G.R. No.
173856             November 20, 2008 This is to formally advise you of the bank's response to your proposal pertaining to the
DAO HENG BANK, INC., now BANCO DE ORO UNIVERSAL BANK, petitioner
vs.
SPS. LILIA and REYNALDO LAIGO, respondent.
DECISION
CARPIO MORALES, J.:
The Spouses Lilia and Reynaldo Laigo (respondents) obtained loans from Dao Heng Bank,
Inc. (Dao Heng) in the total amount of P11 Million, to secure the payment of which they
forged on October 28, 1996, November 18, 1996 and April 18, 1997 three Real Estate
Mortgages covering two parcels of land registered in the name of respondent "Lilia D. Laigo, .
. . married to Reynaldo Laigo," one containing 569 square meters and the other containing
537 square meters.
The mortgages were duly registered in the Registry of Deeds of Quezon City.
The loans were payable within 12 months from the execution of the promissory notes
covering the loans. As of 2000, respondents failed to settle their outstanding obligation,
drawing them to verbally offer to cede to Dao Heng one of the two mortgaged lots by way
of dacion en pago. To appraise the value of the mortgaged lands, Dao Heng in fact
commissioned an appraiser whose fees were shouldered by it and respondents.
There appears to have been no further action taken by the parties after the appraisal of the
properties.
Dao Heng was later to demand the settlement of respondents' obligation by letter of August
18, 20001 wherein it indicated that they had an outstanding obligation of P10,385,109.92
inclusive of interests and other charges. Respondents failed to heed the demand, however.
Dao Heng thereupon filed in September 2000 an application to foreclose the real estate
mortgages executed by respondents. The properties subject of the mortgage were sold
for P10,776,242 at a public auction conducted on December 20, 2000 to Banco de Oro
Universal Bank (hereafter petitioner) which was the highest bidder.
It appears that respondents negotiated for the redemption of the mortgages for by a June 29,
2001 letter2 to them, petitioner, to which Dao Heng had been merged, through its Vice
President on Property Management & Credit Services Department, advised respondent Lilia
Laigo as follows:
redemption of the two (2) foreclosed lots located in Fairview, Quezon City as has been
relayed to you last June 13, 2001 as follows:
1. Redemption price shall be P11.5MM plus 12% interest based on diminishing
balance payable in staggered payments up to January 2, 2002 as follows:
a. P3MM - immediately upon receipt of this approval
b. Balance payable in staggered payments (plus interest) up to January 2,
2002
2. Release Values for Partial Redemption:
a. TCT No. 92257 (along Commonwealth) P7.500 MM*
b. TCT No. N-146289 (along Regalado) P4.000 MM*
* excluding 12% interest
3. Other Conditions:
a. Payments shall be covered by post dated checks
b. TCT No. 92257 shall be the first property to be released upon payment of
the first P7.5MM plus interest
c. Arrangement to be covered by an Agreement
If you are agreeable to the foregoing terms and conditions, please affix your signature
showing your conformity thereto at the space provided below. (Emphasis and underscoring in
the original; italics supplied)
Nothing was heard from respondents, hence, petitioner by its Manager, Property
Management & Credit Services Department, advised her by letter of December 26, 20013 that
in view of their failure to conform to the conditions set by it for the redemption of the
properties, it would proceed to consolidate the titles immediately after the expiration of the
redemption period on January 2, 2002.
Six days before the expiration of the redemption period or on December 27, 2001,
respondents filed a complaint before the Regional Trial Court (RTC) of Quezon City, for
Annulment, Injunction with Prayer for Temporary Restraining Order (TRO), praying for the
annulment of the foreclosure of the properties subject of the real estate mortgages and for
them to be allowed "to deliver by way of ‘dacion en pago' one of the mortgaged properties as
full payment of [their] mortgaged obligation" and to, in the meantime, issue a TRO directing
the defendant-herein petitioner to desist from consolidating ownership over their properties.
By respondents' claim, Dao Heng verbally agreed to enter into a dacion en pago.
In its Opposition to respondents' Application for a TRO,4 petitioner claimed that there was no
meeting of the minds between the parties on the settlement of respondents' loan via dacion
en pago.
A hearing on the application for a TRO was conducted by Branch 215 of the RTC of Quezon
City following which it denied the same.
Petitioner thereupon filed a Motion to Dismiss the complaint on the ground that the claim on
which respondents' action is founded is unenforceable under the Statute of Frauds and the
complaint states no cause of action. Respondents opposed the motion, contending that their
delivery of the titles to the mortgaged properties constituted partial performance of their
obligation under the dacion en pago to take it out from the coverage of the Statute of Frauds.
The trial court granted petitioner's Motion to Dismiss in this wise:
[P]laintiffs' claim must be based on a document or writing evidencing the
alleged dacion en pago, otherwise, the same cannot be enforced in an action in
court. The Court is not persuaded by plaintiffs' contention that their case is an
exception to the operation of the rule on statute of frauds because of their partial
performance of the obligation in the dacion en pago consisting of the delivery of the
titles of the properties to the defendants. As correctly pointed out by the
defendants, the titles were not delivered to them pursuant to the dacion en
pago but by reason of the execution of the mortgage loan agreement. If indeed
a dacion en pago agreement was entered into between the parties, it is inconceivable
that a written document would not be drafted considering the magnitude of the
amount involved.5 (Emphasis and underscoring supplied)
Respondents assailed the dismissal of their complaint via Petition for Review before this
Court which referred it to the Court of Appeals for disposition.
Reversing the trial court's dismissal of the complaint, the appellate court, by Decision of
January 26, 2006,6 reinstated respondents' complaint.7
Particularly, in seeking exception to the application of the Statute of Frauds,
petitioners[-herein respondents] averred partial performance of the supposed
verbal dacion en pago. In paragraph 5 of their complaint, they stated: "As part of the
agreement, defendant Dao Heng Bank had the mortgaged property appraised to
determine which of the two shall be delivered as full payment of the mortgage
obligation; Also as part of the deal, plaintiffs for their part paid P5,000.00 for the
appraisal expense. As reported by the appraiser commissioned by Defendant Dao
Heng, the appraised value of the mortgaged properties were as follows: x x x" Having
done so, petitioners are at least entitled to a reasonable opportunity to prove their
case in the course of a full trial, to which the respondents may equally present their
evidence in refutation of the formers' case. (Underscoring supplied)
Petitioner's Motion for Reconsideration having been denied by the appellate court by
Resolution of July 19, 2006, the present petition was filed faulting the appellate court in ruling:
I.
. . . THAT THE COMPLAINT ALLEGED A SUFFICIENT CAUSE OF ACTION
DESPITE THE ALLEGATIONS, AS WELL AS ADMISSIONS FROM THE
RESPONDENTS, THAT THERE WAS NO PERFECTED DACION EN
PAGO CONTRACT;
II.
. . . THAT THE ALLEGED DACION EN PAGO IS NOT UNENFORCEABLE UNDER
THE STATUTE OF FRAUDS, DESPITE THE ABSENCE OF A WRITTEN &
BINDING CONTRACT;
III.
. . . THAT THE COMPLAINT SUFFICIENTLY STATED A CAUSE OF ACTION.9
Generally, the presence of a cause of action is determined from the facts alleged in the
complaint.
In their complaint, respondents alleged:
xxxx

In ordering the reinstatement of respondents' complaint, the appellate court held that the 4. Sometime in the middle of the year 2000, defendant Dao Heng Bank as the
complaint states a cause of action, respondents having alleged that there was partial creditor bank agreed to the full settlement of plaintiffs' mortgage obligation of P9
performance of the agreement to settle their obligation via dacion en pago when they agreed Million through the assignment of one of the two (2) mortgaged properties;
to have the properties appraised to thus place their agreement within the exceptions provided
under Article 14038 of the Civil Code on Statute of Frauds. Thus the appellate court
ratiocinated:
 [5] As part of the agreement, defendant Dao Heng Bank had the mortgaged
properties appraised to determine which of the two (2) mortgaged properties shall be
delivered as full payment of the mortgage obligation; Also as part of the
deal, plaintiffs for their part paid P5,000.00 for the appraisal expense; As reported by
the appraiser commissioned by defendant Dao Heng, the appraised value of the
mortgaged properties were as follows:
(a) Property No. 1 - T.C.T. No. 92257: P12,518,000.00
L2A Blk 12 Don Mariano Marcos Ave., Fairview, QC
(b) Property No. 2 - T.C.T. No. 146289: P8,055,000.00 L36 Blk 87 Regalado
Ave. Cor. Ipil St., Neopolitan, QC
[6] Sometime in December, year 2000, the protest of plaintiffs notwithstanding and in
blatant breach of the agreed "Dacion en pago" as the mode of full payment of
plaintiffs' mortgage obligation, defendant Dao Heng Bank proceeded to foreclose the
mortgaged properties above-described and sold said properties which were
aggregately valued at more than P20 Million for only P10,776,242.00, an
unconscionably very low price; (Underscoring supplied)
Even if a complaint states a cause of action, however, a motion to dismiss for insufficiency of
cause of action may be granted if the evidence discloses facts sufficient to defeat the claim
and enables the court to go beyond the disclosures in the complaint. In such instances, the
court can dismiss a complaint on this ground, even without a hearing, by taking into account
the discussions in said motion to dismiss and the disposition thereto.10
In its Opposition to respondents' application for the issuance of a TRO,11 petitioner,
responding to respondents' allegation that it agreed to the settlement of their obligation via
the assignment of one of the two mortgaged properties, alleged that there was no meeting of
the minds thereon:
4. Plaintiffs' claim that defendant Dao Heng Bank[s] foreclosure sale of the
mortgaged properties was improper because there was an agreement to dacion one
of the two (2) mortgaged properties as full settlement of the loan obligation and that
defendant Dao Heng Bank and Banco de Oro were already negotiating and colluding
for the latter's acquisition of the mortgaged [properties] for the unsconscionably low
price of P10,776.242.00 are clearly WITHOUT BASIS. Quite to the contrary, there
was no meeting of the minds between defendant Dao Heng Bank and the plaintiffs to
dacion any of the mortgaged properties as full settlement of the loan. Although there
was a PROPOSAL and NEGOTIATIONS to settle the loan by way of dacion, nothing
came out of said proposal, much less did the negotiations mature into the execution
of a dacion en pago instrument. Defendant Dao Heng Bank found the offer to settle
by way of dacion not acceptable and thus, it opted to foreclose on the mortgage.
The law clearly provides that "the debtor of a thing cannot compel the creditor to
receive a different one, although the latter may be of the same value, or more
valuable than that which is due" (Article 1244, New Civil Code). "The oblige is entitled
to demand fulfillment of the obligation or performance as stipulated" (Palmares v.
Court of Appeals, 288 SCRA 422 at p. 444 [1998]). "The power to decide whether or
not to foreclose on the mortgage is the sole prerogative of the mortgagee" (Rural
Bank of San Mateo, Inc. vs. Intermediate Appellate Court, 146 SCRA 205, at 213
[1986]) Defendant Dao Heng Bank merely opted to exercise such
prerogative.12 (Emphasis in the original; capitalization and underscoring supplied)
Dacion en pago as a mode of extinguishing an existing obligation partakes of the nature of
sale whereby property is alienated to the creditor in satisfaction of a debt in money.13 It is an
objective novation of the obligation, hence, common consent of the parties is required in
order to extinguish the obligation.
. . . In dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking
really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing
or property of the debtor, payment for which is to be charged against the debtor's debt. As
such the elements of a contract of sale, namely, consent, object certain, and cause or
consideration must be present. In its modern concept, what actually takes place in dacion en
pago is an objective novation of the obligation where the thing offered as an accepted
equivalent of the performance of an obligation is considered as the object of the contract of
sale, while the debt is considered the purchase price. In any case, common consent is an
essential prerequisite, be it sale or novation, to have the effect of totally extinguishing the
debt or obligation."14 (Emphasis, italics and underscoring supplied; citation omitted)
Being likened to that of a contract of sale, dacion en pago is governed by the law on
sales.15 The partial execution of a contract of sale takes the transaction out of the provisions
of the Statute of Frauds so long as the essential requisites of consent of the contracting
parties, object and cause of the obligation concur and are clearly established to be present.16
Respondents claim that petitioner's commissioning of an appraiser to appraise the value of
the mortgaged properties, his services for which they and petitioner paid, and their delivery to
petitioner of the titles to the properties constitute partial performance of their agreement to
take the case out of the provisions on the Statute of Frauds.
There is no concrete showing, however, that after the appraisal of the properties, petitioner
approved respondents' proposal to settle their obligation via dacion en pago. The delivery to
petitioner of the titles to the properties is a usual condition sine qua non to the execution of
the mortgage, both for security and registration purposes. For if the title to a property is not
delivered to the mortgagee, what will prevent the mortgagor from again encumbering it also
by mortgage or even by sale to a third party.
Finally, that respondents did not deny proposing to redeem the mortgages,17 as reflected in
petitioner's June 29, 2001 letter to them, dooms their claim of the existence of a
perfected dacion en pago.

WHEREFORE, the Court of Appeals Decision of January 26, 2006 is REVERSED and SET
ASIDE. The Resolution of July 2, 2002 of the Regional Trial Court of Quezon City, Branch
215 dismissing respondents' complaint is REINSTATED.

SO ORDERED
G.R. No. 99398 & 104625       January 26, 2001
CHESTER BABST, petitioner,
vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE STEEL
CONSOLIDATED, INC., and PACIFIC MULTI-COMMERCIAL
CORPORATION, respondents.
x ------------------------------------------------ x
ELIZALDE STEEL CONSOLIDATED, INC., petitioner,
vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, PACIFIC MULTI-
COMMERCIAL CORPORATION and CHESTER BABST, respondents.
YNARES-SANTIAGO, J.:
These consolidated petitions seek the review of the Decision dated April 29, 1991 of the
Court of Appeals in CA-G.R. CV No. 172821 entitled, "Bank of the Philippine
Islands, Plaintiff-Appellee versus Elizalde Steel Consolidated, Inc., Pacific Multi-
Commercial Corporation, and Chester G. Babst, Defendants-Appellants."
The complaint was commenced principally to enforce payment of a promissory note and
three domestic letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON)
executed and opened with the Commercial Bank and Trust Company (CBTC).
On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P
8,015,900.84, with interest at the rate of 14% per annum, evidenced by a promissory
note.2 ELISCON defaulted in its payments, leaving an outstanding indebtedness in the
amount of P2,795,240.67 as of October 31, 1982.3
The letters of credit, on the other hand, were opened for ELISCON by CBTC using the
credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank,
pursuant to the Resolution of the Board of Directors of MULTI adopted on August 31,
1977 which reads:
WHEREAS, at least 90% of the Company's gross sales is generated by the sale
of tin-plates manufactured by Elizalde Steel Consolidated, Inc.;
WHEREAS, it is to the best interests of the Company to continue handling said
tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the
Company in obtaining credit facilities to enable it to maintain the present level of
its tin-plate manufacturing output and the Company is willing to extend said
requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing premises ---
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT &
GENERAL MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby
empowered to allow and authorize ELIZALDE STEEL CONSOLIDATED, INC. to
avail and make use of the Credit Line of PACIFIC MULTI-COMMERCIAL
CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF THE
PHILIPPINES, Makati, Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation
guarantee, as it does hereby guarantee, solidarily, the payment of the
corresponding Letters of Credit upon maturity of the same;
RESOLVED, FINALLY, That copies of this resolution be furnished the
Commercial Bank & Trust Company of the Philippines, Makati, Metro Manila, for
their information.4
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst
executed a Continuing Suretyship,5 whereby they bound themselves jointly and severally
liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00
each.1âwphi1.nêt
Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel
Corporation three (3) domestic letters of credit in the amounts of
P1,946,805.73,6 P1,702,869.327 and P200,307.72,8 respectively, which ELISCON used
to purchase tin black plates from National Steel Corporation. ELISCON defaulted in its
obligation to pay the amounts of the letters of credit, leaving an outstanding account, as
of October 31, 1982, in the total amount of P3,963,372.08.9
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into
a merger, wherein BPI, as the surviving corporation, acquired all the assets and
assumed all the liabilities of CBTC.10
Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to
the Development Bank of the Philippines (DBP). In order to settle its obligations,
ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets
mortgaged with DBP, as payment for its total indebtedness in the amount of
P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of
Cession of Property in Payment of Debt.11
In June 1981, ELISCON called its creditors to a meeting to announce the take-over by
DBP of its assets.
In October 1981, DBP formally took over the assets of ELISCON, including its
indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of
ELISCON's obligations to its creditors, but BPI expressly rejected the formula submitted
to it for not being acceptable.12
Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted
with the Regional Trial Court of Makati, Branch 147, a complaint13 for sum of money
against ELISCON, MULTI and Babst, which was docketed as Civil Case No. 49226.
ELISCON, in its Answer,14 argued that the complaint was premature since DBP had
made serious efforts to settle its obligations with BPI.
Babst also filed his Answer alleging that he signed the Continuing Suretyship on the
understanding that it covers only obligations which MULTI incurred solely for its benefit
and not for any third party liability, and he had no knowledge or information of any
transaction between MULTI and ELISCON.15
MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and
averred that the guaranty under its board resolution did not cover purchases made by
ELISCON in the form of trust receipts. It set up a cross-claim against ELISCON alleging
that the latter should be held liable for any judgment which the court may render against
it in favor of BPI.16
On February 20, 1987, the trial court rendered its Decision,17 the dispositive portion of
which reads:
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in
favor of the plaintiff and against all the defendants:
1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67
due on the promissory note, Annex "A" of the Complaint as of 31 October 1982
and the amount of P3,963,372.08 due on the three (3) domestic letters of credit,
also as of 31 October 1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and related charges
on the principal of said promissory note of P2,102,232.02 at the rates provided in
said note from and after 31 October 1982 until full payment thereof, and on the
principal of the three (3) domestic letters of credit of P3,564,349.25 interests and
related charges at the rates provided in said letters of credit, from and after 31
October 1982 until full payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all interests
and related charges but unpaid as of the filing of this complaint, until full payment
thereof;
4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of the
total amount due under the preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally with defendant ELISCON, the total
sum of P3,963,372.08 due on the three (3) domestic letters of credit as of 31
October 1982 with interests and related charges on the principal amount of
P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982
until fully paid, but to the extent of not more than P8,000,000.00 in the case of
defendant Chester Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally plaintiff interests at the legal rate on all
interests and related charges already accrued but unpaid on said three (3)
domestic letters of credit as of the date of the filing of this Complaint until full
payment thereof;
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally, attorney's fees of not less than 10%
of the total amount due under paragraphs 5 and 6 hereof. With costs.
SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal.18
On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:
WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the
underlining to show the principal changes from the decision of the lower court)
thus:
1) Ordering appellant ELISCON to pay the appellee BPI the amount
of P2,731,005.60 due on the promissory note, Annex "A" of the Complaint as of
31 October 1982 and the amount of P3,963,372.08 due on the three (3) domestic
letters of credit, also as of 31 October 1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and related
charges on the principal of said promissory note of P2,102,232.02 at the rates
provided in said note from and after 31 October 1982 until full payment thereof,
 and on the principal of the three (3) domestic letters of credit of P3,564,349.25
interests and related charges at the rates provided in said letters of credit, from
and after 31 October 1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on
all interests and related charges but unpaid as of the filing of this complaint, until
full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant
Chester G. Babst to pay appellee BPI, jointly and severally with appellant
ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic letters of
credit as of 31 October 1982 with interest and .related charges on the principal
amount of P3,963,372.08 at the rates provided in said letters of credit from 30
October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in
the case of defendant Chester Babst;
5) Ordering appellant Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally, appellee BPI interests at the legal
rate on all interests and related charges already accrued but unpaid on said three
(3) domestic letters of credit as of the date of the filing of this Complaint until full
payment thereof and the plaintiff's lawyer's fees in the nominal amount of
P200.000.00;
6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial
Corporation and Chester Babst whatever amount they shall have paid in said
Eliscon's behalf particularly referring to the three (3) letters of credit as of 31
October 1982 and other related charges.
No costs.
SO ORDERED.19
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals
which was, however, denied in a Resolution dated March 9, 1992.20 Subsequently,
ELISCON filed a petition for review on certiorari, docketed as G.R. No. 104625, on the
following grounds:
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO
RECOVER FROM PETITIONER ELISCON THE LATTER'S OBLIGATION WITH
COMMERCIAL BANK AND TRUST COMPANY (CBTC)
B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN
ELISCON AND BPI THERE BEING A PRIOR CONSENT TO AND APPROVAL
BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR IN LIEU OF THE
ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING ELISCON FROM ITS
OBLIGATION TO BPI.
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST
CANNOT LAWFULLY RECOVER FROM ELISCON WHATEVER AMOUNT
THEY MAY BE REQUIRED TO PAY TO BPI AS SURETIES OF ELISCON'S
OBLIGATION TO BPI; THEIR CAUSE OF ACTION MUST BE DIRECTED
AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF
ELISCON.
D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT
OF GOVERNMENT WHICH WAS A FORTUITOUS EVENT EXCULPATING
ELISCON FROM FURTHER LIABILITIES TO RESPONDENT BPI.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY
RESPONDENT BPI THE AMOUNTS STATED IN THE DISPOSITIVE PORTION
OF RESPONDENT COURT OF APPEALS' DECISION:21
BPI filed its Comment22 raising the following arguments, to wit:
1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst
the past due obligations with CBTC prior to the merger of BPI with CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid
novation has been effected.
3. Express consent of creditor to substitution should be recorded in the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily
liable to BPI for the unpaid letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly established.
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by
ELISCON, they may recover from the latter what they may have paid for on
account of that guaranty.
Chester Babst filed a Comment with Manifestation,23 wherein he contends that the
suretyship agreement he executed with Antonio Roxas Chua was in favor of MULTI; and
that there is nothing therein which authorizes MULTI, in turn, to guarantee the obligations
of ELISCON.
In its Comment,24 MULTI maintained that inasmuch as BPI had full knowledge of the
purpose of the meeting in June 1981, wherein the takeover by DBP of ELISCON was
announced, it was incumbent upon the said bank to formally communicate its objection
to the assumption of ELISCON's liabilities by DBP in answer to the call for the meeting.
Moreover, there was no showing that the availment by ELISCON of MULTI's credit
facilities with CBTC, which was supposedly guaranteed by Antonio Roxas Chua, was
indeed authorized by the latter pursuant to the resolution of the Board of Directors of
MULTI.
In compliance with this Court's Resolution dated March 17, 1993,25 the parties submitted
their respective memoranda.
Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No.
99398, Chester Babst alleged that the Court of Appeals acted without jurisdiction and/or
with grave abuse of discretion when:
1. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS NO
NOVATION INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE
ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND APPROVAL OF THE
SUBSTITUTION AS DEBTOR BY THE DEVELOPMENT BANK OF THE
PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE STEEL
CONSOLIDATED, INC. (OR ELISCON) IN THE LATTER 'S OBLIGATION TO
BPI.
2. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT THERE WAS
NO IMPLIED CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE
ISLANDS TO THE SUBSTITUTION BY DEVELOPMENT BANK OF THE
PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE STEEL
CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF MERIT OF
THE CONTENTION OF ELISCON THAT THE FAILURE OF THE OFFICER OF
BPI, WHO WAS PRESENT DURING THE MEETING OF ELISCON'S
CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE
ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND
ASSUMPTION OF ITS LIABILITIES, CONSTITUTED AN IMPLIED CONSENT
TO THE ASSUMPTION BY DBP OF THE OBLIGATIONS OF ELISCON TO BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE
ENTIRE ELISCON WAS AN ACT OF GOVERNMENT CONSTITUTING A
FORTUITOUS EVENT EXCULPATING ELISCON FROM ANY LIABILITY TO
BPI.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI
RELIEVED ELISCON, MULTI AND BABST OF ANY LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY
WITH ELISCON WITH RESPECT TO THE OBLIGATION INVOLVED HERE.
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON
ORDERING THE LATTER TO PAY THE AMOUNTS STATED IN THE
DISPOSITIVE PORTION OF THE DECISION; AND ORDERING PETITIONER
AND MULTI TO PAY SAID AMOUNTS JOINTLY AND SEVERALLY WITH
ELISCON.26
Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National
Development Company, for the latter to take over and continue the operation of its
business. On September 11, 1981, the Board of Governors of the DBP adopted
Resolution No. 2817 which states that DBP shall enter into a contractual arrangement
with NDC for the latter to pay ELISCON's creditors, including BPI in the amount of
P4,015,534.54. This was followed by a Memorandum of Agreement executed on May
4,1983 by and between DBP and NDC, wherein they stipulated, inter alia, that NDC shall
pay to ELISCON's creditors, through DBP, the amount of P299,524,700.00. Among the
creditors mentioned in the agreement was BPI, with a listed credit of P4,015,534.54.
Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired
by the DBP, and later transferred to the NDC, were placed under the Asset Privatization
Trust pursuant to Proclamation No. 50, issued by then President Corazon C. Aquino on
December 8, 1986.
In its Comment,27 BPI countered that by virtue of its merger with CBTC, it acquired all the
latter's rights and interest including all receivables; that in order to effect a valid novation
by substitution of debtors, the consent of the creditor must be express; that in addition,
the consent of BPI must appear in its books, it being a private corporation; that BPI
intentionally did not consent to the assumption by DBP of the obligations of ELISCON
because it wanted to preserve intact its causes of action and legal recourse against
Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and not of
DBP; that MULTI expressly bound itself solidarily for ELISCON's obligations to CBTC in
its Resolution wherein it allowed the latter to use its credit facilities; and that the
suretyship agreement executed by Babst does not exclude liabilities incurred by MULTI
on behalf of third parties, such as ELISCON.
ELISCON likewise filed a Comment,28 wherein it manifested that of the seven errors
raised by Babst in his petition, six are arguments which ELISCON itself raised in its
previous pleadings. It is only the sixth assigned error --- that the Court of Appeals erred
in finding that MULTI and Babst bound themselves solidarily with ELISCON --- that
ELISCON takes exception to. More particularly, ELISCON pointed out the contradictory
positions taken by Babst in admitting that he bound himself to pay the indebtedness of
MULTI, while at the same time completely disavowing and denying any such obligation.
It stressed that should MULTI or Babst be finally adjudged liable under the suretyship
agreement, they cannot lawfully recover from ELISCON, but from the DBP which had
been substituted as the new debtor.
MULTI filed its Comrnent,29 admitting the correctness of the petition and adopting the
Comment of ELISCON insofar as it is not inconsistent with the positions of Babst and
MULTI.
At the outset, the preliminary issue of BPI's right of action must first be addressed.
ELISCON and MULTI assail BPI's legal capacity to recover their obligation to CBTC.
However, there is no question that there was a valid merger between BPI and CBTC. It is
settled that in the merger of two existing corporations, one of the corporations survives
and continues the business, while the other is dissolved and all its rights, properties and
liabilities are acquired by the surviving corporation.30 Hence, BPI has a right to institute
the case a quo.
We now come to the primordial issue in this case — whether or not BPI consented to the
assumption by DBP of the obligations of ELISCON.
Article 1293 of the Civil Code provides:
Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him
the rights mentioned in articles 1236 and 1237.
BPI contends that in order to have a valid novation, there must be an express consent of
the creditor. In the case of Testate Estate of Mota, et al. v. Serra,31 this Court held:
It should be noted that in order to give novation its legal effect, the law requires
that the creditor should consent to the substitution of a new debtor. This consent
must be given expressly for the reason that, since novation extinguishes the
personality of the first debtor who is to be substituted by a new one, it implies on
the part of the creditor a waiver of the right that he had before the novation,
which waiver must be express under the principle of renuntiatio non
proesumitur, recognized by the law in declaring that a waiver of right may not be
performed [should read: presumed] unless the will to waive is indisputably shown
by him who holds the right.32
The import of the foregoing ruling, however, was explained and clarified by this Court in
the later case of Asia Banking Corporation v. EIser33 in this wise:
The aforecited article 1205 [now 1293] of the Civil Code does not state that
the creditor's consent to the substitution of the new debtor for the old be
express, or given at the time of the substitution, and the Supreme Court of
Spain, in its judgment of June 16, 1908, construing said article, laid down the
doctrine that "article 1205 of the Civil Code does not mean or require that the
creditor's consent to the change of debtors must be given simultaneously with the
debtor's consent to the substitution, its evident purpose being to preserve the
creditor's full right, it is sufficient that the latter's consent be given at any time and
in any form whatever, while the agreement of the debtors subsists." The same
rule is stated in the Enciclopedia Juridica Española, volume 23, page 503, which
reads: "'The rule that this kind of novation, like all others, must be express, is not
absolute; for the existence of the consent may well be inferred from the act
of the creditor, since volition may as well be expressed by deeds as by
words." The understanding between Henry W. Elser and the principal director of
Yangco, Rosenstock & Co., Inc., with respect to Luis R. Yangco's stock in said
corporation, and the acts of the board of directors after Henry W. Elser had
acquired said shares, in substituting the latter for Luis R. Yangco, are a clear and
unmistakable expression of its consent. When this court said in the case of
Estate of Mota vs.  Serra (47 Phil. 464), that the creditor's express consent
is necessary in order that there may be a novation of a contract by the
substitution of debtors, it did not wish to convey the impression that the
word "express" was to be given an unqualified meaning. as indicated in the
authorities or cases. both Spanish and American, cited in said decision. 34
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo & Sevilla,
Inc., et al.,35 this Court reiterated the rule that there can be implied consent of the creditor
to the substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI
to register its objection to the take-over by DBP of ELISCON's assets, at the creditors'
meeting held in June 1981 and thereafter, it is deemed to have consented to the
substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear indications that BPI was aware of
the assumption by DBP of the obligations of ELISCON. In fact, BPI admits that ---
"the Development Bank of the Philippines (DBP), for a time, had .proposed a
formula for the settlement of Eliscon's past obligations to its creditors, including
the plaintiff [BPI], but the formula was expressly rejected by the plaintiff as not
acceptable (long before the filing of the complaint at bar)."36
The Court of Appeals held that even if the account officer who attended the June 1981
creditors' meeting had expressed consent to the assumption by DBP of ELISCON' s
debts, such consent would not bind BPI for lack of a specific authority therefor. In its
petition, ELISCON counters that the mere presence of the account officer at the meeting
necessarily meant that he was authorized to represent BPI in that creditors' meeting.
Moreover, BPI did not object to the substitution of debtors, although it objected to the
payment formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting
was an authority to represent the bank, such that when he failed to object to the
substitution of debtors, he did so on behalf of and for the bank. Even
granting arguendo that the said account officer was not so empowered, BPI could have
subsequently registered its objection to the substitution, especially after it had already
learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its
failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's
obligations. As repeatedly pointed out by ELISCON and MULTI, BPI's objection was to
the proposed payment formula, not to the substitution itself.
BPI gives no cogent reason in withholding its consent to the substitution, other than its
desire to preserve its causes of action and legal recourse against the sureties of
ELISCON. It must be remembered, however, that while a surety is solidarily liable with
the principal debtor, his obligation to pay only arises upon the principal debtor's failure or
refusal to pay. A contract of surety is an accessory promise by which a person binds
himself for another already bound, and agrees with the creditor to satisfy the obligation if
the debtor does not.37 A surety is an insurer of the debt; he promises to pay the
principal's debt if the principal will not pay.38
In the case at bar, there was no indication that the principal debtor will default in
payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of
payment. Its authorized capital stock was increased by the government.39 More
importantly, the National Development Company took over the business of ELISCON
and undertook to pay ELISCON's creditors, and earmarked for that purpose the amount
of P4,015,534.54 for payment to BPI.40
Notwithstanding the fact that a reliable institution backed by government funds was
offering to pay ELISCON's debts, not as mere surety but as substitute principal debtor,
BPI, for reasons known only to itself, insisted in going after the sureties. The course of
action chosen taxes the credulity of this Court. At the very least, suffice it to state that
BPI's actuation in this regard runs counter to the good faith covenant in contractual
relations, provided for by the Civil Code, to wit:
ART. 19. Every person must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe honesty and
good faith.1âwphi1.nêt
ART. 1159. Obligations arising from contract have the force of law between the
contracting parties and should be complied with in good faith.
BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for
ELISCON as debtor. Hence, there was a valid novation which resulted in the release of
ELISCON from its obligation to BPI, whose cause of action should be directed against
DBP as the new debtor.
Novation, in its broad concept, may either be extinctive or modificatory .It is
extinctive when an old obligation is terminated by the creation of a new obligation
that takes the place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with the amendatory
agreement. An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person of the debtor
or subrogating a third person in the rights of the creditor (subjective or personal).
Under this mode, novation would have dual functions — one to extinguish an
existing obligation, the other to substitute a new one in its place — requiring a
conflux of four essential requisites, (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a valid new obligation.41
The original obligation having been extinguished, the contracts of suretyship executed
separately by Babst and MULTI, being accessory obligations, are likewise extinguished.42
Hence, BPI should enforce its cause of action against DBP. It should be stressed that
notwithstanding the lapse of time within which these cases have remained pending, the
prescriptive period for BPI to file its action was interrupted when it filed Civil Case No.
49226.43
WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the
Court of Appeals, which held ELISCON, MULTI and Babst solidarily liable for payment to
BPI of the promissory note and letters of credit, is REVERSED and SET ASIDE. BPI's
complaint against ELISCON, MULTI and Babst is DISMISSED.
SO ORDERED.
G.R. No. 154127               December 8, 2003
ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of
the parties or by the complete incompatibility between the old and the new agreements.
Petitioner herein fails to show either requirement convincingly; hence, the summary
judgment holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify
1 
the November 26, 2001 Decision and the June 26, 2002 Resolution of the Court of
2  3 
Appeals (CA) in CA-GR CV No. 60521. The appellate court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from,
insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED,
subject to the modification that the award for attorney’s fees and cost of suit is
DELETED. The portion of the judgment that pertains to x x x Eduardo de Jesus is SET
ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus is
REMANDED to the court of origin for purposes of receiving ex parte [Respondent]
Dionisio Llamas’ evidence against x x x Eduardo de Jesus." 4
The challenged Resolution, on the other hand, denied petitioner’s Motion for
Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages by x x x
[Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de
Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23
December 1996[,] [petitioner and de Jesus] borrowed ₱400,000.00 from [respondent];
that, on the same day, [they] executed a promissory note wherein they bound
themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5%
interest per month; that the loan has long been overdue and, despite repeated demands,
[petitioner and de Jesus] have failed and refused to pay it; and that, by reason of the[ir]
unjustified refusal, [respondent] was compelled to engage the services of counsel to
whom he agreed to pay 25% of the sum to be recovered from [petitioner and de Jesus],
plus ₱2,000.00 for every appearance in court. Annexed to the complaint were the
promissory note above-mentioned and a demand letter, dated 02 May 1997, by
[respondent] addressed to [petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no
liability under the promissory note because he signed it merely as an accommodation
party for x x x de Jesus; and, alternatively, that he is relieved from any liability arising
from the note inasmuch as the loan had been paid by x x x de Jesus by means of a
check dated 17 April 1997; and that, in any event, the issuance of the check and
[respondent’s] acceptance thereof novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder asserting that
the loan remained unpaid for the reason that the check issued by x x x de Jesus
bounced, and that [Petitioner] Garcia’s answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the face of the check and
the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the
supposed ₱400,000.00 loan, he received only ₱360,000.00, the P40,000.00 having been
advance interest thereon for two months, that is, for January and February 1997; that[,]
in fact[,] he paid the sum of ₱120,000.00 by way of interests; that this was made when
[respondent’s] daughter, one Nits Llamas-Quijencio, received from the Central Police
District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus worked), the
sum of ₱40,000.00, representing the peso equivalent of his accumulated leave credits,
another ₱40,000.00 as advance interest, and still another ₱40,000.00 as interest for the
months of March and April 1997; that he had difficulty in paying the loan and had asked
[respondent] for an extension of time; that [respondent] acted in bad faith in instituting the
case, [respondent] having agreed to accept the benefits he (de Jesus) would receive for
his retirement, but [respondent] nonetheless filed the instant case while his retirement
was being processed; and that, in defense of his rights, he agreed to pay his counsel
₱20,000.00 [as] attorney’s fees, plus ₱1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did
they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his
counsel even manifested that he would no [longer] present evidence. Given this
development, the trial court gave [respondent] permission to present his evidence ex
parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court directed
[respondent] to file a motion for judgment on the pleadings, and for [Petitioner] Garcia to
file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow
him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a
[M]anifestation submitting his defense to a judgment on the pleadings. Subsequently,
[respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted that
[petitioner’s and de Jesus’] solidary liability under the promissory note cannot be any
clearer, and that the check issued by de Jesus did not discharge the loan since the
check bounced." 5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed
of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in
favor of [respondent] and against [petitioner and De Jesus], who are hereby ordered to
pay, jointly and severally, the [respondent] the following sums, to wit:
‘1) ₱400,000.00 representing the principal amount plus 5% interest thereon per
month from January 23, 1997 until the same shall have been fully paid, less the
amount of ₱120,000.00 representing interests already paid by x x x de Jesus;
‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for each
day of [c]ourt appearance, and;
‘3) Cost of this suit.’" 6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the pleadings
against De Jesus. According to the appellate court, his Answer raised genuinely
contentious issues. Moreover, he was still required to present his evidence ex parte.
Thus, respondent was not ipso facto entitled to the RTC judgment, even though De
Jesus had been declared in default. The case against the latter was therefore remanded
by the CA to the trial court for the ex parte reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer
had failed to raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place when
respondent accepted the check from De Jesus. According to the CA, the check was
issued precisely to pay for the loan that was covered by the promissory note jointly and
severally undertaken by petitioner and De Jesus. Respondent’s acceptance of the check
did not serve to make De Jesus the sole debtor because, first, the obligation incurred by
him and petitioner was joint and several; and, second, the check -- which had been
intended to extinguish the obligation -- bounced upon its presentment.
Hence, this Petition. 7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding that novation
applies in the instant case as x x x Eduardo de Jesus had expressly assumed sole and
exclusive liability for the loan obligation he obtained from x x x Respondent Dionisio
Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan
of ₱400,000.00 in favor of Respondent Llamas, although the check subsequently
bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in [the]
substitution by x x x de Jesus or [the superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount of
₱120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that
due to financial difficulties, he be given an extension of time to pay his loan
obligation and that his retirement benefits from the Philippine National Police will
answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not holding that the
defense of petitioner that he was merely an accommodation party, despite the fact that
the promissory note provided for a joint and solidary liability, should have been given
weight and credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing
circumstances showing his assumption of sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was properly availed of
by Respondent Llamas, despite the fact that there are genuine issues of fact, which the
Honorable Court of Appeals itself admitted in its Decision, which call for the presentation
of evidence in a full-blown trial."
8 third person who consents to the substitution and assumes the obligation; thus, the
Simply put, the issues are the following: 1) whether there was novation of the obligation;
2) whether the defense that petitioner was only an accommodation party had any basis;
and 3) whether the judgment against him -- be it a judgment on the pleadings or a
summary judgment -- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by
insisting that novation took place, either through the substitution of De Jesus as sole
debtor or the replacement of the promissory note by the check. Alternatively, the former
argues that the original obligation was extinguished when the latter, who was his co-
obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not
have extinguished the obligation, because it bounced upon presentment. By law, the 9  in unequivocal terms that the old obligation is extinguished. It is implied when the new
delivery of a check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. Article 1293 of the Civil Code defines novation as
10  The parties did not unequivocally declare that the old obligation had been extinguished
follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1) expromision
and (2) delegacion. In expromision, the initiative for the change does not come from --
and may even be made without the knowledge of -- the debtor, since it consists of a third
person’s assumption of the obligation. As such, it logically requires the consent of the
third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a
consent of these three persons are necessary. Both modes of substitution by the debtor
11 
require the consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that it remains compatible with
the amendatory agreement. Whether extinctive or modificatory, novation is made either
13 
by changing the object or the principal conditions, referred to as objective or real
novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation. For novation to
14 
take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract. 15
Novation may also be express or implied. It is express when the new obligation declares
obligation is incompatible with the old one on every point. The test of incompatibility is
16 
whether the two obligations can stand together, each one with its own independent
existence. 17
Applying the foregoing to the instant case, we hold that no novation took place.
by the issuance and the acceptance of the check, or that the check would take the place
of the note. There is no incompatibility between the promissory note and the check. As
the CA correctly observed, the check had been issued precisely to answer for the
obligation. On the one hand, the note evidences the loan obligation; and on the other, the
check answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view, also constitutes
novation -- change the terms and conditions of the obligation. Such payment was
18 
already provided for in the promissory note and, like the check, was totally in accord with Accommodation Party
the terms thereof.
Petitioner avers that he signed the promissory note merely as an accommodation party;
Also unmeritorious is petitioner’s argument that the obligation was novated by the and that, as such, he was released as obligor when respondent agreed to extend the
substitution of debtors. In order to change the person of the debtor, the old one must be term of the obligation.
expressly released from the obligation, and the third person or new debtor must assume
the former’s place in the relation. Well-settled is the rule that novation is never
19 
This reasoning is misplaced, because the note herein is not a negotiable instrument. The
presumed. Consequently, that which arises from a purported change in the person of
20 
note reads:
the debtor must be clear and express. It is thus incumbent on petitioner to show clearly
21 

