessity of a P50,000.00 or 2.0% of
Philippine Currency, previous demand or the their monthly sales
during the first three (3) services of a collector, whichever is higher, up to
years of this lease within the first five (5) the end of the third
contract from February 1, days of the month to year after which it shall
1981 to February 1, which said rental shall again be subject to
1984, allowing two (2) correspond, at the Office renegotiations.
months grace period on of the LESSOR at (Emphasis supplied)
rental for Broadway Centrum.
renovation/improvements On 4 March 1962, Broadway responded
on the leased promises During the first year of the lessor-lessee to Tropical's latter by stating that it
from December 1, 1980 relationship between Broadway and (Broadway) believed that the problems of
to January 31. 1961. The Tropical, no problems were apparently Tropical's supermarket in the Broadway
basic rental shall be experienced by either of them. On 5 Centrum were within the control of
increased to ONE February 1982, however, Tropical wrote Tropical's management. Broadway
HUNDRED FORTY to Broadway stating that Tropical's rental offered six (6) suggestions which, if
THOUSAND PESOS payments to Broadway were equivalent implemented, should result in increased
(P140,000.00) per month to 7.31% of Tropical's actual sales of sales for Tropical of at least 15% in the
succeeding months. In the meantime,
Broadway made the following counter-
proposal consisting of conditional
reduction of the stipulated rental by
P20,000.00 for a limited period of four (4)
months:
. . . Meantime, we are
agreeable to a
conditional reduction of
your rental by
P20,000.00 per
month for four months
starting this month on a
trial basis; that is, the
P20,000.00 per month
reduction in rental will be
paid back to us and
spread over the last six
months of the years
should the target of 15%
increase in sales be
achieved by the fourth
month. However, should
your sales not increased
by 5% in spite of the
improvements you have
introduced, the reduction
in rental of P20,000.00
per month of P80,000.00
for four months will not
have to be paid anymore.
In other words, the
monthly reduction in
rental is conditioned upon
your not achieving the
desired 15% increased in
sales volume by the
fourth month assuming
you implement all of the
above changes.
It is understood, however,
that any reduction in
rental extended is merely
a temporary suspension
of the original rate of
rental stipulated in our
contract of lease and not
an amendment
thereto. (Emphases
2 sales and receipts from
supplied)
Officers of Tropical met with the
President of Broadway and during this
conference, Tropical's officers recounted
the "low sales volume" that the Tropical
Supermarket in the Broadway Centrum
was experiencing, apparently as a result
of the temporary closure of Doña Juana
Rodriguez Avenue. This Avenue is a
3
major thoroughfare adjacent to the
Broadway Centrum and was then closed
to vehicular traffic because of the road
expansion project of the Government.
Broadway's President, Mrs. Cita
Fernandez Orosa, was aware that the
temporary closure of the Doña Juana
Rodriguez Avenue had affected the
business of all the Broadway's tenants,
including Tropical. She, therefore,
agreed on 20 April 1982 to a "provisional
and temporary agreement" which
agreement needs to be quoted in full:
Further to our letter dated
April 6, 1982, we hereby
make formal our
provisional and
temporary agreement to
a reduction of your
monthly rental on the
basis of 2% of gross
receipts or P60,000.00
whichever is higher.
Gross receipts should be
construed as the total
sublessees of your area
and from whatever
source arising from the
area leased by you. This
Provisional arrangement
should not be interpreted
as amendment to the
lease contract entered
into between us.
We invite your attention
to the fact that, as agreed
upon, you have
committed to return by
the end of April a certain
portion of your leased
premises totalling 466.56
square meters and
presently occupied by
your drug store and
coffee shop outlets and
half of the hallway.
Finally we wish to remind
you that the temporary
alteration in rental is Centr was provisionally reduced" to
conditioned on your good um P60,000.00 a month or 2% of gross
faith implementation an Mark receipts whichever is higher "without
the suggestions we et, waving any of [Broadway's] rights under
conveyed to you in our Inc. our rental agreement." Broadway then
letter of March 4, 1982 Cond went on to say that:
regarding the operations omini
of the supermarket and um After careful deliberation,
shall not commence until Corp. we regret that this
the area mentioned concession can no
above to be surrendered By: longer be extended in its
is actually surrendered. (Sign present form. We,
ed) therefore, advising that
Should you find the By: we shall increase the
foregoing in accordance (Sign monthly rental to
with our previous verbal ed)4
P100,000.00.
agreement, please signify ____
your acceptance by ____ This increase, however,
signing above the word ____ shall be
"conforme." ____ implemented gradually as
___ follows: P80,000.00
Thank you for your, ____ effective January, 1983
continued patronage. ____ and P100,000.00
____ effective April, 1993 until
Con ____ further notice.
for ____
m e: _ Considering the fact that
Very, (Emp you collect a monthly
truly hasis gross rental of
yours suppl P24,600.00 from your
, ied). concessionaires (other
forms of income not
Tropi Months later, the road expansion project considered), the previous
cal at the Doña Juana Rodriguez Avenue temporary
Hut was completed. By a letter dated 15 arrangement afforded
Food December 1982, addressed to Tropical, you mare than sufficient
Broa Broadway referred to the rental which respite from whatever
dway "as of last, April 20, 1982, business constraints you
 may have had then. The
consequent effect of said
temporary
arrangement is your
payment of a monthly
rental of P35,400.00 or
an effective rate of
P14.32 only per square
mater. We are sure that
you will agree with us
that this rate is very low
and cannot therefore be
sustained
indefinitely. (Emphases
5
supplied).
While the rental rate above fixed by
Broadway was higher than that set out in
the provisional and temporary agreement
of the parties of 20 April 1982, the rates
so fixed were nonetheless lower than
that stipulated in their contract of 28
November 1980. Tropical, however, was
not satisfied with the adjusted rates fixed
by Broadway. In a letter dated 4 January
1983, Mr. Luis Que of Tropical wrote to
Broadway's President appealing to
Broadway "to fix our monthly rental at
P60,000.00 or 2% of our gross receipts
whichever is higher." In this letter, Mr.
Que expressly hoped that
[Broadway would]
understand our position,
and may we reiterate our
appeal to maintain our
present provisional rates
until such time that more
sales are achieved. you regarding your rental
(Emphasis supplied) increased. (Emphasis
6
supplied).
Mr. Luis Que's appeal was, however,
found unsatisfactory by Broadway. In a Tropical continued its renegotiation
letter dated 13 January 1983, Broadway efforts. In another letter dated 29 March
said: 1983, Broadway's President wrote to Mr.
Luis Que turning down his request for
We are replying to your reconsideration. Broadway, however,
letter of January 4, 1983. was evidently desirous of keeping
While it may be admitted Tropical as a tenant if possible and so
that you are incurring stated that the P100,000.00 monthly
losses in your operations, rental would begin, not on April 1983 as
the same is not a stated in its letter of 15 December 1982
monopoly experienced but rather on July 1983. By a letter,
solely by your dated 9 April 1983, the Credit and
corporation. Broadway Collection Officer of Broadway sent Mr.
Centrum itself has had its Luis Que a bill for P81,320.00
share of business representing the accrued differential of
setbacks but we P20,000.00 per month between the
have nevertheless decide rental which Broadway was willing to
d to absorb part of your grant to Tropical (P80,000.00 per month
losses last year by starting 1 January, 1983) and up to 30
agreeing to a temporary June 1983)and the P60,000.00 per
reduction of your monthly month or 2% of gross receipts whichever
rental. However, as we is higher, under the temporary and
have stated in our provisional letter-agreement of 20 April
December 15, 1982 1982.
letter, this concession
can no longer be Tropical responded to the statement of
extended in its present account sent by Broadway by pleading,
form which continues to once more, in a letter dated 15 April
be a considerable 1983, that Tropical's present rentals of
reduction on the P60,000.00 monthly or 2% of gross
provisions of our existing receipts, whichever is higher, "would at
long term contract. least stay until we have somehow
Consequently, we have recovered," to which Tropical proposed,
to reiterate our advise on however, to add 20% of its income from
concessionaires (i.e., concessionaires at
Tropical-Broadway Supermarket). 7
Tropical's last counter-offer was not
acceptable to Broadway. In a letter dated
22 April 1983, Broadway's President
wrote to Mr. Luis Que stating that "the
matter was no longer negotiable":
We are responding to
your letter of April 15,
1983 proposing a counter
offer to the payment of
your rentals. You will
remember that in our last
meeting our position on
the matter has been
unequivocably
stated. The temporary
arrangement of reducing
your monthly rentals was
extended as an
assistance. This had
caused us to lose
P620,000.00 on rental
income.
You will agree that this is
a sizeable amount which
had tremendous adverse
effects on our financial
position. This can no
longer be sustained.
We reiterate, therefore,
that the matter is no
longer negotiable and we
strongly urge you to
settle your obligation to unilaterally increase the
minimize the 2% penalty rentals. This is a matter
on delayed payments which should be mutually
provided for in our agreed upon by us and
contract. as stated, we are not in a
financial position to agree
We trust that you will see to such an
the merits of the increase. (Emphasis
9
foregoing. (Emphasis
8 supplied).
supplied).
On the same day, 5 May 1983, Mrs.
On 5 May 1983, Mr. Mariano Gue, Orosa wrote to Mr. Mariano Que
adopting a new and much harder posture expressing shock and dismay at the
than Mr. Luis Que had, wrote to posture suddenly adopted by the latter.
Broadway as follows: Mrs. Orosa wrote:
. . . I could only confirm We are replying to your
what I told you in our letter of May 5, 1983
conference that we categorically stating that
cannot afford any your position is that we
increase in rentals in the cannot arbitrarily and
space occupied by us at unilaterally increase the
Broadway Centrum. And I rentals. We are appealed
could only repeat what is by the apparent attempt
contained in the letter to distort the very crystal
sent you by our Mr. Luis clear arrangement we
Que dated April 15, reached last April 20,
1983. We cannot agree 1982 anent
to an increase in rentals the temporary
at this time. To do so alteration of your rentals.
would put us in a We hereby attached a
financial situation worse xerox copy of said
then we were in before agreement with our
we agreed to reduce the underscores to refresh
leased premises and your memory.
adjust the rentals. Our
position is that you We have exhaustively,
cannot arbitrarily and repeatedly but patiently
 labored to explain to
you the temporary and
provisional arrangement
to reduce your
monthly rentals is not
amendment to the lease
contract and this was
done merely as an
assistance. There is,
therefore, absolutely no
basis to your claim that
we cannot arbitrarily and
unilaterally increase the
rentals. We strongly feel
that we should have
instead been the
recipient an act of
gratitude from you.
In view therefore of your
obstinate decision to blur
your view and continue
refusing to heed our
demands, we are hereby
formally serving you
notice that if you still fail
to pay your back
accounts amounting to
P100,000.00 exclusive of
penalty charges by
Monday, May 9, 1983,
paragraph five (5) of our
lease contract will be
implemented. (Emphasi
10
s supplied).
A week later, on 12 May 1983, Tropical
filed a Complaint before the Regional
Trial Court, Quezon City, seeking a agreement are to subsist while Tropical's
restraining order or preliminary injunction sales volume "remains low."
to prevent Broadway from invoking and
implementing Section 5 of their Lease Petitioner, upon the other hand,
Contract and asking the court to decree vehemently denied that the original
that the, rental provided for in the letter- Lease Contract had been novated by the
agreement of 20 April 1982 "should letter-agreement of 20 April 1982.
subsist while the low volume of sales [of
Tropical] still continues." A restraining In time, the trial court rendered its
order was issued by the trial court ex decision dated 14 March 1985, the
parte the next day and a preliminary dispositive portion of which reads as
injunction was granted on 2 June 1983, follows:
upon Tropical's filing of a bond in the
amount of P100,000.00.
WHEREFORE,
judgment, is hereby
On 6 January 1984, while trial before the rendered in favor of the
Regional Trial Court was pending, plaintiff and against the
Broadway informed Tropical that the defendant as follows:
basic rental would be increased to
P140,000.00 per month during the next
1. The writ of preliminary
three (3) years from 1 February 1984 to
injunction previously
1 February 1987 in accordance with
issued is made
paragraph (3) of the Lease Contract
permanent;
dated 28 November 1980.
2. The reduced rental
Tropical reacted by filing a supplemental
provided for in the letter-
complaint with the trial court raising for
agreement of April 20,
the first time the issue of whether or not
1982 (Exh. "G" or "5")
the letter-agreement dated 20 April 1982
shall subsist or
had novated the Lease Contract of 28
be effective during the
November 1980. Tropical alleged that
period that a plaintiff
the original Contract. of Lease had been
cannot achieve its
novated in its principal conditions — i.e.,
Projected daily sales
the area subject to the lease and the
average as envisioned in
lease rentals — by the letter-agreement
its feasibility study;
dated 20 April 1982 and that the reduced
lease rates set out in the letter-
3. The contract of leased Febr P139
dated November 28, uary ,702.
1980 (Exh. "A" or "1") is 1, 00.
declared as partially 1984
novated or modified by to Correspondingly,
the letter-agreement; Febr defendant's counterclaim
uary is dismissed.
4. The amount of monthly 1,
rentals payable by 1987 Costs against the
plaintiff for the reduced — defendant.
area of the leased P46.
promises after plaintiff 02
So Ordered. (Emphasis
11

has achieved its per

supplied).
projected daily sales squar
average is fixed as e
mete On appeal, the Court of Appeals affirmed
follows:
r or the decision of the trial court. The Court
P118 of Appeals held that the letter-agreement
Febr dated 20 April 1982 had novated the
uary .530.
00; principal conditions of the Lease
1, Contract. The Court of Appeals also hold
1981 that the reduction in the rentals was not
to Febr
entirely a gratuitous accommodation on
Febr uary
the part of Broadway since the reduction
uary 1,
of the leased space by 466.56 square
1, 1987
meters, possession of which was
1984 to
returned by Tropical to Broadway,
— Febr
constituted valuable consideration for the
P39. uary
reduction of rentals while the "low sales
45 1,
volume" of Tropical continued. The Court
per 1991
of Appeals corrected a microscopic
squar —
arithmetical error committed by the trial
e P54.
court and in effect directed Tropical to
mete 24
pay, when its "low sales volume" shall
r or per
hove been overcome, the following rental
P101 squar
rates:
,609. e
00; mate
r or
 From 1 February 1984 up
to 1 February 1987 —
P118.529.15 per month;
From 1 February 1987 up
to 1 February 1991 —
P139,695.07 per month.
Petitioner Broadway now asks us to
review and set aside the Decision of the
Court of Appeals.
The sole issue confronting us here is
Whether or not the latter-agreement
dated 20 April 1982 had novated the
Contract of Lease of 28 November 1980.
We start with the basic conception that
novation is the extinguishment of an
obligation by the substitution of that
obligation with a subsequent one, which
terminates it, either by changing its
object or principal conditions or by
substituting a now debtor in place of the
old one, or by subrogating a third person
to the rights of the creditor. Novation
12
through a change of the object or
principal conditions of an existing
obligation is referred to as objective (or
real) novation. Novation by the change of
either the person of the debtor or of the
creditor is described as subjective (or
personal) novation. Novation may also
be objective and subjective (mixed) at
the same time. In both objective and
subjective novation, a dual purpose is
achieved — an obligation in extinguished
and a news one is created In lieu
thereof. 13
If objective novation is to take place, it is
essential that the new obligation
expressly declare that the old obligation
to be extinguished, or that now obligation
be on every point incompatible with the
old one. Novation is never presumed; it
14
must be established either by the
discharge of use old debt by the express
terms of the new agreement, or by the
acts of the parties whose intention to
dissolve the old obligation as a
consideration of the emergence of the
new one must be clearly manifested. It 15
is hardly necessary to add that the role
that novation is never presumed, is not
avoided by merely referring to partial
novation. The will to novate, whether
totally or partially, must appear by
express agreement of the parties, by
their acts which are too clear and
unequivocal to be mistaken.
Applying the above principles to the case
at bar, it is entirely clear to the court that
the letter-agreement of 20 April 1992
did not extinguish or alter the obligations
of respondent Tropical and the rights of
petitioner Broadway under their lease
contract dated 28 November 1980.
In the first place, the letter-agreement of
20 April 1982 was, by its own terms, a
" provisional and temporary agreement
to a reduction of [Tropical's] monthly
rental —." The letter-agreement, as
noted earlier, also contained the
following sentence:
This provisional
agreement should not be
interpreted as
amendment to the
contract entered into by
us.
The same letter also referred to the
reduction of rental as a "temporary
alteration in rental" which was
"conditioned" upon good faith
implementation by Tropical of the six (6)
principal suggestions Broadway had
conveyed to Tropical concerning
improvement of the operations of
Tropical's supermarket at the Broadway
Centrum. The non-specification by
Broadway (who had prepared the letter-
agreement an which Tropical placed
its conforme) of the period of time during
which the reduced rentals would remain
in effect, only meant that Broadway
retained for itself the discretionary right
to return to the original contractual rates
of rental whenever Broadway felt it
appropriate to do so. There is nothing in
the text of the 20 April 1982 letter-
agreement to suggest that the reduced
concessional rental rates could not be
terminated Broadway without the
consent of Tropical.
In the second place, the formal notarized
Lease Contract of 28 November 1980
made it clear that a temporary and
provisional concessional reduction of
rentals which Broadway might grant to
Tropical was not to be construed as
alteration or waiver of any; of the terms
of the Lease Contract itself. That Lease
Contract provided, among other things,
as follows:
32. NON-WAIVER OF
CONDITIONS &
COVENANTS —
The failure of the
LESSOR to insist upon
strict performance of any
of the terms, conditions
and stipulation hereof
shall not be deemed a
relinquishment or waiver
of any right or remedy
that said LESSOR may
have, nor shall it be
construed as a waiver of
any subsequent breach
of, or default in the terms,
conditions and covenants
hereof, which terms,
conditions and covenants
shall continue under this
Contract and shall be
deemed to have been
made unless express in
writing and signed by the
LESSOR. (Emphasis
16
supplied).
In the third place, the course of
negotiations between Broadway and
Tropical before the execution of their
letter-agreement of 20 April 1982, quite
clearly indicated that what they were
negotiating was a temporary and
provisional reduction of rentals. Thus,
Tropical itself, in its letter to Broadway
dated 5 February 1982, quoted earlier,
had proposed reduction of rentals from
the stipulated contractual rates to
P50,000.00 per month or 2% of monthly
sales, whichever is higher, "up to the end
of the third year after which it shall again
subject, to renegotiation."
Any reduction in rental
extended is merely a
temporary suspension of
the original rate of rental
stipulated in our contract
of lease and not an
amendment thereto.
In the fourth place, the course of
discussions between Broadway and
Tropical, as disclosed in their
correspondence, after execution of the
20 April 1982 letter-agreement, shows
that the reduction of rentals agreed upon
in the letter-agreement was not to
persist, for the rest of the life of the ten
(10)-year Contract of Lease. That
correspondence is bereft of any, sign of
mutual agreement or recognition that the
reduced rentals had so permanently
replaced the contract stipulations on
rentals as to have become immune to
change save by common consent of
Tropical and Broadway. Quite the
contrary. In Broadway's letter to Tropical
dated 15 December 1982, Mrs. Orosa
referred to the letter-agreement of 20
April 1982 which "provisionally reduced
to P60,000.00 a month or 2% of
[Tropical's] gross receipts, whichever is
higher, without waiving any of our right
under our rental agreement." This 15
December 1982 letter, quoted earlier, in
an obvious effort to be conciliatory, did
not try to go back immediately to the
contract stipulation of P120,000.00
monthly rental, from 1 February 1981 to
1 February 1984. Instead, Broadway
proposed P80,000.00 per month
effective January 1983 and P100 000.00
per month effective April 1983 "until
further notice." In its reply letter of 4
January 1983, Tropical appealed to
Broadway to maintain "our
present provisional rates until such time
that more sales are achieved." In its
rejoinder of 13 January 1983, Broadway
stressed that though it had its own share
of business set backs, it had
"nevertheless decided to absorb part of
[Tropical-Broadway Centrum's] losses
last year by agreeing to
a temporary reduction of the monthly
rental." At the same time, Broadway
stressed that "this concession" could no
longer be extended "in its present form
which continues to be a considerable
reduction on the provisions of
our existing long-term contract." Finally,
in his last letter of 15 April 1983, Mr. Luis
Que of Tropical appealed once more to
Broadway to continue the reduction in
rental under the 20 April 1982 letter-
agreement "until we have somehow
recovered" and then, at the same time,
offered to increase that reduced rental by
adding to it 20% of Tropical's income
from concessionaires at its Broadway
Centrum Supermarket. Turning down Mr.
Que's last counter-officer, Mrs. Orosa of
Broadway on 22 April 1983 once again
stressed that:
The temporary arrangem
ent of reducing your
monthly rentals was
extended as an
assistance. This had
caused us to lose
P620,000.00 on rental
income. (Emphasis
supplied).
It is thus clear to the Court that Tropical
was attempting to modify its formal
Lease Contract with Broadway by
implying or inserting terms into the 20
April 1982 letter-agreement which are
not found in that letter-agreement. Under
both the Civil Code and our case law on
novation and as well the express terms
of the 28 November 1980 Contract of
Lease, only evidence of the clearest and
most explicit kind will suffice for that
purpose. Tropical's theory that Broadway
had agreed in the 20 April 1982 letter-
agreement to maintain the reduced
rental so long as Tropical was suffering
from a "low volume of sales" appears to
us as an afterthought, imaginative and
original no doubt, but still an
afterthought. Tropical did not pretend to
have reached agreement with Broadway
on what level of sales would constitute
the critical "low volume of sales." And so,
the trial court ended up with the truly
extraordinary recourse of referring to the
feasibility study that Tropical had made
on it's own, before Tropical and
Broadway executed their 28 November
1980 Contract of Lease. That feasibility
study was no mare than an expression of
Tropical's own expectations when it
entered into the 1980 Contract of Lease;
yet the trial court held that the reduced
rentals were to remain in effect until
Tropical achieved its own expectations
concerning its sales at the Broadway
Centrum, which presumably were not
"low."
Tropical, in its Memorandum, stressed
that Broadway had supplied the number
of customers which Tropical had inputted
in its feasibility study. Whatever number
Broadway may have submitted to
Tropical in their pre-contract negotiations
was no more than an estimate or
speculation as to the number of
customers that might be coming into the
then proposed Tropical Supermarket at
the Broadway Centrum. We do not
understand Tropical to have suggested
that that number constituted
a representation on the part of Broadway
which turned out to be false and which
vitiated Tropical's consent to the original
1980 Contract, of Lease. Neither do we
understand Tropical to be suggesting
that Broadway had warranted to Tropical
that a certain number of customers
would in fact be visiting the then
proposed Tropical Supermarket at
Broadway Centrum. The 1980 Contract
of Lease itself was totally silent as to any
such estimated or expected number of
customers either as a representation or
as a warranty on the part, of Broadway.
That silence rendered any estimate
which Broadway may have conveyed to
Tropical, quite immaterial. 17
We turn to the holding of the Court of
Appeals that the surrender of 466.56
square meters of leased space by
Tropical to Broadway constituted
valuable consideration, acceptance of
which disabled Broadway from insisting
on the original terms of their Contract of
Lease. Under the view we have taken
above of the legal effects of the 20 April
1982 letter-agreement, this supposed
valuable consideration appears quite
immaterial. We must, nonetheless, note
that comparison of the lease rentals
reduced and the floor space surrendered
yields a strong presumption that
Broadway could not have agreed to the
supposed partial novation. The rentals
were reduced by Broadway by 50%
(from P120,000.00 to P60,000.00 per
month). The floor space was reduced by
slightly over 15% only. No substantial
relationship existed between the amount
of the reduction of rental and the area of
the space returned by Tropical. Hence,
no reasonable presumption can be
indulged that that, return of part of the
leased space constituted consideration
for the reduction of rental rates. In that
Contract of Lease, moreover, the rentals
were stipulated for a specified portion of
the Broadway Centrum having a total
floor area of 3,042.19 square meters; the
rental rate was not specified on a per
square meter basis.
We conclude that the Court, of Appeals
fell into reversible error when it affirmed
the decision of the trial court. We believe
and so hold that the letter-agreement of
20 April 1982 did not constitute a
novation, Whether partial or total, of the
28 November 1980 Contract of Lease
between Broadway and Tropical.
WHEREFORE, for all the foregoing, the
Petition for Review on Certiorari is
hereby GIVEN DUE COURSE, and the
Comment filed by private respondent
Tropical is hereby TREATED as its
ANSWER and the Decision dated 30
January 1987 of the Court, of Appeals
and the Decision dated 14 March 1985
of the trial court are
hereby REVERSED and SET ASIDE. A
new judgment is hereby entered
dismissing the complaint filed by private
respondent Tropical, and requiring
private respondent Tropical to pay to
petitioner Broadway the following rental
rates:
1. P80,000.00 per month from 1 January
1983 up to 30 June 1983;
2. P100,000.00 per, month from 1 July
1983 up to 31 January 1984;
3. P140,000.00 per month from 1
February 1984 to 1 February 1987; and
4. P160,000.00 per month from 1
February 1987 to 31 January 1991.
The penalty of 2% per month on unpaid
rentals specified in Section 5 of the 28
November 1980 Contract of Lease is, in
the exercise of the Court's discretion,
hereby equitably REDUCED to ten
percent (10%) per annum computed from
accrual of such rentals as above
specified until fully paid. In addition,
private respondent Tropical shall pay to
petitioner Broadway attorney's fees in
the amount of ten percent (10%) (and
not twenty percent [20%] as specified in
Section 33 of the Contract of lease) of
the total amount due and payable to
petitioner Broadway under this Decision.
Costs against, private respondent.
SO ORDERED.
G.R. No. 147950 : December 11, 2003
CALIFORNIA BUS LINES,
INC.,, Petitioner, v. STATE INVESTMENT
HOUSE, INC., respondent.
DECISION
QUISUMBING, J.:
In this petition for review, California Bus
Lines, Inc., assails the decision,1 dated
April 17, 2001, of the Court of Appeals in
CA-G.R. CV No. 52667, reversing the
judgment2, dated June 3, 1993, of the
Regional Trial Court of Manila, Branch 13,
in Civil Case No. 84-28505 entitled State
Investment House, Inc. v. California Bus
Lines, Inc., for collection of a sum of
money. The Court of Appeals held
petitioner California Bus Lines, Inc., liable
for the value of five promissory notes
assigned to respondent State Investment
House, Inc.
The facts, as culled from the records, are
as follows:
Sometime in 1979, Delta Motors
CorporationM.A.N. Division (Delta)
applied for financial assistance from
respondent State Investment House, Inc.
(hereafter SIHI), a domestic corporation
engaged in the business of quasi-banking.
SIHI agreed to extend a credit line to
Delta for P25,000,000.00 in three
separate credit agreements dated May
11, June 19, and August 22, 1979.3 On
several occasions, Delta availed of the
credit line by discounting with SIHI some
of its receivables, which evidence actual
sales of Deltas vehicles. Delta eventually
became indebted to SIHI to the tune
of P24,010,269.32.4
cräläwvirtualibräry
Meanwhile, from April 1979 to May 1980,
petitioner California Bus Lines, Inc.
(hereafter CBLI), purchased on
installment basis 35 units of M.A.N. Diesel
Buses and two (2) units of M.A.N. Diesel
Conversion Engines from Delta. To secure
the payment of the purchase price of the
35 buses, CBLI and its president, Mr.
Dionisio O. Llamas, executed sixteen (16)
promissory notes in favor of Delta on
January 23 and April 25, 1980.5In each
promissory note, CBLI promised to pay
Delta or order, P2,314,000 payable in 60
monthly installments starting August 31,
1980, with interest at 14% per annum.
CBLI further promised to pay the holder
of the said notes 25% of the amount due
on the same as attorneys fees and
expenses of collection, whether actually
incurred or not, in case of judicial
proceedings to enforce collection. In
addition to the notes, CBLI executed
chattel mortgages over the 35 buses in
Deltas favor.
When CBLI defaulted on all payments
due, it entered into a restructuring
agreement with Delta on October 7,
1981, to cover its overdue obligations
under the promissory notes.6 The
restructuring agreement provided for a
new schedule of payments of CBLIs past
due installments, extending the period to
pay, and stipulating daily remittance
instead of the previously agreed monthly
remittance of payments. In case of
default, Delta would have the authority to
take over the management and
operations of CBLI until CBLI and/or its
president, Mr. Dionisio Llamas, remitted
and/or updated CBLIs past due account.
CBLI and Delta also increased the interest
rate to 16% p.a. and added a
documentation fee of 2% p.a. and a 4%
p.a. restructuring fee.
On December 23, 1981, Delta executed a
Continuing Deed of Assignment of
Receivables7 in favor of SIHI as security
for the payment of its obligations to SIHI
per the credit agreements. In view of
Deltas failure to pay, the loan agreements
were restructured under a Memorandum
of Agreement dated March 31,
1982.8 Delta obligated itself to pay a fixed
monthly amortization of P400,000 to SIHI
and to discount with SIHI P8,000,000
worth of receivables with the
understanding that SIHI shall apply the
proceeds against Deltas overdue
accounts.
CBLI continued having trouble meeting its
obligations to Delta. This prompted Delta
to threaten CBLI with the enforcement of
the management takeover clause. To pre-
empt the take-over, CBLI filed on May 3,
1982, a complaint for injunction9,
docketed as Civil Case No. 0023-P, with
the Court of First Instance of Rizal, Pasay
City, (now Regional Trial Court of Pasay
City). In due time, Delta filed its amended
answer with applications for the issuance
of a writ of preliminary mandatory
injunction to enforce the management
takeover clause and a writ of preliminary
attachment over the buses it sold to
CBLI.10 On December 27, 1982,11 the trial
court granted Deltas prayer for issuance
of a writ of preliminary mandatory
injunction and preliminary attachment on
account of the fraudulent disposition by
CBLI of its assets.
On September 15, 1983, pursuant to the
Memorandum of Agreement, Delta
executed a Deed of Sale12 assigning to
SIHI five (5) of the sixteen (16)
promissory notes13 from California Bus
Lines, Inc. At the time of assignment,
these five promissory notes, identified
and numbered as 80-53, 80-54, 80-55,
80-56, and 80-57, had a total value
of P16,152,819.80 inclusive of interest at
14% per annum.
SIHI subsequently sent a demand letter
dated December 13, 1983,14 to CBLI
requiring CBLI to remit the payments due
on the five promissory notes directly to it.
CBLI replied informing SIHI of Civil Case
No. 0023-P and of the fact that Delta had
taken over its management and
operations.15
cräläwvirtualibräry
As regards Deltas remaining obligation to
SIHI, Delta offered its available bus units,
valued at P27,067,162.22, as payment in
kind.16 On December 29, 1983, SIHI
accepted Deltas offer, and Delta
transferred the ownership of its available
buses to SIHI, which in turn
acknowledged full payment of Deltas
remaining obligation.17 When SIHI was
unable to take possession of the buses,
SIHI filed a petition for recovery of
possession with prayer for issuance of a
writ of replevin before the RTC of Manila,
Branch 6, docketed as Civil Case No. 84-
23019. The Manila RTC issued a writ of
replevin and SIHI was able to take
possession of 17 bus units belonging to
Delta. SIHI applied the proceeds from the
sale of the said 17 buses amounting
to P12,870,526.98 to Deltas outstanding
obligation. Deltas obligation to SIHI was
thus reduced to P20,061,898.97.
On December 5, 1984, Branch 6 of the
RTC of Manila rendered judgment in Civil
Case No. 84-23019 ordering Delta to pay
SIHI this amount.
Thereafter, Delta and CBLI entered into a
compromise agreement on July 24,
1984,18 in Civil Case No. 0023-P, the
injunction case before the RTC of Pasay.
CBLI agreed that Delta would exercise its
right to extrajudicially foreclose on the
chattel mortgages over the 35 bus units.
The RTC of Pasay approved this
compromise agreement the following
day, July 25, 1984.19 Following this, CBLI
vehemently refused to pay SIHI the value
of the five promissory notes, contending
that the compromise agreement was in
full settlement of all its obligations to
Delta including its obligations under the
promissory notes.
On December 26, 1984, SIHI filed a
complaint, docketed as Civil Case No. 84-
28505, against CBLI in the Regional Trial
Court of Manila, Branch 34, to collect on
the five (5) promissory notes with
interest at 14% p.a. SIHI also prayed for
the issuance of a writ of preliminary
attachment against the properties of
CBLI.20cräläwvirtualibräry
On December 28, 1984, Delta filed a
petition for extrajudicial foreclosure of
chattel mortgages pursuant to its
compromise agreement with CBLI.
On January 2, 1985, Delta filed in the
RTC of Pasay a motion for execution of
the judgment based on the compromise
agreement.21 The RTC of Pasay granted
this motion the following day.22
cräläwvirtualibräry
In view of Deltas petition and motion for
execution per the judgment of
compromise, the RTC of Manila granted in
Civil Case No. 84-28505 SIHIs application
for preliminary attachment on January 4,
1985.23 Consequently, SIHI was able to
attach and physically take possession of
thirty-two (32) buses belonging to
CBLI.24 However, acting on CBLIs motion
to quash the writ of preliminary
attachment, the same court resolved
on January 15, 1986,25to discharge the
writ of preliminary attachment. SIHI
assailed the discharge of the writ before
the Intermediate Appellate Court (now
Court of Appeals) in a petition
for certiorari and prohibition, docketed as
CA-G.R. SP No. 08378. On July 31, 1987,
the Court of Appeals granted SIHIs
petition in CA-GR SP No. 08378 and ruled
that the writ of preliminary attachment
issued by Branch 34 of the RTC Manila in
Civil Case No. 84-28505 should stay.26The
decision of the Court of Appeals attained
finality on August 22, 1987.27cräläwvirtualibräry
Meanwhile, pursuant to the January 3,
1985 Order of the RTC of Pasay, the
sheriff of Pasay City conducted a public
auction and issued a certificate of sheriffs
sale to Delta on April 2, 1987, attesting to
the fact that Delta bought 14 of the 35
buses for P3,920,000.28On April 7, 1987,
the sheriff of Manila, by virtue of the writ
of execution dated March 27, 1987,
issued by Branch 6 of the RTC of Manila
in Civil Case No. 84-23019, sold the same
14 buses at public auction in partial
satisfaction of the judgment SIHI
obtained against Delta in Civil Case No.
84-23019.
Sometime in May 1987, Civil Case No.
84-28505 was raffled to Branch 13 of the
RTC of Manila in view of the retirement of
the presiding judge of Branch 34.
Subsequently, SIHI moved to sell the
sixteen (16) buses of CBLI which had
previously been attached by the sheriff in
Civil Case No. 84-28505 pursuant to
the January 4, 1985, Order of the RTC of
Manila.29SIHIs motion was granted
on December 16, 1987.30On November
29, 1988, however, SIHI filed an
urgent ex-parte motion to amend this
order claiming that through inadvertence
and excusable negligence of its new
counsel, it made a mistake in the list of
buses in the Motion to Sell Attached
Properties it had earlier filed.31SIHI
explained that 14 of the buses listed had
already been sold to Delta on April 2,
1987, by virtue of the January 3, 1985
Order of the RTC of Pasay, and that two
of the buses listed had been released to
third party, claimant Pilipinas Bank, by
Order dated September 16, 198732of
Branch 13 of the RTC of Manila.
CBLI opposed SIHIs motion to allow the
sale of the 16 buses. On May 3,
1989,33 Branch 13 of the RTC of Manila
denied SIHIs urgent motion to allow the
sale of the 16 buses listed in its motion to
amend. The trial court ruled that the best
interest of the parties might be better
served by denying further sales of the
buses and to go direct to the trial of the
case on the merits.34cräläwvirtualibräry
After trial, judgment was rendered in Civil
Case No. 84-28505 on June 3, 1993,
discharging CBLI from liability on the five
promissory notes. The trial court likewise
favorably ruled on CBLIs compulsory
counterclaim. The trial court directed SIHI
to return the 16 buses or to pay
CBLI P4,000,000 representing the value
of the seized buses, with interest at 12%
p.a. to begin from January 11, 1985, the
date SIHI seized the buses, until payment
is made. In ruling against SIHI, the trial
court held that the restructuring
agreement dated October 7, 1981,
between Delta and CBLI novated the five
promissory notes; hence, at the time
Delta assigned the five promissory notes
to SIHI, the notes were already merged
in the restructuring agreement and
cannot be enforced against CBLI.
SIHI appealed the decision to the Court of
Appeals. The case was docketed as CA-
G.R. CV No. 52667. On April 17, 2001,
the Court of Appeals decided CA-G.R. CV
No. 52667 in this manner:
WHEREFORE, based on the foregoing
premises and finding the appeal to be
meritorious, We find defendant-appellee
CBLI liable for the value of the five (5)
promissory notes subject of the
complaint a quo less the proceeds from
the attached sixteen (16) buses. The
award of attorneys fees and costs is
eliminated. The appealed decision is
hereby REVERSED. No costs.
SO ORDERED.35
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Hence, this appeal where CBLI contends
that
I. THE COURT OF APPEALS ERRED IN
DECLARING THAT THE RESTRUCTURING
AGREEMENT BETWEEN DELTA AND THE
PETITIONER DID NOT SUBSTANTIALLY
NOVATE THE TERMS OF THE FIVE
PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN
HOLDING THAT THE COMPROMISE
AGREEMENT BETWEEN DELTA AND THE
PETITIONER IN THE PASAY CITY CASE
DID NOT SUPERSEDE AND DISCHARGE
THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN
UPHOLDING THE CONTINUING VALIDITY
OF THE PRELIMINARY ATTACHMENT AND
EXONERATING THE RESPONDENT OF
MALEFACTIONS IN PRESERVING AND
ASSERTING ITS RIGHTS
THEREUNDER.36 cräläwvirtualibräry
Essentially, the issues are (1) whether
the Restructuring Agreement dated
October 7, 1981, between petitioner CBLI
and Delta Motors, Corp. novated the five
promissory notes Delta Motors, Corp.
assigned to respondent SIHI, and (2)
whether the compromise agreement in
Civil Case No. 0023-P superseded and/or
discharged the subject five promissory
notes. The issues being interrelated, they
shall be jointly discussed.
CBLI first contends that the Restructuring
Agreement did not merely change the
incidental elements of the obligation
under all sixteen (16) promissory notes,
but it also increased the obligations of
CBLI with the addition of new obligations
that were incompatible with the old
obligations in the said notes.37CBLI adds
that even if the restructuring agreement
did not totally extinguish the obligations
under the sixteen (16) promissory notes,
the July 24, 1984, compromise
agreement executed in Civil Case No.
0023-P did.38CBLI cites paragraph 5 of
the compromise agreement which states
that the agreement between it and CBLI
was in full and final settlement,
adjudication and termination of all their
rights and obligations as of the date of
(the) agreement, and of the issues in
(the) case. According to CBLI, inasmuch
as the five promissory notes were subject
matters of the Civil Case No. 0023-P, the
decision approving the compromise
agreement operated as res judicata in the
present case.39 cräläwvirtualibräry
Novation has been defined as the
extinguishment of an obligation by the
substitution or change of the obligation
by a subsequent one which terminates
the first, either by changing the object or
principal conditions, or by substituting the
person of the debtor, or subrogating a
third person in the rights of the
creditor.40
cräläwvirtualibräry
Novation, in its broad concept, may either
be extinctive or modificatory.41It is
extinctive when an old obligation is
terminated by the creation of a new
obligation that takes the place of the
former; it is merely modificatory when
the old obligation subsists to the extent it
remains compatible with the amendatory
agreement.42An extinctive novation
results either by changing the object or
principal conditions (objective or real), or
by substituting the person of the debtor
or subrogating a third person in the rights
of the creditor (subjective or
personal).43Novation has two functions:
one to extinguish an existing obligation,
the other to substitute a new one in its
place.44For novation to take place, four
essential requisites have to be met,
namely, (1) a previous valid obligation;
(2) an agreement of all parties concerned
to a new contract; (3) the extinguishment
of the old obligation; and (4) the birth of
a valid new obligation.45 cräläwvirtualibräry
Novation is never presumed,46and
the animus novandi, whether totally or
partially, must appear by express
agreement of the parties, or by their acts
that are too clear and unequivocal to be
mistaken.47
cräläwvirtualibräry
The extinguishment of the old obligation
by the new one is a necessary element of
novation which may be effected either
expressly or impliedly.48The term
"expressly" means that the contracting
parties incontrovertibly disclose that their
object in executing the new contract is to
extinguish the old one.49 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.50While there is really no hard
and fast rule to determine what might
constitute to be a sufficient change that
can bring about novation, the touchstone
for contrariety, however, would be an
irreconcilable incompatibility between the
old and the new obligations.
There are two ways which could indicate,
in fine, the presence of novation and
thereby produce the effect of
extinguishing an obligation by another
which substitutes the same. The first is
when novation has been explicitly stated
and declared in unequivocal terms.
The second is when the old and the new
obligations are incompatible on every
point. The test of incompatibility is
whether the two obligations can stand
together, each one having its
independent existence.51If they cannot,
they are incompatible and the latter
obligation novates the first.52Corollarily,
changes that breed incompatibility must
be essential in nature and not merely
accidental. The incompatibility must take
place in any of the essential elements of
the obligation, such as its object, cause or
principal conditions thereof; otherwise,
the change would be merely modificatory
in nature and insufficient to extinguish
the original obligation.53
cräläwvirtualibräry
The necessity to prove the foregoing by
clear and convincing evidence is
accentuated where the obligation of the
debtor invoking the defense of novation
has already matured.54 cräläwvirtualibräry
With respect to obligations to pay a sum
of money, this Court has consistently
applied the well-settled rule that the
obligation is not novated by an
instrument that expressly recognizes the
old, changes only the terms of payment,
and adds other obligations not
incompatible with the old ones, or where
the new contract merely supplements the
old one.55
cräläwvirtualibräry
In Inchausti & Co. v. Yulo56 this Court
held that an obligation to pay a sum of
money is not novated in a new
instrument wherein the old is ratified, by
changing only the term of payment and
adding other obligations not incompatible
with the old one. In Tible v.
Aquino57 and Pascual v. Lacsamana58this
Court declared that it is well settled that a
mere extension of payment and the
addition of another obligation not
incompatible with the old one is not a
novation thereof.
In this case, the attendant facts do not
make out a case of novation. The
restructuring agreement between Delta
and CBLI executed on October 7, 1981,
shows that the parties did not expressly
stipulate that the restructuring agreement
novated the promissory notes. Absent an
unequivocal declaration of extinguishment
of the pre-existing obligation, only a
showing of complete incompatibility
between the old and the new obligation
would sustain a finding of novation by
implication.59 However, our review of its
terms yields no incompatibility between
the promissory notes and the
restructuring agreement.
The five promissory notes, which Delta
assigned to SIHI on September 13, 1983,
contained the following common
stipulations:
1. They were payable in 60 monthly
installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments
would render the entire remaining
balance due and payable at the option of
the holder of the notes;
4. In case of judicial collection on the
notes, the maker (CBLI) and co-maker
(its president, Mr. Dionisio O. Llamas, Jr)
were solidarily liable of attorneys fees and
expenses of 25% of the amount due in
addition to the costs of suit.
The restructuring agreement, for its part,
had the following provisions:
WHEREAS, CBL and LLAMAS admit their
past due installment on the following
promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30,
1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30,
1981 P1,105,353.00
WHEREAS, the parties agreed to
restructure the above-mentioned past
due installments under the following
terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and
Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in Daily payments of P15,000.00 from
consideration of the foregoing premises,
the parties hereby agree and covenant as October
follows: 1, 1982
to December
1. That the past due installment referred 31, 1982
to above plus the current and/or falling
due amortization as of October 1, 1981 Daily payments of P16,000.00 from
for Promissory Notes Nos. 16 to 26 and
52 to 57 shall be paid by CBL and/or
January
LLAMAS in accordance with the following
1, 1983
schedule of payments:
to June 30,
1983
Daily payments of P11,000.00 from
Daily payments of P17,000.00 from
October
1 to December
July 1,
31, 1981
1983
Daily payments of P12,000.00 from
2. CBL or LLAMAS shall remit to DMC on
or before 11:00 a.m. everyday the daily
January cash payments due to DMC in accordance
1, 1982 with the schedule in paragraph 1. DMC
to March 31, may send a collector to receive the
1982 amount due at CBLs premises. All delayed
remittances shall be charged additional
Daily payments of P13,000.00 from 2% penalty interest per month.
April 1, 3. All payments shall be applied to
1982 to June amortizations and penalties due in
30, 1982 accordance with paragraph of the
restructured past due installments above
mentioned and PN Nos. 16 to 26 and 52
Daily payments of P14,000.00 from
to 57.
July 1,
1982 4. DMC may at anytime assign and/or
to September send its representatives to monitor the
30, 1982 operations of CBL pertaining to the
financial and field operations and service
and maintenance matters of M.A.N. units.
Records needed by the DMC
representatives in monitoring said
operations shall be made available by CBL
and LLAMAS.
5. Within thirty (30) days after the end of
the terms of the PN Nos. 16 to 26 and 52
to 57, CBL or LLAMAS shall remit in lump
sum whatever balance is left after
deducting all payments made from what
is due and payable to DMC in accordance
with paragraph 1 of this agreement and
PN Nos. 16 to 26 and 52 to 57.
6. In the event that CBL and LLAMAS fail
to remit the daily remittance agreed upon
and the total accumulated unremitted
amount has reached and (sic) equivalent
of Sixty (60) days, DMC and Silverio shall
exercise any or all of the following
options:
(a) The whole sum remaining
then unpaid plus 2%
penalty per month and
16% interest per annum
on total past due
installments will
immediately become due
and payable. In the
event of judicial
proceedings to enforce
collection, CBL and
LLAMAS will pay to DMC
an additional sum
equivalent to 25% of the
amount due for
attorneys fees and
expenses of collection,
whether actually
incurred or not, in
addition to the cost of
suit;
(b) To enforce in accordance
with law, their rights
under the Chattel
Mortgage over various
M.A.N. Diesel bus with
Nos. CU 80-39, 80-40,
80-41, 80-42, 80-43,
80-44 and 80-15, and/or
(c) To take over management
and operations of CBL
until such time that CBL
and/or LLAMAS have
remitted and/or updated
their past due account
with DMC.
7. DMC and SILVERIO shall insure to CBL
continuous supply of spare parts for the
M.A.N. Diesel Buses and shall make
available to CBL at the price prevailing at
the time of purchase, an inventory of
spare parts consisting of at least ninety
(90%) percent of the needs of CBL based
on a moving 6-month requirement to be
prepared and submitted by CBL, and
acceptable to DMC, within the first week
of each month.
8. Except as otherwise modified in this
Agreement, the terms and conditions
stipulated in PN Nos. 16 to 26 and 52 to
57 shall continue to govern the
relationship between the parties and that
the Chattel Mortgage over various M.A.N.
Diesel Buses with Nos. CM No. 80-39, 80-
40, 80-41, 80-42, 80-43, 80-44 and CM
No. 80-15 as well as the Deed of Pledge
executed by Mr. Llamas shall continue to
secure the obligation until full payment.
9. DMC and SILVERIO undertake to recall
or withdraw its previous request to
Notary Public Alberto G. Doller and to
instruct him not to proceed with the
public auction sale of the shares of stock
of CBL subject-matter of the Deed of
Pledge of Shares. LLAMAS, on the other
hand, undertakes to move for the
immediate dismissal of Civil Case No.
9460-P entitled Dionisio O. Llamas vs.
Alberto G. Doller, et al., Court of First
Instance of Pasay, Branch XXIX.60 cräläwvirtualibräry
It is clear from the foregoing that the
restructuring agreement, instead of
containing provisions absolutely
incompatible with the obligations of the
judgment, expressly ratifies such
obligations in paragraph 8 and contains
provisions for satisfying them. There was
no change in the object of the prior
obligations. The restructuring agreement
merely provided for a new schedule of
payments and additional security in
paragraph 6 (c) giving Delta authority to
take over the management and
operations of CBLI in case CBLI fails to
pay installments equivalent to 60 days.
Where the parties to the new obligation
expressly recognize the continuing
existence and validity of the old one,
there can be no novation.61Moreover, this
Court has ruled that an agreement
subsequently executed between a seller
and a buyer that provided for a different
schedule and manner of payment, to
restructure the mode of payments by the
buyer so that it could settle its
outstanding obligation in spite of its
delinquency in payment, is not
tantamount to novation. 62 cräläwvirtualibräry
The addition of other obligations likewise
did not extinguish the promissory notes.
In Young v. CA63, this Court ruled that a
change in the incidental elements of, or
an addition of such element to, an
obligation, unless otherwise expressed by
the parties will not result in its
extinguishment.
In fine, the restructuring agreement can
stand together with the promissory notes.
Neither is there merit in CBLIs argument
that the compromise agreement
dated July 24, 1984, in Civil Case No.
0023-P superseded and/or discharged the
five promissory notes. Both Delta and
CBLI cannot deny that the five promissory
notes were no longer subject of Civil Case
No. 0023-P when they entered into the
compromise agreement on July 24, 1984.
Having previously assigned the five
promissory notes to SIHI, Delta had no
more right to compromise the same.
Deltas limited authority to collect for SIHI
stipulated in the September 13, 1985,
Deed of Sale cannot be construed to
include the power to compromise CBLIs
obligations in the said promissory notes.
An authority to compromise, by express
provision of Article 187864 of the Civil
Code, requires a special power of
attorney, which is not present in this
case. Incidentally, Deltas authority to
collect in behalf of SIHI was, by express
provision of the Continuing Deed of
Assignment,65 automatically revoked
when SIHI opted to collect directly from
CBLI.
As regards CBLI, SIHIs demand letter
dated December 13, 1983, requiring CBLI
to remit the payments directly to SIHI
effectively revoked Deltas limited right to
collect in behalf of SIHI. This should have
dispelled CBLIs erroneous notion that
Delta was acting in behalf of SIHI, with
authority to compromise the five
promissory notes.
But more importantly, the compromise
agreement itself provided that it covered
the rights and obligations only of Delta
and CBLI and that it did not refer to, nor
cover the rights of, SIHI as the new
creditor of CBLI in the subject promissory
notes. CBLI and Delta stipulated in
paragraph 5 of the agreement that:
5. This COMPROMISE AGREEMENT
constitutes the entire understanding by
and between the plaintiffs and the
defendants as well as their
lawyers, and operates as full and final
settlement, adjudication and termination
of all their rights and obligations as of the
date of this agreement, and of the issues
in this case.66
cräläwvirtualibräry
Even in the absence of such a provision,
the compromise agreement still cannot
bind SIHI under the settled rule that a
compromise agreement determines the
rights and obligations of only the parties
to it.67 Therefore, we hold that the
compromise agreement covered the
rights and obligations only of Delta and
CBLI and only with respect to the eleven
(11) other promissory notes that
remained with Delta.
CBLI next maintains that SIHI is estopped
from questioning the compromise
agreement because SIHI failed to
intervene in Civil Case No. 0023-P after
CBLI informed it of the takeover by Delta
of CBLIs management and operations and
the resultant impossibility for CBLI to
comply with its obligations in the subject
promissory notes. CBLI also adds that
SIHIs failure to intervene in Civil Case No.
0023-P is proof that Delta continued to
act in SIHIs behalf in effecting collection
under the notes.
The contention is untenable. As a result
of the assignment, Delta relinquished all
its rights to the subject promissory notes
in favor of SIHI. This had the effect of
separating the five promissory notes from
the 16 promissory notes subject of Civil
Case No. 0023-P. From that time, CBLIs
obligations to SIHI embodied in the five
promissory notes became separate and
distinct from CBLIs obligations in eleven
(11) other promissory notes that
remained with Delta. Thus, any breach of
these independent obligations gives rise
to a separate cause of action in favor of
SIHI against CBLI. Considering that
Deltas assignment to SIHI of these five
promissory notes had the effect of
removing the said notes from Civil Case
No. 0023-P, there was no reason for SIHI
to intervene in the said case. SIHI did not
have any interest to protect in Civil Case
No. 0023-P.
Moreover, intervention is not mandatory,
but only optional and
permissive.68Notably, Section 2,69Rule 12
of the then 1988 Revised Rules of
Procedure uses the word may in defining
the right to intervene. The present rules
maintain the permissive nature of
intervention in Section 1, Rule 19 of the
1997 Rules of Civil Procedure, which
provides as follows:
SEC. 1. Who may intervene.A person who
has a legal interest in the matter in
litigation, or in the success of either of
the parties, or an interest against both, or
is so situated as to be adversely affected
by a distribution or other disposition of
property in the custody of the court or of
an officer thereof may, with leave of
court, be allowed to intervene in the
action. The court shall consider whether
or not the intervention will unduly delay
or prejudice the adjudication of the rights
of the original parties, and whether or not
the intervenor's rights may be fully
protected in a separate proceeding.70 cräläwvirtualibräry
Also, recall that Delta transferred the five
promissory notes to SIHI on September
13, 1983 while Civil Case No. 0023-P was
pending. Then as now, the rule in case of
transfer of interest pendente lite is that
the action may be continued by or against
the original party unless the court, upon
motion, directs the person to whom the
interest is transferred to be substituted in
the action or joined with the original
party.71The non-inclusion of a necessary
party does not prevent the court from
proceeding in the action, and the
judgment rendered therein shall be
without prejudice to the rights of such
necessary party.72cräläwvirtualibräry
In light of the foregoing, SIHIs refusal to
intervene in Civil Case No. 0023-P in
another court does not amount to an
estoppel that may prevent SIHI from
instituting a separate and independent
action of its own.73This is especially so
since it does not appear that a separate
proceeding would be inadequate to
protect fully SIHIs rights.74Indeed, SIHIs
refusal to intervene is precisely because it
considered that its rights would be better
protected in a separate and independent
suit.
The judgment on compromise in Civil
Case No. 0023-P did not operate
as res judicata to prevent SIHI from
prosecuting its claims in the present case.
As previously discussed, the compromise
agreement and the judgment on
compromise in Civil Case No. 0023-P
covered only Delta and CBLI and their
respective rights under the 11 promissory
notes not assigned to SIHI. In contrast,
the instant case involves SIHI and CBLI
and the five promissory notes. There
being no identity of parties and subject
matter, there is no res judicata.
CBLI maintains, however, that in any
event, recovery under the subject
promissory notes is no longer allowed by
Article 1484(3)75of the Civil Code, which
prohibits a creditor from suing for the
deficiency after it has foreclosed on the
chattel mortgages. SIHI, being the
successor-in-interest of Delta, is no
longer allowed to recover on the
promissory notes given as security for the
purchase price of the 35 buses because
Delta had already extrajudicially
foreclosed on the chattel mortgages over
the said buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the
present case. The extrajudicial
foreclosure of the chattel mortgages Delta
effected cannot prejudice SIHIs rights. As
stated earlier, the assignment of the five
notes operated to create a separate and
independent obligation on the part of
CBLI to SIHI, distinct and separate from
CBLIs obligations to Delta. And since
there was a previous revocation of Deltas
authority to collect for SIHI, Delta was no
longer SIHIs collecting agent. CBLI, in
turn, knew of the assignment and Deltas
lack of authority to compromise the
subject notes, yet it readily agreed to the
foreclosure. To sanction CBLIs argument
and to apply Article 1484 (3) to this case
would work injustice to SIHI by depriving
it of its right to collect against CBLI who
has not paid its obligations.
That SIHI later on levied on execution
and acquired in the ensuing public sale in
Civil Case No. 84-23019 the buses Delta
earlier extrajudicially foreclosed on April
2, 1987, in Civil Case No. 0023-P, did not
operate to render the compromise
agreement and the foreclosure binding on
SIHI. At the time SIHI effected the levy
on execution to satisfy its judgment credit
against Delta in Civil Case No. 84-23019,
the said buses already pertained to Delta
by virtue of the April 2, 1987 auction
sale. CBLI no longer had any interest in
the said buses. Under the circumstances,
we cannot see how SIHIs belated
acquisition of the foreclosed buses
operates to hold the compromise
agreementand consequently Article
1484(3)applicable to SIHI as CBLI
contends. CBLIs last contention must,
therefore, fail. We hold that the writ of
execution to enforce the judgment of
compromise in Civil Case No. 0023-P and
the foreclosure sale of April 2, 1987, done
pursuant to the said writ of execution
affected only the eleven (11) other
promissory notes covered by the
compromise agreement and the judgment
on compromise in Civil Case No. 0023-P.
In support of its third assignment of
error, CBLI maintains that there was no
basis for SIHIs application for a writ of
preliminary attachment.76According to
CBLI, it committed no fraud in contracting
its obligation under the five promissory
notes because it was financially sound
when it issued the said notes on April 25,
1980.77CBLI also asserts that at no time
did it falsely represent to SIHI that it
would be able to pay its obligations under
the five promissory notes.78According to
CBLI, it was not guilty of fraudulent
concealment, removal, or disposal, or of
fraudulent intent to conceal, remove, or
dispose of its properties to defraud its
creditors;79and that SIHIs bare allegations
on this matter were insufficient for the
preliminary attachment of CBLIs
properties.80
cräläwvirtualibräry
The question whether the attachment of
the sixteen (16) buses was valid and in
accordance with law, however, has
already been resolved with finality by the five (5) promissory notes subject of the
Court of Appeals in CA-G.R. SP No. complaint in Civil Case No. 84-28505 less
08376. In its July 31, 1987, decision, the the proceeds from the sale of the
Court of Appeals upheld the legality of the attached sixteen (16) buses. No
writ of preliminary attachment SIHI pronouncement as to costs.
obtained and ruled that the trial court
judge acted with grave abuse of SO ORDERED.
discretion in discharging the writ of
attachment despite the clear presence of
a determined scheme on the part of CBLI G.R. No. 213582, September 12,
to dispose of its property. Considering 2018
that the said Court of Appeals decision
has already attained finality on August NYMPHA S. ODIAMAR,*Petitioner,
22, 1987, there exists no reason to
v. LINDA ODIAMAR
resolve this question anew. Reasons of
public policy, judicial orderliness, VALENCIA, Respondent.
economy and judicial time and the
interests of litigants as well as the peace RESOLUTION
and order of society, all require that
stability be accorded the solemn and final
PERLAS-BERNABE, J.:
judgments of courts or tribunals of
competent jurisdiction.81
cräläwvirtualibräry
Before the Court is a Motion for
Finally, in the light of the justness of Reconsideration1 filed by
SIHIs claim against CBLI, we cannot respondent Linda Odiamar Valencia
sustain CBLIs contention that the Court of (respondent) assailing the
Appeals erred in dismissing its Decision2 dated June 28, 2016 of
counterclaim for lost income and the
the Court which affirmed the
value of the 16 buses over which SIHI
obtained a writ of preliminary Decision3 dated March 16, 2012 and
attachment. Where the party who the Resolution4 dated July 14, 2014
requested the attachment acted in good of the Court of Appeals (CA) in C.A.
faith and without malice, the claim for G.R. CV No. 93624, with
damages resulting from the attachment modification ordering petitioner
of property cannot be sustained.82
Nympha S. Odiamar (petitioner) to
cräläwvirtualibräry
pay respondent the amount of
WHEREFORE, the decision dated April
17, 2001, of the Court of Appeals in CA-
P1,010,049.00 representing the
G.R. CV No. 52667 is AFFIRMED. remaining balance of petitioner's
Petitioner California Bus Lines, Inc., is debt to the latter in the original
ORDERED to pay respondent State amount of P1,400,000.00.
Investment House, Inc., the value of the

