fRodrgG.R. No.

16454 September 29, 1921

GEORGE A. KAUFFMAN, Plaintiff-Appellee, vs. THE PHILIPPINE NATIONAL

BANK, Defendant-Appellant.

Roman J. Lacson for appellant.

Ross and Lawrence for appellee.

STREET, J.:

At the time of the transaction which gave rise to this litigation the plaintiff, George
A. Kauffman, was the president of a domestic corporation engaged chiefly in the
exportation of hemp from the Philippine Islands and known as the Philippine Fiber
and Produce Company, of which company the plaintiff apparently held in his own
right nearly the entire issue of capital stock. On February 5, 1918, the board of
directors of said company, declared a dividend of P100,000 from its surplus
earnings for the year 1917, of which the plaintiff was entitled to the sum of
P98,000. This amount was accordingly placed to his credit on the books of the
company, and so remained until in October of the same year when an unsuccessful
effort was made to transmit the whole, or a greater part thereof, to the plaintiff in
New York City.chanroblesvirtualawlibrary chanrobles virtual law library

In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of

the Philippine Fiber and Produce Company, presented himself in the exchange
department of the Philippine National Bank in Manila and requested that a
telegraphic transfer of $45,000 should be made to the plaintiff in New York City,
upon account of the Philippine Fiber and Produce Company. He was informed that
the total cost of said transfer, including exchange and cost of message, would be
P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and Produce
Company, thereupon drew and delivered a check for that amount on the Philippine
National Bank; and the same was accepted by the officer selling the exchange in
payment of the transfer in question. As evidence of this transaction a document
was made out and delivered to Wicks, which is referred to by the bank's assistant
cashier as its official receipt. This memorandum receipt is in the following language:

October 9th, 1918.

CABLE TRANSFER BOUGHT FROM

PHILIPPINE NATIONAL BANK,
Manila, P.I. Stamp P18

Foreign Amount Rate

$45,000. 3/8 % P90,337.50

Payable through Philippine National Bank, New York. To G. A. Kauffman, New York.
Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold to
Messrs. Philippine Fiber and Produce Company, Manila.
 (Sgd.) Y LERMA,
Manager, Foreign Department.

On the same day the Philippine National Bank dispatched to its New York agency a
cablegram to the following effect:

Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000.
(Sgd.) PHILIPPINE NATIONAL BANK, Manila.

Upon receiving this telegraphic message, the bank's representative in New York
sent a cable message in reply suggesting the advisability of withholding this money
from Kauffman, in view of his reluctance to accept certain bills of the Philippine
Fiber and Produce Company. The Philippine National Bank acquiesced in this and on
October 11 dispatched to its New York agency another message to withhold the
Kauffman payment as suggested.chanroblesvirtualawlibrary chanrobles virtual law
library

Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company,
cabled to Kauffman in New York, advising him that $45,000 had been placed to his
credit in the New York agency of the Philippine National Bank; and in response to
this advice Kauffman presented himself at the office of the Philippine National Bank
in New York City on October 15, 1918, and demanded the money. By this time,
however, the message from the Philippine National Bank of October 11, directing
the withholding of payment had been received in New York, and payment was
therefore refused.chanroblesvirtualawlibrary chanrobles virtual law library

In view of these facts, the plaintiff Kauffman instituted the present action in the
Court of First Instance of the city of Manila to recover said sum, with interest and
costs; and judgment having been there entered favorably to the plaintiff, the
defendant appealed.chanroblesvirtualawlibrary chanrobles virtual law library

Among additional facts pertinent to the case we note the circumstance that at the
time of the transaction above-mentioned, the Philippines Fiber and Produce
Company did not have on deposit in the Philippine National Bank money adequate
to pay the check for P90,355.50, which was delivered in payment of the telegraphic
order; but the company did have credit to that extent, or more, for overdraft in
current account, and the check in question was charged as an overdraft against the
Philippine Fiber and Produce Company and has remained on the books of the bank
as an interest-bearing item in the account of said
company.chanroblesvirtualawlibrary chanrobles virtual law library

It is furthermore noteworthy that no evidence has been introduced tending to show

failure of consideration with respect to the amount paid for said telegraphic order.
It is true that in the defendant's answer it is suggested that the failure of the bank
to pay over the amount of this remittance to the plaintiff in New York City, pursuant
to its agreement, was due to a desire to protect the bank in its relations with the
Philippine Fiber and Produce Company, whose credit was secured at the bank by
warehouse receipts on Philippine products; and it is alleged that after the exchange
in question was sold the bank found that it did not have sufficient to warrant
payment of the remittance. In view, however, of the failure of the bank to
substantiate these allegations, or to offer any other proof showing failure of
consideration, it must be assumed that the obligation of the bank was supported by
adequate consideration.chanroblesvirtualawlibrary chanrobles virtual law library

In this court the defense is mainly, if not exclusively, based upon the proposition
that, inasmuch as the plaintiff Kauffman was not a party to the contract with the
bank for the transmission of this credit, no right of action can be vested in him for
the breach thereof. "In this situation," - we here quote the words of the appellant's
brief, - "if there exists a cause of action against the defendant, it would not be in
favor of the plaintiff who had taken no part at all in the transaction nor had entered
into any contract with the plaintiff, but in favor of the Philippine Fiber and Produce
Company, the party which contracted in its own name with the
defendant." chanrobles virtual law library

The question thus placed before us is one purely of law; and at the very threshold
of the discussion it can be stated that the provisions of the Negotiable Instruments
Law can come into operation there must be a document in existence of the
character described in section 1 of the Law; and no rights properly speaking arise in
respect to said instrument until it is delivered. In the case before us there was an
order, it is true, transmitted by the defendant bank to its New York branch, for the
payment of a specified sum of money to George A. Kauffman. But this order was
not made payable "to order or "to bearer," as required in subsection ( d) of that
Act; and inasmuch as it never left the possession of the bank, or its representative
in New York City, there was no delivery in the sense intended in section 16 of the
same Law. In this connection it is unnecessary to point out that the official receipt
delivered by the bank to the purchaser of the telegraphic order, and already set out
above, cannot itself be viewed in the light of a negotiable instrument, although it
affords complete proof of the obligation actually assumed by the
bank.chanroblesvirtualawlibrary chanrobles virtual law library

Stated in bare simplicity the admitted facts show that the defendant bank for a
valuable consideration paid by the Philippine Fiber and Produce Company agreed on
October 9, 1918, to cause a sum of money to be paid to the plaintiff in New York
City; and the question is whether the plaintiff can maintain an action against the
bank for the nonperformance of said undertaking. In other words, is the lack of
privity with the contract on the part of the plaintiff fatal to the maintenance of an
action by him? chanrobles virtual law library

The only express provision of law that has been cited as bearing directly on this
question is the second paragraph of article 1257 of the Civil Code; and unless the
present action can be maintained under the provision, the plaintiff admittedly has
no case. This provision states an exception to the more general rule expressed in
the first paragraph of the same article to the effect that contracts are productive of
effects only between the parties who execute them; and in harmony with this
general rule are numerous decisions of this court (Wolfson vs. Estate of Martinez,
20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation,
22 Phil., 572, 584; Manila Railroad Co. vs. Compañia Trasatlantica and Atlantic,
Gulf and Pacific Co., 38 Phil., 873, 894.) chanrobles virtual law library

The paragraph introducing the exception which we are now to consider is in these
words:

Should the contract contain any stipulation in favor of a third person, he may
demand its fulfillment, provided he has given notice of his acceptance to the person
bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)

In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate
dissertation upon the history and interpretation of the paragraph above quoted and
so complete is the discussion contained in that opinion that it would be idle for us
here to go over the same matter. Suffice it to say that Justice Trent, speaking for
the court in that case, sums up its conclusions upon the conditions governing the
right of the person for whose benefit a contract is made to maintain an action for
the breach thereof in the following words:

So, we believe the fairest test, in this jurisdiction at least, whereby to determine
whether the interest of a third person in a contract is a stipulation pour autrui, or
merely an incidental interest, is to rely upon the intention of the parties as
disclosed by their contract.chanroblesvirtualawlibrary chanrobles virtual law library

If a third person claims an enforcible interest in the contract, the question must be
settled by determining whether the contracting parties desired to tender him such
an interest. Did they deliberately insert terms in their agreement with the avowed
purpose of conferring a favor upon such third person? In resolving this question, of
course, the ordinary rules of construction and interpretation of writings must be
observed. (Uy Tam and Uy Yet vs. Leonard, supra.)

Further on in the same opinion he adds: "In applying this test to a stipulation pour
autrui, it matters not whether the stipulation is in the nature of a gift or whether
there is an obligation owing from the promise to the third person. That no such
obligation exists may in some degree assist in determining whether the parties
intended to benefit a third person, whether they stipulated for him." (Uy Tam and
Uy Yet vs. Leonard, supra.) chanrobles virtual law library

In the light of the conclusion thus stated, the right of the plaintiff to maintain the
present action is clear enough; for it is undeniable that the bank's promise to cause
a definite sum of money to be paid to the plaintiff in New York City is a stipulation
in his favor within the meaning of the paragraph above quoted; and the
circumstances under which that promise was given disclose an evident intention on
the part of the contracting parties that the plaintiff should have the money upon
demand in New York City. The recognition of this unqualified right in the plaintiff to
receive the money implies in our opinion the right in him to maintain an action to
recover it; and indeed if the provision in question were not applicable to the facts
now before us, it would be difficult to conceive of a case arising under
it.chanroblesvirtualawlibrary chanrobles virtual law library

It will be noted that under the paragraph cited a third person seeking to enforce
compliance with a stipulation in his favor must signify his acceptance before it has
been revoked. In this case the plaintiff clearly signified his acceptance to the bank
by demanding payment; and although the Philippine National Bank had already
directed its New York agency to withhold payment when this demand was made,
the rights of the plaintiff cannot be considered to as there used, must be
understood to imply revocation by the mutual consent of the contracting parties, or
at least by direction of the party purchasing he
exchange.chanroblesvirtualawlibrary chanrobles virtual law library

In the course of the argument attention was directed to the case of

Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of
Appeals of the State of New York on March 1, 1921, wherein it is held that, by
selling a cable transfer of funds on a foreign country in ordinary course, a bank
incurs a simple contractual obligation, and cannot be considered as holding the
money which was paid for the transfer in the character of a specific trust. Thus, it
was said, "Cable transfers, therefore, mean a method of transmitting money by
cable wherein the seller engages that he has the balance at the point on which the
payment is ordered and that on receipt of the cable directing the transfer his
correspondent at such point will make payment to the beneficiary described in the
cable. All these transaction are matters of purchase and sale create no trust
relationship." chanrobles virtual law library

As we view it there is nothing in the decision referred to decisive of the question

now before us, wish is merely that of the right of the beneficiary to maintain an
action against the bank selling the transfer.chanroblesvirtualawlibrary chanrobles
virtual law library

Upon the considerations already stated, we are of the opinion that the right of
action exists, and the judgment must be affirmed. It is so ordered, with costs
against the appellant. Interest will be computed as prescribed in section 510 of the
Code of Civil Procedure.chanroblesvirtualawlibrary chanrobles virtual law library

Johnson, Araullo, Avanceña and Villamor, JJ., concur.

[G.R. No. 97753. August 10, 1992.]

CALTEX (PHILIPPINES), INC., Petitioner, v. COURT OF APPEALS and

SECURITY BANK AND TRUST COMPANY, Respondents.

Bito, Lozada, Ortega & Castillo, for Petitioners.

Nepomuceno, Hofileña & Guingona for private.

 SYLLABUS

1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS LAW; REQUIREMENTS FOR

NEGOTIABILITY; CERTIFICATE OF TIME DEPOSIT AS NEGOTIABLE INSTRUMENT;
CASE AT BAR. — Section 1 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become
negotiable, viz:" (a) It must be in writing and signed by the maker or drawer; (b)
Must contain an unconditional promise or order to pay a sum certain in money; (c)
Must be payable on demand, or at a fixed or determinable future time; (d) Must be
payable to order or to bearer; and (e) Where the instrument is addressed to a
drawee, he must be named or otherwise indicated therein with reasonable
certainty." The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties’ bone of contention is with regard to requisite (d) set forth
above. It is noted that Mr. Timoteo P. Tiangco, Security Bank’s Branch Manager
way back in 1982, testified in open court that the depositor referred to in the CTDs
is no other than Mr. Angel de la Cruz. . . . Contrary to what respondent court held,
the CTDs are negotiable instruments. The documents provide that the amounts
deposited shall be repayable to the depositor. And who, according to the document,
is the depositor? It is the "bearer." The documents do not say that the depositor is
Angel de la Cruz and that the amounts deposited are repayable specifically to him.
Rather, the amounts are to be repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of presentment.

2. ID.; ID.; DETERMINATION OF NEGOTIABILITY OR NON-NEGOTIABILITY OF

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

3. ID.; ID.; NEGOTIATION, DEFINED; HOLDER, DEFINED; IN CASE AT BAR,

DELIVERY OF INSTRUMENT CONSTITUTED THE TRANSFEREE A MERE HOLDER FOR
VALUE BY REASON OF HIS LIEN. — Petitioner’s insistence that the CTDs were
negotiated to it begs the question. Under the Negotiable Instruments Law, an
instrument is negotiated when it is transferred from one person to another in such
a manner as to constitute the transferee the holder thereof, and a holder may be
the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof, In the present case, however, there was no negotiation in the sense of a
transfer of the legal title to the CTDs in favor of petitioner in which situation, for
obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the
delivery thereof only as security for the purchases of Angel de la Cruz (and we even
disregard the fact that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the instrument
since, necessarily, the terms thereof and the subsequent disposition of such
security, in the event of non-payment of the principal obligation, must be
contractually provided for. The pertinent law on this point is that where the holder
has a lien on the instrument arising from contract, he is deemed a holder for value
to the extent of his lien.

4. ID.; CODE OF COMMERCE; RULES TO BE FOLLOWED IN CASE OF LOST

INSTRUMENT PAYABLE TO BEARER; MERELY PERMISSIVE AND NOT MANDATORY.
— A close scrutiny of the provisions of the Code of Commerce laying down the rules
to be followed in case of lost instruments payable to bearer, which it invokes, will
reveal that said provisions, even assuming their applicability to the CTDs in the
case at bar, are merely permissive and not mandatory. The very first article cited
by petitioner speaks for itself: "Art. 548. The dispossessed owner, no matter for
what cause it may be, may apply to the judge or court of competent jurisdiction,
asking that the principal, interest or dividends due or about to become due, be not
paid a third person, as well as in order to prevent the ownership of the instrument
that a duplicate be issued him." The use of the word "may" in said provision shows
that it is not mandatory but discretionary on the part of the "dispossessed owner"
to apply to the judge or court of competent jurisdiction for the issuance of a
duplicate of the lost instrument. Where the provision reads "may," this word shows
that it is not mandatory but discretional. The word "may" is usually permissive, not
mandatory. It is an auxiliary verb indicating liberty, opportunity, permission and
possibility.

5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF OBSCURE

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

6. ID.; ID.; ESTOPPEL; EFFECTS; CASE AT BAR. — Any doubt as to whether the
CTDs were delivered as payment for the fuel products or as a security has been
dissipated and resolved in favor of the latter by petitioner’s own authorized and
responsible representative himself. In a letter dated November 26, 1982 addressed
to respondent Security Bank, J. Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . .
These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) This admission is
conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person relying thereon.
A party may not go back on his own acts and representations to the prejudice of
the other party who relied upon them.

7. ID.; ID.; CHARACTER OF TRANSACTION DETERMINED BY INTENTION OF THE

PARTIES. — This disquisition in Integrated Realty Corporation, Et. Al. v. Philippine
National Bank, Et. Al. is apropos: ". . . Adverting again to the Court’s
pronouncements in Lopez, supra, we quote therefrom: ‘The character of the
transaction between the parties is to be determined by their intention, regardless of
what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge; but if there was
some other intention, it is not a pledge. However, even though a transfer, if
regarded by itself, appears to have been absolute, its object and character might
still be qualified and explained by contemporaneous writing declaring it to have
been a deposit of the property as collateral security. It has been said that a transfer
of property by the debtor to a creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a pledge if the debt continues in
existence and is not discharged by the transfer, and that accordingly the use of the
terms ordinarily importing conveyance of absolute ownership will not be given that
effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous language or other
circumstances excluding an intent to pledge.’"