and unequivocally that novation has indeed taken place. "PROMISSORY NOTE

In the present case, petitioner has not shown that he was expressly released from the "₱400,000.00
obligation, that a third person was substituted in his place, or that the joint and solidary
obligation was cancelled and substituted by the solitary undertaking of De Jesus. The CA
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED
aptly held:
THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at No.
144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per month or fraction
"x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de Jesus thereof.
either, the nature of the obligation being solidary due to the fact that the promissory note
expressly declared that the liability of appellants thereunder is joint and [solidary.]
"It is understood that our liability under this loan is jointly and severally [sic].
Reason: under the law, a creditor may demand payment or performance from one of the
solidary debtors or some or all of them simultaneously, and payment made by one of
them extinguishes the obligation. It therefore follows that in case the creditor fails to "Done at Quezon City, Metro Manila this 23rd day of December, 1996." 30

collect from one of the solidary debtors, he may still proceed against the other or others.
xxx" 22 By its terms, the note was made payable to a specific person rather than to bearer or to
order -- a requisite for negotiability under Act 2031, the Negotiable Instruments Law
31 

Moreover, it must be noted that for novation to be valid and legal, the law requires that (NIL). Hence, petitioner cannot avail himself of the NIL’s provisions on the liabilities and
the creditor expressly consent to the substitution of a new debtor. Since novation implies
23  defenses of an accommodation party. Besides, a non-negotiable note is merely a simple
a waiver of the right the creditor had before the novation, such waiver must be contract in writing and is evidence of such intangible rights as may have been created by
express. It cannot be supposed, without clear proof, that the present respondent has
24  the assent of the parties. The promissory note is thus covered by the general provisions
32 

done away with his right to exact fulfillment from either of the solidary debtors.25 of the Civil Code, not by the NIL.

More important, De Jesus was not a third person to the obligation. From the beginning,
he was a joint and solidary obligor of the ₱400,000 loan; thus, he can be released from it
only upon its extinguishment. Respondent’s acceptance of his check did not change the
person of the debtor, because a joint and solidary obligor is required to pay the entirety
of the obligation.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for
the promissory note. Under Article 29 of Act 2031, an accommodation party is liable for
the instrument to a holder for value even if, at the time of its taking, the latter knew the
former to be only an accommodation party. The relation between an accommodation
party and the party accommodated is, in effect, one of principal and surety -- the
accommodation party being the surety. It is a settled rule that a surety is bound equally
33 

and absolutely with the principal and is deemed an original promissor and debtor from
It must be noted that in a solidary obligation, the creditor is entitled to demand the
the beginning. The liability is immediate and direct. 34

satisfaction of the whole obligation from any or all of the debtors. It is up to the former to
26 

determine against whom to enforce collection. Having made himself jointly and severally
27 

liable with De Jesus, petitioner is therefore liable for the entire obligation.
28  29 Third Issue:

Second Issue:
Propriety of Summary Judgment From the records, it also appears that petitioner himself moved to submit the case for
or Judgment on the Pleadings judgment on the basis of the pleadings and documents.  In a written Manifestation, he
1âwphi1
42 

stated that "judgment on the pleadings may now be rendered without further evidence,
The next issue illustrates the usual confusion between a judgment on the pleadings and considering the allegations and admissions of the parties." 43

a summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary

judgment may be rendered after a summary hearing if the pleadings, supporting In view of the foregoing, the CA correctly considered as a summary judgment that which
affidavits, depositions and admissions on file show that (1) except as to the amount of the trial court had issued against petitioner.
damages, there is no genuine issue regarding any material fact; and (2) the moving party
is entitled to a judgment as a matter of law. WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED.
Costs against petitioner.
A summary judgment is a procedural device designed for the prompt disposition of
actions in which the pleadings raise only a legal, not a genuine, issue regarding any SO ORDERED.
material fact. Consequently, facts are asserted in the complaint regarding which there is
35 

yet no admission, disavowal or qualification; or specific denials or affirmative defenses

are set forth in the answer, but the issues are fictitious as shown by the pleadings,
depositions or admissions. A summary judgment may be applied for by either a claimant
36 

or a defending party.37

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the
pleadings is proper when an answer fails to render an issue or otherwise admits the
material allegations of the adverse party’s pleading. The essential question is whether
there are issues generated by the pleadings. A judgment on the pleadings may be
38 

sought only by a claimant, who is the party seeking to recover upon a claim,
counterclaim or cross-claim; or to obtain a declaratory relief. 
39

Apropos thereto, it must be stressed that the trial court’s judgment against petitioner was
correctly treated by the appellate court as a summary judgment, rather than as a
judgment on the pleadings. His Answer apparently raised several issues -- that he
40 

signed the promissory note allegedly as a mere accommodation party, and that the
obligation was extinguished by either payment or novation. However, these are not
factual issues requiring trial. We quote with approval the CA’s observations:

"Although Garcia’s [A]nswer tendered some issues, by way of affirmative defenses, the
documents submitted by [respondent] nevertheless clearly showed that the issues so
tendered were not valid issues. Firstly, Garcia’s claim that he was merely an
accommodation party is belied by the promissory note that he signed. Nothing in the note
indicates that he was only an accommodation party as he claimed to be. Quite the
contrary, the promissory note bears the statement: ‘It is understood that our liability
under this loan is jointly and severally [sic].’ Secondly, his claim that his co-defendant de
Jesus already paid the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check." 41
G.R. No. 170141             April 22, 2008
JAPAN AIRLINES, petitioner,
vs.
JESUS SIMANGAN, respondent.
DECISION
REYES R.T., J.:
WHEN an airline issues a ticket to a passenger confirmed on a particular flight on a
certain date, a contract of carriage arises, and the passenger has every right to expect
that he would fly on that flight and on that date. If he does not, then the carrier opens
itself to a suit for breach of contract of carriage.1
The power to admit or not an alien into the country is a sovereign act which cannot be
interfered with even by Japan Airlines (JAL).2
In this petition for review on certiorari,3 petitioner JAL appeals the: (1) Decision4 dated
May 31, 2005 of the Court of Appeals (CA) ordering it to pay respondent Jesus
Simangan moral and exemplary damages; and (2) Resolution5 of the same court dated
September 28, 2005 denying JAL's motion for reconsideration.
The Facts
In 1991, respondent Jesus Simangan decided to donate a kidney to his ailing cousin,
Loreto Simangan, in UCLA School of Medicine in Los Angeles, California, U.S.A. Upon
request of UCLA, respondent undertook a series of laboratory tests at the National
Kidney Institute in Quezon City to verify whether his blood and tissue type are compatible
with Loreto's.6 Fortunately, said tests proved that respondent's blood and tissue type
were well-matched with Loreto's.7
Respondent needed to go to the United States to complete his preliminary work-up and
donation surgery. Hence, to facilitate respondent's travel to the United States, UCLA
wrote a letter to the American Consulate in Manila to arrange for his visa. In due time,
respondent was issued an emergency U.S. visa by the American Embassy in Manila.8
Having obtained an emergency U.S. visa, respondent purchased a round trip plane ticket
from petitioner JAL for US$1,485.00 and was issued the corresponding boarding
pass.9 He was scheduled to a particular flight bound for Los Angeles, California, U.S.A.
via Narita, Japan.10
On July 29, 1992, the date of his flight, respondent went to Ninoy Aquino International
Airport in the company of several relatives and friends.11 He was allowed to check-in at
JAL's counter.12 His plane ticket, boarding pass, travel authority and personal articles
were subjected to rigid immigration and security routines.13 After passing through said
immigration and security procedures, respondent was allowed by JAL to enter its
airplane.14
While inside the airplane, JAL's airline crew suspected respondent of carrying a falsified
travel document and imputed that he would only use the trip to the United States as a
pretext to stay and work in Japan.15 The stewardess asked respondent to show his travel
documents. Shortly after, the stewardess along with a Japanese and a Filipino haughtily
ordered him to stand up and leave the plane.16 Respondent protested, explaining that he
was issued a U.S. visa. Just to allow him to board the plane, he pleaded with JAL to
closely monitor his movements when the aircraft stops over in Narita.17 His pleas were
ignored. He was then constrained to go out of the plane.18 In a nutshell, respondent was
bumped off the flight.
Respondent went to JAL's ground office and waited there for three hours. Meanwhile, the
plane took off and he was left behind.19 Afterwards, he was informed that his travel
documents were, indeed, in order.20 Respondent was refunded the cost of his plane ticket
less the sum of US$500.00 which was deducted by JAL.21 Subsequently, respondent's
U.S. visa was cancelled.22
Displeased by the turn of events, respondent filed an action for damages against JAL
with the Regional Trial Court (RTC) in Valenzuela City, docketed as Civil Case No. 4195-
V-93. He claimed he was not able to donate his kidney to Loreto; and that he suffered
terrible embarrassment and mental anguish.23 He prayed that he be awarded P3 million
as moral damages, P1.5 million as exemplary damages and P500,000.00 as attorney's
fees.24
JAL denied the material allegations of the complaint. It argued, among others, that its
failure to allow respondent to fly on his scheduled departure was due to "a need for his
travel documents to be authenticated by the United States Embassy"25 because no one
from JAL's airport staff had encountered a parole visa before.26 It posited that the
authentication required additional time; that respondent was advised to take the flight the
following day, July 30, 1992. JAL alleged that respondent agreed to be rebooked on July
30, 1992.27
JAL also lodged a counterclaim anchored on respondent's alleged wrongful institution of
the complaint. It prayed for litigation expenses, exemplary damages and attorney's fees.28
On September 21, 2000, the RTC presided by Judge Floro P. Alejo rendered its decision
in favor of respondent (plaintiff), disposing as follows:
WHEREFORE, judgment is hereby rendered ordering the defendant to pay the
plaintiff the amount of P1,000,000.00 as moral damages, the amount
of P500,000.00 as exemplary damages and the amount of P250,000.00 as
attorney's fees, plus the cost of suit.29
The RTC explained:
In summarily and insolently ordering the plaintiff to disembark while the latter was
already settled in his assigned seat, the defendant violated the contract of
carriage; that when the plaintiff was ordered out of the plane under the pretext
that the genuineness of his travel documents would be verified it had caused him
embarrassment and besmirched reputation; and that when the plaintiff was finally
not allowed to take the flight, he suffered more wounded feelings and social
humiliation for which the plaintiff was asking to be awarded moral and exemplary
damages as well as attorney's fees.
The reason given by the defendant that what prompted them to investigate the
genuineness of the travel documents of the plaintiff was that the plaintiff was not
then carrying a regular visa but just a letter does not appear satisfactory. The
defendant is engaged in transporting passengers by plane from country to
country and is therefore conversant with the travel documents. The defendant
should not be allowed to pretend, to the prejudice of the plaintiff not to know that
the travel documents of the plaintiff are valid documents to allow him entry in the
United States.
The foregoing act of the defendant in ordering the plaintiff to deplane while
already settled in his assigned seat clearly demonstrated that the defendant
breached its contract of carriage with the plaintiff as passenger in bad faith and
as such the plaintiff is entitled to moral and exemplary damages as well as to an
award of attorney's fees.30
Disagreeing with the RTC judgment, JAL appealed to the CA contending that it is not
guilty of breach of contract of carriage, hence, not liable for damages.31 It posited that it is
the one entitled to recover on its counterclaim.32
CA Ruling
In a Decision33 dated May 31, 2005, the CA affirmed the decision of the RTC with
modification in that it lowered the amount of moral and exemplary damages and deleted
the award of attorney's fees. The fallo of the CA decision reads:
WHEREFORE, the appealed Decision is AFFIRMED with MODIFICATION.
Appellant JAPAN AIR LINES is ordered to pay appellee JESUS SIMANGAN the
reduced sums, as follows: Five Hundred Thousand Pesos (P500,000.00) as
moral damages, and Two Hundred Fifty Thousand Pesos (P250,000.00) as
exemplary damages. The award of attorney's fees is hereby DELETED.34
The CA elucidated that since JAL issued to respondent a round trip plane ticket for a
lawful consideration, "there arose a perfected contract between them."35 It found that
respondent was "haughtily ejected"36 by JAL and that "he was certainly embarrassed and
humiliated"37 when, in the presence of other passengers, JAL's airline staff "shouted at
him to stand up and arrogantly asked him to produce his travel papers, without the least
courtesy every human being is entitled to";38 and that "he was compelled to deplane on
the grounds that his papers were fake."39
The CA ratiocinated:
While the protection of passengers must take precedence over convenience, the
implementation of security measures must be attended by basic courtesies.
In fact, breach of the contract of carriage creates against the carrier a
presumption of liability, by a simple proof of injury, relieving the injured passenger
of the duty to establish the fault of the carrier or of his employees; and placing on
the carrier the burden to prove that it was due to an unforeseen event or to force
majeure.
That appellee possessed bogus travel documents and that he might stay illegally
in Japan are allegations without substantiation. Also, appellant's attempt to
rebook appellee the following day was too late and did not relieve it from liability.
The damage had been done. Besides, its belated theory of novation, i.e., that
appellant's original obligation to carry appellee to Narita and Los Angeles on July
29, 1992 was extinguished by novation when appellant and appellant agreed that
appellee will instead take appellant's flight to Narita on the following day, July 30,
1992, deserves little attention. It is inappropriate at bar. Questions not taken up
during the trial cannot be raised for the first time on appeal.40 (Underscoring ours
and citations were omitted)
Citing Ortigas, Jr. v. Lufthansa German Airlines,41 the CA declared that "(i)n contracts of
common carriage, inattention and lack of care on the part of the carrier resulting in the
failure of the passenger to be accommodated in the class contracted for amounts to bad
faith or fraud which entitles the passengers to the award of moral damages in
accordance with Article 2220 of the Civil Code."42
Nevertheless, the CA modified the damages awarded by the RTC. It explained:
 Fundamental in the law on damages is that one injured by a breach of a contract,
or by a wrongful or negligent act or omission shall have a fair and just
compensation commensurate to the loss sustained as consequence of the
defendant's act. Being discretionary on the court, the amount, however, should
not be palpably and scandalously excessive.
Here, the trial court's award of P1,000,000.00 as moral damages appears to be
overblown. No other proof of appellee's social standing, profession, financial
capabilities was presented except that he was single and a businessman. To Us,
the sum of 500,000.00 is just and fair. For, moral damages are emphatically not
intended to enrich a complainant at the expense of the defendant. They are
awarded only to enable the injured party to obtain means, diversion or
amusements that will serve to alleviate the moral suffering he has undergone, by
reason of the defendant's culpable action.
Moreover, the grant of P500,000.00 as exemplary damages needs to be reduced
to a reasonable level. The award of exemplary damages is designed to permit
the courts to mould behavior that has socially deleterious consequences and its
imposition is required by public policy to suppress the wanton acts of the
offender. Hence, the sum of P250,000.00 is adequate under the circumstances.
The award of P250,000.00 as attorney's fees lacks factual basis. Appellee was
definitely compelled to litigate in protecting his rights and in seeking relief from
appellant's misdeeds. Yet, the record is devoid of evidence to show the cost of
the services of his counsel and/or the actual expenses incurred in prosecuting his
action.43 (Citations were omitted)
When JAL's motion for reconsideration was denied, it resorted to the petition at bar.
Issues
JAL poses the following issues -
I.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT
RESPONDENT WAS ENTITLED TO MORAL DAMAGES, CONSIDERING
THAT:
A. JAL WAS NOT GUILTY OF BREACH OF CONTRACT.
B. MORAL DAMAGES MAY BE AWARDED IN BREACH OF
CONTRACT CASES ONLY WHEN THE BREACH IS ATTENDED BY
FRAUD OR BAD FAITH. ASSUMING ARGUENDO THAT JAL WAS
GUILTY OF BREACH, JAL DID NOT ACT FRAUDULENTLY OR IN BAD
FAITH AS TO ENTITLE RESPONDENT TO MORAL DAMAGES.
C. THE LAW DISTINGUISHES A CONTRACTUAL BREACH EFFECTED
IN GOOD FAITH FROM ONE ATTENDED BY BAD FAITH.
II.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT
RESPONDENT WAS ENTITLED TO EXEMPLARY DAMAGES CONSIDERING
THAT:
A. EXEMPLARY DAMAGES ARE NOT RECOVERABLE IN BREACH OF
CONTRACT OF CARRIAGE UNLESS THE CARRIER IS GUILTY OF
WANTON, FRAUDULENT, RECKLESS, OPPRESSIVE OR
MALEVOLENT CONDUCT.
B. ASSUMING ARGUENDO THAT JAL WAS GUILTY OF BREACH, JAL
DID NOT ACT IN A WANTON FRAUDULENT, RECKLESS,
OPPRESSIVE OR MALEVOLENT MANNER AS TO ENTITLE
RESPONDENT TO EXEMPLARY DAMAGES.
III.
ASSUMING ARGUENDO THAT RESPONDENT WAS ENTITLED TO AN
AWARD OF DAMAGES, WHETHER OR NOT THE COURT OF APPEALS
AWARD OF P750,000 IN DAMAGES WAS EXCESSIVE AND
UNPRECEDENTED.
IV.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING
FOR JAL ON ITS COUNTERCLAIM.44 (Underscoring Ours)
Basically, there are three (3) issues to resolve here: (1) whether or not JAL is guilty of
contract of carriage; (2) whether or not respondent is entitled to moral and exemplary
damages; and (3) whether or not JAL is entitled to its counterclaim for damages.
Our Ruling
This Court is not a trier of facts.
Chiefly, the issues are factual. The RTC findings of facts were affirmed by the CA. The
CA also gave its nod to the reasoning of the RTC except as to the awards of damages,
which were reduced, and that of attorney's fees, which was deleted.
We are not a trier of facts. We generally rely upon, and are bound by, the conclusions on
this matter of the lower courts, which are better equipped and have better opportunity to
assess the evidence first-hand, including the testimony of the witnesses.45
We have repeatedly held that the findings of fact of the CA are final and conclusive and
cannot be reviewed on appeal to the Supreme Court provided they are based on
substantial evidence.46 We have no jurisdiction, as a rule, to reverse their
findings.47 Among the exceptions to this rule are: (a) when the conclusion is a finding
grounded entirely on speculations, surmises or conjectures; (b) when the inference made
is manifestly mistaken, absurd or impossible; (c) where there is grave abuse of
discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the
findings of facts are conflicting; (f) when the CA, in making its findings, went beyond the
issues of the case and the same is contrary to the admissions of both appellant and
appellee.48
The said exceptions, which are being invoked by JAL, are not found here. There is no
indication that the findings of the CA are contrary to the evidence on record or that vital
testimonies of JAL's witnesses were disregarded. Neither did the CA commit
misapprehension of facts nor did it fail to consider relevant facts. Likewise, there was no
grave abuse of discretion in the appreciation of facts or mistaken and absurd inferences.
We thus sustain the coherent facts as established by the courts below, there being no
sufficient showing that the said courts committed reversible error in reaching their
conclusions.
JAL is guilty of breach of
contract of carriage.
That respondent purchased a round trip plane ticket from JAL and was issued the
corresponding boarding pass is uncontroverted.49 His plane ticket, boarding pass, travel
authority and personal articles were subjected to rigid immigration and security
procedure.50 After passing through said immigration and security procedure, he was
allowed by JAL to enter its airplane to fly to Los Angeles, California, U.S.A. via Narita,
Japan.51 Concisely, there was a contract of carriage between JAL and respondent.
Nevertheless, JAL made respondent get off the plane on his scheduled departure on July
29, 1992. He was not allowed by JAL to fly. JAL thus failed to comply with its obligation
under the contract of carriage.
JAL justifies its action by arguing that there was "a need to verify the authenticity of
respondent's travel document."52 It alleged that no one from its airport staff had
encountered a parole visa before.53 It further contended that respondent agreed to fly the
next day so that it could first verify his travel document, hence, there was novation.54 It
maintained that it was not guilty of breach of contract of carriage as respondent was not
able to travel to the United States due to his own voluntary desistance.55
We cannot agree. JAL did not allow respondent to fly. It informed respondent that there
was a need to first check the authenticity of his travel documents with the U.S.
Embassy.56 As admitted by JAL, "the flight could not wait for Mr. Simangan because it
was ready to depart."57
Since JAL definitely declared that the flight could not wait for respondent, it gave
respondent no choice but to be left behind. The latter was unceremoniously bumped off
despite his protestations and valid travel documents and notwithstanding his contract of
carriage with JAL. Damage had already been done when respondent was offered to fly
the next day on July 30, 1992. Said offer did not cure JAL's default.
Considering that respondent was forced to get out of the plane and left behind against
his will, he could not have freely consented to be rebooked the next day. In short, he did
not agree to the alleged novation. Since novation implies a waiver of the right the creditor
had before the novation, such waiver must be express.58 It cannot be supposed, without
clear proof, that respondent had willingly done away with his right to fly on July 29, 1992.
Moreover, the reason behind the bumping off incident, as found by the RTC and CA, was
that JAL personnel imputed that respondent would only use the trip to the United States
as a pretext to stay and work in Japan.59
Apart from the fact that respondent's plane ticket, boarding pass, travel authority and
personal articles already passed the rigid immigration and security routines,60 JAL, as a
common carrier, ought to know the kind of valid travel documents respondent carried. As
provided in Article 1755 of the New Civil Code: "A common carrier is bound to carry the
passengers safely as far as human care and foresight can provide, using the utmost
diligence of very cautious persons, with a due regard for all the circumstances."61 Thus,
We find untenable JAL's defense of "verification of respondent's documents" in its breach
of contract of carriage.
It bears repeating that the power to admit or not an alien into the country is a sovereign
act which cannot be interfered with even by JAL.62
In an action for breach of contract of carriage, all that is required of plaintiff is to prove
the existence of such contract and its non-performance by the carrier through the latter's
failure to carry the passenger safely to his destination.63 Respondent has complied with
these twin requisites.
Respondent is entitled to moral and exemplary damages and attorney's fees plus
legal interest.
With reference to moral damages, JAL alleged that they are not recoverable in actions ex
contractu except only when the breach is attended by fraud or bad faith. It is contended
that it did not act fraudulently or in bad faith towards respondent, hence, it may not be
held liable for moral damages.
As a general rule, moral damages are not recoverable in actions for damages predicated
on a breach of contract for it is not one of the items enumerated under Article 2219 of the
Civil Code.64 As an exception, such damages are recoverable: (1) in cases in which the
mishap results in the death of a passenger, as provided in Article 1764, in relation to
Article 2206(3) of the Civil Code; and (2) in the cases in which the carrier is guilty of fraud
or bad faith, as provided in Article 2220.65
The acts committed by JAL against respondent amounts to bad faith. As found by the
RTC, JAL breached its contract of carriage with respondent in bad faith. JAL personnel
summarily and insolently ordered respondent to disembark while the latter was already
settled in his assigned seat. He was ordered out of the plane under the alleged reason
that the genuineness of his travel documents should be verified.
These findings of facts were upheld by the CA, to wit:
x x x he was haughtily ejected by appellant. He was certainly embarrassed and
humiliated when, in the presence of other passengers, the appellant's airline staff
shouted at him to stand up and arrogantly asked him to produce his travel
papers, without the least courtesy every human being is entitled to. Then, he was
compelled to deplane on the grounds that his papers were fake. His protestation
of having been issued a U.S. visa coupled with his plea to appellant to closely
monitor his movements when the aircraft stops over in Narita, were
ignored. Worse, he was made to wait for many hours at the office of appellant
only to be told later that he has valid travel documents.66 (Underscoring ours)
Clearly, JAL is liable for moral damages. It is firmly settled that moral damages are
recoverable in suits predicated on breach of a contract of carriage where it is proved that
the carrier was guilty of fraud or bad faith, as in this case. Inattention to and lack of care
for the interests of its passengers who are entitled to its utmost consideration, particularly
as to their convenience, amount to bad faith which entitles the passenger to an award of
moral damages. What the law considers as bad faith which may furnish the ground for an
award of moral damages would be bad faith in securing the contract and in the execution
thereof, as well as in the enforcement of its terms, or any other kind of deceit.67
JAL is also liable for exemplary damages as its above-mentioned acts constitute wanton,
oppressive and malevolent acts against respondent. Exemplary damages, which are
awarded by way of example or correction for the public good, may be recovered in
contractual obligations, as in this case, if defendant acted in wanton, fraudulent, reckless,
oppressive, or malevolent manner.68
Exemplary damages are designed by our civil law to permit the courts to reshape
behaviour that is socially deleterious in its consequence by creating negative incentives
or deterrents against such behaviour. In requiring compliance with the standard of
extraordinary diligence, a standard which is, in fact, that of the highest possible degree of
diligence, from common carriers and in creating a presumption of negligence against
them, the law seeks to compel them to control their employees, to tame their reckless
instincts and to force them to take adequate care of human beings and their property.69
Neglect or malfeasance of the carrier's employees could give ground for an action for
damages. Passengers have a right to be treated by the carrier's employees with
kindness, respect, courtesy and due consideration and are entitled to be protected
against personal misconduct, injurious language, indignities and abuses from such
employees.70
The assessment of P500,000.00 as moral damages and P100,000.00 as exemplary
damages in respondent's favor is, in Our view, reasonable and realistic. This award is
reasonably sufficient to indemnify him for the humiliation and embarrassment he
suffered. This also serves as an example to discourage the repetition of similar
oppressive acts.
With respect to attorney's fees, they may be awarded when defendant's act or omission
has compelled plaintiff to litigate with third persons or to incur expenses to protect his
interest.71 The Court, in Construction Development Corporation of the Philippines v.
Estrella,72 citing Traders Royal Bank Employees Union-Independent v. National Labor
Relations Commission,73 elucidated thus:
There are two commonly accepted concepts of attorney's fees, the so-called
ordinary and extraordinary. In its ordinary concept, an attorney's fee is the
reasonable compensation paid to a lawyer by his client for the legal services he
has rendered to the latter. The basis of this compensation is the fact of his
employment by and his agreement with the client.
In its extraordinary concept, an attorney's fee is an indemnity for damages
ordered by the court to be paid by the losing party in a litigation. The basis
 of this is any of the cases provided by law where such award can be made, such
as those authorized in Article 2208, Civil Code, and is payable not to the lawyer
but to the client, unless they have agreed that the award shall pertain to the
lawyer as additional compensation or as part thereof.74
It was therefore erroneous for the CA to delete the award of attorney's fees on the
ground that the record is devoid of evidence to show the cost of the services of
respondent's counsel. The amount is actually discretionary upon the Court so long as it
passes the test of reasonableness. They may be recovered as actual or compensatory
damages when exemplary damages are awarded and whenever the court deems it just
and equitable,75 as in this case.
Considering the factual backdrop of this case, attorney's fees in the amount
of P200,000.00 is reasonably modest.
The above liabilities of JAL in the total amount of P800,000.00 earn legal interest
pursuant to the Court's ruling in Construction Development Corporation of the Philippines
v. Estrella,76 citing Eastern Shipping Lines, Inc. v. Court of Appeals,77 to wit:
Regarding the imposition of legal interest at the rate of 6% from the time of the
filing of the complaint, we held in Eastern Shipping Lines, Inc. v. Court of
Appeals, that 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 payment of interest in the concept of actual and compensatory
damages, subject to the following rules, to wit -
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.78 (Emphasis supplied and citations omitted)
Accordingly, in addition to the said total amount of P800,000.00, JAL is liable to pay
respondent legal interest. Pursuant to the above ruling of the Court, the legal interest is
6% and it shall be reckoned from September 21, 2000 when the RTC rendered its
judgment. From the time this Decision becomes final and executory, the interest rate
shall be 12% until its satisfaction.
JAL is not entitled to its counterclaim for damages.
The counterclaim of JAL in its Answer79 is a compulsory counterclaim for damages and
attorney's fees arising from the filing of the complaint. There is no mention of any other
counter claims.
This compulsory counterclaim of JAL arising from the filing of the complaint may not be
granted inasmuch as the complaint against it is obviously not malicious or unfounded. It
was filed by respondent precisely to claim his right to damages against JAL. Well-settled
is the rule that the commencement of an action does not per se make the action wrongful
and subject the action to damages, for the law could not have meant to impose a penalty
on the right to litigate.80
We reiterate case law that if damages result from a party's exercise of a right, it
is damnum absque injuria.81 Lawful acts give rise to no injury. Walang perhuwisyong
maaring idulot ang paggamit sa sariling karapatan.
During the trial, however, JAL presented a witness who testified that JAL suffered further
damages. Allegedly, respondent caused the publications of his subject complaint against
JAL in the newspaper for which JAL suffered damages.82
Although these additional damages allegedly suffered by JAL were not incorporated in its
Answer as they arose subsequent to its filing, JAL's witness was able to testify on the
same before the RTC.83 Hence, although these issues were not raised by the pleadings,
they shall be treated in all respects as if they had been raised in the pleadings.
As provided in Section 5, Rule 10 of the Rules of Court, "(w)hen issues not raised by the
pleadings are tried with the express or implied consent of the parties, they shall be
treated in all respects as if they had been raised in the pleadings."
Nevertheless, JAL's counterclaim cannot be granted.
JAL is a common carrier. JAL's business is mainly with the traveling public. It invites
people to avail themselves of the comforts and advantages it offers.84 Since JAL deals
with the public, its bumping off of respondent without a valid reason naturally drew public
attention and generated a public issue.
The publications involved matters about which the public has the right to be informed
because they relate to a public issue. This public issue or concern is a legitimate topic of
a public comment that may be validly published.
be actionable. To be considered malicious, the libelous statements must be shown to
have been written or published with the knowledge that they are false or in reckless
disregard of whether they are false or not.88
Considering that the published articles involve matters of public interest and that its
expressed opinion is not malicious but based on established facts, the imputations
against JAL are not actionable. Therefore, JAL may not claim damages for them.
WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals
is AFFIRMED WITH MODIFICATION. As modified, petitioner Japan Airlines is ordered
to pay respondent Jesus Simangan the following: (1) P500,000.00 as moral damages;
(2) P100,000.00 as exemplary damages; and (3) P200,000.00 as attorney's fees.
The total amount adjudged shall earn legal interest at the rate of 6% per annum from the
date of judgment of the Regional Trial Court on September 21, 2000 until the finality of
this Decision. From the time this Decision becomes final and executory, the unpaid
amount, if any, shall earn legal interest at the rate of 12% per annum until its satisfaction.

Assuming that respondent, indeed, caused the publication of his complaint, he may not SO ORDERED.
be held liable for damages for it. The constitutional guarantee of freedom of the speech
and of the press includes fair commentaries on matters of public interest. This is
explained by the Court in Borjal v. Court of Appeals,85 to wit:

To reiterate, fair commentaries on matters of public interest are privileged and

constitute a valid defense in an action for libel or slander. The doctrine of fair
comment means that while in general every discreditable imputation publicly
made is deemed false, because every man is presumed innocent until his guilt is
judicially proved, and every false imputation is deemed malicious,
nevertheless, when the discreditable imputation is directed against a public
person in his public capacity, it is not necessarily actionable. In order that such
discreditable imputation to a public official may be actionable, it must either be a
false allegation of fact or a comment based on a false supposition. If the
comment is an expression of opinion, based on established facts, then it is
immaterial that the opinion happens to be mistaken, as long as it might
reasonably be inferred from the facts.86 (Citations omitted and underscoring ours)

Even though JAL is not a public official, the rule on privileged commentaries on matters
of public interest applies to it. The privilege applies not only to public officials but extends
to a great variety of subjects, and includes matters of public concern, public men, and
candidates for office.87