In said motion, respondent prays
for the imposition of legal interest
on the monetary award due
her.5 She likewise insists that
petitioner's loan obligation to her is
not just P1,400,000.00 but
P2,100,000.00 and, as such, she
should be made to pay the latter
amount.6
Respondent's contentions are partly
meritorious.
At the outset, the Court notes that
there are two (2) types of interest,
namely, monetary interest and
compensatory interest. Monetary
interest is the compensation fixed
by the parties for the use or
forbearance of money. On the other
hand, compensatory interest is that
imposed by law or by the courts as
penalty or indemnity for damages.
In other words, the right to recover
interest arises only either by virtue
of a contract (monetary interest) or
as damages for the delay or failure
to pay the principal loan on which
the interest is demanded
(compensatory interest).7
Anent monetary interest, it is an
elementary rule that no interest
shall be due unless it has been
expressly stipulated in writing.8 In
this case, no monetary interest may
be imposed on the loan obligation,
considering that there was no
written agreement expressly
providing for such.9
This notwithstanding, such loan
obligation may still be subjected to
compensatory interest, following
the guidelines laid down
in Nacar v. Gallery Frames,10 as
follows:
Thus, from the foregoing, in the
absence of an express stipulation as
to the rate of interest that would
govern the parties, the rate of legal
interest for loans or forbearance of
any money, goods or credits and
the rate allowed in judgments shall
no longer be twelve percent (12%)
per annum — as reflected in the
case of [Eastern Shipping Lines,
Inc. v. CA (Eastern Shipping
Lines)11] and Subsection X305.1 of
the Manual of Regulations for Banks
and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of
Regulations for Non-Bank Financial
Institutions, before its amendment
by BSP-MB Circular No. 799 — but
will now be six percent (6%) per
annum effective July 1, 2013. It
should be noted, nonetheless, that
the new rate could only be applied
prospectively and not
retroactively. Consequently, the
twelve percent (12%) per
annum legal interest shall apply
only until June 30, 2013. Come
July 1, 2013 the new rate of six
percent (6%) per annum shall
be the prevailing rate of
interest when applicable.
xxxx
To recapitulate and for future
guidance, the guidelines laid down
in the case of Eastern Shipping
Lines are accordingly modified to
embody BSP-MB Circular No. 799,
as follows:
I. When an obligation, regardless of
its source, i.e., law, contracts,
quasi contracts, delicts or quasi-
delicts is breached, the contravenor
can be held liable for damages. The
provisions under Title XVIII on
"Damages" of the Civil Code govern
in determining the measure of
recoverable damages.
II. With regard particularly to an
award of interest in the concept of
actual and compensatory damages,
the rate of interest, as well as the
accrual thereof, is imposed, as
follows:
1. When the obligation is
breached, and it consists
in the payment of a sum
of money, i.e., a loan or
forbearance of money, the
interest due should be that
which may have been
stipulated in writing.
Furthermore, the interest
due shall itself earn legal
interest from the time it is
judicially demanded. In the
absence of stipulation,
the rate of interest shall
be 6% per annum to be
computed from
default, i.e., from judicial
or extrajudicial
demand under and subject
to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not
constituting a loan or
forbearance of money, is
breached, an interest on the
amount of damages awarded
may be imposed at
the discretion of the court at
the rate of 6% per annum.
No interest, however, shall
be adjudged on unliquidated
claims or damages, except
when or until the demand
can be established with
reasonable certainty.
Accordingly, where the
demand is established with
reasonable certainty, the
interest shall begin to run
from the time the claim is
made judicially or
extrajudicially (Art. 1169,
Civil Code), but when such
certainty cannot be so
reasonably established at the
time the demand is made,
the interest shall begin to
run only from the date the
judgment of the court is
made (at which time the
quantification of damages
may be deemed to have
been reasonably
ascertained). The actual
base for the computation of
legal interest shall, in any
case, be on the amount
finally adjudged.
3. When the judgment of the
court awarding a sum of
money becomes final and
executory, the rate of
legal interest, whether
the case falls under
paragraph 1 or paragraph
2, above, shall be 6% per
annum from such finality
until its satisfaction, this
interim period being
deemed to be by then an
equivalent to a
forbearance of
credit.12 (Emphases and
underscoring supplied)
Applying the foregoing parameters
to this case, petitioner's loan
obligation to respondent shall be
subjected to compensatory interest
at the legal rate of twelve percent
(12%) per annum from the date of
judicial demand, i.e., August 20,
2003,13 until June 30, 2013, and
thereafter at the legal rate of six
percent (6%) per annum from July
1, 2013 until finality of this ruling.
Moreover, all monetary
awards14 due to respondent shall
earn legal interest of six percent
(6%) per annum from finality of
this ruling until fully paid.
However, as to respondent's other
contentions, suffice it to say that
the same are mere reiterations of
the grounds already evaluated and
passed upon in the Assailed
Decision. Therefore, there is no
cogent reason to warrant a
modification or reversal of the
same.
WHEREFORE, the motion for
reconsideration is PARTLY
GRANTED. The Decision dated
June 28, 2016 of the Court is
hereby AFFIRMED with MODIFIC
ATION, imposing on petitioner
Nympha S. Odiamar's liability to
respondent Linda Odiamar Valencia
in the amount of P1,010,049.00
legal interest at the rate of twelve
percent (12%) per annum from the
date of judicial
demand, i.e., August 20, 2003,
until June 30, 2013, and thereafter
at the legal rate of six percent (6%)
per annum from July 1, 2013 until
finality of this ruling. Moreover, all
monetary awards due to
respondent shall earn legal interest
at the rate of six percent (6%) per
annum from finality of this ruling
until fully paid.
SO ORDERED.
G.R. Nos. 187822-23, August
03, 2016
EVER ELECTRICAL
MANUFACTURING, INC.,
VICENTE C. GO AND GEORGE C.
GO, Petitioners, v. PHILIPPINE
BANK OF COMMUNICATIONS
(PBCOM), REPRESENTED BY ITS
VICE-PRESIDENT, MR.
DOMINGO S. AURE, Respondent.
DECISION
REYES, J.:
Before the Court is a Petition for
Review on Certiorari1 under Rule 45
of the Rules of Court filed by Ever
Electrical Manufacturing, Inc.
(Ever), its President Vicente Go
(Vicente) and Board Director
George Go (collectively, the
petitioners) questioning the
Decision2 dated November 28, 2008
and Resolution3 dated May 6, 2009
of the Court of Appeals (CA) in CA-
G.R. SP Nos. 84631 and 87444.
Antecedent Facts
Ever is a duly organized domestic
corporation with a history of
transacting with respondent
Philippine Bank of Communications
(PBCom), a domestic commercial
bank.4 The parties had been
involved in litigation for collection of
a sum of money where PBCom was
able to get a favorable Partial
Judgment5 dated July 23, 2001
issued by the Regional Trial Court
(RTC) of Manila, Branch 24, in Civil
Case No. 01-100899.
On December 13, 2002, Ever,
represented by Vicente, took out a
loan from PBCom in the amount of
P65,000,000.00 for its working
capital.6 As security, Ever
mortgaged two parcels of land
covered by Transfer Certificates of
Title (TCT) Nos. T-61475 and T-
61476 with areas of 10,025 square
meters and 9,117 sq m,
respectively, located at National
Road, Barangay Makiling, Calamba,
Laguna.7 On December 27, 2002,
Ever executed Promissory Note No.
8200013327,8 which stated that the
loan had a maturity date of
December 27, 2010, and an
interest rate of 8.5937% per
annum for 10 years.
On February 14, 2003, the parties
entered into a compromise
agreement whereby Vicente
voluntarily undertook to pay for
Ever's loan with PBCom. Under the
terms of the compromise
agreement, Vicente would make
partial payments as stated in the
promissory note with a caveat that
any failure on his part to pay the
installment due would make the
whole amount immediately
demandable. The compromise
agreement reads as follows:
ChanRoblesVirtualawlibrary
WHEREAS, [VICENTE] has
offered to assume full liability
and to undertake the full
payment of all the past due
accounts of [EVER] and to
exempt from any and all
obligations/liabilities his co-
defendants-sureties GEORGE C. GO
and NG MENG TAM arising from and
subject of the above-captioned
litigation, without prejudice to the
right of [VICENTE] to avail himself
of his right for reimbursement
under Art. 1236 of the Civil Code
of the Philippines;
WHEREAS, [PBCom] has agreed
and accepted [VICENTE's]
aforementioned offer to pay, in
accordance with the terms and
conditions of the Promissory Note
8200013327 dated 27 Dec. 2002,
copy of which is hereto attached
as Annex "A" hereof.
WHEREAS, [VICENTE] fully
understands that failure on his
part to make partial
payments of the amount, due
under the said Promissory
Note shall make the whole
balance of the unpaid amounts
due and demandable, less the
amounts actually paid on
account, without any necessity
of notice to him and [PBCom]
shall be entitled to the issuance
of the corresponding writ of
execution for the full amounts due
as specified in the prayer of the
above-mentioned
complaint.9 (Emphasis ours)
On February 21, 2003, the RTC
approved the compromise
agreement.10 Consequently, the
loan was restructured.
However, Vicente was not able to
make the necessary payments as
stipulated in the compromise
agreement. PBCom, thus, filed with
the RTC a motion for execution.
PBCom alleged that Vicente violated
the terms of the compromise
agreement for non-payment of
installments from September to
December 2003 and the first
quarter of 2004. It prayed that a
writ of execution be issued per the
terms of the compromise
agreement.11 chanrobleslaw
Ruling of the RTC
On May 4, 2004, the RTC found
merit in PBCom's application for a
writ of execution and granted the
same.12 A writ of execution13 dated
May 14, 2004 was thereby issued.
The petitioners moved for
reconsideration.14 chanrobleslaw
Thereafter, on May 19, 2004, a
Notice of Levy upon Realty15 was
issued by the Deputy Sheriff to the
Register of Deeds (RD) of Calamba,
Laguna. He informed the RD that
the properties described under TCT
Nos. T-61475 and T-61476 were
under custodia legis and thus
requested that the proper
annotations be made in the Book of
the RD.
On June 9, 2004, the RTC denied
the petitioners' motion for
reconsideration. It found that while
the petitioners did in fact make
some payments, these were not in
accord with the clear terms of the
compromise agreement which
required quarterly payments for a
specific amount.16 chanrobleslaw
On June 11, 2004, the Sheriff
issued a Notice of Sale and
scheduled the public auction on July
14, 2004 for the parcels of
land.17 Due to some
postponements, public auction was
actually held on September 16,
2004 where PBCom won as the
highest bidder.18 chanrobleslaw
Ruling of the CA
The petitioners then filed with the
CA two petitions
for certiorari19 questioning the
validity of the writ of execution,
levy on execution and the auction
sale. The petitions were
consolidated.20chanrobleslaw
While the case was pending, TCT
Nos. 61475 and 61476 were
cancelled and TCT Nos. 060-
2012023698 and 060-2012023699
were issued by the RD of Calamba,
Laguna, in favor of Star Asset
Management NPL, Inc. The
pendency of the instant case was
annotated at the back of the new
titles.21
chanrobleslaw
In the Decision22 dated November
28, 2008, the CA dismissed the
petitions for lack of merit after
finding that the evidence supported
the conclusion of the RTC that
Vicente failed to make installment
payments for the period covering.
January 21, 2004 to March 31,
2004 in direct contravention of the
terms of the compromise
agreement. The liability amounted
to P1,125,000.00 including
interests and penalty charges. The
CA stated that the petitioners did
not deny the allegation, and merely
asserted that Vicente made
payments for the period of April 2,
2003 to January 20, 2004. Since
Vicente defaulted in the payments
and under the terms of the
compromise agreement to which he
agreed, the immediate issuance of
a writ of execution was in order.
The CA also found no merit with the
petitioners' contention that the writ
of execution was not valid on the
ground that it was issued against
the properties of Ever and not
against Vicente who assumed sole
responsibility for the payment of
the loan. The compromise
agreement specifically stated that
in the event that Vicente failed to
comply with the terms of the
compromise agreement, execution
would revert to the full amounts in
the complaint. Since the writ of
execution was valid, the notice of
levy and the levy on execution, as
well as the public auction, were also
valid and binding on the parties.
The CA, thus, ruled that the RTC
did not commit any grave abuse of
discretion. The dispositive portion
of the decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the Consolidated
Petition for Certiorari is
hereby DISMISSED.
SO ORDERED.23 chanroblesvirtuallawlibrary
Vicente moved for reconsideration
but it was denied in a
Resolution24 dated May 6, 2009.
Hence, this petition.
The petitioners assert that Vicente
had faithfully complied with the
terms of the compromise
agreement. The petitioners argue
that the writ of execution had been
issued prematurely on two points:
1) that Vicente did not violate the
terms of the compromise
agreement; and 2) that the
compromise agreement effectively
novated the original contract
pursuant to Article 1293 of the Civil
Code.
Vicente further states that PBCom's
application for the issuance of a
writ of execution on March 26, 2004
was premature since amortizations
for the first quarter of 2004 were
not yet due and demandable, as
these were still due on March 31,
2004.25cralawre dchanrobleslaw
More importantly, Vicente argues
that the writ of execution was
erroneously issued against Ever. Fie
alleges that the Partial Judgment
dated July 23, 2001 of the RTC was
novated by the compromise
agreement. As a consequence,
Ever's obligation to PBCom was
already extinguished as it was
substituted by Vicente when he
assumed full responsibility of the
loan repayment. Under Article 1293
of the Civil Code, Ever had been
substituted by Vicente thus
novating the obligation.26 chanrobleslaw
For its part, PBCom maintains that
the writ of execution was valid. It
reiterates that Vicente had
defaulted in the payment of the
quarterly installment, comprising
the principal, interests and penalty
amounting to P1,125,000.00 for the
period of September 30, 2003 to
December 31, 2003. Vicente once
again defaulted paying the
installment for the period of
December 31, 2003 to March 31,
2004. With the petitioner's failure
to abide by the terms of the
compromise agreement, the whole
balance of the obligation became
immediately due and
demandable.27 chanrobleslaw
With respect to the petitioners'
claim that the writ of execution was
directed at the wrong party, PBCom
stressed that the compromise
agreement is clear that upon the
failure of Vicente to make
installment payments, the bank is
entitled to "the issuance of the
corresponding writ of execution for
the full amounts due as specified in
the prayer of the above-captioned
complaint."28
chanrobleslaw
The Issues Presented
1. Whether or not the CA
correctly drew the
conclusion that
Vicente failed to
comply with the
compromise In Spouses Bernales v. Heirs of
agreement in the face Julian Sambaan,30 the Court
of the existence of reiterated that for a question to be
payments made by one of law, it must involve no
Vicente. examination of the probative value
of the evidence presented by the
2. Whether or not there litigants or any of them. There is a
was novation of the question of law when the doubt or
Partial Judgment difference arises as to what the law
dated July 23, 2001. is pertaining to a certain state of
facts. On the other hand, there is a
3. Whether or not the question of fact when the doubt
issue on novation of arises as to the truth or the falsity
the Partial Judgment of alleged facts.31
chanrobleslaw
dated July 23, 2001
by the February 21, Here, the petitioners essentially
2003 decision was argue that since the parties entered
resolved by the CA. into a compromise agreement,
which was judicially approved, the
4. Whether or not the same novated the original loan
writ of execution was agreement.
correctly issued
against the The Court disagrees.
petitioners.29
Under the Civil Code, novation is
Simply, the issue for the Court's one of the means to extinguish an
consideration is whether the CA obligation. This is done either by
erred in ruling that the writ of changing the object or principal
execution, levy on execution and conditions, by substituting the
person of the debtor, or by
auction sale were valid.
subrogating a third person in the
Ruling of the Court rights of the creditor.32 It is a
relative extinguishment since a new
The Court denies the petition. obligation is created in lieu of the
old obligation. The following
The Court is not a trier of facts.
requisites must be met for novation
to take place: ChanRoblesVirtualawlibrary
(1) There must be a previous valid
obligation;
(2) There must be an agreement of the
parties concerned to a new
contract;
(3) There must be the extinguishment
of the old contract; and
(4) There must be the validity of the
new contract.33
However, novation is never
presumed.34 Article 1292 of the Civil
Code provides: ChanRoblesVirtualawlibrary
Art. 1292. In order that an
obligation may be extinguished by
another which substitutes the
same, it is imperative that it be so
declared in unequivocal terms, or
that the old and the new obligations
be on every point incompatible with
each other.
It must be established that the old
and new contracts are incompatible
on all points, or that the will to
novate appear by express
agreement of the parties or acts of
equivalent import.35 In the absence
of an express provision, a contract
may still be considered novated
impliedly if it passes the test of
incompatibility, that is, whether the
contracts can stand together, each
one having an independent
existence.36 chanrobleslaw
In the early case of Santos v.
Reyes, et al.,37 the Court held that
there was no novation where under
the original contract consisting of a
principal debtor and a surety, the
latter subsequently made an
agreement with the creditor to be
bound as a principal for the same
obligation. There, the Court stated
that there can be no effective
novation if the contract was not
extinguished by an instrument
subsequently executed therefor.38
As stated in Article 1291, novation
may also be brought about by a
change in the person of the debtor.
Article 1293 of the Civil Code
states:ChanRoblesVirtualawlibrary
Art. 1293. Novation which consists
in substituting a new debtor in the
place of the original one, may be
made even without the knowledge
or against the will of the latter, but
not without the consent of the
creditor. Payment by the new
debtor gives him the rights
mentioned in Articles 1236 and
1237.
In Mercantile Insurance Co., Inc. v.
CA,39 the Court said:
The general rule is that novation is
never presumed; it must always be
clearly and unequivocally shown.
Thus, "the mere fact that the
creditor receives a guaranty or
accepts payments from a third
person who has agreed to assume
the obligation, when there is no
agreement that the first debtor
shall be released from
responsibility, does not
constitute novation, and the
creditor can still enforce the
obligation against the original
debtor."40 (Emphasis ours and
citations omitted)
In the present case, the
chanrobleslaw compromise agreement entered
into by the parties does not contain
any provision releasing Ever (the
debtor) from its liability to PBCom
(the lender). In fact, the first
paragraph of the approved
compromise agreement states: ChanRoblesVirtualawlibrary
WHEREAS, [VICENTE] has
offered to assume full liability
and to undertake the full
payment of all the past due
accounts of [EVER] and to
exempt from any and
all obligations/liabilities his co-
defendants-sureties GEORGE C.
GO and NG MENG TAM arising
from and subject of the above-
captioned litigation, without
ChanRoblesVirtualawlibrary prejudice to the right of [VICENTE]
to avail himself of his right for
reimbursement under Art. 1236 of
the Civil Code of the
Philippines[.]41 (Emphasis ours)
There is nothing to be construed
from the above-stated paragraph
releasing Ever from its obligation.
Under the terms of the agreement,
Vicente is an additional person who
would ensure that the loan of Ever
to PBCom would be paid. Under the
rules of novation, the mere act of
adding another person to be
personally liable, who in this case is
Vicente, did not constitute novation
since there was no agreement to
release Ever from its responsibility
to PBCom. Thus, absent the release
of Ever from the original obligation,
PBCom may still enforce the
obligation against it.
Since there was no novation,
PBCom may proceed to collect from
the original debtor, Ever, under the
terms of the original loan
agreement. The Court holds that
there was no irregularity in the
issuance of the writ of execution,
levy on the properties and the
subsequent sale of the auction sale.
WHEREFORE, the petition
is DENIED. The Decision dated
November 28, 2008 and Resolution
dated May 6, 2009 of the Court of
Appeals in CA-G.R. SP Nos. 84631
and 87444 are hereby AFFIRMED.
SO ORDERED. chanRoblesvirtualLawlibrary
ROMEO C. GARCIA, Petitioner, v.
DIONISIO V.
LLAMAS, Respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It
must be clearly shown either by the
express assent of the parties or by
the complete incompatibility
between the old and the new
agreements. Petitioner herein fails
to show either requirement
convincingly; hence, the summary
judgment holding him liable as a
joint and solidary debtor stands.
The Case
Before us is a Petition for Review 1
under Rule 45 of the Rules of Court,
seeking to nullify the November 26,
2001 Decision 2 and the June 26,
2002 Resolution 3 of the Court of
Appeals (CA) in CA-GR CV No.
60521. The appellate court
disposed as follows:
"UPON THE VIEW WE TAKE OF THIS
CASE, THUS, the judgment
appealed from, insofar as it
pertains to [Petitioner] Romeo
Garcia, must be, as it hereby is,
AFFIRMED, subject to the
modification that the award for
attorney’s fees and cost of suit is
DELETED. The portion of the
judgment that pertains to . . .
Eduardo de Jesus is SET ASIDE and
VACATED. Accordingly, the case
against . . . Eduardo de Jesus is
REMANDED to the court of origin for
purposes of receiving ex parte
[Respondent] Dionisio Llamas’
evidence against . . . Eduardo de
Jesus." 4
The challenged Resolution, on the
other hand, denied petitioner’s
Motion for Reconsideration.
chanrob1es virtua1 1aw 1ibrary
The Antecedents
The antecedents of the case are
narrated by the CA as follows:
jgc:chanrobles.com.ph
"This case started out as a
complaint for sum of money and
damages by . . . [Respondent]
Dionisio Llamas against . . .
[Petitioner] Romeo Garcia and
jgc:chanrobles.com.ph
Eduardo de Jesus. Docketed as Civil
Case No. Q97-32-873, the
complaint alleged that on 23
December 1996[,] [petitioner and
de Jesus] borrowed P400,000.00
from [respondent]; that, on the
same day, [they] executed a
promissory note wherein they
bound themselves jointly and
severally to pay the loan on or
before 23 January 1997 with a 5%
interest per month; that the loan
has long been overdue and, despite
repeated demands, [petitioner and
de Jesus] have failed and refused to
pay it; and that, by reason of
the[ir] unjustified refusal,
[respondent] was compelled to
engage the services of counsel to
whom he agreed to pay 25% of the
sum to be recovered from
[petitioner and de Jesus], plus
P2,000.00 for every appearance in
court. Annexed to the complaint
were the promissory note above-
mentioned and a demand letter,
dated 02 May 1997, by
[respondent] addressed to
[petitioner and de Jesus].
"Resisting the complaint, [Petitioner
Garcia,] in his [Answer,] averred
that he assumed no liability under
the promissory note because he
signed it merely as an
accommodation party for . . . de
Jesus; and, alternatively, that he is
relieved from any liability arising
from the note inasmuch as the loan
had been paid by . . . de Jesus by
means of a check dated 17 April
1997; and that, in any event, the
issuance of the check and
[respondent’s] acceptance thereof
novated or superseded the note.
" [Respondent] tendered a reply to
[Petitioner] Garcia’s answer,
thereunder asserting that the loan
remained unpaid for the reason that
the check issued by . . . de Jesus
bounced, and that [Petitioner]
Garcia’s answer was not even
accompanied by a certificate of
non-forum shopping. Annexed to
the reply were the face of the check
and the reverse side thereof.
"For his part, . . . de Jesus asserted
in his [A]nswer with [C]ounterclaim
that out of the supposed
P400,000.00 loan, he received only
P360,000.00, the P40,000.00
having been advance interest
thereon for two months, that is, for
January and February 1997; that[,]
in fact[,] he paid the sum of
P120,000.00 by way of interests;
that this was made when
[respondent’s] daughter, one Nits
Llamas-Quijencio, received from the
Central Police District Command at
Bicutan, Taguig, Metro Manila
(where . . . de Jesus worked), the
sum of P40,000.00, representing
the peso equivalent of his
accumulated leave credits, another
P40,000.00 as advance interest,
and still another P40,000.00 as
interest for the months of March
and April 1997; that he had
difficulty in paying the loan and had
asked [respondent] for an
extension of time; that
[respondent] acted in bad faith in
instituting the case, [respondent]
having agreed to accept the
benefits he (de Jesus) would
receive for his retirement, but
[respondent] nonetheless filed the
instant case while his retirement
was being processed; and that, in
defense of his rights, he agreed to
pay his counsel P20,000.00 [as]
attorney’s fees, plus P1,000.00 for
every court appearance. chanrob1es virtua1 1aw 1ibrary
"During the pre-trial
conference, . . . de Jesus and his
lawyer did not appear, nor did they
file any pre-trial brief. Neither did
[Petitioner] Garcia file a pre-trial
brief, and his counsel even
manifested that he would no
[longer] present evidence. Given
this development, the trial court
gave [respondent] permission to
present his evidence ex parte
against . . . de Jesus; and, as
regards [Petitioner] Garcia, the trial
court directed [respondent] to file a
motion for judgment on the
pleadings, and for [Petitioner]
Garcia to file his comment or
opposition thereto.
"Instead, [respondent] filed a
[M]otion to declare [Petitioner]
Garcia in default and to allow him
to present his evidence ex parte.
Meanwhile, [Petitioner] Garcia filed
a [M]anifestation submitting his
defense to a judgment on the
pleadings. Subsequently,
[respondent] filed a
[M]anifestation/[M]otion to submit
the case for judgment on the
pleadings, withdrawing in the
process his previous motion.
Thereunder, he asserted that
[petitioner’s and de Jesus’] solidary
liability under the promissory note
cannot be any clearer, and that the
check issued by de Jesus did not
discharge the loan since the check
bounced." 5
On July 7, 1998, the Regional Trial
Court (RTC) of Quezon City (Branch
222) disposed of the case as
follows:jgc:chanrobles.com.ph
"WHEREFORE, premises considered,
judgment on the pleadings is
hereby rendered in favor of
[respondent] and against
[petitioner and De Jesus], who are
hereby ordered to pay, jointly and
severally, the [respondent] the
following sums, to wit: chanrob1es virtual 1aw library
‘1) P400,000.00 representing the
principal amount plus 5% interest
thereon per month from January
23, 1997 until the same shall have
been fully paid, less the amount of
P120,000.00 representing interests
already paid by . . . de Jesus;
‘2) P100,000.00 as attorney’s fees
plus appearance fee of P2,000.00
for each day of [c]ourt appearance,
and;
‘3) Cost of this suit.’" 6
Ruling of the Court of Appeals
The CA ruled that the trial court
had erred when it rendered a
judgment on the pleadings against
De Jesus. According to the
appellate court, his Answer raised
genuinely contentious issues.
Moreover, he was still required to
present his evidence ex parte.
Thus, respondent was not ipso facto
entitled to the RTC judgment, even
though De Jesus had been declared
in default. The case against the
latter was therefore remanded by
the CA to the trial court for the ex
parte reception of the former’s
evidence.
As to petitioner, the CA treated his
case as a summary judgment,
because his Answer had failed to
raise even a single genuine issue
regarding any material fact.
The appellate court ruled that no
novation — express or implied —
had taken place when respondent
accepted the check from De Jesus.
According to the CA, the check was
issued precisely to pay for the loan
that was covered by the promissory
note jointly and severally
undertaken by petitioner and De
Jesus. Respondent’s acceptance of
the check did not serve to make De
Jesus the sole debtor because, first,
the obligation incurred by him and
petitioner was joint and several;
and, second, the check — which
had been intended to extinguish the
obligation — bounced upon its
presentment. chanrob1es virtua1 1aw 1ibrary
Hence, this Petition. 7
Issues
Petitioner submits the following
issues for our consideration: chanrob1es virtual 1aw library
 "I
Whether or not the Honorable Court
of Appeals gravely erred in not
holding that novation applies in the
instant case as . . . Eduardo de
Jesus had expressly assumed sole
and exclusive liability for the loan
obligation he obtained from . . .
Respondent Dionisio Llamas, as
clearly evidenced by: chanrob1es virtual 1aw library
a) Issuance by . . . de Jesus of a
check in payment of the full amount
of the loan of P400,000.00 in favor
of Respondent Llamas, although the
check subsequently bounced[;]
b) Acceptance of the check by
the . . . Respondent. . . which
resulted in [the] substitution by . . .
de Jesus or [the superseding of] the
promissory note;
c) . . . de Jesus having paid
interests on the loan in the total
amount of P120,000.00;
d) The fact that Respondent Llamas
agreed to the proposal of . . . de
Jesus that due to financial
difficulties, he be given an
extension of time to pay his loan
obligation and that his retirement
benefits from the Philippine
National Police will answer for said
obligation.
"II
Whether or not the Honorable Court
of Appeals seriously erred in not
holding that the defense of
petitioner that he was merely an
accommodation party, despite the
fact that the promissory note
provided for a joint and solidary
liability, should have been given
weight and credence considering
that subsequent events showed
that the principal obligor was in
truth and in fact . . . de Jesus, as
evidenced by the foregoing
circumstances showing his
assumption of sole liability over the
loan obligation.
‘’III
Whether or not judgment on the
pleadings or summary judgment
was properly availed of by
Respondent Llamas, despite the
fact that there are genuine issues of
fact, which the Honorable Court of
Appeals itself admitted in its
Decision, which call for the
presentation of evidence in a full-
blown trial." 8
Simply put, the issues are the
following: 1) whether there was
novation of the obligation; 2)
whether the defense that petitioner
was only an accommodation party
had any basis; and 3) whether the
judgment against him — be it a
judgment on the pleadings or a
summary judgment — was proper.
The Court’s Ruling
The Petition has no merit
First Issue: chanrob1es virtual 1aw library
Novation
Petitioner seeks to extricate himself
from his obligation as joint and
solidary debtor by insisting that
novation took place, either through
the substitution of De Jesus as sole
debtor or the replacement of the
promissory note by the check.
Alternatively, the former argues
that the original obligation was
extinguished when the latter, who
was his co-obligor, "paid" the loan
with the check. chanrob1es virtua1 1aw 1ibrary
The fallacy of the second
(alternative) argument is all too
apparent. The check could not have
extinguished the obligation,
because it bounced upon
presentment. By law, 9 the delivery
of a check produces the effect of
payment only when it is encashed.
We now come to the main issue of
whether novation took place.
Novation is a mode of extinguishing
an obligation by changing its
objects or principal obligations, by
substituting a new debtor in place
of the old one, or by subrogating a
third person to the rights of the
creditor. 10 Article 1293 of the Civil
Code defines novation as follows:
"Art. 1293. Novation which consists
in substituting a new debtor in the
place of the original one, may be
made even without the knowledge
or against the will of the latter, but
not without the consent of the
creditor. Payment by the new
debtor gives him rights mentioned
in articles 1236 and 1237." cralaw virtua1aw library
In general, there are two modes of
substituting the person of the
debtor: (1) expromision and (2)
delegacion. In expromision, the
initiative for the change does not
come from — and may even be
made without the knowledge of —
the debtor, since it consists of a
third person’s assumption of the
obligation. As such, it logically 2) The parties concerned must
requires the consent of the third agree to a new contract.
person and the creditor. In
delegacion, the debtor offers, and 3) The old contract must be
the creditor accepts, a third person extinguished.
who consents to the substitution
and assumes the obligation; thus, 4) There must be a valid new
the consent of these three persons contract. 15
are necessary. 11 Both modes of
substitution by the debtor require Novation may also be express or
the consent of the creditor. 12 implied. It is express when the new
obligation declares in unequivocal
Novation may also be extinctive or terms that the old obligation is
modificatory. It is extinctive when extinguished. It is implied when the
an old obligation is terminated by new obligation is incompatible with
jgc:chanrobles.com.ph the creation of a new one that the old one on every point. 16 The
takes the place of the former. It is test of incompatibility is whether
merely modificatory when the old the two obligations can stand
obligation subsists to the extent together, each one with its own
that it remains compatible with the independent existence. 17
amendatory agreement. 13
Whether extinctive or modificatory, Applying the foregoing to the
novation is made either by instant case, we hold that no
changing the object or the principal novation took place.
conditions, referred to as objective
or real novation; or by substituting The parties did not unequivocally
the person of the debtor or declare that the old obligation had
subrogating a third person to the been extinguished by the issuance
rights of the creditor, an act known and the acceptance of the check, or
as subjective or personal novation. that the check would take the place
14 For novation to take place, the of the note. There is no
following requisites must concur:chanrob1es virtual 1aw library incompatibility between the
promissory note and the check. As
1) There must be a previous valid the CA correctly observed, the
obligation. check had been issued precisely to
answer for the obligation. On the
one hand, the note evidences the
loan obligation; and on the other,
the check answers for it. Verily, the
two can stand together. chanrob1es virtua1 1aw 1ibrary
Neither could the payment of
interests — which, in petitioner’s
view, also constitutes novation 18
— change the terms and conditions
of the obligation. Such payment
was already provided for in the
promissory note and, like the
check, was totally in accord with
the terms thereof.
Also unmeritorious is petitioner’s
argument that the obligation was
novated by the substitution of
debtors. In order to change the
person of the debtor, the old one
must be expressly released from
the obligation, and the third person
or new debtor must assume the
former’s place in the relation. 19
Well-settled is the rule that
novation is never presumed. 20
Consequently, that which arises
from a purported change in the
person of the debtor must be clear
and express. 21 It is thus
incumbent on petitioner to show
clearly and unequivocally that
novation has indeed taken place.
In the present case, petitioner has
not shown that he was expressly
released from the obligation, that a
third person was substituted in his
place, or that the joint and solidary
obligation was cancelled and
substituted by the solitary
undertaking of De Jesus. The CA
aptly held:jgc:chanrobles.com.ph
". . . Plaintiff’s acceptance of the
bum check did not result in
substitution by de Jesus either, the
nature of the obligation being
solidary due to the fact that the
promissory note expressly declared
that the liability of appellants
thereunder is joint and [solidary.]
Reason: under the law, a creditor
may demand payment or
performance from one of the
solidary debtors or some or all of
them simultaneously, and payment
made by one of them extinguishes
the obligation. It therefore follows
that in case the creditor fails to
collect from one of the solidary
debtors, he may still proceed
against the other or others . . ." 22
Moreover, it must be noted that for
novation to be valid and legal, the
law requires that the creditor
expressly consent to the
substitution of a new debtor. 23
Since novation implies a waiver of
the right the creditor had before the
novation, such waiver must be
express. 24 It cannot be supposed,
without clear proof, that the
present respondent has done away
with his right to exact fulfillment
from either of the solidary
debtors.25 cralaw:red
More important, De Jesus was not a
third person to the obligation. From
the beginning, he was a joint and
solidary obligor of the P400,000
loan; thus, he can be released from
it only upon its extinguishment.
Respondent’s acceptance of his
check did not change the person of
the debtor, because a joint and
solidary obligor is required to pay
the entirety of the obligation.
It must be noted that in a solidary
obligation, the creditor is entitled to
demand the satisfaction of the
whole obligation from any or all of
the debtors. 26 It is up to the
former to determine against whom
to enforce collection. 27 Having
made himself jointly and severally
liable with De Jesus, petitioner is
therefore liable 28 for the entire
obligation. 29
Second Issue: chanrob1es virtual 1aw library
Accommodation Party
Petitioner avers that he signed the
promissory note merely as an 2031, the Negotiable Instruments
accommodation party; and that, as Law (NIL). Hence, petitioner cannot
such, he was released as obligor avail himself of the NIL’s provisions
when respondent agreed to extend on the liabilities and defenses of an
the term of the obligation. accommodation party. Besides, a
non-negotiable note is merely a
This reasoning is misplaced, simple contract in writing and is
because the note herein is not a evidence of such intangible rights
negotiable instrument. The note as may have been created by the
reads:jgc:chanrobles.com.ph assent of the parties. 32 The
promissory note is thus covered by
"PROMISSORY NOTE the general provisions of the Civil
Code, not by the NIL.
"P400,000.00
Even granting arguendo that the
"RECEIVED FROM ATTY. DIONISIO NIL was applicable, still, petitioner
V. LLAMAS, the sum of FOUR would be liable for the promissory
HUNDRED THOUSAND PESOS, note. Under Article 29 of Act 2031,
Philippine Currency payable on or an accommodation party is liable
before January 23, 1997 at No. 144 for the instrument to a holder for
K-10 St. Kamias, Quezon City, with value even if, at the time of its
interest at the rate of 5% per taking, the latter knew the former
month or fraction thereof. chanrob1es virtua1 1aw 1ibrary to be only an accommodation party.
The relation between an
"It is understood that our liability accommodation party and the party
under this loan is jointly and accommodated is, in effect, one of
severally [sic]. principal and surety — the
accommodation party being the
"Done at Quezon City, Metro Manila surety. 33 It is a settled rule that a
this 23rd day of December, 1996." surety is bound equally and
30 absolutely with the principal and is
deemed an original promisor and
By its terms, the note was made debtor from the beginning. The
payable to a specific person rather liability is immediate and direct. 34
than to bearer or to order 31 — a
requisite for negotiability under Act Third Issue: chanrob1es virtual 1aw library
Propriety of Summary Judgment or
Judgment on the Pleadings
The next issue illustrates the usual
confusion between a judgment on
the pleadings and a summary
judgment. Under Section 3 of Rule
35 of the Rules of Court, a
summary judgment may be
rendered after a summary hearing
if the pleadings, supporting
affidavits, depositions and
admissions on file show that (1)
except as to the amount of
damages, there is no genuine issue
regarding any material fact; and (2)
the moving party is entitled to a
judgment as a matter of law.
A summary judgment is a
procedural device designed for the
prompt disposition of actions in
which the pleadings raise only a
legal, not a genuine, issue
regarding any material fact. 35
Consequently, facts are asserted in
the complaint regarding which there
is yet no admission, disavowal or
qualification; or specific denials or
affirmative defenses are set forth in
the answer, but the issues are
fictitious as shown by the
pleadings, depositions or
admissions. 36 A summary
judgment may be applied for by
either a claimant or a defending
party. 37
On the other hand, under Section 1
of Rule 34 of the Rules of Court, a
judgment on the pleadings is
proper when an answer fails to
render an issue or otherwise admits
the material allegations of the
"Although Garcia’s [A]nswer
tendered some issues, by way of
affirmative defenses, the
documents submitted by
[respondent] nevertheless clearly
showed that the issues so tendered
were not valid issues. Firstly,
Garcia’s claim that he was merely
an accommodation party is belied
In view of the foregoing, the CA
correctly considered as a summary
judgment that which the trial court
had issued against petitioner.
WHEREFORE, this Petition is hereby
DENIED and the assailed Decision
AFFIRMED. Costs against
petitioner. chanrob1es virtua1 1aw 1ibrary