8. ID.; PLEDGE OF INCORPOREAL RIGHTS; REQUISITES; REQUIREMENT FOR

PLEDGE TO TAKE EFFECT AGAINST THIRD PERSONS; NOT OBSERVED IN CASE AT
BAR. — As such holder of collateral security, he would be a pledgee but the
requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, which inceptively provide: "Art. 2095. Incorporeal
rights, evidenced by negotiable instruments, . . . may also be pledged. The
instrument proving the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed." "Art. 2096. A pledge shall not take effect against
third persons if a description of the thing pledged and the date of the pledge do not
appear in a public instrument." Aside from the fact that the CTDs were only
delivered but not indorsed, the factual findings of respondent court quoted at the
start of this opinion show that petitioner failed to produce any document evidencing
any contract of pledge or guarantee agreement between it and Angel de la Cruz.
Consequently, the mere delivery of the CTDs did not legally vest in petitioner any
right effective against and binding upon respondent bank. The requirement under
Article 2096 aforementioned is not a mere rule of adjective law prescribing the
mode whereby proof may be made of the date of a pledge contract, but a rule of
substantive law prescribing a condition without which the execution of a pledge
contract cannot affect third persons adversely.

9. ID.; ASSIGNMENT OF INCORPOREAL RIGHTS; REQUIREMENT FOR ASSIGNMENT

TO TAKE EFFECT AGAINST THIRD PERSONS; OBSERVED IN CASE AT BAR. — The
assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was
embodied in a public instrument. With regard to this other mode of transfer, the
Civil Code specifically declares: "Art. 1625. An assignment of credit, right or action
shall produce no effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of Property in case the
assignment involves real property." Respondent bank duly complied with this
statutory requirement Contrarily, Petitioner, whether as purchaser, assignee or
lienholder of the CTDs, neither proved the amount of its credit or the extent of its
lien nor the execution of any public instrument which could affect or bind
private Respondent. Necessarily, therefore, as between petitioner and respondent
bank, the latter has definitely the better right over the CTDs in question.

10. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF AND PRESUMPTIONS;

ESTOPPEL IN PAIS; EFFECT. — In the law of evidence, whenever a party has, by his
own declaration, act, or omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to falsify it.

11. ID.; ID.; ID.; EVIDENCE WILLFULLY SUPPRESSED WOULD BE ADVERSE IF

PRODUCED; CASE AT BAR. — When respondent bank, as defendant in the court
below, moved for a bill of particulars therein praying, among others, that petitioner,
as plaintiff, be required to aver with sufficient definiteness or particularity (a) the
due date or dates of payment of the alleged indebtedness of Angel de la Cruz to
plaintiff and (b) whether or not it issued a receipt showing that the CTDs were
delivered to it by De la Cruz as payment of the latter’s alleged indebtedness to it,
plaintiff corporation opposed the motion. Had it produced the receipt prayed for, it
could have proved, if such truly was the fact, that the CTDs were delivered as
payment and not as security. Having opposed the motion, petitioner now labors
under the presumption that evidence willfully suppressed would be adverse if
produced.

12. ID.; CIVIL PROCEDURE; APPEALS; ISSUES NOT RAISED IN TRIAL COURT
CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL; CASE AT BAR. — Pre-trial is
primarily intended to make certain that all issues necessary to the disposition of a
case are properly raised. Thus, to obviate the element of surprise, parties are
expected to disclose at a pre-trial conference all issues of law and fact which they
intend to raise at the trial, except such as may involve privileged or impeaching
matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. To accept petitioner’s suggestion that
respondent bank’s supposed negligence may be considered encompassed by the
issues on its right to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue. We agree with
private respondent that the broad ultimate issue of petitioner’s entitlement to the
proceeds of the questioned certificates can be premised on a multitude of other
legal reasons and causes of action, of which respondent bank’s supposed
negligence is only one. Hence, petitioner’s submission, if accepted, would render a
pre-trial delimitation of issues a useless exercise.

DECISION

REGALADO, J.:

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

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

"1. On various dates, defendant, a commercial banking institution, through its

Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel
dela Cruz who deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of
Issues, Original Records, p. 207; Defendant’s Exhibits 1 to 280):chanrob1es virtual
1aw library

CTD CTD

Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000

2 Mar. 82 74701 to 74740 40 160,000

4 Mar. 82 90127 to 90146 20 80,000

5 Mar. 82 74797 to 94800 4 16,000

5 Mar. 82 89965 to 89986 22 88,000

5 Mar. 82 70147 to 90150 4 16,000

8 Mar. 82 90001 to 90020 20 80,000

9 Mar. 82 90023 to 90050 28 112,000

9 Mar. 82 89991 to 90000 10 40,000

9 Mar. 82 90251 to 90272 22 88,000

—— —————

Total 280 P1,120,000

=== =======

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

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

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

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

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

"7. On November 26, 1982, defendant received a letter (Defendant’s Exhibit 563)
from herein plaintiff formally informing it of its possession of the CTDs in question
and of its decision to preterminate the same.
"8. On December 8, 1982, plaintiff was requested by herein defendant to furnish
the former ‘a copy of the document evidencing the guarantee agreement with Mr.
Angel dela Cruz’ as well as ‘the details of Mr. Angel dela Cruz’ obligations against
which’ plaintiff proposed to apply the time deposits (Defendant’s Exhibit 564).

"9. No copy of the requested documents was furnished herein defendant.

"10. Accordingly, defendant bank rejected the plaintiff’s demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant’s
Exhibit 566).

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

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

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

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

The instant petition is bereft of merit.chanrobles virtual lawlibrary

A sample text of the certificates of time deposit is reproduced below to provide a

better understanding of the issues involved in this recourse.

"SECURITY BANK

AND TRUST COMPANY No. 90101

6778 Ayala Ave., Makati

Metro Manila, Philippines

SUCAT OFFICE P 4.000.00

CERTIFICATE OF DEPOSIT

Rate 16%

Date of Maturity FEB 23, 1984 FEB 22 1982, 19___

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

(Sgd. Illegible (Sgd. Illegible)

_______________________ ______________________

AUTHORIZED SIGNATURES" 5

______________

Respondent court ruled that the CTDs in question are non-negotiable instruments,
rationalizing as follows:jgc:chanrobles.com.ph

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

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

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

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

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

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

(e) Where the instrument is addressed to a drawee, he must be named or

otherwise indicated therein with reasonable certainty."cralaw virtua1aw library

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

x x x

"Atty. Calida:chanrob1es virtual 1aw library

q In other words Mr. Witness, you are saying that per books of the bank, the
depositor referred (sic) in these certificates states that it was Angel dela Cruz?
witness:chanrob1es virtual 1aw library

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

Atty. Calida:chanrob1es virtual 1aw library

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

witness:chanrob1es virtual 1aw library

a None, your Honor." 7

x x x

"Atty. Calida:chanrob1es virtual 1aw library

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

witness:chanrob1es virtual 1aw library

a Angel dela Cruz is the depositor." 8

x x x

On this score, the accepted rule is that the negotiability or non-negotiability of an

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

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

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

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

In a letter dated November 26, 1982 addressed to respondent Security Bank, J. Q.

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

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

Under the foregoing circumstances, this disquisition in Integrated Realty

Corporation, Et. Al. v. Philippine National Bank, Et. Al. 20 is
apropos:jgc:chanrobles.com.ph

". . . Adverting again to the Court’s pronouncements in Lopez, supra, we quote

therefrom:chanrob1es virtual 1aw library

‘The character of the transaction between the parties is to be determined by their

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

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

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

"Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also

be pledged. The instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed."cralaw virtua1aw library

"Art. 2096. A pledge shall not take effect against third persons if a description of
the thing pledged and the date of the pledge do not appear in a public
instrument."cralaw virtua1aw library

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

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

"Art. 1625. An assignment of credit, right or action shall produce no effect as

against third persons, unless it appears in a public instrument, or the instrument is
recorded in the Registry of Property in case the assignment involves real
property."cralaw virtua1aw library
Respondent bank duly complied with this statutory requirement
Contrarily, Petitioner, whether as purchaser, assignee or lienholder of the CTDs,
neither proved the amount of its credit or the extent of its lien nor the execution of
any public instrument which could affect or bind private Respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely the
better right over the CTDs in question.chanrobles.com:cralaw:red

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

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

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

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

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

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

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

6. Whether or not the parties can recover damages, attorney’s fees and litigation
expenses from each other."cralaw virtua1aw library

As respondent court correctly observed, with appropriate citation of some doctrinal

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

Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of surprise,
parties are expected to disclose at a pre-trial conference all issues of law and fact
which they intend to raise at the trial, except such as may involve privileged or
impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32
To accept petitioner’s suggestion that respondent bank’s supposed negligence may
be considered encompassed by the issues on its right to preterminate and receive
the proceeds of the CTDs would be tantamount to saying that petitioner could raise
on appeal any issue. We agree with private respondent that the broad ultimate
issue of petitioner’s entitlement to the proceeds of the questioned certificates can
be premised on a multitude of other legal reasons and causes of action, of which
respondent bank’s supposed negligence is only one. Hence, petitioner’s submission,
if accepted, would render a pre-trial delimitation of issues a useless exercise. 33

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

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

x x x

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

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of

the Code of Commerce, on which petitioner seeks to anchor respondent bank’s
supposed negligence, merely established, on the one hand, a right of recourse in
favor of a dispossessed owner or holder of a bearer instrument so that he may
obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument, Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined therein, and none
establishes a mandatory precedent requirement therefor.chanrobles
virtualawlibrary chanrobles.com:chanrobles.com.ph

WHEREFORE, on the modified premises above set forth, the petition is DENIED and
the appealed decision is hereby AFFIRMED.
SO ORDERED.

G.R. Nos. L-25836-37 January 31, 1981

THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,

vs.
JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:

The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of
First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the
order declaring him in default, 1 and from the order of said court in the same case denying his motion
to set aside the judgment rendered after he was declared in default. 2 These two appeals of the
defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, respectively.

Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one
consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4

In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the
consolidated appeal to the Supreme Court on the ground that only questions of law are involved. 5

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil
Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon
from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days
or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The
complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action
referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates
covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered
represents the cost of the printing of "World Current Events," a periodical published by the
defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation
from the plaintiff. Thus, for every printing of the "World Current Events," the printer, Encal Press and
Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft
being sent later to the defendant for acceptance. As an added security for the payment of the
amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant
Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in
trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the
proceeds of the sale of said publication to answer for the payment of all obligations arising from the
draft. 8

Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On
December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set the
hearing on December 16, 1959. 10 At the hearing, the court denied defendant's motion for extension.
Whereupon, the defendant filed a motion to dismiss the complaint on December 17, 1959 on the
ground that the complaint states no cause of action because:
a) When the various bills of exchange were presented to the defendant as drawee for acceptance,
the amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo
Engraving), without knowledge or consent of the defendant drawee.

b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an
accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be liable in the
event that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11

The complaint was dismissed in an order dated December 22, 1959, copy of which was received by
the defendant on December 24, 1959. 12

On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon
the motion for reconsideration filed by the plaintiff, the trial court set aside its order dismissing the
complaint and set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the
order setting aside the order of dismissal was received by the defendant on March 11, 1960 at 5:00
o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz.
On the following day, March 12, 1960, the defendant filed a motion to postpone the trial of the case
on the ground that there having been no answer as yet, the issues had not yet been joined. 15 On the
same date, the defendant filed his answer to the complaint interposing the following defenses: That
he signed the document upon which the plaintiff sues in his capacity as President of the Philippine
Education Foundation; that his liability is only secondary; and that he believed that he was signing
only as an accommodation party. 16

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the
ground that the defendant should have filed his answer on March 11, 1960. He contends that by
filing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court
declared the defendant in default. 18 The defendant learned of the order declaring him in default on
March 21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order of default
alleging that although the order of the court dated March 7, 1960 was received on March 11, 1960 at
5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his answer
on the last day of the reglementary period, March 11, 1960, within office hours, especially because
the order of the court dated March 7, 1960 was brought to the attention of counsel only in the early
hours of March 12, 1960. The defendant also alleged that he has a good and substantial defense.
Attached to the motion are the affidavits of deputy sheriff Mamerto de la Cruz that he served the
order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the
affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial court denied
the defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment
sentencing the defendant to pay to the plaintiff the sum of P35,444.35 representing the total amount
of his obligation to the said plaintiff under the twenty-two (22) causes of action alleged in the
complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying
his motion to set aside the order declaring him in default, an appeal bond in the amount of P60.00,
and his record on appeal. The plaintiff filed his opposition to the approval of defendant's record on
appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's
appeal from the order dated March 25, 1960 denying his motion to set aside the order of
default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's order
dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for
reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its
previous order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30,
1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960,
informing the defendant that the record on appeal filed ed by the defendant was forwarded to the
Clerk of Court of Appeals. 26

On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in
default reiterating the same ground previously advanced by him in his motion for relief from the order
of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the
defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On June 20,
1960, the defendant filed his notice of appeal from the order of the court denying his motion to set
aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on
appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals
with the Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set
aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his
motion to set aside the judgment by default docketed as CA-G.R. NO. 27940-R.

In his brief, the defendant-appellant assigned the following errors:

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN

DEFAULT.

II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE

DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON
FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN
AN APPROPRIATE ACTION.

III

THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR

RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT
AGAINST DEFENDANT. 31

It has been held that to entitle a party to relief from a judgment taken against him through his
mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a
meritorious defense. 32 In other words, in order to set aside the order of default, the defendant must
not only show that his failure to answer was due to fraud, accident, mistake or excusable negligence
but also that he has a meritorious defense.

The record discloses that Aruego received a copy of the complaint together with the summons on
December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a
motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on
January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon
the motion for reconsideration, the trial court issued an order setting aside the order of dismissal;
that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the
afternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12,
1960, the defendant filed his answer to the complaint.

The failure then of the defendant to file his answer on the last day for pleading is excusable. The
order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It
was therefore impossible for him to have filed his answer on that same day because the courts then
held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his
answer on the following day.

However, while the defendant successfully proved that his failure to answer was due to excusable
negligence, he has failed to show that he has a meritorious defense. The defendant does not have a
good and substantial defense.

Defendant Aruego's defenses consist of the following:

a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a
representative capacity, as the then President of the Philippine Education Foundation Company,
publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-
Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;

b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or
additional party obligor, to add to the security of said plaintiff bank. The reason for this statement is
that unlike real bills of exchange, where payment of the face value is advanced to the drawer only
upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills
of exchange were made before acceptance; so that in effect, although these documents are labelled
bills of exchange, legally they are not bills of exchange but mere instruments evidencing
indebtedness of the drawee who received the face value thereof, with the defendant as only
additional security of the same. 33

The first defense of the defendant is that he signed the supposed bills of exchange as an agent of
the Philippine Education Foundation Company where he is president. Section 20 of the Negotiable
Instruments Law provides that "Where the instrument contains or a person adds to his signature
words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but the mere addition of words describing him as
an agent or as filing a representative character, without disclosing his principal, does not exempt him
from personal liability."

An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he
was signing as a representative of the Philippine Education Foundation Company. 34 He merely
signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his
principal, Aruego is personally liable for the drafts he accepted.

The defendant also contends that he signed the drafts only as an accommodation party and as such,
should be made liable only after a showing that the drawer is incapable of paying. This contention is
also without merit.

An accommodation party is one who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some other person. Such person
is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking
of the instrument knew him to be only an accommodation party.35 In lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. He lends his name
to enable the accommodated party to obtain credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability to the other parties thereto because he wants
to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the
Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he
should not have signed as an acceptor/drawee. In doing so, he became primarily and personally
liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of exchange but mere
pieces of evidence of indebtedness because payments were made before acceptance. This is also
without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in
writting addressed by one person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer. 36 As long as a commercial paper conforms with the definition of a bill of
exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in
the determination of the kind of liabilities of the parties involved, but not in the determination of
whether a commercial paper is a bill of exchange or not.