Hence, pursuant to the Borjal case, there must be an actual malice in order that a
discreditable imputation to a public person in his public capacity or to a public official may
 [G.R. No. 142838. August 9, 2001.]
ABELARDO B. LICAROS, Petitioner, v. ANTONIO P.
GATMAITAN, Respondent.
DECISION
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court. The
petition seeks to reverse and set aside the Decision 1 dated February 10, 2000 of
the Court of Appeals and its Resolution 2 dated April 7, 2000 denying petitioner’s
Motion for Reconsideration thereto. The appellate court decision reversed the
Decision 3 dated November 11, 1997 of the Regional Trial Court of Makati,
Branch 145 in Civil Case No. 96-1211.chanrob1es virtua1 1aw 1ibrary
The facts of the case, as stated in the Decision of the Court of Appeals dated
February 10, 2000, are as follows:jgc:chanrobles.com.ph
"The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for brevity), is a private
bank registered and organized to do business under the laws of the Republic of
Vanuatu but not in the Philippines. Its business consists primarily in receiving
fund placements by way of deposits from institutions and individual investors
from different parts of the world and thereafter investing such deposits in money
market placements and potentially profitable capital ventures in Hongkong,
Europe and the United States for the purpose of maximizing the returns on those
investments.
Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo
Licaros, a Filipino businessman, decided to make a fund placement with said bank
sometime in the 1980’s. As it turned out, the grim outcome of Licaros’ foray in
overseas fund investment was not exactly what he envisioned it to be. More
particularly, Licaros, after having invested in Anglo-Asean, encountered
tremendous and unexplained difficulties in retrieving, not only the interest or
profits, but even the very investments he had put in Anglo-Asean.
Confronted with the dire prospect of not getting back any of his investments,
Licaros then decided to seek the counsel of Antonio P. Gatmaitan, a reputable
banker and investment manager who had been extending managerial, financial
and investment consultancy services to various firms and corporations both here
and abroad. To Licaros’ relief, Gatmaitan was only too willing enough to help.
Gatmaitan voluntarily offered to assume the payment of Anglo-Asean’s
indebtedness to Licaros subject to certain terms and conditions. In order to
effectuate and formalize the parties’ respective commitments, the two executed a
notarized MEMORANDUM OF AGREEMENT on July 29, 1988 (Exh. "B" ; also
Exhibit "1"), the full text of which reads:chanrob1es virtual 1aw library
‘Memorandum of Agreement
KNOW ALL MEN BY THESE PRESENTS:chanrob1es virtual 1aw library
This MEMORANDUM OF AGREEMENT made and executed this 29th day of July
1988, at Makati by and between:chanrob1es virtual 1aw library
ABELARDO B. LICAROS, Filipino, of legal age and holding office at Concepcion
Building, Intramuros, Manila hereinafter referred to as THE PARTY OF THE FIRST
PART,
and
ANTONIO P. GATMAITAN, Filipino, of legal age and residing at 7 Mangyan St., La
Vista, hereinafter referred to as the PARTY OF THE SECOND PART,chanrob1es
virtua1 1aw 1ibrary
WITNESSETH THAT:chanrob1es virtual 1aw library
WHEREAS, ANGLO-ASEAN BANK & TRUST, a company incorporated by the
Republic of Vanuatu, hereinafter referred to as the OFFSHORE BANK, is indebted
to the PARTY OF THE FIRST PART in the amount of US dollars; ONE HUNDRED
FIFTY THOUSAND ONLY (US$150,000) which debt is now due and demandable.
WHEREAS, the PARTY OF THE FIRST PART has encountered difficulties in securing
full settlement of the said indebtedness from the OFFSHORE BANK and has
sought a business arrangement with the PARTY OF THE SECOND PART regarding
his claims;
WHEREAS, the PARTY OF THE SECOND PART, with his own resources and due to
his association with the OFFSHORE BANK, has offered to the PARTY OF THE
FIRST PART to assume the payment of the aforesaid indebtedness, upon certain
terms and conditions, which offer, the PARTY OF THE FIRST PART has
accepted;chanrob1es virtua1 1aw 1ibrary
WHEREAS, the parties herein have come to an agreement on the nature, form
and extent of their mutual prestations which they now record herein with the
express conformity of the third parties concerned;
NOW, THEREFORE, for and in consideration of the foregoing and the mutual
covenants stipulated herein, the PARTY OF THE FIRST PART and the PARTY OF
THE SECOND PART have agreed, as they do hereby agree, as follows:chanrob1es
virtual 1aw library
1. The PARTY OF THE SECOND PART hereby undertakes to pay the PARTY OF THE
FIRST PART the amount of US DOLLARS ONE HUNDRED FIFTY THOUSAND
((US$150,000) payable in Philippine Currency at the fixed exchange rate of
Philippine Pesos 21 to US$1 without interest on or before July 15, 1993.
For this purpose, the PARTY OF THE SECOND PART shall execute and deliver a
non negotiable promissory note, bearing the aforesaid material consideration in
favor of the PARTY OF THE FIRST PART upon execution of this MEMORANDUM OF
AGREEMENT, which promissory note shall form part as ANNEX A
hereof.chanrob1es virtua1 1aw 1ibrary
2. For and in consideration of the obligation of the PARTY OF THE SECOND PART,
the PARTY OF THE FIRST does hereby;
a. Sell, assign, transfer and set over unto the PARTY OF THE SECOND PART that
certain debt now due and owing to the PARTY OF THE FIRST PART by the
OFFSHORE BANK, to the amount of US Dollars One Hundred Fifty Thousand plus
Interest due and accruing thereon;
b. Grant the PARTY OF THE SECOND PART the full power and authority, for his
own use and benefit, but at his own cost and expense, to demand, collect,
receive, compound, compromise and give acquittance for the same or any part
thereof, and in the name of the PARTY OF THE FIRST PART, to prosecute, and
withdraw any suit or proceedings therefor;chanrob1es virtua1 1aw 1ibrary
c. Agree and stipulate that the debt assigned herein is justly owing and due to
the PARTY OF THE FIRST PART from the said OFFSHORE BANK, and that the
PARTY OF THE FIRST PART has not done and will not cause anything to be done
to diminish or discharge said debt, or to delay or prevent the PARTY OF THE
SECOND PART from collecting the same; and;
d. At the request of the PARTY OF SECOND PART and the latter’s own cost and
expense, to execute and do all such further acts and deeds as shall be reasonably
necessary for proving said debt and to more effectually enable the PARTY OF THE
SECOND PART to recover the same in accordance with the true intent and
meaning of the arrangements herein.
IN WITNESS WHEREOF, the parties have caused this MEMORANDUM OF
AGREEMENT to be signed on the date and place first written above.
Sgd. Sgd.
ABELARDO B. LICAROS ANTONIO P. GATMAITAN
PARTY OF THE FIRST PART PARTY OF THE FIRST PART
WITH OUR CONFORME:chanrob1es virtual 1aw library
ANGLO-ASEAN BANK & TRUST
BY: (Unsigned)
SIGNED IN THE PRESENCE OF.
Sgd. (illegible)
_________________________ _________________________’
Conformably with his undertaking under paragraph 1 of the aforequoted
agreement, Gatmaitan executed in favor of Licaros a NON-NEGOTIABLE
PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS (Exhs. "A" ; also
Exh. "2"), which promissory note, appended as Annex "A" to the same
Memorandum of Agreement, states in full, thus
"NON-NEGOTIABLE PROMISSORY NOTE
WITH ASSIGNMENT OF CASH DIVIDENDS
This promissory note is Annex A of the Memorandum of Agreement executed
between Abelardo B. Licaros and Antonio P. Gatmaitan, on ______ 1988 at
Makati, Philippines and is an integral part of said Memorandum of Agreement.
P3,150,000.
On or before July 15, 1993, I promise to pay to Abelardo B. Licaros the sum of
Philippine Pesos 3,150,000 (P3,150,000) without interest as material
consideration for the full settlement of his money claims from ANGLO-ASEAN
BANK, referred to in the Memorandum of Agreement as the ‘OFFSHORE
BANK’.chanrob1es virtua1 1aw 1ibrary
As security for the payment of this Promissory Note, I hereby ASSIGN, CEDE and
TRANSFER, Seventy Percent (70%) of ALL CASH DIVIDENDS, that may be due or
owing to me as the registered owner of ________________ (________) shares
of stock in the Prudential Life Realty, Inc.
This assignment shall likewise include SEVENTY PERCENT (70%) of cash
dividends that may be declared by Prudential Life Realty, Inc. and due or owing
to Prudential Life Plan, Inc., of which I am a stockholder, to the extent of or in
proportion to my aforesaid shareholding in Prudential Life Plan, Inc., the latter
being the holding company of Prudential Life Realty, Inc.
In the event that I decide to sell or transfer my aforesaid shares in either or both
the Prudential Life Plan, Inc. or Prudential Life Realty, Inc. and the Promissory
Note remains unpaid or outstanding, I hereby give Mr. Abelardo B. Licaros the
first option to buy the said shares.chanrob1es virtua1 1aw 1ibrary
Manila, Philippines
July ____, 1988
(SGD.)
Antonio P. Gatmaitan
7 Mangyan St., La Vista, QC
Signed in the Presence of
(SGD.)
________________ _______________
Francisco A. Alba
President, Prudential Life Plan, Inc." .
Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement
earlier executed by him and Licaros for the purpose of collecting the latter’s
placement thereat of U.S.$150,000.00. Albeit the officers of Anglo-Asean
allegedly committed themselves to "look into [this matter]", no formal response
was ever made by said bank to either Licaros or Gatmaitan. To date, Anglo-Asean
has not acted on Gatmaitan’s monetary claims.chanrob1es virtua1 1aw 1ibrary
Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not
bother anymore to make good his promise to pay Licaros the amount stated in
his promissory note (Exh. "A" ; also Exh. 2"). Licaros, however, thought
differently. He felt that he had a right to collect on the basis of the promissory
note regardless of the outcome of Gatmaitan’s recovery efforts. Thus, in July
1996, Licaros, thru counsel, addressed successive demand letters to Gatmaitan
(Exhs. "C" and "D"), demanding payment of the latter’s obligations under the
promissory note. Gatmaitan, however, did not accede to these demands.
Hence, on August 1, 1996, in the Regional Trial Court at Makati, Licaros filed the
complaint in this case. In his complaint, docketed in the court below as Civil Case
No. 96-1211, Licaros prayed for a judgment ordering Gatmaitan to pay him the
following:chanrob1es virtual 1aw library
‘a) Principal Obligation in the amount of Three Million Five Hundred Thousand
Pesos (P3,500,000.00);
b) Legal interest thereon at the rate of six (6%) percent per annum from July 16,
1993 when the amount became due until the obligation is fully paid;chanrob1es
virtua1 1aw 1ibrary
c) Twenty percent (20%) of the amount due as reasonable attorney’s fees;
d) Costs of the suit.’" 4
After trial on the merits, the court a quo rendered judgment in favor of petitioner
Licaros and found respondent Gatmaitan liable under the Memorandum of
Agreement and Promissory Note for P3,150,000.00 plus 12% interest per annum
from July 16, 1993 until the amount is fully paid. Respondent was likewise
ordered to pay attorney’s fees of P200,000.00. 5
Respondent Gatmaitan appealed the trial court’s decision to the Court of Appeals.
In a decision promulgated on February 10, 2000, the appellate court reversed the
decision of the trial court and held that respondent Gatmaitan did not at any
point become obligated to pay to petitioner Licaros the amount stated in the
promissory note. In a Resolution dated April 7, 2000, the Court of Appeals denied
petitioner’s Motion for Reconsideration of its February 10, 2000 Decision.
Hence this petition for review on certiorari where petitioner prays for the reversal
of the February 10, 2000 Decision of the Court of Appeals and the reinstatement
of the November 11, 1997 decision of the Regional Trial Court.chanrob1es virtua1
1aw 1ibrary
The threshold issue for the determination of this Court is whether the
Memorandum of Agreement between petitioner and respondent is one of
assignment of credit or one of conventional subrogation. This matter is
determinative of whether or not respondent became liable to petitioner under the
promissory note considering that its efficacy is dependent on the Memorandum of
Agreement, the note being merely an annex to the said memorandum. 6
An assignment of credit has been defined as the process of transferring the right
of the assignor to the assignee who would then have the right to proceed against
the debtor. The assignment may be done gratuitously or onerously, in which
case, the assignment has an effect similar to that of a sale. 7
On the other hand, subrogation has been defined as the transfer of all the rights
of the creditor to a third person, who substitutes him in all his rights. It may
either be legal or conventional. Legal subrogation is that which takes place
without agreement but by operation of law because of certain acts. Conventional
subrogation is that which takes place by agreement of parties. 8
The general tenor of the foregoing definitions of the terms "subrogation" and
"assignment of credit" may make it seem that they are one and the same which
they are not. A noted expert in civil law notes their distinctions
thus:jgc:chanrobles.com.ph
"Under our Code, however, conventional subrogation is not identical to
assignment of credit. In the former, the debtors consent is necessary; in the
latter it is not required. Subrogation extinguishes the obligation and gives rise to
a new one; assignment refers to the same right which passes from one person to
another. The nullity of an old obligation may be cured by subrogation, such that a
new obligation will be perfectly valid; but the nullity of an obligation is not
remedied by the assignment of the creditor’s right to another." 9
For our purposes, the crucial distinction deals with the necessity of the consent of
the debtor in the original transaction. In an assignment of credit, the consent of
the debtor is not necessary in order that the assignment may fully produce legal
effects. 10 What the law requires in an assignment of credit is not the consent of
the debtor but merely notice to him as the assignment takes effect only from the
time he has knowledge thereof. 11 A creditor may, therefore, validly assign his
credit and its accessories without the debtor’s consent. 12 On the other hand,
conventional subrogation requires an agreement among the three parties
concerned — the original creditor, the debtor, and the new creditor. It is a new
contractual relation based on the mutual agreement among all the necessary
parties. Thus, Article 1301 of the Civil Code explicitly states that" (C)onventional
subrogation of a third person requires the consent of the original parties and of
the third person." chanrobles virtual law library
The trial court, in finding for the petitioner, ruled that the Memorandum of
Agreement was in the nature of an assignment of credit. As such, the court a quo
held respondent liable for the amount stated in the said agreement even if the
parties thereto failed to obtain the consent of Anglo-Asean Bank. On the other
hand, the appellate court held that the agreement was one of conventional
subrogation which necessarily requires the agreement of all the parties
concerned. The Court of Appeals thus ruled that the Memorandum of Agreement
never came into effect due to the failure of the parties to get the consent of
Anglo-Asean Bank to the agreement and, as such, respondent never became
liable for the amount stipulated.
We agree with the finding of the Court of Appeals that the Memorandum of
Agreement dated July 29, 1988 was in the nature of a conventional subrogation
which requires the consent of the debtor, Anglo-Asean Bank, for its validity. We
note with approval the following pronouncement of the Court of
Appeals:jgc:chanrobles.com.ph
"Immediately discernible from above is the common feature of contracts
involving conventional subrogation, namely, the approval of the debtor to the
subrogation of a third person in place of the creditor. That Gatmaitan and Licaros
had intended to treat their agreement as one of conventional subrogation is
plainly borne by a stipulation in their Memorandum of Agreement, to
wit:jgc:chanrobles.com.ph
"WHEREAS, the parties herein have come to an agreement on the nature, form
and extent of their mutual prestations which they now record herein with the
express conformity of the third parties concerned" (Emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a mere
"assignee" of appellee’s credit, there is simply no sense for them to have
stipulated in their agreement that the same is conditioned on the "express
conformity" thereto of Anglo-Asean Bank. That they did so only accentuates their
intention to treat the agreement as one of conventional subrogation. And it is
basic in the interpretation of contracts that the intention of the parties must be
the one pursued (Rule 130, Section 12, Rules of Court).chanrob1es virtua1 1aw
1ibrary
Given our finding that the Memorandum of Agreement (Exh. "B" ; also Exh. "1"),
is not one of "assignment of credit" but is actually a "conventional subrogation",
the next question that comes to mind is whether such agreement was ever
perfected at all. Needless to state, the perfection — or non-perfection — of the
subject agreement is of utmost relevance at this point. For, if the same
Memorandum of Agreement was actually perfected, then it cannot be denied that
Gatmaitan still has a subsisting commitment to pay Licaros on the basis of his
promissory note. If not, Licaros’ suit for collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of Agreement expressly
requires the consent of Anglo-Asean to the subrogation. Upon whom the task of
securing such consent devolves, be it on Licaros or Gatmaitan, is of no
significance. What counts most is the hard reality that there has been an abject
failure to get Anglo-Asean’s nod of approval over Gatmaitan’s being subrogated
in the place of Licaros. Doubtless, the absence of such conformity on the part of
Anglo-Asean, which is thereby made a party to the same Memorandum of
Agreement, prevented the agreement from becoming effective, much less from
being a source of any cause of action for the signatories thereto." 13
Aside for the ‘whereas clause" cited by the appellate court in its decision, we
likewise note that on the signature page, right under the place reserved for the
signatures of petitioner and respondent, there is, typewritten, the words "WITH
OUR CONFORME." Under this notation, the words "ANGLO-ASEAN BANK AND
TRUST" were written by hand. 14 To our mind, this provision which contemplates
the signed conformity of Anglo-Asean Bank, taken together with the
aforementioned preambulatory clause leads to the conclusion that both parties
intended that Anglo-Asean Bank should signify its agreement and conformity to
the contractual arrangement between petitioner and Respondent. The fact that
Anglo-Asean Bank did not give such consent rendered the agreement inoperative
considering that, as previously discussed, the consent of the debtor is needed in
the subrogation of a third person to the rights of a creditor.
In this petition, petitioner assails the ruling of the Court of Appeals that what was
entered into by the parties was a conventional subrogation of petitioner’s rights
as creditor of the Anglo-Asean Bank which necessarily requires the consent of the
latter. In support, petitioner alleges that: (1) the Memorandum of Agreement did
not create a new obligation and, as such, the same cannot be a conventional
subrogation; (2) the consent of Anglo-Asean Bank was not necessary for the
validity of the Memorandum of Agreement; (3) assuming that such consent was
necessary, respondent failed to secure the same as was incumbent upon him;
and (4) respondent himself admitted that the transaction was one of assignment
of credit.chanrob1es virtua1 1aw 1ibrary
Petitioner argues that the parties to the Memorandum of Agreement could not
have intended the same to be a conventional subrogation considering that no
new obligation was created. According to petitioner, the obligation of Anglo-Asean
Bank to pay under Contract No. 00193 was not extinguished and in fact, it was
the basic intention of the parties to the Memorandum of Agreement to enforce
the same obligation of Anglo-Asean Bank under its contract with petitioner.
Considering that the old obligation of Anglo-Asean Bank under Contract No.
00193 was never extinguished under the Memorandum of Agreement, it is
contended that the same could not be considered as a conventional subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of extinguishing the old
obligation and giving rise to a new one. However, the extinguishment of the old
obligation is the effect of the establishment of a contract for conventional
subrogation. It is not a requisite without which a contract for conventional
subrogation may not be created. As such, it is not determinative of whether or
not a contract of conventional subrogation was constituted.
Moreover, it is of no moment that the subject of the Memorandum of Agreement
was the collection of the obligation of Anglo-Asean Bank to petitioner Licaros
under Contract No. 00193. Precisely, if conventional subrogation had taken place
with the consent of Anglo-Asean Bank to effect a change in the person of its
creditor, there is necessarily created a new obligation whereby Anglo-Asean Bank
must now give payment to its new creditor, herein Respondent.cralawred
Petitioner next argues that the consent or conformity of Anglo-Asean Bank is not
necessary to the validity of the Memorandum of Agreement as the evidence on
record allegedly shows that it was never the intention of the parties thereto to
treat the same as one of conventional subrogation. He claims that the
preambulatory clause requiring the express conformity of third parties, which
admittedly was Anglo-Asean Bank, is a mere surplusage which is not necessary
to the validity of the agreement.
As previously discussed, the intention of the parties to treat the Memorandum of
Agreement as embodying a conventional subrogation is shown not only by the
"whereas clause" but also by the signature space captioned "WITH OUR
CONFORME" reserved for the signature of a Anglo-Asean Bank. These provisions
in the aforementioned Memorandum of Agreement may not simply be
disregarded or dismissed as superfluous.chanrob1es virtua1 1aw 1ibrary
It is a basic rule in the interpretation of contracts that" (t)he various stipulations
of a contract shall be interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly." 15 Moreover, under our
Rules of Court, it is mandated that" (i)n the construction of an instrument where
there are several provisions or particulars, such a construction is, if possible, to
be adopted as will give effect to all." 16 Further, jurisprudence has laid down the
rule that contracts should be so construed as to harmonize and give effect to the
different provisions thereof. 17
In the case at bench, the Memorandum of Agreement embodies certain
provisions that are consistent with either a conventional subrogation or
assignment of credit. It has not been shown that any clause or provision in the
Memorandum of Agreement is inconsistent or incompatible with a conventional
subrogation. On the other hand, the two cited provisions requiring consent of the
debtor to the memorandum is inconsistent with a contract of assignment of
credit. Thus, if we were to interpret the same as one of assignment of credit,
then the aforementioned stipulations regarding the consent of Anglo-Asean Bank
would be rendered inutile and useless considering that, as previously discussed,
the consent of the debtor is not necessary in an assignment of credit.

Petitioner next argues that assuming that the conformity of Anglo-Asean was
necessary to the validity of the Memorandum of Agreement, respondent only had
himself to blame for the failure to secure such conformity as was, allegedly,
incumbent upon him under the memorandum.chanrob1es virtua1 1aw 1ibrary

As to this argument regarding the party responsible for securing the conformity
of Anglo-Asean Bank, we fail to see how this question would have any relevance
on the outcome of this case. Having ruled that the consent of Anglo-Asean was
necessary for the validity of the Memorandum of Agreement, the determinative
fact is that such consent was not secured by either petitioner or respondent
which consequently resulted in the invalidity of the said memorandum.

With respect to the argument of petitioner that respondent himself allegedly

admitted in open court that an assignment of credit was intended, it is enough to
say that respondent apparently used the word "assignment" in his testimony in
the general sense. Respondent is not a lawyer and as such, he is not so well
versed in law that he would be able to distinguish between the concepts of
conventional subrogation and of assignment of credit. Moreover, even assuming
that there was an admission on his part, such admission is not conclusive on this
court as the nature and interpretation of the Memorandum of Agreement is a
question of law which may not be the subject of stipulations and admissions. 18

Considering the foregoing, it cannot then be said that the consent of the debtor
Anglo-Asean Bank is not necessary to the validity of the Memorandum of
Agreement. As above stated, the Memorandum of Agreement embodies a
contract for conventional subrogation and in such a case, the consent of the
original parties and the third person is required. 19 The absence of such
conformity by Anglo-Asean Bank prevented the Memorandum of Agreement from
becoming valid and effective. Accordingly, the Court of Appeals did not err when
it ruled that the Memorandum of Agreement was never perfected.

Having arrived at the above conclusion, the Court finds no need to discuss the
other issues raised by petitioner.

WHEREFORE, the instant petition is DENIED and the Decision of the Court of
Appeals dated February 10, 2000 and its Resolution dated April 7, 2000 are
hereby AFFIRMED.c
G.R. No. 120817 November 4, 1996
ELSA B. REYES, petitioner,
vs.
COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-MUTUAL BENEFIT
ASSOCIATION, INC., and GRACIELA ELEAZAR, respondents.
 
TORRES, JR., J.:
Petitioner assails the respondent court's decision  dated May 12, 1995 which sustained
1
the two resolutions of the respondent Secretary of Justice, namely: 1) the Resolution
dated January 23, 1992 affirming the resolution of the Provincial Prosecutor of Rizal
dismissing the complaints of petitioner against private respondent Eleazar in I.S. Nos.
91-2853, 91-4328 to 29, 91-4585 to 91 and 91-4738 to 39 for violations of B.P. Blg. 22
and estafa under Article 315, par. 4, no. 2 (d) of the Revised Penal Code, and 2) the
Resolution dated January 12, 1993 affirming the resolution of the City Prosecutor of
Quezon City finding a prima facie case in I.S. No. 92-926 for violation of B.P. Blg. 22 and
estafa filed by respondent AFP-Mutual Benefit Association, Inc. (AFP-MBAI, for brevity)
against petitioner Reyes.
The facts as summarized by the respondent court are as follows:
Elsa Reyes is the president of Eurotrust Capital Corporation
(EUROTRUST), a domestic corporation engaged in credit financing.
Graciela Eleazar, private respondent, is the president of B.E. Ritz
Mansion International Corporation (BERMIC), a domestic enterprise
engaged in real estate development. The other respondent, Armed
Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI), is a
corporation duly organized primarily to perform welfare services for the
Armed Forces of the Philippines.
A. Re: Resolution dated January 23, 1992.
In her various affidavits-complaint with the Office of the Provincial
Prosecutor of Rizal, Elsa Reyes alleges that Eurotrust and Bermic
entered into a loan agreement. Pursuant to the said contract, Eurotrust
extended to Bermic P216.053,126.80 to finance the construction of the
latter's Ritz Condominium and Gold Business Park. The loan was without
collateral but with higher interest rates than those allowed by the banks.
In turn, Bermic issued 21 postdated checks to cover payments of the loan
packages. However, when those checks were presented for payment, the
same were dishonored by the drawee bank, Rizal Commercial Banking
Corporation (RCBC), due to stop payment order made by Graciela
Eleazar. Despite Eurotrust's notices and repeated demands to pay,
Eleazar failed to make good the dishonored checks, prompting Reyes to
file against her several criminal complaints for violation of B.P. 22 and
estafa under Article 315, 4th paragraph, No. 2 (d) of the Revised Penal
Code.
Graciela Eleazar, in her counter-affidavits, asserts that beginning
December 1989, Eurotrust extended to Bermic several loan packages
amounting to P190,336,388.86. For its part, Bermic issued several
postdated checks to cover payments of the principal and interest of every
a loan packages involved.
Subsequently, Elsa Reyes was investigated by the Senate Blue Ribbon
Committee. She was involved in a large scale scam amounting to millions
of pesos belonging to Instructional Material Corporation (IMC), an agency
under the Department of Education, Culture and Sports.
Meanwhile, respondent AFP-MBAI which invested its funds with
Eurotrust, by buying from it government securities, conducted its own
investigation and found that after Eurotrust delivered to AFP-MBAI the
securities it purchased, the former borrowed the same securities but
failed to return them to AFP-MBAI; and that the amounts paid by AFP-
MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to
Bermic and others.
When Eleazar came to know that the funds originally loaned by Eurotrust
to Bermic belonged to AFP-MBAI, she, as President of Bermic, requested
a meeting with Eurotrust representatives. Thus, on February 15, 1991,
the representatives of Eurotrust and Bermic agreed that Bermic would
directly settle its obligations with the real owners of the fund-AFP-MBAI
and DECS-IMC. This agreement was formalized in two letters dated
March 19, 1991. Pursuant to this understanding, Bermic negotiated with
AFP-MBAI and DECS-IMC and made payments to the latter. In fact,
Bermic paid AFP-MBAI P31,711.11 and a check of P1-million.
However, Graciela Eleazar later learned that Elsa Reyes continued to
collect on the postdated checks issued by her (Eleazar) contrary to their
agreement. So, Bermic wrote to Eurotrust to hold the amounts "in
constructive trust" for the real owners. But Reyes continued to collect on
 the other postdated checks dated April 17 to June 28, 1991. Upon her
counsel's advise, Eleazar had the payment stopped. Hence, her checks
issued in favor of Eurotrust were dishonored.
After investigation, the Office of the Provincial Prosecutor of Rizal issued
a resolution dismissing the complaints filed by Elsa Reyes against
Graciela Eleazar on the ground that when the latter assumed the
obligation of Reyes to AFP-MBAI, it constituted novation, extinguishing
any criminal liability on the part of Eleazar.
Reyes filed a petition for review of the said resolution with respondent
Secretary of Justice contending that novation did not take place.
The Secretary of Justice dismissed the petition holding that "the novation
of the loan agreement prevents the rise of any incipient criminal liability
since the novation had the effect of canceling the checks and rendering
without effect the subsequent dishonor of the already cancelled checks."
B. Re: Resolution dated January 12, 1993
At the time of the pendency of the cases filed by Elsa Reyes against
Graciela Eleazar, AFP-MBAI lodged a separate complaint for estafa and
a violation of BP 22 against Elsa Reyes with the office of the city
prosecutor of Quezon City docketed as I.S. 92-926. The affidavit of
Gudelia Dinapo a member of the investigating committee formed by AFP-
MBAI to investigate the anomalies committed by Eurotrust/Reyes, shows
that between August 1989 and September 1990, Eurotrust offered to sell
to AFP-MBAI various marketable securities, including government
securities, such as but not limited to treasury notes, treasury bills, Land
Bank of the Philippines Bonds and Asset Participation Certificates.
Relying on a canvass conducted by one of its employees, Cristina
Cornista, AFP-MBAI decided to purchase several securities amounting to
P120,000,000.00 from Eurotrust. From February 1990 to September
1990, a total of 21 transactions were entered into between Eurotrust and
AFP-MBAI. Eurotrust delivered to AFP-MBAI treasury notes amounting to
P73 million. However, Eurotrust fraudulently borrowed all those treasury
notes from the AFP-MBAI for purposes of verification with the Central
Bank. Despite AFP-MBAI's repeated demands, Eurotrust failed to return
the said treasury notes. Instead it delivered 21 postdated checks in favor
of AFP-MBAI which were dishonored upon presentment for payment.
Eurotrust nonetheless made partial payment to AFP-MBAI amounting to
P35,151,637.72. However, after deducting this partial payment, the
amounts of P73 million treasury notes with interest and P35,151,637.72
have remained unpaid. Consequently, AFP-MBAI filed with the Office of
the City Prosecutor of Quezon City a complaint for violation of BP 22 and
estafa against Elsa Reyes.
Reyes interposed the defense of novation and insisted that AFP-MBAI's
claim of unreturned P73 million worth of government securities has been
satisfied upon her payment of P30 million. With respect to the remaining
P43 million, the same was paid when Eurotrust assigned its Participation
Certificates to AFP-MBAI.
Eventually, the Office of the City Prosecutor of Quezon City issued a
resolution recommending the filing of an information against Reyes for
violation of BP 22 and estafa.
Whereupon, Reyes filed a petition for review with respondent Secretary
of Justice. The latter dismissed the petition on the ground that only
resolutions of the prosecutors dismissing criminal complaints are
cognizable for review by the Department of Justice. 2
On February 2, 1994, petitioner seeking the nullification of either of the two resolutions of
the respondent Secretary of Justice filed a petition for certiorari, prohibition
and mandamus   with the respondent court which, however, denied and dismissed her
3
petition. Her motion for reconsideration  was likewise denied in a Resolution  dated June
4 5
27, 1995. Hence, this present petition.
The first Department of Justice Resolution dated January 23, 1992 which sustained the
Provincial Prosecutor's decision dismissing petitioner's complaints against respondent
Eleazar for violation of B.P. 22 and estafa ruled that the contract of loan between
petitioner and respondent Eleazar had been novated when they agreed that respondent
Eleazar should settle her firm's (BERMIC) loan obligations directly with AFP-MBAI and
DECS-IMC instead of settling it with petitioner Reyes. This finding was affirmed by the
respondent court which pointed out that "the first contract was novated in the sense that
there was a substitution of creditor"  when respondent Eleazar, with the agreement of
6
Reyes, directly paid her obligations to AFP-MBAI.
We cannot see how novation can take place considering the surrounding circumstances
which negate the same. The principle of novation by substitution of creditor was
erroneously applied in the first questioned resolution involving the contract of loan
between petitioner and respondent Eleazar.
Admittedly, in order that a novation can take place, the concurrence of the following
requisites  is indispensable:
7
1. there must be a previous valid obligation,
2 there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
4. there must be the validity of the new contract.
January 23, 1992 finding a prima facie case against the petitioner in as much as it had
already become final. It appears that petitioner filed two motions for reconsideration to
the said resolution, the first one on February 6, 1992 and the second one in June 2,
1992. These two motions were, however, denied by the respondent Secretary of Justice,
the last denial was contained in a Resolution dated June 25, 1992 which was received by
petitioner on July 9, 1992. Petitioner made no prompt attempt to question the said
resolutions before the proper forum. It took her almost seventeen months (from July 9,
1992 to February 2, 1994) to challenge the January 23, 1992 Resolution when she filed
the petition for certiorari with the respondent court on February 3, 1994,  which resolved
13

Upon the facts shown in the record, there is no doubt that the last three essential to affirm the aforesaid resolution of the Secretary of Justice.
requisites of novation are wanting in the instant case. No new agreement for substitution
of creditor war forged among the parties concerned which would take the place of the
Petitioner who chose her forum but unfortunately lost her claim is bound by such adverse
preceding contract. The absence of a new contract extinguishing the old one destroys
judgment on account of finality of judgment, otherwise, there would be no end to
any possibility of novation by conventional subrogation, In concluding that a novation
litigation. Litigation must end and terminate sometime and somewhere, and it is essential
took place, the respondent court relied on the two letters dated March 19, 1991,  which,
8

to an effective administration of justice that once a judgment has become final, the issue
according to it, formalized petitioner's and respondent Eleazar's agreement that BERMIC
or cause therein should be laid at rest.  While the respondent Secretary of Justice was in
14

would directly settle its obligation with the real owners of the funds - the AFP MBAI and
error in applying the rule on novation in the January 23, 1992 Resolution, such
DECS IMC.  Be that as it may, a cursory reading of these letters, however clearly and
9

irregularity, however, does not affect the validity of the proceedings in the Department of
unmistakably shows that there was nothing therein that would evince that respondent
Justice. Erroneous application of a legal principle cannot bring a judgment that has
AFP-MBAI agreed to substitute for the petitioner as the new creditor of respondent
already attained the status of finality to an absolute nullity under the well entrenched rule
Eleazar in the contract of loan. It is evident that the two letters merely gave respondent
of finality of judgment. The basic rule of finality of judgment is grounded on the
Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-
fundamental principle of public policy and sound practice that at the risk of occasional
IMC. It is essentially an agreement between petitioner and respondent Eleazar only.
error, the judgment of court and award of quasi-judicial agencies must become final at
There was no mention whatsoever of AFP-MBAI's consent to the new agreement
some definite date fixed by law. 15

between petitioner and respondent Eleazar much less an indication of AFP-MBAI's

intention to be the substitute creditor in the loan contract. Well settled is the rule that
novation by substitution of creditor requires an agreement among the three parties
concerned — the original creditor, the debtor and the new creditor.  It is a new
10
contractual relation based on the mutual agreement among all the necessary parties,
Hence, there is no novation if no new contract was executed by the parties. Article 1301
of the Civil Code is explicit, thus:
We find no plausible explanation nor justifiable reason offered by petitioner for the
obvious delay or omission to take a timely action against the questioned resolution. She
is apparently guilty of laches which bars her from seeking relief in a court of law after she
intentionally and unreasonably fails to guard of her rights. Laches is the failure or neglect
for an unreasonable and unexplained length of time to do that which by exerting due
diligence could/should have been done earlier.  Petitioner's omission to assert her right
16

to avail of the remedies in law within a reasonable time warrants a presumption that she
Conventional subrogation of a third person requires the consent of the
abandoned it or declined to assert it. The law serves those who are vigilant and diligent
original parties and of the third person.
and no those who sleep when the law requires to act. 17

The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted
Its bears emphasis that the above pronouncement we laid down applies only pro hac
them does not ipso facto result in novation. There must be an express intention to novate
vice. This Court in affirming the questioned resolution despite the erroneous application
— animus novandi.  Novation is never
11

of a legal principle acted according to what the peculiar circumstances of the instant case
presumed.  Article 1300 of the Civil Code provides inter alia that conventional
12

demand. Its factual setting led us to consider that to sustain the resolution is but the
subrogation must be clearly established in order that it may take effect.
proper action to take in this particular case.
Notwithstanding our disagreement with the decision of the respondent court and the
Regarding the second Resolution of respondent Secretary of Justice dated January 12,
ruling of the Secretary of Justice that a novation by substitution of creditor has taken
1993 which affirms the City Prosecutor's finding of a prima facie case against petitioner
place, we opt not to disturb the Resolution of the respondent Secretary of Justice dated
for violation of B.P. Blg. 22 and estafa involving the contract of sale of securities,
petitioner avers that she could not be held criminally liable for the crime charged because In the civil law setting, novatio is literally construed as to make new. So it is deeply
the contract of sale of securities between her and respondent AFP-MBAI was novated by rooted in the Roman Law jurisprudence, the principle novatio non praesumitur — that
substitution of debtor. According to petitioner, the obligation assumed by respondent novation is never presumed. At bottom, for novation to be a jural reality, its animus must
Eleazar pursuant to the authority given by her to respondent Eleazar in a letter dated be ever present, debitum pro debito — basically extinguishing the old obligation for the
March 19, 1991 was precisely her (petitioner's) obligation to respondent AFP-MBAI new one.
under the contract of sale of securities. She claims that private respondent Eleazar,
instead of fulfilling her obligation under the contract of loan to pay petitioner the amount The foregoing elements are found wanting in the case at bar.
of debts, assumed petitioner's obligation under the contract of sale to make payments to
respondent AFP-MBAI directly. 18
ACCORDINGLY, finding no reversible error in the decision appealed from dated May 12,
1995, the same is hereby AFFIRMED in all respects.
This contention is bereft of any legal and factual basis. Just like in the first questioned
resolution, no novation took place in this case. A thorough examination of the records SO ORDERED.
shows that no hard evidence was presented which would expressly and unequivocably
demonstrate the intention of respondent AFP-MBAI to release petitioner from her
obligation to pay under the contract of sale of securities. It is a rule that novation by
substitution of debtor must always be made with the consent of the creditor.  Article 1293
19

of the Civil Code is explicit, thus:

Novation which consists in substituting a new debtor in the place of the

original one, may be made even without or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor
gives him the rights mentioned in Articles 1236 and 1237.