adverse party’s pleading. The by the promissory note that he

essential question is whether there
are issues generated by the
pleadings. 38 A judgment on the
pleadings may be sought only by a
claimant, who is the party seeking
to recover upon a claim,
counterclaim or cross-claim; or to
obtain a declaratory relief. 39
Apropos thereto, it must be
stressed that the trial court’s
judgment against petitioner was
correctly treated by the appellate
court as a summary judgment,
rather than as a judgment on the
pleadings. His Answer 40
apparently raised several issues —
that he signed the promissory note
allegedly as a mere accommodation
party, and that the obligation was
extinguished by either payment or
novation. However, these are not
factual issues requiring trial. We
quote with approval the CA’s
observations:jgc:chanrobles.com.ph
signed. Nothing in the note SO ORDERED.
indicates that he was only an
accommodation party as he claimed
to be. Quite the contrary, the
promissory note bears the
statement: ‘It is understood that
our liability under this loan is jointly
and severally [sic].’ Secondly, his
claim that his co-defendant de
Jesus already paid the loan by
means of a check collapses in view
of the dishonor thereof as shown at [G.R. No. 126712. April 14, 1999]
the dorsal side of said check." 41
LEONIDA C.
From the records, it also appears QUINTO, Petitioner, v. PEOPLE OF
that petitioner himself moved to THE PHILIPPINES, respondent.
submit the case for judgment on
the basis of the pleadings and DECISION
documents. In a written
Manifestation, 42 he stated that VITUG, J.:
"judgment on the pleadings may
now be rendered without further Assailed in this Petition for Review on
evidence, considering the Certiorari under Rule 45 of the Rules
allegations and admissions of the of Court is the decision of the Court
parties." 43 of Appeals, promulgated on 27
September 1996, in People of the
Philippines v. Leonida Quinto y valued complainant) at the latter's residence
Calayan, docketed CA-G.R. CR No. at ............................................. in Makati. Leonida asked Aurelia to
16567, which has affirmed the P 2,500.00 allow her have some pieces of jewelry
decision of Branch 157 of the that she could show to prospective
Regional Trial Court (RTC), National with a total value of P36,000.00 for buyers. Aurelia acceded and handed
Capital Judicial Region, Branch 157, the purpose of selling the same on over to Leonida one (1) set of
Pasig City, finding Leonida Quinto y commission basis and with the marques with briliantitos worth
Calayan guilty beyond reasonable express obligation on the part of the P17,500.00, one (1) solo ring of 2.30
doubt of the crime of Estafa. accused to turn over the proceeds of karats worth P16,000.00 and one
sale thereof, or to return the said (1) rosetas ring worth P2,500.00.
Leonida Quinto y Calayan, herein jewelries (sic), if not sold, five (5) Leonida signed a receipt (Exhibit "A")
petitioner, was indicted for the crime days after receipt thereof, but the therefor, thus:
of estafa under Article 315, accused once in possession of the
paragraph 1(b), of the Revised Penal jewelries (sic), far from complying "RECEIPT
Code, in an information which read: with her obligation, with intent of
gain, gave abuse of confidence and to Pinatutunayan ko na tinanggap ko
"That on or about the 23rd day of defraud said Aurelia Cariaga, did then kay Gng. Aurelia B. Cariaga (ang)
March 1977, in the Municipality of and there wilfully, unlawfully and mga alahas na nakatala sa ibaba,
Makati, Metro Manila, Philippines and feloniously misappropriate, misapply upang aking ipagbili sa pamamagitan
within the jurisdiction of this and convert to her own personal use ng BIGAY PALA o Commission at
Honorable Court, the above-named and benefit the said jewelries (sic) Kaliwaan lamang. Ako'y hindi
accused, received in trust from one and/or the proceeds of sale or to pinahihintulutan (na) ipagbili ang
Aurelia Cariaga the following pieces return the pieces of jewelry, to the mga ito ng Pautang. Pinananagutan
of jewelry, to wit: damage and prejudice of the said ko na ang mga alahas na ito ay hindi
Aurelia Cariaga in the aforementioned ko ipagkakaloob o ipagkakatiwala sa
One (1) set of marques with amount of P 36,000.00. kanino pa man upang ilagak o
briliantitos maipagbili nila, at ang mga ito ay ako
"Contrary to law "1cräläwvirtualibräry ang magbibili sa ilalim ng aking
valued pangangasiwa at pananagutan sa
at ............................................. Upon her arraignment on 28 March halagang nakatala sa ibaba. At aking
P17,500.00 1978, petitioner Quinto pleaded not isasauli ang mga hindi na maipagbili
One (1) solo ring (2 karats & 30 guilty; trial on the merits thereupon sa loob ng 5 days (sic) araw mula sa
points) ensued. petsa nito o sa kahilingan, na nasa
valued mabuti at malinis na kalagayan
at ............................................. According to the prosecution, on or katulad ng tanggapin ko sa petsang
P16,000.00 about 23 March 1977, Leonida went ito.
One (1) diamond ring (rosetas) to see Aurelia Cariaga (private
MGA URI NG ALAHAS
1 set marques with titos 17,500.
1 solo 2 karats & 30 points 16,000.
1 ring Rosetas brill 2,500.
Makati, March 23, 1977
(Sgd.)"2cräläwvirtualibräry
When the 5-day period given to her
had lapsed, Leonida requested for
and was granted additional time
within which to vend the items.
Leonida failed to conclude any sale
and, about six (6) months later,
Aurelia asked that the pieces of
jewelry be returned. She sent to
Leonida a demand letter which the
latter ignored. The inexplicable delay
of Leonida in returning the items
spurred the filing of the case for
estafa against her.
The defense proffered differently. In
its version, the defense sought to
prove that Leonida was engaged in
the purchase and sale of jewelry. She
was used to buying pieces of jewelry
from a certain Mrs. Antonia Ilagan
who later introduced her (Leonida) to
Aurelia. Sometime in 1975, the two,
Aurelia and Leonida, started to
transact business in pieces of jewelry
among which included a solo ring
worth P40,000.00 which was sold to
Mrs. Camacho who paid P20,000.00
in check and the balance of Leonida interposed an appeal to the
P20,000.00 in installments later paid Court of Appeals which affirmed, in
directly to Aurelia. The last its 27th September 1996 decision,
transaction Leonida had-with Mrs. the RTC's assailed judgment.
Camacho involved a "marques" worth
P16,000.00 and a ring valued at The instant petition before this Court
P4,000.00. Mrs. Camacho was not would have it that the agreement
able to pay the due amount in full between petitioner and private
and left a balance of P13,000.00. complainant was effectively novated
Leonida brought Mrs. Camacho to when the latter consented to receive
Aurelia who agreed to allow Mrs. payment on installments directly
Camacho to pay the balance in from Mrs. Camacho and Mrs. Ramos.
installments. Leonida was also able to
sell for Aurelia a 2-karat diamond The petition is bereft of merit.
ring worth P17,000.00 to Mrs.
Concordia Ramos who, unfortunately,
Novation, in its broad concept, may
was unable to pay the whole amount.
either be extinctive or modificatory.
Leonida brought Mrs. Ramos to
It is extinctive when an old obligation
Aurelia and they talked about the
is terminated by the creation of a
terms of payment. As first payment,
new obligation that takes the place of
Mrs. Ramos gave Leonida a ring
the former; it is merely modificatory
valued at P3,000.00. The next
when the old obligation subsists to
payment made by her was
the extent it remains compatible with
P5,000.00. Leonida herself then
the amendatory agreement. An
paid P2,000.00.
extinctive novation results either by
changing the object or principal
The RTC, in its 25th January 1993 conditions (objective or real), or by
decision, found Leonida guilty beyond substituting the person of the debtor
reasonable doubt of the crime of or subrogating a third person in the
estafa and sentenced her to suffer rights of the creditor (subjective or
the penalty of imprisonment of seven personal).3 Under this mode, novation
(7) years and one (1) day would have dual functions - one to
of prision mayor as minimum to nine extinguish an existing obligation, the other
(9) years of prision mayor as to substitute a new one in its place4 -
maximum and to indemnify private requiring a conflux of four essential
complainant in the amount requisites: (1) a previous valid obligation;
of P36,000.00. (2) an agreement of all parties concerned
to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a
valid new obligation.5
Novation is never presumed,6 and
the animus novandi, whether totally
or partially, must appear by express
agreement of the parties, or by their
acts that are too clear and
unequivocal to be mistaken.7
The extinguishment of the old
obligation by the new one is a
necessary element of novation which
may be effected either expressly or
impliedly.8 The term "expressly"
means that the contracting parties
incontrovertibly disclose that their
object in executing the new contract
is to extinguish the old one.9 Upon
the other hand, no specific form is
required for an implied
novation,10 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.11
There are two ways which could
indicate, in fine, the presence of
novation and thereby produce the
effect of extinguishing an obligation
by another which substitutes the
same. The first is when novation has
been explicitly stated and declared in
unequivocal terms. The second is
when the old and the new obligations
are incompatible on every point. The
test of incompatibility is whether or
not the two obligations can stand
together, each one having its
independent existence. If they
cannot, they are incompatible and
the latter obligation novates the
first.12 Corollarily, changes that breed
incompatibility must be essential in
nature and not merely accidental.
The incompatibility must take place in
any of the essential elements of the
obligation, such as its object, cause
or principal conditions thereof;
otherwise, the change would be
merely modificatory in nature and
insufficient to extinguish the original
obligation.
The changes alluded to by petitioner
consists only in the manner of
payment. There was really no
substitution of debtors since private
complainant merely acquiesced to the
payment but did not give her
consent13 to enter into a new
contract. The appellate court
observed:
"Appellant, however, insists that their
agreement was novated when
complainant agreed to be paid
directly by the buyers and on
installment basis. She adds that her
liability is merely civil in nature.
"We are unimpressed.
"It is to remembered that one of the
buyers, Concordia Ramos, was not
presented to testify on the alleged
aforesaid manner of payment.
"The acceptance by complainant of
partial payment tendered by the
buyer, Leonor Camacho, does not
evince the intention of the
complainant to have their agreement
novated. It was simply necessitated
by the fact that, at that time,
Camacho had substantial accounts
payable to complainant, and because
of the fact that appellant made
herself scarce to complainant. (TSN,
April 15, 1981, 31-32) Thus, to
obviate the situation where
complainant would end up with
nothing, she was forced to receive
the tender of Camacho. Moreover, it
is to be noted that the aforesaid
payment was for the purchase, not of
the jewelry subject of this case, but
of some other jewelry subject of a
previous transaction. (Ibid. June 8,
1981, 10-11)"14cräläwvirtualibräry
There are two forms of novation by
substituting the person of the debtor,
depending on whose initiative it
comes from, to
wit: expromision and delegacion. In
the former, the initiative for the
change does not come from the
debtor and may even be made
without his knowledge. Since a third
person would substitute for the
original debtor and assume the
obligation, his consent and that of the
creditor would be required. In the
latter, the debtor offers, and the
creditor accepts, a third person who
consents to the substitution and
assumes the obligation, thereby
releasing the original debtor from the
obligation, here, the intervention and
the consent of all parties thereto
would perforce be necessary.15 In
either of these two modes of
substitution, the consent of the
creditor, such as can be seen, is an
indispensable requirement.16
It is thus easy to see why Cariaga's
acceptance of Ramos and Camacho's
payment on installment basis cannot
be construed as a case of
either expromision or
delegacion sufficient to justify the
attendance of extinctive novation.
Not too uncommon is when a
stranger to a contract agrees to
assume an obligation; and while this
may have the effect of adding to the
number of persons liable, it does not
necessarily imply the extinguishment
of the liability of the first
debtor.17 Neither would the fact
alone that the creditor receives
guaranty or accepts payments from a
third person who has agreed to
assume the obligation, constitute an
extinctive novation absent an
agreement that the first debtor shall
be released from responsibility.18
Petitioner's reliance on Candida
Mariano v. People19 is misplaced. The
factual milieu in Mariano would
indicate a clear intention on the part
of the parties to release the accused
from her responsibility as an agent
and for her to instead assume the
obligation of a guarantor.
Unfortunately for petitioner in the
case at bar, the factual findings of
both the trial court and the appellate
court prove just the opposite which is
that there has never been
any animus novandi between or
among the parties.
Article 315 of the Revised Penal Code
defines estafa and penalizes any
person who shall defraud another by
"misappropriating or converting, to
the prejudice of another, money,
goods, or any other personal property
received by the offender in trust or
on commission, or for administration,
or under any other obligation
involving the duty to make delivery of
or to return the same, even though
such obligation be totally or partially
guaranteed by a bond; or by denying
having received such money, goods,
or other property." It is axiomatic
that the gravamen of the offense is
the appropriation or conversion of
money or property received to the
prejudice of the owner. The terms
"convert" and "misappropriate" have
been held to connote "an act of using
or disposing of another's property as
if it were one's own or devoting it to
a purpose or use different from that
agreed upon." The phrase, 'to
misappropriate to one's own use" has
been said to include "not only
conversion to one's personal
advantage, but also every attempt to
dispose of the property of another
without right."20 Verily, the sale of the
pieces of jewelry on installments in
contravention of the explicit terms of
the authority granted to her in Exhibit
"A" (supra) is deemed to be one of
conversion. Thus, neither the theory
of "delay in the fulfillment of
commission" nor that of novation
posed by petitioner, can avoid the
incipient criminal liability. In People
vs. Nery,21 this Court held:
"It may be observed in this regard
that novation is not one of the means
recognized by the Penal Code
whereby criminal liability can be
extinguished; hence, the role of
novation may only be either to
prevent the rise of criminal liability or
to cast doubt on the true nature of
the original basic transaction,
whether or not it was such that its
breach would not give rise to penal
responsibility ..."
The criminal liability for estafa
already committed is then not
affected by the subsequent novation mayor or reclusion temporal, as the analogous to modifying
of contract, for it is a public offense case may be." circumstances in the imposition of the
which must be prosecuted and maximum term of the full
punished by the State in its own In the leading case of People vs. indeterminate sentence. This
conation.22 Gabres23 this Court ruled: interpretation of the law accords with
the rule that penal laws should be
Finally, this Court fails to see any "Under the Indeterminate Sentence construed in favor of the accused.
reversible error, let alone any grave Law, the maximum term of the Since the penalty prescribed by law
abuse of discretion, in the penalty shall be 'that which, in view for the estafa charge against
appreciation of the evidence by the of the attending circumstances, could accused-appellant is prision
Court of Appeals which, in fact, hews be properly imposed' under the correccional maximum to prision
with those of the trial court. Indeed, Revised Penal Code, and the mayor minimum, the penalty next
under the circumstances, this Court minimum shall be 'within the range of lower would then be prision
must be deemed bound by the factual the penalty next lower to that correccional minimum to medium.
findings of those courts. prescribed' for the offense. The Thus, the minimum term of the
penalty next lower should be based indeterminate sentence should be
Article 315, 1st paragraph, of the on the penalty prescribed by the anywhere within six (6) months and
Revised Penal Code, as amended by Code for the offense, without first one (1) day to four (4) years and two
Presidential Decree No. 818, provides considering any modifying (2) months while the maximum term
that the penalty circumstance attendant to the of the indeterminate sentence should
of "prision correccional in its commission of the crime. The at least be six (6) years and one (1)
maximum period to prison mayor in determination of the minimum day because the amounts involved
its minimum period, if the amount of penalty is left by law to the sound exceeded P22,000.00, plus an
the fraud is over 12,000 but does not discretion of the court and it can be additional one (1) year for each
exceed 22,000 pesos, and if such anywhere within the range of the additional
amount exceeds the latter sum, the penalty next lower without any P10,000.00."24cräläwvirtualibräry
penalty provided in this paragraph reference to the periods into which it
shall be imposed in its maximum might be subdivided. The modifying The penalty imposed by the trial
period, adding one year for each circumstances are considered only in court, affirmed by the appellate
additional 10,000 pesos; but the total the imposition of the maximum term court, should accordingly be
penalty which may be imposed shall of the indeterminate sentence. modified.
not exceed twenty years. In such
case, and in connection with the "The fact that the amounts involved WHEREFORE, the assailed decision of
accessory penalties which may be in the instant case the Court of Appeals is AFFIRMED
imposed and for the purpose of the exceed P22,000.00 should not be except that the imprisonment term is
other provisions of this Code, the considered in the initial determination MODIFIED by now sentencing
penalty shall be termed prision of the indeterminate penalty; instead, petitioner to an indeterminate penalty
the matter should be so taken as of from two (2) years, eight (8)
months and one (1) day of prison Civil Case No. 6028 (a collection case
correccional to seven (7) years and filed by Metrobank against respondent
one (1) day of prision mayor. The Rural Bank of Gerona, Inc. [RBG]), and
civil liability of appellant ordered the remand of the case to
for P36,000.00 in favor of private include the Central Bank of the
complainant is maintained. Costs Philippines5 (Central Bank) as a borrower Dominador de Jesus. RBG
against petitioner. necessary party.
SO ORDERED. THE FACTUAL ANTECEDENTS
RBG is a rural banking corporation
organized under Philippine laws and
located in Gerona, Tarlac. In the 1970s,
the Central Bank and the RBG entered
into an agreement providing that RBG
shall facilitate the loan applications of
farmers-borrowers under the Central
Bank-International Bank for
Reconstruction and Development’s
G.R. No. 159097 July 5, 2010
(IBRD’s) 4th Rural Credit Project. The
agreement required RBG to open a
METROPOLITAN BANK AND TRUST
COMPANY, Petitioner,
separate bank account where the IBRD
vs. loan proceeds shall be deposited. The
RURAL BANK OF GERONA, RBG accordingly opened a special
INC. Respondent. savings account with Metrobank’s Tarlac
Branch. As the depository bank of RBG,
BRION, J.: Metrobank was designated to receive the
credit advice released by the Central
Petitioner Metropolitan Bank and Trust Bank representing the proceeds of the
Company (Metrobank) filed this Petition IBRD loan of the farmers-borrowers;
for Review on Certiorari1 under Rule 45 Metrobank, in turn, credited the proceeds
of the Rules of Court to challenge the to RBG’s special savings account for the
Court of Appeals (CA) decision dated latter’s release to the farmers-borrowers.
December 17, 20022 and the resolution
dated July 14, 20033 in CA-G.R. CV No. On September 27, 1978, the Central
46777. The CA decision set aside the Bank released a credit advice in
July 7, 1994 decision4 of the Regional Metrobank’s favor and accordingly
Trial Court (RTC) of Tarlac, Branch 65, in credited Metrobank’s demand deposit
account in the amount of ₱178,652.00,
for the account of RBG. The amount,
which was credited to RBG’s special
savings account represented the
approved loan application of farmer-
withdrew the ₱178,652.00 from its
account.
On the same date, the Central Bank
approved the loan application of another
farmer-borrower, Basilio Panopio, for
₱189,052.00, and credited the amount to
Metrobank’s demand deposit account.
Metrobank, in turn, credited RBG’s
special savings account. Metrobank
claims that the RBG also withdrew the
entire credited amount from its account.
On October 3, 1978, the Central Bank
approved Ponciano Lagman’s loan
application for ₱220,000.00. As with the
two other IBRD loans, the amount was
credited to Metrobank’s demand deposit
account, which amount Metrobank later
credited in favor of RBG’s special
savings account. Of the ₱220,000.00,
RBG only withdrew ₱75,375.00.
On November 3, 1978, more than a
month after RBG had made the above
withdrawals from its account with
Metrobank, the Central Bank issued
debit advices, reversing all the approved
IBRD loans.6 The Central Bank
implemented the reversal by debiting
from Metrobank’s demand deposit
account the amount corresponding to all
three IBRD loans.
Upon receipt of the November 3, 1978
debit advices, Metrobank, in turn,
debited the following amounts from
RBG’s special savings account:
₱189,052.00, ₱115,000.00, and
₱8,000.41. Metrobank, however, claimed
that these amounts were insufficient to
cover all the credit advices that were
reversed by the Central Bank. It
demanded payment from RBG which
could make partial payments. As of
October 17, 1979, Metrobank claimed
that RBG had an outstanding balance of
₱334,220.00. To collect this amount, it
filed a complaint for collection of sum of
money against RBG before the RTC,
docketed as Civil Case No. 6028.7
In its July 7, 1994 decision, 8 the RTC
ruled for Metrobank, finding that legal
subrogation had ensued:
[Metrobank] had allowed releases of the
amounts in the credit advices it credited
in favor of [RBG’s special savings
account] which credit advices and
deposits were under its supervision.
Being faulted in these acts or omissions,
the Central Bank [sic] debited these
amounts against [Metrobank’s] demand
[deposit] reserve; thus[, Metrobank’s]
demand deposit reserves diminished
correspondingly, [Metrobank as of this
time,] suffers prejudice in which case
legal subrogation has ensued.9
It thus ordered RBG to pay Metrobank
the sum of ₱334,200.00, plus interest at
14% per annum until the amount is fully
paid.
On appeal, the CA noted that this was
not a case of legal subrogation under
Article 1302 of the Civil Code.
Nevertheless, the CA recognized that
Metrobank had a right to be reimbursed
of the amount it had paid and failed to
recover, as it suffered loss in an
agreement that involved only the Central
Bank and the RBG. It clarified, however,
that a determination still had to be made
on who should reimburse Metrobank.
Noting that no evidence exists why the
Central Bank reversed the credit advices
it had previously confirmed, the CA
declared that the Central Bank should be
impleaded as a necessary party so it
could shed light on the IBRD loan
reversals. Thus, the CA set aside the
RTC decision, and remanded the case to
the trial court for further proceedings
after the Central Bank is impleaded as a
necessary party.10 After the CA denied its
motion for reconsideration, Metrobank
filed the present petition for review on
certiorari.
THE PETITION FOR REVIEW ON
CERTIORARI
Metrobank disagrees with the CA’s ruling
to implead the Central Bank as a
necessary party and to remand the case
to the RTC for further proceedings. It
argues that the inclusion of the Central
Bank as party to the case is unnecessary
since RBG has already admitted its
liability for the amount Metrobank failed
to recover. In two letters,11 RBG’s
President/Manager made proposals to
Metrobank for the repayment of the
amounts involved. Even assuming that
no legal subrogation took place,
Metrobank claims that RBG’s letters
more than sufficiently proved its liability.
Metrobank additionally contends that a
remand of the case would unduly delay
the proceedings. The transactions
involved in this case took place in 1978,
and the case was commenced before
the RTC more than 20 years ago. The
RTC resolved the complaint for collection
in 1994, while the CA decided the appeal
in 2002. To implead Central Bank, as a
necessary party in the case, means a
return to square one and the restart of
the entire proceedings.
THE COURT’S RULING The petition is
impressed with merit.
A basic first step in resolving this case is
to determine who the liable parties are
on the IBRD loans that the Central Bank
extended. The Terms and Conditions of
the IBRD 4th Rural Credit
Project12 (Project Terms and Conditions)
executed by the Central Bank and the
RBG shows that the farmers-borrowers
to whom credits have been extended,
are primarily liable for the payment of the
borrowed amounts. The loans were
extended through the RBG which also
took care of the collection and of the
remittance of the collection to the Central
Bank. RBG, however, was not a mere
conduit and collector. While the farmers-
1avvphil
borrowers were the principal debtors,
RBG assumed liability under the Project
Terms and Conditions by solidarily
binding itself with the principal debtors to
fulfill the obligation.
1awphi1
How RBG profited from the transaction is
not clear from the records and is not part
of the issues before us, but if it delays in
remitting the amounts due, the Central
Bank imposed a 14% per annum penalty
rate on RBG until the amount is actually
remitted. The Central Bank was further
authorized to deduct the amount due
from RBG’s demand deposit reserve
should the latter become delinquent in
payment. On these points, paragraphs 5
and 6 of the Project Terms and
Conditions read:
5. Collection received representing
repayments of borrowers shall be
immediately remitted to the Central
Bank, otherwise[,] the Rural Bank/SLA
shall be charged a penalty of fourteen
[percent] (14%) p.a. until date of
remittance.
6. In case the rural bank becomes
delinquent in the payment of
amortizations due[,] the Central Bank is
authorized to deduct the corresponding
amount from the rural bank’s demand
deposit reserve13 at any time to cover any
delinquency. [Emphasis supplied.]
Based on these arrangements, the
Central Bank’s immediate recourse,
therefore should have been against the
farmers-borrowers and the RBG; thus, it
erred when it deducted the amounts
covered by the debit advices from
Metrobank’s demand deposit account.
Under the Project Terms and Conditions,
Metrobank had no responsibility over the
proceeds of the IBRD loans other than
serving as a conduit for their transfer
from the Central Bank to the RBG once
credit advice has been issued. Thus, we
agree with the CA’s conclusion that the
agreement governed only the parties
involved – the Central Bank and the
RBG. Metrobank was simply an outsider
to the agreement. Our disagreement with
the appellate court is in its conclusion
that no legal subrogation took place; the
present case, in fact, exemplifies the
circumstance contemplated under
paragraph 2, of Article 1302 of the Civil
Code which provides:
Art. 1302. It is presumed that there is
legal subrogation:
(1) When a creditor pays another
creditor who is preferred, even
without the debtor’s knowledge;
(2) When a third person, not
interested in the obligation, pays
with the express or tacit approval
of the debtor;
(3) When, even without the
knowledge of the debtor, a
person interested in the
fulfillment of the obligation pays,
without prejudice to the effects of
confusion as to the latter’s share.
[Emphasis supplied.]
As discussed, Metrobank was a third
party to the Central Bank-RBG
agreement, had no interest except as a
conduit, and was not legally answerable
for the IBRD loans. Despite this, it was
Metrobank’s demand deposit account,
instead of RBG’s, which the Central
Bank proceeded against, on the
assumption perhaps that this was the
most convenient means of recovering
the cancelled loans. That Metrobank’s
payment was involuntarily made does
not change the reality that it was
Metrobank which effectively answered
for RBG’s obligations.
Was there express or tacit approval by
RBG of the payment enforced against
Metrobank? After Metrobank received
the Central Bank’s debit advices in
November 1978, it (Metrobank)
accordingly debited the amounts it could
from RBG’s special savings account
without any objection from RBG.14 RBG’s
President and Manager, Dr. Aquiles
Abellar, even wrote Metrobank, on
August 14, 1979, with proposals
regarding possible means of settling the
amounts debited by Central Bank from
Metrobank’s demand deposit
account.15 These instances are all
indicative of RBG’s approval of
Metrobank’s payment of the IBRD loans.
That RBG’s tacit approval came after
payment had been made does not
completely negate the legal subrogation
that had taken place.
Article 1303 of the Civil Code states that
subrogation transfers to the person
subrogated the credit with all the rights
thereto appertaining, either against the
debtor or against third persons. As the
entity against which the collection was
enforced, Metrobank was subrogated to
the rights of Central Bank and has a
cause of action to recover from RBG the
amounts it paid to the Central Bank, plus
14% per annum interest.
Under this situation, impleading the
Central Bank as a party is completely
unnecessary. We note that the CA
erroneously believed that the Central
Bank’s presence is necessary "in order x
x x to shed light on the matter of
reversals made by it concerning the loan
applications of the end users and to have
a complete determination or settlement
of the claim."16 In so far as Metrobank is
concerned, however, the Central Bank’s
presence and the reasons for its
reversals of the IBRD loans are
immaterial after subrogation has taken
place; Metrobank’s interest is simply to
collect the amounts it paid the Central
Bank. Whatever cause of action RBG
may have against the Central Bank for
the unexplained reversals and any
undue deductions is for RBG to ventilate
as a third-party claim; if it has not done
so at this point, then the matter should
be dealt with in a separate case that
should not in any way further delay the
disposition of the present case that had
been pending before the courts since
1980.
While we would like to fully and finally
resolve this case, certain factual matters
prevent us from doing so. Metrobank
contends in its petition that it credited
RBG’s special savings account with
three amounts corresponding to the
three credit advices issued by the
Central Bank: the ₱178,652.00 for
Dominador de Jesus; the ₱189,052.00
for Basilio Panopio; and the ₱220,000.00
for Ponciano Lagman. Metrobank claims
that all of the three credit advices were
subsequently reversed by the Central
Bank, evidenced by three debit advices.
The records, however, contained only
the credit and debit advices for the
amounts set aside for de Jesus and
Lagman;17 nothing in the findings of fact
by the RTC and the CA referred to the
amount set aside for Panopio.
Thus, what were sufficiently proven as
credited and later on debited from
Metrobank’s demand deposit account
were only the amounts of ₱178,652.00
and ₱189,052.00. With these amounts
combined, RBG’s liability would amount
to ₱398,652.00 – the same amount RBG
acknowledged as due to Metrobank in its
August 14, 1979 letter.18 Significantly,
Metrobank likewise quoted this amount
in its July 11, 197919 and July 26,
197920 demand letters to RBG and its
Statement of Account dated December
23, 1982.21
RBG asserts that it made partial
payments amounting to
₱145,197.40,22 but neither the RTC nor
the CA made a conclusive finding as to
the accuracy of this claim. Although
Metrobank admitted that RBG indeed
made partial payments, it never
mentioned the actual amount paid;
neither did it state that the ₱145,197.40
was part of the ₱312,052.41 that, it
admitted, it debited from RBG’s special
savings account.
Deducting ₱312,052.41 (representing
the amounts debited from RBG’s special
savings account, as admitted by
Metrobank) from ₱398,652.00 amount THE HON. COURT OF APPEALS and others, that plaintiffs are
due to Metrobank from RBG, the BUEN REALTY DEVELOPMENT tenants or lessees of
difference would only be ₱86,599.59. We CORPORATION, respondents. residential and
are, therefore, at a loss on how commercial spaces
Metrobank computed the amount of Antonio M. Albano for petitioners. owned by defendants
₱334,220.00 it claims as the balance of described as Nos. 630-
RBG’s loan. As this Court is not a trier of Umali, Soriano & Associates for private 638 Ongpin Street,
facts, we deem it proper to remand this respondent. Binondo, Manila; that
factual issue to the RTC for they have occupied said
determination and computation of the spaces since 1935 and
actual amount RBG owes to Metrobank, have been religiously
plus the corresponding interest and paying the rental and
penalties. VITUG, J.: complying with all the
conditions of the lease
WHEREFORE, we GRANT the petition Assailed, in this petition for review, is the contract; that on several
for review on certiorari, and REVERSE decision of the Court of Appeals, dated occasions before October
the decision and the resolution of the 04 December 1991, in CA-G.R. SP No. 9, 1986, defendants
Court of Appeals, in CA-G.R. CV No. 26345 setting aside and declaring informed plaintiffs that
46777, promulgated on December 17, without force and effect the orders of they are offering to sell
2002 and July 14, 2003, respectively. We execution of the trial court, dated 30 the premises and are
AFFIRM the decision of the Regional August 1991 and 27 September 1991, in giving them priority to
Trial Court, Branch 65, Tarlac, Civil Case No. 87-41058. acquire the same; that
promulgated on July 7, 1994, insofar as during the negotiations,
it found respondent liable to the The antecedents are recited in good Bobby Cu Unjieng
petitioner Metropolitan Bank and Trust detail by the appellate court thusly: offered a price of P6-
Company, but order the REMAND of the million while plaintiffs
case to the trial court to determine the On July 29, 1987 a made a counter offer of
actual amounts due to the petitioner. Second Amended P5-million; that plaintiffs
Costs against respondent Rural Bank of Complaint for Specific thereafter asked the
Gerona, Inc. SO ORDERED. Performance was filed by defendants to put their
Ang Yu Asuncion and offer in writing to which
CONTRACTS (Definitions, other fundamental concepts)
Keh Tiong, et al., against request defendants
Bobby Cu Unjieng, Rose acceded; that in reply to
Cu Unjieng and Jose Tan defendant's letter,
G.R. No. 109125 December 2, 1994
before the Regional Trial plaintiffs wrote them on
Court, Branch 31, Manila October 24, 1986 asking
ANG YU ASUNCION, ARTHUR GO in Civil Case No. 87- that they specify the
AND KEH TIONG, petitioners, 41058, alleging, among terms and conditions of
vs.
the offer to sell; that proposed sale, hence, subseque
when plaintiffs did not there was no contract of ntly
receive any reply, they sale at all. Nonetheless, decide to
sent another letter dated the lower court ruled that offer their
January 28, 1987 with should the defendants property
the same request; that subsequently offer their for sale
since defendants failed to property for sale at a for a
specify the terms and price of P11-million or purchase
conditions of the offer to below, plaintiffs will have price of
sell and because of the right of first refusal. Eleven
information received that Thus the dispositive Million
defendants were about to portion of the decision Pesos or
sell the property, plaintiffs states: lower,
were compelled to file the then the
complaint to compel WHEREF plaintiffs
defendants to sell the ORE, has the
property to them. judgment option to
is hereby purchase
Defendants filed their rendered the
answer denying the in favor of property
material allegations of the the or of first
complaint and interposing defendant refusal,
a special defense of lack s and otherwise,
of cause of action. against defendant
the s need
After the issues were plaintiffs not offer
joined, defendants filed a summarily the
motion for summary dismissin property
judgment which was g the to the
granted by the lower complaint plaintiffs if
court. The trial court subject to the
found that defendants' the purchase
offer to sell was never aforement price is
accepted by the plaintiffs ioned higher
for the reason that the condition than
parties did not agree that if the Eleven
upon the terms and defendant Million
conditions of the s Pesos.
 SO claim for to any
ORDERE specific material
D. performan fact and
ce will not the
Aggrieved by the lie. moving
decision, plaintiffs Appellant party is
appealed to this Court in s' entitled to
CA-G.R. CV No. 21123. demand a
In a decision for actual, judgment
promulgated on moral and as a
September 21, 1990 exemplar matter of
(penned by Justice y law
Segundino G. Chua and damages (Garcia
concurred in by Justices will vs. Court
Vicente V. Mendoza and likewise of
Fernando A. Santiago), fail as Appeals,
this Court affirmed with there 176
modification the lower exists no SCRA
court's judgment, holding: justifiable 815). All
ground for requisites
In its award. obtaining,
resume, Summary the
there was judgment decision
no for of the
meeting defendant court a
of the s was quo is
minds properly legally
between granted. justifiable.
the Courts
parties may WHEREF
concernin render ORE,
g the sale summary finding
of the judgment the
property. when appeal
Absent there is unmeritori
such no ous, the
requireme genuine judgment
nt, the issue as appealed
from is economy 1991 "for insufficiency in
hereby today. We form and substances"
AFFIRME find no (Annex H, Petition).
D, but reason
subject to not to On November 15, 1990,
the grant the while CA-G.R. CV No.
following same 21123 was pending
modificati right of consideration by this
on: The first Court, the Cu Unjieng
court a refusal to spouses executed a
quo in the herein Deed of Sale (Annex D,
aforestate appellants Petition) transferring the
d decision in the property in question to
gave the event that herein petitioner Buen
plaintiffs- the Realty and Development
appellants subject Corporation, subject to
the right property the following terms and
of first is sold for conditions:
refusal a price in
only if the excess of 1. That for
property Eleven and in
is sold for Million considera
a pesos. No tion of the
purchase pronounc sum of
price of ement as FIFTEEN
Eleven to costs. MILLION
Million PESOS
pesos or SO (P15,000,
lower; ORDERE 000.00),
however, D. receipt of
considerin which in
g the The decision of this Court full is
mercurial was brought to the hereby
and Supreme Court by acknowle
uncertain petition for review dged, the
forces in on certiorari. The VENDOR
our Supreme Court denied S hereby
market the appeal on May 6, sells,
transfers pending 881 in the name of the
and ejectment Cu Unjieng spouses was
conveys proceedin cancelled and, in lieu
for and in g; thereof, TCT No. 195816
favor of was issued in the name
the 2. That of petitioner on
VENDEE, the December 3, 1990.
his heirs, VENDEE
executors shall pay On July 1, 1991,
, the petitioner as the new
administr Document owner of the subject
ators or ary Stamp property wrote a letter to
assigns, Tax, the lessees demanding
the registratio that the latter vacate the
above- n fees for premises.
described the
property transfer of On July 16, 1991, the
with all title in his lessees wrote a reply to
the favor and petitioner stating that
improvem other petitioner brought the
ents expenses property subject to the
found incidental notice of lis
therein to the pendens regarding Civil
including sale of Case No. 87-41058
all the above- annotated on TCT No.
rights and described 105254/T-881 in the
interest in property name of the Cu Unjiengs.
the said including
property capital The lessees filed a
free from gains tax Motion for Execution
all liens and dated August 27, 1991 of
and accrued the Decision in Civil Case
encumbra real No. 87-41058 as
nces of estate modified by the Court of
whatever taxes. Appeals in CA-G.R. CV
nature,
No. 21123.
except As a consequence of the
the sale, TCT No. 105254/T-
On August 30, 1991, today's elevated
respondent Judge issued considera to the
an order (Annex A, tion of the Supreme
Petition) quoted as motion as Court
follows: evidenced upon the
by the petition
Presented rubber for review
before the stamp and that
Court is a and the same
Motion for signature was
Execution s upon denied by
filed by the copy the
plaintiff of the highest
represent Motion for tribunal in
ed by Execution its
Atty. . resolution
Antonio dated
Albano. The gist May 6,
Both of the 1991 in
defendant motion is G.R. No.
s Bobby that the L-97276,
Cu Decision had now
Unjieng of the become
and Rose Court final and
Cu dated executory.
Unjieng Septembe As a
represent r 21, 1990 conseque
ed by as nce, there
Atty. modified was an
Vicente by the Entry of
Sison and Court of Judgment
Atty. Appeals by the
Anacleto in its Supreme
Magno decision Court as
respective in CA of June 6,
ly were G.R. CV- 1991,
duly 21123, stating
notified in and that the
aforesaid defendant pesos or
modified s decide more.
decision to offer
had the WHEREF
already property ORE,
become for sale defendant
final and for a price s are
executory. of P11 hereby
Million or ordered to
It is the lower, and execute
observati considerin the
on of the g the necessary
Court that mercurial Deed of
this and Sale of
property uncertain the
in dispute forces in property
was the our in
subject of market litigation
the Notic economy in favor of
e of Lis today, the plaintiffs
Pendens same Ang Yu
and that right of Asuncion,
the first Keh Tiong
modified refusal to and
decision herein Arthur Go
of this plaintiffs/a for the
Court ppellants considera
promulgat in the tion of
ed by the event that P15
Court of the Million
Appeals subject pesos in
which had property recognitio
become is sold for n of
final to a price in plaintiffs'
the effect excess of right of
that Eleven first
should Million refusal
the and that a
 new another order, the one (1)
Transfer dispositive portion of week
Certificate which reads: from
of Title be receipt of
issued in WHEREF this Order
favor of ORE, let and for
the buyer. there be defendant
Writ of s to
All Execution execute
previous issue in the
transactio the necessary
ns above- Deed of
involving entitled Sale of
the same case the
property directing property
notwithsta the in
nding the Deputy litigation
issuance Sheriff in favor of
of another Ramon the
title to Enriquez plaintiffs
Buen of this Ang Yu
Realty Court to Asuncion,
Corporati implemen Keh Tiong
on, is t said Writ and
hereby of Arthur Go
set aside Execution for the
as having ordering considera
been the tion of
executed defendant P15,000,0
in bad s among 00.00 and
faith. others to ordering
comply the
SO with the Register
ORDERE aforesaid of Deeds
D. Order of of the City
this Court of Manila,
within a to cancel
On September 22, 1991
period of and set
respondent Judge issued
 aside the execution (Annex C, sources of obligations (law, contracts,
title Petition) was issued. 1
quasi-contracts, delicts and quasi-
already delicts); (b) the object which is the
issued in On 04 December 1991, the appellate prestation or conduct; required to be
favor of court, on appeal to it by private observed (to give, to do or not to do);
Buen respondent, set aside and declared and (c) the subject-persons who, viewed
Realty without force and effect the above from the demandability of the obligation,
Corporati questioned orders of the court a quo. are the active (obligee) and the passive
on which (obligor) subjects.
was In this petition for review on certiorari,
previously petitioners contend that Buen Realty can Among the sources of an obligation is a
executed be held bound by the writ of execution by contract (Art. 1157, Civil Code), which is
between virtue of the notice of lis pendens, carried a meeting of minds between two persons
the latter over on TCT No. 195816 issued in the whereby one binds himself, with respect
and name of Buen Realty, at the time of the to the other, to give something or to
defendant latter's purchase of the property on 15 render some service (Art. 1305, Civil
s and to November 1991 from the Cu Unjiengs. Code). A contract undergoes various
register stages that include its negotiation or
the new preparation, its perfection and, finally, its
We affirm the decision of the appellate
title in consummation. Negotiation covers the
court.
favor of period from the time the prospective
the contracting parties indicate interest in the
aforesaid A not too recent development in real
contract to the time the contract is
plaintiffs estate transactions is the adoption of
concluded (perfected). The perfection of
Ang Yu such arrangements as the right of first
the contract takes place upon the
Asuncion, refusal, a purchase option and a contract
concurrence of the essential elements
Keh Tiong to sell. For ready reference, we might
thereof. A contract which
and point out some fundamental precepts
is consensual as to perfection is so
Arthur that may find some relevance to this
established upon a mere meeting of
Go. discussion.
minds, i.e., the concurrence of offer and
acceptance, on the object and on the
SO An obligation is a juridical necessity to cause thereof. A contract which requires,
ORDERE give, to do or not to do (Art. 1156, Civil in addition to the above, the delivery of
D. Code). The obligation is constituted upon the object of the agreement, as in a
the concurrence of the essential pledge or commodatum, is commonly
elements thereof, viz: (a) The vinculum referred to as a real contract. In
On the same day,
juris or juridical tie which is the efficient a solemn contract, compliance with
September 27, 1991 the
cause established by the various certain formalities prescribed by law,
corresponding writ of
such as in a donation of real property, is
essential in order to make the act valid,
the prescribed form being thereby an
essential element thereof. The stage
of consummation begins when the
parties perform their respective
undertakings under the contract
culminating in the extinguishment
thereof.
Until the contract is perfected, it cannot,
as an independent source of obligation,
serve as a binding juridical relation. In
sales, particularly, to which the topic for
discussion about the case at bench
belongs, the contract is perfected when a
person, called the seller, obligates
himself, for a price certain, to deliver and
to transfer ownership of a thing or right to
another, called the buyer, over which the
latter agrees. Article 1458 of the Civil
Code provides:
Art. 1458. By the contract
of sale one of the
contracting parties
obligates himself to
transfer the ownership of
and to deliver a
determinate thing, and
the other to pay therefor
a price certain in money
or its equivalent.
A contract of sale may be
absolute or conditional.
When the sale is not
absolute but conditional, such as in a
"Contract to Sell" where invariably the
ownership of the thing sold is retained
until the fulfillment of a positive
suspensive condition (normally, the full
payment of the purchase price), the
breach of the condition will prevent the
obligation to convey title from acquiring
an obligatory force. In Dignos vs. Court
2
of Appeals (158 SCRA 375), we have
said that, although denominated a "Deed
of Conditional Sale," a sale is still
absolute where the contract is devoid of
any proviso that title is reserved or the
right to unilaterally rescind is stipulated,
e.g., until or unless the price is paid.
Ownership will then be transferred to the
buyer upon actual or constructive
delivery (e.g., by the execution of a
public document) of the property sold.
Where the condition is imposed upon the
perfection of the contract itself, the
failure of the condition would prevent
such perfection. If the condition is
3
imposed on the obligation of a party
which is not fulfilled, the other party may
either waive the condition or refuse to
proceed with the sale (Art. 1545, Civil
Code). 4
An unconditional mutual promise to buy
and sell, as long as the object is made
determinate and the price is fixed, can
be obligatory on the parties, and
compliance therewith may accordingly
be exacted. 5
An accepted unilateral
promise which specifies the thing to be
sold and the price to be paid, when
coupled with a valuable consideration
distinct and separate from the price, is
what may properly be termed a perfected
contract of option. This contract is legally
binding, and in sales, it conforms with
the second paragraph of Article 1479 of
the Civil Code, viz:
Art. 1479. . . .
An accepted unilateral
promise to buy or to sell
a determinate thing for a
price certain is binding
upon the promissor if the
promise is supported by
a consideration distinct
from the price. (1451a) 6
Observe, however, that the option
is not the contract of sale itself. The
7
optionee has the right, but not the
obligation, to buy. Once the option is
exercised timely, i.e., the offer is
accepted before a breach of the option, a
bilateral promise to sell and to buy
ensues and both parties are then
reciprocally bound to comply with their
respective undertakings. 8
Let us elucidate a little. A negotiation is
formally initiated by an offer. An imperfect
promise (policitacion) is merely an offer.
Public advertisements or solicitations
and the like are ordinarily construed as
mere invitations to make offers or only as
proposals. These relations, until a
contract is perfected, are not considered
binding commitments. Thus, at any time
prior to the perfection of the contract,
either negotiating party may stop the
negotiation. The offer, at this stage, may
be withdrawn; the withdrawal is effective
immediately after its manifestation, such
as by its mailing and not necessarily
when the offeree learns of the withdrawal
(Laudico vs. Arias, 43 Phil. 270). Where
a period is given to the offeree within
which to accept the offer, the following
rules generally govern:
(1) If the period is not itself founded upon
or supported by a consideration, the
offeror is still free and has the right to
withdraw the offer before its acceptance,
or, if an acceptance has been made,
before the offeror's coming to know of
such fact, by communicating that
withdrawal to the offeree (see Art. 1324,
Civil Code; see also Atkins, Kroll & Co.
vs. Cua, 102 Phil. 948, holding that this
rule is applicable to a unilateral promise
to sell under Art. 1479, modifying the
previous decision in South Western
Sugar vs. Atlantic Gulf, 97 Phil. 249; see
also Art. 1319, Civil Code; Rural Bank of
Parañaque, Inc., vs. Remolado, 135
SCRA 409; Sanchez vs. Rigos, 45
SCRA 368). The right to withdraw,
however, must not be exercised
whimsically or arbitrarily; otherwise, it
could give rise to a damage claim under
Article 19 of the Civil Code which ordains
that "every person must, in the exercise
of his rights and in the performance of
his duties, act with justice, give everyone
his due, and observe honesty and good
faith."
(2) If the period has a separate
consideration, a contract of "option" is
deemed perfected, and it would be a
breach of that contract to withdraw the
offer during the agreed period. The
option, however, is an independent
contract by itself, and it is to be
distinguished from the projected main
agreement (subject matter of the option)
which is obviously yet to be concluded.
If, in fact, the optioner-offeror withdraws
the offer before its acceptance (exercise
of the option) by the optionee-offeree,
the latter may not sue for specific
performance on the proposed contract
("object" of the option) since it has failed
to reach its own stage of perfection. The
optioner-offeror, however, renders
himself liable for damages for breach of
the option. In these cases, care should
be taken of the real nature of
the consideration given, for if, in fact, it
has been intended to be part of the
consideration for the main contract with a
right of withdrawal on the part of the
optionee, the main contract could be
deemed perfected; a similar instance
would be an "earnest money" in a
contract of sale that can evidence its
perfection (Art. 1482, Civil Code).
In the law on sales, the so-called "right of
first refusal" is an innovative juridical
relation. Needless to point out, it cannot
be deemed a perfected contract of sale
under Article 1458 of the Civil Code.
Neither can the right of first refusal,
understood in its normal concept, per
se be brought within the purview of an
option under the second paragraph of
Article 1479, aforequoted, or possibly of
an offer under Article 1319 of the same
9
Code. An option or an offer would