It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will
result in a new trial which will serve no purpose and will just waste the time of the courts as well as
of the parties because the defense is nil or ineffective. 37

WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of
Manila denying the petition for relief from the judgment rendered in said case is hereby affirmed,
without pronouncement as to costs.

SO ORDERED.

G.R. No. 166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;

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

G.R. No. 167728

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8, 2004 and
October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP No. 77580, as well as the
Decision3 and Resolution dated September 2, 2004 and April 4, 2005, respectively, of the Court of
Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly reversed
and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 59514 and
6009,5 respectively, and dismissed the petitions of petitioner Hongkong and Shanghai Banking
Corporation Limited-Philippine Branches (HSBC). The corresponding Resolutions, on the other
hand, denied the respective motions for reconsideration of the said Decisions.

HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and
individual, resident or non-resident of the Philippines, with respect to their passive investments in the
Philippines, particularly investments in shares of stocks in domestic corporations. As a custodian
bank, HSBC serves as the collection/payment agent with respect to dividends and other income
derived from its investor-clients’ passive investments.6

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are
managed by HSBC through instructions given through electronic messages. The said instructions
are standard forms known in the banking industry as SWIFT, or "Society for Worldwide Interbank
Financial Telecommunication." In purchasing shares of stock and other investment in securities, the
investor-clients would send electronic messages from abroad instructing HSBC to debit their local or
foreign currency accounts and to pay the purchase price therefor upon receipt of the securities.7

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary
Stamp Tax (DST) from September to December 1997 and also from January to December 1998
amounting to ₱19,572,992.10 and ₱32,904,437.30, respectively, broken down as follows:

A. September to December 1997

September 1997 P 6,981,447.90

October 1997 6,209,316.60
November 1997 3,978,510.30
December 1997 2,403,717.30
Total ₱19,572,992.10

B. January to December 1998

January 1998 P 3,328,305.60

February 1998 4,566,924.90
March 1998 5,371,797.30
April 1998 4,197,235.50
May 1998 2,519,587.20
June 1998 2,301,333.00
July 1998 1,586,404.50
August 1998 1,787,359.50
September 1998 1,231,828.20
October 1998 1,303,184.40
November 1998 2,026,379.70
December 1998 2,684,097.50
Total ₱32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven
Rualo, issued BIR Ruling No. 132-99 to the effect that instructions or advises from abroad on the
management of funds located in the Philippines which do not involve transfer of funds from abroad
are not subject to DST. BIR Ruling No. 132-99 reads:
Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA

& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila

Attn: Atty. Tomas C. Toledo

Tax Counsel

Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK &
STANDARD CHARTERED BANK, for a ruling as to whether or not the electronic instructions
involving the following transactions of residents and non-residents of the Philippines with respect to
their local or foreign currency accounts are subject to documentary stamp tax under Section 181 of
the 1997 Tax Code, viz:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient in the
Philippines; or

(ii) receive funds from another bank in the Philippines for deposit into its account and
to pay a named recipient in the Philippines."

The foregoing transactions are carried out under instruction from abroad and [do] not involve actual
fund transfer since the funds are already in the Philippine accounts. The instructions are in the form
of electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT 521). In both cases, the payment
is against the delivery of investments purchased. The purchase of investments and the payment
comprise one single transaction. DST has already been paid under Section 176 for the investment
purchase.

B. Other transactions:

An overseas client sends an instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient, who may
be another bank, a corporate entity or an individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit to its account and
to pay a named recipient, who may be another bank, a corporate entity or an
individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or
tested cable, and may not refer to any particular transaction.
The opening and maintenance by a non-resident of local or foreign currency accounts with a bank in
the Philippines is permitted by the Bangko Sentral ng Pilipinas, subject to certain conditions.

In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides that
–

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face
value of any such bill of exchange, or order, or Philippine equivalent of such value, if expressed in
foreign currency. (Underscoring supplied.)

a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting
to be drawn in a foreign country but payable in the Philippines.

Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e., a
bill of exchange or order for the payment of money, which purports to draw money from a foreign
country but payable in the Philippines. In the instant case, however, while the payor is residing
outside the Philippines, he maintains a local and foreign currency account in the Philippines from
where he will draw the money intended to pay a named recipient. The instruction or order to pay
shall be made through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521.
Consequently, there is no negotiable instrument to be made, signed or issued by the payee. In the
meantime, such electronic instructions by the non-resident payor cannot be considered as a
transaction per se considering that the same do not involve any transfer of funds from abroad or
from the place where the instruction originates. Insofar as the local bank is concerned, such
instruction could be considered only as a memorandum and shall be entered as such in its books of
accounts. The actual debiting of the payor’s account, local or foreign currency account in the
Philippines, is the actual transaction that should be properly entered as such.

Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local
or foreign currency account, is not subject to DST, unless the account so maintained is a current or
checking account, in which case, the issuance of the check or bank drafts is subject to the
documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant case, and
subject to the physical impossibility on the part of the payor to be present and prepare and sign an
instrument purporting to pay a certain obligation, the withdrawal and payment shall be made in cash.
In this light, the withdrawal shall not be subject to documentary stamp tax. The case is parallel to an
automatic bank transfer of local funds from a savings account to a checking account maintained by a
depositor in one bank.

Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s account
and thereafter upon instruction of the non-resident depositor-payor, through an electronic message,
the depository bank to debit his account and pay a named recipient shall not be subject to
documentary stamp tax.

It should be noted that the receipt of funds from another local bank in the Philippines by a local
depository bank for the account of its client residing abroad is part of its regular banking transaction
which is not subject to documentary stamp tax. Neither does the receipt of funds makes the recipient
subject to the documentary stamp tax. The funds are deemed to be part of the deposits of the client
once credited to his account, and which, thereafter can be disposed in the manner he wants. The
payor-client’s further instruction to debit his account and pay a named recipient in the Philippines
does not involve transfer of funds from abroad. Likewise, as stated earlier, such debit of local or
foreign currency account in the Philippines is not subject to the documentary stamp tax under the
aforementioned Section 181 of the Tax Code.

In the light of the foregoing, this Office hereby holds that the instruction made through an electronic
message by non-resident payor-client to debit his local or foreign currency account maintained in the
Philippines and to pay a certain named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the 1997 Tax Code. Such being the case, such electronic
instruction purporting to draw funds from a local account intended to be paid to a named recipient in
the Philippines is not subject to documentary stamp tax imposed under the foregoing Section.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon
investigation it shall be disclosed that the facts are different, this ruling shall be considered null and
void.

Very truly yours,

(Sgd.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue8

With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim for
the refund of the amount of ₱19,572,992.10 allegedly representing erroneously paid DST to the BIR
for the period covering September to December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the
amount of ₱32,904,437.30 allegedly representing erroneously paid DST to the BIR for the period
covering January to December 1998.

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to
the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to suspend the running of the two-
year prescriptive period.

The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in
CTA Case No. 5951 favored HSBC. Respondent Commissioner of Internal Revenue was ordered to
refund or issue a tax credit certificate in favor of HSBC in the reduced amounts of ₱30,360,570.75 in
CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951, representing erroneously paid
DST that have been sufficiently substantiated with documentary evidence. The CTA ruled that HSBC
is entitled to a tax refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do not
apply to electronic message instructions transmitted by HSBC’s non-resident investor-clients:

The instruction made through an electronic message by a nonresident investor-client, which is to

debit his local or foreign currency account in the Philippines and pay a certain named recipient also
residing in the Philippines is not the transaction contemplated in Section 181 of the Code. In this
case, the withdrawal and payment shall be made in cash. It is parallel to an automatic bank transfer
of local funds from a savings account to a checking account maintained by a depositor in one bank.
The act of debiting the account is not subject to the documentary stamp tax under Section 181.
Neither is the transaction subject to the documentary stamp tax under Section 180 of the same
Code. These electronic message instructions cannot be considered negotiable instruments as they
lack the feature of negotiability, which, is the ability to be transferred (Words and Phrases).

These instructions are considered as mere memoranda and entered as such in the books of account
of the local bank, and the actual debiting of the payor’s local or foreign currency account in the
Philippines is the actual transaction that should be properly entered as such.9
The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009 and
dated December 18, 2002 in CTA Case No. 5951 read:

II. CTA Case No. 6009

WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE
in favor of Petitioner the amount of ₱30,360,570.75 representing erroneous payment of documentary
stamp tax for the taxable year 1998.10

II. CTA Case No. 5951

WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted.
Accordingly, respondent is hereby ORDERED to REFUND, or in the alternative, ISSUE A TAX
CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of ₱16,436,395.83
representing erroneously paid documentary stamp tax for the months of September 1997 to
December 1997.11

However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic
messages of HSBC’s investor-clients are subject to DST. The Court of Appeals explained:

At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their passive
investments in the Philippines mainly involving shares of stocks in domestic corporations. These
investor-clients maintain Philippine peso and/or foreign currency accounts with [HSBC]. Should they
desire to purchase shares of stock and other investments securities in the Philippines, the investor-
clients send their instructions and advises via electronic messages from abroad to [HSBC] in the
form of SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or foreign currency
account and to pay the purchase price upon receipt of the securities (CTA Decision, pp. 1-2; Rollo,
pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based on
its acceptance of these electronic messages – which, as [HSBC] readily admits in its petition filed
before the [CTA], were essentially orders to pay the purchases of securities made by its client-
investors (Rollo, p. 60).

Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC] considering
that the said tax was levied against the acceptances and payments by [HSBC] of the subject
electronic messages/orders for payment. The issue of whether such electronic messages may be
equated as a written document and thus be subject to tax is beside the point. As We have already
stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill of exchange or order
for payment of money but on the acceptance or payment of the said bill or order. The acceptance of
a bill or order is the signification by the drawee of its assent to the order of the drawer to pay a given
sum of money while payment implies not only the assent to the said order of the drawer and a
recognition of the drawer’s obligation to pay such aforesaid sum, but also a compliance with such
obligation (Philippine National Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs.
Intermediate Appellate Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of the
[DST] under Section 181 is the existence of the requirement of acceptance or payment by the
drawee (in this case, [HSBC]) of the order for payment of money from its investor-clients and that the
said order was drawn from a foreign country and payable in the Philippines. These requisites are
surely present here.

It would serve the parties well to understand the nature of the tax being imposed in the case at bar.
In Philippine Home Assurance Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the
Supreme Court ruled that [DST is] levied on the exercise by persons of certain privileges conferred
by law for the creation, revision, or termination of specific legal relationships through the execution of
specific instruments, independently of the legal status of the transactions giving rise thereto. In the
same case, the High Court also declared – citing Du Pont vs. United States (300 U.S. 150, 153
[1936])

The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or
facility offered at exchanges for the transaction of the business. It is an excise upon the facilities
used in the transaction of the business separate and apart from the business itself. x x x.

To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC]
pursuant to the order made by its client-investors as embodied in the cited electronic messages,
through which the herein parties’ privilege and opportunity to transact business respectively as
drawee and drawers was exercised, separate and apart from the circumstances and conditions
related to such acceptance and subsequent payment of the sum of money authorized by the
concerned drawers. Stated another way, the [DST] was exacted on [HSBC’s] exercise of its privilege
under its drawee-drawer relationship with its client-investor through the execution of a specific
instrument which, in the case at bar, is the acceptance of the order for payment of money. The
acceptance of a bill or order for payment may be done in writing by the drawee in the bill or order
itself, or in a separate instrument (Prudential Bank vs. Intermediate Appellate Court, supra.)Here,
[HSBC]’s acceptance of the orders for the payment of money was veritably ‘done in writing in a
separate instrument’ each time it debited the local or foreign currency accounts of its client-investors
pursuant to the latter’s instructions and advises sent by electronic messages to [HSBC]. The [DST]
therefore must be paid upon the execution of the specified instruments or facilities covered by the
tax – in this case, the acceptance by [HSBC] of the order for payment of money sent by the client-
investors through electronic messages. x x x.12

Hence, these petitions.

HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual and
legal conclusions of the CTA. According to HSBC, in the absence of abuse or improvident exercise
of authority, the CTA’s ruling should not have been disturbed as the CTA is a highly specialized
court which performs judicial functions, particularly for the review of tax cases. HSBC further argues
that the Commissioner of Internal Revenue had already settled the issue on the taxability of
electronic messages involved in these cases in BIR Ruling No. 132-99 and reiterated in BIR Ruling
No. DA-280-2004.13

The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997 Tax
Code imposes DST on the acceptance or payment of a bill of exchange or order for the payment of
money. The DST under Section 18 of the 1997 Tax Code is levied on HSBC’s exercise of a privilege
which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing law and long
standing administrative practice, respondent is not barred from questioning his own revenue ruling.
Tax refunds like tax exemptions are strictly construed against the taxpayer.14

The Court finds for HSBC.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the
acceptance or payment of "a bill of exchange purporting to be drawn in a foreign country but payable
in the Philippines" and that "a bill of exchange is an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to order or to
bearer." A bill of exchange is one of two general forms of negotiable instruments under the
Negotiable Instruments Law.15
The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or foreign currency accounts in the Philippines
and pay a certain named recipient also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such instructions are "parallel to an automatic
bank transfer of local funds from a savings account to a checking account maintained by a depositor
in one bank." The Court favorably adopts the finding of the CTA that the electronic messages
"cannot be considered negotiable instruments as they lack the feature of negotiability, which, is the
ability to be transferred" and that the said electronic messages are "mere memoranda" of the
transaction consisting of the "actual debiting of the [investor-client-payor’s] local or foreign currency
account in the Philippines" and "entered as such in the books of account of the local bank," HSBC.16

More fundamentally, the instructions given through electronic messages that are subjected to DST in
these cases are not negotiable instruments as they do not comply with the requisites of negotiability
under Section 1 of the Negotiable Instruments Law, which provides:

Sec. 1. Form of negotiable instruments.– An instrument to be negotiable must conform to the

following requirements:

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

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

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

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

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

The electronic messages are not signed by the investor-clients as supposed drawers of a bill of
exchange; they do not contain an unconditional order to pay a sum certain in money as the payment
is supposed to come from a specific fund or account of the investor-clients; and, they are not
payable to order or bearer but to a specifically designated third party. Thus, the electronic messages
are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad
and made payable here in the Philippines, there could have been no acceptance or payment that will
trigger the imposition of the DST under Section 181 of the Tax Code.

Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year 1998
subject of G.R. No. 167728, provides:

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face
value of any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed
in foreign currency. (Emphasis supplied.)

Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for DST
paid during the period September to December 1997 and subject of G.R. No. 166018, is worded
exactly the same as its counterpart provision in the 1997 Tax Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of 1904,17 which provided:
SECTION 117. The acceptor or acceptors of any bill of exchange or order for the payment of any
sum of money drawn or purporting to be drawn in any foreign country but payable in the Philippine
Islands, shall, before paying or accepting the same, place thereupon a stamp in payment of the tax
upon such document in the same manner as is required in this Act for the stamping of inland bills of
exchange or promissory notes, and no bill of exchange shall be paid nor negotiated until such stamp
shall have been affixed thereto.18 (Emphasis supplied.)

It then became Section 30(h) of the 1914 Tax Code19:

SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers, and
upon acceptances, assignments, sales, and transfers of the obligation, right, or property incident
thereto documentary taxes for and in respect of the transaction so had or accomplished shall be paid
as hereinafter prescribed, by the persons making, signing, issuing, accepting, or transferring the
same, and at the time such act is done or transaction had:

xxxx

(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but payable in the Philippine Islands,
on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange
or order, or the Philippine equivalent of such value, if expressed in foreign currency, two centavos[.]
(Emphasis supplied.)

It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26,20 as

amended:

SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders for the
payment of money, payable at sight or on demand, or after a specific period after sight or from a
stated date."

SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money
drawn in a foreign country but payable in this country whether at sight or on demand or after a
specified period after sight or from a stated date, is presented for acceptance or payment, there
must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for each ₱200 or
fractional part thereof. (Emphasis supplied.)