The consent of the creditor to a novation by change of debtor is as indispensable

as the creditor's consent in conventional subrogation in order that a novation
shall legally take place. The mere circumstance of AFP-MBAI receiving payments
from respondent Eleazar who acquiesced to assume the obligation of petitioner
under the contract of sale of securities, when there is clearly no agreement to
release petitioner from her responsibility, does not constitute novation, at most, it
only creates a juridical relation of co-debtorship or suretyship on the part of
respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and
the latter can still enforce the obligation against the petitioner. In Ajax Marketing
and Development Corporation vs. Court of Appeals.  which is relevant in the
20

instant case, we stated that—

In the same vein, to effect a subjective novation by a change in the

person of the debtor, it is necessary that the old debtor be released
expressly from the obligation, and the third person or new debtor
assumes his place in the relation. There is no novation without such
release as the third person who has assumed the debtor's obligation
becomes merely a co-debtor or surety. . . Novation arising from a
purported change in the person of the debtor must be clear and
express. . .
 SECOND DIVISION
[G.R. No. 136729. September 23, 2003.]
ASTRO ELECTRONICS CORP. and PETER ROXAS, Petitioners, v.
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Assailed in this petition for review on certiorari under Rule 45 of the Rules of
Court is the decision of the Court of Appeals in CA-G.R. CV No. 41274, 1
affirming the decision of the Regional Trial Court (Branch 147) of Makati, then
Metro Manila, whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro
for brevity) were ordered to pay respondent Philippine Export and Foreign Loan
Guarantee Corporation (Philguarantee), jointly and severally, the amount of
P3,621,187.52 with interests and costs. nad
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3,000,000.00 with interest and secured by three promissory
notes: PN No. PFX-254 dated December 14, 1981 for P600,000.00, PN No. PFX-
258 also dated December 14, 1981 for P400,000.00 and PN No. 15477 dated
August 27, 1981 for P2,000,000.00. In each of these promissory notes, it
appears that petitioner Roxas signed twice, as President of Astro and in his
personal capacity. 2 Roxas also signed a Continuing Suretyship Agreement in
favor of Philtrust Bank, as President of Astro and as surety. 3
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of
Philtrust the payment of 70% of Astro’s loan, 4 subject to the condition that upon
payment by Philguarantee of said amount, it shall be proportionally subrogated to
the rights of Philtrust against Astro. 5
As a result of Astro’s failure to pay its loan obligations, despite demands,
Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money with
the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter
alia, that he merely signed the same in blank and the phrases "in his personal
capacity" and "in his official capacity" were fraudulently inserted without his
knowledge. 6
After trial, the RTC rendered its decision in favor of Philguarantee with the
following dispositive portion:chanrob1es virtual 1aw library
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in
favor or (sic) the plaintiff and against the defendants Astro Electronics
Corporation and Peter T. Roxas, ordering the then (sic) to pay, jointly and
severally, the plaintiff the sum of P3,621,187.52 representing the total obligation
of defendants in favor of plaintiff Philguarantee as of December 31, 1984 with
interest at the stipulated rate of 16% per annum and stipulated penalty charges
of 16% per annum computed from January 1, 1985 until the amount is fully paid.
With costs.
SO ORDERED. 7
The trial court observed that if Roxas really intended to sign the instruments
merely in his capacity as President of Astro, then he should have signed only
once in the promissory note. 8
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial
court that Roxas failed to explain satisfactorily why he had to sign twice in the
contract and therefore the presumption that private transactions have been fair
and regular must be sustained. 9
In the present petition, the principal issue to be resolved is whether or not Roxas
should be jointly and severally liable (solidary) with Astro for the sum awarded by
the RTC.
The answer is in the affirmative.
Astro’s loan with Philtrust Bank is secured by three promissory notes. These
promissory notes are valid and binding against Astro and Roxas. As it appears on
the notes, Roxas signed twice: first, as president of Astro and second, in his
personal capacity. In signing his name aside from being the President of Astro,
Roxas became a co-maker of the promissory notes and cannot escape any
liability arising from it. Under the Negotiable Instruments Law, persons who write
their names on the face of promissory notes are makers, 10 promising that they
will pay to the order of the payee or any holder according to its tenor. 11 Thus,
even without the phrase "personal capacity," Roxas will still be primarily liable as
a joint and several debtor under the notes considering that his intention to be
liable as such is manifested by the fact that he affixed his signature on each of
the promissory notes twice which necessarily would imply that he is undertaking
the obligation in two different capacities, official and personal.
Unnoticed by both the trial court and the Court of Appeals, a closer examination
of the signatures affixed by Roxas on the promissory notes, Exhibits "A-4" and
"3-A" and "B-4" and "4-A" readily reveals that portions of his signatures covered
portions of the typewritten words "personal capacity" indicating with certainty
that the typewritten words were already existing at the time Roxas affixed his
signatures thus demolishing his claim that the typewritten words were just
inserted after he signed the promissory notes. If what he claims is true, then
portions of the typewritten words would have covered portions of his signatures,
and not vice versa.chanrob1es virtua1 1aw 1ibrary
As to the third promissory note, Exhibit "C-4" and "5-A", the copy submitted is
not clear so that this Court could not discern the same observations on the notes,
Exhibits "A-4" and "3-A" and "B-4" and "4-A" .
Nevertheless, the following discussions equally apply to all three promissory
notes.
The three promissory notes uniformly provide: "FOR VALUE RECEIVED, I/We
jointly, severally and solidarily, promise to pay to PHILTRUST BANK or order . . ."
12 An instrument which begins with "I", "We", or "Either of us" promise to pay,
when signed by two or more persons, makes them solidarily liable. 13 Also, the
phrase "joint and several" binds the makers jointly and individually to the payee
so that all may be sued together for its enforcement, or the creditor may select
one or more as the object of the suit. 14 Having signed under such terms, Roxas
assumed the solidary liability of a debtor and Philtrust Bank may choose to
enforce the notes against him alone or jointly with Astro.
Roxas’ claim that the phrases "in his personal capacity" and "in his official
capacity" were inserted on the notes without his knowledge was correctly
disregarded by the RTC and the Court of Appeals. It is not disputed that Roxas
does not deny that he signed the notes twice. As aptly found by both the trial and
appellate court, Roxas did not offer any explanation why he did so. It devolves
upon him to overcome the presumptions that private transactions are presumed
to be fair and regular 15 and that a person takes ordinary care of his concerns.
16 Aside from his self-serving allegations, Roxas failed to prove the truth of such
allegations. Thus, said presumptions prevail over his claims. Bare allegations,
when unsubstantiated by evidence, documentary or otherwise, are not equivalent
to proof under our Rules of Court. 17
Roxas is the President of Astro and reasonably, a businessman who is presumed
to take ordinary care of his concerns. Absent any countervailing evidence, it
cannot be gainsaid that he will not sign a document without first informing
himself of its contents and consequences. Clearly, he knew the nature of the
transactions and documents involved as he not only executed these notes on two
different dates but he also executed, and again, signed twice, a "Continuing
Suretyship Agreement" notarized on July 31, 1981, wherein he guaranteed,
jointly and severally with Astro the repayment of P3,000,000.00 due to Philtrust.
Such continuing suretyship agreement even re-enforced his solidary liability to
Philtrust because as a surety, he bound himself jointly and severally with Astro’s
obligation. 18 Roxas cannot now avoid liability by hiding under the convenient
excuse that he merely signed the notes in blank and the phrases "in his personal
capacity" and "in his official capacity" were fraudulently inserted without his
knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner. It is
subrogated to the rights of Philtrust to demand for and collect payment from both
Roxas and Astro since it already paid the value of 70% of Roxas and Astro
Electronics Corp.’s loan obligation, in compliance with its contract of "Guarantee"
in favor of Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights. 19 It may either be legal or conventional. Legal
subrogation is that which takes place without agreement but by operation of law
because of certain acts. 20 Instances of legal subrogation are those provided in
Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is
that which takes place by agreement of the parties. 21
Roxas’ acquiescence is not necessary for subrogation to take place because the
instant case is one of legal subrogation that occurs by operation of law, and
without need of the debtor’s knowledge. 22 Further, Philguarantee, as guarantor,
became the transferee of all the rights of Philtrust as against Roxas and Astro
because the "guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor." 23
WHEREFORE, finding no error with the decision of the Court of Appeals dated
December 10, 1998, the same is hereby AFFIRMED in toto.chanrob1es virtua1
1aw 1ibrary
SO ORDERED.
G.R. No. 181163               July 24, 2013 Double Cab 4x2 model, without engine, tires and batteries, on board the vessel S/S
"Calayan Iris" from Japan to Manila. The shipment, which had a declared value of
ASIAN TERMINALS, INC., Petitioner, US$81,368 or ₱29,400,000, was insured with Philam against all risks under Marine
vs. Policy No. 708-8006717-4.4
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance,
Inc.), Respondent. The carrying vessel arrived at the port of Manila on April 20, 1995, and when the
shipment was unloaded by the staff of ATI, it was found that the package marked as 03-
x-----------------------x 245-42K/1 was in bad order.5 The Turn Over Survey of Bad Order Cargoes6 dated April
21, 1995 identified two packages, labeled 03-245-42K/1 and 03/237/7CK/2, as being
G.R. No. 181262 dented and broken. Thereafter, the cargoes were stored for temporary safekeeping
inside CFS Warehouse in Pier No. 5.
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance, Inc.), Petitioner,
vs. On May 11, 1995, the shipment was withdrawn by R.F. Revilla Customs Brokerage, Inc.,
WESTWIND SHIPPING CORPORATION and ASIAN TERMINALS, INC., Respondents. the authorized broker of Universal Motors, and delivered to the latter’s warehouse in
Mandaluyong City. Upon the request7 of Universal Motors, a bad order survey was
conducted on the cargoes and it was found that one Frame Axle Sub without LWR was
x-----------------------x
deeply dented on the buffle plate while six Frame Assembly with Bush were deformed
and misaligned.8 Owing to the extent of the damage to said cargoes, Universal Motors
G.R. No. 181319 declared them a total loss.

WESTWIND SHIPPING CORPORATION, Petitioner,
vs.
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance, Inc.) and
ASIAN TERMINALS, INC., Respondents.
DECISION
VILLARAMA, JR., J.:
Before us are three consolidated petitions for review on certiorari assailing the
Decision1 dated October 15, 2007 and the Resolution2 dated January 11, 2008 of the
Court of Appeals (CA) which affirmed with modification the Decision3 of the Regional
Trial Court (RTC) of Makati City, Branch 148, in Civil Case No. 96-062. The RTC had
ordered Westwind Shipping Corporation (Westwind) and Asian Terminals, Inc. (ATI) to
pay, jointly and severally, Philam Insurance Co., Inc. (Philam) the sum of ₱633,957.15,
with interest at 12% per annum from the date of judicial demand and ₱158,989.28 as
attorney’s fees.
The facts of the case follow:
On August 4, 1995, Universal Motors filed a formal claim for damages in the amount of
₱643,963.84 against Westwind,9 ATI10 and R.F. Revilla Customs Brokerage, Inc.11 When
Universal Motors’ demands remained unheeded, it sought reparation from and was
compensated in the sum of ₱633,957.15 by Philam. Accordingly, Universal Motors
issued a Subrogation Receipt12 dated November 15, 1995 in favor of Philam.
On January 18, 1996, Philam, as subrogee of Universal Motors, filed a Complaint13 for
damages against Westwind, ATI and R.F. Revilla Customs Brokerage, Inc. before the
RTC of Makati City, Branch 148.
On September 24, 1999, the RTC rendered judgment in favor of Philam and ordered
Westwind and ATI to pay Philam, jointly and severally, the sum of ₱633,957.15 with
interest at the rate of 12% per annum, ₱158,989.28 by way of attorney’s fees and
expenses of litigation.
The court a quo ruled that there was sufficient evidence to establish the respective
participation of Westwind and ATI in the discharge of and consequent damage to the
shipment. It found that the subject cargoes were compressed while being hoisted using a
cable that was too short and taut.

On April 15, 1995, Nichimen Corporation shipped to Universal Motors Corporation The trial court observed that while the staff of ATI undertook the physical unloading of
(Universal Motors) 219 packages containing 120 units of brand new Nissan Pickup Truck the cargoes from the carrying vessel, Westwind’s duty officer exercised full supervision
and control throughout the process. It held Westwind vicariously liable for failing to prove
that it exercised extraordinary diligence in the supervision of the ATI stevedores who
unloaded the cargoes from the vessel. However, the court absolved R.F. Revilla
Customs Brokerage, Inc. from liability in light of its finding that the cargoes had been
damaged before delivery to the consignee.
The trial court acknowledged the subrogation between Philam and Universal Motors on
the strength of the Subrogation Receipt dated November 15, 1995. It likewise upheld
Philam’s claim for the value of the alleged damaged vehicle parts contained in Case Nos.
03-245-42K/1 and 03-245-51K or specifically for "7 pieces of Frame Axle Sub Without
Lower and Frame Assembly with Bush."14
Westwind filed a Motion for Reconsideration15 which was, however, denied in an
Order16 dated October 26, 2000.
On appeal, the CA affirmed with modification the ruling of the RTC. In a Decision dated
October 15, 2007, the appellate court directed Westwind and ATI to pay Philam, jointly
and severally, the amount of ₱190,684.48 with interest at the rate of 12% per annum
until fully paid, attorney’s fees of ₱47,671 and litigation expenses.
The CA stressed that Philam may not modify its allegations by claiming in its Appellee’s
Brief17 that the six pieces of Frame Assembly with Bush, which were purportedly
damaged, were also inside Case No. 03-245-42K/1. The CA noted that in its Complaint,
Philam alleged that "one (1) pc. FRAME AXLE SUB W/O LWR from Case No. 03-245-
42K/1 was completely deformed and misaligned, and six (6) other pcs. of FRAME
ASSEMBLY WITH BUSH from Case No. 03-245-51K were likewise completely deformed
and misaligned."18
The appellate court accordingly affirmed Westwind and ATI’s joint and solidary liability for
the damage to only one (1) unit of Frame Axle Sub without Lower inside Case No. 03-
245-42K/1. It also noted that when said cargo sustained damage, it was not yet in the
custody of the consignee or the person who had the right to receive it. The CA pointed
out that Westwind’s duty to observe extraordinary diligence in the care of the cargoes
subsisted during unloading thereof by ATI’s personnel since the former exercised full
control and supervision over the discharging operation.
Similarly, the appellate court held ATI liable for the negligence of its employees who
carried out the offloading of cargoes from the ship to the pier. As regards the extent of
ATI’s liability, the CA ruled that ATI cannot limit its liability to ₱5,000 per damaged
package. It explained that Section 7.0119 of the Contract for Cargo Handling
Services20 does not apply in this case since ATI was not yet in custody and control of the
cargoes when the Frame Axle Sub without Lower suffered damage.
Citing Belgian Overseas Chartering and Shipping N.V. v. Philippine First Insurance Co.,
Inc.,21 the appellate court also held that Philam’s action for damages had not prescribed
notwithstanding the absence of a notice of claim.
All the parties moved for reconsideration, but their motions were denied in a Resolution
dated January 11, 2008. Thus, they each filed a petition for review on certiorari which
were consolidated together by this Court considering that all three petitions assail the
same CA decision and resolution and involve the same parties.
Essentially, the issues posed by petitioner ATI in G.R. No. 181163, petitioner Philam in
G.R. No. 181262 and petitioner Westwind in G.R. No. 181319 can be summed up into
and resolved by addressing three questions: (1) Has Philam’s action for damages
prescribed? (2) Who between Westwind and ATI should be held liable for the damaged
cargoes? and (3) What is the extent of their liability?
Petitioners’ Arguments
G.R. No. 181163
Petitioner ATI disowns liability for the damage to the Frame Axle Sub without Lower
inside Case No. 03-245-42K/1. It shifts the blame to Westwind, whom it charges with
negligence in the supervision of the stevedores who unloaded the cargoes. ATI admits
that the damage could have been averted had Westwind observed extraordinary
diligence in handling the goods. Even so, ATI suspects that Case No. 03-245-42K/1 is
"weak and defective"22 considering that it alone sustained damage out of the 219
packages.
Notwithstanding, petitioner ATI submits that, at most, it can be held liable to pay only
₱5,000 per package pursuant to its Contract for Cargo Handling Services. ATI maintains
that it was not properly notified of the actual value of the cargoes prior to their discharge
from the vessel.
G.R. No. 181262
Petitioner Philam supports the CA in holding both Westwind and ATI liable for the
deformed and misaligned Frame Axle Sub without Lower inside Case No. 03-245-42K/1.
It, however, faults the appellate court for disallowing its claim for the value of six Chassis
Frame Assembly which were likewise supposedly inside Case Nos. 03-245-51K and 03-
245-42K/1. As to the latter container, Philam anchors its claim on the results of the
Inspection/Survey Report23 of Chartered Adjusters, Inc., which the court received without
objection from Westwind and ATI. Petitioner believes that with the offer and consequent
admission of evidence to the effect that Case No. 03-245-42K/1 contains six pieces of
dented Chassis Frame Assembly, Philam’s claim thereon should be treated, in all
respects, as if it has been raised in the pleadings. Thus, Philam insists on the
reinstatement of the trial court’s award in its favor for the payment of ₱633,957.15 plus
legal interest, ₱158,989.28 as attorney’s fees and costs.
G.R. No. 181319
Petitioner Westwind denies joint liability with ATI for the value of the deformed Frame
Axle Sub without Lower in Case No. 03-245-42K/1. Westwind argues that the evidence
shows that ATI was already in actual custody of said case when the Frame Axle Sub
without Lower inside it was misaligned from being compressed by the tight cable used to
unload it. Accordingly, Westwind ceased to have responsibility over the cargoes as
provided in paragraph 4 of the Bill of Lading which provides that the responsibility of the
carrier shall cease when the goods are taken into the custody of the arrastre.
Westwind contends that sole liability for the damage rests on ATI since it was the latter’s
stevedores who operated the ship’s gear to unload the cargoes. Westwind reasons that
ATI is an independent company, over whose employees and operations it does not
exercise control. Moreover, it was ATI’s employees who selected and used the wrong
cable to lift the box containing the cargo which was damaged.
Westwind likewise believes that ATI is bound by its acceptance of the goods in good
order despite a finding that Case No. 03-245-42K/1 was partly torn and crumpled on one
side. Westwind also notes that the discovery that a piece of Frame Axle Sub without
Lower was completely deformed and misaligned came only on May 12, 1995 or 22 days
after the cargoes were turned over to ATI and after the same had been hauled by R.F.
Revilla Customs Brokerage, Inc.
Westwind further argues that the CA erred in holding it liable considering that Philam’s
cause of action has prescribed since the latter filed a formal claim with it only on August
17, 1995 or four months after the cargoes arrived on April 20, 1995. Westwind stresses
that according to the provisions of clause 20, paragraph 224 of the Bill of Lading as well
as Article 36625 of the Code of Commerce, the consignee had until April 20, 1995 within
which to make a claim considering the readily apparent nature of the damage, or until
April 27, 1995 at the latest, if it is assumed that the damage is not readily apparent.
Lastly, petitioner Westwind contests the imposition of 12% interest on the award of
damages to Philam reckoned from the time of extrajudicial demand. Westwind asserts
that, at most, it can only be charged with 6% interest since the damages claimed by
Philam does not constitute a loan or forbearance of money.
The Court’s Ruling
The three consolidated petitions before us call for a determination of who between ATI
and Westwind is liable for the damage suffered by the subject cargo and to what extent.
However, the resolution of the issues raised by the present petitions is predicated on the
appreciation of factual issues which is beyond the scope of a petition for review on
certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended. It is settled
that in petitions for review on certiorari, only questions of law may be put in issue.
Questions of fact cannot be entertained.26
There is a question of law if the issue raised is capable of being resolved without need of
reviewing the probative value of the evidence. The resolution of the issue must rest
solely on what the law provides on the given set of circumstances. Once it is clear that
the issue invites a review of the evidence presented, the question posed is one of fact. If
the query requires a re-evaluation of the credibility of witnesses, or the existence or
relevance of surrounding circumstances and their relation to each other, the issue in that
query is factual.27
In the present petitions, the resolution of the question as to who between Westwind and
ATI should be liable for the damages to the cargo and to what extent would have this
Court pass upon the evidence on record. But while it is not our duty to review, examine
and evaluate or weigh all over again the probative value of the evidence presented,28 the
Court may nonetheless resolve questions of fact when the case falls under any of the
following exceptions:
(1) when the findings are grounded entirely on speculation, surmises, or conjectures; (2)
when the inference made is manifestly mistaken, absurd, or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a misapprehension of
facts; (5) when the findings of fact are conflicting; (6) when in making its findings the
Court of Appeals went beyond the issues of the case, or its findings are contrary to the
admissions of both the appellant and the appellee; (7) when the findings are contrary to
those of the trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as well as
in the petitioner’s main and reply briefs are not disputed by the respondent; and (10)
when the findings of fact are premised on the supposed absence of evidence and
contradicted by the evidence on record.29
In the cases at bar, the fifth and seventh exceptions apply. While the CA affirmed the
joint liability of ATI and Westwind, it held them liable only for the value of one unit of
Frame Axle Sub without Lower inside Case No. 03-245-42K/1. The appellate court
disallowed the award of damages for the six pieces of Frame Assembly with Bush, which
petitioner Philam alleged, for the first time in its Appellee’s Brief, to be likewise inside
Case No. 03-245-42K/1. Lastly, the CA reduced the award of attorney’s fees to ₱47,671.
Foremost, the Court holds that petitioner Philam has adequately established the basis of
its claim against petitioners ATI and Westwind. Philam, as insurer, was subrogated to the
rights of the consignee, Universal Motors Corporation, pursuant to the Subrogation
Receipt executed by the latter in favor of the former. The right of subrogation accrues
simply upon payment by the insurance company of the insurance claim.30 Petitioner
Philam’s action finds support in Article 2207 of the Civil Code, which provides as follows:
Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. x x x.
In their respective comments31 to Philam’s Formal Offer of Evidence,32 petitioners ATI and
Westwind objected to the admission of Marine Certificate No. 708-8006717-4 and the
Subrogation Receipt as documentary exhibits "B" and "P," respectively. Petitioner
Westwind objects to the admission of both documents for being hearsay as they were
not authenticated by the persons who executed them. For the same reason, petitioner
ATI assails the admissibility of the Subrogation Receipt. As regards Marine Certificate
No. 708-8006717-4, ATI makes issue of the fact that the same was issued only on April
27, 1995 or 12 days after the shipment was loaded on and transported via S/S "Calayan
Iris."
The nature of documents as either public or private determines how the documents may
be presented as evidence in court. Public documents, as enumerated under Section
19,33 Rule 132 of the Rules of Court, are self-authenticating and require no further
authentication in order to be presented as evidence in court.34
In contrast, a private document is any other writing, deed or instrument executed by a
private person without the intervention of a notary or other person legally authorized by
which some disposition or agreement is proved or set forth. Lacking the official or
sovereign character of a public document, or the solemnities prescribed by law, a private
document requires authentication35 in the manner prescribed under Section 20, Rule 132
of the Rules:
SEC. 20. Proof of private document. – Before any private document offered as authentic
is received in evidence, its due execution and authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to be.
The requirement of authentication of a private document is excused only in four
instances, specifically: (a) when the document is an ancient one within the context of
Section 21,36 Rule 132 of the Rules; (b) when the genuineness and authenticity of the
actionable document have not been specifically denied under oath by the adverse party;
(c) when the genuineness and authenticity of the document have been admitted; or (d)
when the document is not being offered as genuine.37
Indubitably, Marine Certificate No. 708-8006717-4 and the Subrogation Receipt are
private documents which Philam and the consignee, respectively, issue in the pursuit of
their business. Since none of the exceptions to the requirement of authentication of a
private document obtains in these cases, said documents may not be admitted in
evidence for Philam without being properly authenticated.
Contrary to the contention of petitioners ATI and Westwind, however, Philam presented
its claims officer, Ricardo Ongchangco, Jr. to testify on the execution of the Subrogation
Receipt, as follows:
ATTY. PALACIOS
Q How were you able to get hold of this subrogation receipt?
A Because I personally delivered the claim check to consignee and have them receive
the said check.
Q I see. Therefore, what you are saying is that you personally delivered the claim check
of Universal Motors Corporation to that company and you have the subrogation receipt
signed by them personally?
A Yes, sir.
Q And it was signed in your presence?
A Yes, sir.38
Indeed, all that the Rules require to establish the authenticity of a document is the
testimony of a person who saw the document executed or written. Thus, the trial court
did not err in admitting the Subrogation Receipt in evidence despite petitioners ATI and
Westwind’s objections that it was not authenticated by the person who signed it.
However, the same cannot be said about Marine Certificate No. 708-8006717-4 which
Ongchangcho, Jr. merely identified in court. There is nothing in Ongchangco, Jr.’s
testimony which indicates that he saw Philam’s authorized representative sign said
document, thus:
ATTY. PALACIOS
Q Now, I am presenting to you a copy of this marine certificate 708-8006717-4 issued by
Philam Insurance Company, Inc. to Universal Motors Corporation on April 15, 1995. Will
you tell us what relation does it have to that policy risk claim mentioned in that letter?
A This is a photocopy of the said policy issued by the consignee Universal Motors
Corporation.
ATTY. PALACIOS
I see. May I request, if Your Honor please, that this marine risk policy of the plaintiff as
submitted by claimant Universal Motors Corporation be marked as Exhibit B.
COURT
Mark it.39
As regards the issuance of Marine Certificate No. 708-8006717-4 after the fact of loss
occurred, suffice it to say that said document simply certifies the existence of an open
insurance policy in favor of the consignee. Hence, the reference to an "Open Policy
Number 9595093" in said certificate. The Court finds it completely absurd to suppose
that any insurance company, of sound business practice, would assume a loss that has
already been realized, when the profitability of its business rests precisely on the non-
happening of the risk insured against.
Yet, even with the exclusion of Marine Certificate No. 708-8006717-4, the Subrogation
Receipt, on its own, is adequate proof that petitioner Philam paid the consignee’s claim
on the damaged goods. Petitioners ATI and Westwind failed to offer any evidence to
controvert the same. In Malayan Insurance Co., Inc. v. Alberto,40 the Court explained the
effect of payment by the insurer of the insurance claim in this wise:
We have held that payment by the insurer to the insured operates as an equitable
assignment to the insurer of all the remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon
payment by the insurance company of the insurance claim. The doctrine of subrogation
has its roots in equity. It is designed to promote and accomplish justice; and is the mode
that equity adopts to compel the ultimate payment of a debt by one who, in justice,
equity, and good conscience, ought to pay.41
Neither do we find support in petitioner Westwind’s contention that Philam’s right of
action has prescribed.
The Carriage of Goods by Sea Act (COGSA) or Public Act No. 521 of the 74th US
Congress, was accepted to be made applicable to all contracts for the carriage of goods
by sea to and from Philippine ports in foreign trade by virtue of Commonwealth Act (C.A.)
No. 65.42 Section 1 of C.A. No. 65 states:
Section 1. That the provisions of Public Act Numbered Five hundred and twenty-one of
the Seventy-fourth Congress of the United States, approved on April sixteenth, nineteen
hundred and thirty-six, be accepted, as it is hereby accepted to be made applicable to all
contracts for the carriage of goods by sea to and from Philippine ports in foreign trade:
Provided, That nothing in the Act shall be construed as repealing any existing provision
of the Code of Commerce which is now in force, or as limiting its application.
The prescriptive period for filing an action for the loss or damage of the goods under the
COGSA is found in paragraph (6), Section 3, thus:
(6) Unless notice of loss or damage and the general nature of such loss or damage be
given in writing to the carrier or his agent at the port of discharge before or at the time of
the removal of the goods into the custody of the person entitled to delivery thereof under
the contract of carriage, such removal shall be prima facie evidence of the delivery by the
carrier of the goods as described in the bill of lading. If the loss or damage is not
apparent, the notice must be given within three days of the delivery.
Said notice of loss or damage maybe endorsed upon the receipt for the goods given by
the person taking delivery thereof.
The notice in writing need not be given if the state of the goods has at the time of their
receipt been the subject of joint survey or inspection.
In any event the carrier and the ship shall be discharged from all liability in respect of
loss or damage unless suit is brought within one year after delivery of the goods or the
date when the goods should have been delivered: Provided, That if a notice of loss or
damage, either apparent or concealed, is not given as provided for in this section, that
fact shall not affect or prejudice the right of the shipper to bring suit within one year after
the delivery of the goods or the date when the goods should have been delivered.
In the Bill of Lading43 dated April 15, 1995, Rizal Commercial Banking Corporation
(RCBC) is indicated as the consignee while Universal Motors is listed as the notify party.
These designations are in line with the subject shipment being covered by Letter of
Credit No. I501054, which RCBC issued upon the request of Universal Motors.
A letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of his goods before paying.44 However, letters of credit are
employed by the parties desiring to enter into commercial transactions, not for the benefit
of the issuing bank but mainly for the benefit of the parties to the original transaction,45 in
these cases, Nichimen Corporation as the seller and Universal Motors as the buyer.
Hence, the latter, as the buyer of the Nissan CKD parts, should be regarded as the
person entitled to delivery of the goods. Accordingly, for purposes of reckoning when
notice of loss or damage should be given to the carrier or its agent, the date of delivery to
Universal Motors is controlling.
S/S "Calayan Iris" arrived at the port of Manila on April 20, 1995, and the subject cargoes
were discharged to the custody of ATI the next day. The goods were then withdrawn
from the CFS Warehouse on May 11, 1995 and the last of the packages delivered to
Universal Motors on May 17, 1995. Prior to this, the latter filed a Request for Bad Order
Survey46 on May 12,1995 following a joint inspection where it was discovered that six
pieces of Chassis Frame Assembly from two bundles were deformed and one Front Axle
Sub without Lower from a steel case was dented. Yet, it was not until August 4, 1995 that
Universal Motors filed a formal claim for damages against petitioner Westwind.
Even so, we have held in Insurance Company of North America v. Asian Terminals, Inc.
that a request for, and the result of a bad order examination, done within the
reglementary period for furnishing notice of loss or damage to the carrier or its agent,
serves the purpose of a claim. A claim is required to be filed within the reglementary
period to afford the carrier or depositary reasonable opportunity and facilities to check
the validity of the claims while facts are still fresh in the minds of the persons who took
part in the transaction and documents are still available.47 Here, Universal Motors filed a
request for bad order survey on May 12, 1995, even before all the packages could be
unloaded to its warehouse.
Moreover, paragraph (6), Section 3 of the COGSA clearly states that failure to comply
with the notice requirement shall not affect or prejudice the right of the shipper to bring
suit within one year after delivery of the goods. Petitioner Philam, as subrogee of
Universal Motors, filed the Complaint for damages on January 18, 1996, just eight
months after all the packages were delivered to its possession on May 17, 1995.
Evidently, petitioner Philam’s action against petitioners Westwind and ATI was
seasonably filed.
This brings us to the question that must be resolved in these consolidated petitions. Who
between Westwind and ATI should be liable for the damage to the cargo?
It is undisputed that Steel Case No. 03-245-42K/1 was partly torn and crumpled on one
side while it was being unloaded from the carrying vessel. The damage to said container
was noted in the Bad Order Cargo Receipt48 dated April 20, 1995 and Turn Over Survey
of Bad Order Cargoes dated April 21, 1995. The Turn Over Survey of Bad Order
Cargoes indicates that said steel case was not opened at the time of survey and was
accepted by the arrastre in good order. Meanwhile, the Bad Order Cargo Receipt bore a
notation "B.O. not yet t/over to ATI." On the basis of these documents, petitioner ATI
claims that the contents of Steel Case No. 03-245-42K/1 were damaged while in the
custody of petitioner Westwind.
We agree.
Common carriers, from the nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence in the vigilance over the goods transported by
them. Subject to certain exceptions enumerated under Article 173449 of the Civil Code,
common carriers are responsible for the loss, destruction, or deterioration of the goods.
The extraordinary responsibility of the common carrier lasts from the time the goods are
unconditionally placed in the possession of, and received by the carrier for transportation
until the same are delivered, actually or constructively, by the carrier to the consignee, or
to the person who has a right to receive them.50
The court a quo, however, found both petitioners Westwind and ATI, jointly and
severally, liable for the damage to the cargo. It observed that while the staff of ATI
undertook the physical unloading of the cargoes from the carrying vessel, Westwind’s
duty officer exercised full supervision and control over the entire process. The appellate
court affirmed the solidary liability of Westwind and ATI, but only for the damage to one
Frame Axle Sub without Lower.
Upon a careful review of the records, the Court finds no reason to deviate from the
finding that petitioners Westwind and ATI are concurrently accountable for the damage to
the content of Steel Case No. 03-245-42K/1.
Section 251 of the COGSA provides that under every contract of carriage of goods by the
sea, the carrier in relation to the loading, handling, stowage, carriage, custody, care and
discharge of such goods, shall be subject to the responsibilities and liabilities and entitled
to the rights and immunities set forth in the Act. Section 3 (2)52 thereof then states that
among the carrier’s responsibilities are to properly load, handle, stow, carry, keep, care
for and discharge the goods carried.53
At the trial, Westwind’s Operation Assistant, Menandro G. Ramirez, testified on the
presence of a ship officer to supervise the unloading of the subject cargoes.
ATTY. LLAMAS
Q Having been present during the entire discharging operation, do you remember who
else were present at that time?
A Our surveyor and our checker the foreman of ATI.
Q Were there officials of the ship present also?
A Yes, sir there was an officer of the vessel on duty at that time.54
xxxx
Q Who selected the cable slink to be used?
A ATI Operation.
Q Are you aware of how they made that selection?
A Before the vessel arrived we issued a manifesto of the storage plan informing the ATI
of what type of cargo and equipment will be utilitized in discharging the cargo.55
xxxx
Q You testified that it was the ATI foremen who select the cable slink to be used in
discharging, is that correct?
A Yes sir, because they are the one who select the slink and they know the kind of
cargoes because they inspected it before the discharge of said cargo.
Q Are you aware that the ship captain is consulted in the selection of the cable sling?
A Because the ship captain knows for a fact the equipment being utilized in the
discharge of the cargoes because before the ship leave the port of Japan the crew
already utilized the proper equipment fitted to the cargo.56 (Emphasis supplied.)
It is settled in maritime law jurisprudence that cargoes while being unloaded generally
remain under the custody of the carrier.57 The Damage Survey Report58 of the survey
conducted by Phil. Navtech Services, Inc. from April 20-21, 1995 reveals that Case No.
03-245-42K/1 was damaged by ATI stevedores due to overtightening of a cable sling
hold during discharge from the vessel’s hatch to the pier. Since the damage to the cargo
was incurred during the discharge of the shipment and while under the supervision of the
carrier, the latter is liable for the damage caused to the cargo.
This is not to say, however, that petitioner ATI is without liability for the damaged cargo.
The functions of an arrastre operator involve the handling of cargo deposited on the
wharf or between the establishment of the consignee or shipper and the ship’s tackle.
Being the custodian of the goods discharged from a vessel, an arrastre operator’s duty is
to take good care of the goods and to turn them over to the party entitled to their
possession.59
Handling cargo is mainly the arrastre operator’s principal work so its drivers/operators or
employees should observe the standards and measures necessary to prevent losses
and damage to shipments under its custody.60
While it is true that an arrastre operator and a carrier may not be held solidarily liable at
all times,61 the facts of these cases show that apart from ATI’s stevedores being directly
in charge of the physical unloading of the cargo, its foreman picked the cable sling that
was used to hoist the packages for transfer to the dock. Moreover, the fact that 218 of
the 219 packages were unloaded with the same sling unharmed is telling of the
inadequate care with which ATI’s stevedore handled and discharged Case No. 03-245-
42K/1.
With respect to petitioners ATI and Westwind’s liability, we agree with the CA that the
same should be confined to the value of the one piece Frame Axle Sub without Lower.
In the Bad Order Inspection Report62 prepared by Universal Motors, the latter referred to
Case No. 03-245-42K/1 as the source of said Frame Axle Sub without Lower which
suffered a deep dent on its buffle plate. Yet, it identified Case No. 03-245-51K as the
container which bore the six pieces Frame Assembly with Bush. Thus, in Philam’s
Complaint, it alleged that "the entire shipment showed one (1) pc. FRAME AXLE SUB
W/O LWR from Case No. 03-245-42K/1 was completely deformed and misaligned, and
six (6) other pcs. of FRAME ASSEMBLY WITH BUSH from Case No. 03-245-51K were
likewise completely deformed and misaligned."63 Philam later claimed in its Appellee’s
Brief that the six pieces of Frame Assembly with Bush were also inside the damaged
Case No. 03-245-42K/1.
However, there is nothing in the records to show conclusively that the six Frame
Assembly with Bush were likewise contained in and damaged inside Case No. 03-245-
42K/1. In the Inspection Survey Report of Chartered Adjusters, Inc., it mentioned six
pieces of chassis frame assembly with deformed body mounting bracket. However, it
merely noted the same as coming from two bundles with no identifying marks.
Lastly, we agree with petitioner Westwind that the CA erred in imposing an interest rate
of 12% on the award of damages. Under Article 2209 of the Civil Code, when an
obligation not constituting a loan or forbearance of money is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum.64 In the similar case of Belgian Overseas Chartering and Shipping NV v.
Philippine First Insurance Co., lnc.,65 the Court reduced the rate of interest on the
damages awarded to the carrier therein to 6% from the time of the filing of the complaint
until the finality of the decision.