require, among other things, a clear
10
certainty on both the object and the
cause or consideration of the envisioned
contract. In a right of first refusal, while
the object might be made determinate,
the exercise of the right, however, would
be dependent not only on the grantor's
eventual intention to enter into a binding
juridical relation with another but also on
terms, including the price, that obviously
are yet to be later firmed up. Prior
thereto, it can at best be so described as
merely belonging to a class of
preparatory juridical relations governed
not by contracts (since the essential
elements to establish the vinculum
juris would still be indefinite and
inconclusive) but by, among other laws of
general application, the pertinent
scattered provisions of the Civil Code on
human conduct.
Even on the premise that such right of
first refusal has been decreed under a
final judgment, like here, its breach
cannot justify correspondingly an
issuance of a writ of execution under a
judgment that merely recognizes its
existence, nor would it sanction an action
for specific performance without thereby
negating the indispensable element of
consensuality in the perfection of
contracts. It is not to say, however, that
11
the right of first refusal would be
inconsequential for, such as already
intimated above, an unjustified disregard
thereof, given, for instance, the
circumstances expressed in Article 19 of12
the Civil Code, can warrant a recovery
for damages.
The final judgment in Civil Case No. 87-
41058, it must be stressed, has merely
accorded a "right of first refusal" in favor
of petitioners. The consequence of such
a declaration entails no more than what
has heretofore been said. In fine, if, as it
is here so conveyed to us, petitioners are
aggrieved by the failure of private
respondents to honor the right of first
refusal, the remedy is not a writ of
execution on the judgment, since there is
none to execute, but an action for
damages in a proper forum for the
purpose.
Furthermore, whether private respondent
Buen Realty Development Corporation,
the alleged purchaser of the property,
has acted in good faith or bad faith and
whether or not it should, in any case, be
considered bound to respect the
registration of the lis pendens in Civil
Case No. 87-41058 are matters that
must be independently addressed in
appropriate proceedings. Buen Realty,
not having been impleaded in Civil Case
No. 87-41058, cannot be held subject to
the writ of execution issued by
respondent Judge, let alone ousted from
the ownership and possession of the
property, without first being duly afforded
its day in court.
We are also unable to agree with
petitioners that the Court of Appeals has
erred in holding that the writ of execution
varies the terms of the judgment in Civil
Case No. 87-41058, later affirmed in CA-
G.R. CV-21123. The Court of Appeals, in
this regard, has observed:
Finally, the questioned
writ of execution is in
variance with the
decision of the trial court
as modified by this Court.
As already stated, there
was nothing in said
decision that decreed
13
the execution of a deed
of sale between the Cu
Unjiengs and respondent
lessees, or the fixing of
the price of the sale, or
the cancellation of title in
the name of petitioner
(Limpin vs. IAC, 147
SCRA 516; Pamantasan
ng Lungsod ng Maynila
vs. IAC, 143 SCRA 311;
De Guzman vs. CA, 137
SCRA 730; Pastor vs.
CA, 122 SCRA 885).
It is likewise quite obvious to us that the
decision in Civil Case No. 87-41058
could not have decreed at the time the
execution of any deed of sale between
the Cu Unjiengs and petitioners.
WHEREFORE, we UPHOLD the Court of
Appeals in ultimately setting aside the
questioned Orders, dated 30 August
1991 and 27 September 1991, of the
court a quo. Costs against petitioners.
SO ORDERED.
[G.R. Nos. 155217 and 156393.
July 30, 2003.]
GATEWAY ELECTRONICS
CORPORATION, Petitioner, v.
LAND BANK OF THE
PHILIPPINES, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Before the Court are consolidated
petitions (1) for review of the
decision of the Court of Appeals in
CA-G.R. SP No. 62658, 1 which set
aside the Order dated October 18,
2000 of the Regional Trial Court of
Makati City, Branch 133, in Civil
Case No. 98-782; 2 and (2) to cite
Landbank President Margarito
Teves, and Landbank’s counsel, in
contempt of Court. chanrob1es virtua1 1aw 1ibrary
The undisputed facts are as follows:
In 1995, petitioner Gateway
Electronics Corporation applied for
a loan in the amount of one billion
pesos with respondent Landbank to
finance the construction and
acquisition of machineries and
equipment for a semi-conductor
plant at Gateway Business Park in
Javalera, General Trias, Cavite.
However, Landbank was only able
to extend petitioner a loan in the
amount of six hundred million
pesos (P600,000,00;0.00). Hence,
it offered to assist petitioner in
securing additional funding through
its investment banking services,
which offer petitioner accepted.
Thereafter, Landbank released to
petitioner the initial amount of
P250,000,000.00, with the balance
of P350,000,000.00 to be released
in June 1996. As security for the
said loans, petitioner mortgaged in
favor of Landbank two parcels of
land 3 located in Barangay
Javalera, General Trias, Cavite, the
movable properties as well as the
machineries to be installed therein.
4 be on equal footing where the
After petitioner’s acceptance of
Landbank’s financial banking
services, the latter prepared an
Information Memorandum which it
disseminated to various banks to
attract them into providing
additional funding for petitioner.
The Information Memorandum
stated that the security for the
proposed loan syndication will be
the "Mortgage Trust Indenture
(MTI) on the project assets
including land, building and
equipment." 5 In a letter dated July
30, 1996, Landbank informed
petitioner of its willingness to share
the loan collateral which the latter
constituted in its favor as part of
the collateral for the syndicated
loan from the other banks. 6 On
August 20, 1996, Landbank
confirmed its undertaking to share
the said collateral with the other
creditor banks, to wit:chanrob1es virtual 1aw library
In case of failure of syndication of
the loan, allow the banks that have
granted loans to GEC [Gateway
Electronics Corporation] in
anticipation of the loan syndication
to have a registered pari passu
mortgage with you over the
property, the intention being that
all banks, including Landbank, shall
aforesaid collateral is concerned. 7
Consequently, Philippine
Commercial International Bank
(PCIB), Union Bank of the
Philippines, (UBP), Rizal
Commercial Banking Corporation-
Trust Investment Division (RCBC),
and Asia Trust Bank (Asia Trust)
joined the loan syndication and
released various loans to petitioner.
On October 10, 1996, a
Memorandum of Understanding
(MOU) 8 was executed by
Landbank, PCIB, UBP, RCBC,
Asiatrust and the petitioner, with
RCBC as the trustee of the loan
syndication. Under the
Memorandum of Understanding, the
said signatories agreed to —
enter into a Mortgage Trust
Indenture (herein, the "MTI"),
under which GEC will constitute a
mortgage over the land, building,
other land improvements,
machinery and equipment of GEC
located within Gateway Business
Park, Crisanto de Los Reyes
Avenue, Javalera, General Trias,
Cavite as well as the assets to be
acquired by GEC under the Project
(as hereinafter defined) in favor of
RCBC-TID as trustee, for the
benefit of the Creditors (as defined
in the MTI), to secure the payment
by GEC of its loan obligations. 9
Meanwhile, the negotiations for the
execution of an MTI failed because
Landbank and the petitioner were
unable to agree on the valuation of
the equipment and machineries to
be acquired by the latter. The
petitioner insisted on a 70%
valuation, while the former wanted
a 50% valuation. To break the
impasse, PCIB, RCBC, UBP, and
Asiatrust proposed, subject to the
approval of their respective
Executive Committees or Board of
Directors, to execute a Joint Real
Estate Mortgage (JREM) 10 as the
"new mode to secure [their]
respective loan vis-à-vis
[petitioner’s] collaterals." 11 Under
the proposed JREM, the six hundred
million peso-loan granted by Land
Bank shall be secured up to
94.42%, while the loans granted by
PCIB, RCBC, and UBP would be
similarly secured up to 75.22%. 12
Land Bank, however, refused to
agree to the said proposal unless
100% of its loan exposure is
secured, pursuant to the Loan
Agreement it executed with
petitioner. 13
On February 27, 1998, Land Bank
informed petitioner of its intention
not to share collaterals with the
other banks. In the meantime,
petitioner’s loan with PCIB became
due because of its failure to comply
with the collateral requirement
under the MTI or JREM, or to
provide acceptable substitute
collaterals. Hence, petitioner filed
with the Regional Trial Court of
Makati City, Branch 133, a
complaint against Land Bank for
specific performance and damages
with prayer for the issuance of
preliminary mandatory injunction.
After hearing, the trial court issued
an order on October 18, 2000
granting petitioner’s prayer for the
issuance of a writ of preliminary
mandatory injunction, the
dispositive portion of which reads: chanrob1es virtual
1aw library
Wherefore, in view of the foregoing,
the application for a writ of
preliminary mandatory injunction is
granted, conditioned upon the filing
of a bond in the amount of three
hundred thousand pesos
(P300,000.00).
Defendant is hereby directed to
accede to the terms of the draft
MTI and/or to agree to share
collaterals under a joint real estate
mortgage [JREM] with long-term
creditors of plaintiff (including
PCIB) as joint mortgagees and with
defendant as custodian of the titles.
SO ORDERED. 14
With the denial of its motion for
reconsideration, respondent filed a
petition for certiorari with the Court
of Appeals, on the ground that the
trial court gravely abused its
discretion in issuing the assailed
writ of preliminary mandatory
injunction. On March 23, 2001, the
Court of Appeals, on motion of
Landbank, issued a temporary
restraining order enjoining the trial
court from enforcing the October
18, 2000 Order. 15
In a decision rendered on April 12,
2002, the Court of Appeals annulled
the assailed order of the trial court.
16 It ruled that petitioner failed to
prove the requisite clear and legal
right that would justify the issuance
of the writ of preliminary
mandatory injunction; and that
respondent cannot be compelled to
accede to the terms of the MTI
and/or JREM which was supposed
to cover the syndicated loan of
petitioner inasmuch as the said
schemes were never executed nor
approved by the petitioner and the
participating banks. chanrob1es virtua1 1aw 1ibrary
Hence, the instant petition for
review filed by petitioner which was
docketed as G.R. No. 155217. On
December 10, 2002, petitioner filed
an omnibus motion seeking, inter
alia, the issuance of a temporary
restraining order enjoining
Landbank from proceeding and
completing the foreclosure
proceedings over its mortgaged
properties. 17 On January 22,
2003, the Court denied said motion
for lack of merit. 18 Petitioner’s
motion for reconsideration was
likewise denied on March 26, 2003.
19
Meanwhile, on January 10, 2003,
petitioner filed a petition to cite
Landbank President Margarito
Teves and Landbank’s lawyer in
contempt of Court for proceeding
and concluding the foreclosure
proceedings and public auction sale.
20 Petitioner contended that
Landbank’s acts constitute improper
conduct which directly or indirectly
impede, obstruct, or degrade the
administration of justice. The
petition was docketed as G.R. No.
156393.
On March 12, 2003, the
consolidation of G.R. No. 156393
and G.R. No. 155217 was ordered.
21
The issues to be resolved in this
petition are as follows: (1) Is
Landbank bound to share the
properties mortgaged to it by
respondent with the other creditor
banks in the loan syndication? (2) If
the answer is in the affirmative, can
Landbank be compelled at this point
to agree with the terms of the MTI
or JREM?
Anent the first issue, the Court
finds that Landbank is bound by a
perfected contract to share
petitioner’s collateral with the
participating banks in the loan
syndication. Article 1305 of the Civil
Code defines a contract as a
meeting of minds between two
persons whereby one binds himself,
with respect to the other, to give
something or to render some
service. A contract undergoes three
distinct stages — (1) preparation or
negotiation; (2) perfection; and (3)
consummation. Negotiation begins
from the time the prospective
contracting parties manifest their
interest in the contract and ends at
the moment of agreement of the
parties. The perfection or birth of
the contract takes place when the
parties agree upon the essential
elements of the contract. The last
stage is the consummation of the
contract wherein the parties fulfill
or perform the terms agreed upon
in the contract, culminating in the
extinguishment thereof. Article
1315 of the Civil Code, on the other
hand, provides that a contract is
perfected by mere consent, which is
manifested by the meeting of the
offer and the acceptance upon the
thing and the cause which are to
constitute the contract. 22
In the case at bar, a perfected
contract for the sharing of
collaterals is evident from the
exchange of communications
between Landbank and petitioner
and the participating banks, as well
as in the Memorandum of
Understanding executed by
petitioner and the participating
banks, including Landbank. In its
July 31, 1996 letter to petitioner,
Landbank stated that it is "willing to
submit the properties covered by
the real estate mortgage (REM) in
its favor as part of [petitioner’s]
assets that will be covered by a
Mortgage Trust Indenture (MTI)."
Thus, the Information Memorandum
distributed by Landbank to entice
other banks to participate in the
loan syndication, expressly stated
that the security for the syndicated
loan will be the "MTI on project
assets including land, building and
equipment." 23 Finally, on October
10, 1996, Petitioner, Landbank,
PCIB, RCBC, UBP, and Asiatrust
executed a Memorandum of
Understanding confirming the said
collateral sharing agreement. To
effect said sharing, they decided to
enter into a Mortgage Trust
Indenture (MTI) which will be
secured by the same properties
previously mortgaged by petitioner
to Landbank, or more specifically,
to —
enter into a Mortgage Trust
Indenture (herein, the "MTI"),
under which GEC will constitute a
mortgage over the land, building,
other land improvements,
machinery and equipment of GEC
located within Gateway Business
Park, Crisanto de Los Reyes
Avenue, Javalera, General Trias,
Cavite as well as the assets to be
acquired by GEC under the Project
(as hereinafter defined) in favor of
RCBC-TID as trustee, for the
benefit of the Creditors (as defined
in the MTI), to secure the payment
by GEC of its loan obligations. 24
Clearly, there was an acceptance by
petitioner and by PCIB, RCBC, UBP,
and Asiatrust of Landbank’s offer to
share collaterals, culminating in the
execution of the Memorandum of
Understanding. We agree with
petitioner that the MTI and/or the
JREM belong to the realm of
consummation of said
Memorandum of Understanding,
being the proposed vehicles or
modes to effect the sharing
agreement. Thus, in the JREM
which was approved by Landbank,
except for its loan security
coverage, the participating banks
expressly acknowledged that" [t]he
Joint Real Estate Mortgage [is]
pursued by [them] as a new mode
to secure [their] respective loans
vis-à-vis GEC’s collateral." 25
Verily, the perfection of the
collateral sharing agreement is not
dependent upon the execution of
the MTI or the JREM. The failure to
execute said schemes did not affect
the perfected and binding collateral
sharing contract.
With respect, however, to the
second issue, we find that the
issuance by the trial court of the
writ of preliminary mandatory
injunction directing Landbank to
agree with the terms of the MTI or
JREM was premature. This is so
because the MTI and/or JREM that
were supposed to consummate the
perfected collateral sharing
agreement have not yet come into
existence. As correctly held by the
Court of Appeals, Landbank cannot
be compelled to agree with the
terms of the MTI considering that
no such terms were finalized and
approved by the petitioner and the
participating banks. Simply stated,
Landbank cannot be forced to give
its conformity to an inexistent
contract. So, also, the proposed
JREM was never approved by the
petitioner and the participating
banks. Notably, the JREM expressly
stated that "we hereby appeal to
the GEC’s senior management to
decide swiftly and to favorably
approve our humble requests so
that, in turn, we can seek
respective approvals from sour
senior management to culminate
this long term project financing deal
of ours." 26 No such approval,
however, appears in the records.
As to the questioned security
coverage under the JREM,
Landbank cannot be compelled to
agree to the proposed 94.42% loan
security coverage over its six
hundred million peso-loan to
petitioner. The security coverage of
the participating banks on the
collaterals of petitioner was not
agreed upon in the Memorandum of
Understanding. While it is true that
Landbank informed petitioner in its
letter dated July 30, 1996 that "the
participating banks in the loan
syndication will have equal security
position," 27 and that on August
20, 1996, Landbank confirmed to
PCIB that the participating banks,
"shall be on equal footing where the
aforesaid collateral is concerned,"
28 no such stipulation was
embodied in the Memorandum of
Understanding executed by
petitioner, Landbank, PCIB, RCBC,
UBP, and Asiatrust on October 10,
1996. As the repository of the
terms and conditions agreed upon
by the parties, the Memorandum of
Understanding is considered as
containing all their stipulations and
there can be no evidence of such
terms other than the contents
thereof. 29 Inasmuch as the parties
to the Memorandum of
Understanding did not agree on the
terms of the security coverage of
the participating banks in the MTI
or JREM, we can neither add such a
stipulation nor direct Landbank to
agree to the security coverage
stated in the JREM. Furthermore,
the reasonableness of the terms of
the MTI and JREM, as well as the
good faith or bad faith of the
parties in negotiating the terms of
the said schemes, are matters that
should be determined at the trial,
and cannot at this point be passed
upon by this Court.
Furthermore, the other participating
banks, namely PCIB, RCBC, UBP,
and Asiatrust, are not parties to the
instant case and cannot, therefore,
be bound by an order directing
Landbank to accede to the terms of
the MTI or the JREM. We are not
even aware if said banks are
amenable to the said schemes or
pursuing other modes to effect the
sharing agreement. Indeed, the
scheme or mode and the terms that
would consummate the collateral
sharing agreement are matters that
the signatories of the Memorandum
of Understanding have yet to come
up with. The rule in this jurisdiction
is that the contracting parties may
establish any agreement, term, and
condition they may deem advisable,
provided they are not contrary to
law, morals or public policy. The
right to enter into lawful contracts
constitutes one of the liberties
guaranteed by the Constitution. It
cannot be struck down or arbitrarily
interfered with without violating the
freedom to enter into lawful
contracts. 30
A writ of mandatory injunction
requires the performance of a
particular act and is granted only
upon a showing of the following
requisites — (1) the invasion of the
right is material and substantial;
(2) the right of a complainant is
clear and unmistakable; and (3)
there is an urgent and permanent
necessity for the writ to prevent
serious damage. Since it commands
the performance of an act, a
mandatory injunction does not
preserve the status quo and is thus
more cautiously regarded than a
mere prohibitive injunction.
Accordingly, the issuance of the
former is justified only in a clear
case, free from doubt and dispute.
31
While it is true that petitioner has a
right to compel Landbank to comply
with the collateral sharing
agreement, its right to enforce the
same by way of an inexistent MTI
or JREM is certainly not clear and
unmistakable. At this stage,
Landbank cannot be compelled to
agree to the terms of the MTI
and/or JREM. At the most,
Landbank can be compelled to
comply with its obligation to share
with the other participating banks
of the loan syndication the
properties mortgaged to it by
petitioner and to execute the
necessary contract that would
implement said collateral sharing
agreement.
Coming now to the petition for
contempt, we find that Landbank’s
acts of foreclosing and selling at
public auction the lots mortgaged
by petitioner were not
contumacious. Landbank instituted
the foreclosure proceedings upon
an honest belief that petitioner had
defaulted in the payment of its
obligation. Having acted in good
faith, the officers of the bank
cannot be held in contempt of
court. However, in order not to
render this decision moot and
ineffectual, the sale at public
auction should be annulled.
WHEREFORE, in view of all the
foregoing, the petition in G.R. No.
155217 is GRANTED. The decision
of the Court of Appeals dated April
12, 2002 in CA-G.R. SP. No. 62658
is SET ASIDE. The assailed Order
dated October 18, 2000 of the
Regional Trial Court of Makati City,
Branch 133, in Civil Case No. 98-
782 is MODIFIED as follows:
respondent Landbank is directed to
implement its agreement under the
Memorandum of Understanding
dated October 10, 1996 to share
with Philippine Commercial
International Bank (PCIB), Union
Bank of the Philippines, (UBP), Rizal
Commercial Banking Corporation-
Trust Investment Division (RCBC),
and Asia Trust Bank (Asia Trust)
the properties mortgaged to it by
petitioner Gateway Electronics
Corporation, as collaterals for the
syndicated loan.
In G.R. No. 156393, the petition to
cite Landbank President Margarito
Teves and Landbank’s lawyer in
contempt of Court is DENIED for
lack of merit.chanrob1es virtua1 1aw 1ibrary
SO ORDERED.
G.R. No. L-10551
IGNACIO ARROYO, plaintiff-appellant,
vs.
ALFRED BERWIN, defendant-appellee.
J. M. Arroyo for appellant.
No appearance for appellee.
CARSON, J.:
The complaint filed in this action is as
follows:
1. That both the plaintiff and the
defendant are residents of the
municipality of Iloilo, Province of
Iloilo, Philippine Islands.
2. That the defendant is
a procurador judicial in the law
office of the Attorney John
Bordman, and is duly authorized
by the court to practice in justice
of the peaces courts of the
Province of Iloilo.
3. That the defendant, as
such procurador judicial,
represented Marcela Juanesa in
the justice of the peace court of
Iloilo in proceeding for theft
prosecuted by the plaintiff
Ignacio Arroyo; that said cause
was decided by the said justice
of the peace against the
accused, and the latter appealed
to the Court of First Instance of
March 3, 1917 Iloilo.
4. That on August 14, 1914,
which was the day set for the
hearing of the appeal of the said
cause against Marcela Juaneza
for theft, Case No. 3120, the
defendant requested the plaintiff
to agree to dismiss the said
criminal proceeding, and, on
August 14, 1914, stipulated with
the plaintiff in the presence of
Roque Samson, among other
things, that his client Marcela
Juaneza would recognize the
plaintiff's ownership in the land
situated on Calle San Juan,
suburb of Molo, municipality of
Iloilo, Province of Iloilo, where his
said client ordered the cane cut,
which land and which cut cane
are referred to in the cause for
theft above-mentioned; and the
defendant furthermore agreed
that the plaintiff should obtain a
Torrens title to the said land
during the next term of the court
for the trial of cadastral cases,
and that the defendant's client,
Marcela Juaneza, would not
oppose the application for
registration to be filed by the said
applicant; provided that the
plaintiff would ask the
prosecuting attorney to dismiss
the said proceedings filed against
Marcela Juaneza and Alejandro
Castro for the crime of theft.
5. That the plaintiff on his part
complied with the agreement,
and requested the prosecuting
attorney to dismiss the above-
mentioned criminal cause; that
the latter petitioned the court and
the court did dismiss the said
cause; that in exchange the
defendant does not wish to
comply with the above-
mentioned agreement; that the
plaintiff delivered to the
defendant for the signature of the
said Marcela Juaneza a written
agreement stating that the
defendant's said client
recognized the plaintiff's
ownership in the described land
and that she would not oppose
the plaintiff's application for
registration; and that up to the
present time, the defendant has
not returned to the plaintiff the
said written agreement,
notwithstanding the plaintiff's
many demands.
Therefore, the plaintiff prays the
court to render judgment ordering
the defendant to comply with the
agreement by causing the latter's
said client Marcela Juaneza to
sign the document in which she
recognizes the plaintiff's
ownership of the land on which
she ordered the cane cut and
states that she will not oppose
the plaintiff's application for the
registration of the said land, and,
further, by awarding to the
plaintiff the costs of the present
suit, as well as any other relief
that justice and equity require.
The trial judge dismissed this complaint
on the ground of the illegality of the
consideration of the alleged contract,
and without stopping to consider any
other objection to the complaint than that
indicated by the court below, we are of
opinion that the order appealed from
must be affirmed.
An agreement by the owner of stolen
goods to stifle the prosecution of the
person charged with the theft, for a
pecuniary or other valuable
consideration, is manifestly contrary to
public policy and the due administration
of justice. In the interest of the public it is
of the utmost importance that criminals
should be prosecuted, and that all
criminal proceedings should be instituted
and maintained in the form and manner
prescribed by law; and to permit an
offender to escape the penalties
prescribed by law by the purchase of
immunity from private individuals would
result in a manifest perversion of justice.
Article 1255 of the Civil Code provides
that:
The contracting parties may
make the agreement and
establish the clauses and
conditions which they may dream
advisable, provided they are not
in contravention of law, morals,
or public order.
Article 1275 provides that:
Contracts without consideration
or with an illicit one have no
 effect whatsoever. A
consideration is illicit when it is
contrary to law and good morals.
The order entered in the court below
should, therefore, be affirmed, with the
costs of the instance against the
appellant.
So ordered.
G.R. No. L-47806 April 14, 1941
LEONCIO GABRIEL, petitioner,
vs.
MONTE DE PIEDAD Y CAJA DE
AHARROS and THE COURT OF
APPEALS, respondents.
Vicente J. Francisco and Rody M.
Jalandoni for petitioner.
Cavanna, Jazmines and Tianco for
respondent.
LAUREL, J.:
The herein petitioner was employed as
appraiser of jewels in the pawnshop of
the Monte de Piedad from 1913 up to
May, 1933. On December 13, 1932, he
executed a chattel mortgage to secure
the payment of the deficiencies which
resulted from his erroneous appraisal of
the jewels pawned to the appellee,
amounting to P14,679.07, with six per
cent (6%) interest from said date. In this
chattel mortgage, the appellant promised
to pay to the appellee the sum of P300 a
month until the sum of P14,679.07, with
interest is fully paid. The document was
registered on December 22, 1932
(statement, decision of Court of
Appeals). To recover the aforementioned
sum less what had been paid, amounting
to P3,333.25 or the balance of
P11,345.75, and in case of default to
effectuate the chattel mortgage, an
action was instituted against the
petitioner by the respondent Monte de
Piedad in the Court of First Instance of
Manila (civil case No. 50847). The
petitioner answered, denying generally
and specifically all the specifications
therein, and also denied under oath the
genuiness of the execution of the alleged
chattel mortgage attached thereto. By
way of special defense, he alleged (1)
that the chattel mortgage was a part of a
scheme on the part of the management
of the Monte de Piedad to cover up
supposed losses incurred in its
pawnshop department; (2) that a criminal
action had been instituted at the instance
of the plaintiff against him wherein said
chattel mortgage was presented by the
prosecution with regard his supposed
responsibility as expert appraiser of
jewels of the plaintiff entity but he was
therein acquitted; and (3) that said
acquittal constituted a bar to the civil
case. By way of cross-complaint, the
petitioner alleged (1) that the chattel
mortgage was entered into by E. Marco
for and in behalf of the Monte de Piedad
without being duly authorized to do so by
the latter; (2) that the defendant was
induced, through false representation, to
sign said chattel mortgage against his
will; (3) that the chattel mortgage was
based upon all non-existing subject
matter and non-existing consideration;
and (4) that the chattel mortgage was
null and void ab initio. By way of
counterclaim, the petitioner alleged (1)
that the payments made by for him the
account of the chattel mortgage
amounting to P3,333.25 were made
through deceit and without his consent
and consisted of P300 monthly
deductions from his salary, printing job
for plaintiff done by him in his printing
press, and reimbursement made from
the pocket of E. Marco; (2) that he has
received P356.25 a month as expert
appraiser of the plaintiff and that he was
separated arbitrarily at the end of the
month of May 1933, from notice and
plaintiff failed to pay him his salary for
the month of May, 1933 and the month of
June, 1933, in accordance with law; and
(3) that due to the malicious and
systematic prosecution brought in
criminal case No. 49078 and in the
present case, he suffered damages and
losses both materially and in his
reputation in the amount of at least
P15,000. Wherefore, petitioner, among
others, prayed that the Monte de Piedad
be ordered to return the unlawful
deductions from his monthly
remuneration, to pay his salary for the
months of May and June, 1933, and
damages and losses he suffered
amounting to P15,000.
The lower court rendered judgment in
favor of the Monte de Piedad against the
herein petitioner. Petitioner brought the
case on appeal to the Court of Appeals,
which affirmed the judgment of the lower
court in a decision rendered May 29,
1940. Hence, this petition for review
by certiorari.
Petitioner contends that the provisions of
the chattel mortgage contract by which
he guaranteed to pay the deficiencies
amounting of P14,679.07 are contrary to
law, morals and public policy, and hence,
the chattel mortgage contract is
ineffective and the principal obligation
secured by it is void. A contract is to be
judge by its character, and courts will
look to the substances and not to the
mere form of the transaction. The
freedom of contract is both a
constitutional and statutory right and to
uphold this right, courts should move
with all the necessary caution and
prudence in holding contracts void.
(People vs. Pomar, 46 Phil., 440;
Ferrazzini vs. Gsell, 34 Phil., 697.) At any
rate, courts should not rashly extend the
rule which holds that a contract is void as
against public policy. The term "public
policy" is vague and uncertain in
meaning, floating and changeable in
connotation. It may be said, however,
that, in general, a contract which is
neither prohibited by law nor condemned
by judicial decision, nor contrary to public
morals, contravenes no public policy. In
the absence of express legislation or
constitutional prohibition, a court, in
order to declare a contract void as
against public policy, must find that the
contract as to the consideration or thing
to be done, has a tendency to injure the
public, is against the public good, or
contravenes some established interests
of society, or is inconsistent with sound
policy and good morals, or tends clearly
to undermine the security of individual
rights, whether of personal liability or of
private property. Examining the contract
at bar, we are of the opinion that it does
not in anyway militate against the public
good. Neither does it contravene the
policy of the law nor the established
interests of society.
Petitioner also contends that the chattel
mortgage in question is void because it
lacks consideration. A consideration, in
the legal sense of the word, is some
right, interest, benefit, or advantage
conferred upon the promisor, to which he
is otherwise not lawfully entitled, or any
detriment, prejudice, loss, or
disadvantage suffered or undertaken by
the promisee other than to such as he is
at the time of consent bound to suffer.
We think that there is sufficient
consideration in this contract, for
accounting to the Court of Appeals, "it
has been satisfactorily established that it
was executed voluntarily by the latter to
guarantee the deficiencies resulting from
his erroneous appraisals of the jewels." A
preexisting admitted liability is a good
consideration for a promise. The fact that
the bargain is a hard one will not
deprived it of validity. The exception to
this rule in modern legislation is where
the inadequacy is so gross as to amount
to fraud, oppression or undue influence,
or when statutes require the
consideration to be adequate. We are
not convinced that the instant case falls
within the exception.
Another objection raised is that the
requirement of section 5 of Act No. 1508
has not been complied with. We think
that there is substantial compliance with
the requirements of the Chattel Mortgage
Law on this point. The wording of the
affidavit under discussion, as it appears
from the record, is almost in the same
language of the statute. Likewise, it
appears that it was signed by E. Marco,
who was Director-General of the Monte
de Piedad at the time of the execution of
the contract of chattel mortgage. The
Court of Appeals found that "the
contention that director Marco had no
authority to enter into the agreement is
without merit. It appears that there was
confirmation of Exhibit A by the Consejo
de Administracion of the Monte de
Piedad." Statutory requirements as to
forms or words of the affidavits in chattel
mortgage contracts must be
substantially, but need not be literally,
complied with.
The second assignment of error made by
the petitioner is that the Court of Appeals
erred in not holding that the acquittal of
the petitioner in criminal case No. 49078
of the Court of First Instance of Manila
bars the action to enforce any civil
liability under said chattel mortgage. We
do not need to dwell at length on this
assignment of error, for we find no
reason for distributing the conclusion
reached by the Court of Appeals on this
point:
The appellant claims that his
acquittal in criminal case No.
49078 of the Court of First
Instance of Manila is a bar to the
institution of the present case.
The evidence of record does not
bear out this contention. There is
no identity of subject matter
between the two cases; nor is the
instant case defendant upon the
said criminal action. We agree
with the trial court that the
transactions involved in this case
are different from those involved
in criminal case No. 49078. The
court's finding that the
transactions involved in the case
at the bar commenced in August,
1932, can not be considered
erroneous simply because
Exhibit F-32 of the plaintiff is
allegedly dated August 20, 1931.
Exhibit F-22 can not be given any
probative value, it was undated
during the hearing of the case.
We do not find it necessary to discuss
the last assignment of error.
The petition is hereby dismissed and the
judgment sought to be reviewed is
affirmed, with costs against the
petitioner.
So ordered.
G.R. No. L-40424 June 30, 1980
R. MARINO CORPUS, petitioner,
vs.
COURT OF APPEALS and JUAN T.
DAVID, respondents
MAKASIAR, J.:
This is a petition for review on certiorari
of the decision of the Court of Appeals
promulgated on February 14, 1975 in
CA-G.R. No. 40583-R, affirming the
decision of the court of Instance of
Manila, Branch V. dated september 4,
1967, in Civil Case no. 61802 entitled
"Juan T. David,plaintiff, versus R.
Mariano Corpus, defendant', for the
recovery of attorneys fees for
professional services rendered by the
plaintiff, private respondent herein, to
defendant, petitioner herein.
A
Having been close friends, aside from
being membres Civil Liberties Union,
petitioner Corpus intimately calls
respondent David by his nickname
"Juaning" and the latter addresses the
former simply as "Marino".
The factual setting of this case is stated
in the decision of the lower court, thus:
It appears that in March,
1958, the defendant was
charged administratively
by several employee of
the Central Bank Export
Department of which the
defendant is the director.
The defendant was
represented by Atty.
Rosauro Alvarez.
Pending the investigation
and effective March 18,
1958, he defendant was
suspended from office.
After the investigating
committee found the
administrative charges to
be without merit, and
subsequently
recommended the
immediate reinstatement
of the defendant, the then
Governor of Central
Bank, Miguel Cuaderno,
Sr., recommended that
the defendant be
considered resigned as
on the ground that he
had lost confidence in
him. The Monetary
Board, by a resolution of
July 20, 1959, declared
the defendant as
resigned as of the date of
suspension.
On August 18, 1959, the
defendant, thru Atty.
Alvarez, filed the Court of
First Instance of Manila a
petition for certiorari,
mandamus and quo
warranto with preliminary
mandatory injuction and
damages against Miguel
Cuaderno, Sr., the
Central Bank and Mario
Marcos who was administrative remedies
appointed to the position available to the herein
of the defendant, said defendant.
case having been
docketed as Civil Case On June 24, 1960, Atty.
No. 41226 and assigned Alverez received a copy
to Branch VII presided of the order of dismissal
over by Judge Gregorio It was at this state that
T. Lantin. On September the plaintiff entered into
7, 1959, the respondent the case under
filed a motion to dismiss circumstances about
the petition, alleging which the parties herein
among other grounds, have given divergent
the failure of the versions.
defendant to exhaust,
available administrative According to the plaintiff,
remedies (Exh. X). On six or seven days prior to
September 25, 1959, the the expiration of the
defendant, thru Atty. period for appeal from
Alvarez, filed his the order of dismissal, he
opposition to the said chanced to meet the late
motion. On March 17, Rafael Corpus, father of
1960, during the course the defendant, at the
of the presentation of the Taza de Oro coffee shop.
evidence for the petition After they talked about
for a writ of preliminary the defendant's having
mandatory injunction, lost his case before
Atty. Alvarez manifested Judge Lantin, and
that the defendant was knowing that the plaintiff
abandoning his prayer for and the defendant were
a writ of preliminary both members of the Civil
mandatory injunction and Liberties Union, Rafael
asked for a ruling on the Corpus requested the
motion to dismiss. On plaintiff to go over the
June 14, 1960, Judge case and further said that
Lantin dismissed Civil he would send his son,
Case No. 41226 for the herein defendant, to
failure to exhaust she the plaintiff to find out
what could be done
about the case. The
defendant called up the
plaintiff the following
morning for an
appointment, and the
plaintiff agreed to am him
in the latter's office. At
said conference, the
defendant requested the
plaintiff to handle the
case because Atty.
Alvarez had already been
disenchanted and wanted
to give up the case.
Although at first reluctant
to handle the case, the
plaintiff finally agreed on
condition that he and
Atty. Alverez would
collaborate in the case.
The defendant's version
of how the plaintiff came
into the case is as
follows:
After the order of
dismissal issued by
Judge Lantin was
published in the
newspapers, the plaintiff
sought a conference with
the defendant at Taza de
Oro, but the defendant
told him that he would
rather meet the plaintiff at
the Swiss Inn. Even
before the case was
dismissed the plaintiff
had shown interest in the
same by being present
during the hearings of
said case in the sala of
Judge Lantin When the
plaintiff and the
defendant met at the
Swiss Inn, the plaintiff
handed the defendant a
memorandum prepared
by him on how he can
secure the reversal of the
order of dismissal by
means of a formula
stated in said
memorandum. During the
said occasion the plaintiff
scribbled some notes on
a paper napkin (Exhibit
19). On June 28, 1960,
the defendant wrote the
plaintiff, sending with it a
copy of the order of
Judge Lantin dated June
14, 1960 (Exhibit S
Inasmuch as said letter,
Exhibit S already
mentions the
'memorandum' of the
plaintiff, the defendant
contends that it was not
six or seven days prior to
the expiration of the
period of appeal (which
should be on or about
July 2 or 3, 1960) but on
a date even earlier than
June 28, 1960 that the
plaintiff and the
defendant met together
to discuss the latter's
case.
Laying aside for the
moment the true
circumstances under
which the plaintiff started
rendering professional
services to the
defendant, the
undisputed evidence
shows that on July 7,
1960, the plaintiff filed a
motion for
reconsideration of the
order of dismissal under
the joint signatures of the
plaintiff and Atty. Alverez
(Exhibit B). The plaintiff
argued the said motion
during the hearing
thereof On August 8,
1960, he file a 13-page
'Memorandum of
Authorities in support of
said motion for
reconsideration (Exhibit
C). A 3-page
supplemental
memorandum of
authorities was filed by
the plaintiff on September
6, 1960 (Exhibit D)
On November 15, 1960,
Judge Lantin denied the
motion for
reconsideration. On
November 19, 1960, the
plaintiff perfected the
appeal from the order of
dismissal dated June 14,
1960. For purposes of
said appeal the plaintiff
prepared a 232-page
brief and submitted the
same before the
Supreme Court in Baguio
City on April 20, 1961.
The plaintiff was the one
who orally argued the
case before the Supreme
Court. In connection with
the trip to Baguio for the
said oral argument, the
plaintiff used his car hich
broke down and
necessitated extensive
repairs paid for by the
plaintiff himself.
On March 30, 1962, the
Supreme Court
promulgated its decision
reversing the order of
dismissal and remanding
the case for further
proceedings. On April 18,
1962, after the
promulgation of the
decision of the Supreme
Court reversing the
dismissal of the case the
defendant wrote the
plaintiff the following
letter, Exhibit 'Q'. .
xxxxxxxxx
Dear Juaning
Will you please accept
the attached check in the
amount of TWO
THOUSAND P2,000.00)
PESOS for legal services
in the handling of L-
17860 recently decided
by the Court? I wish I
could give more but as
yu know we were
banking on a SC
decision reinstating me
and reimburse my
backstage I had been
wanting to offer some
token of my appreciation
of your legal fight for and
in my behalf, and it was
only last week that I
received something on
account of a pending
claim.
Looking forward to a
continuation of the
case in the lower court, I
remain
Sincerely yours, Illegible
xxxxxxxxx
In a reply letter dated
April 25, 1962, the
plaintiff returned the
check, explaining said act
as follows:
April 25, 1962
My dear Marino:
Yesterday, I received
your letter of April 18th
with its enclosure. I
wished thank you for your
kind thoughts,
however, please don't
take offense if I have to
return the check. I will
explain.
When I decided to render
professional services in
your case, I was
motivated by the value to
me of the very intimate
relations which you and I
have enjoyed during the
past many years. It was
nor primarily, for a
professional fee.
Although we were not
fortunate to have
obtained a decision in
your case which should
have put an end to it. I
feel that we have reason
to be jubilant over the
outcome, because, the
final favorable outcome
of the case seems
certain irrespective of the
length of time required to
terminate the same.
Your appreciation of the
efforts I have invested in
your case is enough
compensation therefor,
however, when you shall
have obtained a decision
which would have finally
resolved the case in your
favor, remembering me
then will make me
happy. In the meantime,
you will make me happier
by just keeping the
check.
Sincerely yours,
JUANING
xxxxxxxxx
When the case was
remanded for further
proceedings before
Judge Lantin, the
evidence for the On March 31, 1965, the
defendant was presented Supreme Court rendered
by Atty. 'Alvarez with the a decision affirming the
plaintiff cooperating in judgment of the Court of
the same-'On June 24, first Instance of Manila.
1963, Judge Lantin
rendered his decision in On April 19, 1965 the
favor of the defendant plaintiffs law office made
declaring illegal the a formal de command
resolution of the upon the defendant for
Monetary Board of July collection of 50% of the
20, 1959, and ordering amount recovered by the
the defendant's defendant as back
reinstatement and the salaries and other
payment of his back emoluments from the
salaries and allowances - Central Bank (Exhibit N).
The respondents in said This letter was written
Civil Case No. 41226 after the defendant failed
filed a motion for to appear at an
reconsideration which appointment with the
was opposed by the plaintiff so that they could
herein plaintiff. The said go together to the
decision was appealed Central Bank to claim the
by the respondents, as possession of the office
well as by the herein to which the defendant
defendant with respect to was reinstated and after
the award of P5, 000. 00 a confrontation in the
attorney's feed The office of the plaintiff
plaintiff prepared two wherein the plaintiff was
briefs for submission to remanding 50% of the
the Court of Appeals one back salaries and other
as appellee (Exhibit H) emoluments amounting
and the other as to P203,000.00
appellant (Exhibit H-1). recoverable by the
The Court of Appeal defendant. The
however, certified the defendant demurred to
case to the Supreme this demand inasmuch
Court in 1964. as he had plenty of
 outstanding obligations T. David, plaintiff therein, filed a reply in the amount of
and that his tax liability with answer to the counterclaim of P30,000.00 when at most
for said back salaries petitioner. he would be entitled to
was around P90,000.00, only P2,500.00;
and that he expected to After due trial, the lower court rendered
net only around judgment on September 4, 1967, the 3. In not dismissing
P10,000.00 after dispositive portion of which reads: plaintiff's complaint; and
deducting all expenses
and taxes. WHEREFORE, judgment 4. In not awarding
is hereby rendered, damages and attorney's
On the same date, April ordering the defendant to fees to the defendant (p.
19,1965 the plaintiff pay plaintiff the sum of 2, CA Decision, p. 26,
wrote the Governor for of P30,000.00 in the rec.)
Central Bank requesting concept of professional
that the amount fees, and to pay the costs Likewise, private respondent Atty. Juan
representing the sack (pp. 112-113, CA Record T. David, plaintiff therein, appealed to the
salaries of the defendant on Appeal p. 54, rec.) Court of Appeals on October 9, 1967
be made out in two one assigning one error, to wit:
in favor of the defendant After receipt on September 7, 1967 of a
and the other copy of the aforequoted judgment, The lower court erred in
representing the petitioner Marino Corpus, defendant ordering the defendant to
professional fees therein, filed on October 7, 1967 a notice pay the plaintiff only the
equivalent to 50% of the of appeal from said judgment to the sum of P30,000.00 in the
said back salaries being Court of Appeals. In his appeal, he concept of attorney's fees
claimed by the plaintiff alleged that the lower court erred: (p. 1, CA Decision, p. 25,
(Exhibit 8). F to obtain
rec.).
the relief from the
1. In not holding that the
Governor of Central
plaintiff's professional On February 14, 1975, respondent Court
Bank, the plaintiff
services were offered of Appeals promulgated its decision
instituted this action
and rendered affirming in toto the decision of the lower
before this Court on July
gratuitously; court, with costs against petitioner
20, 1965 (Emphasis
supplied). Marino Corpus (Annex A, Petition for
2. Assuming that plaintiff Certiorari, p. 25, rec.)
is entitled to
As therein defendant, herein petitioner
compensation — in Hence, the instant petition for review on
Marino Corpus filed in August 5, 1965 an
holding that he was certiorari, petitioner — contending that
answer with counter-claim. On August
entitled to attorney's fees the respondent Court of Appeals erred in
30, 1965, private respondent Atty. Juan
finding that petitioner accepted private
respondent's services "with the
understanding of both that he (private
respondent) was to be compensated" in
money; and that the fee of private
respondent was contingent (pp. 3 & 5,
Petition for Certiorari, pp. 17 & 19, rec.).
On October 1, 1975, the case was
deemed submitted for decision (p. 177,
rec.), after the parties filed their
respective memoranda.
B reconsideration of the September 19,
On January 31, 1978, private respondent
Atty. Juan T. David filed a petition to
remand the case to the court a quo for
execution of the latter's decision in Civil
Case No. 61802, dated September 4,
1967, alleging that said decision is
already deemed affirmed pursuant to
Section 11(2), Article X of the New
Constitution by reason of the failure of
this Tribunal to decide the case within 18
months. Then on July 7, 1978, another
petition to remand the case to the lower
court to execution was filed by herein
private respondent.
Subsequently, private respondent Atty.
Juan T. David filed with The court a
quo a motion dated September 13, 1978
for the issuance of a writ of execution of
the lower court's decision in the
aforesaid civil case, also invoking
Section 11 (2), Article X of the 1973
Constitution. In an order dated
September 19, 1978, the lower court,
through Judge Jose H. Tecson, directed
the issuance of a writ of execution. The
writ of execution was issued on October
2, 1978 and a notice of garnishment was
also issued n October 13, 1978 to
garnish the bank deposits of herein
petitioner Marino Corpus in the
Commercial Bank and Trust Company,
Makati Branch.
It appears that on October 13, 1978,
herein petitioner filed a motion for
1978 order. Private respondent Atty.
Juan T. David filed on October 19, 1978
an opposition to said motion and herein
petitioner filed a reply on October 30,
1978. The lower court denied said
motion for reconsideration in its over
dated November 7, 1978.
It appears also that in a letter dated
October 18, 1978, herein petitioner
Marino Corpus requested this Court to
inquire into what appears to be an
irregularity in the issuance of the
aforesaid garnishment notice to the
Commercial Bank and Trust Company,
by virtue of which his bank deposits were
garnished and he was prevented from
making withdrawals from his bank
account.
In OUR resolution of November 3, 1978,
WE required private respondent Atty.
Juan T. David and the Commercial Bank
and Trust Company to comment on
petitioner's letter, and for the bank to
explain why it did not honor petitioner's
withdrawals from his bank deposits when
no garnishment order has been issued
by the Supreme Court. This Court further
inquired from the lower court whether it
has issued any garnishment order during
the pendency of the present case.
On November 27, 1978, the Commercial
Bank and Trust Company filed its
comment which was noted in the Court's
resolution of December 4, 1978. In said
resolution, the Court also required Judge
Jose H. Tecson to comply with the
resolution of November 3, 1978,
inquiring as to whether he had issued
any garnishment order, and to explain
why a writ of execution was issued
despite the pendency of the present
case before the Supreme Court.
Further, WE required private respondent
Atty. Juan T. David Lo explain his failure
to file his comment, and to file the same
as directed by the resolution of the Court
dated November 3, 1978. Private
respondent's compliance came on
December 13, 1978, requesting to be
excused from the filing of his comment
because herein petitioner's letter was
unverified. Judge Tecson's compliance
was filed on December 15, 1978, to
which herein petitioner replied on
January 11, 1979.
In OUR resolution dated January 3,
1979, WE set aside the order of Judge
Jose H. Tecson dated September 19,
1978, the writ of execution as well as the
notice of garnishment, and required
private respondent Atty. Juan T. David to
show cause why he should not be cited
for contempt for his failure to file his
comment as directed by the resolution of
the Court dated December 4, 1978, and
for filing a motion for execution knowing
that the case is pending appeal and
review before this Court Likewise, the
Court required Judge Jose H. Tecson to
show cause why he should not be cited
for contempt for issuing an order
directing the issuance of a writ of
execution and for issuing such writ
despite the pendency of the present
case in the Supreme Court.
On January 12, 1979, Judge Jose H.
Tecson filed his compliance explanation
as directed by the aforesaid resolution of
January 3, 1979, while private
respondent Atty. Juan T. David filed on
January 30, 19 79 his compliance and
motion for reconsideration after the Court
has granted him an extension of time to
file his compliance.