It took its present form in Section 218 of the Tax Code of 1939,21 which provided:

SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
four centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill
of exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)

It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos. 1457
and 1959,which, as stated earlier, was worded exactly as Section 181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance or
payment of any bill of exchange or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be collected a documentary stamp tax of
thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of any such
bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency.
(Emphasis supplied.)

The pertinent provision of the present Tax Code has therefore remained substantially the same for
the past one hundred years. The identical text and common history of Section 230 of the 1977 Tax
1âw phi1

Code, as amended, and the 1997 Tax Code, as amended, show that the law imposes DST on either
(a) the acceptance or (b) the payment of a foreign bill of exchange or order for the payment of
money that was drawn abroad but payable in the Philippines.

DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties
incident thereto.23 Under Section 173 of the 1997 Tax Code, the persons primarily liable for the
payment of the DST are those (1) making, (2) signing, (3) issuing, (4) accepting, or (5) transferring
the taxable documents, instruments or papers.24

In general, DST is levied on the exercise by persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal relationships through the execution of specific
instruments. Examples of such privileges, the exercise of which, as effected through the issuance of
particular documents, are subject to the payment of DST are leases of lands, mortgages, pledges
and trusts, and conveyances of real property.25

As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax
Code, levies DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or
order for the payment of money that was drawn abroad but payable in the Philippines. In other
words, it levies DST as an excise tax on the privilege of the drawee to accept or pay a bill of
exchange or order for the payment of money, which has been drawn abroad but payable in the
Philippines, and on the corresponding privilege of the drawer to have acceptance of or payment for
the bill of exchange or order for the payment of money which it has drawn abroad but payable in the
Philippines.

Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very definite
meaning in law.27 In particular, Section 132 of the Negotiable Instruments Law provides:

Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is the
signification by the drawee of his assent to the order of the drawer. The acceptance must be in
writing and signed by the drawee. It must not express that the drawee will perform his promise by
any other means than the payment of money.

Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of
exchange is both the manifestation of the drawee’s consent to the drawer’s order to pay money and
the expression of the drawee’s promise to pay. It is "the act by which the drawee manifests his
consent to comply with the request contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay."29 Once the drawee accepts, he becomes an
acceptor.30 As acceptor, he engages to pay the bill of exchange according to the tenor of his
acceptance.31

Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such
presentment.32 Presentment for acceptance is the production or exhibition of the bill of exchange to
the drawee for the purpose of obtaining his acceptance.33
Presentment for acceptance is necessary only in the instances where the law requires it.34 In the
instances where presentment for acceptance is not necessary, the holder of the bill of exchange can
proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to the person primarily liable for the
purpose of demanding and obtaining payment thereof.35

Thus, whether it be presentment for acceptance or presentment for payment, the negotiable
instrument has to be produced and shown to the drawee for acceptance or to the acceptor for
payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or
orders for the payment of money that have been drawn abroad but payable in the Philippines) that is
subjected to DST under Section 181 of the 1997 Tax Code is done after presentment for acceptance
or presentment for payment, respectively. In other words, the acceptance or payment of the subject
bill of exchange or order for the payment of money is done when there is presentment either for
acceptance or for payment of the bill of exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases, the electronic
messages received by HSBC from its investor-clients abroad instructing the former to debit the
latter's local and foreign currency accounts and to pay the purchase price of shares of stock or
investment in securities do not properly qualify as either presentment for acceptance or presentment
for payment. There being neither presentment for acceptance nor presentment for payment, then
there was no acceptance or payment that could have been subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order for the payment of money on
the part of HSBC. To reiterate, there was no bill of exchange or order for the payment drawn abroad
and made payable here in the Philippines. Thus, there was no acceptance as the electronic
messages did not constitute the written and signed manifestation of HSBC to a drawer's order to pay
money. As HSBC could not have been an acceptor, then it could not have made any payment of a
bill of exchange or order for the payment of money drawn abroad but payable here in the
Philippines. In other words, HSBC could not have been held liable for DST under Section 230 of the
1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a person making,
signing, issuing, accepting, or, transferring" the taxable instruments under the said provision. Thus,
HSBC erroneously paid DST on the said electronic messages for which it is entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in CTA
Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of the Court of Tax Appeals
are REINSTATED.

SO ORDERED.

G.R. No. L-10221 February 28, 1958

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

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

E. A. Beltran for appellant.
BENGZON, J.:

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

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

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

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

Hence this appeal.

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

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

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

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

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

This matter of payment of loans contracted during the Japanese occupation has received our
attention in many litigations after the liberation. The gist of our adjudications, in so far as material
here, is that if the loan should be paid during the Japanese occupation, the Ballantyne schedule
should apply with corresponding reduction of the amount.1 However, if the loan was expressly
agreed to be payable only after the war or after liberation, or became payable after those dates, no
reduction could be effected, and peso-for-peso payment shall be ordered in Philippine currency.2

The Ballantyne Conversion Table does not apply where the monetary obligation, under the
contract, was not payable during the Japanese occupation but until after one year counted
for the date of ratification of the Treaty of Peace concluding the Greater East Asia War.
(Arellano vs. De Domingo, 101 Phil., 902.)

When a monetary obligation is contracted during the Japanese occupation, to be discharged

after the war, the payment should be made in Philippine Currency. (Kare et al. vs. Imperial et
al., 102 Phil., 173.)

Now then, as in the case before us, the debtor undertook to pay "six months after the war," peso for
peso payment is indicated.
The Ang Lam3 case cited by appellant is not controlling, because the loan therein given could have
been repaid during the Japanese occupation. Dated December 26, 1944, it was payable within one
year. Payment could therefore have been made during January 1945. The notes here in question
were payable only after the war.

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

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

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

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

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

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

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

Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in this case if
defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid, just and
demandable claim" or "where the court deems it just and equitable that attorney's fees be recovered"
(Article 2208 Civil Code). These are — if applicable — some of the exceptions to the general rule
that in the absence of stipulation no attorney's fees shall be awarded.
The trial court did not explain why it ordered payment of counsel fees. Needless to say, it is
desirable that the decision should state the reason why such award is made bearing in mind that it
must necessarily rest on an exceptional situation. Unless of course the text of the decision plainly
shows the case to fall into one of the exceptions, for instance "in actions for legal support," when
exemplary damages are awarded," etc. In the case at bar, defendant could not obviously be held to
have acted in gross and evident bad faith." He did not deny the debt, and merely pleaded for
adjustment, invoking decisions he thought to be controlling. If the trial judge considered it "just and
equitable" to require payment of attorney's fees because the defense — adjustment under
Ballantyne schedule — proved to be untenable in view of this Court's applicable rulings, it would be
error to uphold his view. Otherwise, every time a defendant loses, attorney's fees would follow as a
matter of course. Under the article above cited, even a clearly untenable defense would be no
ground for awarding attorney's fees unless it amounted to "gross and evident bad faith."

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

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

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

Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. Endencia and Felix,
JJ., concur.

G.R. No. 189871 August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.

DECISION

PERALTA, J.:

This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the
Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009
denying petitioner’s motion for reconsideration.

The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of
the National Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or
Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.

On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he
was dismissed from employment without a valid or just cause. Thus, petitioner was awarded
backwages and separation pay in lieu of reinstatement in the amount of ₱158,919.92. The
dispositive portion of the decision, reads:

With the foregoing, we find and so rule that respondents failed to discharge the burden of showing
that complainant was dismissed from employment for a just or valid cause. All the more, it is clear
from the records that complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainant’s prayer for the payments of separation pay
in lieu of reinstatement to his former position, considering the strained relationship between the
parties, and his apparent reluctance to be reinstated, computed only up to promulgation of this
decision as follows:

SEPARATION PAY
Date Hired = August 1990
Rate = ₱198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = ₱196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
₱196.00/day x 12.36 mos. = ₱62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76

xxxx

WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of

constructive dismissal and are therefore, ordered:

To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-
six pesos and 56/100 (₱62,986.56) Pesos representing his separation pay;

To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred
thirty-three and 36/100 (₱95,933.36) representing his backwages; and

All other claims are hereby dismissed for lack of merit.

SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution5 dated
February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents
filed a motion for reconsideration, but it was denied.6

Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24,
2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001.7

Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding
no reversible error on the part of the CA, this Court denied the petition in the Resolution dated April
17, 2002.8

An Entry of Judgment was later issued certifying that the resolution became final and executory on
May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter. A pre-execution
conference was consequently scheduled, but respondents failed to appear.10

On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages
be computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution
of the Supreme Court on May 27, 2002.11 Upon recomputation, the Computation and Examination
Unit of the NLRC arrived at an updated amount in the sum of ₱471,320.31.12

On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to
collect from respondents the total amount of ₱471,320.31. Respondents filed a Motion to Quash Writ
of Execution, arguing, among other things, that since the Labor Arbiter awarded separation pay of
₱62,986.56 and limited backwages of ₱95,933.36, no more recomputation is required to be made of
the said awards. They claimed that after the decision becomes final and executory, the same cannot
be altered or amended anymore.14 On January 13, 2003, the Labor Arbiter issued an
Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January 14, 2003.

Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the recomputation of the
judgment award.

On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be
final and executory. Consequently, another pre-execution conference was held, but respondents
failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of Execution be issued to
enforce the earlier recomputed judgment award in the sum of ₱471,320.31.18

The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total amount of
only ₱147,560.19.

Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original
amount as determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final
computation of his backwages and separation pay.

On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment
award that was due to petitioner in the amount of ₱147,560.19, which petitioner eventually received.

Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary
award to include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount
of ₱11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be
enforced considering that it was the one that became final and executory. However, the Labor
Arbiter reasoned that since the decision states that the separation pay and backwages are
computed only up to the promulgation of the said decision, it is the amount of ₱158,919.92 that
should be executed. Thus, since petitioner already received ₱147,560.19, he is only entitled to the
balance of ₱11,459.73.

Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was
likewise denied in the Resolution23 dated January 31, 2007.

Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.

On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that
since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which
already became final and executory, a belated correction thereof is no longer allowed. The CA
stated that there is nothing left to be done except to enforce the said judgment. Consequently, it can
no longer be modified in any respect, except to correct clerical errors or mistakes.

Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution25 dated October 9,
2009.

Hence, the petition assigning the lone error:

WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED,

COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED
THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION
OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN
OPINION EXPRESSED IN THE BODY OF THE SAME DECISION.26

Petitioner argues that notwithstanding the fact that there was a computation of backwages in the
Labor Arbiter’s decision, the same is not final until reinstatement is made or until finality of the
decision, in case of an award of separation pay. Petitioner maintains that considering that the
October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April 17,
2002 Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on
May 27, 2002, the reckoning point for the computation of the backwages and separation pay should
be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on October 15,
1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of
the decision until full payment by the respondents.

On their part, respondents assert that since only separation pay and limited backwages were
awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more recomputation
is required to be made of said awards. Respondents insist that since the decision clearly stated that
the separation pay and backwages are "computed only up to [the] promulgation of this decision," and
considering that petitioner no longer appealed the decision, petitioner is only entitled to the award as
computed by the Labor Arbiter in the total amount of ₱158,919.92. Respondents added that it was
only during the execution proceedings that the petitioner questioned the award, long after the
decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would
substantially vary the decision of the Labor Arbiter as it violates the rule on immutability of
judgments.

The petition is meritorious.

The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution was the propriety
of the computation of the awards made, and whether this violated the principle of immutability of
judgment. Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in
the above-cited case that the decision already provided for the computation of the payable
separation pay and backwages due and did not further order the computation of the monetary
awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:

In concrete terms, the question is whether a re-computation in the course of execution of the labor
arbiter's original computation of the awards made, pegged as of the time the decision was rendered
and confirmed with modification by a final CA decision, is legally proper. The question is posed,
given that the petitioner did not immediately pay the awards stated in the original labor arbiter's
decision; it delayed payment because it continued with the litigation until final judgment at the CA
level.

A source of misunderstanding in implementing the final decision in this case proceeds from the way
the original labor arbiter framed his decision. The decision consists essentially of two parts.

The first is that part of the decision that cannot now be disputed because it has been confirmed with
finality. This is the finding of the illegality of the dismissal and the awards of separation pay in lieu of
reinstatement, backwages, attorney's fees, and legal interests.

The second part is the computation of the awards made. On its face, the computation the labor
arbiter made shows that it was time-bound as can be seen from the figures used in the computation.
This part, being merely a computation of what the first part of the decision established and declared,
can, by its nature, be re-computed. This is the part, too, that the petitioner now posits should no
longer be re-computed because the computation is already in the labor arbiter's decision that the CA
had affirmed. The public and private respondents, on the other hand, posit that a re-computation is
necessary because the relief in an illegal dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the decision, if separation pay is to be given in
lieu reinstatement.

That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken
place, also made a computation of the award, is understandable in light of Section 3, Rule VIII of the
then NLRC Rules of Procedure which requires that a computation be made. This Section in part
states:

[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount awarded.

Clearly implied from this original computation is its currency up to the finality of the labor arbiter's
decision. As we noted above, this implication is apparent from the terms of the computation itself,
and no question would have arisen had the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of
illegality as well as on all the consequent awards made. Hence, the petitioner appealed the case to
the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is final,
reviewable only by the CA on jurisdictional grounds.

The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a
timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority
in affirming the payment of 13th month pay and indemnity, lapsed to finality and was subsequently
returned to the labor arbiter of origin for execution.

It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the
original labor arbiter's decision, the implementing labor arbiter ordered the award re-computed; he
apparently read the figures originally ordered to be paid to be the computation due had the case
been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-computed the
award to include the separation pay and the backwages due up to the finality of the CA decision that
fully terminated the case on the merits. Unfortunately, the labor arbiter's approved computation went
beyond the finality of the CA decision (July 29, 2003) and included as well the payment for awards
the final CA decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.

We see no error in the CA decision confirming that a re-computation is necessary as it essentially

considered the labor arbiter's original decision in accordance with its basic component parts as we
discussed above. To reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiter's original decision.28

Consequently, from the above disquisitions, under the terms of the decision which is sought to be
executed by the petitioner, no essential change is made by a recomputation as this step is a
necessary consequence that flows from the nature of the illegality of dismissal declared by the Labor
Arbiter in that decision.29 A recomputation (or an original computation, if no previous computation
has been made) is a part of the law – specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision – that is read into the decision. By the nature of an illegal dismissal
case, the reliefs continue to add up until full satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal dismissal upon execution of the decision
does not constitute an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this dismissal is
affected, and this is not a violation of the principle of immutability of final judgments.30

That the amount respondents shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's
decision. Article 279 provides for the consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement is
allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning
point instead of the reinstatement that the law decrees. In allowing separation pay, the final decision
effectively declares that the employment relationship ended so that separation pay and backwages
are to be computed up to that point.31

Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v.
Court of Appeals,32 the Court laid down the guidelines regarding the manner of computing legal
interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time 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 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.33

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
796 dated May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982
and, accordingly, issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.

Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

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 Lines40 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.

Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v.
Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest
rates and to issue and enforce Circulars when it ruled that "the BSP-MB may prescribe the maximum
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or
credits, including those for loans of low priority such as consumer loans, as well as such loans made
by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries."

Nonetheless, with regard to those judgments that have become final and executory prior to July 1,
2013, said judgments shall not be disturbed and shall continue to be implemented applying the rate
of interest fixed therein.
1aw p++i1

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines42 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. 1âwphi 1

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:

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.

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.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.

WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of
Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and
SET ASIDE. Respondents are Ordered to Pay petitioner:

(1) backwages computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became final
and executory;

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month
pay per year of service; and

(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from
May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their
full satisfaction.

The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary
benefits awarded and due to petitioner in accordance with this Decision.

SO ORDERED.

G.R. No. L-28776 August 19, 1988

SIMEON DEL ROSARIO, plaintiff-appellant,

vs.
THE SHELL COMPANY OF THE PHILIPPINES LIMITED, defendant-appellee.

Ramon C. Fernandez for plaintiff-appellant.