WHEREFORE, the Court AFFIRMS with MODIFICATION the Decision dated October
15,2007 and the Resolution dated January 11, 2008 of the Court of Appeals in CA-G.R.
CV No. 69284 in that the interest rate on the award of ₱190,684.48 is reduced to 6% per
annum from the date of extrajudicial demand, until fully paid.

With costs against the petitioners in G.R. No. 181163 and G.R. No. 181319, respectively.

SO ORDERED
G.R. No. 173622               March 11, 2013
ROBERN DEVELOPMENT CORPORATION and RODOLFO M. BERNARDO,
JR., Petitioners,
vs.
PEOPLE'S LANDLESS ASSOCIATION represented by FLORIDA RAMOS and
NARDO LABORA, Respondent.
DECISION
DEL CASTILLO, J.:
"This Court cannot presume the existence of a sale of land, absent any direct proof of
it."1
Challenged in this Petition for Review on Certiorari are the August 16, 2005
Decision2 and May 30, 2006 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No.
66071, which ordered petitioner Robern Development Corporation (Robern) to reconvey
the 2,000-square meter lot it bought from Al-Amanah Islamic Development Bank of the
Philippines (Al-Amanah) to respondent People's Landless Association (PELA).
Factual Antecedents
Al-Amanah owned a 2000-square meter lot located in Magtu-od, Davao City and covered
by Transfer Certificate of Title (TCT) No. 138914.4 On December 12, 1992, Al-Amanah
Davao Branch, thru its officer-in-charge Febe O. Dalig (OIC Dalig), asked5 some of the
members of PELA6 to desist from building their houses on the lot and to vacate the
same, unless they are interested to buy it. The informal settlers thus expressed their
interest to buy the lot at ₱100.00 per square meter, which Al-Amanah turned down for
being far below its asking price.7 Consequently, Al-Amanah reiterated its demand to the
informal settlers to vacate the lot.8
In a letter9 dated March 18, 1993, the informal settlers together with other members
comprising PELA offered to purchase the lot for ₱300,000.00, half of which shall be paid
as down payment and the remaining half to be paid within one year. In the lower portion
of the said letter, Al-Amanah made the following annotation:
Note:
Subject offer has been acknowledged/received but processing to take effect upon putting
up of the partial amt. of ₱150,000.00 on or before April 15, 1993.
By May 3, 1993, PELA had deposited ₱150,000.00 as evidenced by four bank
receipts.10 For the first three receipts, the bank labelled the payments as "Partial deposit
on sale of TCT No. 138914", while it noted the 4th receipt as "Partial/Full payment on
deposit on sale of A/asset TCT No. 138914."
In the meantime, the PELA members remained in the property and introduced further
improvements.
On November 29, 1993, Al-Amanah, thru Davao Branch Manager Abraham D. Ututalum-
Al Haj, wrote then PELA President Bonifacio Cuizon, Sr. informing him of the Head
Office’s disapproval of PELA’s offer to buy the said 2,000-square meter lot, viz:
Dear Mr. Cuizon, Sr.,
Please be inform[ed] that your offer to purchase the lot covered by TCT No. T-138914,
containing an area of 2,000 square meters, located at Bakingan, Barangay Magtuod,
Davao City for ₱300,000.00 has been turned down by the top management, due to the
reason that your offered price is way below the selling price of the Bank which is ₱500.00
per square meter, or negotiate but on Cash basis only.
You had been told regarding this matter, but you failed to counter offer since you have
[conferred] with the Bank’s local management. Despite x x x the time given to you to
counter offer or to vacate the lot presently and illegally occupied by you and the
members of the association, still you refrain to hear our previous notices. You even
deliberately construct more residential structures without our permission. As such, you
are finally instructed to vacate the lot and remove all the house structures erected on the
said lot within 15 days upon receipt of this letter. Failure on your part including that of the
members, the Bank will be constrained to take legal action against you.
Furthermore, you can withdraw the amount deposited in the name of your association
anytime during banking hours.11
Subsequently, Al-Amanah sent similarly worded letters,12 all dated December 14, 1993,
to 19 PELA members demanding that they vacate the lot.
In a letter13 dated December 20, 1993, PELA, through Atty. Pedro S. Castillo, replied that
it had already reached an agreement with Al-Amanah regarding the sale of the subject
lot based on their offered price:
Dear Mr. Ututalum-Al-Haj,
The People’s Landless Association, Inc., through Mr. Bonifacio Cuizon, Sr. has
requested us to assist them in communicating with you anent your letter of 29 November
1993. According to Mr. Cuizon the present occupants of the lot covered by T.C.T. No. T-
138914 with an area of 2,000 square meters, had a definite agreement with the Islamic
Bank through its previous Manager or
Officer-in-Charge to buy this foreclosed property at ₱300,000.00. As a matter of fact their
deposit of ₱150,000.00 was on that basis. For this reason, the occupants, who are
members of the association, have already made lot allocations among themselves and
have improved their respective houses.
It would be most unfair if the Bank would now renege on its commitment and eject these
occupants. In line with the national policy of granting landless members of our society the
opportunity of owning land and providing shelter to their families, it would be equitable
and socially justifiable to grant these occupants their occupied areas pursuant to the
earlier agreement with the Bank.
For the foregoing reasons we hope that the Islamic Bank, for legal, moral and social
grounds would reconsider.
Meanwhile, acting on Robern’s undated written offer,14 Al-Amanah issued a
Recommendation Sheet15 dated December 27, 1993 addressed to its Board Operations
Committee, indicating therein that Robern is interested to buy the lot for ₱400,000.00;
that it has already deposited 20% of the offered purchase price; that it is buying the lot on
"as is" basis; and, that it is willing to shoulder the relocation of all informal settlers
therein. On December 29, 1993, the Head Office informed the Davao Branch Manager
that the Board Operations Committee had accepted Robern’s offer.16
Eight days later, Robern was informed of the acceptance. Al-Amanah stressed that it is
Robern’s responsibility to eject the occupants in the subject lot, if any, as well as the
payment of the remaining amount within 15 days; otherwise, the ₱80,000.00 deposit
shall be forfeited.17
In a letter18 dated January 13, 1994, Robern expressed to Al-Amanah its uncertainty on
the status of the subject lot, viz.:
This is in connection with TCT No. 138914 which your bank offered to sell to us and
which we committed to buy.
A group calling itself PEOPLE’S LANDLESS ASSOCIATION, INC. made representation
with our office bringing with them copies of official receipts totalling ₱150,000.00 issued
by your bank which stated---"PARTIAL PAYMENT/DEPOSIT on sale of TCT #138914".
While condition no. 6 in the sale of property to us states that the buyer shall be
responsible for ejecting the squatters of the property, the occupants of the said lot could
hardly be categorized as squatters considering the supposed transaction previously
entered by your bank with them. We were greatly appalled that we should learn about
this not from the bank but from outside sources. 1âwphi1
My company is ready to finalize our transaction provided, however, that the problem with
this group is cleared. In this connection, we are requesting for a definite statement from
your bank on whether the official receipts being brandished by this group are genuine or
not, and if they were, were they ever invalidated by virtue of the return of their deposit
and whether there was a cancellation of your agreement with them.
In the meantime, please consider the 15-day period for us to pay the amount of
₱320,000.00 imposed by your bank suspended until such time that the legal problem
with the lot occupants is settled.
To convince Robern that it has no existing contract with PELA, Al-Amanah furnished it
with copies of the Head Office’s rejection letter of PELA’s bid, the demand letters to
vacate, and the proof of consignment of PELA’s ₱150,000.00 deposit to the Regional
Trial Court (RTC) of Davao City that PELA refused to withdraw.19 Thereafter, on February
2, 1994, it informed Robern that should the latter fail to pay the balance by February 9,
1994, its ₱80,000.00 deposit will be forfeited and the lot shall be up for sale to other
prospective buyers.20 Meanwhile, Al-Amanah requested for assistance for the removal of
the houses not only from the Office of the City Engineer of Davao City21 but also from
Mayor Rodrigo Duterte. Gaining a favorable legal opinion from the City Legal Officer, the
matter was indorsed to the Chief of Demolition Consensus of the Department of Public
Services for action.22
On March 4, 1994, Robern paid the balance of the purchase price.23 The Deed of
Sale24 over the realty was executed on April 6, 1994 and TCT No. T-21298325 was issued
in Robern’s name the following day.
A week later, PELA consigned ₱150,000.00 in the RTC of Davao City.26 Then on April
14, 1994, it wrote27 Al-Amanah asking the latter to withdraw the amount consigned. Part
of the letter states:
xxxx
On March 21, 1994 (almost one month before the April 15, 1994 deadline) we came to
your bank to remit the balance and full payment [for] the abovementioned lot. [Inasmuch]
as you refuse[d] to accept the payment, we have decided to deposit the amount
consigned to your bank.
In our dialogue at your office in 1993, we have agreed that documents will be processed
as soon as we pay the ₱150,000.00 initial deposit. [Inasmuch] as we have not only paid
the deposit but have also made full payment of the account, kindly facilitate processing of
the documents to finalize transaction.
We have not been remiss in doing our part of the transaction; please do your share.
Thank you.
Very truly yours,
For the occupants/claimants
T.C.T. No. T-13891428
Three months later, as its members were already facing eviction and possible demolition
of their houses, and in order to protect their rights as vendees, PELA filed a suit for
Annulment and Cancellation of Void Deed of Sale29 against Al-Amanah, its Director Engr.
Farouk Carpizo (Engr. Carpizo), OIC Dalig, Robern, and Robern’s President and General
Manager, petitioner Rodolfo Bernardo (Bernardo) before the RTC of Davao City. It
insisted that as early as March 1993 it has a perfected contract of sale with Al-Amanah.
However, in an apparent act of bad faith and in cahoots with Robern, Al-Amanah
proceeded with the sale of the lot despite the prior sale to PELA.
Incidentally, the trial court granted PELA’s prayer for a temporary restraining
order.30 Subsequently, it issued on August 12, 1994 an Order31 finding merit in the
issuance of the writ of preliminary injunction, inter alia. The RTC’s grant of injunctive
relief was affirmed by the CA in CA-G.R. SP No. 3523832 when the factual and legal
bases for its issuance were questioned before the appellate court.
The respondents in the annulment case filed their respective Answers.33 Al-Amanah and
Engr. Carpizo claimed that the bank has every right to sell its lot to any interested buyer
with the best offer and thus they chose Robern. They clarified that the ₱150,000.00
PELA handed to them is not part of the payment but merely a deposit in connection with
its offer. They asserted that PELA was properly apprised that its offer to buy was subject
to the approval of Al-Amanah’s Head Office. They stressed that Al-Amanah never
entered into a sale with PELA for there was no perfected agreement as to the price since
the Head Office rejected
PELA’s offer.
For their part, Robern and Bernardo asserted the corporation’s standing as a purchaser
in good faith and for value in the sale of the property, having relied on the clean title of
Al-Amanah. They also alleged that the purported sale to PELA is violative of the Statute
of Frauds34 as there is no written agreement covering the same.
Ruling of the Regional Trial Court
In its August 10, 1999 Decision,35 the RTC dismissed PELA’s Complaint. It opined that
the March 18, 1993 letter PELA has been relying upon as proof of a perfected contract of
sale was a mere offer which was already rejected.
Furthermore, the annotation appearing in the bottom part of the said letter could not be
construed as an acceptance because the same is a mere acknowledgment of receipt of
the letter (not the offer) which will still be subject to processing. The RTC likewise ruled
that being a corporation, only Al-Amanah’s board of directors can bind the bank with third
persons involving the sale of its property. Thus, the purported offer made by Al-
Amanah’s OIC, who was never conferred authority by the board of directors to sell the
lot, cannot bind the bank. In contrast, when the Head Office accepted Robern’s offered
price, it was duly approved by the board of directors, giving birth to a perfected contract
of sale between Al-Amanah and Robern.
Refusing to accept the Decision, PELA elevated its case to the CA.36
Ruling of the Court of Appeals
Reversing the RTC in its assailed Decision37 of August 16, 2005, the CA ruled that there
was already a perfected contract of sale between PELA and Al-Amanah. It held that the
annotationon the lower portion of the March 18, 1993 letter could be construed to mean
that for Al-Amanah to accept PELA’s offer, the sum of ₱150,000.00 must be first put up.
The CA also observed that the subsequent receipt by Al-Amanah of the amounts totalling
₱150,000.00, and the annotation of "deposit on sale of TCT No. 138914," on the receipts
it issued explicitly indicated an acceptance of the association’s offer to buy.
Consequently, the CA invalidated the sale between Robern and Al-Amanah.
The CA also concluded that Al-Amanah is guilty of bad faith in dealing with PELA
because it took Al-Amanah almost seven months to reject PELA’s offer while holding on
to the ₱150,000.00 deposit. The CA thus adjudged PELA entitled to moral and
exemplary damages as well as attorney’s fees.
The dispositive portion of the CA Decision reads:
WHEREFORE, premises considered, the assailed Decision is SET ASIDE. Judgment is
hereby rendered:
 1. DECLARING the contract of sale between PELA and defendant Bank valid
and subsisting.
2. ORDERING the defendant Bank to receive the balance of ₱150,000.00 of the
purchase price from PELA as consigned in court.
3. DECLARING the deed of sale executed by defendant Bank in favor or Robern
Development Corporation as invalid and, therefore, void.
4. ORDERING defendant Bank to return to Robern the full amount of
₱400,000.00 which Robern paid as the purchase price of the subject property
within ten (10) days from finality of this decision. It shall earn a legal interest of
twelve percent (12%) per annum from the tenth (10th) day aforementioned if
there is delay in payment.
5. ORDERING Robern Development Corporation to reconvey the land covered
by T.C.T. No. 212983 in favor of People’s Landless Association within a similar
period of ten (10) days from finality of this decision.
6. ORDERING defendant Bank to pay plaintiffs-appellants the following:
a. The sum of ₱100,000.00 as moral damages;
b. The sum of ₱30,000.00 as exemplary damages;
c. The sum of ₱30,000.00 as attorney’s fees;
d. A legal interest of SIX PERCENT (6%) per annum on the sums
awarded in (a), (b), and (c) from the date of this Decision up to the time of
full payment thereof.
SO ORDERED.38
Robern and Bernardo filed a Motion for Reconsideration39 which Al-Amanah adopted.
The CA, however, was firm in its disposition and thus denied40 the same. Aggrieved,
Robern and Al-Amanah separately filed Petitions for Review on Certiorari before us.
However, Al-Amanah’s Petition docketed as G.R. No. 173437, was denied on September
27, 2006 on procedural grounds.41 Al-Amanah’s Motion for Reconsideration of the said
Resolution of dismissal was
denied with finality on December 4, 2006.42
Hence, only the Petition of Robern and Bernardo subsists.
Petitioners’ Arguments
Petitioners stress that there was no sale between PELA and Al-Amanah, for neither a
deed nor any written agreement was executed. They aver that Dalig was a mere OIC of
Al-Amanah’s Davao Branch, who was never vested with authority by the board of
directors of Al-Amanah to sell the lot. With regard to the notation on the March 18, 1993
letter and the four bank receipts, Robern contends that these are only in connection with
PELA’s offer.
Petitioners likewise contend that Robern is a purchaser in good faith. The PELA
members are mere informal settlers. The title to the lot was clean on its face, and at the
time Al-Amanah accepted Robern’s offer, the latter was unaware of the alleged
transaction with PELA. And when PELA later represented to Robern that it entered into a
transaction with Al-Amanah regarding the subject lot, Robern even wrote Al-Amanah to
inquire about PELA’s claim over the property. And when informed by Al-Amanah that it
rejected the offer of PELA and of its action of requesting assistance from the local
government to remove the occupants from the subject property, only then did Robern
push through with the sale.
Respondent’s Arguments
PELA, on the other hand, claims that petitioners are not the proper parties who can
assail the contract of sale between it and the bank. It likewise argues that the Petition
should be dismissed because the petitioners failed to attach the material portions of the
records that would support its allegations, as required by Section 4, Rule 45 of the Rules
of Court.43
Aside from echoing the finding of the CA that Al-Amanah has a perfected contract of sale
with PELA, the latter further invokes the reasoning of the RTC and the CA (CA-G.R. SP
No. 35238) in finding merit in the issuance of the writ of preliminary injunction, that is,
that there was ‘an apparent perfection of contract (of sale) between the Bank and
PELA.’44 Furthermore, PELA claims that Al-Amanah accepted its offered price and the
₱150,000.00, thus barring the application of the Statute of Frauds as the contract was
already partially executed. As to the non-existence of a written contract evidencing the
same, PELA ascribes fault on the bank claiming that nothing happened despite its
repeated follow-ups for the OIC of Al-Amanah to execute the deed after payment of the
₱150,000.00 in May 1993.
Issue
At issue before us is whether there was a perfected contract of sale between PELA and
Al-Amanah, the resolution of which will decide whether the sale of the lot to Robern
should be sustained or not.
Our Ruling
We shall first briefly address some matters raised by PELA.
PELA’s contention that Robern cannot assail the alleged sale between PELA and Al-
Amanah is untenable. Robern is one of the parties who claim title to the disputed lot. As
such, it is a real party in interest since it stands to be benefited or injured by the
judgment.45
Petitioners’ failure to attach the material portions of the record that would support the
allegations in the Petition is not fatal. We ruled in F.A.T. Kee Computer Systems, Inc. v.
Online Networks International, Inc.,46 thus:
x x x However, such a requirement failure to attach material portions of the record was
not meant to be an ironclad rule such that the failure to follow the same would merit the
outright dismissal of the petition. In accordance with Section 7 of Rule 45, ‘the Supreme
Court may require or allow the filing of such pleadings, briefs, memoranda or documents
as it may deem necessary within such periods and under such conditions as it may
consider appropriate.’ More importantly, Section 8 of Rule 45 declares that ‘[i]f the
petition is given due course, the Supreme Court may require the elevation of the
complete record of the case or specified parts thereof within fifteen (15) days from
notice.’ x x x47
Anent the statement of the courts below that there was ‘an apparent perfection of
contract (of sale) between Al-Amanah and PELA’, we hold that the same is strictly
confined to the resolution of whether a writ of preliminary injunction should issue since
the PELA members were then about to be evicted. PELA should not rely on such
statement as the same is not decisive of the rights of the parties and the merits of this
case.
We shall now delve into the crucial issue of whether there was a perfected contract of
sale between PELA and Al-Amanah.
Essential Elements of a Contract of Sale
A contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.48 Thus, for a contract of sale to be
valid, all of the following essential elements must concur: "a) consent or meeting of the
minds; b) determinate subject matter; and c) price certain in money or its equivalent."49
In the case at bench, there is no controversy anent the determinate subject matter, i.e.,
the 2,000-square meter lot. This leaves us to resolve whether there was a concurrence
of the remaining elements.
As for the price, fixing it can never be left to the decision of only one of the contracting
parties.50 "But a price fixed by one of the contracting parties, if accepted by the other,
gives rise to a perfected sale."51
As regards consent, "when there is merely an offer by one party without acceptance of
the other, there is no contract."52 The decision to accept a bidder’s proposal must be
communicated to the bidder.53 However, a binding contract may exist between the parties
whose minds have met, although they did not affix their signatures to any written
document,54 as acceptance may be expressed or implied.55 It "can be inferred from the
contemporaneous and subsequent acts of the contracting parties."56 Thus, we held:
x x x The rule is that except where a formal acceptance is so required, although the
acceptance must be affirmatively and clearly made and must be evidenced by some acts
or conduct communicated to the offeror, it may be made either in a formal or an informal
manner, and may be shown by acts, conduct, or words of the accepting party that clearly
manifest a present intention or determination to accept the offer to buy or sell. Thus,
acceptance may be shown by the acts, conduct, or words of a party recognizing the
existence of the contract of sale.57
There is no perfected contract of sale between PELA and Al-Amanah for want of consent
and agreement on the price.
After scrutinizing the testimonial and documentary evidence in the records of the case,
we find no proof of a perfected contract of sale between Al-Amanah and PELA. The
parties did not agree on the price and no consent was given, whether express or implied.
When PELA Secretary Florida Ramos (Ramos) testified, she referred to the March 18,
1993 letter which PELA sent to Al-Amanah as the document supposedly embodying the
perfected contract of sale.58 However, we find that the March 18, 1993 letter referred to
was merely an offer to buy, viz:
March 18, 1993
The Manager
Islamic Bank
Davao Branch
Davao City
Sir/Madam:
This has reference to the offer made by Messrs. Alejandro Padilla, Leonardo Labora,
Boy Bartiana, Francisco Paig, and Mr. Asterio Aki for the purchase of the acquired asset
of the bank with an area of 2,000 square meters and covered by T.C.T. No. T-138914,
portions of which are occupied by their houses. These occupants have formed and
registered a group of x x x landless families who have occupied shoulders of National
Highways, to be able to raise an amount that would meet the approval of the Bank as the
consideration for the purchase of the property. The group which is known as PELA or
People’s Landless Association, is offering the bank the amount of THREE HUNDRED
THOUSAND PESOS (₱300,000.00) for the whole 2,000 sq. meters. Of this amount the
buyers will pay a down payment of ONE HUNDRED FIFTY THOUSAND PESOS
(₱150,000.00) and the balance payable in one (1) year.
According to the plan of PELA, about 24 landless families can be accommodated in the
property. We hope the Bank can help these families own even a small plot for their
shelter. This would be in line with the government’s program of housing which the
present administration promised to put in high gear this year.59 (Emphasis supplied)
Neither can the note written by the bank that "subject offer has been
acknowledged/received but processing to take effect upon putting up of the partial
amount of ₱150,000.00 on or before April 15, 1993" be construed as acceptance of
PELA’s offer to buy. Taken at face value, the annotation simply means that the bank
merely acknowledged receipt of PELA’s letter-offer. Furthermore, by ‘processing,’ Al-
Amanah only meant that it will ‘act on the offer’, i.e., it still has to evaluate whether
PELA’s offer is acceptable. Until and unless Al-Amanah accepts, there is as yet no
perfected contract of sale. Notably here, the bank never signified its ‘approval’ or
‘acceptance’ of the offer.
We cannot agree with the CA’s ratiocination that receipt of the amount, coupled with the
phrase written on the four receipts as "deposit on sale of TCT No. 138914," signified a
tacit acceptance by Al-Amanah of PELA’s offer. For sure, the money PELA gave was not
in the concept of an earnest money. Besides, as testified to by then OIC Dalig, it is the
usual practice of Al-Amanah to require submission of a bid deposit which is
acknowledged by way of bank receipts before it entertains offers. Thus:
Atty. Bolcan:
Now, as far as you can remember, these receipts state that these are partial deposits,
what do you mean by that?
WITNESS:
A: x x x, we normally request an offeror to submit or make deposit, actually the bank
does not entertain any offer without any deposit and just like that, during my time x x x in
buying the property for those interested the bank does not entertain any offer unless they
make a deposit.
xxxx
Q: Why do you issue receipts as officer-in-charge stating only partial deposits?
A: Because there was no sale, there was no consu[m]mated sale, so any amount which
you will give as a deposit will be accepted by the bank for the offer and that if their offer
will be disapproved we will return the deposit because their offer was very low and this
might be disapproved by the head office in Manila.60
xxxx
Atty. Taasan:
Do you confirm that based on the interest of the plaintiff to acquire the property they
made a deposit with said bank, as evidenced by the receipts that were shown to you by
your counsel, correct?
A: Yes, sir.
Q: And according to you, the bank does not entertain any offer to buy the property
without deposits?
A: Yes, sir.
Q: In this case since the plaintiffs made a deposit x x x they were properly entertained,
correct?
A: Yes because it is under negotiation, now while their offer price is below the selling
price of the bank.61
The absence of a perfected contract of sale was further buttressed by the testimony of
PELA Secretary Ramos on cross examination, viz:
Atty. Rabor:
Since it was x x x hard earned money you did not require the Amanah Bank when you
gave that ₱150,000.00 to reduce your agreement into writing regarding the sale of this
property?
A: I insisted but she will not issue that.62
xxxx
Atty. Bolcan:
Now, on April 15, 1993 when the deposit was made, you were present?
A: Yes, sir.
Q: Now, after making the deposit of One Hundred Fifty Thousand (₱150,000.00) Pesos
on April 15, 1993 did you not request for the bank to execute a document to prove that
actually you are buying the property?
A: I even said to the OIC or the manager that ma’am, now that you have received our
money, where is our paper that we were the ones to buy that property, sir.
Q: To whom are you referring to?
A: Febe Dalig, the OIC, sir.
Q: And this OIC Febe Dalig informed you that the Offer on your part to buy the property
is subject for approval by the head office in Manila, is that correct?
A: Yes she told me that it would be subject to approval in Manila x x x.
Q: And later on you were informed by the bank that your offer was not accepted by the
head office in Manila, is that correct?
A: She did not inform us but we kept on following it up with their office and she told us
that it did not arrive yet, sir.63 (Emphasis supplied)
PELA Secretary Ramos’ testimony thus corroborated OIC Dalig’s consistent stand that it
is the Head Office which will decide whether Al-Amanah would accept PELA’s offer:
Atty. Bolcan:
And now, if there are interested persons making offer x x x what would you do?
A: Well, we have to screen the offer before we forward the offer to Manila for approval
because…
Court:
What would you do before you forward that to Manila?
A: We will be screening the offer x x x.
Atty. Bolcan:
And you said that it is referred to Manila?
A: Yes, sir.
Q: Who will eventually approve the offer made by the interested persons to buy the
property?
A: We have a committee in Manila to approve the sale of the property.
Q: Do you have any idea who will approve the offer of the property?
A: I have no idea but the president, rather it consists of the president I think and then
signed also by the vice-president and some officers in the office, sir.
xxxx
Q: Now, in case of offers of the property of the bank, x x x the officer-in-charge of the
bank, Al-Amanah Bank branch, usually refers this matter to the head office in Manila?
A: Yes, sir.
Q: And it is the head office that will decide whether the offer will be approved or not?
A: Yes as head of the branch, we have to forward the offer whether it was acceptable or
not.64
It is thus undisputed, and PELA even acknowledges, that OIC Dalig made it clear that
the acceptance of the offer, notwithstanding the deposit, is subject to the approval of the
Head Office. Recognizing the corporate nature of the bank and that the power to sell its
real properties is lodged in the higher authorities,65 she never falsely represented to the
bidders that she has authority to sell the bank’s property. And regardless of PELA’s
insistence that she execute a written agreement of the sale, she refused and told PELA
to wait for the decision of the Head Office, making it clear that she has no authority to
execute any deed of sale.