Private respondent Atty. Juan T. David
filed on February 28, 1979, a petition
praying that the merits of his compliance
be resolved by the Court en banc.
Subsequently, on March 26, 1979,
another petition was filed by herein
private respondent asking the Chief
Justice and the members of the First
Division to inhibit themselves from
participating in the determination of the
merits of his compliance and for its
merits to be resolved by the Court en
banc.
C Petitioner's act of giving the check for
The main thrust of this petition for review
is whether or not private respondent Atty.
Juan T. David is entitled to attorney's
fees.
Petitioner Marino Corpus contends that
respondent David is not entitled to
attorney's fees because there was no
contract to that effect. On the other hand,
respondent David contends that the
absence of a formal contract for the
payment of the attorney's fees will not
negate the payment thereof because the
contract may be express or implied, and
there was an implied understanding
between the petitioner and private
respondent that the former will pay the
latter attorney's fees when a final
decision shall have been rendered in
favor of the petitioner reinstating him to
-his former position in the Central Bank
and paying his back salaries.
I counsel in the case because of the value
WE find respondent David's position
meritorious. While there was express
agreement between petitioner Corpus
and respondent David as regards
attorney's fees, the facts of the case
support the position of respondent David
that there was at least an implied
agreement for the payment of attorney's
fees.
P2,000.00 through his aforestated April
18, 1962 letter to respondent David
indicates petitioner's commitment to pay
the former attorney's fees, which is
stressed by expressing that "I wish I
could give more but as you know we
were banking on a SC decision
reinstating me and reimbursing my back
salaries This last sentiment constitutes a
promise to pay more upon his
reinstatement and payment of his back
salaries. Petitioner ended his letter that
he was "looking forward to a continuation
of the case in the lower court, ... to which
the certiorari-mandamus-quo warranto
case was remanded by the Supreme
Court for further proceedings.
Moreover, respondent David's letter-reply
of April 25, 1962 confirms the promise of
petitioner Corpus to pay attorney's fees
upon his reinstatement and payment of
back salaries. Said reply states that
respondent David decided to be his
to him of their intimate relationship over
the years and "not, primarily, for a
professional fee." It is patent then, that
respondent David agreed to render
professional services to petitioner
Corpus secondarily for a professional
fee. This is stressed by the last
paragraph of said reply which states that
"however, when you shall have obtained
a decision which would have finally
resolved the case in your favor,
remembering me then will make me
happy. In the meantime, you will make
me happier by just keeping the check."
Thereafter, respondent David continued
to render legal services to petitioner
Corpus, in collaboration with Atty. Alverez
until he and Atty. Alvarez secured the
decision directing petitioner's
reinstatement with back salaries, which
legal services were undisputedly
accepted by, and benefited petitioner.
Moreover, there is no reason to doubt
respondent David's assertion that Don
Rafael Corpus, the late father of
petitioner Corpus, requested respondent
to help his son, whose suit for
reinstatement was dismissed by the
lower court; that pursuant to such
request, respondent conferred in his
office with petitioner, who requested
respondent to handle the case as his
lawyer, Atty. Alvarez, was already
disenchanted and wanted to give up the
case; and that respondent agreed on the
case. It would have been unethical for
respondent to even offer his services
when petitioner had a competent counsel
in the person of Atty. Alvarez, who has
been teaching political, constitutional and
administrative law for over twenty years.
Likewise, it appears that after the
Supreme Court affirmed on March 31,
1965 the order of the lower court
reinstating petitioner Corpus with back
salaries and awarding attorney's fees of
P5,000.00, respondent David made a
written demand on April 19, 1965 upon
petitioner Corpus for the payment of his
attorney's fees in an amount equivalent
to 50% of what was paid as back
salaries (Exh. N p. 75, Folder of Exhibits,
Civil Case No. 61802). Petitioner
Corpus, in his reply dated May 7, 1965 to
the aforesaid written demand, while
disagreeing as to the amount of
attorney's fees demanded, did not
categorically deny the right of
respondent David to attorney's fees but
on the contrary gave the latter the
amount of P2,500.00, which is one-half
(½) of the court-awarded attorney's fees
of P5,000.00, thus impliedly admitting
the right of respondent David to
attorney's fees (Exh. K, p. 57, Folder of
Exhibits, Civil Case No. 61802).
It is further shown by the records that in
the motion filed on March 5, 1975 by
petitioner Corpus before the Court of
Appeals for the reconsideration of its
decision the order of the lower court
granting P30,000.00 attorney's fee's to
respondent David, he admitted that he
was the first to acknowledge that
respondent David was entitled to tion for
legal services rendered when he sent the
chock for P2,000.00 in his letter of April
18, 1962, and he is still to compensate
the respondent but only to the extent of
P10,000.00 (p. 44, rec.). This admission
serves only to further emphasize the fact
that petitioner Corpus was aware all the
time that he was liable to pay attorney's
fees to respondent David which is
therefore inconsistent with his position
that the services of respondent David
were gratuitous, which did not entitle
said respondent to compensation.
It may be advanced that respondent
David may be faulted for not reducing
the agreement for attorney's fees with
petitioner Corpus in writing. However,
this should be viewed from their special
relationship. It appears that both have
been friends for several years and were
co-members of the Civil Liberties Union.
In addition, respondent David and
petitioner's father, the late Rafael
Corpus, were also close friends. Thus,
the absence of an express contract for
attorney's fees between respondent
David and petitioner Corpus is no
argument against the payment of
attorney's fees, considering their close
relationship which signifies mutual trust
and confidence between them.
II
Moreover, the payment of attorney's fees
to respondent David may also be
justified by virtue of the innominate
contract of facio ut des (I do and you
give which is based on the principle that
"no one shall unjustly enrich himself at
the expense of another." innominate
contracts have been elevated to a codal
provision in the New Civil Code by
providing under Article 1307 that such
contracts shall be regulated by the
stipulations of the parties, by the general
provisions or principles of obligations
and contracts, by the rules governing the
most analogous nominate contracts, and
by the customs of the people. The
rationale of this article was stated in the
1903 case of Perez vs. Pomar (2 Phil.
982). In that case, the Court sustained
the claim of plaintiff Perez for payment of
services rendered against defendant
Pomar despite the absence of an
express contract to that effect, thus:
It does not appear that
any written contract was
entered into between the
parties for the
employment of the
plaintiff as interpreter, or
that any other innominate
contract was entered into
but
whethertheplaintiffsservic
esweresolicitedorwhether
theywereoffered to the
defendant for his
assistance, inasmuch as
these services were
accepted and made use
of by the latter, we must
consider that there was a
tacit and mutual consent
as to the rendition of the
services. This gives rise that no one should
to the obligation upon the permitted to enrich
person benefited by the himself to the damage of
services to make another" (emphasis
compensation therefor, supplied; see also
since the bilateral Tolentino, Civil Code of
obligation to render the Philippines, p. 388,
service as interpreter, on Vol. IV 119621, citing
the one hand, and on the Estate of Reguera vs.
other to pay for the Tandra 81 Phil. 404
service rendered, is [1948]; Arroyo vs. Azur
thereby incurred. (Arts. 76 Phil. 493119461; and
1088, 1089, and 1262 of Perez vs. Pomar. 2 Phil.
the Civil Code). 682 [1903]).
xxxxxxxxx WE reiterated this rule in Pacific
Merchandising Corp. vs. Consolacion
... Whether the service Insurance & Surety Co., Inc. (73 SCRA
was solicited or offered, 564 [1976]) citing the case of Perez v.
the fact remains that Pomar, supra thus:
Perez rendered to Pomar
services as interpreter. Where one has rendered
As it does not appear that services to another, and
he did this gratuitously, these services are
the duty is imposed upon accepted by the latter, in
the defendant, he having the absence of proof that
accepted the benefit of the service was rendered
the service, to pay a just gratuitously, it is but just
compensation therefor, that he should pay a
by virtue of the reasonable remuneration
innominate contract of therefor because 'it is a
facio ut des implicitly well-known principle of
established. law, that no one should
be permitted to enrich
xxxxxxxxx himself to the damage of
another (emphasis
supplied).
... because it is a well-
known principle of law
Likewise, under American law, the same C.J.S. 1063 citing 7, 1958 against petitioner Corpus. He
rule obtains (7 CJS 1079; FL Still & Co. Fleming v. Phinizy 134 represented petitioner Corpus in the
v. Powell, 114 So 375). S.E. 814). hearing of said case which was
conducted from May 5, 1958 to October
III While there was no express contract 8, 1958, involving 56 sessions, and this
between the parties for the payment of resulted in the complete exoneration by
There was no contract for contingent fee attorney's fees, the fact remains that the Investigating Committee of all the
between Corpus and respondent David. respondent David rendered legal charges against the petitioner. It appears
Contingent fees depend on an express services to petitioner Corpus and further that after the Monetary Board, in
contract therefor. Thus, "an attorney is therefore as aforestated, is entitled to its resolution of July 20, 1959, declared
not entitled to a percentage of the compensation under the innominate petitioner Corpus as being considered
amount recovered by his client in the contract of facio lit des And such being resigned from the service, Atty. Alvarez
absence of an express contract to that the case, respondent David is entitled to instituted on August 18, 1958 Civil Case
effect" (7 C.J.S. 1063 citing Thurston v. a reasonable compensation. No. 41126 in the Court of First Instance
Travelers Ins. Co., 258 N.W. 66, 128 of Manila for the setting aside of the
Neb. 141). IV aforestated resolution and for the
reinstatement of petitioner Corpus. Atty.
Alvarez actively participated in the
Where services were In determining a reasonable fee to be
proceedings.
rendered without any paid to respondent David as
agreement whatever as compensation for his services, on a
to the amount or terms of quantum meruit basis, it is proper to On the other hand, respondent David
compensation, the consider all the facts and circumstances entered his appearance as counsel for
attorney is not acting obtaining in this case particularly the petitioner Corpus sometime after the
under a contract for a following: dismissal on June 14, 1960 of the
contingent fee, and a aforesaid civil case. From the time he
letter by the attorney to entered his appearance, both he and
The extent of the services rendered by
the client stating that a Atty. Alvarez rendered legal services to
respondent David should be considered
certain sum would be a petitioner Corpus in connection with the
together with the extent of the services of
reasonable amount to appeals of the aforementioned civil case
Petitioner's other counsel, Atty. Rosauro
charge for his services to the Court of Appeals and to the
Alvarez, It is undisputed that Atty.
and adding that a rate of Supreme Court. The records disclose
Rosauro Alvarez had rendered legal
not less than five percent that in connection with the appeal from
services as principal counsel for more
nor more than ten would the June 14, 1960 order of dismissal,
shall six (6) years while respondent
be reasonable and respondent David prepared and signed
David has rendered legal services as
customary does not pleadings although the same were made
collaborating counsel for almost four (4)
convert the original for and on behalf of Atty. Alvarez and
years. It appears that Atty. Alvarez
agreement into a contract himself And it is not far-fetched to
started to render legal services after the
for a contingent fee (7 conclude that all appearances were
administrative case was filed on March
made by both counsels considering that
Atty. Alverez was the principal counsel
and respondent David was the
collaborating counsel. Thus, when the
case was called for oral argument on
April 20, 1961 before the Supreme
Court, respondent David and Atty.
Alverez appeared for petitioner Corpus
although it was David who orally argued
the case.
When the Supreme Court, in its decision
of March 30, 1962, remanded the case
to the lower court for further it was Atty.
Alverez who conducted the presentation
of evidence while respondent David
assisted him The records also review
that respondent David prepared and
signed for Atty. Alverez and himself.
certain pleadings, including a
memorandum. Moreover, after the lower
court rendered judgment on June 2 4,
1963 ordering the reinstatement and
payment of back salaries to petitioner
Corpus and awarding him P5,000.00 by
way of attorney's fees, both petitioner
Corpus and the respondents in said case
appealed the judgment. At that stage,
respondent David again prepared and
signed for Atty. Alvarez and himself, the
necessary pleadings, including two
appeal briefs. And in addition, he made
oral arguments in the hearings of
motions filed in the lower court before
the records of the case were forwarded
to the appellate court. Furthermore, while
it appears that it was Atty. Alvarez who
laid down the basic theory and
foundation of the case of petitioner
Corpus in the administrative case and
later in the civil case, respondent David
also advanced legal propositions.
Petitioner Corpus contends that said
legal propositions were invariably
rejected by the courts. This is, however,
of no moment because the fact remains
that respondent David faithfully rendered
legal services for the success of
petitioner's case.
The benefits secured for petitioner
Corpus may also be considered in
ascertaining what should be the
compensation of respondent David. It
cannot be denied that both Atty. Alvarez
and respondent David were instrumental
in obtaining substantial benefits for
petitioner Corpus which consisted
primarily of his reinstatement, recovery
of back salaries and the vindication of his
honor and reputation. But, note should
also be taken of the fact that respondent
David came at the crucial stage when
the case of petitioner Corpus was
dismissed by the lower court.
Atty. Rosauro Alvarez admittedly was
paid by petitioner Corpus the sum of
P20,000.00 or at most P22,500.00
(T.s.n., Jan. 11, 1967, pp. 34-35; T.s.n.,
Feb. 10, 1967, pp. 48-49). On the other
hand, petitioner Corpus, after WE
suggested on August 15, 1975 that they
settle the case amicably has, in his
September 15, 1975 pleading filed
before this Court (p. 166, rec.),
manifested his willingness to pay
P10,000.00 for the services of
respondent David. However, respondent
David has not manifested his intention to
accept the offer.
In his complaint in the instant case, he
asked for P75,000.00 as his attorney's
fees. The records reveal that petitioner
Corpus actually received only
P150,158.50 as back salaries and
emoluments after deducting taxes as
well as retirement and life insurance
premiums due to the GSIS. The amount
thus claimed by respondent David
represents 50% of the amount actually
received by petitioner Corpus. The lower
court, however, awarded only
P30,000.00 and it was affirmed by the
Court of Appeals.
Considering the aforestated
circumstances, WE are of the opinion
that the reasonable compensation of
respondent David should be P20,000.00.
V
WE find private respondent Juan T.
David and Judge Jose H. Tecson,
Presiding Judge of the Court of First
Instance of Manila, Branch V, guilty of
contempt of court.
Respondent David filed on or about
September 13, 1978 a motion with the
court a quo for the issuance of a writ of
execution to enforce its decision in Civil
Case No 61802, subject of the present
petition, knowing fully well that it was
then still pending appeal before this
Court. In addition, no certification that the
aforesaid decision is already deemed
affirmed had as yet been issued by the
Chief Justice pursuant to Section 11,
paragraph 2, Article X of the New
Constitution; because respondent
David's petitions filed with the Supreme
Court on January 31, 1978 and on July
7, 1978 to remand the case to the trial
court for execution and for the issuance
of such certification had not yet been
acted upon as the same were still
pending consideration by this Court. In
fact, this Court has not as of this time
made any pronouncement on the
aforesaid provision of the New
Constitution.
This act of respondent David constitutes
disrespect to, as well as disregard of, the
authority of this Court as the final arbiter
of all cases duly appealed to it,
especially constitutional questions. It
must be emphasized that as a member
of the Philippine Bar he is required "to
observe and maintain the respect due to
the court of justice and judicial officers"
(Section 20 (b), 138 of the Revised
Rules of Court). Likewise, Canon 1 of.
the Canons of Professional Ethic
expressly provide that: "It is the duty of
the lawyer to maintain towards the
Courts a respectful attitude, not for the
sake of the temporary incumbent of the
judgement office, but for the
maintenance of its supreme importance."
And this Court had stressed that "the
duty of an attorney to the courts 'can only
be maintained by rendering no service
involving any disrespect to the judicial
office which he is bound to uphold'"
(Rheem of the Philippines v. Ferrer, 20
SCRA 441, 444 [1967] citing the case of
Lualhati v. Albert, 67 Phil. 86, 92 [1932]).
Moreover, this Court takes judicial notice
of the fact that herein respondent David,
in the previous case of Integrated
Construction Services, Inc. and
Engineering Construction, Inc. v. Relova
(65 SCRA 638 [1975]), had sent letters
addressed to the then Chief Justice
Querube C. Makalintal and later to the
late Chief Justice Fred Ruiz Castro,
requesting for the issuance of
certification on the basis of the
aforementioned provision of the New
Constitution which were not given due
consideration. And knowing this,
respondent David should have been
more prudent and cautious in g with the
court a quo any motion for execution.
Furthermore, there was even a taint of
arrogance and defiance on the part of
respondent David in not filing his
comment to the letter- complaint dated
October 18, 1978 of petitioner Corpus,
as required by this Court in its November
3, 1978 and December 4,1978
resolutions which were duly received by
him, and instead, he sent on December
13, 1978 a letter requesting to be
excused from the filing of his comment
on the lame excuse that petitioner's
letter-complaint was not verified.
On the part of Judge Jose H. Tecson, his
presumptuous and precipitate act of
granting the motion for execution of dent
David likewise constitutes disrespect to,
as well as of, the authority of this Court
because he know for a that the case was
still pending apply as the had not yet
been remanded to it and that no
certification has been issued by this
Court. As a judicial officer, Judge Tecson
is charged with the knowledge of the fact
that this Court has yet to make a definite
pronouncement on Section 11,
paragraph 2, Article X of the New
Constitution. Judge Tecson should know
that only the Supreme Court can
authoritatively interpret Section 11 (2) of
Article X of the 1973 Constitution. Yet,
Judge Tecson assumed the role of the
Highest Court of the Land. He should be
reminded of what Justice Laurel
speaking for the Court, has said
in People v. Vera (65 Phil 56, 82 [1937]):
A becoming modesty of
inferior courts demands
conscious realization of
the position that they
occupy in the interrelation
and operation of the
integrated judged system
of the nation.
It may also be added that the
improvident act of respondent David in
firing the motion for execution and the
precipitate act of Judge Tecson in issuing
the writ of execution are intriguing as
they invite suspicion that there was
connivance between the two.
Respondent David would seem to imply
that his claim for attorney's fees should
be given preference over the other cams
now pending in this Court. Certainly,
such should not be the case because
there are cases which by their nature
require immediate or preferential
attention by this Tribunal like habeas
corpus cases, labor cases and c cases
involving death sentence, let alone cases
involving properties and property rights
of poor litigants pending decision or
resolution long before the New
Constitution of 1973. Nobility and exempt
forbearance were expected of Atty.
David, who is old and experienced in the
practice of the legal profession, from
which he has derived a great measure.
of economic well-being and
independence
Consequently, the filing of the motion for
immediate tion and the issuance of the
writ of execution constitute a defiance
and usurpation of the jurisdiction of the
Supreme Court. As a disciplinary
measure for the preservation and
vindication of the dignity of this Supreme
Tribunal respondent Atty. Juan T. David
should be REPRIMANDED for his
precipitate action of filing a motion for
execution as well as Judge Jose H.
Tecson for his improvident issuance of a
writ of execution while the case is
pending appeal before the Supreme
Court, and a repetition of said acts would
be dealt with more severely.
WHEREFORE, PETITIONER R.
MARINO CORPUS IS HEREBY
DIRECTED TO PAY RESPONDENT
ATTY. JUAN T. DAVID THE SUM OF
TWENTY THOUSAND (P20,000.00)
PESOS AS ATTORNEY'S FEES.
RESPONDENT ATTY. JUAN T. DAVID
AND JUDGE JOSE H. TECSON OF
THE COURT OF FIRST INSTANCE OF
MANILA, BRANCH V, ARE HEREBY
DECLARED GUILTY OF CONTEMPT
AND ARE HEREBY REPRIMANDED,
WITH A WARNING THAT REPETITION
TION OF THE SAME OR SIMILAR
ACTS WILL BE DEALT WITH MORE
SEVERELY.
COSTS AGAINST PETITIONER.
SO ORDERED.
G.R. No. L-18841 January 27,
1969
REPUBLIC OF THE
PHILIPPINES, plaintiff-appellant,
vs.
PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, defendant-
appellant.
Office of the Solicitor General Arturo A.
Alafriz, Assistant Solicitor General
Antonio A. Torres and Solicitor Camilo D.
Quiason for plaintiff-appellant.
Ponce Enrile, Siguion Reyna, Montecillo
and Belo for defendant-appellant.
REYES, J.B.L., J.:
Direct appeals, upon a joint record on
appeal, by both the plaintiff and the
defendant from the dismissal, after
hearing, by the Court of First Instance of
Manila, in its Civil Case No. 35805, of
their respective complaint and
counterclaims, but making permanent a
preliminary mandatory injunction
theretofore issued against the defendant
on the interconnection of telephone
facilities owned and operated by said
parties.
The plaintiff, Republic of the
Philippines, is a political entity exercising
governmental powers through its
branches and instrumentalities, one of
which is the Bureau of
Telecommunications. That office was
created on 1 July 1947, under Executive
Order No. 94, with the following powers
and duties, in addition to certain powers
and duties formerly vested in the Director
of Posts:
1awphil.ñêt
 SEC. 79. The Bureau of
Telecommunications shall exercise the
following powers and duties:
(a) To operate and maintain
existing wire-telegraph and radio-
telegraph offices, stations, and
facilities, and those to be
established to restore the pre-
war telecommunication service
under the Bureau of Posts, as
well as such additional offices or
stations as may hereafter be
established to provide
telecommunication service in
places requiring such service;
(b) To investigate, consolidate,
negotiate for, operate and
maintain wire-telephone or radio
telephone communication service
throughout the Philippines by
utilizing such existing facilities in
cities, towns, and provinces as
may be found feasible and under
such terms and conditions or
arrangements with the present
owners or operators thereof as
may be agreed upon to the
satisfaction of all concerned;
(c) To prescribe, subject to
approval by the Department
Head, equitable rates of charges
for messages handled by the
system and/or for time calls and
other services that may be
rendered by said system;
(d) To establish and maintain
coastal stations to serve ships at
sea or aircrafts and, when public
interest so requires, to engage in
the international
telecommunication service in
agreement with other countries
desiring to establish such service
with the Republic of the
Philippines; and
(e) To abide by all existing rules
and regulations prescribed by the
International Telecommunication
Convention relative to the
accounting, disposition and
exchange of messages handled
in the international service, and
those that may hereafter be
promulgated by said convention
and adhered to by the
Government of the Republic of
the Philippines. 1
The defendant, Philippine Long
Distance Telephone Company (PLDT for
short), is a public service corporation
holding a legislative franchise, Act 3426,
as amended by Commonwealth Act 407,
to install, operate and maintain a
telephone system throughout the
Philippines and to carry on the business
of electrical transmission of messages
within the Philippines and between the
Philippines and the telephone systems of
other countries. 2 The RCA
Communications, Inc., (which is not a
party to the present case but has
contractual relations with the parties) is
an American corporation authorized to
transact business in the Philippines and
is the grantee, by assignment, of a
legislative franchise to operate a
domestic station for the reception and
transmission of long distance wireless
messages (Act 2178) and to operate
broadcasting and radio-telephone and
radio-telegraphic communications
services (Act 3180). 3
Sometime in 1933, the defendant,
PLDT, and the RCA Communications,
Inc., entered into an agreement whereby
telephone messages, coming from the
United States and received by RCA's
domestic station, could automatically be
transferred to the lines of PLDT; and
vice-versa, for calls collected by the
PLDT for transmission from the
Philippines to the United States. The
contracting parties agreed to divide the
tolls, as follows: 25% to PLDT and 75%
to RCA. The sharing was amended in
1941 to 30% for PLDT and 70% for RCA,
and again amended in 1947 to a 50-50
basis. The arrangement was later
extended to radio-telephone messages
to and from European and Asiatic
countries. Their contract contained a
stipulation that either party could
terminate it on a 24-month notice to the
other. 4 On 2 February 1956, PLDT gave
notice to RCA to terminate their contract
on 2 February 1958. 5
 Soon after its creation in 1947, the
Bureau of Telecommunications set up its
own Government Telephone System by
utilizing its own appropriation and
equipment and by renting trunk lines of
the PLDT to enable government offices
to call private parties. 6 Its application for
the use of these trunk lines was in the
usual form of applications for telephone
service, containing a statement, above
the signature of the applicant, that the
latter will abide by the rules and
regulations of the PLDT which are on file
with the Public Service
Commission. 7 One of the many rules
prohibits the public use of the service
furnished the telephone subscriber for
his private use. 8 The Bureau has
extended its services to the general
public since 1948, 9 using the same trunk
lines owned by, and rented from, the
PLDT, and prescribing its (the Bureau's)
own schedule of rates. 10 Through these
trunk lines, a Government Telephone
System (GTS) subscriber could make a
call to a PLDT subscriber in the same
way that the latter could make a call to
the former.
On 5 March 1958, the plaintiff, through
the Director of Telecommunications,
entered into an agreement with RCA
Communications, Inc., for a joint
overseas telephone service whereby the
Bureau would convey radio-telephone
overseas calls received by RCA's station
to and from local residents. 11 Actually,
they inaugurated this joint operation on 2
February 1958, under a "provisional"
agreement. 12
On 7 April 1958, the defendant
Philippine Long Distance Telephone
Company, complained to the Bureau of
Telecommunications that said bureau
was violating the conditions under which
their Private Branch Exchange (PBX) is
inter-connected with the PLDT's facilities,
referring to the rented trunk lines, for the
Bureau had used the trunk lines not only
for the use of government offices but
even to serve private persons or the
general public, in competition with the
business of the PLDT; and gave notice
that if said violations were not stopped
by midnight of 12 April 1958, the PLDT
would sever the telephone
connections. 13 When the PLDT received
no reply, it disconnected the trunk lines
being rented by the Bureau at midnight
on 12 April 1958. 14 The result was the
isolation of the Philippines, on telephone
services, from the rest of the world,
except the United States. 15
At that time, the Bureau was
maintaining 5,000 telephones and had
5,000 pending applications for telephone
connection. 16 The PLDT was also
maintaining 60,000 telephones and had
also 20,000 pending
applications. 17 Through the years, neither
of them has been able to fill up the
demand for telephone service.
The Bureau of Telecommunications had
proposed to the PLDT on 8 January
1958 that both enter into an
interconnecting agreement, with the
government paying (on a call basis) for
all calls passing through the
interconnecting facilities from the
Government Telephone System to the
PLDT. 18 The PLDT replied that it was
willing to enter into an agreement on
overseas telephone service to Europe
and Asian countries provided that the
Bureau would submit to the jurisdiction
and regulations of the Public Service
Commission and in consideration of 37
1/2% of the gross revenues. 19 In its
memorandum in lieu of oral argument in
this Court dated 9 February 1964, on
page 8, the defendant reduced its offer to
33 1/3 % (1/3) as its share in the
overseas telephone service. The
proposals were not accepted by either
party.
On 12 April 1958, plaintiff Republic
commenced suit against the defendant,
Philippine Long Distance Telephone
Company, in the Court of First Instance
of Manila (Civil Case No. 35805), praying
in its complaint for judgment
commanding the PLDT to execute a
contract with plaintiff, through the
Bureau, for the use of the facilities of
defendant's telephone system
throughout the Philippines under such
terms and conditions as the court might
consider reasonable, and for a writ of
preliminary injunction against the
defendant company to restrain the (1) to forthwith reconnect and
severance of the existing telephone restore the seventy-eight (78)
connections and/or restore those trunk lines that it has
severed. disconnected between the
facilities of the Government
Acting on the application of the plaintiff, Telephone System, including its
and on the ground that the severance of overseas telephone services,
telephone connections by the defendant and the facilities of defendant; (2)
company would isolate the Philippines to refrain from carrying into effect
from other countries, the court a quo, on its threat to sever the existing
14 April 1958, issued an order for the telephone communication
defendant: between the Bureau of
Telecommunications and
defendant, and not to make
connection over its telephone
system of telephone calls coming
to the Philippines from foreign
countries through the said
Bureau's telephone facilities and
the radio facilities of RCA
Communications, Inc.; and (3) to
accept and connect through its
telephone system all such
telephone calls coming to the
Philippines from foreign countries
— until further order of this Court.
On 28 April 1958, the defendant
company filed its answer, with
counterclaims.
It denied any obligation on its part to
execute a contrary of services with the
Bureau of Telecommunications;
contested the jurisdiction of the Court of
First Instance to compel it to enter into
interconnecting agreements, and averred
that it was justified to disconnect the
trunk lines heretofore leased to the
Bureau of Telecommunications under the
existing agreement because its facilities
were being used in fraud of its rights.
PLDT further claimed that the Bureau
was engaging in commercial telephone
operations in excess of authority, in
competition with, and to the prejudice of,
the PLDT, using defendants own
telephone poles, without proper
accounting of revenues.
After trial, the lower court rendered
judgment that it could not compel the
PLDT to enter into an agreement with the
Bureau because the parties were not in
agreement; that under Executive Order
94, establishing the Bureau of
Telecommunications, said Bureau was
not limited to servicing government
offices alone, nor was there any in the
contract of lease of the trunk lines, since
the PLDT knew, or ought to have known,
at the time that their use by the Bureau
was to be public throughout the Islands,
hence the Bureau was neither guilty of
fraud, abuse, or misuse of the poles of
the PLDT; and, in view of serious public
prejudice that would result from the
disconnection of the trunk lines, declared
the preliminary injunction permanent,
although it dismissed both the complaint
and the counterclaims.
Both parties appealed.
Taking up first the appeal of the
Republic, the latter complains of the
action of the trial court in dismissing the
part of its complaint seeking to compel
the defendant to enter into an
interconnecting contract with it, because
the parties could not agree on the terms
and conditions of the interconnection,
and of its refusal to fix the terms and
conditions therefor.
We agree with the court below that
parties can not be coerced to enter into a
contract where no agreement is had
between them as to the principal terms
and conditions of the contract. Freedom
to stipulate such terms and conditions is
of the essence of our contractual system,
and by express provision of the statute, a
contract may be annulled if tainted by
violence, intimidation, or undue influence
(Articles 1306, 1336, 1337, Civil Code of
the Philippines). But the court a quo has
apparently overlooked that while the
Republic may not compel the PLDT to
celebrate a contract with it, the Republic
may, in the exercise of the sovereign
power of eminent domain, require the
telephone company to permit
interconnection of the government
telephone system and that of the PLDT,
as the needs of the government service
may require, subject to the payment of
just compensation to be determined by
the court. Nominally, of course, the
power of eminent domain results in the
taking or appropriation of title to, and
possession of, the expropriated property;
but no cogent reason appears why the
said power may not be availed of to
impose only a burden upon the owner of
condemned property, without loss of title
and possession. It is unquestionable that
real property may, through expropriation,
be subjected to an easement of right of
way. The use of the PLDT's lines and
services to allow inter-service connection
between both telephone systems is not
much different. In either case private
property is subjected to a burden for
public use and benefit. If, under section
6, Article XIII, of the Constitution, the
State may, in the interest of national
welfare, transfer utilities to public
ownership upon payment of just
compensation, there is no reason why
the State may not require a public utility
to render services in the general interest,
provided just compensation is paid
therefor. Ultimately, the beneficiary of the
interconnecting service would be the
users of both telephone systems, so that
the condemnation would be for public
use.
The Bureau of Telecommunications,
under section 78 (b) of Executive Order
No. 94, may operate and maintain wire
telephone or radio telephone
communications throughout the
Philippines by utilizing existing facilities
in cities, towns, and provinces under
such terms and conditions or
arrangement with present owners or
operators as may be agreed upon to the
satisfaction of all concerned; but there is
nothing in this section that would exclude
resort to condemnation proceedings
where unreasonable or unjust terms and
conditions are exacted, to the extent of
crippling or seriously hampering the
operations of said Bureau.
A perusal of the complaint shows that
the Republic's cause of action is
predicated upon the radio telephonic
isolation of the Bureau's facilities from
the outside world if the severance of
interconnection were to be carried out by
the PLDT, thereby preventing the Bureau
of Telecommunications from properly
discharging its functions, to the prejudice
of the general public. Save for the prayer
to compel the PLDT to enter into a
contract (and the prayer is no essential
part of the pleading), the averments
make out a case for compulsory
rendering of inter-connecting services by
the telephone company upon such terms
and conditions as the court may
determine to be just. And since the lower
court found that both parties "are
practically at one that defendant (PLDT)
is entitled to reasonable compensation
from plaintiff for the reasonable use of
the former's telephone facilities"
(Decision, Record on Appeal, page 224),
the lower court should have proceeded
to treat the case as one of condemnation
of such services independently of
contract and proceeded to determine the
just and reasonable compensation for
the same, instead of dismissing the
petition.
 This view we have taken of the true
nature of the Republic's petition
necessarily results in overruling the plea
of defendant-appellant PLDT that the
court of first instance had no jurisdiction
to entertain the petition and that the
proper forum for the action was the
Public Service Commission. That body,
under the law, has no authority to pass
upon actions for the taking of private
property under the sovereign right of
eminent domain. Furthermore, while the
defendant telephone company is a public
utility corporation whose franchise,
equipment and other properties are
under the jurisdiction, supervision and
control of the Public Service Commission
(Sec. 13, Public Service Act), yet the
plaintiff's telecommunications network is
a public service owned by the Republic
and operated by an instrumentality of the
National Government, hence exempt,
under Section 14 of the Public Service
Act, from such jurisdiction, supervision
and control. The Bureau of
Telecommunications was created in
pursuance of a state policy reorganizing
the government offices —
to meet the exigencies
attendant upon the establishment
of the free and independent
Government of the Republic of
the Philippines, and for the
purpose of promoting simplicity,
economy and efficiency in its
operation (Section 1, Republic
Act No. 51) —
and the determination of state policy is
not vested in the Commission (Utilities
Com. vs. Bartonville Bus Line, 290 Ill.
574; 124 N.E. 373).
Defendant PLDT, as appellant,
contends that the court below was in
error in not holding that the Bureau of
Telecommunications was not
empowered to engage in commercial
telephone business, and in ruling that
said defendant was not justified in
disconnecting the telephone trunk lines it
had previously leased to the Bureau. We
find that the court a quo ruled correctly in
rejecting both assertions.
Executive Order No. 94, Series of 1947,
reorganizing the Bureau of
Telecommunications, expressly
empowered the latter in its Section 79,
subsection (b), to "negotiate for, operate
and maintain wire telephone or radio
telephone communication service
throughout the Philippines", and, in
subsection (c), "to prescribe, subject to
approval by the Department Head,
equitable rates of charges for messages
handled by the system and/or for time
calls and other services that may be
rendered by the system". Nothing in
these provisions limits the Bureau to
non-commercial activities or prevents it
from serving the general public. It may
be that in its original prospectuses the
Bureau officials had stated that the
service would be limited to government
offices: but such limitations could not
block future expansion of the system, as
authorized by the terms of the Executive
Order, nor could the officials of the
Bureau bind the Government not to
engage in services that are authorized
by law. It is a well-known rule that
erroneous application and enforcement
of the law by public officers do not block
subsequent correct application of the
statute (PLDT vs. Collector of Internal
Revenue, 90 Phil. 676), and that the
Government is never estopped by
mistake or error on the part of its agents
(Pineda vs. Court of First Instance of
Tayabas, 52 Phil. 803, 807; Benguet
Consolidated Mining Co. vs. Pineda, 98
Phil. 711, 724).
The theses that the Bureau's
commercial services constituted unfair
competition, and that the Bureau was
guilty of fraud and abuse under its
contract, are, likewise, untenable.
First, the competition is merely
hypothetical, the demand for telephone
service being very much more than the
supposed competitors can supply. As
previously noted, the PLDT had 20,000
pending applications at the time, and the
Bureau had another 5,000. The
telephone company's inability to meet
the demands for service are notorious
even now. Second, the charter of the
defendant expressly provides:
SEC. 14. The rights herein
granted shall not be exclusive,
 and the rights and power to grant
to any corporation, association or
person other than the grantee
franchise for the telephone or
electrical transmission of
message or signals shall not be
impaired or affected by the
granting of this franchise: — (Act
3436)
And third, as the trial court correctly
stated, "when the Bureau of
Telecommunications subscribed to the
trunk lines, defendant knew or should
have known that their use by the
subscriber was more or less public and
all embracing in nature, that is,
throughout the Philippines, if not abroad"
(Decision, Record on Appeal, page 216).
The acceptance by the defendant of the
payment of rentals, despite its
knowledge that the plaintiff had extended
the use of the trunk lines to commercial
purposes, continuously since 1948,
implies assent by the defendant to such
extended use. Since this relationship has
been maintained for a long time and the
public has patronized both telephone
systems, and their interconnection is to
the public convenience, it is too late for
the defendant to claim misuse of its
facilities, and it is not now at liberty to
unilaterally sever the physical connection
of the trunk lines.
..., but there is high authority for
the position that, when such
physical connection has been
voluntarily made, under a fair and
workable arrangement and
guaranteed by contract and the
continuous line has come to be
patronized and established as a
great public convenience, such
connection shall not in breach of
the agreement be severed by
one of the parties. In that case,
the public is held to have such an
interest in the arrangement that
its rights must receive due
consideration. This position finds
approval in State ex rel. vs.
Cadwaller, 172 Ind. 619, 636, 87
N.E. 650, and is stated in the
elaborate and learned opinion of
Chief Justice Myers as follows:
"Such physical connection
cannot be required as of right,
but if such connection is
voluntarily made by contract, as
is here alleged to be the case, so
that the public acquires an
interest in its continuance, the act
of the parties in making such
connection is equivalent to a
declaration of a purpose to waive
the primary right of
independence, and it imposes
upon the property such a public
status that it may not be
disregarded" — citing Mahan v.
Mich. Tel. Co., 132 Mich. 242, 93
N.W. 629, and the reasons upon
which it is in part made to rest
are referred to in the same
opinion, as follows: "Where
private property is by the consent
of the owner invested with a
public interest or privilege for the
benefit of the public, the owner
can no longer deal with it as
private property only, but must
hold it subject to the right of the
public in the exercise of that
public interest or privilege
conferred for their benefit." Allnut
v. Inglis (1810) 12 East, 527. The
doctrine of this early case is the
acknowledged law. (Clinton-Dunn
Tel. Co. v. Carolina Tel. & Tel.
Co., 74 S.E. 636, 638).
It is clear that the main reason for the
objection of the PLDT lies in the fact that
said appellant did not expect that the
Bureau's telephone system would
expand with such rapidity as it has done;
but this expansion is no ground for the
discontinuance of the service agreed
upon.
The last issue urged by the PLDT as
appellant is its right to compensation for
the use of its poles for bearing telephone
wires of the Bureau of
Telecommunications. Admitting that
section 19 of the PLDT charter reserves
to the Government —
the privilege without
compensation of using the poles
of the grantee to attach one ten-
pin cross-arm, and to install,
 maintain and operate wires of its
telegraph system
thereon; Provided, however, That
the Bureau of Posts shall have
the right to place additional
cross-arms and wires on the
poles of the grantee by paying a
compensation, the rate of which
is to be agreed upon by the
Director of Posts and the
grantee; —
the defendant counterclaimed for
P8,772.00 for the use of its poles by the
plaintiff, contending that what was
allowed free use, under the aforequoted
provision, was one ten-pin cross-arm
attachment and only for plaintiff's
telegraph system, not for its telephone
system; that said section could not refer
to the plaintiff's telephone system,
because it did not have such telephone
system when defendant acquired its
franchise. The implication of the
argument is that plaintiff has to pay for
the use of defendant's poles if such use
is for plaintiff's telephone system and has
to pay also if it attaches more than one
(1) ten-pin cross-arm for telegraphic
purposes.
As there is no proof that the telephone
wires strain the poles of the PLDT more
than the telegraph wires, nor that they
cause more damage than the wires of
the telegraph system, or that the
Government has attached to the poles
more than one ten-pin cross-arm as
permitted by the PLDT charter, we see dismisses the petition of the Republic of
no point in this assignment of error. So the Philippines to compel the Philippine
long as the burden to be borne by the Long Distance Telephone Company to
PLDT poles is not increased, we see no continue servicing the Government
reason why the reservation in favor of telephone system upon such terms, and
the telegraph wires of the government for a compensation, that the trial court
should not be extended to its telephone may determine to be just, including the
lines, any time that the government period elapsed from the filing of the
decided to engage also in this kind of original complaint or petition. And for this
communication. purpose, the records are ordered
returned to the court of origin for further
In the ultimate analysis, the true hearings and other proceedings not
objection of the PLDT to continue the link inconsistent with this opinion.
between its network and that of the
Government is that the latter competes No costs.
"parasitically" (sic) with its own telephone
services. Considering, however, that the
PLDT franchise is non-exclusive; that it is
well-known that defendant PLDT is G.R. No. 96107 June 19, 1995
unable to adequately cope with the
current demands for telephone service,
CORAZON JALBUENA DE
as shown by the number of pending
LEON, petitioner,
applications therefor; and that the
vs.
PLDT's right to just compensation for the
HON. COURT OF APPEALS (SPECIAL
services rendered to the Government
SECOND DIVISION) and ULDARICO
telephone system and its users is herein
INAYAN, respondents.
recognized and preserved, the
objections of defendant-appellant are
without merit. To uphold the PLDT's
contention is to subordinate the needs of
the general public to the right of the ROMERO, J.:
PLDT to derive profit from the future
expansion of its services under its non-
exclusive franchise.
WHEREFORE, the decision of the
Court of First Instance, now under
appeal, is affirmed, except in so far as it
In this petition for review, we are asked
to set aside the amended decision of the
Court of Appeals dated November 8,
1990 in "Corazon Jalbuena de Leon v.
Uldarico Inayan," (CA-G.R. CV No.
19777) which reversed its original
1
decision dated May 24, 1990. 2
The subject property in the case at
bench involves two parcels of irrigated
riceland covering an area of 117,785
square meters located in Barangays
Guintas and Bingke, Napnod, Leganes,
Iloilo. Jesus Jalbuena, the owner of the
land, entered into a verbal lease contract
in 1970 with Uldarico Inayan, for one
year renewable for the same period.
Inayan, private respondent herein, bound
himself to deliver 252 cavans of palay
each year as rental to be paid during the
first ten days of January. Private
respondent who was a godson of Jesus
Jalbuena, was allowed to continue with
the lease from year to year.
Petitioner Corazon Jalbuena de Leon is
the daughter of Jesus Jalbuena and the
transferee of the subject property.
Although private respondent cultivated
the subject property through hired men,
the cavans of palay were paid annually
until 1983 when Inayan ceased paying
the agreed rental and instead, asserted
dominion over the land. When asked by
the petitioner to vacate the land, he
refused to do so, prompting the latter to
bring an action in court.
In March 1984, herein petitioner filed a terminated due to
complaint against private respondent defendant's failure to pay
before the Regional Trial Court of Iloilo his rentals from 1983 up
City for "Termination of Civil Law Lease; to the present;
Recovery of Possession, Recovery of
Unpaid Rentals and Damages." 2. Ordering defendant
Uldarico Inayan and his
Private respondent, in his Answer, privies and successors-
claimed that the land had been tenanted in-interest to immediately
by his father since 1938 and that he has vacate the land subject-
already been issued Certificates of Land matter of this complaint
Transfer (CLT) for the subject property. and to return possession
These Certificates of Land Transfer were thereof to plaintiff;
subsequently canceled by the then
Ministry of Agrarian Reform on 3. Ordering defendant
November 22, 1983 upon a finding that Uldarico Inayan to pay
said lands were owned by Jesus plaintiff Corazon
Jalbuena and that the CLTs were Jalbuena de Leon, one
erroneously issued. 3
thousand two hundred
sixty (1,260) cavans of
On April 11, 1984, the lower court issued palay representing
an order adopting the procedure in unpaid rentals from 1983
agrarian cases. up to 1987, or its money
equivalent computed at
The dispositive portion of the trial court's the current market price
decision dated February 26, 1988 in of palay, less whatever
favor of petitioner De Leon reads: amount may have been
deposited by defendant
WHEREFORE, Premises with the Court during the
considered, judgment is pendency of this case,
hereby rendered: which deposit should be
released in favor of
plaintiff;
1. Declaring the lease
contract between plaintiff
and defendant as a civil 4. Ordering defendant
law lease, and that the Inayan to pay to plaintiff
same has already been Jalbuena de Leon the
sum of P38,501.28
 representing the unpaid MODIFICATION that the
irrigation fees, and all period within which
fees thereafter until appellant should be
possession of the land ordered to pay the rentals
has been transferred to in arrears now covers the
the plaintiff; years 1983 to 1990.
Costs against appellant. 5
5. Ordering defendant
Inayan to pay to plaintiff It held that while jurisdiction must exist
Jalbuena de Leon the as a matter of law, private respondent's
sum of P3,000.00 as attack on the jurisdiction of the lower
attorney' s fees; court must fail for he is guilty of
P1,000.00 as litigation estoppel. Despite several opportunities
6 petitioner's complaint below. Such failure
expenses, and P2,000.00 to question the jurisdiction of the lower
as moral damages, plus court, he failed to do so. Moreover, it was
costs; and he who insisted, through his
misrepresentations, that the case,
6. Dismissing defendant's involving, as it does, purely agrarian
counterclaim for lack of issues, should be referred to the Ministry
merit.4 of Agrarian Reform. Finally, the
7 case. 9
decision, the appellate court held that
petitioner's complaint below was
anchored on acción interdictal, a
summary action for recovery of physical
possession that should have been
brought before the proper inferior court.
To make private respondent a deforciant
so that the unlawful detainer suit may be
properly filed, it is necessary to allege
when demand to pay rent and to vacate
were made. The court found that this
requisite was not specifically met in
on her part is fatal to her cause since the
one-year period within which a detainer
suit may be instituted had not yet
elapsed when Civil Case No. 15628 was
filed. Therefore, the court below was
devoid of jurisdiction to entertain the