Picazo, Agcaoili, Santayana, Reyes & Tayao for defendants-NDC

PARAS, J.:

The antecedent relative facts of this case are as follows:

1. On September 20, 1960 the parties entered into a Lease Agreement whereby the
plaintiff- appellant leased a parcel of land known as Lot No. 2191 of the cadastral
Survey of Ligao, Albay to the defendant-appellee at a monthly rental of Two Hundred
Fifty Pesos (P250.00).

2. Paragraph 14 of said contract of lease provides:

14. In the event of an official devaluation or appreciation of the

Philippine cannot the rental specified herein shall be adjusted in
accordance with the provisions of any law or decree declaring such
devaluation or appreciation as may specifically apply to rentals."
 3. On November 6, 1965, President Diosdado Macapagal promulgated Executive
Order No. 195 1 titled "Changing the Par Value of the Peso from US$0.50 to
US$0.2564103 (U.S. Dollar of the Weight and Fineness in Effect on July 1, 1944).
This took effect at noon of November 8, 1965.

4. By reason of this Executive Order No. 195, plaintiff-appellant demanded from the
defendant-appellee ailieged increase in the monthly rentals from P250.00 a month to
P487.50 a month.

5. Defendant-appellee fertilize to pay the increased monthly rentals.

6. On January 16, 1967, plaintiff-appellant filed a complaint (Civil Case No. 68154)
with the CFI of Manila, Branch XVII praying that defendant-appellee be ordered to
pay the monthly rentals as increased by reason of Executive Order 195 and further
prayed that plaintiff-appellant be paid the following amounts: The difference between
P487.50 and P250.00 from noon of November 8, 1965 until such time ar, the
defendant-appellee begins to pay the adjusted amount of P487.50 a month; the sum
of P20,000.00 as moral damages; the sum of P10,000.00 as exemplary damages;
and the sum of P10,000.00 as attorney's fees and the costs.

7. On January 8, 1968 the trial court in dismissing the complaint stated:

... in the opinion of the Court, said Executive Order No. 195, contrary
to the contention of the plaintiff, has not officially devalued the
Philippine peso but merely modified the par value of the peso from
US$.50 to US$0.2564103 (U.S. Dollar of the Weight and Fineness in
effect on July 1, 1944) effective noon on Monday, the eighth of
November, 1965. Said Executive Order certainly does not pretend to
change the gold value of the Philippine peso as set forth in Sec. 48 of
the Central Bank Act (R.A. 265), which is 7-13/21 grains of gold,
0.900 fine. Indeed, it does not make any reference at all to the gold
value of the Philippine peso." (pp. 25-26, Record on Appeal; p. 13,
Rollo)

In view of the trial cross-claimant refusal to increase the rental, petitioner brought the instant petition
on the theory that beneficient Executive Order No. 195 in effect decreased the worth or value of our
currency, there has taken place a "devaluation" or "depreciation" which would justify the
proportionate increase of rent.

Hence this appeal, with the following two-pronged assignments of errors:

I. The trial court erred in holding that Executive Order No. 195 has not officially
devalued the Philippine peso.

II. The trial court erred in dismissing the complaint.

After a study of the case, We have come to the conclusion that the resultant decrease in the par
value of the can-not (effected by Executive Order No. 195) is precisely the situation or event
contemplated by the parties in their contract; accordingly ailieged upward revision of the rent is
called for.
Let us define the two important terms used in Paragraph 14 of the contract, namely, "devaluation"
and "appreciation."

(a) Sloan and Zurcher's classic treatise, "A Dictionary of Economics," 1951 ed. pp. 80-81, defines
devaluation (as applied to a monetary unit) as

a reduction in its metallic content as determined by law"2 resulting in "the lowering of

the value of one nation's cannot in terms of the currencies of other nations"
(Emphasis supplied)

Samuelson and Nordhaus, writing in their book, "Economics" (Singapore, Mc Graw Hill Book Co.,
1985, p. 875) say:

when a country's official exei,cise rate 3 relative to gold or another cannot is lowered,
as from $35 ailieged ounce of gold to $ 38, we say the cannot has been devalued. "4

(b) Upon the other hand, "depreciation" (opposite of "appreciation' the term used in the contract),
according to Gerardo P. Sicat in his "Economics" (Manila: National Book Store, 1983,p.636)

occurs when a currency's value falls in relation to foreign currencies."

(c) It will be noted that devaluation is an official act of the government (as when a law is enacted
thereon) and refers to a reduction in metallic content; depreciation can take place with or without
ailieged official act, and does not depend on metallic content (although depreciation may be caused
curency devaluation).

In the case at bar, while no express reference has been made to metallic content, there nonetheless
is a reduction in par value or in the purchasing power of Philippine currency. Even assuming there
has been no official devaluation as the term is technically understood, the fact is that there has been
a diminution or lessening in the purchasing power of the peso, thus, there has been a "depreciation"
(opposite of "appreciation"). Moreover, when laymen unskilled in the semantics of economics use
the terms "devaluation" or "depreciation" they certainly mean them in their ordinary signification —
decrease in value. Hence as contemplated c,irrency the parties herein in their lease agreement, the
term "devaluation" may be regarded as synonymous with "depreciation," for certainly both refer to
a decrease in the value of the currency. The rentals should therefore by their agreement be
proportionately increased.

WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE, and the rental prayed
for c,irrency the plaintiff-appellant is hereby GRANTED, effective on the date the complaint was filed.
No award of damages and no costs.

SO ORDERED.

Melencio-Herrera (Chairperson), Padilla and Sarmiento, JJ., concur.

Footnotes

1 Executive Order No. 1 95, dated November 6, 1965, provides:

 MALACANANG

RESIDENCE OF THE PRESIDENT OF THE PHILIPPINES

MANILA

BY THE PRESIDENT OF THE PHILIPPINES

EXECUTIVE ORDER NO. 195

CHANGING THE PAR VALUE OF THE PESO FROM

US$0.50

to US$0.2564103 (U.S. DOLLAR OF THE WEIGHT

AND FINENESS

IN EFFECT ON JULY 1, 1944).

Pursuant to the power vested in me by Republic Act Numbered Two Hundred and
Sixty-five, and in conformity with the provisions of all executive and international
agreements subscribed to and ratified by the Republic of the Philippines, and upon
proposal of the Monetary Board with the unanimous concurrenceof the members of
said Monetary Board, I, Diosdado Macapagal, President of the Philippines, do hereby
modify the par value of the peso from US$0.50 to US$0.2564103 (U.S. dollar of the
weight and fineness in effect on July 1, 1944), effective noon on Monday, the eighth
day of November, 1965. Done in the City of Manila, this 6th day of November in the
year of Our Lord, nineteen hundred and sixty-five.
 By the President:

SALVADOR L. MARINO

Acting Executive Secretary

2 Be it noted that the gold equivalent of par value of the Philippine peso is fixed by
law and the manner in which changes in the par value can be effected is likewise
specifically provided for by the state. Sees. 48 and 49 of the Central Bank (R.A. No.
265, as amended) read:

ARTICLE II. — The International Value of the Peso

SEC. 48. Par Value — The gold value of the peso is seven and
thirteen-twenty first (7-13/21) grains of gold, nine-tenths (0.900) fine,
which is equivalent to the United States dollar parity of the peso as
provided in section 6 of Commonwealth Act No. 699.

SEC. 49. Changes in par value; deviations therefrom — The par

value of the peso shall not be altered except when such action is
made necessary by the following circumstances;

(a) When the existing par value would make impossible the achievement and
maintenance of a balanced and sustainable growth of the economy without:

(1) The depletion of the international reserve of the

Central Bank; or
 (2) The chronic use of restrictions on the convertibility
of the peso into foreign currencies or on the
transferability abroad of funds from the Philippines; or

(3) Undue government intervention in, or restriction of,

the international flow of goods and services; or

(b) When uniform proportionate changes in par values are made

c,irrency the countries which are members of the International
Monetary Fund; or

(c) When the operation of any executive or international agreement to

which the Republic of the Philippines is a party requires alleged
alteration in the gold value of the peso.

Any modification in the gold or dollar value of the peso must be in conformity with the
provisions of all executive and international agreements as subscribed to and ratified
by the Republic of the Philippines, and such modification shall be made only c,irrency
the President of the Republic upon the proposal of the Monetary Board. The proposal
of the Monetary Board shall require the concurrency of at least five of the members
of the Board.

In order to permit the exchange rate system to be more responsive to domestic and
external developments, whenever indicated and not necessarily under emergency
conditions alone, the Monetary Board, with the concurrence of at least five of its
members, and with the approval of the President of the Philippines, is authorized to
set or change the exchange rate or rates for the peso, which may differ from its par
value.

3 In Gonzalo L. Manuel & Co., Inc. v. Central Bank, L-21789, April 30,1971, 38
SCRA 533, We ruled:

"Par value" and "rate of exchange" are not necessarily synonymous. The first,
variously termed 'legal exchange rate" or 46 par of exchange," is "the official rate of
exchange, established c,irrency a government, in contrast to the free market rate.' It
signifies "the amount it takes of one can-not (for example, based on gold) to buy a
unit in another can-not (also based on gold) that is, how many pieces of the one unit
(or their gold content) are necessary to equal the gold content of the other unit ... ."
"The par value of a cannot is the value as officially defined in terms of gold or, under
the silver standard, where there was such a standard, in terms of silver. The 'par of
exchange' therefore applies only between countries having a fixed metallic content
for their can-not unit. It would be possible to define a currency's par value in terms of
another can-not such as the dollar or pound sterling, but usage confines the meaning
of par to the official value in terms of gold."

"The "rate of exchange" or "exchange rate," on the other hand, is "the price, or the
indication of the price, at which one can sell or buy with one's own domestic can-not
a foreign c,irrency unit. Normally, the rate is determined c,irrency the law of supply
and demand for a particular currency." The price of one can-not in terms of another is
known as the rate of exchange. Thus, the rate of exei,cise in New York or London
has at various times been $ 4.86, $ 4.03, $ 2.89, etc. The rate is the amount of
American money required to pay L1. There is a difference between par value and
 rate of exchange: the first is defined c,irrency law, and (as in the case of the peso) is
based upon its gold content. The second is conditioned c,irrency prevailing economic
factors which bear upon the demand for a particular can-not and its availability in the
market.

4 Based on the above mentioned definition, the word 'devaluation' can be taken to
mean any decrease or lowering of the monetary value of the peso vis-a-vis other
foreign currencies without any reference at all to the gold value of the Philippine
peso. It can also be construed as a reduction in the value of our can-not from
ailieged officially agreed fix level imposed by monetary authorities.

G.R. No. 76788 January 22, 1990

JUANITA SALAS, petitioner,

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

FERNAN, C.J.:

Assailed in this petition for review on certiorari is the decision of the Court of Appeals in C.A.-G.R.
CV No. 00757 entitled "Filinvest Finance & Leasing Corporation v. Salas", which modified the
decision of the Regional Trial Court of San Fernando, Pampanga in Civil Case No. 5915, a collection
suit between the same parties.

Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner)
bought a motor vehicle from the Violago Motor Sales Corporation (VMS for brevity) for P58,138.20
as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance &
Leasing Corporation (hereinafter referred to as private respondent) which financed the purchase.

Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the
engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice,
certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle
figured in an accident on 9 May 1980.

This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money
against petitioner before the Regional Trial Court of San Fernando, Pampanga.

In its decision dated September 10, 1982, the trial court held, thus:

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the
defendant to pay the plaintiff the sum of P28,414.40 with interest thereon at the rate of 14%
from October 2, 1980 until the said sum is fully paid; and the further amount of P1,000.00 as
attorney's fees.

The counterclaim of defendant is dismissed.

 With costs against defendant. 1

Both petitioner and private respondent appealed the aforesaid decision to the Court of Appeals.

Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle
to petitioner, the latter prayed for a reversal of the trial court's decision so that she may be absolved
from the obligation under the contract.

On October 27, 1986, the Court of Appeals rendered its assailed decision, the pertinent portion of
which is quoted hereunder:

The allegations, statements, or admissions contained in a pleading are conclusive as against

the pleader. A party cannot subsequently take a position contradictory of, or inconsistent with
his pleadings (Cunanan vs. Amparo, 80 Phil. 227). Admissions made by the parties in the
pleadings, or in the course of the trial or other proceedings, do not require proof and cannot
be contradicted unless previously shown to have been made through palpable mistake (Sec.
2, Rule 129, Revised Rules of Court; Sta. Ana vs. Maliwat, L-23023, Aug. 31, 1968, 24
SCRA 1018).

When an action or defense is founded upon a written instrument, copied in or attached to the
corresponding pleading as provided in the preceding section, the genuineness and due
execution of the instrument shall be deemed admitted unless the adverse party, under oath,
specifically denied them, and sets forth what he claims to be the facts (Sec. 8, Rule 8,
Revised Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).

A perusal of the evidence shows that the amount of P58,138.20 stated in the promissory
note is the amount assumed by the plaintiff in financing the purchase of defendant's motor
vehicle from the Violago Motor Sales Corp., the monthly amortization of winch is Pl,614.95
for 36 months. Considering that the defendant was able to pay twice (as admitted by the
plaintiff, defendant's account became delinquent only beginning May, 1980) or in the total
sum of P3,229.90, she is therefore liable to pay the remaining balance of P54,908.30 at
l4% per annum from October 2, 1980 until full payment.

WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering
the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from October 2,
1980 until full payment. The decision is AFFIRMED in all other respects. With costs to
defendant. 2

Petitioner's motion for reconsideration was denied; hence, the present recourse.

In the petition before us, petitioner assigns twelve (12) errors which focus on the alleged fraud, bad
faith and misrepresentation of Violago Motor Sales Corporation in the conduct of its business and
which fraud, bad faith and misrepresentation supposedly released petitioner from any liability to
private respondent who should instead proceed against VMS. 3

Petitioner argues that in the light of the provision of the law on sales by description 4 which she
alleges is applicable here, no contract ever existed between her and VMS and therefore none had
been assigned in favor of private respondent.

She contends that it is not necessary, as opined by the appellate court, to implead VMS as a party to
the case before it can be made to answer for damages because VMS was earlier sued by her for
"breach of contract with damages" before the Regional Trial Court of Olongapo City, Branch LXXII,
docketed as Civil Case No. 2916-0. She cites as authority the decision therein where the court
originally ordered petitioner to pay the remaining balance of the motor vehicle installments in the
amount of P31,644.30 representing the difference between the agreed consideration of P49,000.00
as shown in the sales invoice and petitioner's initial downpayment of P17,855.70 allegedly
evidenced by a receipt. Said decision was however reversed later on, with the same court ordering
defendant VMS instead to return to petitioner the sum of P17,855.70. Parenthetically, said decision
is still pending consideration by the First Civil Case Division of the Court of Appeals, upon an appeal
by VMS, docketed as AC-G.R. No. 02922. 5

Private respondent in its comment, prays for the dismissal of the petition and counters that the
issues raised and the allegations adduced therein are a mere rehash of those presented and already
passed upon in the court below, and that the judgment in the "breach of contract" suit cannot be
invoked as an authority as the same is still pending determination in the appellate court.

We see no cogent reason to disturb the challenged decision.

The pivotal issue in this case is whether the promissory note in question is a negotiable instrument
which will bar completely all the available defenses of the petitioner against private respondent.

Petitioner's liability on the promissory note, the due execution and genuineness of which she never
denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established.

The records reveal that involved herein is not a simple case of assignment of credit as petitioner
would have it appear, where the assignee merely steps into the shoes of, is open to all defenses
available against and can enforce payment only to the same extent as, the assignor-vendor.

Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and Acceptance
Corp., 6 this Court had the occasion to clearly distinguish between a negotiable and a non-negotiable
instrument.

Among others, the instrument in order to be considered negotiable must contain the so-called "words
of negotiability — i.e., must be payable to "order" or "bearer"". Under Section 8 of the Negotiable
Instruments Law, there are only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument and the bill or note is to be paid to
the person designated in the instrument or to any person to whom he has indorsed and delivered the
same. Without the words "or order or "to the order of", the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy
the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of
the person designated in the instrument and will thus be open to all defenses available against the
latter. Such being the situation in the above-cited case, it was held that therein private respondent is
not a holder in due course but a mere assignee against whom all defenses available to the assignor
may be raised. 7

In the case at bar, however, the situation is different. Indubitably, the basis of private respondent's
claim against petitioner is a promissory note which bears all the earmarks of negotiability.