Contracts undergo three stages: "a) negotiation which begins from the time the
prospective contracting parties indicate interest in the contract and ends at the moment
of their agreement[; b) perfection or birth, x x x which takes place when the parties agree
upon all the essential elements of the contract x x x; and c) consummation, which occurs
when the parties fulfill or perform the terms agreed upon, culminating in the
extinguishment thereof."66

In the case at bench, the transaction between Al-Amanah and PELA remained in the
negotiation stage. The offer never materialized into a perfected sale, for no oral or
documentary evidence categorically proves that Al-Amanah expressed amenability to the
offered ₱300,000.00 purchase price. Before the lapse of the 1-year period PELA had set
to pay the remaining ‘balance,’ Al-Amanah expressly rejected its offered purchase price,
although it took the latter around seven months to inform the former and this entitled
PELA to award of damages.67 Al-Amanah’s act of selling the lot to another buyer is the
final nail in the coffin of the negotiation with PELA. Clearly, there is no double sale, thus,
we find no reason to disturb the consummated sale between Al-Amanah and Robern.

At this juncture, it is well to stress that Al-Amanah’s Petition before this Court docketed
as G.R. No. 173437 was already denied with finality on December 4, 2006. Hence, we
see no reason to disturb paragraph 6 of the CA’s Decision ordering Al-Amanah to pay
damages to PELA.

WHEREFORE, we PARTIALLY GRANT the Petition. Except for paragraph 6 of the Court
of Appeals Decision which had already been long settled,68 the rest of the judgment in the
assailed August 16, 2005 Decision and May 30, 2006 Resolution of the Court of Appeals
in CA-G.R. No. CV No. 66071 are hereby ANNULLED and SET ASIDE. The August 10,
1999 Decision of the Regional Trial Court of Davao City, Branch 12, dismissing the
Complaint for Annulment and Cancellation of Void Deed of Sale filed by respondent
People's Landless Association is REINSTATED and AFFIRMED. The amount of Pesos:
Three Hundred Thousand (₱300,000.00) consigned with the Regional Trial Court of
Davao City may now be withdrawn by People's Landless Association.