appellate court held that since regional

On appeal to the Court of Appeals,
private respondent raised the sole issue
of jurisdiction and alleged that the lower
court, acting as Court of Agrarian
Relations, had no jurisdiction over the
action.
The respondent appellate court, on May
24, 1990, affirmed the trial court's
decision, disposing as follows:
WHEREFORE, premises
considered, the decision
appealed from should be,
as it is hereby
AFFIRMED, with a
trial courts, by express provision of B.P.
129, Section 24, now have exclusive
original jurisdiction over agrarian cases,
but still applying the special rules of
agrarian procedure, it was no error for
the court below, even if acting as an
agrarian court, to resolve a controversy
involving a civil lease. 8
Private respondent's motion to
reconsider the above decision was
granted by the Court of Appeals on
November 8, 1990. Respondent court
then set aside its earlier decision and
dismissed the civil case filed by
petitioner below (Civil Case No. 15628)
for want of jurisdiction. In its amended
Hence this petition for review.
It is petitioner's contention that the Court
of Appeals erred in holding that the case
below is an unlawful detainer action.
Since the parties did not confine
themselves to issues pertaining solely to
possession but also to the nature of the
lease contract, the case is not one of
unlawful detainer but one incapable of
pecuniary estimation.
Next, petitioner argues that the issue of
lack of jurisdiction should not have been
resolved in favor of private respondent
who had voluntarily submitted to the
jurisdiction of the court a quo and raised
the issue only after an adverse decision
was rendered against him.
Aside from emphasizing the correctness
of respondent court's ruling that the case
below was a mere ejectment case,
private respondent raises the issue
of res judicata in his comment.
Private respondent Inayan claims that
the issue in the instant petition, i.e.
whether or not the trial court, acting as
an agrarian court, had jurisdiction over
the unlawful detainer suit filed by
petitioner, had already been ruled upon
by the Court of Appeals in CA G.R. SP
No. 15700 entitled "Uldarico Inayan v.
Hon. Alonsagay and Corazon Jalbuena"
and the petition for review of said
decision had already been denied by this
Court in G.R. No. 89312.
10
The petition is impressed with merit.
The primary issue presented here
revolves around the jurisdiction of the
trial court, then acting as a court of
agrarian relations employing agrarian
procedure, to try the suit filed by
petitioner.
Jurisdiction of the court over the subject
matter is conferred only by the
Constitution or by law. It is
11
determinable on the basis of allegations
in the complaint. 12
An error in jurisdiction can be raised at
any time and even for the first time on
appeal. Barring highly meritorious and
13
exceptional circumstances, neither
14
estoppel nor waiver may be raised as
defenses to such an error. 15
In order to determine whether the court
below had jurisdiction, it is necessary to
first ascertain the nature of the complaint
filed before it.
A study of the complaint instituted by
petitioner in the lower court reveals that
the case is, contrary to the findings of the
respondent appellate court, not one of
unlawful detainer.
An unlawful detainer suit (acción
interdictal) together with forcible entry
are the two forms of an ejectment suit
that may be filed to recover possession
of real property. Aside from the summary
action of ejectment, acción publiciana or
the plenary action to recover the right of
possession and acción reivindicatoria or
the action to recover ownership which
includes recovery of possession, make
up the three kinds of actions to judicially
recover possession.
16
Illegal detainer consists in withholding by
a person from another of the possession
of a land or building to which the latter is
entitled after the expiration or termination
of the former's right to hold possession
by virtue of a contract, express or
implied. An ejectment suit is brought
17
before the proper inferior court to recover
physical possession only or
possession de facto and not
possession de jure, where dispossession
has lasted for not more than one year.
Forcible entry and unlawful detainer are
quieting processes and the one-year
time bar to the suit is in pursuance of the
summary nature of the action. The use
18
of summary procedure in ejectment
cases is intended to provide an
expeditious means of protecting actual
possession or right to possession of the
property. They are not processes to
determine the actual title to an estate. If
at all, inferior courts are empowered to
rule on the question of ownership raised
by the defendant in such suits, only to
resolve the issue of possession. Its19
determination on the ownership issue is,
however, not conclusive.
Acción publiciana is the plenary action to
recover the right of possession when
dispossession has lasted for more than
one year or when dispossession was
effected by means other than those
mentioned in Rule 70. Under
20
these circumstances, a plenary
action may be brought before the
21
regional trial court.
22
Acción reivindicatoria, which is an action
to recover ownership, including the
recovery of possession, should also be
filed in the regional trial court.
Petitioner's complaint was for
"Termination of Civil Law Lease;
Recovery of Possession; Recovery of
Unpaid Rentals and Damages" After23
alleging the facts regarding the lease of
the subject property, including Inayan's
refusal to pay rent and to vacate,
petitioner prayed that the trial court
declare the civil law lease (and not
"tenancy or agricultural lease")
terminated. Plaintiff likewise prayed that
defendant be ordered to vacate the
premises, pay back rentals, unpaid
irrigation fees, moral and exemplary
damages and litigation fees.
Clearly, the case involves more than just
the issue of possession. It was
necessary for the trial court below to
determine whether the lease was civil
and not an agricultural or tenancy
relationship and whether its termination
was in order. More specifically, the
complaint emphasized, in paragraph 4:
That in entering into the
contract, Jesus Jalbuena
and defendant Uldarico
Inayan definitely agreed
that the contract was to
be CIVIL LAW LEASE
NOT TENANCY OR
AGRICULTURAL LEASE,
for a period of one (1)
year renewable for the
same period at the option
and agreement of the
parties;24
As correctly determined by the trial court,
one of the issues in the case below was
whether or not the contract entered into
by the plaintiff and defendant was a civil
law lease or an agricultural lease. If the
former, the next issue was whether the
lease contract between the parties had
been terminated in 1983 for failure of
defendant to pay his annual rental. 25
A detainer suit exclusively involves the
issue of physical possession. The case
below, however, did not concern merely
the issue of possession but as well, the
nature of the lease contracted by
petitioner's predecessor-in-interest and
private respondent. It likewise involved
the propriety of terminating the
relationship contracted by said parties,
as well as the demand upon defendant
to deliver the premises and pay unpaid
rentals, damages and incidental fees.
Where the issues of the case extend
beyond those commonly involved in
unlawful detainer suits, such as for
instance, the respective rights of parties
under various contractual arrangements
and the validity thereof, the case is
converted from a mere detainer suit to
one "incapable of pecuniary estimation,"
thereby placing it under the exclusive
original jurisdiction of the regional trial
courts (formerly the courts of first
instance). 26
Not being merely a case of ejectment,
the regional trial court possessed
jurisdiction to try and resolve the case.
Still on the question of jurisdiction,
private respondent Inayan, as appellant
before the respondent court, claimed that
the trial court, acting as a court of
agrarian relations, did not have
jurisdiction over the complaint filed by
petitioner because the latter did not
concern itself with tenancy or agrarian
matters. The Court of Appeals, in its
original decision, ruled that private
respondent was guilty of estoppel.
Accordingly, he can not successfully
raise the issue.
In the past, the principle of estoppel has
been used by the courts to avoid a clear
case of injustice. Its use as a defense to
a jurisdictional error is more of an
exception rather than the rule. The
circumstances outlining estoppel must
be unequivocal and intentional, for it is
an exception to standard legal norms
and is generally applied only in highly
exceptional and justifiable cases. 27
We find that the situation in the case at
bench falls within the ambit of justifiable
cases where estoppel may be applied.
The trial court's recourse to agrarian
procedure was undoubtedly provoked by
private respondent Inayan's insistence
on the existence of a tenancy
relationship with petitioner. Private
respondent cannot now use these same
misrepresentations to assert the court's The respondent court also correctly held:
lack of jurisdiction. He cannot invoke the
court's jurisdiction to secure affirmative Finally, and more
relief against petitioner and, after failing importantly, while it is
to obtain such relief, repudiate or true that when the trial
question that same jurisdiction. 28
court decreed that the
procedure outlined in
Participation in judicial proceedings P.D. 946 was to be
where the court was devoid of observed at the trial of
jurisdiction is not normally considered as the case at bar, it, in
estoppel because the jurisdiction of a effect assumed its
court is mandated by law. Estoppel is character as an agrarian
likewise not appreciated where a court which is a court of
mistaken belief in the court's jurisdiction limited jurisdiction, and
is maintained. that since agrarian
matters are solely
But private respondent's case is different cognizable by agrarian
for it does not involve an honest mistake. courts in the exercise of
He is directly responsible for the trial their limited jurisdiction
court's use of the special rules of (Depositario vs. Herbas
agrarian procedure. His insistence 121 SCRA 756)
brought about the want of jurisdiction he conversely, agrarian
conveniently asserted before the courts have no
appellate court, and only after an jurisdiction in cases
adverse decision was leveled against where there is no
him. Private respondent cannot be tenancy relation between
allowed to seek refuge under the the parties (Dumlao vs.
protective mantle of the law after he has De Guzman, 1 SCRA
abused and made a mockery of it. He is, 144). We believe,
therefore, considered estopped from however, that the dictum
asserting the court's want of jurisdiction enunciated in the Dumlao
to try the case. case obtains only when,
as before, the then C.F.I.
and C.A.R. are two
Moreover, the case was ostensibly one
separate and distinct
that involved agrarian matters, as
entities. Consequently,
alleged by private respondent. Hence the
the foregoing legal
trial court cannot be faulted for its use of
principle no longer finds
agrarian procedure.
much relevance under
the present system, said
agrarian courts having
been integrated into the
Regional Trial Courts
which, by express
mandate of Section 24 of
B.P. 129, shall have
exclusive original
jurisdiction over agrarian
cases although they are
ordained to continue
applying the special rules
of procedure provided for
said cases. This being
the case, it is no error for
the court below, acting as
an agrarian court, to
resolve a controversy
involving a civil lease
since it is already a
settled rule that
inasmuch as the RTC is
a court of general
jurisdiction, whether a
particular matter should
be resolved by it in the
exercise of its general
jurisdiction, or in its
limited jurisdiction, or in
its limited jurisdiction, is
not a jurisdictional
question but a procedural
question involving a
mode of practice which,
therefore, may be
waived (Manalo vs.
Mariano, L-33850, Jan.
 22, 1976; Santos vs.
Banayo, L-31854, Sept.
9, 1982). (Emphasis
29
ours.)
On the matter of res judicata raised by
private respondent, we conclude that the
same does not find application in instant
petition. The issues herein and in the
petition in G.R. No. 89312 are not the
30
same. In the latter, the issue involved
execution pending appeal granted by the
trial court judge to petitioner Jalbuena De
Leon. The Court of Appeals enjoined 31
the respondent judge from enforcing the
execution pending appeal after having
found no valid and compelling reason to
justify said execution. Then too, private
respondent asserted, and the appellate
court found, that an agrarian court has
no jurisdiction in a case where there
exists no tenancy relation between the
parties. The court said:
In any event, the matter
of jurisdiction of
respondent court having
been impugned and said
issue permeating and
going as it does into the
very competence of the
trial court to act on CAR
Case No. 15628, it
behooves us to tread
softly and give the benefit
of the doubt to petitioner,
for should execution
pending appeal be
allowed and the judgment
is later ordered vacated
on the ground that the
trial court had no
jurisdiction to hear the
case, then it would be
well-nigh impossible to
restore petitioner to his
former status. 32
From the foregoing quote, we find that
the decision of the appellate court did not
categorically rule on the matter of
jurisdiction but only made mention of it in
passing and in ruling upon the real issue
of the correctness of execution pending
appeal ordered by the respondent judge.
The decision in CA-G.R. SP No. 15700
became final after the petition for review
of said decision was dismissed by the
Court for failure to pay the prescribed
legal fees and to attach duplicate original
or certified true copies of the questioned
decision. 33
In sum, we have concluded that the case
filed by petitioner below, not being one of
unlawful detainer, the regional trial court
had jurisdiction to hear and try the case.
Moreover, as shown in the foregoing
paragraphs, private respondent is
estopped from asserting the lower court's
lack of jurisdiction.
WHEREFORE, the petition is
GRANTED. The amended decision of
the Court of Appeals dated November 8,
1990 in CA G.R. CV No. 19777
("Corazon Jalbuena de Leon v. Uldarico
Inayan") is SET ASIDE and the original
decision dated May 24, 1990 is
REINSTATED.
Costs against private respondent.
SO ORDERED.
[G.R. NO. 156841 : June 30, 2005]
GF EQUITY,
INC., Petitioner, v. ARTURO
VALENZONA, Respondent.
DECISION
CARPIO-MORALES, J.:
On challenge via Petition for Review
on Certiorari is the Court of Appeals
October 14, 2002 Decision1 reversing that
of the Regional Trial Court (RTC) of
Manila dated June 28, 19972 which
dismissed the complaint of herein
respondent Arturo Valenzona (Valenzona)
for breach of contract with damages
against herein petitioner GF Equity, Inc.
(GF Equity).
The factual antecedents of the case are
as follows:
GF Equity, represented by its Chief
Financial Officer W. Steven Uytengsu
(Uytengsu), hired Valenzona as Head
Coach of the Alaska basketball team in
the Philippine Basketball Association
(PBA) under a Contract of Employment.3
As head coach, the duties of Valenzona
were described in the contract to include
the following:
xxx
1. . . . coaching at all practices and
games scheduled for the CORPORATION's
TEAM during the scheduled season of the
ASSOCIATION . . ., coaching all exhibition
games scheduled by the corporation as
approved by the PBA during and prior to
the scheduled season, coaching (if invited
to participate) in the ASSOCIATION's All
Star Game and attending every event
conducted in association with the All Star
Game, and coaching the play-off games
subsequent to the scheduled
season based on the athletic program of
the PBA.
xxx
3. The COACH agrees to observe and
comply with all requirements of the
CORPORATION respecting conduct of its
TEAM and its players, at all times whether
on or off the playing floor. The which is detrimental to the best interests
CORPORATION may, from time to time of the CORPORATION.
during the continuance of this contract,
xxx
establish reasonable rules for the
government of its players "at home" and
7. The COACH agrees that if so requested
"on the road"; and such rules shall be
by the CORPORATION, he will endorse the
part of this contract as fully is (sic) if
CORPORATION's products in commercial
herein written and shall be the
advertising, promotions and the like. The
responsibility of the COACH to
COACH further agrees to allow the
implement; x x x
CORPORATION or the ASSOCIATION to
take pictures of the COACH alone or
4. The COACH agrees (a) to report at the
together with others, for still
time and place fixed by the
photographs, motion pictures or
CORPORATION in good physical
television, at such times as the
condition; (b) to keep himself throughout
CORPORATION or the ASSOCIATION may
the entire season in good physical
designate, and no matter by whom taken
condition; (c) to give his best services, as
may be used in any manner desired by
well as his loyalty to the CORPORATION,
either of them for publicity or promotional
and to serve as basketball coach for the
purposes. (Underscoring supplied).
CORPORATION and its assignees; (d)
to be neatly and fully attired in public and
xxx
always to conduct himself on and off the
court according to the highest standards
of honesty, morality, fair play and
sportsmanship; (e) not to do anything
Even before the conclusion of the
contract, Valenzona had already served
GF Equity under a verbal contract by
coaching its team, Hills Brothers, in the
3rd PBA Conference of 1987 where the
team was runner-up.
Under the contract, GF Equity would pay
Valenzona the sum of Thirty Five
Thousand Pesos (P35,000.00) monthly,
net of taxes, and provide him with a
service vehicle and gasoline allowance.
While the employment period agreed
upon was for two years commencing on
January 1, 1988 and ending on December
31, 1989, the last sentence of paragraph
3 of the contract carried the following
condition:
3. x x x If at any time during the
contract, the COACH, in the sole opinion
of the CORPORATION, fails to exhibit
sufficient skill or competitive ability to
coach the team, the CORPORATION may
terminate this contract. (Emphasis
supplied)ςrαlαωlιbrαrÿ
Before affixing his signature on the
contract, Valenzona consulted his lawyer
who pointed out the one-sidedness of the
above-quoted last sentence of paragraph
3 thereof. The caveat notwithstanding,
Valenzona still acceded to the terms of
the contract because he had trust and
confidence in Uytengsu who had
recommended him to the management of
GF Equity.
During his stint as Alaska's head coach,
the team placed third both in the Open
and All-Filipino PBA Conferences in 1988.
Valenzona was later advised by the
management of GF Equity by letter of
September 26, 1988 of the termination of
his services in this wise:
We regret to inform you that under
the contract of employment dated
January 1, 1988 we are invoking our
rights specified in paragraph 3.
You will continue to be paid until your
outstanding balance which, as of
September 25, 1988, is P75,868.38 has
been fully paid.
Please return the service vehicle to my
office no later than September 30,
1988.4 (Emphasis supplied) ςrαlαωlιbrαrÿ
Close to six years after the termination of
his services, Valenzona's counsel, by
letter of July 30, 1994,5 demanded from
GF Equity payment of compensation
arising from the arbitrary and unilateral
termination of his employment. GF
Equity, however, refused the claim.
Valenzona thus filed on September 26,
1994 before the Regional Trial Court of
Manila a complaint6 against GF Equity for
breach of contract with damages,
ascribing bad faith, malice and "disregard
to fairness and to the rights of the
plaintiff" by unilaterally and arbitrarily
pre-terminating the contract without just
cause and legal and factual basis. He
prayed for the award of actual damages
in the amount of P560,000.00
representing his unpaid compensation
from September 26, 1988 up to
December 31, 1989, at the rate
of P35,000.00 a month; moral damages
in the amount of P100,000.00; exemplary
damages in the amount of P50,000.00;
attorney's fees in the amount
of P100,000.00; and costs of suit.
Before the trial court, Valenzona
challenged the condition in paragraph 3 of
the contract as lacking the element of
mutuality of contract, a clear
transgression of Article 1308 of the New
Civil Code, and reliance thereon, he
contended, did not warrant his unjustified
and arbitrary dismissal.
GF Equity maintained, on the other hand,
that it merely exercised its right under
the contract to pre-terminate Valenzona's
employment due to incompetence. And it
posited that he was guilty of laches and,
in any event, his complaint should have
been instituted before a labor arbiter.
The trial court, upholding the validity of
the assailed provision of the contract,
dismissed, by decision of June 28,
1997,7 the complaint of Valenzona who, it
held, was fully aware of entering into a
bad bargain.
The Court of Appeals, before which
Valenzona appealed, reversed the trial
court's decision, by decision of October
14, 2002,8 and accordingly ordered GF
Equity to pay him damages.
In its decision, the appellate court held
that the questioned provision in the
contract "merely confers upon GF Equity
the right to fire its coach upon a finding of
inefficiency, a valid reason within the
ambit of its management
prerogatives, subject to limitations
imposed by law, although not expressly
stated in the clause"; and
"the right granted in the contract can neit
her be said to be immoral, unlawful, or co
ntrary to public policy." It concluded,
however, that while "the mutuality of the
clause" is evident, GF Equity "abused its
right by arbitrarily terminating . . .
Valenzona's employment and opened
itself to a charge of bad faith." Hence,
finding that Valenzona's claim for
damages is "obviously . . . based on Art.
19 of the Civil Code" which provides:
Art. 19. Every person must, in the
exercise of his rights and in the
performance of his duties, act with
justice, give everyone his due, and
observe honesty and good faith.,
the appellate court awarded Valenzona
the following damages, furnishing the
justification therefor:
. . . a) Compensatory
damages representing his unearned
income for 15 months. Actual and
compensatory damages are those
recoverable because of a pecuniary loss
in business, trade, property, profession,
job or occupation. As testified, his
employment contract provided a monthly
income of PhP35,000, which he lost from
September 26, 1988 up to December 31,
1989 as a consequence of his arbitrary
dismissal; b) Moral damages of
PhP20,000. The act caused wounded
feelings on the part of the plaintiff. Moral
damages is recoverable under Article
2220 and the chapter on Human
Relations of the Civil Code (Articles 1936)
when a contract is breached in bad faith;
c) Exemplary damages of PhP20,000, by
way of example or correction for the
public good; and d) When exemplary
damages are awarded, attorney's fees
can also be given. We deem it just to
grant 10% of the actual damages
as attorney's fees. (Underscoring
supplied)ςrαlαωlιbrαrÿ
Hence, this petition at bar, GF Equity
faulting the appellate court in
. . . CONCLUD[ING] WRONGLY FROM
ESTABLISHED FACTS IN A MANNER
VIOLATIVE OF APPLICABLE LAWS AND
ESTABLISHED JURISPRUDENCE.9
GF Equity argues that the appellate court
committed a non-sequitur when it agreed
with the findings of fact of the lower court
but reached an opposite conclusion. It
avers that the appellate court made itself
a guardian of an otherwise intelligent
individual well-versed in tactical
maneuvers; that the freedom to enter
into contracts is protected by law, and the
courts will not interfere therewith unless
the contract is contrary to law, morals,
good customs, public policy or public
order; that there was absolutely no
reason for the appellate court to have
found bad faith on its part; and that, at
all events, Valenzona is guilty of laches
for his unexplained inaction for six years.
Central to the resolution of the instant
controversy is the determination of
whether the questioned last sentence of
paragraph 3 is violative of the principle of
mutuality of contracts.
Mutuality is one of the characteristics of a
contract, its validity or performance or
compliance of which cannot be left to the
will of only one of the parties.10 This is
enshrined in Article 1308 of the New
Civil Code, whose underlying principle is
explained in Garcia v. Rita Legarda,
Inc.,11 viz:
Article 1308 of the New Civil Code reads
as follows:
"The contract must bind both contracting
parties; its validity or compliance cannot
be left to the will of one of them."
The above legal provision is a virtual
reproduction of Article 1256 of the old
Civil Code but it was so phrased as to
emphasize the principle that the contract
must bind both parties. This, of course is
based firstly, on the principle that
obligations arising from contracts have
the force of law between the contracting
parties and secondly, that there must
be mutuality between the parties
based on their essential equality to
which is repugnant to have one party
bound by the contract leaving the
other free therefrom (8 Manresa
556). Its ultimate purpose is to
render void a contract containing a
condition which makes its fulfillment
dependent exclusively upon the
uncontrolled will of one of the
contracting parties.
x x x (Emphasis, italics and underscoring
supplied)
The ultimate purpose of the mutuality
principle is thus to nullify a contract
containing a condition which makes its
fulfillment or pre-termination
dependent exclusively upon the uncontroll
ed will of one of the contracting parties.
Not all contracts though which vest to one
party their determination of validity or
compliance or the right to terminate the
same are void for being violative of the
mutuality principle. Jurisprudence is
replete with instances of cases12 where
this Court upheld the legality of contracts
which left their fulfillment or
implementation to the will of either of the
parties. In these cases, however, there
was a finding of the presence of essential
equality of the parties to the contracts,
thus preventing the perpetration of
injustice on the weaker party.
In the case at bar, the contract
incorporates in paragraph 3 the right of
GF Equity to pre-terminate the contract -
that "if the coach, in the sole opinion of
the corporation, fails to exhibit sufficient
skill or competitive ability to coach the
team, the corporation may terminate the
contract." The assailed condition clearly
transgresses the principle of mutuality of
contracts. It leaves the determination of
whether Valenzona failed to exhibit
sufficient skill or competitive ability to
coach Alaska team solely to the opinion of
GF Equity. Whether Valenzona indeed
failed to exhibit the required skill or
competitive ability depended exclusively
on the judgment of GF Equity. In other
words, GF Equity was given an unbridled
prerogative to pre-terminate the contract
irrespective of the soundness, fairness or
reasonableness, or even lack of basis of
its opinion.
To sustain the validity of the assailed
paragraph would open the gate for
arbitrary and illegal dismissals, for void
contractual stipulations would be used as
justification therefor.
The assailed stipulation being violative of
the mutuality principle underlying Article
1308 of the Civil Code, it is null and void.
The nullity of the stipulation
notwithstanding, GF Equity was not
precluded from the right to pre-terminate
the contract. The pre-termination must
have legal basis, however, if it is to be
declared justified.
GF Equity failed, however, to advance any
ground to justify the pre-termination. It
simply invoked the assailed provision
which is null and void.
While GF Equity's act of pre-terminating
Valenzona's services cannot be
considered willful as it was based on a
stipulation, albeit declared void, it, in
doing so, failed to consider the abuse of
rights principle enshrined in Art. 19 of
the Civil Code which provides:
Art. 19. Every person must, in the
exercise of his rights and in the
performance of his duties, act with
justice, give everyone his due, and
observe honesty and good faith.
This provision of law sets standards which
must be observed in the exercise of
one's rights as well as in the
performance of its duties, to wit: to act
with justice; give every one his due;
and observe honesty and good faith.
Since the pre-termination of the contract
was anchored on an illegal ground, hence,
contrary to law, and GF Equity negligently
failed to provide legal basis for such pre-
termination, e.g. that Valenzona breached
the contract by failing to discharge his
duties thereunder, GF Equity failed to
exercise in a legitimate manner its right
to pre-terminate the contract, thereby
abusing the right of Valenzona to thus
entitle him to damages under Art. 19 in
relation to Article 20 of the Civil Code the
latter of which provides:
Art. 20. Every person who, contrary to
law, willfully or negligently causes
damage to another, shall indemnify the
latter for the same.
In De Guzman v. NLRC,13 this Court
quoted the following explanation of
Tolentino why it is impermissible to abuse
our rights to prejudice others.
The exercise of a right ends when the
right disappears, and it disappears when
it is abused, especially to the prejudice of
others. The mask of a right without the
spirit of justice which gives it life is
repugnant to the modern concept of
social law. It cannot be said that a person
exercises a right when he unnecessarily
prejudices another or offends morals or
good customs. Over and above the
specific precepts of positive law are the
supreme norms of justice which the law
develops and which are expressed in
three principles: honeste vivere,14 alterum
non laedere15 and jus suum quique
tribuere;16 and he who violates them
violates the law. For this reason, it is not
permissible to abuse our rights to
prejudice others.
The disquisition in Globe Mackay Cable
and Radio Corporation v. Court of
Appeals17 is just as relevant as it is
illuminating on the present case. In that
case, this Court declared that even
granting that the therein petitioners
might have had the right to dismiss the
therein respondent from work, the
abusive manner in which that right was
exercised amounted to a legal wrong for
which the petitioners must be held liable.
One of the more notable innovations of
the New Civil Code is the codification of
"some basic principles that are to be
observed for the rightful relationship
between human beings and for the
stability of the social order." [REPORT ON
THE CODE COMMISSION ON THE
PROPOSED CIVIL CODE OF THE
PHILIPPINES, p. 39]. The framers of the
Code, seeking to remedy the defect of the
old Code which merely stated the effects
of the law, but failed to draw out its
spirit, incorporated certain fundamental
precepts which were "designed to indicate
certain norms that spring from the
fountain of good conscience" and which
were also meant to serve as "guides for
human conduct [that] should run as
golden threads through society, to the
end that law may approach its supreme
ideal, which is the sway and dominance of
justice" (Id.) Foremost among these
principles is that pronounced in Article 19
which provides:
Art. 19. Every person must, in the
exercise of his rights and in the
performance of his duties, act with
justice, give everyone his due, and
observe honesty and good faith.
This article, known to contain what is
commonly referred to as the principle of
abuse of rights, sets certain standards
which must be observed not only in the
exercise of one's rights but also in the
performance of one's duties. These
standards are the following: to act with
justice; to give everyone his due; and to
observe honesty and good faith. The law,
therefore, recognizes a primordial
limitation on all rights; that in their
exercise, the norms of human conduct set
forth in Article 19 must be observed. A
right, though by itself legal because
recognized or granted by law as
such, may nevertheless become the
source of some illegality. When a
right is exercised in a manner which
does not conform with the norms
enshrined in Article 19 and results in
damage to another, a legal wrong is
thereby committed for which the
wrongdoer must be held
responsible. But while Article 19 lays
down a rule of conduct for the
government of human relations and for
the maintenance of social order, it does
not provide a remedy for its violation.
Generally, an action for damages under
either Article 20 or Article 21 would be
proper.18 Emphasis and underscoring
supplied).
As for GF Equity's defense of laches on
account of Valenzona's invocation of his
right under the contract only after the
lapse of six years, the same fails.
Laches has been defined as the failure or
neglect for an unreasonable and
unexplained length of time to do that
which by exercising due diligence, could
or should have been done earlier, thus
giving rise to a presumption that the
party entitled to assert it either has
abandoned or declined to assert it. It is
not concerned with mere lapse of time;
the fact of delay, standing alone, is
insufficient to constitute laches.19
Laches applies in equity, whereas
prescription applies at law. Our courts are
basically courts of law, not courts of
equity. Laches cannot thus be invoked to
evade the enforcement of an existing
legal right. Equity, which has been aptly
described as a "justice outside legality," is
applied only in the absence of, and never
against, statutory law. Aequetas
nunquam contravenit legis. Thus, where
the claim was filed within the statutory
period of prescription, recovery therefor
cannot be barred by laches. The doctrine
of laches should never be applied earlier
than the expiration of time limited for the
commencement of actions at
law,20 unless, as a general rule,
inexcusable delay in asserting a right and
acquiescense in existing conditions are
proven.21 GF Equity has not proven, nay
alleged, these.
Under Article 114422 of the New Civil
Code, an action upon a written contract
must be brought within 10 years from the
time the right of action accrues. Since the
action filed by Valenzona is an action for
breach upon a written contract, his filing
of the case 6 years from the date his
cause of action arose was well within the
prescriptive period, hence, the defense of
laches would not, under the
circumstances, lie.
Consequently, Valenzona is entitled to
recover actual damages - his salary which
he should have received from the time his
services were terminated up to the time
the employment contract expired.23
As for moral damages which the appellate
court awarded, Article 2220 of the New
Civil Code allows such award to breaches
of contract where the defendant acted
fraudulently or in bad faith. Malice or bad
faith implies a conscious and intentional
design to do a wrongful act for a
dishonest purpose or moral obliquity. It
contemplates a state of mind
affirmatively operating with furtive design
or ill-will.24 Bad faith means a breach of a
known duty through some motive of
interest or ill will. It must, however, be
substantiated by evidence. Bad faith
under the law cannot be presumed, it
must be established by clear and
convincing evidence.
As earlier stated, however, the pre-
termination of the contract was not willful
as GF Equity based it on a provision
therein which is void. Malice or bad faith
cannot thus be ascribed to GF Equity.
The unbroken jurisprudence is that in
breach of contract cases where a party is
not shown to have acted fraudulently or
in bad faith, liability for damages is
limited to the natural and probable
consequences of the breach of the
obligation which the parties had foreseen
or could reasonably have foreseen. The
damages, however, do not include moral
damages.25
The award by the appellate court of moral
damages must thus be set aside. And so
must the award of exemplary damages,
absent a showing that GF Equity acted in
a wanton, fraudulent, reckless,
oppressive or malevolent manner.26
The award to Valenzona of attorney's fees
must remain, however, GF Equity having
refused to pay the balance of Valenzona's
salaries to which he was, under the facts
and circumstances of the case, entitled
under the contract, thus compelling him
to litigate to protect his interest.27
WHEREFORE, the decision of the Court
of Appeals dated October 14, 2002 is
hereby SET ASIDE and another rendered
declaring the assailed provision of the
contract NULL AND VOID and ORDERING
petitioner, GF Equity, to pay private
respondent, Arturo Valenzona, actual
damages in the amount of P525,000.00
and attorney's fees in the amount
of P60,000.00.
Costs against petitioner. SO ORDERED.
G.R. No. 144412 November 18,
2003
ALLIED BANKING
CORPORATION, Petitioner,
vs.
COURT OF APPEALS and
POTENCIANO L.
GALANIDA, Respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for
review assailing the Decision of 27 April
1 2
2000 and the Resolution of 8 August
2000 of the Court of Appeals in CA-G.R.
SP No. 51451. The Court of Appeals
upheld the Decision of 18 September
3
1998 and the Resolution of 24 December
1998 of the National Labor Relations
Commission ("NLRC") in NLRC Case
No. V-000180-98. The NLRC modified
the Decision dated 23 December 1997 of
Labor Arbiter Dominador A. Almirante
("Labor Arbiter") in NLRC Case No. RAB
VII-05-0545-94 holding that Allied
Banking Corporation ("Allied Bank")
illegally dismissed Potenciano L.
Galanida ("Galanida"). The NLRC
awarded Galanida separation pay,
backwages, moral and exemplary
damages, and other amounts totaling ₱
1,264,933.33.
Antecedent Facts
For a background of this case, we quote
in part from the Decision of the Court of
Appeals:
Private respondent Potenciano Galanida
was hired by petitioner Allied Banking
Corporation on 11 January 1978 and
rose from accountant-book(k)eeper to
assistant manager in 1991. His
appointment was covered by a "Notice of
Personnel Action" which provides as one
of the conditions of employment the
provision on petitioner’s right to transfer
employees:
"REGULAR APPOINTMENT: xxx It is
understood that the bank reserves the
right to transfer or assign you to other
departments or branches of the bank as
the need arises and in the interest of
maintaining smooth and uninterrupted
service to the public."
Private respondent was promoted
several times and was transferred to
several branches as follows:
"a) January, 1978 to March, 1982
– Tagbilaran City Branch
"b) April, 1982 to May, 1984 –
Lapulapu City Branch
"c) June, 1984 – Mandaue City
Branch
"d) July, 1984 to April, 1986 –
Tagbilaran City Branch
"e) May, 1986 to May, 1987 –
Dumaguete City Branch
"f) June, 1987 to August, 1987 –
Carbon Branch, Cebu City
"g) September, 1987 to Sept.
1989 – Lapulapu City Branch,
Cebu
"h) October, 1989 to Sept. 1992
– Carbon Branch, Cebu City
"i) October 1992 to Sept. 1994 –
Jakosalem Regional Branch,
Cebu City" (Rollo, p. 47)
Effecting a rotation/movement of officers
assigned in the Cebu homebase,
petitioner listed respondent as second in
the order of priority of assistant
managers to be assigned outside of
Cebu City having been stationed in Cebu
for seven years already. Private
respondent manifested his refusal to be
transferred to Bacolod City in a letter
dated 19 April 1994 citing as reason
parental obligations, expenses, and the
anguish that would result if he is away
from his family. He then filed a complaint
before the Labor Arbiter for constructive
dismissal.
Subsequently, petitioner bank informed
private respondent (Rollo, p. 86) that he
was to report to the Tagbilaran City
Branch effective 23 May 1994. Private
respondent refused. In a letter dated 13
June 1994, petitioner warned and
required of private respondent as
follows:
"There is no discrimination in your
transfer. In fact, among the officers
mentioned, only you have refused the
new assignment citing difficulty of
working away from your family as if the
other officers concerned do not suffer the
same predicament. To exempt you from
the officer transfer would result in
favoritism in your favor and
discrimination as against the other
officers concerned.
"In furtherance of maintaining a smooth
and uninterrupted service to the public,
and in accordance with the Bank’s order
of priority of rotating its accountants’
places of assignments, you are well
aware that Roberto Isla, AM/Accountant,
assigned in Cebu for more than ten (10)
years, was, on February 14, 1994,
reassigned to Iligan City Branch and
then to Cagayan de Oro City Branch on
June 8, 1994. Hence, your objection on
the ground of your length of service is
without merit.
xxx
"As discussed, your refusal to follow
instruction concerning your transfer and
reassignment to Bacolod City and to
Tagbilaran City is penalized under Article
XII of the Bank’s Employee Discipline
Policy and Procedure [which] provides:
‘XII Transfer and Reassignment
Refusal to follow instruction concerning
transfers and reassignments.
First and subsequent offenses –
The penalty may range from suspension
to dismissal as determined by
management. The employee shall be
required to comply with the order of
transfer and reassignment, if the penalty
is not termination of employment.’
"In view of the foregoing, please explain
in writing within three (3) days from
receipt hereof why no disciplinary action
should be meted against you for your
xxx What I cannot decipher now under
the headship of Mr. Olveda is
management’s discriminatory act of
transferring only the long staying
accountants of Cebu in the guise of its
exercise of management prerogative
when in truth and in fact, the ulterior
motive is to accommodate some new
officers who happen to enjoy favorable
connection with management. How can
the bank ever justify the transfer of
Melinda T. Co, a new officer who had
experienced being assigned outside of
Cebu for more than a year only to
Tabunok Branch? If the purpose is for
check and balance, is management
implying that Melinda Co can better carry
out such function over Mr. Larry
Sabelino, who is a seasoned and
experienced accountant or any of the
Metro Cebu accountants for that matter?
Isn’t this act of management an obvious
display of favoritism? xxx
6 Notice of termination shall be issued by
On 5 October 1994, Galanida received
an inter-office communication ("Memo")
7
Therefore, your refusal to follow
instruction concerning your transfer and
reassignment to Bacolod City and to
Tagbilaran City is without any justifiable
reason and constituted violations of
Article XII of the Bank’s EDPP xxx
In view of the foregoing, please be
informed that the Bank has terminated
your services effective September 1,
1994 and considered whatever benefit, if
any, that you are entitled as forfeited in
accordance with 04, V Administrative
Penalties, page 6 of the Bank’s EDPP
which provides as follows:
"04. Dismissal.
Dismissal is a permanent separation for
cause xxx
the Investigation Committee subject to
the confirmation of the President or his
authorized representative as