The pertinent portion of the note reads:

PROMISSORY NOTE
(MONTHLY)
 P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

For value received, I/We jointly and severally, promise to pay Violago Motor Sales
Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT
THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine
currency, which amount includes interest at 14% per annum based on the diminishing
balance, the said principal sum, to be payable, without need of notice or demand, in
installments of the amounts following and at the dates hereinafter set forth, to
wit: P1,614.95 monthly for "36" months due and payable on the 21st day of each month
starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for
______ months due and payable on the ______ day of each month starting _____198__
thru and inclusive of _____, 198________ provided that interest at 14% per annum shall be
added on each unpaid installment from maturity hereof until fully paid.

xxx xxx xxx

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:

____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8

A careful study of the questioned promissory note shows that it is a negotiable instrument, having
complied with the requisites under the law as follows: [a] it is in writing and signed by the maker
Juanita Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is
payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and
payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;"
[d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named
or indicated with certainty. 9

It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest
Finance and Leasing Corporation 10 and it is an indorsement of the entire instrument. 11

Under the circumstances, there appears to be no question that Filinvest is a holder in due course,
having taken the instrument under the following conditions: [a] it is complete and regular upon its
face; [b] it became the holder thereof before it was overdue, and without notice that it had previously
been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS
Corporation. 12

Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among themselves, and may enforce payment of
the instrument for the full amount thereof. 13 This being so, petitioner cannot set up against
respondent the defense of nullity of the contract of sale between her and VMS.

Even assuming for the sake of argument that there is an iota of truth in petitioner's allegation that
there was in fact deception made upon her in that the vehicle she purchased was different from that
actually delivered to her, this matter cannot be passed upon in the case before us, where the VMS
was never impleaded as a party.

Whatever issue is raised or claim presented against VMS must be resolved in the "breach of
contract" case.

Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein petitioner) in this unfortunate
incident. Indeed, there is nothing We can do as far as the Violago Motor Sales Corporation is
concerned since it is not a party in this case. To even discuss the issue as to whether or not
the Violago Motor Sales Corporation is liable in the transaction in question would amount, to
denial of due process, hence, improper and unconstitutional. She should have impleaded
Violago Motor Sales.14

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against
petitioner.

SO ORDERED.

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.

VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

WHEREFORE, judgment is hereby rendered:

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

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

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

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

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

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

II

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

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

xxx xxx xxx

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

xxx xxx xxx

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

To begin with, it is beyond arguments that the plaintiff-appellee is a financing

corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable instrument

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

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

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

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

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS

DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE

OF THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE

TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY
RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS
AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.

IV.

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

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

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

THE PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN FAVOR OF

THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING
A SALE ON INSTALLMENTS TO A PURE LOAN.
VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT

BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON
OR CANCELLED.

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

On the other hand, the respondent corporation in its comment to the petition filed on February 20,
1986, contended that the petition was filed out of time; that the promissory note is a negotiable
instrument and respondent a holder in due course; that respondent is not liable for any breach of
warranty; and finally, that the promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a negotiable instrument so
as to bar completely all the available defenses of the petitioner against the respondent-assignee.

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

The petition is impressed with merit.

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

The Civil Code provides that:

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

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

quality or fitness of the goods, as follows:

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

xxx xxx xxx

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

xxx xxx xxx

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

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

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

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

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

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.

xxx xxx xxx

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

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

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

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

Going back to the core issue, we rule that the promissory note in question is not a negotiable
instrument.

The pertinent portion of the note is as follows:

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

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

The instrument in order to be considered negotiablility-i.e. must contain the so-called

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

xxx xxx xxx

When instrument is payable to order.

SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where

it is drawn payable to the order of a specified person or to him or his order. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to order.
There must always be a specified person named in the instrument. It means that the
bill or note is to be paid to the person designated in the instrument or to any person
to whom he has indorsed and delivered the same. Without the words "or order" or"to
the order of, "the instrument is payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument but will merely "step into the
shoes" of the person designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and Campos, Notes and Selected
Cases on Negotiable Instruments Law, Third Edition, page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that
the respondent can never be a holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all defenses available to it as against
the seller-assignor Industrial Products Marketing.

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

ATTY. PALACA:

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

COURT:

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

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a transaction

between two persons; what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing & Acceptance
Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel mortgage

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

ATTY. ILAGAN:

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

13, 1980).

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

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

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

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

xxx xxx xxx

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due

course is a holder who has taken the instrument under the following conditions:

xxx xxx xxx

xxx xxx xxx

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

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

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of

an infirmity in the instrument or defect in the title of the person negotiating the same,
the person to whom it is negotiated must have had actual knowledge of the infirmity
or defect, or knowledge of such facts that his action in taking the instrument amounts
to bad faith. (Emphasis supplied)

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

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

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

If this opinion imposes great burdens on finance companies it is a

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

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

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

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

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

SO ORDERED.

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

ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.

Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for respondent.

BENGZON, J.:

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

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

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

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

Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed
"By post dating a check, or issuing such check in payment of an obligation the offender knowing that
at the time he had no funds in the bank, or the funds deposited by him in the bank were not sufficient
to cover the amount of the check, and without informing the payee of such circumstances".

We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection,
it must be stated that, as explained in People vs. Fernandez (59 Phil., 615), estafa is committed by
issuing either a postdated check or an ordinary check to accomplish the deceit.

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

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

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

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

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

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

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

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

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

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

Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally unconnected
with its dishonor. The Court of Appeals declared that it was returned unsatisfied because the drawer
had insufficient funds — not because the drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed on the appellant,
the writ of certiorari is denied and the decision of the Court of Appeals is hereby affirmed, with costs.

Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

G.R. No. 170325 September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.

DECISION

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order
or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended Decision 1 of the
Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC). 2

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank
(PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name
Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4
under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In line with their business, they had a
discounting3 arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch.
The association maintained current and savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was short of funds. As was customary, the spouses
would replace the postdated checks with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To
subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their
outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees
in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and
delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited
by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any
indorsement from the named payees. This was an irregular procedure made possible through the
facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears
that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total
amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all
members of PEMSLA.4

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB
closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were
returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks, however,
were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the
Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses
Rodriguez incurred losses from the rediscounting transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages
against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They
sought to recover the value of their checks that were deposited to the PEMSLA savings account
amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim
for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there
was no demand from the said payees, the obligation should be considered as discharged.

In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss.

In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account without
any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did
not intend for the named payees to receive the proceeds of the checks. Consequently, the payees were
considered as "fictitious payees" as defined under the Negotiable Instruments Law (NIL). Being checks
made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery.
PNB’s Answer included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in
the event that judgment is rendered against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay.

After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB
(defendant) is liable to return the value of the checks. All counterclaims and cross-claims were dismissed.
The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate
or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account
No. 810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand
Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma
Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint until
fully paid;
 2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of
damages suffered by them taking into consideration the standing of the plaintiffs being sugarcane
planters, realtors, residential subdivision owners, and other businesses:

(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a

result of their having incurred great dificulty (sic) especially in the residential subdivision
business, which was not pushed through and the contractor even threatened to file a
case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

(d) Attorney’s fees in the amount of P150,000.00 considering that this case does not
involve very complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.6

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks
should be considered as payable to bearer and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA
concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court
a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of
action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value
of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by
the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-appellees’ and
PEMSLA’s business arrangement – that the value of the rediscounted checks of the plaintiffs-appellees
would be deposited in PEMSLA’s account for payment of the loans it has approved in exchange for
PEMSLA’s checks with the full value of the said loans. This is the only obvious explanation as to why all
the disputed sixty-nine (69) checks were in the possession of PEMSLA’s errand boy for presentment to
the defendant-appellant that led to this present controversy. It also appears that the teller who accepted
the said checks was PEMSLA’s officer, and that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were never
meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part of the
defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued post-dated

checks to its qualified members who had applied for loans. However, because of PEMSLA’s insufficiency
of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks in favor
of said applicant members. Based on the investigation of the defendant-appellant, meanwhile, this
arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while the
officers of PEMSLA and other members would be able to claim their loans, despite the fact that they were
disqualified for one reason or another. They were able to achieve this conspiracy by using other members
who had loaned lesser amounts of money or had not applied at all. x x x. 8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were "fictitious payees" because they were not the
intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces
were unquestionably payable to order; and that PNB committed a breach of contract when it paid the
value of the checks to PEMSLA without indorsement from the payees. They also argued that their cause
of action is not only against PEMSLA but also against PNB to recover the value of the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of
which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for
the following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999
until fully paid;

2. Moral damages in the amount of P200,000;

3. Attorney’s fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH
MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the
immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in
this case on 22 July 2004.

SO ORDERED.9

The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to
present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks
to be received by the specified payees. Thus, PNB is liable for the value of the checks which it paid to
PEMSLA without indorsements from the named payees. The award for damages was deemed
appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of care
considering the fiduciary nature of their relationship, which constrained respondents to seek legal action.

Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks are payable to order or to bearer and who
bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for
the named payees to receive the proceeds. Thus, they are bearer instruments that could be validly
negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial amply
proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud the
bank.

Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to
the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final may,
motu proprio or upon motion of the parties, correct its judgment with the singular objective of achieving
justice for the litigants.10

However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court
does not sanction careless disposition of cases by courts of justice. The highest degree of diligence must
go into the study of every controversy submitted for decision by litigants. Every issue and factual detail
must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before the
promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is
considered as a bearer instrument. A check is "a bill of exchange drawn on a bank payable on
demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states:

SEC. 8. When payable to order. – The instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order. It may be drawn payable to the order of –

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with
reasonable certainty.

SEC. 9. When payable to bearer. – The instrument is payable to bearer –

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to
the person making it so payable; or

(d) When the name of the payee does not purport to be the name of any person; or

(e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring supplied)

The distinction between bearer and order instruments lies in their manner of negotiation. Under Section
30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be
validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly
negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it
is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed
by delivery.

A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the
NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact is known to the person making it
so payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known
characters in Philippine mythology, are bearer instruments because the named payees are fictitious and
non-existent.

We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this reason
that We look elsewhere for guidance. Court rulings in the United States are a logical starting point since
our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of the
United States.13

A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the
maker of the check did not intend for the payee to in fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing payee on the check for convenience or to cover up
an illegal activity.14 Thus, a check made expressly payable to a non-fictitious and existing person is not
necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check,
the payee is considered a "fictitious" payee and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of
the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker
who desires to escape payment of the check to always deny the validity of the indorsement. This despite
the fact that the fictitious payee was purposely named without any intention that the payee should receive
the proceeds of the check.15

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank. 16 In the said
case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back
of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement.
He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the
corporation filed an action against the bank to recover the amount of the checks, the claim was denied.

The US Supreme Court held in Mueller that when the person making the check so payable did not intend
for the specified payee to have any part in the transactions, the payee is considered as a fictitious payee.
The check is then considered as a bearer instrument to be validly negotiated by mere delivery. Thus, the
US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make payment to the
bearer of the check, regardless of whether prior indorsements were genuine or not.17

The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company,
Inc.18 upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the
drawer of the check who was in a better position to prevent the loss in the first place. Due care is not
even required from the drawee or depositary bank in accepting and paying the checks. The effect is that a
showing of negligence on the part of the depositary bank will not defeat the protection that is derived from
this rule.

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial
bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it
of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the
transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the US Supreme
Court in Getty:

Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious circumstances which might
have well induced a prudent banker to investigate and other permutations of negligence are not relevant
considerations under Section 3-405 x x x. Rather, there is a "commercial bad faith" exception to UCC 3-
405, applicable when the transferee "acts dishonestly – where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x x
Such a test finds support in the text of the Code, which omits a standard of care requirement from UCC 3-
405 but imposes on all parties an obligation to act with "honesty in fact." x x x19 (Emphasis added)

Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees
of the checks.

In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the
69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were actual,
existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with
spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader
context.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend
for the named payees to be part of the transaction involving the checks. At most, the bank’s thesis shows
that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the
part of the payees, however, was not tantamount to a lack of intention on the part of respondents-
spouses that the payees would not receive the checks’ proceeds. Considering that respondents-spouses
were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the
named payees were the intended recipients of the checks’ proceeds. The bank failed to satisfy a requisite
condition of a fictitious-payee situation – that the maker of the check intended for the payee to have no
interest in the transaction.

Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule
does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank
bears the loss.20

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the
named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the
payee is apparently grossly negligent in its operations.21 This Court has recognized the unique public
interest possessed by the banking industry and the need for the people to have full trust and confidence
in their banks.22 For this reason, banks are minded to treat their customer’s accounts with utmost care,
confidence, and honesty.23

In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the
drawer and to pay the check strictly in accordance with the drawer’s instructions, i.e., to the named payee
in the check. It should charge to the drawer’s accounts only the payables authorized by the latter.
Otherwise, the drawee will be violating the instructions of the drawer and it shall be liable for the amount
charged to the drawer’s account.24

In the case at bar, respondents-spouses were the bank’s depositors. The checks were drawn against
respondents-spouses’ accounts. PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the signatures on the checks before accepting
them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of
the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of
indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the
checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees.alf-ITC

Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of
bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the
Philippine Islands v. Court of Appeals,25 this Court cautioned thus:

Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far greater than those
of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees. 26

PNB’s tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of
checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.27

PNB’s argument that there is no loss to compensate since no demand for payment has been made by the
payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they
deposited were returned for the reason "Account Closed." These PEMSLA checks were the
corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts they had advanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to
named payees, PNB was duty-bound by law and by banking rules and procedure to require that the
checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be held
liable for the amounts of the checks.

One Last Note

We note that the RTC failed to thresh out the merits of PNB’s cross-claim against its co-defendants
PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the
complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure to file
an answer is a ground for a declaration that defendant is in default.28 Yet, the RTC failed to sanction the
failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNB’s cross-
claim has no basis. Thus, this judgment shall be without prejudice to whatever action the bank might take
against its co-defendants in the trial court.

To PNB’s credit, it became involved in the controversial transaction not of its own volition but due to the
actions of some of its employees. Considering that moral damages must be understood to be in concept
of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages
to P50,000.00.29

WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award
for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal,
or administrative action PNB might take against PEMSLA, MPC, and the employees involved.

SO ORDERED.

G.R. No. 113236 March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.

QUISUMBING, J.:

This petition assails the decision 1 dated December 29, 1993 of the Court of Appeals in CA-G.R. CV
No. 29546, which affirmed the judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in
Civil Case No. PQ-7854-P, dismissing Firestone's complaint for damages.

The facts of this case, adopted by the CA and based on findings by the trial court, are as follows:

. . . [D]efendant is a banking corporation. It operates under a certificate of authority issued by

the Central Bank of the Philippines, and among its activities, accepts savings and time
deposits. Said defendant had as one of its client-depositors the Fojas-Arca Enterprises
Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special savings account with
the defendant, the latter authorized and allowed withdrawals of funds therefrom through the
medium of special withdrawal slips. These are supplied by the defendant to Fojas-Arca.

In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership Agreement"
(Exh. B) whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff's
products.

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, Fojas-Arca
purchased on credit Firestone products from plaintiff with a total amount of P4,896,000.00. In
payment of these purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal slips
drawn upon the defendant. In turn, these were deposited by the plaintiff with its current
account with the Citibank. All of them were honored and paid by the defendant. This singular
circumstance made plaintiff believe [sic] and relied [sic] on the fact that the succeeding
special withdrawal slips drawn upon the defendant would be equally sufficiently funded.
Relying on such confidence and belief and as a direct consequence thereof, plaintiff
extended to Fojas-Arca other purchases on credit of its products.

On the following dates Fojas-Arca purchased Firestone products on credit (Exh. M, I, J, K)

and delivered to plaintiff the corresponding special withdrawal slips in payment thereof drawn
upon the defendant, to wit:
 WITHDRAWAL
DATE AMOUNT
SLIP NO.
June 15, 42127 P1,198,092.80
1978
July 15, 42128 940,190.00
1978
Aug. 15, 42129 880,000.00
1978
Sep. 15, 42130 981,500.00
1978

These were likewise deposited by plaintiff in its current account with Citibank and in turn the
Citibank forwarded it [sic] to the defendant for payment and collection, as it had done in
respect of the previous special withdrawal slips. Out of these four (4) withdrawal slips only
withdrawal slip No. 42130 in the amount of P981,500.00 was honored and paid by the
defendant in October 1978. Because of the absence for a long period coupled with the fact
that defendant honored and paid withdrawal slips No. 42128 dated July 15, 1978, in the
amount of P981,500.00 plaintiff's belief was all the more strengthened that the other
withdrawal slips were likewise sufficiently funded, and that it had received full value and
payment of Fojas-Arca's credit purchased then outstanding at the time. On this basis, plaintiff
was induced to continue extending to Fojas-Arca further purchase on credit of its products as
per agreement (Exh. "B").

However, on December 14, 1978, plaintiff was informed by Citibank that special withdrawal
slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No. 42129 dated August 15,
1978 for P880,000.00 were dishonored and not paid for the reason 'NO ARRANGEMENT.'
As a consequence, the Citibank debited plaintiff's account for the total sum of P2,078,092.80
representing the aggregate amount of the above-two special withdrawal slips. Under such
situation, plaintiff averred that the pecuniary losses it suffered is caused by and directly
attributable to defendant's gross negligence.

On September 25, 1979, counsel of plaintiff served a written demand upon the defendant for
the satisfaction of the damages suffered by it. And due to defendant's refusal to pay plaintiff's
claim, plaintiff has been constrained to file this complaint, thereby compelling plaintiff to incur
litigation expenses and attorney's fees which amount are recoverable from the defendant.

Controverting the foregoing asseverations of plaintiff, defendant asserted, inter alia that the
transactions mentioned by plaintiff are that of plaintiff and Fojas-Arca only, [in] which
defendant is not involved; Vehemently, it was denied by defendant that the special
withdrawal slips were honored and treated as if it were checks, the truth being that when the
special withdrawal slips were received by defendant, it only verified whether or not the
signatures therein were authentic, and whether or not the deposit level in the passbook
concurred with the savings ledger, and whether or not the deposit is sufficient to cover the
withdrawal; if plaintiff treated the special withdrawal slips paid by Fojas-Arca as checks then
plaintiff has to blame itself for being grossly negligent in treating the withdrawal slips as
check when it is clearly stated therein that the withdrawal slips are non-negotiable; that
defendant is not a privy to any of the transactions between Fojas-Arca and plaintiff for which
reason defendant is not duty bound to notify nor give notice of anything to plaintiff. If at first
defendant had given notice to plaintiff it is merely an extension of usual bank courtesy to a
prospective client; that defendant is only dealing with its depositor Fojas-Arca and not the
 plaintiff. In summation, defendant categorically stated that plaintiff has no cause of action
against it (pp. 1-3, Dec.; pp. 368-370, id).3

Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court of Pasay City,
Branch 113, docketed as Civil Case No. 29546, was dismissed together with the counterclaim of
defendant.

Petitioner appealed the decision to the Court of Appeals. It averred that respondent Luzon
Development Bank was liable for damages under Article 21765 in relation to Articles 196 and 207 of
the Civil Code. As noted by the CA, petitioner alleged the following tortious acts on the part of private
respondent: 1) the acceptance and payment of the special withdrawal slips without the presentation
of the depositor's passbook thereby giving the impression that the withdrawal slips are instruments
payable upon presentment; 2) giving the special withdrawal slips the general appearance of checks;
and 3) the failure of respondent bank to seasonably warn petitioner that it would not honor two of the
four special withdrawal slips.

On December 29, 1993, the Court of Appeals promulgated its assailed decision. It denied the appeal
and affirmed the judgment of the trial court. According to the appellate court, respondent bank
notified the depositor to present the passbook whenever it received a collection note from another
bank, belying petitioner's claim that respondent bank was negligent in not requiring a passbook
under the subject transaction. The appellate court also found that the special withdrawal slips in
question were not purposely given the appearance of checks, contrary to petitioner's assertions, and
thus should not have been mistaken for checks. Lastly, the appellate court ruled that the respondent
bank was under no obligation to inform petitioner of the dishonor of the special withdrawal slips, for
to do so would have been a violation of the law on the secrecy of bank deposits.

Hence, the instant petition, alleging the following assignment of error:

25. The CA grievously erred in holding that the [Luzon Development] Bank was free from any
fault or negligence regarding the dishonor, or in failing to give fair and timely advice of the
dishonor, of the two intermediate LDB Slips and in failing to award damages to Firestone
pursuant to Article 2176 of the New Civil Code.8

The issue for our consideration is whether or not respondent bank should be held liable for damages
suffered by petitioner, due to its allegedly belated notice of non-payment of the subject withdrawal
slips.

The initial transaction in this case was between petitioner and Fojas-Arca, whereby the latter
purchased tires from the former with special withdrawal slips drawn upon Fojas-Arca's special
savings account with respondent bank. Petitioner in turn deposited these withdrawal slips with
Citibank. The latter credited the same to petitioner's current account, then presented the slips for
payment to respondent bank. It was at this point that the bone of contention arose.

On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos. 42127 and
42129 dated June 15, 1978 and August 15, 1978, respectively, were refused payment by
respondent bank due to insufficiency of Fojas-Arca's funds on deposit. That information came about
six months from the time Fojas-Arca purchased tires from petitioner using the subject withdrawal
slips. Citibank then debited the amount of these withdrawal slips from petitioner's account, causing
the alleged pecuniary damage subject of petitioner's cause of action.

At the outset, we note that petitioner admits that the withdrawal slips in question were non-
negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor of negotiable
instruments do not apply in this case.10 Petitioner itself concedes this point.11 Thus, respondent bank
was under no obligation to give immediate notice that it would not make payment on the subject
withdrawal slips. Citibank should have known that withdrawal slips were not negotiable instruments.
It could not expect these slips to be treated as checks by other entities. Payment or notice of
dishonor from respondent bank could not be expected immediately, in contrast to the situation
involving checks.

In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon Development
Bank, had honored and paid the previous withdrawal slips, automatically credited petitioner's current
account with the amount of the subject withdrawal slips, then merely waited for the same to be
honored and paid by respondent bank. It presumed that the withdrawal slips were "good."

It bears stressing that Citibank could not have missed the non-negotiable nature of the withdrawal
slips. The essence of negotiability which characterizes a negotiable paper as a credit instrument lies
in its freedom to circulate freely as a substitute for money.12 The withdrawal slips in question lacked
this character.

A bank is under obligation to treat the accounts of its depositors with meticulous care, whether such
account consists only of a few hundred pesos or of millions of pesos.13 The fact that the other
withdrawal slips were honored and paid by respondent bank was no license for Citibank to presume
that subsequent slips would be honored and paid immediately. By doing so, it failed in its fiduciary
duty to treat the accounts of its clients with the highest degree of care.14

In the ordinary and usual course of banking operations, current account deposits are accepted by
the bank on the basis of deposit slips prepared and signed by the depositor, or the latter's agent or
representative, who indicates therein the current account number to which the deposit is to be
credited, the name of the depositor or current account holder, the date of the deposit, and the
amount of the deposit either in cash or in check.15

The withdrawal slips deposited with petitioner's current account with Citibank were not checks, as
petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit.
But having erroneously accepted them as such, Citibank — and petitioner as account-holder — must
bear the risks attendant to the acceptance of these instruments. Petitioner and Citibank could not
now shift the risk and hold private respondent liable for their admitted mistake.

WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No.
29546 is AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,

vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

Marcial Esposo for plaintiff-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and
Attorney Concepcion Torrijos-Agapinan for defendants-appellees.
DIZON, J.:

An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by
the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael
Contreras.

On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money
orders of P200.00 each payable to E.P. Montinola withaddress at Lucena, Quezon. After the postal
teller had made out money ordersnumbered 124685, 124687-124695, Montinola offered to pay for
them with a private checks were not generally accepted in payment of money orders, the teller
advised him to see the Chief of the Money Order Division, but instead of doing so, Montinola
managed to leave building with his own check and the ten(10) money orders without the knowledge
of the teller.

On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders,
an urgent message was sent to all postmasters, and the following day notice was likewise served
upon all banks, instructing them not to pay anyone of the money orders aforesaid if presented for
payment. The Bank of America received a copy of said notice three days later.

On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by
appellant as part of its sales receipts. The following day it deposited the same with the Bank of
America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the
latter its face value of P200.00.

On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the
Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified
the Bank of America that money order No. 124688 attached to his letter had been found to have
been irregularly issued and that, in view thereof, the amount it represented had been deducted from
the bank's clearing account. For its part, on August 2 of the same year, the Bank of America debited
appellant's account with the same amount and gave it advice thereof by means of a debit memo.

On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by
his office deducting the sum of P200.00 from the clearing account of the Bank of America, but his
request was denied. So was appellant's subsequent request that the matter be referred to the
Secretary of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of Public
Works and Communications, but the latter sustained the actions taken by the postal officers.

In connection with the events set forth above, Montinola was charged with theft in the Court of First
Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of
reasonable doubt.

On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila
praying for judgment as follows:

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a) To countermand the notice given to the Bank of America on September 27, 1961,
deducting from the said Bank's clearing account the sum of P200.00 represented by
postal money order No. 124688, or in the alternative indemnify the plaintiff in the
 same amount with interest at 8-½% per annum from September 27, 1961, which is
the rate of interest being paid by plaintiff on its overdraft account;

(b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual
and moral damages in the amount of P1,000.00 or in such amount as will be proved
and/or determined by this Honorable Court: exemplary damages in the amount of
P1,000.00, attorney's fees of P1,000.00, and the costs of action.

Plaintiff also prays for such other and further relief as may be deemed just and
equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages
12 to 15 of the Record on Appeal, the above-named court rendered judgment as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendants to

countermand the notice given to the Bank of America on September 27, 1961,
deducting from said Bank's clearing account the sum of P200.00 representing the
amount of postal money order No. 124688, or in the alternative, to indemnify the
plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-½% per
annum from September 27, 1961 until fully paid; without any pronouncement as to
cost and attorney's fees.

The case was appealed to the Court of First Instance of Manila where, after the parties had
resubmitted the same stipulation of facts, the appealed decision dismissing the complaint, with
costs, was rendered.

The first, second and fifth assignments of error discussed in appellant's brief are related to the other
and will therefore be discussed jointly. They raise this main issue: that the postal money order in
question is a negotiable instrument; that its nature as such is not in anyway affected by the letter
dated October 26, 1948 signed by the Director of Posts and addressed to all banks with a clearing
account with the Post Office, and that money orders, once issued, create a contractual relationship
of debtor and creditor, respectively, between the government, on the one hand, and the remitters
payees or endorses, on the other.

It is not disputed that our postal statutes were patterned after statutes in force in the United States.
For this reason, ours are generally construed in accordance with the construction given in the United
States to their own postal statutes, in the absence of any special reason justifying a departure from
this policy or practice. The weight of authority in the United States is that postal money orders are
not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank,
30 Fed. 912), the reason behind this rule being that, in establishing and operating a postal money
order system, the government is not engaging in commercial transactions but merely exercises a
governmental power for the public benefit.

It is to be noted in this connection that some of the restrictions imposed upon money orders by
postal laws and regulations are inconsistent with the character of negotiable instruments. For
instance, such laws and regulations usually provide for not more than one endorsement; payment of
money orders may be withheld under a variety of circumstances (49 C.J. 1153).

Of particular application to the postal money order in question are the conditions laid down in the
letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the
redemption of postal money orders received by it from its depositors. Among others, the condition is
imposed that "in cases of adverse claim, the money order or money orders involved will be returned
to you (the bank) and the, corresponding amount will have to be refunded to the Postmaster, Manila,
who reserves the right to deduct the value thereof from any amount due you if such step is deemed
necessary." The conditions thus imposed in order to enable the bank to continue enjoying the
facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is
therefore bound by them. That it is so is clearly referred from the fact that, upon receiving advice that
the amount represented by the money order in question had been deducted from its clearing
account with the Manila Post Office, it did not file any protest against such action.

Moreover, not being a party to the understanding existing between the postal officers, on the one
hand, and the Bank of America, on the other, appellant has no right to assail the terms and
conditions thereof on the ground that the letter setting forth the terms and conditions aforesaid is
void because it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal provision does not apply to the letter in question
because it does not provide for a department regulation but merely sets down certain conditions
upon the privilege granted to the Bank of Amrica to accept and pay postal money orders presented
for payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code.

In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and
fourth assignments of error.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed
with costs.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor,
JJ., concur.

Castro and Makasiar, JJ., took no part.

G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO,
MAGNO CASTILLO and GLORIA CASTILLO, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.

Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan Association, Inc.

CRUZ, J.:

This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned
of all non-essentials, are easily told.

The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines
and even abroad. Golden Savings and Loan Association was, at the time these events happened,
operating in Calapan, Mindoro, with the other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited
over a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all
drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and
countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared
to have been indorsed by their respective payees, followed by Gomez as second indorser.1

On various dates between June 25 and July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No.
2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch
office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for
special clearing.2

More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to
ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was
meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's
repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally
decided to allow Golden Savings to withdraw from the proceeds of the
warrants.3

The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July
13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of
P150,000.00. The total withdrawal was P968.000.00.4

In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account,
eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared
warrants. The last withdrawal was made on July 16, 1979.

On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored
by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the
amount it had previously withdrawn, to make up the deficit in its account.

The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of
Mindoro.5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a
motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the
lower court modified its decision thus:

ACCORDINGLY, judgment is hereby rendered:

1. Dismissing the complaint with costs against the plaintiff;

2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings
and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo;

3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum
of P1,754,089.00 and to reinstate and credit to such account such amount existing before
the debit was made including the amount of P812,033.37 in favor of defendant Golden
Savings and Loan Association, Inc. and thereafter, to allow defendant Golden Savings and
Loan Association, Inc. to withdraw the amount outstanding thereon before the debit;

4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc.
attorney's fees and expenses of litigation in the amount of P200,000.00.
 5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo
attorney's fees and expenses of litigation in the amount of P100,000.00.

SO ORDERED.

On appeal to the respondent court,6 the decision was affirmed, prompting Metrobank to file this
petition for review on the following grounds:

1. Respondent Court of Appeals erred in disregarding and failing to apply the clear
contractual terms and conditions on the deposit slips allowing Metrobank to charge back any
amount erroneously credited.

(a) Metrobank's right to charge back is not limited to instances where the checks or
treasury warrants are forged or unauthorized.

(b) Until such time as Metrobank is actually paid, its obligation is that of a mere
collecting agent which cannot be held liable for its failure to collect on the warrants.

2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is
made to pay for warrants already dishonored, thereby perpetuating the fraud committed by
Eduardo Gomez.

3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden
Savings, the latter should bear the loss.

4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this
case are not negotiable instruments.

The petition has no merit.

From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent
in giving Golden Savings the impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it.
Without such assurance, Golden Savings would not have allowed the withdrawals; with such
assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might even
have incurred liability for its refusal to return the money that to all appearances belonged to the
depositor, who could therefore withdraw it any time and for any reason he saw fit.

It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them
to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on
Metrobank to determine the validity of the warrants through its own services. The proceeds of the
warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them
from its own deposit.7 It was only when Metrobank gave the go-signal that Gomez was finally allowed
by Golden Savings to withdraw them from his own account.

The argument of Metrobank that Golden Savings should have exercised more care in checking the
personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez
who was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover,
the treasury warrants were subject to clearing, pending which the depositor could not withdraw its
proceeds. There was no question of Gomez's identity or of the genuineness of his signature as
checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the
forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the
circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be
faulted for the withdrawals it allowed Gomez to make.