having refused to follow instructions officer/employee who is terminated for

concerning the foregoing transfer and
reassignment." xxx 4
On 16 June 1994, Galanida replied that
"(w)hether the bank’s penalty for my
refusal be Suspension or Dismissal xxx it
will all the more establish and fortify my
complaint now pending at NLRC, RAB
7." In the same letter, he charged Allied
5
Bank with discrimination and favoritism
in ordering his transfer, thus:
dated 8 September 1994 from Allied
cause shall not be eligible to receive any
Bank’s Vice-President for Personnel, Mr.
benefit arising from her/his employment
Leonso C. Pe. The Memo informed
with the Bank or to termination pay."
Galanida that Allied Bank had terminated
his services effective 1 September 1994.
The reasons given for the dismissal It is understood that the termination of
were: (1) Galanida’s continued refusal to your service shall be without prejudice to
be transferred from the Jakosalem, Cebu whatever legal remedies which the Bank
City branch; and (2) his refusal to report may have already undertaken and/or will
for work despite the denial of his undertake against you.
application for additional vacation leave.
The salient portion of the Memo reads:
Please be guided accordingly. (Emphasis
supplied)8
The Ruling of the Labor Arbiter
After several hearings, the Labor Arbiter
held that Allied Bank had abused its
management prerogative in ordering the
transfer of Galanida to its Bacolod and
Tagbilaran branches. In ruling that
Galanida’s refusal to transfer did not
amount to insubordination, the Labor
Arbiter misquoted this Court’s decision
in Dosch v. NLRC, thus:
9
As a general rule, the right to transfer or
reassign an employee is recognized as
an employer’s exclusive right and the
prerogative of management (Abbott
Laboratories vs. NLRC, 154 SCRA 713
[1987]).
The exercise of this right, is not however,
absolute. It has certain limitations. Thus,
in Helmut Dosch vs. NLRC, et al. 123
SCRA 296 (1983), the Supreme Court,
ruled:
"While it may be true that the right to
transfer or reassign an employee is an
employer’s exclusive right and the
prerogative of management, such right is
not absolute. The right of an employer to
freely select or discharge his employee
is limited by the paramount police power
xxx for the relations between capital and
labor are not merely contractual but
impressed with public interest. xxx And
neither capital nor labor shall act
oppressively against each other.
Refusal to obey a transfer order cannot
be considered insubordination where
employee cited reason for said refusal,
such (sic) as that of being away from the
family." (Underscoring supplied by the
10
Labor Arbiter)
The Labor Arbiter reasoned that
Galanida’s transfer was inconvenient and
prejudicial because Galanida would have
to incur additional expenses for board,
lodging and travel. On the other hand,
the Labor Arbiter held that Allied Bank
failed to show any business urgency that
would justify the transfer.
The Labor Arbiter also gave credence to
Galanida’s claim that Allied Bank gave
Ms. Co special treatment. The Labor
Arbiter stated that Allied Bank
deliberately left out Ms. Co’s name from
the list of accountants transferred to
Cebu as contained in Allied Bank’s letter
dated 13 June 1994. However, Mr.
Regidor Olveda, Allied Bank’s Vice
President for Operations Accounting,
testified that the bank transferred Ms. Co
to the Tabunok, Cebu branch within the
first half of 1994.
Still, the Labor Arbiter declined to award
Galanida back wages because he was
not entirely free from blame. Since
another bank had already employed
Galanida, the Labor Arbiter granted
Galanida separation pay in lieu of
reinstatement. The dispositive portion of
the Labor Arbiter’s Decision of 23
December 1997 provides:
WHEREFORE, premises considered,
judgment is hereby rendered ordering
respondent Allied Banking Corporation to
pay complainant the aggregate total
amount of Three Hundred Twenty Four
Thousand Pesos (₱ 324,000.00)
representing the following awards:
a) Separation pay for ₱
272,000.00;
b) Quarter bonus for 1994 – ₱
16,000.00;
c) 13th month pay for 1994 – ₱
16,000.00;
d) Refund of contribution to
Provident Fund - ₱ 20,000.00.
SO ORDERED. 11
The Ruling of the NLRC
On appeal, the NLRC likewise ruled that
Allied Bank terminated Galanida without
just cause. The NLRC agreed that the
transfer order was unreasonable and
unjustified, considering the family
considerations mentioned by Galanida.
The NLRC characterized the transfer as
a demotion since the Bacolod and
Tagbilaran branches were smaller than
the Jakosalem branch, a regional office,
and because the bank wanted Galanida,
an assistant manager, to replace an
assistant accountant in the Tagbilaran
branch. The NLRC found unlawful
discrimination since Allied Bank did not
transfer several junior accountants in
Cebu. The NLRC also held that Allied
Bank gave Ms. Co special treatment by
assigning her to Cebu even though she
had worked for the bank for less than
two years.
The NLRC ruled that Galanida’s
termination was illegal for lack of due
process. The NLRC stated that Allied
Bank did not conduct any hearing. The
NLRC declared that Allied Bank failed to
send a termination notice, as required by
law for a valid termination. The Memo
merely stated that Allied Bank would
issue a notice of termination, but the
bank did not issue any notice.
The NLRC concluded that Allied Bank
dismissed Galanida in bad faith,
tantamount to an unfair labor practice as
the dismissal undermined Galanida’s
right to security of tenure and equal
protection of the laws. On these grounds,
the NLRC promulgated its Decision of 18
September 1998, the relevant portion of
which states:
In this particular case, We view as
impractical, unrealistic and no longer
advantageous to both parties to order Provident
reinstatement of the complainant. xxx Fund
For lack of sufficient basis, We deny the Contribution
claim for 1994 quarter bonus. Likewise,
no attorney’s fees is awarded as representin
counsels for complainant-appellee are e> ₱ 50,000.00 g moral
from the City Prosecutor’s Office of damages
Cebu.
representin
f> ₱ 20,000.00 g exemplary
WHEREFORE, premises considered, the damages
decision of the Labor Arbiter dated
December 23, 1997 is hereby
MODIFIED by increasing the award of =========== TOTAL
separation pay and granting in addition ₱ 1,264,933.33 AWARD
thereto backwages, moral and
exemplary damages. The respondent-
All other claims are dismissed for lack of
appellant, ALLIED BANKING
basis. The other respondents are
CORPORATION, is thus ordered to pay
dropped for lack of sufficient basis that
to herein complainant-appellee,
they acted in excess of their corporate
POTENCIANO L. GALANIDA, the
powers.
following amounts:
SO ORDERED. 12
representin
a) ₱ 336,000.00, g separation Allied Bank filed a motion for
pay reconsideration which the NLRC denied
representin in its Resolution of 24 December 1998. 13
b> ₱ 833,600.00, g
backwages Dissatisfied, Allied Bank filed a petition
for review questioning the Decision and
representin Resolution of the NLRC before the Court
g of Appeals.
c> ₱ 5,333.23 proportional
1994 13th The Ruling of the Court of Appeals
month pay
representin Citing Dosch v. NLRC, the Court of
14
d> ₱ 20,000.00
g refund of Appeals held that Galanida’s refusal to
comply with the transfer orders did not
warrant his dismissal. The appellate
court ruled that the transfer from a
regional office to the smaller Bacolod or
Tagbilaran branches was effectively a
demotion. The appellate court agreed
that Allied Bank did not afford Galanida
procedural due process because there
was no hearing and no notice of
termination. The Memo merely stated
that the bank would issue a notice of
termination but there was no such notice.
The Court of Appeals affirmed the ruling
of the NLRC in its Decision of 27 April
2000, thus:
WHEREFORE, for lack of merit, the
petition is DISMISSED and the assailed
Decision of public respondent NLRC is
AFFIRMED.
SO ORDERED. 15
Allied Bank filed a motion for
reconsideration which the appellate court
denied in its Resolution of 8 August
2000.16
On 26 April 2001, Allied Bank appealed
the appellate court’s decision and
resolution to the Supreme Court. Allied
Bank prayed that the Supreme Court: (1)
issue a temporary restraining order or
writ of preliminary injunction ex parte to
restrain the implementation or execution
of the questioned Decision and
Resolution; (2) declare Galanida’s
termination as valid and legal; (3) set
aside the Court of Appeals’ Decision and
Resolution; (4) make permanent the
restraining order or preliminary
injunction; (5) order Galanida to pay the
costs; and (6) order other equitable
reliefs.
The Issues
Allied Bank raises the following issues:
1. WHETHER UNDER THE
FACTS PRESENTED THERE IS
LEGAL BASIS IN PETITIONER’S
EXERCISE OF ITS
MANAGEMENT PREROGATIVE.
2. WHETHER PRIVATE
RESPONDENT’S VIOLATIONS
OF COMPANY RULES
CONSTITUTE A GROUND TO
WARRANT THE PENALTY OF
DISMISSAL.
3. WHETHER UNDER THE
FACTS PRESENTED, THERE IS
LEGAL BASIS TO HOLD THAT
ALLIED BANK AFFORDED
PRIVATE RESPONDENT THE
REQUIRED DUE PROCESS.
4. WHETHER UNDER THE
FACTS, THERE IS LEGAL
BASIS TO HOLD THAT PRIVATE
RESPONDENT CANNOT
RECOVER ANY MONETARY
AWARD. 17
In sum, Allied Bank argues that the
transfer of Galanida was a valid exercise
of its management prerogative. Allied
Bank contends that Galanida’s continued
refusal to obey the transfer orders
constituted willful disobedience or
insubordination, which is a just cause for
termination under the Labor Code.
On the other hand, Galanida defended
his right to refuse the transfer order. The
memorandum for Galanida filed with this
Court, prepared by Atty. Loreto M.
Durano, again misquoted the Court’s
ruling in Dosch v. NLRC, thus:
xxx His [Galanida’s] refusal to transfer
falls well within the ruling of the Supreme
Court in Helmut Dosch vs. NLRC, et. al.,
123 SCRA 296 (1983) quoted as follows:
xxx
Refusal to obey a transfer order cannot
be considered insubordination where
employee cited reason for said refusal,
such as that of being away from the
family."
18
The Ruling of the Court
The petition is partly meritorious.
Preliminary Matter: Misquoting Decisions
of the Supreme Court
The memorandum prepared by Atty.
Durano and, worse, the assailed
Decision of the Labor Arbiter,
both misquoted the Supreme Court’s
ruling in Dosch v. NLRC. The Court held
in Dosch:
We cannot agree to Northwest’s
submission that petitioner was guilty of
disobedience and insubordination which
respondent Commission sustained. The
only piece of evidence on which
Northwest bases the charge of
contumacious refusal is petitioner’s letter
dated August 28, 1975 to R.C. Jenkins
wherein petitioner acknowledged receipt
of the former’s memorandum dated
August 18, 1975, appreciated his
promotion to Director of International
Sales but at the same time regretted
"that at this time for personal reasons
and reasons of my family, I am unable to
accept the transfer from the Philippines"
and thereafter expressed his preference
to remain in his position, saying: "I
would, therefore, prefer to remain in my
position of Manager-Philippines until
such time that my services in that
capacity are no longer required by
Northwest Airlines." From this evidence,
We cannot discern even the slightest hint
of defiance, much less imply
insubordination on the part of petitioner.
19
The phrase "[r]efusal to obey a transfer
order cannot be considered
insubordination where employee cited
reason for said refusal, such as that of
being away from the family" does not
appear anywhere in the Dosch decision.
Galanida’s counsel lifted the erroneous
phrase from one of the italicized lines in
the syllabus of Dosch found in the
Supreme Court Reports Annotated
("SCRA").
The syllabus of cases in official or
unofficial reports of Supreme Court
decisions or resolutions is not the work
of the Court, nor does it state this Court’s
decision. The syllabus is simply the work
of the reporter who gives his
understanding of the decision. The
reporter writes the syllabus for the
convenience of lawyers in reading the
reports. A syllabus is not a part of the
court’s decision. A counsel should not
20
cite a syllabus in place of the carefully
considered text in the decision of the
Court.
In the present case, Labor Arbiter
Almirante and Atty. Durano began by
quoting from Dosch, but substituted a
portion of the decision with a headnote
from the SCRA syllabus, which they
even underscored. In short, they
deliberately made the quote from the
SCRA syllabus appear as the words of
the Supreme Court. We admonish them
for what is at the least patent
carelessness, if not an outright attempt
to mislead the parties and the courts
taking cognizance of this case. Rule
10.02, Canon 10 of the Code of
Professional Responsibility mandates
that a lawyer shall not knowingly
misquote or misrepresent the text of a
decision or authority. It is the duty of all
officers of the court to cite the rulings and
decisions of the Supreme Court
accurately.21
Whether Galanida was dismissed for just
cause
We accord great weight and even finality
to the factual findings of the Court of
Appeals, particularly when they affirm the
findings of the NLRC or the lower courts.
However, there are recognized
exceptions to this rule. These exceptions
are: (1) when the findings are grounded
on speculation, surmise and conjecture;
(2) when the inference made is
manifestly mistaken, absurd or
impossible; (3) when there is grave
abuse of discretion in the appreciation of
facts; (4) when the factual findings of the
trial and appellate courts are conflicting;
(5) when the Court of Appeals, in making
its findings, has gone beyond the issues
of the case and such findings are
contrary to the admissions of both
appellant and appellee; (6) when the
judgment of the appellate court is
premised on a misapprehension of facts
or when it has failed to consider certain
relevant facts which, if properly
considered, will justify a different
conclusion; (7) when the findings of fact
are conclusions without citation of
specific evidence on which they are
based; and (8) when the findings of fact
of the Court of Appeals are premised on
the absence of evidence but are
contradicted by the evidence on
record. After a scrutiny of the records,
22
we find that some of these exceptions
obtain in the present case.
The rule is that the transfer of an
employee ordinarily lies within the ambit
of the employer’s prerogatives. The
23
employer exercises the prerogative to
transfer an employee for valid reasons
and according to the requirement of its
business, provided the transfer does not
Intermediaries, requires the rotation of
27
these personnel. The Manual directs that
the "duties of personnel handling cash,
securities and bookkeeping records
should be rotated" and that such rotation
"should be irregular, unannounced and
long enough to permit disclosure of any
irregularities or manipulations."
28
Galanida was well aware of Allied Bank’s
policy of periodically transferring
personnel to different branches. As the
Court of Appeals found, assignment to
the different branches of Allied Bank was
a condition of Galanida’s employment.
Galanida consented to this condition
when he signed the Notice of Personnel
Action.29
Galanida in his complaint or
corroborated his allegations of
widespread discrimination and
favoritism.
As regards Ms. Co, Galanida’s letter of
16 June 1994 itself showed that her
assignment to Cebu was not in any way
related to Galanida’s transfer. Ms. Co
was supposed to replace a certain Larry
Sabelino in the Tabunok branch. The
employer has the prerogative, based on
its assessment of the employees’
qualifications and competence, to rotate
them in the various areas of its business
operations to ascertain where they will
function with maximum benefit to the
company. 31

result in demotion in rank or diminution

of the employee’s salary, benefits and
other privileges. In illegal dismissal
24
cases, the employer has the burden of
showing that the transfer is not
unnecessary, inconvenient and
prejudicial to the displaced employee.
The constant transfer of bank officers
and personnel with accounting
responsibilities from one branch to
another is a standard practice of Allied
Bank, which has more than a hundred
branches throughout the country. Allied
26
Bank does this primarily for internal
control. It also enables bank employees
to gain the necessary experience for
eventual promotion. The Bangko Sentral
ng Pilipinas, in its Manual of Regulations
for Banks and Other Financial
The evidence on record contradicts the
charge that Allied Bank discriminated
against Galanida and was in bad faith
when it ordered his transfer. Allied Bank’s
letter of 13 June 1994 showed that at
30
25
least 14 accounting officers and
personnel from various branches,
including Galanida, were transferred to
other branches. Allied Bank did not
single out Galanida. The same letter
explained that Galanida was second in
line for assignment outside Cebu
because he had been in Cebu for seven
years already. The person first in line,
Assistant Manager Roberto Isla, who
had been in Cebu for more than ten
years, had already transferred to a
branch in Cagayan de Oro City. We note
that none of the other transferees joined
Neither was Galanida’s transfer in the
nature of a demotion. Galanida did not
present evidence showing that the
transfer would diminish his salary,
benefits or other privileges. Instead,
Allied Bank’s letter of 13 June 1994
assured Galanida that he would not
suffer any reduction in rank or grade, and
that the transfer would involve the same
rank, duties and obligations. Mr. Olveda
explained this further in the affidavit he
submitted to the Labor Arbiter, thus:
19. There is no demotion in position/rank
or diminution of complainant’s salary,
benefits and other privileges as the
transfer/assignment of branch officers is
premised on the role/functions that they
will assume in the management and
operations of the branch, as shown
below:
(a) The Branch Accountant, as controller
of the branch is responsible for the
proper discharge of the functions of the
accounting section of the branch, review
of documentation/proper accounting and
control of transaction. As such, the
accounting functions in the branch can
be assumed by any of the following
officers with the rank of: Senior
Manager/Acctg.; Manager/ Acctg.; Senior
Asst. Manager/Acctg.; Asst.
Manager/Acctg.; Accountant or Asst.
Accountant.
xxx
20. The transfer/assignment of branch
officer from one branch, to another
branch/office is lateral in nature and
carries with it the same position/rank,
salary, benefits and other privileges. The
assignment/transfer is for the officer to
assume the functions relative to his job
and NOT the position/rank of the officer
to be replaced.
There is also no basis for the finding that
Allied Bank was guilty of unfair labor
practice in dismissing Galanida. Unfair
labor practices relate only to violations of
"the constitutional right of workers and
employees to self-organization" and are
32
limited to the acts enumerated in Article
248 of the Labor Code, none of which
applies to the present case. There is no
evidence that Galanida took part in
forming a union, or even that a union
existed in Allied Bank.
This leaves the issue of whether
Galanida could validly refuse the transfer
orders on the ground of parental
obligations, additional expenses, and the
anguish he would suffer if assigned away
from his family.
The Court has ruled on this issue before.
In the case of Homeowners Savings
and Loan Association, Inc. v.
NLRC, we held:
33
The acceptability of the proposition that
transfer made by an employer for an
illicit or underhanded purpose – i.e., to
defeat an employee’s right to self-
organization, to rid himself of an
undesirable worker, or to penalize an
employee for union activities – cannot be
upheld is self-evident and cannot be
gainsaid. The difficulty lies in the
situation where no such illicit, improper
or underhanded purpose can be
ascribed to the employer, the objection to
the transfer being grounded solely upon
the personal inconvenience or hardship
that will be caused to the employee by
reason of the transfer. What then?
This was the very same situation we
faced in Phil. Telegraph and
Telephone Corp. v. Laplana. In that
case, the employee, Alicia Laplana, was
a cashier at the Baguio City Branch of
PT&T who was directed to transfer to the
company’s branch office at Laoag City. In
refusing the transfer, the employee
averred that she had established Baguio
City as her permanent residence and
that such transfer will involve additional
expenses on her part, plus the fact that
an assignment to a far place will be a big
sacrifice for her as she will be kept away
from her family which might adversely
affect her efficiency. In ruling for the
employer, the Court upheld the transfer
from one city to another within the
country as valid as long as there is no
bad faith on the part of the employer. We
held then:
"Certainly the Court cannot accept the
proposition that when an employee
opposes his employer’s decision to
transfer him to another work place, there
being no bad faith or underhanded
motives on the part of either party, it is
the employee’s wishes that should be
made to prevail."
Galanida, through counsel, invokes the
Court’s ruling in Dosch v.
NLRC. Dosch, however, is not
34
applicable to the present case. Helmut
Dosch refused a transfer consequential
to a promotion. We upheld the refusal
because no law compels an employee to
accept a promotion, and because the
position Dosch was supposed to be
promoted to did not even exist at that
time. This left as the only basis for the
35
charge of insubordination a letter from
Dosch in which the Court found "not
even the slightest hint of defiance, much
less xxx insubordination."36
Moreover, the transfer of an employee to
an overseas post, as in the Dosch case,
cannot be likened to a transfer from one
city to another within the country, which
37
is the situation in the present case. The
distance from Cebu City to Bacolod City
or from Cebu City to Tagbilaran City does
not exceed the distance from Baguio City
to Laoag City or from Baguio City to
Manila, which the Court considered a
reasonable distance in PT&T v.
Laplana. 38
The refusal to obey a valid transfer order
constitutes willful disobedience of a
lawful order of an employer. Employees
39
may object to, negotiate and seek
redress against employers for rules or
orders that they regard as unjust or
illegal. However, until and unless these
rules or orders are declared illegal or
improper by competent authority, the
employees ignore or disobey them at
their peril. For Galanida’s continued
40
refusal to obey Allied Bank’s transfer
orders, we hold that the bank dismissed
Galanida for just cause in accordance
with Article 282 (a) of the Labor
Code. Galanida is thus not entitled to
41
reinstatement or to separation pay.
Whether Galanida’s dismissal violated
the
requirement of notice and hearing
To be effective, a dismissal must comply
with Section 2 (d), Rule 1, Book VI of the
Omnibus Rules Implementing the Labor
Code ("Omnibus Rules"), which
provides:
For termination of employment based on
just causes as defined in Article 282 of
the Labor Code:
(i) A written notice served on the
employee specifying the ground
or grounds of termination, and
giving said employee reasonable
opportunity within which to
explain his side.
(ii) A hearing or conference
during which the employee
concerned, with the assistance of
counsel if he so desires is given
opportunity to respond to the
charge, present his evidence, or
rebut the evidence presented
against him.
(iii) A written notice of termination
served on the employee
indicating that upon due
consideration of all the
circumstances, grounds have
been established to justify his
termination.
The first written notice was embodied in
Allied Bank’s letter of 13 June 1994. The
first notice required Galanida to explain
why no disciplinary action should be
taken against him for his refusal to
comply with the transfer orders.
On the requirement of a hearing, this
Court has held that the essence of due
process is simply an opportunity to be
heard. An actual hearing is not
42
necessary. The exchange of several
letters, in which Galanida’s wife, a lawyer
with the City Prosecutor’s Office,
assisted him, gave Galanida an
opportunity to respond to the charges
against him.
The remaining issue is whether the
Memo dated 8 September 1994 sent to
Galanida constitutes the written notice of
termination required by the Omnibus
Rules. In finding that it did not, the Court
of Appeals and the NLRC cited Allied
Bank’s rule on dismissals, quoted in the
Memo, that, "Notice of termination shall
be issued by the Investigation
Committee subject to the confirmation of
the President or his authorized
representative." The appellate court and
43
NLRC held that Allied Bank did not send
any notice of termination to Galanida.
The Memo, with the heading "Transfer
and Reassignment," was not the
termination notice required by law.
We do not agree.
Even a cursory reading of the Memo will
show that it unequivocally informed
Galanida of Allied Bank’s decision to
dismiss him. The statement, "please be
informed that the Bank has terminated
your services effective September 1,
1994 and considered whatever benefit, if
any, that you are entitled [to] as forfeited
xxx" is plainly worded and needs no
44
interpretation. The Memo also discussed
the findings of the Investigation
Committee that served as grounds for
Galanida’s dismissal. The Memo referred
to Galanida’s "open defiance and
refusal" to transfer first to the Bacolod
1. On March 13, 1994 Private
47
Respondent-Appellee filed before
the Region VII Arbitration Branch
a Complaint for Constructive
Dismissal. A copy of the
Complaint is attached to the
Petition as Annex "H";
xxx
5. On September 8, 1994,
Petitioner-Appellant issued him a
President or his authorized
representative to confirm the notice of
termination. The bank’s Vice-President
for Personnel, as the head of the
department that handles the movement
of personnel within Allied Bank, can
certainly represent the bank president in
cases involving the dismissal of
employees.
Nevertheless, we agree that the Memo
suffered from certain errors. Although
1âwphi1

City branch and then to the Tagbilaran Letter of Termination. A copy of the Memo stated that Allied Bank
City branch. The Memo also mentioned said letter is attached to the terminated Galanida’s services as of 1
his continued refusal to report for work Petition as Annex "N"; September 1994, the Memo bore the
despite the denial of his application for date 8 September 1994. More
additional vacation leave. The Memo
45
importantly, Galanida only received a
6. Private Respondent-Appellee
also refuted Galanida’s charges of copy of the Memo on 5 October 1994, or
filed an Amended/ Supplemental
discrimination and demotion, and more than a month after the supposed
Complaint wherein he alleged
concluded that he had violated Article XII date of his dismissal. To be effective, a
illegal dismissal. A copy of the
of the bank’s Employee Discipline Policy written notice of termination must
Amended/Supplemental
and Procedure. be served on the employee. Allied Bank
51
Complaint is attached to the
Petition as Annex "O"; could not terminate Galanida on 1
The Memo, although captioned "Transfer xxx (Emphasis supplied)
48 September 1994 because he had not
and Reassignment," did not preclude it received as of that date the notice of
from being a notice of termination. The Allied Bank’s decision to dismiss him.
The Memorandum for Private
Court has held that the nature of an Galanida’s dismissal could only take
Respondent-Appellee refers to the
instrument is characterized not by the effect on 5 October 1994, upon his
Memo as a "Letter of Termination."
title given to it but by its body and receipt of the Memo. For this reason,
Further, Galanida amended his
contents. Moreover, it appears that
46
Galanida is entitled to backwages for the
complaint for constructive dismissal to
49

Galanida himself regarded the Memo as period from 1 September 1994 to 4

one for illegal dismissal after he
50

a notice of termination. We quote from October 1994.

received the Memo. Clearly, Galanida
the Memorandum for Private
had understood the Memo to mean that
Respondent-Appellee, as follows: Under the circumstances, we also find
Allied Bank had terminated his services.
an award of ₱ 10,000 in nominal
The proceedings may be capsulized as damages proper. Courts award nominal
The Memo complied with Allied Bank’s
follows: damages to recognize or vindicate the
internal rules which required the bank’s
right of a person that another has
violated. The law entitles Galanida to
52
receive timely notice of Allied Bank’s
decision to dismiss him. Allied Bank
should have exercised more care in
issuing the notice of termination.
WHEREFORE, the Decision of 27 April
2000 of the Court of Appeals in CA-G.R.
SP No. 51451 upholding the Decision of
18 September 1998 of the NLRC in
NLRC Case No. V-000180-98 is
AFFIRMED, with the following
MODIFICATIONS:
1) The awards of separation pay,
moral damages and exemplary
damages are hereby deleted for
lack of basis;
2) Reducing the award of
backwages to cover only the
period from 1 September 1994 to
4 October 1994; and
3) Awarding nominal damages to
private respondent for ₱ 10,000.
This case is REMANDED to the Labor
Arbiter for the computation, within thirty
(30) days from receipt of this Decision, of
the backwages, inclusive of allowances
and other benefits, due to Potenciano L.
Galanida for the time his dismissal was
ineffectual from 1 September 1994 until 4
October 1994.
Labor Arbiter Dominador A. Almirante
and Atty. Loreto M. Durano are
ADMONISHED to be more careful in
citing the decisions of the Supreme
Court in the future.
SO ORDERED.
[G.R. NO. 163269 : April 19,
2006]
ROLANDO C.
RIVERA, Petitioner, v. SOLIDBANK
CORPORATION, Respondent.
DECISION
CALLEJO, SR., J.:
Assailed in this Petition for Review
on Certiorari is the Decision1 of the
Court of Appeals (CA) in CA-G.R. CV
No. 52235 as well as its
Resolution2 denying the Motion for
Partial Reconsideration of petitioner
Rolando C. Rivera.
Petitioner had been working for
Solidbank Corporation since July 1,
1977.3 He was initially employed as
an Audit Clerk, then as Credit
Investigator, Senior Clerk, Assistant
Accountant, and Assistant Manager.
Prior to his retirement, he became
the Manager of the Credit
Investigation and Appraisal Division
of the Consumer's Banking Group. In
the meantime, Rivera and his
brother-in-law put up a poultry
business in Cavite.
In December 1994, Solidbank offered
two retirement programs to its
employees: (a) the Ordinary
Retirement Program (ORP), under
which an employee would receive
85% of his monthly basic salary
multiplied by the number of years in
service; and (b) the Special
Retirement Program (SRP), under
which a retiring employee would
receive 250% of the gross monthly
salary multiplied by the number of
years in service.4 Since Rivera was
only 45 years old, he was not
qualified for retirement under the
ORP. Under the SRP, he was entitled
to receive P1,045,258.95 by way of
benefits.5
Deciding to devote his time and
attention to his poultry business in
Cavite, Rivera applied for retirement
under the SRP. Solidbank approved
the application and Rivera was
entitled to receive the net amount
of P963,619.28. This amount
included his performance incentive
award (PIA), and his unearned
medical, dental and optical
allowances in the amount
of P1,666.67, minus his total
accountabilities to Solidbank
amounting to P106,973.00.6 Rivera
received the amount and confirmed
his separation from Solidbank on
February 25, 1995.7
Subsequently, Solidbank required
Rivera to sign an undated Release,
Waiver and Quitclaim, which was
notarized on March 1, 1995.8 Rivera
acknowledged receipt of the net
proceeds of his separation and
retirement benefits and promised
that "[he] would not, at any time, in
any manner whatsoever, directly or
indirectly engage in any unlawful
activity prejudicial to the interest of
Solidbank, its parent, affiliate or
subsidiary companies, their
stockholders, officers, directors,
agents or employees, and their
successors-in-interest and will not
disclose any information concerning
the business of Solidbank, its manner
or operation, its plans, processes, or
data of any kind."9
Aside from acknowledging that he
had no cause of action against
Solidbank or its affiliate companies,
Rivera agreed that the bank may
bring any action to seek an award for
damages resulting from his breach of
the Release, Waiver and Quitclaim,
and that such award would include
the return of whatever sums paid to
him by virtue of his retirement under
the SRP.10 Rivera was likewise
required to sign an undated
Undertaking as a supplement to the
Release, Waiver and Quitclaim in
favor of Solidbank in which he
declared that he received in full his
entitlement under the law (salaries,
benefits, bonuses and other
emoluments), including his
separation pay in accordance with the
SRP. In this Undertaking, he
promised that "[he] will not seek
employment with a competitor bank
or financial institution within one (1)
year from February 28, 1995, and
that any breach of the Undertaking or
the provisions of the Release, Waiver
and Quitclaim would entitle Solidbank
to a cause of action against him
before the appropriate courts of
law.11 Unlike the Release, Waiver and
Quitclaim, the Undertaking was not
notarized.
On May 1, 1995, the Equitable
Banking Corporation (Equitable)
employed Rivera as Manager of its
Credit Investigation and Appraisal
Division of its Consumers' Banking
Group.12 Upon discovering this,
Solidbank First Vice-President for
Human Resources Division (HRD)
Celia J.L. Villarosa wrote a letter
dated May 18, 1995, informing Rivera
that he had violated the Undertaking.
She likewise demanded the return of
all the monetary benefits he received
in consideration of the SRP within five
(5) days from receipt; otherwise,
appropriate legal action would be
taken against him.13
When Rivera refused to return the
amount demanded within the given
period, Solidbank filed a complaint for
Sum of Money with Prayer for Writ of
Preliminary Attachment14 before the
Regional Trial Court (RTC) of Manila
on June 26, 1995. Solidbank, as
plaintiff, alleged therein that in
accepting employment with a
competitor bank for the same
position he held in Solidbank before
his retirement, Rivera violated his
Undertaking under the SRP.
Considering that Rivera accepted
employment with Equitable barely
three months after executing the
Undertaking, it was clear that he had
no intention of honoring his
commitment under said deed.
Solidbank prayed that Rivera be
ordered to return the net amount
of P963,619.28 plus interests therein,
and attorney's fees, thus:
WHEREFORE, it is respectfully prayed
that:
1. At the commencement of this
action and upon the filing of a bond in
such amount as this Honorable Court
may fix, a writ of preliminary
attachment be forthwith issued
against the properties of the
defendant as satisfaction of any
judgment that plaintiff may secure;
2. After trial, judgment be rendered
ordering defendant to pay plaintiff
the following sums: NINE HUNDRED
SIXTY-THREE THOUSAND SIX
HUNDRED NINETEEN AND 28/100
ONLY (P963,619.28) PESOS,
Philippine Currency, as of 23 May
1995, plus legal interest of 12% per
annum until fully paid;
3. Such sum equivalent to 10% of
plaintiff's claims plus P2,000.00 for
every appearance by way of
attorney's fees; andcralawlibrary
4. Costs of suit.
PLAINTIFF prays for other reliefs just
and equitable under the premises.15
Solidbank appended the Affidavit of
HRD First Vice-President Celia
Villarosa and a copy of the Release,
Waiver and Quitclaim and
Undertaking which Rivera executed.16
In an Order dated July 6, 1995, the
trial court issued a Writ of Preliminary
Attachment17 ordering Deputy Sheriff
Eduardo Centeno to attach all of
Rivera's properties not exempt from
execution. Thus, the Sheriff levied on
a parcel of land owned by Rivera.
In his Answer with Affirmative
Defenses and Counterclaim, Rivera
admitted that he received the net
amount of P963,619.28 as separation
pay. However, the employment ban
provision in the Undertaking was
never conveyed to him until he was
made to sign it on February 28,
1995. He emphasized that, prior to
said date, Solidbank never disclosed
any condition to the retirement
scheme, nor did it impose such
employment ban on the bank officers
and employees who had previously
availed of the SRP. He alleged that
the undertaking not to "seek
employment with any competitor
bank or financial institution within
one (1) year from February 28, 1995"
was void for being contrary to the
Constitution, the law and public
policy, that it was unreasonable,
arbitrary, oppressive, discriminatory,
cruel, unjust, inhuman, and violative
of his human rights. He further
claimed that the Undertaking was a
contract of adhesion because it was
prepared solely by Solidbank without
his participation; considering his
moral and economic disadvantage, it
must be liberally construed in his
favor and strictly against the bank.
On August 15, 1995, Solidbank filed a
Verified Motion for Summary
Judgment, alleging therein that
Rivera raised no genuine issue as to
any material fact in his Answer
except as to the amount of damages.
It prayed that the RTC render
summary judgment against Rivera.
Solidbank alleged that whether or not
the employment ban provision
contained in the Undertaking is
unreasonable, arbitrary, or
oppressive is a question of law. It
insisted that Rivera signed the
Undertaking voluntarily and for
valuable consideration; and under the
Release, Waiver and Quitclaim, he
was obliged to return
the P963,619.28 upon accepting
employment from a competitor bank
within the one-year proscribed
period. Solidbank appended to its
motion the Affidavit of Villarosa,
where she declared that Rivera was
employed by Equitable on May 1,
1995 for the same position he held
before his retirement from Solidbank.
Rivera opposed the motion
contending that, as gleaned from the
pleadings of the parties as well as
Villarosa's Affidavit, there are
genuine issues as to material facts
which call for the presentation of
evidence. He averred that there was
a need for the parties to adduce
evidence to prove that he did not sign
the Undertaking voluntarily. He
claimed that he would not have been
allowed to avail of the SRP if he had
not signed it, and consequently, his
retirement benefits would not have
been paid. This was what Ed Nallas,
Solidbank Assistant Vice-President for
HRD and Personnel, told him when he
received his check on February 28,
1995. Senior Vice-President Henry
Valdez, his superior in the
Consumers' Banking Group, also did
not mention that he would have to
sign such Undertaking which
contained the assailed provision.
Thus, he had no choice but to sign it.
He insisted that the question of
whether he violated the Undertaking
is a genuine issue of fact which called
for the presentation of evidence
during the hearing on the merits of
the case. He also asserted that he
could not cause injury or prejudice to
Solidbank's interest since he never
acquired any sensitive or delicate
information which could prejudice the
bank's interest if disclosed.
Rivera averred that he had the right
to adduce evidence to prove that he
had been faithful to the provisions of
the Release, Waiver and Quitclaim,
and the Undertaking, and had not
committed any act or done or said
anything to cause injury to
Solidbank.18
Rivera appended to his Opposition his
Counter-Affidavit in which he
reiterated that he had to sign the
Undertaking containing the
employment ban provision, otherwise
his availment of the SRP would not
push through. There was no truth to
the bank's allegation that, "in
exchange for receiving the larger
amount of P1,045,258.95 under the
SRP, instead of the very much
smaller amount of P224,875.81 under
the ORP, he agreed that he will not
seek employment in a competitor
bank or financial institution within
one year from February 28, 1995." It
was the bank which conceived the
SRP to streamline its organization
and all he did was accept it. He
stressed that the decision whether to
allow him to avail of the SRP
belonged solely to Solidbank. He also
pointed out that the employment ban
provision in the Undertaking was not
a consideration for his availment of
the SRP, and that if he did not avail
of the retirement program, he would
have continued working for Solidbank
for at least 15 more years, earning
more than what he received under
the SRP. He alleged that he intended
to go full time into the poultry
business, but after about two
months, found out that, contrary to
his expectations, the business did not
provide income sufficient to support
his family. Being the breadwinner, he
was then forced to look for a job, and
considering his training and
experience as a former bank
employee, the job with Equitable was
all he could find. He insisted that he
had remained faithful to Solidbank
and would continue to do so despite
the case against him, the attachment
of his family home, and the resulting
mental anguish, torture and expense
it has caused them.19
In his Supplemental Opposition,
Rivera stressed that, being a former
bank employee, it was the only kind
of work he knew. The ban was, in
fact, practically absolute since it
applied to all financial institutions for
one year from February 28, 1995. He
pointed out that he could not work in
any other company because he did
not have the qualifications, especially
considering his age. Moreover, after
one year from February 28, 1995, he
would no longer have any marketable
skill, because by then, it would have
been rendered obsolete by non-use
and rapid technological advances. He
insisted that the ban was not
necessary to protect the interest of
Solidbank, as, in the first place, he
had no access to any "secret"
information which, if revealed would
be prejudicial to Solidbank's interest.
In any case, he was not one to reveal
whatever knowledge or information
he may have acquired during his
employment with said bank.20
In its Reply, Solidbank averred that
the wisdom of requiring the
Undertaking from the 1995 SRP is
purely a management prerogative. It
was not for Rivera to question and
decry the bank's policy to protect
itself from unfair competition and
disclosure of its trade secrets. The
substantial monetary windfall given
the retiring officers was meant to tide
them over the one-year period of
hiatus, and did not prevent them
from engaging in any kind of
business or bar them from being
employed except with competitor
banks/financial institutions.21
On December 18, 1995, the trial
court issued an Order of Summary
Judgment.22 The fallo of the decision
reads:
WHEREFORE, SUMMARY JUDGMENT
is hereby rendered in favor of plaintiff
and against defendant ordering the
latter to pay to plaintiff bank the
amount of NINE HUNDRED SIXTY-
THREE THOUSAND SIX HUNDRED
NINETEEN AND 28/100
(P963,619.28) PESOS, Philippine
Currency, as of May 23, 1995, plus
legal interest at 12% per annum until
fully paid, and the costs of the suit.
FURTHER, NEVERTHELESS, both
parties are hereby encouraged as
they are directed to meet again and
sit down to find out how they can
finally end this rift and litigation, all
in the name of equity, for after all,
defendant had worked for the bank
for some 18 years.23
The trial court declared that there
was no genuine issue as to a matter
of fact in the case since Rivera
voluntarily executed the Release,
Waiver and Quitclaim, and the
Undertaking. He had a choice not to
retire, but opted to do so under the
SRP, and, in fact, received the
benefits under it.
According to the RTC, the prohibition
incorporated in the Undertaking was
not unreasonable. To allow Rivera to
be excused from his undertakings in
said deed and, at the same time,
benefit therefrom would be to allow
him to enrich himself at the expense
of Solidbank. The RTC ruled that
Rivera had to return the P963,619.28
he received from Solidbank, plus
interest of 12% per annum from May
23, 1998 until fully paid.
Aggrieved, Rivera appealed the ruling
to the CA which rendered judgment
on June 14, 2002 partially granting
the appeal. The fallo of the decision
reads:
WHEREFORE, the appeal is
PARTIALLY GRANTED. The decision
appealed from is AFFIRMED with the
modification that the attachment and
levy upon the family home covered
by TCT No. 51621 of the Register of
Deeds, Las Piñas, Metro Manila, is
hereby SET ASIDE and DISCHARGED.
SO ORDERED.24
The CA declared that there was no
genuine issue regarding any material
fact except as to the amount of
damages. It ratiocinated that the
agreement between Rivera and
Solidbank was the law between them,
and that the interpretation of the
stipulations therein could not be left
upon the whims of Rivera. According
to the CA, Rivera never denied
signing the Release, Waiver, and
Quitclaim, including the Undertaking
regarding the employment
prohibition. He even admitted joining
Equitable as an employee within the
proscribed one-year period. The
alleged defenses of Rivera, the CA
declared, could not prevail over the
admissions in his
pleadings.ςηαñrοblεš νιr†υαl lαω lιbrα
rÿ
Moreover, Rivera's justification for
taking the job with Equitable, "dire
necessity," was not an acceptable
ground for annulling the Undertaking
since there were no earmarks of
coercion, undue influence, or fraud in
its execution. Having executed the
said deed and thereafter receiving
the benefits under the SRP, he is
deemed to have waived the right
to assail the same, hence, is
estopped from insisting or retaining
the said amount of P963,619.28.
However, the CA ruled that the
attachment made upon Rivera's
family home was void, and, pursuant
to the mandate of Article 155, in
relation to Article 153 of the Family
Code, must be discharged.
Hence, this recourse to the Court.
Petitioner avers that '
I.
THE COURT OF APPEALS ERRED IN
UPHOLDING THE PROPRIETY OF THE
SUMMARY JUDGMENT RENDERED BY
THE TRIAL COURT CONSIDERING
THE EXISTENCE OF GENUINE ISSUES
AS TO MATERIAL FACTS WHICH CALL
FOR THE PRESENTATION OF
EVIDENCE IN A TRIAL ON THE
MERITS.
II.
THE COURT OF APPEALS ERRED IN
NOT DECLARING THE ONE-YEAR
EMPLOYMENT BAN IMPOSED BY
RESPONDENT SOLIDBANK UPON
HEREIN PETITIONER NULL AND VOID
FOR BEING UNREASONABLE AND
OPPRESSIVE AND FOR
CONSTITUTING RESTRAINT OF
TRADE WHICH VIOLATES PUBLIC
POLICY AS ENUNCIATED IN OUR
CONSTITUTION AND LAWS.
III.
THE COURT OF APPEALS ERRED IN
AFFIRMING THE TRIAL COURT'S
DECISION ORDERING HEREIN
RESPONDENT TO PAY SOLIDBANK
THE AMOUNT OF P963,619.28 AS OF
MAY 23, 1995, PLUS LEGAL
INTEREST OF 12% PER
ANNUM UNTIL FULLY PAID.
IV.
MORE SPECIFICALLY, THE COURT OF
APPEALS ERRED IN AFFIRMING THE
PORTION OF THE SUMMARY
JUDGMENT ORDERING PETITIONER
TO PAY SOLIDBANK LEGAL INTEREST
OF 12% PER ANNUM UNTIL FULLY
PAID ON THE AFOREMENTIONED
SUM [OF] P963,619.28.25
The issues for resolution are: (1)
whether the parties raised a genuine
issue in their pleadings, affidavits,
and documents, that is, whether the
employment ban incorporated in the
Undertaking which petitioner
executed upon his retirement is
unreasonable, oppressive, hence,
contrary to public policy; and (2)
whether petitioner is liable to
respondent for the restitution
of P963,619.28 representing his
retirement benefits, and interest
thereon at 12% per annum as of May
23, 1995 until payment of the full
amount.
On the first issue, petitioner claims
that, based on the pleadings of the
parties, and the documents and
affidavits appended thereto, genuine
issues as to matters of fact were
raised therein. He insists that the
resolution of the issue of whether the
employment ban is unreasonable
requires the presentation of evidence
on the circumstances which led to
respondent bank's offer of the SRP
and ORP, and petitioner's eventual
acceptance and signing of the
Undertaking on March 1, 1995. There
is likewise a need to adduce evidence
on whether the employment ban is
necessary to protect respondent's
interest, and whether it is an undue
restraint on petitioner's constitutional
right to earn a living to support his
family. He further insists that
respondent is burdened to prove that
it sustained damage or injury by
reason of his alleged breach of the
employment ban since neither the
Release, Waiver and Quitclaim, and
Undertaking he executed contain any
provision that respondent is
automatically entitled to the
restitution of the P963,619.28.
Petitioner points out that all the
deeds provide is that, in case of
breach thereof, respondent is entitled
to protection before the appropriate
courts of law.
On the second issue, petitioner avers
that the prohibition incorporated in
the Release, Waiver and Quitclaim
barring him as retiree from engaging
directly or indirectly in any unlawful
activity and disclosing any
information concerning the business
of respondent bank, as well as the
employment ban contained in the
Undertaking he executed, are
oppressive, unreasonable, cruel and
inhuman because of its overbreath.
He reiterates that it is against public
policy, an unreasonable restraint of
trade, because it prohibits him to
work for one year in the Philippines,
ultimately preventing him from
supporting his family. He points out
that a breadwinner in a family of four
minor daughters who are all
studying, with a wife who does not
work, one would have a very difficult
time meeting the financial obligations
even with a steady, regular-paying
job. He insists that the Undertaking
deprives him of the means to support
his family, and ultimately, his
children's chance for a good
education and future. He reiterates
that the returns in his poultry
business fell short of his
expectations, and unfortunately, the
business was totally destroyed by
typhoon "Rosing" in November 1995.
Petitioner further maintains that
respondent's management
prerogative does not give it a license
to entice its employees to retire at a
very young age and prohibit them
from seeking employment in a so-
called competitor bank or financial
institution, thus prevent them from
working and supporting their families
(considering that banking is the only
kind of work they know). Petitioner
avers that "management's
prerogative must be without abuse of
discretion. A line must be drawn
between management prerogative
regarding business operations per se
and those which affect the rights of
the employees. In treating its
employees, management should see
to it that its employees are at least
properly informed of its decision or
modes of action."
On the last issue, petitioner alleges
that the P1,045,258.95 he received
was his retirement benefit which he
earned after serving the bank for 18
years. It was not a mere gift or
gratuity given by respondent bank,
without the latter giving up
something of value in return. On the
contrary, respondent bank received
"valuable consideration," that is,
petitioner quit his job at the relatively
young age of 45, thus enabling
respondent to effect its
reorganization plan and forego the
salary, benefits, bonuses, and
promotions he would have received
had he not retired early.
Petitioner avers that, under the
Undertaking, respondent would be
entitled to a cause of action against
him before the appropriate courts of
law if he had violated the
employment ban. He avers that
respondent must prove its
entitlement to the P963,619.28. The
Undertaking contains no provision
that he would have to return the
amount he received under the SRP;
much less does it provide that he
would have to pay 12% interest per
annum on said amount. On the other
hand, the Release, Waiver and
Quitclaim does not contain the
provision prohibiting him from being
employed with any competitor bank
or financial institution within one year
from February 28, 1995. Petitioner
insists that he acted in good faith
when he received his retirement
benefits; hence, he cannot be
punished by being ordered to return
the sum of P963,619.28 which was
given to him for and in consideration
of his early retirement.
Neither can petitioner be subjected to
the penalty of paying 12% interest
per annum on his retirement pay
of P963,619.28 from May 23, 1995,
as it is improper and oppressive to
him and his family. As of July 3,
2002, the interest alone would
amount to P822,609.67, thus
doubling the amount to be returned
to respondent bank under the
decision of the RTC and the CA. The
imposition of interest has no basis
because the Release, Waiver and
Quitclaim, and the Undertaking do
not provide for payment of interest.
The deeds only state that breach
thereof would entitle respondent to
bring an action to seek damages, to
include the return of the amount that
may have been paid to petitioner by
virtue thereof. On the other hand,
any breach of the Undertaking or the
Release, Waiver and Quitclaim would
only entitle respondent to a cause of
action before the appropriate courts
of law. Besides, the amount received
by petitioner was not a loan and,
therefore, should not earn interest
pursuant to Article 1956 of the Civil
Code.
Finally, petitioner insists that he
acted in good faith in seeking
employment with another bank within
one year from February 28, 1995
because he needed to earn a living to
support his family and finance his
children's education. Hence, the
imposition of interest, which is a
penalty, is unwarranted.
By way of Comment on the petition,
respondent avers that the
Undertaking is the law between it and
petitioner. As such, the latter could
not assail the deed after receiving the
retirement benefit under the SRP. As
gleaned from the averments in his
petition, petitioner admitted that he
executed the Undertaking after
having been informed of the nature
and consequences of his refusal to
sign the same, i.e., he would not be
able to receive the retirement benefit
under the SRP.
Respondent maintains that courts
have no power to relieve parties of
obligations voluntarily entered into
simply because their contracts turned
out to be disastrous deeds. Citing the
ruling of this Court in Eastern
Shipping Lines, Inc. v. Court of
Appeals,26 respondent avers that
petitioner is obliged to pay 12% per
annum interest of the P963,619.28
from judicial or extrajudicial demand.
In reply, petitioner asserts that
respondent failed to prove that it
sustained damages, including the
amount thereof, and that neither the
Release, Waiver and Quitclaim nor
the Undertaking obliged him to pay
interest to respondent.
The petition is meritorious.
Sections 1 and 3, Rule 34 of the
Revised Rules of Civil Procedure
provide:
Section 1. Summary judgment for
claimant. - A party seeking to recover
upon a claim, counterclaim, or cross-
claim or to obtain a declaratory relief
may, at any time after the pleading in
answer thereto has been served,
move with supporting affidavits,
depositions or admissions for a
summary judgment in his favor upon
all or any part thereof.
xxxx
Sec. 3. Motion and proceedings
thereon. - The motion shall be served
at least ten (10) days before the time
specified for the hearing. The adverse
party may serve opposing affidavits,
depositions, or admissions at least
three (3) days before the hearing.
After the hearing, the judgment
sought shall be rendered forthwith 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.
For a summary judgment to be
proper, the movant must establish
two requisites: (a) there must be no
genuine issue as to any material fact,
except for the amount of damages;
and (b) the party presenting the
motion for summary judgment must
be entitled to a judgment as a matter
of law.27 Where, on the basis of the
pleadings of a moving party,
including documents appended
thereto, no genuine issue as to a
material fact exists, the burden to
produce a genuine issue shifts to the
opposing party. If the opposing party
fails, the moving party is entitled to a
summary judgment.28
A genuine issue is an issue of fact
which requires the presentation of
evidence as distinguished from an
issue which is a sham, fictitious,
contrived or a false claim. The trial
court can determine a genuine issue
on the basis of the pleadings,
admissions, documents, affidavits or
counteraffidavits submitted by the
parties. When the facts as pleaded
appear uncontested or undisputed,
then there is no real or genuine issue
or question as to any fact and
summary judgment called for. On the
other hand, where the facts pleaded
by the parties are disputed or
contested, proceedings for a
summary judgment cannot take the
place of a trial.29 The evidence on
record must be viewed in light most
favorable to the party opposing the
motion who must be given the
benefit of all favorable inferences as
can reasonably be drawn from the
evidence.30
Courts must be critical of the papers
presented by the moving party and
not of the papers/documents in
opposition thereto.31 Conclusory
assertions are insufficient to raise an
issue of material fact.32 A party
cannot create a genuine dispute of
material fact through mere
speculations or compilation of
differences.33 He may not create an
issue of fact through bald assertions,
unsupported contentions and
conclusory statements.34 He must do
more than rely upon allegations but
must come forward with specific facts
in support of a claim. Where the
factual context makes his claim
implausible, he must come forward
with more persuasive evidence
demonstrating a genuine issue for
trial.35
Where there are no disputed material
facts, the determination of whether a
party breached a contract is a
question of law and is appropriate for
summary judgment.36 When
interpreting an ambiguous contract
with extrinsic evidence, summary
judgment is proper so long as the
extrinsic evidence presented to the
court supports only one of the
conflicting interpretations.37 Where
reasonable men could differ as to the
contentions shown from the
evidence, summary judgment might
be denied.
In United Rentals (North America),
Inc. v. Keizer,38 the U.S. Circuit Court
of Appeals resolved the issue of
whether a summary judgment is
proper in a breach of contract action
involving the interpretation of such
contract, and ruled that:
[A] contract can be interpreted by the
court on summary judgment if (a)
the contract's terms are clear, or (b)
the evidence supports only one
construction of the controverted
provision, notwithstanding some
ambiguity. x x x If the court finds no
ambiguity, it should proceed to
interpret the contract - and it may do
so at the summary judgment stage.
If, however, the court discerns an
ambiguity, the next step - involving
an examination of extrinsic evidence
- becomes essential. x x x Summary
judgment may be appropriate even if
ambiguity lurks as long as the
extrinsic evidence presented to the
court supports only one of the
conflicting interpretations.39
In this case, there is no dispute
between the parties that, in
consideration for his availment of the
SRP, petitioner executed the Release,
Waiver and Quitclaim, and the
Undertaking as supplement thereto,
and that he received retirement pay
amounting to P963,619.28 from
respondent. On May 1, 1995, within
the one-year ban and without prior
knowledge of respondent, petitioner
was employed by Equitable as
Manager of its Credit Investigation
and Appraisal Division, Consumers'
Banking Group. Despite demands,
petitioner failed to return
the P963,619.28 to respondent on
the latter's allegation that he had
breached the one-year ban by
accepting employment from
Equitable, which according to
respondent was a competitor bank.
We agree with petitioner's contention
that the issue as to whether the post-
retirement competitive employment
ban incorporated in the Undertaking
is against public policy is a genuine
issue of fact, requiring the parties to
present evidence to support their
respective claims.
As gleaned from the records,
petitioner made two undertakings.
The first is incorporated in the
Release, Waiver and Quitclaim that
he signed, to wit:
4. I will not, at any time, in any
manner whatsoever, directly or
indirectly engage in any unlawful
activity prejudicial to the interest of
the BANK, its parent, affiliate or
subsidiary companies, their
stockholders, officers, directors,
agents or employees, and their
successors-in-interest and will not
disclose any information concerning
the business of the BANK, its manner
or operation, its plans, processes or
data of any kind.40
The second undertaking is
incorporated in the Undertaking
following petitioner's execution of the
Release, Waiver and Quitclaim which
reads:
4. That as a supplement to the
Release and Quitclaim, I executed in
favor of Solidbank on FEBRUARY 28,
1995, I hereby expressly undertake
that I will not seek employment with
any competitor bank or financial
institution within one (1) year from
February 28, 1995.41
In the Release, Waiver and Quitclaim,
petitioner declared that respondent
may bring "an action for damages
which may include, but not limited to
the return of whatever sums he may
have received from respondent under
said deed if he breaks his
undertaking therein."42 On the other
hand, petitioner declared in the
Undertaking that "any breach on his
part of said Undertaking or the terms
and conditions of the Release, Waiver
and Quitclaim will entitle respondent
to a cause of action against
[petitioner] for protection before the
appropriate courts of law."43
Article 1306 of the New Civil Code
provides that the contracting parties
may establish such stipulations,
clauses, terms and conditions as they
may deem convenient, provided they
are not contrary to law, morals, good
customs, public order or public policy.
The freedom of contract is both a
constitutional and statutory right.44 A
contract is the law between the
parties and courts have no choice but
to enforce such contract as long as it
is not contrary to law, morals, good
customs and against public policy.
The well-entrenched doctrine is that
the law does not relieve a party from
the effects of an unwise, foolish or
disastrous contract, entered into with
full awareness of what he was doing
and entered into and carried out in
good faith. Such a contract will not be
discarded even if there was a mistake
of law or fact. Courts have no
jurisdiction to look into the wisdom of
the contract entered into by and
between the parties or to render a
decision different therefrom. They
have no power to relieve parties from
obligation voluntarily assailed, simply
because their contracts turned out to
be disastrous deals.45
On the other hand, retirement plans,
in light of the constitutional mandate
of affording full protection to labor,
must be liberally construed in favor of
the employee, it being the general
rule that pension or retirement plans
formulated by the employer are to be
construed against it.46 Retirement
benefits, after all, are intended to
help the employee enjoy the
remaining years of his life, releasing
him from the burden of worrying for
his financial support, and are a form
of reward for being loyal to the
employer.47
In Ferrazzini v. Gsell,48 the Court
defined public policy in civil law
countries and in the United States
and the Philippines:
By "public policy," as defined by the
courts in the United States and
England, is intended that principle of
the law which holds that no subject
or citizen can lawfully do that which
has a tendency to be injurious to the
public or against the public good,
which may be termed the "policy of
the law," or "public policy in relation
to the administration of the law."
(Words & Phrases Judicially Defined,
vol. 6, p. 5813, and cases cited.)
Public policy is the principle under
which freedom of contract or private
dealing is restricted by law for the
good of the public. (Id., Id.) In
determining whether a contract is
contrary to public policy the nature of
the subject matter determines the
source from which such question is to
be solved. (Hartford Fire Ins. Co. v.
Chicago, M. & St. P. Ry. Co., 62 Fed.
904, 906.)
The foregoing is sufficient to show
that there is no difference in principle
between the public policy (orden
publico) in the two jurisdictions (the
United States and the Philippine
Islands) as determined by the
Constitution, laws, and judicial
decisions.49
The Court proceeded to define
"trade" as follows:
x x x In the broader sense, it is any
occupation or business carried on for
subsistence or profit. Anderson's
Dictionary of Law gives the following
definition: "Generally equivalent to
occupation, employment, or business,
whether manual or mercantile; any
occupation, employment or business
carried on for profit, gain, or
livelihood, not in the liberal arts or in
the learned professions." In Abbott's
Law Dictionary, the word is defined
as "an occupation, employment or
business carried on for gain or profit."
Among the definitions given in the
Encyclopaedic Dictionary is the
following: "The business which a
person has learnt, and which he
carries on for subsistence or profit;
occupation; particularly employment,
whether manual or mercantile, as
distinguished from the liberal arts or
the learned professions and
agriculture." Bouvier limits the
meaning to commerce and traffic,
and the handicraft of mechanics. (In
re Pinkney, 47 Kan., 89.) We are
inclined to adopt and apply the
broader meaning given by the
lexicographers.50
In the present case, the trial court
ruled that the prohibition against
petitioner accepting employment with
a competitor bank or financial
institution within one year from
February 28, 1995 is not
unreasonable. The appellate court
held that petitioner was estopped
from assailing the post-retirement
competitive employment ban because
of his admission that he signed the
Undertaking and had already received
benefits under the SRP.
The rulings of the trial court and the
appellate court are incorrect.
There is no factual basis for the trial
court's ruling, for the simple reason
that it rendered summary judgment
and thereby foreclosed the
presentation of evidence by the
parties to prove whether the
restrictive covenant is reasonable or
not. Moreover, on the face of the
Undertaking, the post-retirement
competitive employment ban is
unreasonable because it has no
geographical limits; respondent is
barred from accepting any kind of
employment in any competitive bank
within the proscribed period.
Although the period of one year may
appear reasonable, the matter of
whether the restriction is reasonable
or unreasonable cannot be
ascertained with finality solely from
the terms and conditions of the
Undertaking, or even in tandem with
the Release, Waiver and Quitclaim.
Undeniably, petitioner retired under
the SRP and received P963,619.28
from respondent. However, petitioner
is not proscribed, by waiver or
estoppel, from assailing the post-
retirement competitive employment
ban since under Article 1409 of the
New Civil Code, those contracts
whose cause, object or purpose is
contrary to law, morals, good
customs, public order or public policy
are inexistent or void from the
beginning. Estoppel cannot give
validity to an act that is prohibited by
law or one that is against public
policy.51
Respondent, as employer, is
burdened to establish that a
restrictive covenant barring an
employee from accepting a
competitive employment after
retirement or resignation is not an
unreasonable or oppressive, or in
undue or unreasonable restraint of
trade, thus, unenforceable for being
repugnant to public policy. As the
Court stated in Ferrazzini v.
Gsell,52 cases involving contracts in
restraint of trade are to be judged
according to their circumstances, to
wit:
x x x There are two principal grounds
on which the doctrine is founded that
a contract in restraint of trade is void
as against public policy. One is, the
injury to the public by being deprived
of the restricted party's industry; and
the other is, the injury to the party
himself by being precluded from
pursuing his occupation, and thus
being prevented from supporting
himself and his family.
And in Gibbs v. Consolidated Gas Co.
of Baltimore, supra, the court stated
the rule thus:
Public welfare is first considered, and
if it be not involved, and the restraint
upon one party is not greater than
protection to the other party
requires, the contract may be
sustained. The question is, whether,
under the particular circumstances of
the case and the nature of the
particular contract involved in it, the
contract is, or is not, unreasonable.53
In cases where an employee assails a
contract containing a provision
prohibiting him or her from accepting
competitive employment as against
public policy, the employer has to
adduce evidence to prove that the
restriction is reasonable and not
greater than necessary to protect the
employer's legitimate business
interests.54 The restraint may not be
unduly harsh or oppressive in
curtailing the employee's legitimate
efforts to earn a livelihood and must
be reasonable in light of sound public
policy.55
Courts should carefully scrutinize all
contracts limiting a man's natural
right to follow any trade or profession
anywhere he pleases and in any
lawful manner. But it is just as
important to protect the enjoyment of
an establishment in trade or
profession, which its employer has
built up by his own honest application
to every day duty and the faithful
performance of the tasks which every
day imposes upon the ordinary man.
What one creates by his own labor is
his. Public policy does not intend that
another than the producer shall reap
the fruits of labor; rather, it gives to
him who labors the right by every
legitimate means to protect the fruits
of his labor and secure the enjoyment
of them to himself.56 Freedom to
contract must not be unreasonably
abridged. Neither must the right to
protect by reasonable restrictions
that which a man by industry, skill
and good judgment has built up, be
denied.57
The Court reiterates that the
determination of reasonableness is
made on the particular facts and
circumstances of each case.58 In
Esmerson Electric Co. v. Rogers,59 it
was held that the question of
reasonableness of a restraint requires
a thorough consideration of
surrounding circumstances, including
the subject matter of the contract,
the purpose to be served, the
determination of the parties, the
extent of the restraint and the
specialization of the business of the
employer. The court has to consider
whether its enforcement will be
injurious to the public or cause undue
hardships to the employee, and
whether the restraint imposed is
greater than necessary to protect the
employer. Thus, the court must have
before it evidence relating to the
legitimate interests of the employer
which might be protected in terms of
time, space and the types of activity
proscribed.60
Consideration must be given to the
employee's right to earn a living and
to his ability to determine with
certainty the area within which his
employment ban is restituted. A
provision on territorial limitation is
necessary to guide an employee of
what constitutes as violation of a
restrictive covenant and whether the
geographic scope is co-extensive with
that in which the employer is doing
business. In considering a territorial
restriction, the facts and
circumstances surrounding the case
must be considered.61
Thus, in determining whether the
contract is reasonable or not, the trial
court should consider the following
factors: (a) whether the covenant
protects a legitimate business
interest of the employer; (b) whether
the covenant creates an undue
burden on the employee; (c) whether
the covenant is injurious to the public
welfare; (d) whether the time and
territorial limitations contained in the
covenant are reasonable; and (e)
whether the restraint is reasonable
from the standpoint of public policy.62
Not to be ignored is the fact that the
banking business is so impressed
with public interest where the trust
and interest of the public in general is
of paramount importance such that
the appropriate standard of diligence
must be very high, if not the highest
degree of diligence.63
We are not impervious of the
distinction between restrictive
covenants barring an employee to
accept a post-employment
competitive employment or restraint
on trade in employment contracts
and restraints on post-retirement
competitive employment in pension
and retirement plans either
incorporated in employment contracts
or in collective bargaining
agreements between the employer
and the union of employees, or
separate from said contracts or
collective bargaining agreements
which provide that an employee who
accepts post retirement competitive
employment will forfeit retirement
and other benefits or will be obliged
to restitute the same to the
employer. The strong weight of
authority is that forfeitures for
engaging in subsequent competitive
employment included in pension and
retirement plans are valid even
though unrestricted in time or
geography. The raison d etre is
explained by the United States Circuit
Court of Appeals in Rochester
Corporation v. W.L. Rochester, Jr.:64
x x x The authorities, though,
generally draw a clear and obvious
distinction between restraints on
competitive employment in
employment contracts and in pension
plans. The strong weight of authority
holds that forfeitures for engaging in
subsequent competitive employment,
included in pension retirement plans,
are valid, even though unrestricted in
time or geography. The reasoning
behind this conclusion is that the
forfeiture, unlike the restraint
included in the employment contract,
is not a prohibition on the employee's
engaging in competitive work but is
merely a denial of the right to
participate in the retirement plan if
he does so engage. A leading case on
this point is Van Pelt v. Berefco, Inc.,
supra, 208 N.E.2d at p. 865, where,
in passing on a forfeiture provision
similar to that here, the Court said:
"A restriction in the contract which
does not preclude the employee from
engaging in competitive activity, but
simply provides for the loss of rights
or privileges if he does so is not in
restraint of trade." (emphasis
added)65
A post-retirement competitive
employment restriction is designed to
protect the employer against
competition by former employees
who may retire and obtain retirement
or pension benefits and, at the same
time, engage in competitive
employment.66
We have reviewed the Undertaking
which respondent impelled petitioner
to sign, and find that in case of
failure to comply with the promise
not to accept competitive
employment within one year from
February 28, 1995, respondent will
have a cause of action against
petitioner for "protection in the courts
of law." The words "cause of action
for protection in the courts of law"
are so broad and comprehensive,
that they may also include a cause of
action for prohibitory and mandatory
injunction against petitioner, specific
performance plus damages, or a
damage suit (for actual, moral and/or
exemplary damages), all inclusive of
the restitution of the P963,619.28
which petitioner received from
respondent. The Undertaking and the
Release, Waiver and Quitclaim do not
provide for the automatic forfeiture of
the benefits petitioner received under
the SRP upon his breach of said
deeds. Thus, the post-retirement
competitive employment ban
incorporated in the Undertaking of
respondent does not, on its face,
appear to be of the same class or
genre as that contemplated in
Rochester.
It is settled that actual damages or
compensatory damages may be
awarded for breach of contracts.
Actual damages are primarily
intended to simply make good or
replace the loss covered by said
breach.67 They cannot be presumed.
Even if petitioner had admitted to
having breached the Undertaking,
respondent must still prove that it
suffered damages and the amount
thereof.68 In determining the amount
of actual damages, the Court cannot
rely on mere assertions, speculations,
conjectures or guesswork but must
depend on competent proof and on
the best evidence obtainable
regarding the actual amount of
losses.69 The benefit to be derived
from a contract which one of the
parties has absolutely failed to
perform is of necessity to some
extent a matter of speculation of the
injured party.
On the assumption that the
competitive employment ban in the
Undertaking is valid, petitioner is not
automatically entitled to return
the P963,619.28 he received from
respondent. To reiterate, the terms of
the Undertaking clearly state that any
breach by petitioner of his promise
would entitle respondent to a cause
of action for protection in the courts
of law; as such, restitution of
the P963,619.28 will not follow as a
matter of course. Respondent is still
burdened to prove its entitlement to
the aforesaid amount by producing
the best evidence of which its case is
susceptible.70
IN LIGHT OF ALL THE FOREGOING,
the petition is GRANTED. The
Decision of the Court of Appeals in
CA-G.R. CV No. 52235 is SET ASIDE.
Let this case be REMANDED to the
Regional Trial Court of Manila for
further proceedings conformably with
this decision of the Court.
SO ORDERED.
G.R. No. 139532 August 9, 2001
REGAL FILMS, INC., petitioner,
vs.
GABRIEL CONCEPCION, respondent.
VITUG, J.:
The case involves a compromise
judgment issued by the Regional Trial
Court of Quezon City, later affirmed by
the Court of Appeals, and now being
assailed in the instant petition for review.
Culled from the records, the facts that
led to the controversy would not appear
to be in serious dispute.
In 1991, respondent Gabriel "Gabby"
Conception, a television artist and movie
actor, through his manager Lolita Solis,
entered into a contract with petitioner
Regal Films, Inc., for services to be
rendered by respondent in petitioner's
motion pictures. Petitioner, in turn,
undertook to give two parcels of land to
respondent, one located in Marikina and
the other in Cavite, on top of the "talent
fees" it had agreed to pay.
In 1993, the parties renewed the
contract, incorporating the same
undertaking on the part of petitioner to
give respondent on the part of petitioner
to give respondent the two parcels of
land mentioned in the first agreement.
Despite the appearance of respondent in
several films produced by petitioner, the
latter failed to comply with its promise to
convey to respondent the two
aforementioned lots. 1âwphi1.nêt
On 30 May 1994, respondent and his
manager filed an action against
petitioner before the Regional Trial Court
of Quezon City, docketed Civil Case No.
Q-94-20714 and raffled to Branch 76, for
rescission of contract with damages. In
his complaint, respondent contended
that he was entitled to rescind the
contract, plus damages, and to be
released from further commitment to
work exclusively for petitioner owing to
the latter's failure to honor the
agreement.
Instead of filing an answer to the
complaint, petitioner moved for its
dismissal on the allegation that the
parties had settled their differences
amicably. Petitioner averred that both
parties had executed an agreement,
dated 17 June 1994, which was to so
operate as an addendum to the 1991
and 1993 contracts between them. The
agreement was signed by a
representative of petitioner and by Solis
purportedly acting for and in behalf of
respondent Concepcion.
The preliminary conference held by the
trial court failed to produce a settlement
between the parties; thereupon, the trial
court ordered Solis and respondent to
comment on petitioner's motion to
dismiss.
On 30 September 1994, Solis filed a
motion to dismiss the complaint
reiterating that she, acting for herself and
for respondent Concepcion, had already
settled the case amicably with petitioner.
On 17 October 1994, respondent
Concepcion himself opposed the motion
to dismiss contending that
the addendum, containing provisions
grossly disadvantageous to him, was
executed without his knowledge and
consent. Respondent stated that Solis
had since ceased to be his manager and
had to authority to sign the addendum for
him.
During the preliminary conference held
on 23 June 1995, petitioner intimated to
respondent and his counsel its
willingness to allow respondent to be
released from his 1991 and 1993
contracts with petitioner rather than to
further pursue the addendum which
respondent had challenged.
On 03 July 1995, respondent filed a
manifestation with the trial court to the
effect that he was now willing to honor
the addendum to the 1991 and 1993
contracts and to have it considered as
compromise agreement as to warrant a
judgment in accordance therewith. The
manifestation elicited a comment from
both petitioner and Solis to the effect that
the relationship between the parties had
by then become strained, following the
notorious Manila Film Festival scam
involving respondent, but that it was still
willing to release respondent from his
contract.
On 24 October 1995, the trial court
issued an order rendering judgment on
compromise based on the
subject addendum which respondent had
previously challenged but later agreed to
honor pursuant to his manifestation of 03
July 1995.
Petitioner moved for reconsideration;
having been denied, it then elevated the
case to the Court of Appeals arguing that
the trial court erred in treating
the addendum of 17 June 1994 as being
a compromise agreement and in
depriving it of its right to procedural due
process.
On 30 July 1999, the appellate court
rendered judgment affirming the order of
the trial court of 24 October 1995; it
ruled:
"In the instant case, there was an
Addendum to the contract signed
by Lolita and Regal Films'
representative to which
addendum Concepcion through
his Manifestation expressed his
conformity. There was, therefore,
consent of all the parties.
"The addendum/compromise "II.
agreement was perfected and is
binding on the parties and may THE COURT OF APPEALS
not later be disowned simply ERRED IN RENDERING
because of a change of mind of JUDGMENT ON A
Regal Films and/or Lolita by COMPROMISE WHEN THE
claiming, in their PARTIES DID NOT AGREE TO
Opposition/Reply to Conception's SUCH A COMPROMISE;
Manifestion, that after the 1995
Metro Manila Films Festival "III.
scam/fiasco in which Concepcion
was involved, the relationship
THE COURT OF APPEALS
between the parties had become
ERRED IN HOLDING THAT THE
bitter to render compliance with
MINDS OF THE PARTIES HAD
the terms and conditions of the
MET TO ELEVATE THE
Addendum no longer possible
PREVIOUSLY REJECTED
and consequently release
ADDENDUM TO THE LEVEL OF
Concepcion from the 1991 and
A JUDGMENT ON A
1993 contracts." 1
COMPROMISE." 2
Dissatisfied, petitioner appealed to this
The petition is meritorious.
Court claiming in its petition for review
that –
Petitioner argues that the
subject addendum could not be the basis
"I.
of the compromise judgment. The Court
agrees.
THE COURT OF APPEALS
ERRED IN AFFIRMING THE
A compromise is an agreement between
TRIAL COURT'S ACTION IN
two or more persons who, for preventing
RENDERING JUDGMENT ON A
or putting an end to a lawsuit, adjust their
COMPROMISE BASED ON THE
respective positions by mutual consent in
ADDENDUM WHEN
the way they feel they can live with.
PETITIONER REGAL FILMS
Reciprocal concessions are the very
SUBMITTED THIS DOCUMENT
heart and life of every compromise
TO THE TRIAL COURT MERELY
agreement, where each party
3
TO SERVE AS BASIS FOR ITS
approximates and concedes in the hope
MOTION TO DISMISS;
of gaining balanced by the danger of
losing. It is, in essence, a contract. Law
4
and jurisprudence recite three minimum
elements for any valid contract – (a)
consent; (b) object certain which is the
subject matter of the contract; and (c)
cause of the obligation which is
established. Consent is manifested by
5
the meeting of the offer and cause which
are to constitute the agreement. The
offer, however, must be certain and the
acceptance seasonable and absolute; if
qualified, the acceptance would merely
constitute a counter-offer.
6
In this instance, the addendum was flatly
rejected by respondent on the theses (a)
that he did not give his consent thereto
nor authorized anyone to enter into the
agreement, and (b) that it contained
provisions grossly disadvantageous to
him. The outright rejection of
the addendum made known to the other
ended the offer. When respondent later
filed his Manifestation, stating that he
was, after all, willing to honor
the addendum, there was nothing to still
accept.
Verily, consent could be given not only by
the part himself but by anyone duly
authorized and acting for and in his
behalf. But by respondent's own
admission, the addendum was entered
into without his knowledge and consent.
A contract entered into in the name of
another by one who ostensibly might
have but who, in reality, had no real
authority or legal representation, or who,
having such authority, acted beyond his
powers, would be
unenforceable. The addendum, let us
7
then assume, resulted in an
unenforceable contract, might it not then
be susceptible to ratification by the
person on whose behalf it was
executed? The answer would obviously
be in the affirmative; however, that
ratification should be made before its
revocation by the other contracting
party. The adamant refusal of
8
respondent to accept the terms of
the addendum constrained petitioner,
during the preliminary conference held
on 23 June 1995, to instead express its
willingness to release respondent from
his contracts prayed for in his complaint
and to thereby forego the
rejected addendum. Respondent's
subsequent attempt to ratify
the addendum came much too late for,
by then, the addendum had already been
deemed revoked by petitioner.
WHEREFORE, the petition is
GRANTED, and the appealed judgment
of the Court of the appealed judgment of
the Court of Appeals affirming that of the
trial court is SET ASIDE, and the case is
remanded to the trial court for further
proceedings. No costs.
SO ORDERED. 1âwphi1.nêt