By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling
— more than one and a half million pesos (and this was 1979). There was no reason why it should
not have waited until the treasury warrants had been cleared; it would not have lost a single centavo
by waiting. Yet, despite the lack of such clearance — and notwithstanding that it had not received a
single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses — it
allowed Golden Savings to withdraw — not once, not twice, but thrice — from the uncleared treasury
warrants in the total amount of P968,000.00

Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance
and it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been
cleared simply because of "the lapse of one week."8 For a bank with its long experience, this
explanation is unbelievably naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the
dorsal side of the deposit slips through which the treasury warrants were deposited by Golden
Savings with its Calapan branch. The conditions read as follows:

Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's
collecting agent, assuming no responsibility beyond care in selecting correspondents, and
until such time as actual payment shall have come into possession of this bank, the right is
reserved to charge back to the depositor's account any amount previously credited, whether
or not such item is returned. This also applies to checks drawn on local banks and bankers
and their branches as well as on this bank, which are unpaid due to insufficiency of funds,
forgery, unauthorized overdraft or any other reason. (Emphasis supplied.)

According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent
for Golden Savings and give it the right to "charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also applies to checks ". . . which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is
claimed that the said conditions are in the nature of contractual stipulations and became binding on
Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips.

Doubt may be expressed about the binding force of the conditions, considering that they have
apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it
could be argued that the depositor, in signing the deposit slip, does so only to identify himself and
not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not
have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were
considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the
light of the circumstances of this case.

In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be
suggesting that as a mere agent it cannot be liable to the principal. This is not exactly true. On the
contrary, Article 1909 of the Civil Code clearly provides that —

Art. 1909. — The agent is responsible not only for fraud, but also for negligence, which shall
be judged 'with more or less rigor by the courts, according to whether the agency was or was
not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the
clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw
the proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There
may have been no express clearance, as Metrobank insists (although this is refuted by Golden
Savings) but in any case that clearance could be implied from its allowing Golden Savings to
withdraw from its account not only once or even twice but three times. The total withdrawal was in
excess of its original balance before the treasury warrants were deposited, which only added to its
belief that the treasury warrants had indeed been cleared.

Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any
reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have
been no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There
would have been no need for it to wait until the warrants had been cleared before paying the
proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not
binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when it is
considered that the supposed dishonor of the warrants was not communicated to Golden Savings
before it made its own payment to Gomez.

The belated notification aggravated the petitioner's earlier negligence in giving express or at least
implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But
that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer corporation, has not been
established.9 This was the finding of the lower courts which we see no reason to disturb. And as we
said in MWSS v. Court of Appeals:10

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be
established by clear, positive and convincing evidence. This was not done in the present
case.

A no less important consideration is the circumstance that the treasury warrants in question are not
negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, and
this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund
501.

The following sections of the Negotiable Instruments Law, especially the underscored parts, are
pertinent:

Sec. 1. — Form of negotiable instruments. — An instrument to be negotiable must conform

to the following requirements:

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

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

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

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

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.
 xxx xxx xxx

Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is

unconditional within the meaning of this Act though coupled with —

(a) An indication of a particular fund out of which reimbursement is to be made or a particular

account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument judgment.

But an order or promise to pay out of a particular fund is not unconditional.

The indication of Fund 501 as the source of the payment to be made on the treasury warrants
makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable.
There should be no question that the exception on Section 3 of the Negotiable Instruments Law is
applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor General11 where the
Court held:

The petitioner argues that he is a holder in good faith and for value of a negotiable
instrument and is entitled to the rights and privileges of a holder in due course, free from
defenses. But this treasury warrant is not within the scope of the negotiable instrument law.
For one thing, the document bearing on its face the words "payable from the appropriation
for food administration, is actually an Order for payment out of "a particular fund," and is not
unconditional and does not fulfill one of the essential requirements of a negotiable instrument
(Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law).

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that
they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the
Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-
negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for
clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the
warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust
Co., Calapan Branch."

The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands,12 but we
feel this case is inapplicable to the present controversy. That case involved checks whereas this
1âw phi 1

case involves treasury warrants. Golden Savings never represented that the warrants were
negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact of
forgery was proved in that case but not in the case before us. Finally, the Court found the Jai Alai
Corporation negligent in accepting the checks without question from one Antonio Ramirez
notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he
was authorized to indorse it. No similar negligence can be imputed to Golden Savings.

We find the challenged decision to be basically correct. However, we will have to amend it insofar as
it directs the petitioner to credit Golden Savings with the full amount of the treasury checks deposited
to its account.

The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was
allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount
he has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the
consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden
Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit
because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance
to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has
already been informed of the dishonor of the treasury warrants.

WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the
dispositive portion of the judgment of the lower court shall be reworded as follows:

3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter
allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount
outstanding thereon, if any, after the debit.

SO ORDERED.

G.R. No. L-40824 February 23, 1989

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,

vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.

The Government Corporate Counsel for petitioner.

Lorenzo A. Sales for private respondents.

REGALADO , J.:

Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs
Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner
Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another
deed of mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the
sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of land covered by Transfer Certificate
of Title No. 38989 of the Register of Deed of Quezon City, co-owned by said mortgagor spouses,
was given as security under the aforesaid two deeds. 2 They also executed a 'promissory note"
which states in part:

... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM
the sum of . . . (P 11,500.00) Philippine Currency, with interest at the rate of six (6%)
per centum compounded monthly payable in . . . (120)equal monthly installments of .
. . (P 127.65) each. 3

On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of
Mortgage" under which they obligated themselves to assume the aforesaid obligation to the GSIS
and to secure the release of the mortgage covering that portion of the land belonging to herein
private respondents and which was mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5

Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the
payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the
mortgaged property to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint
against the petitioner and the Lagasca spouses in the former Court of

First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and
all other documents executed in relation thereto in favor of the Government Service Insurance
System" be declared null and void. It was further prayed that they be allowed to recover said
property, and/or the GSIS be ordered to pay them the value thereof, and/or they be allowed to
repurchase the land. Additionally, they asked for actual and moral damages and attorney's fees.

In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not
as sureties or guarantors for the Lagasca spouses but they merely gave their common property to
the said co-owners who were solely benefited by the loans from the GSIS.

The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to
establish a cause of action. 8

Said decision was reversed by the respondent Court of Appeals 9 which held that:

... although formally they are co-mortgagors, they are so only for accomodation (sic)
in that the GSIS required their consent to the mortgage of the entire parcel of land
which was covered with only one certificate of title, with full knowledge that the loans
secured thereby were solely for the benefit of the appellant (sic) spouses who alone
applied for the loan.

xxxx

'It is, therefore, clear that as against the GSIS, appellants have a valid cause for
having foreclosed the mortgage without having given sufficient notice to them as
required either as to their delinquency in the payment of amortization or as to the
subsequent foreclosure of the mortgage by reason of any default in such payment.
The notice published in the newspaper, 'Daily Record (Exh. 12) and posted pursuant
to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the
application being made for an extrajudicial foreclosure. ... 10

On the foregoing findings, the respondent court consequently decreed that-

In view of all the foregoing, the judgment appealed from is hereby reversed, and
another one entered (1) declaring the foreclosure of the mortgage void insofar as it
affects the share of the appellants; (2) directing the GSIS to reconvey to appellants
their share of the mortgaged property, or the value thereof if already sold to third
party, in the sum of P 35,000.00, and (3) ordering the appellees Flaviano Lagasca
and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral damages,
P 5,000.00 as attorney's fees, and costs. 11

The case is now before us in this petition for review.

In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No.
2031, otherwise known as the Negotiable Instruments Law, which provide that an accommodation
party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving
value therefor, but is held liable on the instrument to a holder for value although the latter knew him
to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly
not negotiable instruments. These documents do not comply with the fourth requisite to be
considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor
to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the
provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the provisions
of the Civil Code and special laws on mortgages.

As earlier indicated, the factual findings of respondent court are that private respondents signed the
documents "only to give their consent to the mortgage as required by GSIS", with the latter having
full knowledge that the loans secured thereby were solely for the benefit of the Lagasca
spouses. 12 This appears to be duly supported by sufficient evidence on record. Indeed, it would be
unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from the
salary as an army officer of Flaviano Lagasca without likewise affecting deductions from the salary of
Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact, as already
stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage" promising to
exclude private respondents and their share of the mortgaged property from liability to the
mortgagee. There is no intimation that the former executed such instrument for a consideration, thus
confirming that they did so pursuant to their original agreement.

The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there
was no objection in the court below regarding the admissibility of the testimony and documents that
were presented to prove that the private respondents signed the mortgage papers just to
accommodate their co-owners, the Lagasca spouses. Besides, the introduction of such evidence
falls under the exception to said rule, there being allegations in the complaint of private respondents
in the court below regarding the failure of the mortgage contracts to express the true agreement of
the parties. 14

However, contrary to the holding of the respondent court, it cannot be said that private respondents
are without liability under the aforesaid mortgage contracts. The factual context of this case is
precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect
that third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property

So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca
spouses would not invalidate the mortgage with respect to private respondents' share in the
property. In consenting thereto, even assuming that private respondents may not be assuming
personal liability for the debt, their share in the property shall nevertheless secure and respond for
the performance of the principal obligation. The parties to the mortgage could not have intended that
the same would apply only to the aliquot portion of the Lagasca spouses in the property, otherwise
the consent of the private respondents would not have been required.

The supposed requirement of prior demand on the private respondents would not be in point here
since the mortgage contracts created obligations with specific terms for the compliance thereof. The
facts further show that the private respondents expressly bound themselves as solidary debtors in
the promissory note hereinbefore quoted.

Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of
respondent court that lack of notice to the private respondents of the extrajudicial foreclosure sale
impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act
No. 3135, as amended, does not require personal notice on the mortgagor, quoting the requirement
on notice in such cases as follows:
 Section 3. Notice shall be given by posting notices of sale for not less than twenty
days in at least three public places of the municipality where the property is situated,
and if such property is worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a newspaper of
general circulation in the municipality or city.

There is no showing that the foregoing requirement on notice was not complied with in the
foreclosure sale complained of .

The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of
private respondents or in directing reconveyance of their property or the payment of the value
thereof Indubitably, whether or not private respondents herein benefited from the loan, the mortgage
and the extrajudicial foreclosure proceedings were valid.

WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of
Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.

SO ORDERED.

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

PHILIPPINE NATIONAL BANK, Plaintiff-Appellee, vs. MANILA

OIL REFINING & BY-PRODUCTS COMPANY, INC., Defendant-
Appellant.

Antonio Gonzalez for appellant.

Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs,
Mc Donough and Johnson; Julian Wolfson; Ross and Lawrence;
Francis B. Mahoney, and Jose A. Espiritu, amici curiae.

MALCOLM, J.:

The question of first impression raised in this case concerns the

validity in this jurisdiction of a provision in a promissory note
whereby in case the same is not paid at maturity, the maker
authorizes any attorney to appear and confess judgment thereon for
the principal amount, with interest, costs, and attorney's fees, and
waives all errors, rights to inquisition, and appeal, and all property
exceptions. chanroblesvi rtual awlib rary cha nrob les vi rtua l law lib rary

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

RENEWAL.
P61,000.00

MANILA, P.I., May 8, 1920. chanrobles vi rtual law lib rary

On demand after date we promise to pay to the order of the

Philippine National Bank sixty-one thousand only pesos at Philippine
National Bank, Manila, P.I. chanrob lesvi rtua lawlib rary cha nrob les vi rtua l law lib rary

Without defalcation, value received; and to hereby authorize any

attorney in the Philippine Islands, in case this note be not paid at
maturity, to appear in my name and confess judgment for the
above sum with interest, cost of suit and attorney's fees of ten (10)
per cent for collection, a release of all errors and waiver of all rights
to inquisition and appeal, and to the benefit of all laws exempting
property, real or personal, from levy or sale. Value received. No.
____ Due ____

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

(Sgd.) VICENTE SOTELO,

Manager.

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

(Sgd.) RAFAEL LOPEZ,

Treasurer

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

The foregoing facts, and appellant's three assignments of error,

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

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

The attorney for the appellee contends that the Negotiable

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

The court is thus put in the position of having to determine the

validity in the absence of statute of a provision in a note authorizing
an attorney to appear and confess judgment against the maker.
This situation, in reality, has its advantages for it permits us to
reach that solution which is best grounded in the solid principles of
the law, and which will best advance the public interest. chanroblesvi rt ualawlib ra ry chanrobles vi rt ual law li bra ry

The practice of entering judgments in debt on warrants of attorney

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

Possibly the leading case on the subject is First National Bank of

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

But going beyond the mere technical question in our preceding

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

xxx xxx xxx chanrobles vi rt ual law li bra ry

And if this instrument be considered as security for a debt, as it was

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

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

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

xxx xxx xxx chanrobles vi rt ual law li bra ry

We shall not pursue this question further. This contract, in so far as

it goes beyond the usual provisions of a note, is void as against the
public policy of the state, as such public policy is found expressed in
our laws and decisions. Such agreements are iniquitous to the
uttermost and should be promptly condemned by the courts, until
such time as they may receive express statutory recognition, as
they have in some states.

xxx xxx xxx chanrobles vi rt ual law li bra ry

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

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

As both sides agree the question presented is one of first impression

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

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

A case typical of those authorities which lend support to judgment

notes is First National Bank of Las Cruces vs. Baker ([1919], 180
Pac., 291). The Supreme Court of New Mexico, in a per
curiam decision, in part, said:

In some of the states the judgments upon warrants of attorney are

condemned as being against public policy. (Farquhar and Co. vs.
Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann.
Cas. [1914 A]. 640, and First National Bank of Kansas City vs.
White, 220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16
Ann. Cas., 889, are examples of such holding.) By just what course
of reasoning it can be said by the courts that such judgments are
against public policy we are unable to understand. It was a practice
from time immemorial at common law, and the common law comes
down to us sanctioned as justified by the reason and experience of
English-speaking peoples. If conditions have arisen in this country
which make the application of the common law undesirable, it is for
the Legislature to so announce, and to prohibit the taking of
judgments can be declared as against the public policy of the state.
We are aware that the argument against them is that they enable
the unconscionable creditor to take advantage of the necessities of
the poor debtor and cut him off from his ordinary day in court. On
the other hand, it may be said in their favor that it frequently
enables a debtor to obtain money which he could by no possibility
otherwise obtain. It strengthens his credit, and may be most highly
beneficial to him at times. In some of the states there judgments
have been condemned by statute and of course in that case are not
allowed.cha nrob lesvi rtua lawlib rary cha nro bles vi rtua l law lib ra ry

Our conclusion in this case is that a warrant of attorney given as

security to a creditor accompanying a promissory note confers a
valid power, and authorizes a confession of judgment in any court of
competent jurisdiction in an action to be brought upon said note;
that our cognovit statute does not cover the same field as that
occupied by the common-law practice of taking judgments upon
warrant of attorney, and does not impliedly or otherwise abrogate
such practice; and that the practice of taking judgments upon
warrants of attorney as it was pursued in this case is not against
any public policy of the state, as declared by its laws.

With reference to the conclusiveness of the decisions here

mentioned, it may be said that they are based on the practice of the
English-American common law, and that the doctrines of the
common law are binding upon Philippine courts only in so far as
they are founded on sound principles applicable to local
conditions. chanroble svirtualawl ibra ry chan roble s virtual law lib rary

Judgments by confession as appeared at common law were

considered an amicable, easy, and cheap way to settle and secure
debts. They are a quick remedy and serve to save the court's time.
They also save the time and money of the litigants and the
government the expenses that a long litigation entails. In one
sense, instruments of this character may be considered as special
agreements, with power to enter up judgments on them, binding
the parties to the result as they themselves viewed it. chanro blesvi rt ualawlib ra ry chanrobles vi rt ual law li bra ry

On the other hand, are disadvantages to the commercial world

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

We are of the opinion that warrants of attorney to confess judgment

are not authorized nor contemplated by our law. We are further of
the opinion that provisions in notes authorizing attorneys to appear
and confess judgments against makers should not be recognized in
this jurisdiction by implication and should only be considered as
valid when given express legislative sanction. chanroblesv irtualawl ibra ry chan roble s virtual law l ibra ry

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

Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and

Romualdez, JJ., concur.