SO ORDERED.
G.R. No. L-36821 June 22, 1978
JOSE P. DIZON, petitioner,
vs.
ALFREDO G. GABORRO (Substituted by PACITA DE GUZMAN GABORRO as
Judicial Administratrix of the Estate of Alfredo G. Gaborro) and the
DEVELOPMENT BANK OF THE PHILIPPINES, respondents.
Leonardo Abola for petitioner.
Carlos J. Antiporda for respondents.
GUERRERO, J.:
Petition for review on certiorari of the decision of the Court Appeals   in CA-G.R. No.
1
46975-R entitled "Jose P. Dizon, Plaintiff-Appellant, vs. Alfredo G. Gaborro (substituted
by Pacita de Guzman Gaborro as Judicial Administratrix of the Estate of Alfredo G,
Gaborro) trial the Development Bank of the Philippines, Defendants-Appellees," affirming
with modification the decision of the Court of First Instance of Pampanga, Branch II in
Civil Case No. 2184.
The dispositive portion of the decision sought to be reviewed reads:
IN VIEW OF THE FOREGOING, the judgment appealed therefrom is
hereby affirmed with modification that the plaintiff-appellant has the right
to refund or reimburse the defendant- appellees he sum of P131,831.91
with interest at 8% per annum from October 6, 1959 until full payment,
said right to be exercised within one year from the date this judgment
becomes final, with the understanding that, if he fails to do so within the
said period, then he is deemed to have lost his right over the lands
forever. With costs against the appellant. 2
MODIFIED.
The basic issue to be resolved in this case is whether the 'Deed of Sale with Assumption
of Mortgage', trial Option to Purchase Real Estate". two instruments executed by trial
between Petitioner Jose P. Dizon trial Alfredo G. Gaborro (defendant below) on the same
day, October 6, 1959 constitute in truth trial in fact an absolute sale of the three parcels
of land therein described or merely an equitable mortgage or conveyance thereof by way
of security for reimbursement, refund or repayment by petitioner Jose P. Dizon of any
trial all sums which may have been paid to the Development Bank of the Philippines trial
the Philippine National Bank by Alfredo G. Gaborro (later substituted herein by his wife
Pacita de Guzman Gaborro as administratrix of the estate of Alfredo G. Gaborro) who
had died during the pendency of the case.
A supplementary issue raised is whether or not Gaborro or the respondent administratrix
of the estate should account for all the fruits produced trial income received by them from
the lands mentioned trial described in the aforesaid "Deed of Sale with Assumption of
Mortgage."
The antecedent facts established in the record are not disputed. Petitioner Jose P. Dizon
was the owner of the three (3) parcels of land, subject matter of this litigation, situated in
Mabalacat, Pampanga with an aggregate area of 130.58 hectares, as evidenced by
Transfer Certificate of Title No. 15679. He constituted a first mortgage lien in favor of the
Develop. ment Bank of the Philippines in order to secure a loan in the sum of P38,000.00
trial a second mortgage lien in favor of the Philippine National Bank to cure his
indebtedness to said bank in the amount of P93,831.91.
Petitioner Dizon having defaulted in the payment of his debt, the Development Bank of
the Philippines foreclosed the mortgage extrajudicially pursuant to the provisions of Act
No. 3135. On May 26, 1959, the hinds were sold to the DBP for- P31,459.21, which
amount covered the loan, interest trial expenses, trial the corresponding "Certificate of
Sale," (Exhibit A-2, Exhibit 1b was executed in favor of the said On November 12, 1959,
Dizon himself executed the deed of sale (Exhibit Al over the properties in favor of the
DBP which deed was recorded in the Office of the Register of Deeds on October 6,
1960.
Sometime prior to October 6, 1959 Alfredo G. Gaborro trial Jose P. Dizon met. Gaborro
became interested in the lands of Dizon. Dizon originally intended to lease to Gaborro
the property which had been lying idle for some time. But as the mortgage was already
foreclosed by the DPB trial the bank in fact purchased the lands at the foreclosure sale
on May 26, 1959, they abandoned the projected lease. They then entered into the
following contract on October 6, 1959 captioned trial quoted, to wit:
DEED OF SALE WITH ASSUMPTION
OF MORTGAGE
KNOW ALL MEN BY THESE PRESENTS:
This DEED OF SALE WITH ASSUMPTION OF MORTGAGE, made trial
executed at the City of Manila, Philippines, on this 6th day of October,
1959 by trial between —
JOSE P. DIZON, of legal age, Filipino, married to Norberta Torres, with
residence trial postal address at Mabalacat, Pampanga, hereinafter
referred to as the VENDOR.
ALFREDO G. GABORRO, likewise of legal age, Filipino, married to
Pacita de Guzman, with residence trial postal address at 46, 7th St.,
Gilmore Avenue, Quezon City, hereinafter referred to as the VENDEE,
W I T N E S S E T H: That —
WHEREAS, the VENDOR is the registered owner of three (3) parcels of
land covered by Transfer Certificate of Title No. 15679 of the land records
of Pampanga. situated in the Municipality of Mabalacat, Province of
Pampanga, trial more particularly described trial bounded as follows:
1. A parcel of land (Lot No. 188 of the Cadastral Survey of Mabalacat),
with the improvements thereon, situated in the Municipality of Mabalacat,
Bounded on the NE by Lot No 187: on the SE., by Lots Nos. 183, 189,
191 trial 192; on the SW by Lot No. 192 trial on the NW by the
unimproved provincial road to Magalang. Containing an area of TWO
HUNDRED AND TWENTY ONE THOUSAND ONE HUNDRED
SEVENTY TWO SQUARE METERS (221,172), more or less.
2. A parcel of land (Lot No. 193 of the Cadastral Survey of Mabalacat),
with the improvements thereon, situated in the Municipality of Mabalacat.
Bounded on the NE., by a road trial Lots Nos. 569,570 trial 571; on the
SE., by Lot No. 571 trial the unimproved road to Magalang, on the SW by
a road; trial on the NE., by a road trial the Sapang Pritil Containing an
area of NINE HUNDRED SEVENTY EIGHT THOUSAND SEVEN
HUNDRED AND SEVENTEEN SQUARE METERS (978,717), more or
less.
3. A parcel of land (Lot No. 568 of the Cadastral Survey of Mabalacat),
with the improvements thereon, situated in the Municipality of Mabalacat.
Bounded on the NE., by Lot No. 570, on the SE SW trial NW by roads.
Containing an area of ONE HUNDRED FIVE THOUSAND NINE
HUNDRED AND TWENTY ONE SQUARE METERS (105,921), more or
less,
WHEREAS, the above-described properties are presently mortgaged
(first mortgage) to the Development Bank of the Philippines (,formerly
Rehabilitation Finance Corporation) to secure the payment of a loan, plus
interest, of THIRTY EIGHT THOUSAND PESOS ONLY (P38,000.00),
Philippine currency, as evidenced by a deed of mortgage for- P...
dated ... which deed was ratified trial acknowledged before Notary Public
of Manila, Mr. ... as Doc. No. Page No. Reg. No. Series of 196 ... ;
WHEREAS, the aforesaid properties are likewise mortgage (second
mortgage) to the Philippine National Bank to secure the payment of a
loan of NINETY THREE THOUSAND EIGHT HUNDRED THIRTY ONE
PESOS & 91/100 (P93,831.91), Philippine Currency, plus interest up to
August 13, 1957, as evidenced by deed of Mortgage for P.............
dated................... which deed was ratified trial acknowledged before
Notary Public of Manila, Mr, I . I as Doc. No............ Page No.......... Reg.
No. Series of 196........... ; WHEREAS, the VENDOR, has offered to sell
trial the VENDEE is willing to purchase the above-described properties
for ONE HUNDRED THIRTY ONE THOUSAND EIGHT HUNDRED
THIRTY ONE PESOS & 91 /100 (P131,831.91), Philippine Currency,
under the terms trial conditions herein below set forth;
NOW, THEREFORE, for- trial in consideration of the above premises trial
the amount of ONE HUNDRED THIRTY ONE THOUSAND EIGHT
HUNDRED THIRTY ONE PESOS & 91/100 (P131,831.91), Philippine
Currency, in hand paid in cash by the VENDEE unto the VENDOR,
receipt whereof is hereby acknowledged by the VENDOR to his entire
trial full satisfaction, trial the assumption by the VENDEE of the entire
mortgage indebtedness, both with the Development Bank of the
Philippines trial the Philippine National Bank above mentioned, the
VENDOR does by these presents, sell, transfer trial convey, as he had
sold, transferred, trial conveyed, by way of absolute sale, perpetually trial
forever, unto the VENDEE, his heirs, successors trial assigns. above-
described properties, with all the improvements thereon, free from all
liens trial encumbrances of whatever nature. except the pre- existing
mortgage obligations with the Development Bank of the Philippines trial
the Philippine National Bank aforementioned. The VENDOR does hereby
warrant title, ownership trial possession over the properties herein sold
trial conveyed, trial binds himself to defend the same from any trial all
claimants.
That the VENDEE, does by these presents, assume as he has assumed,
under the same terms trial conditions of the mortgage contracts dated ...
and ... of the mortgage indebtedness of the VENDOR in favor of the
Development Bank of the Philippines trial the Philippine National Bank,
 respectively, as if the aforesaid documents were personally executed by
the VENDEE trial states trial reiterates all the terms trial conditions
stipulated in said both documents, making them to all intent trial
purposes, parts hereof by reference.
IN WITNESS WHEREOF, the VENDOR and the VENDEE together with
their instrumental witnesses, have signed this deed of the place, date,
month trial year first above written.
(Sgd.) JOSE P. DIZON (Sgd.) ALFREDO G. GABORRO
Vendor Vendee
Signed in the Presence of:
(Sgd.) (Illegible) (Sgd.) (Illegible)
(Acknowledgment Omitted)
The second contract executed the same day, October 6, 1959 is called Option to
Purchase Real Estate, trial is in the following wise trial manner:
OPTION TO PURCHASE REAL ESTATE
KNOW ALL MEN BY THESE PRESENTS:
That 1, ALFREDO G. GABORRO, of legal age, Filipino, married to Pacita
de Guzman, with residence trial postal address at 46, 7th St., Gilmore
Ave., Quezon City, for- valuable consideration, do hereby give to JOSE
P. DIZON, of legal age, Filipino, married to Norberta Torres, resident of
Mabalacat, Pampanga, his heirs, successors and assigns, the option of
repurchasing the following described properties:
TRANSFER CERTIFICATE OF TITLE
NO. 15679, PROVINCE OF PAMPANGA
1. A parcel of land (Lot No. 188 of Cadastral Survey of Mabalacat,
Pampanga containing an area of (211,172) more or less.
2. A parcel of land (Lot No. 193 of the Cadastral Survey of Mabalacat,
Pampanga), containing an area of (978,172) more or less.
3. A parcel of land (Lot No. 568 of the Cadastral Survey of Mabalacat,
Pampanga containing an area of (105,921), more or less. which I
acquired from the said Jose P. Dizon by purchase by virtue of that
document entitled "Deed of Sale with Assumption of Mortgage" dated
October 6, 1959, acknowledged by both of us before Notary Public of
Manila GREGORIO SUMBILIO as DOC. No. 342, Page No. 70, Reg. No.
VII Series of 1959.
Said option shall be valid trial effective within the period comprises from
January, 1965 to December 31, 1970, inclusive, upon payment of the
amount of ONE HUNDRED THIRTY ONE THOUSAND EIGHT
HUNDRED THIRTY ONE PESOS & 91/100 (?131,831.91), Philippine
Currency, plus an interest of eight per centum (8%) thereof, per annum.
This is without prejudice at any time to the payment by Mr. Dizon of any
partial amount to be applied to the principal obligation, without any way
disturbing the possession and/or ownership of the above properties since
only full payment can effect the necessary change.
In the event that Mr. Jose P. Dizon may be able to find a purchaser for-
the foregoing properties on or the fifth year from the date the execution of
this document, the GRANTEE, Mr. JOSE P. DIZON, may do so provided
that the aggregate amount which was Paid to Development Bank of the
Philippines trial to the Philippine National Bank together with the interests
thereon at the rate of 8% shall be refunded to the undersigned.
Furthermore, in case Mr. Jose P. Dizon shall be able to find a purchaser
for- the said properties, it shall be his duty to first notify the undersigned
of the contemplated sale, naming the price trial the purchaser therefor,
trial awarding the first preference in the sale hereof to the undersigned.
IN WITNESS WHEREOF, I have hereunto signed these presents at the
City of Manila, on this 6th day of October, 1959.
(Sgd.) ALFREDO G. GABORRO
CONFORME:
(Sgd.) JOSE P. DIZON
SIGNED IN THE PRESENCE OF:
(Acknowledgment Omit)
The sum of P131,813.91 which purports to be the consideration of the sale was not ASSIGNMENT OF RIGHT OF REDEMPTION
actually paid by Alfredo G. Gaborro to the petitioner. The said amount represents the
aggregate debts of the petitioner with the Development Bank of the Philippines trial the AND ASSUMPTION OF OBLIGATION
Philippine National Bank.
KNOW ALL MEN BY THESE PRESENTS:
After the execution of said contracts, Alfredo G. Gaborro took possession of the three
parcels of land in question. This instrument, made trial executed by trial between JOSE P. DIZON,
married to Norberta P. Torres, Filipino, of legal age, with residence trial
On October 7, 1959, Gaborro wrote the Development Bank of the Philippines a letter postal address at Mabalacat, Pampanga. hereinafter referred to as the
(Exh. J), as follows: ASSIGNOR trial ALFREDO G. GABORRO, married to Pacita de
Guzman, likewise of legal age, Filipino, with residence trial postal
Sir: address at 46, 7th Street, Gilmore Ave., Quezon City, hereinafter referred
to as the ASSIGNEE,
This is with reference to your mortgage lien of P38,000.00 more or less
over the properties more particularly described in TCT No. 15679 of the WITNESSETH:
land records of Pampanga in the name of Jose P. Dizon. In this
connection, we have the honor to inform you that pursuant to a Deed of WHEREAS, the Assignor is the owner trial mortgagor of three (3) parcels
Sale with Assumption of Mortgage executed on October 6, 1959 by Jose agricultural land together with all the improvements existing thereon trial
P. Dizon in my favor, copy of which is hereto attached, the ownership of more particularly described trial bounded as follows:
the same has been transferred to me subject of course to your conformity
to the assumption of mortgage. As a consequence of the foregoing TRANSFER CERTIFICATE OF TITLE NO. 1567
document, the obligation therefore of paying your goodselves the total
amount of indebtedness has shifted to me
PROVINCE OF PAMPANGA
Considering that these agricultural properties have not been under
1. A parcel of land (Lot No. 188 of the Cadastral Survey of
cultivation for- quite a long time, I would therefore request that, on the
Mabalacat), with the improvements thereon, situated in
premise that the assumption of mortgage would be agreeable to you, that
the Municipality of Mabalacat. Bounded on the NE by Lot
I be allowed to pay the outstanding obligation, under the same terms trial
No. 187: on the SE. by Lots Nos. 183, 189, 191 trial 192;
conditions as embodied in the original contract of mortgage within ten
on the SW. by Lot No. 192; trial on the NW by the
(10) years to be divided in 10 equal annual amortizations. I am enclosing
unimproved provincial road to Magalan. Containing an
herewith a check in the amount of P3,609.95 representing 10% of the
area of two hundred twenty-one thousand one hundred
indebtedness of Jose P. Dizon to show my honest intention in assuming
trial seventy two square meters (221,172), more or less.
the mortgage obligation to you ...
2. A parcel of land (Lot No. 193 of the Cadastral Survey of
The Board of Governors of the DBP, in its Resolution No. 7066 dated October 21, 1959
Mabalacat), with the improvements thereon, situated in
approved the offer of Gaborro but said Board required him to pay 20% of the purchase
the Municipality of Mabalacat. Bounded on the NE. by a
price as initial payment, (Exh. D) Accordingly, on July 11, 1960, the DBP trial Gaborro
road trial Lots Nos. 569, 570 trial 571; on the SE. by Lot
executed a conditional sale of the properties in consideration of the sum of P36,090.95
No. 571 trial the unimproved road to Magalan-, on the
(Exh. C) payable 20% down trial the balance in 10 years in the yearly amortization plan
SW. by a road; trial on the NW by a road trial the Sapang
at 8% per annum.
Pritil Containing an area of nine hundred seventy eight
thousand seven hundred and seven hundred square
On January 7, 1960, Dizon assigned his right of redemption Lo Gaborro in an instrument meters (978,717), more or less.
(Exh. 9) entitled:
 3. A parcel of Land (Lot No. 568 of the Cadastral Survey
of Mabalacat), with the improvements thereon, situated in
the Municipality of Mabalacat, Bounded on the NE. by Lot
No. 570; and on the SE., SW. and NW. by roads.
Containing an area of one hundred five thousand nine
hundred and twenty-one square meters (105,921), more
or less.
WHEREAS, the above described properties were mortgaged with the
Rehabilitation Finance Corporation, now Development Bank of the
Philippines, which mortgage has been foreclosed on May 26, 1959;
AND WHEREAS, the herein Assignor has still the right to redeem the
said properties from the said Development Bank of the Philippines within
a period of one (1) year counted from the date of foreclosure of the said
mortgage.
NOW, THEREFORE, for ......................................... trial other valuable
considerations, receipt whereof is hereby acknowledged by the Assignor
from the Assignee, The herein Assignor does hereby transfer trial assign
to the herein Assignee, his heirs, successors trial assigns the aforesaid
right to redeem the aforementioned properties above described.
That with this document the herein Assignor relinquishes any and all
rights to the said properties including the improvements existing thereon.
That the Assignee, by these presents, hereby assumes the obligation in
favor of the d Development Bank of the Philippines, as Paying whatever
legal indebtedness the Assignor has with the d B in connection with the
transaction regarding the hove mentioned Properties subject to the file
and conditions that the said Bank may require and further recognizes the
second mortgage in favor Of the Philippine National Bank.
IN WITNESS WHEREOF, the parties have hereunto set their hands in
the City of Manila, Philippines this --------- day of - - - - - -1959.
(Sgd-) JOSE P. DIZON (Sgd.) ALFREDO G. GABORRO
Assignor (Assignee)
(Acknowledgment Omitted)
After the execution of the conditional e to him Gaborro made several payments to the
DBP and PNB. He introduced improvements, cultivated the kinds raised sugarcane and
other crops and appropriated the produce to himself. He will paid the land taxes thereon.
On July 5, 1961, Jose P. Dizon through his lawyer, Atty. Leonardo Abola, wrote a letter
to Gaborro informing him that he is formally offering reimburse Gaborro Of what he paid
to the banks but without, however, tendering any cash, and demanding an accounting of
the income and of the pro contending that the transaction they entered into was one of
antichresis. Gaborro did not accede to the demands of the petitioner, whereupon, on
JULY 30, 1962, Jose P. Dizon instituted a complaint in the Court of First Instance of
Pampanga, Gaborro, alleging that the documents Deed of Sale With Assumption of
Mortgage and the Option to Purchase Real Estate did not express the true intention and
agreement bet. between the parties. Petitioner Dizon, as Plaintiff below, contended that
the two deeds constitute in fact a single transaction that their real agreement was not an
absolute e of the d of land but merely an equitable mortgage or conveyance by way of
security for the reimbursement or refund by Dizon to Gaborro of any and all sums which
the latter may have paid on account of the mortgage debts in favor of the DBP and the
PNB. Plaintiff prayed that defendant Gaborro be ordered to accept plaintiff's offer to
reimburse him of what he paid to the banks; to surrender the possession of the lands to
plaintiff; to make an accounting of all the fruits, produce, harvest and other income which
he had received from the three (3) parcels of land; and to pay the plaintiff for the loss of
two barns and for damages.
In its answer, the DBP specifically denied the material averments of the complaint and
stated that on October 6, 1959, the plaintiff Dizon was no longer the owner of the land in
question because the DBP acquired them at the extrajudicial foreclosure sale held on
May 26, 1959, and that the only right which plaintiff possessed was a mere right to
redeem the lands under Act 3135 as amended.
Defendant Alfredo G. Gaborro also answer, denying the material averments of the
complaint, stating that the "Deed of Sale with Assumption of Mortgage" expresses the
true agreement of the parties "fully, truthfully and religiously" but the Option to Purchase
Real Estate" does not express the true intention of the parties because it was made only
to protect the reputation of the plaintiff among his townmates, and even in the
supposition that said option is valid, the action is premature. He also filed a counterclaim
for damages, which plaintiff denied.
The issues having been joined, a pre-trial was held and the following stipulation of facts
admitted by the parties was approved by the Court in the following order dated February
22, 1963:
ORDER
At today's initial trial the following were present: Mr. Leonardo Abola, for
the plaintiff; Mr. Carlos Antiporda, for the defendant Alfredo Gaborro; and
Mr. Virgillo Fugoso, for the Development Bank of the Philippines:
The parties brave stipulated on the following facts:
1. That Annex A attached to the complaint is marked Exhibit
A- Stipulation. The parties have admitted the due execution, authenticity
and genuineness of said Exhibit A-Stipulation. This fact has been
admitted by all the three parties.
2. That the defendant Gaborro executed Annex B, which is marked
Exhibit B-Stipulation. This fact has been admitted only between plaintiff
and defendant Gaborro.
3. That the three parcels of land referred to in paragraph 3 of the
complaint, on or before October 6, 1959, were subject to a first mortgage
lien in favor of the Development Bank of the Philippines, formerly
Rehabilitation Finance Corporation, to secure payment of a loan obtained
by the plaintiff Jose P. Dizon in the original sum of P38,000.00 plus
interest, which has been assumed by defendant Gaborro by virtue of a
document, Exhibit A-Stipulation, and also subject to a second mortgage
lien in favor of the Philippine National Bank to secure the payment of a
loan in the sum of P93,831.91 plus interest up to August 30, 1951, which
mortgage liens were duly annotated on TCT 15679. This fact has been
admitted by the plaintiff and defendant Gaborro.
4. In respect to the foreclosure of the first mortgage referred to above, it
was admit that the same was foreclosed on May 26, 1959, the second
mortgage has not been admitted nor foreclosed.
5. That the Development Bank of the Philippines admits that the first
mortgage referred to above was foreclosed on May 26, 1959 under the
provision,,; of Public Act No- 3135, as amended.
6. That subsequently the Development Bank and the defendant Gaborro
executed a document entitled Conditional Sale over the same parcels of
land referred to in paragraph 3 of the complaint, and copy thereof will be
furnished by the Development Bank of the Philippines and marked Exhibit
C-Stipulation.
7. That on or before October 6, 1960, TCT No. 15679 of the Register of D
of Pampanga in the name of Jose P. Dizon covering the three parcels of
land referred to in the complaint was cancelled and in lieu thereof TCT
NO. 24292 of the Register of Deeds of Pampanga was issued in the
name of the Development Bank of the Philippines. This fact has been
admitted by all the parties.
8. That after the execution of the deed of conditional sale, certain
payments were made by the defendant Gaborro to the Development
Bank, the exact amount to be determined later and receipts of payments
to be also exhibited later. This fact has been admitted by all the three
parties.
9. That since October 6, 1959, the defendant Gaborro has made several
payments to the PNB in the amounts appearing on the receipts which will
be shown later, such payments being made on account of the sum of
P38,831.91. The payment was assumed by said - defendant Gaborro.
This fact has been admitted by plaintiff and defendant Gaborro only.
10. That since the execution of Exhibits A and B-Stipulation, it,, defendant
Gaborro has been and still is in the actual possession f the three parcels
of land in question and he is actually cultivating the same and that the
land taxes thereon have been paid by said defendant Gaborro, the
amounts of said taxes appearing on the official receipts to be shown later.
This fact has been admitted by plaintiff and defendant Gaborro only.
11. That since defendant Gaborro took possession of the lands in
question, he has been appropriating all the fruits produced and income of
said lands without giving to the plaintiff any share hereof. This fact has
been admitted by plaintiff and defendant Gaborro only.
Let a copy of this order be served upon the plaintiff, defendant Gaborro
and the Development Bank of the Philippines with the understanding that,
if, within fifteen (15) days, none of the parties questions the correctness
of The facts set forth above. this stipulation of facts shall be conclusive
upon the parties interested in this case.
Set the trial on the controversial facts on April 18, 1963 at 13:00 clock in
the morning.
Paragraphs 3 and 10 of the above quoted order were deleted in an order dated July 26,
1963.
The records disclose that during the pendency of the case in the trial court, motions were
filed by the plaintiff for the appointment of a receiver of the properties but all were denied.
plaintiff also reiterated the same motion before the appellate court which, however,
dismissed the same, reserving to him the right to file in the trial court. Plaintiff did file but
with the same result. certiorari proceedings were resorted to in the Court of Appeals in
CA-G.R. No. SP-01403 entitled "Jose P. Dizon vs. Hon. Felipe Buencamino, et al." which
the respondent court denied.
After trial the court held that the true agreement between Jose P. Dizon, the plaintiff
therein, and the defendant Alfredo G. Gaborro is that the defendant would assume and
pay the indebtedness of the plaintiff to the Development Bank of the Philippines and the
Philippine National Bank, and in consideration therefor, the defendant was given the
possession and enjoyment of the properties in question until the plaintiff shall have
reimbursed to defendant fully the amount of P131,831.91 plus 8% interest per annum.
Accordingly, on March 14, 1970, the lower court rendered judgment, the dispositive part
of which reads:
IN VIEW OF THE FOREGOING, the documents entitled 'Deed of Sale
with Assumption of Mortgage'(Exhibit A-Stipulation) and 'Option to
Purchase Real Estate' (Exhibit B-Stipulation) are hereby reformed to the
extent indicated above. However, since this action was filed before the
period allowed the plaintiff to redeem his property, the prematurity of this
action aside from not being principally alleged in the complaint, deters
this Court from ordering further reliefs and remedies. The counterclaim of
the defendant is dismissed.
The plaintiff's motion for new trial and for reconsideration and motion for admission of
supplemental complaint having been denied for lack of merit, on June 6, 1970, plaintiff
appealed to the Court of Appeals, which. however, affirmed the decision with the
modification that the plaintiff-appellant has the right to refund or reimburse the defendant-
appellee the sum of P131,831.91 with interest at 8% per annum from October 6, 1959
until full payment, said right to be exercised within one (1) year from the date the
judgment becomes final, with the understanding that, if he fails to do so within the said
period, then he is deemed to have lost his right over the lands forever.
Petitioner's motion for reconsideration and/or rehearing having been denied by the Court
of Appeals, hence the present petition for review on certiorari. The petitioner assigns the
following errors, to wit:
I. The Court of Appeals, like the lower court, erred in not holding that
upon established facts and undisputed documentary evidence, the deed
of sale with assumption of mortgage (Exhibit A-Stipulation) constitutes an
equitable mortgage or conveyance to secure petitioner's obligation to
reimburse or refund to defendant Alfredo Gaborro any and all sums to the
extent of P131,831.91, paid by said defendant in total or partial
satisfaction of petitioner's mortgage debts to the DBP and the PNB. In
this connection, the Court of Appeals erred:
(A) In not finding that the petitioner was the lawful owner
of the lands in question:
(B) In not finding that the deed of sale in question is not a
real and unconditional sale; and
(C) In not holding that the option to purchase real estate
(Exhibit B-Stipulation is conclusive evidence that the
transaction in question is in fact an equitable mortgage.
II. The Court of Appeals also erred in finding that the instrument entitled
'Assignment of Right of Redemption and Assumption of Obligation' is
conclusive evidence that the real transaction Evidenced by the 'Deed of
Sale with Assumption of Mortgage' is not an equitable mortgage. In this
connection the said court also erred or at least committed a grave abuse
of discretion:
(A) In not finding that the said deed of assignment is in
fact a mere reiteration of the terms and condition of the
deed of sale;
(B) In finding that the price or consideration of The
aforesaid assignment. of right of redemption consisted of
300 cavans of palay delivered by Mrs. Gaborro to the
petitioner; and
(C) In finding that defendant Gaborro purchased the lands
in question by virtue of the aforementioned deed of
assignment.
III. The, Court of Appeals, like the trial court, also erred in not finding that
the estate of Alfredo G. Gaborro is under obligation to render an
accounting of all the produce, fruits and other income of the lands in
question from October 6, 1959, and to reconvey the said lands to the
herein petitioner. In to connection, the said court also erred:
(A) In not holding that as a mortgagee in possession the
Gaborro estate has the obligation to either render an
 accounting of the produce or fruits of the lands, or to pay
rentals for the occupation of said lands;
(B) In not finding that the Gaborro estate has the
obligations to reconvey the lands in controversy to the
herein petitioner, upon payment of the balance due from
him after deducting either the net value of the produce or
fruits of the Said lands or the rentals thereof,
(C) In not finding that further reliefs or remedies may be
granted the herein petitioner; and
(D) In not ordering the admission of herein petitioners
'Supplemental Complaint' dated April 30, 1970.
IV. The Court of Appeals finally erred in not reversing the decision of the
trial court, and in not rendering judgment declaring that the deed of sale
with assumption of mortgage (Exhibit A Stipulation) is in fact an equitable
mortgage; and in not ordering the Gaborro estate either to render an
accounting of all the produce or fruits of the lands in question or to pay
rentals for the occupation thereof, from October 6, 1959; and in not
ordering the estate of Alfredo G. Gaborro to reconvey, transfer and
assign unto the petitioner the aforementioned lands.
The two instruments sought to be reformed in this case ap pear to stipulate rights and
obligations between the parties thereto Pertaining to and involving parcels of land that
had already beer foreclosed and sold extrajudicially, and purchased by the mortgage
creditor, a degree party. It becomes, therefore, necessary to determine the legality of
said rights and obligation arising from the foreclosure and e pro. proceedings only
between the two contracting parties to the instruments executed between them but also
in the so far a agreement affects the rights of the degree panty, the purchase Bank.
Act 3135, Section 6 as amended by Act 4118, under which the Properties were
extrajudicially foreclosed and sold, provides that:
Sec. 6. In all cases in which an extrajudicial rule is made under the
special power hereinbefore referred to, the debtor, his successors in
interest or any judicial creditor or judgment creditor of e debtor, or any
person having a lien on the property subsequent to the mortgage or deed
of trust under which the property is sold, may redeem the same at any
time within the term or one year from and after the date of the sale; and
such redemption shall be governed by the provisions of sections four
hundred and sixty-four to four hundred and sixty-six, inclusive, of the
Code of Civil Procedure, in so far as these are not consistent with the
provisions of this Act.
Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains in
possession of the property foreclosed and sold, during the period of redemption. If the
judgment debtor is in possession of the property sold, he is entitled to retain it and
receive the fruits, the purchaser not being entitled to such possession. (Riosa v. Verzosa,
26 Phil. 86; Velasco v. Rosenberg's Inc., 32 Phil. 72; Pabico v. Pauco 43 Phil. 572;
Power v. PNB, 54 Phil. 54; Gorospe v. Gochangco L-12735, Oct. 30, 1959).
A judgment debtor, whose property is levied on execution, may transfer his right of
redemption to any one whom he may desire. The right to redeem land sold under
execution within 12 months is a property right and may be sold voluntarily by its owner
and may also be attached and sold under execution (Magno v. Viola and Sotto, 61 Phil.
80).
Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by
the sheriff. (Section 27, Revised Rules of Court) After the termination of the period of
redemption and no redemption having been made, the purchaser is entitled to a deed of
conveyance and to the possession of the properties. (Section 35, Revised Rules of
Court). The weight of authority is to the effect that the purchaser of land sold at public
auction under a writ of execution only has an inchoate right in the property, subject to be
defeated and terminated within the period of 12 months from the date of sale, by a
redemption on the part of the owner. Therefore, the judgment debtor in possession of the
property is entitled to remain therein during the period allowed for redemption. (Riosa v.
Verzosa. 26 Phil, 86; 89; Gonzales v. Calimbas, 51 Phil. 355.)
In the case before Us, after the extrajudicial foreclosure and sale of his properties,
petitioner Dizon retained the right to redeem the lands, the possession, use and
enjoyment of the same during the period of redemption. And these are the only rights
that Dizon could legally transfer, cede and convey unto respondent Gaborro under the
instrument captioned Deed of Sale with Assumption of Mortgage (Exh. A-Stipulation),
likewise the same rights that said respondent could acquire in consideration of the latter's
promise to pay and assume the loan of petitioner Dizon with DBP and PNB.
Such an instrument cannot be legally considered a real and unconditional sale of the
parcels of land, firstly, because there was absolutely no money consideration therefor, as
admittedly stipulated the sum of P131,831.91 mentioned in the document as the
consideration "receipt of which was acknowledged" was not actually paid; and secondly,
because the properties had already been previously sold by the sheriff at the foreclosure
sale, thereby divesting the petitioner of his full right as owner thereof to dispose and sell
the lands.
In legal consequence thereby, respondent Gaborro as transferee of these certain limited
rights or interests under Exh. A-Stipulation, cannot grant to petitioner Dizon more that
said rights, such ac the option Co purchase the lands as stipulated in the document
called Option to Purchase Real Estate (Exhibit B-Stipulation), This is necessarily so for
the reason that respondent Gaborro did not purchase or acquire the full title and
ownership of the properties by virtue of the Deed of Sale With Assumption of Mortgage
(Exh. A Stipulation), earlier executed between them which We have ruled out as an
absolute sale. The only legal effect of this Option Deed is the grant to petitioner the right
to recover the properties upon reimbursing respondent Gaborro of the total sums of
money that the latter may have paid to DBP and PNB on account of the mortgage debts,
the said right to be exercised within the stipulated 5 years period.
In the light of the foreclosure proceedings and sale of the properties, a legal point of
primary importance here, as well as other relevant facts and circumstances, We agree
with the findings of the trial and appellate courts that the true intention of the parties is
that respondent Gaborro would assume and pay the indebtedness of petitioner Dizon to
DBP and PNB, and in consideration therefor, respondent Gaborro was given the
possession, the enjoyment and use of the lands until petitioner can reimburse fully the
respondent the amounts paid by the latter to DBP and PNB, to accomplish the following
ends: (a) payment of the bank obligations; (b) make the lands productive for the benefit
of the possessor, respondent Gaborro, (c) assure the return of the land to the original
owner, petitioner Dizon, thus rendering equity and fairness to all parties concerned.
In view of all these considerations, the law and Jurisprudence, and the facts established.
We find that the agreement between petitioner Dizon and respondent Gaborro is one of
those inanimate contracts under Art. 1307 of the New Civil Code whereby petitioner and
respondent agreed "to give and to do" certain rights and obligations respecting the lands
and the mortgage debts of petitioner which would be acceptable to the bank. but
partaking of the nature of the antichresis insofar as the principal parties, petitioner Dizon
and respondent Gaborro, are concerned.
Mistake is a ground for the reformation of an instrument which there having been a
meeting of the minds of The parties o a contract, their true intention is not expressed in
the instrument purporting to embody the agreement, and one of the parries may ask for
such reformation to the end that such true intention may be expressed. (Art. 1359, New
Civil code). When a mutual mistake of the parties causes the failure of the instrument to
disclose their real agreement, said instrument may be reformed. (Art. 1361, New Civil
Code.) It was a mistake for the parties to execute the Deed of Sale With Assumption of
Mortgage and the Option to Purchase Real Estate and stand on the literal meaning of the
file and stipulations used therein.
The instruments must, therefore, be reformed in accordance with the intention and legal
rights and obligations of the parties — the petitioner, the respondent and the Banks. We
agree with the reformation decreed by the trial and appellate courts, but in the sense that
petitioner Jose P. Dizon has the right to reacquire the three parcels of land within the
one-year period indicated below by refunding or reimbursing to respondent Alfredo G.
Gaborro or the Judicial Administratrix of his Estate whatever amount the latter has
actually paid on account of the principal only, of the loans of Dizon with the DBP and
PNB, excluding the interests and land taxes that may have been paid or may have
accrued, on duly certified financial statements issued by the said banks.
On the issue of the accounting of the fruits, harvests and other income received from the
three parcels of land from October 6, 1959 up to the present, prayed and demanded by
Dizon of Gaborro or the Judicial Administratrix of the latter's estate, We hold that in
fairness and equity and in the interests of justice that since We have ruled out the
obligation of petitioner Dizon to reimburse respondent Gaborro of any interests and land
taxes that have accrued or been paid by the latter on the loans of Dizon with DBP and
PNB, petitioner Dizon in turn is not entitled to an accounting of the fruits, harvests and
other income received by respondent Gaborro from the lands, for certainly, petitioner
cannot have both benefits and the two may be said to offset each other.
By virtue of the Option to Purchase Real Estate (Exh. B Stipulation) which on its face
granted Dizon the option to purchase the properties which must be exercise within the
period from January, 1960 to December 31, 1965 but which We held to be simply the
grant of the right to petitioner Dizon to recover his properties within the said period,
although already expired by reasons and circumstances beyond his control, petitioner is
entitled to a reconveyance of the properties within a reasonable period The period of one
year from the date of the finality of this judgment as laid down by the Court of Appeals for
the exercise of such right by petitioner Dizon appears fair and reasonable and We
approve the same.
Since We are not informed of the status of Dizon's loan of P93,831.91 with the Philippine
National Bank which appears to be on a subsisting basis, it is proper to indicate here
how petitioner Dizon may exercise the right to a reconveyance of the properties as
herein affirmed, as follows:
(a) Dizon is granted the right to a reconveyance of the properties by
reimbursing Gaborro (or his estate) whatever amounts) the latter has
actually paid on account of the principal only, of Dizon's loans of
P38,000.00 and P93,831.91 which the DBP and PNB,
respectively, exclusive of the interests that may have accrued thereon or
may have been paid by Gaborro, on the basis of duly certified statements
issued by said banks;
(b) Any outstanding balance due on Dizon's original principal loan of
P38,000.00 with the Development Bank of the Philippines assumed by
Gaborro and on Dizon's original principal loan of 93,831.91 with the PNB
 shag be deducted from the above-fixed reconveyance price payable to
Gaborro, in order to enable Dizon to pay off the said mortgage loans
directly to the said banks, in accordance with file mutually agreed upon
with them by Dizon;

(c) In other words, the maximum reconveyance price that Dizon is

obligated to pay is the total sum of ?131,831.91 (the sum total of the
principals of his two original loans with the DBP and PNB), and should
the amounts due to the said banks exceed this total of P131,831.91
(because of delinquent interests and other charges), nothing shall be due
Gaborro by way of reimbursement and Dizon will thereupon step into the
shoes of Gaborro as owner-mortgagor of the properties and directly
arrange with the banks for the settlement of the amounts still due and
payable to them, subject to the right of Dizon to recover such amounts in
excess of P131,831.91 from Gaborro by writ of execution in this case;
and

(d) As already stated, Dizon is not entitled to an accounting of the fruits,

harvests and other income received by Gaborro from the land while
Gaborro in turn is not entitled to the payment of any interests on any
amounts paid by him on account of the principal loans to the banks nor
reimbursement of any interests paid by him to the banks.

WHEREFORE, the judgment appealed from is hereby affirmed with the modification that
petitioner Dizon is granted the right within one year from finality of this decision to a
reconveyance of the properties in litigation upon payment and reimbursement to
respondent estate of o G. Gaborro of the amounts actually paid by Gaborro or his estate
on account of the principal only of Dizon's original loans with the Development Bank of
the Philippines and Philippine National Bank in and up to the total amount of
P131,831.91, under the terms and conditions set forth in the preceding paragraph with
subparagraphs (a) to (d), which are hereby incorporated by reference as an integral part
of this judgment, and upon the exercise of such right, respondent estate shall forthwith
execute the corresponding deed of reconveyance in favor of petitioner Dizon and deliver
possession of the properties to him. Without pronouncement as to costs.

Teehankee (Chairman), Makasiar, Muñoz Palma and Fernandez, JJ., concur.

G.R. No. L-47806             April 14, 1941
LEONCIO GABRIEL, petitioner,
vs.
MONTE DE PIEDAD Y CAJA DE AHARROS and THE COURT OF
APPEALS, respondents.
Vicente J. Francisco and Rody M. Jalandoni for petitioner.
Cavanna, Jazmines and Tianco for respondent.
LAUREL, J.:
The herein petitioner was employed as appraiser of jewels in the pawnshop of the Monte
de Piedad from 1913 up to May, 1933. On December 13, 1932, he executed a chattel
mortgage to secure the payment of the deficiencies which resulted from his erroneous
appraisal of the jewels pawned to the appellee, amounting to P14,679.07, with six per
cent (6%) interest from said date. In this chattel mortgage, the appellant promised to pay
to the appellee the sum of P300 a month until the sum of P14,679.07, with interest is fully
paid. The document was registered on December 22, 1932 (statement, decision of Court
of Appeals). To recover the aforementioned sum less what had been paid, amounting to
P3,333.25 or the balance of P11,345.75, and in case of default to effectuate the chattel
mortgage, an action was instituted against the petitioner by the respondent Monte de
Piedad in the Court of First Instance of Manila (civil case No. 50847). The petitioner
answered, denying generally and specifically all the specifications therein, and also
denied under oath the genuiness of the execution of the alleged chattel mortgage
attached thereto. By way of special defense, he alleged (1) that the chattel mortgage was
a part of a scheme on the part of the management of the Monte de Piedad to cover up
supposed losses incurred in its pawnshop department; (2) that a criminal action had
been instituted at the instance of the plaintiff against him wherein said chattel mortgage
was presented by the prosecution with regard his supposed responsibility as expert
appraiser of jewels of the plaintiff entity but he was therein acquitted; and (3) that said
acquittal constituted a bar to the civil case. By way of cross-complaint, the petitioner
alleged (1) that the chattel mortgage was entered into by E. Marco for and in behalf of
the Monte de Piedad without being duly authorized to do so by the latter; (2) that the
defendant was induced, through false representation, to sign said chattel mortgage
against his will; (3) that the chattel mortgage was based upon all non-existing subject
matter and non-existing consideration; and (4) that the chattel mortgage was null and
void ab initio. By way of counterclaim, the petitioner alleged (1) that the payments made
by for him the account of the chattel mortgage amounting to P3,333.25 were made
through deceit and without his consent and consisted of P300 monthly deductions from
his salary, printing job for plaintiff done by him in his printing press, and reimbursement
made from the pocket of E. Marco; (2) that he has received P356.25 a month as expert
appraiser of the plaintiff and that he was separated arbitrarily at the end of the month of
May 1933, from notice and plaintiff failed to pay him his salary for the month of May,
1933 and the month of June, 1933, in accordance with law; and (3) that due to the
malicious and systematic prosecution brought in criminal case No. 49078 and in the
present case, he suffered damages and losses both materially and in his reputation in
the amount of at least P15,000. Wherefore, petitioner, among others, prayed that the
Monte de Piedad be ordered to return the unlawful deductions from his monthly
remuneration, to pay his salary for the months of May and June, 1933, and damages and
losses he suffered amounting to P15,000.
The lower court rendered judgment in favor of the Monte de Piedad against the herein
petitioner. Petitioner brought the case on appeal to the Court of Appeals, which affirmed
the judgment of the lower court in a decision rendered May 29, 1940. Hence, this petition
for review by certiorari.
Petitioner contends that the provisions of the chattel mortgage contract by which he
guaranteed to pay the deficiencies amounting of P14,679.07 are contrary to law, morals
and public policy, and hence, the chattel mortgage contract is ineffective and the
principal obligation secured by it is void. A contract is to be judge by its character, and
courts will look to the substances and not to the mere form of the transaction. The
freedom of contract is both a constitutional and statutory right and to uphold this right,
courts should move with all the necessary caution and prudence in holding contracts
void. (People vs. Pomar, 46 Phil., 440; Ferrazzini vs. Gsell, 34 Phil., 697.) At any rate,
courts should not rashly extend the rule which holds that a contract is void as against
public policy. The term "public policy" is vague and uncertain in meaning, floating and
changeable in connotation. It may be said, however, that, in general, a contract which is
neither prohibited by law nor condemned by judicial decision, nor contrary to public
morals, contravenes no public policy. In the absence of express legislation or
constitutional prohibition, a court, in order to declare a contract void as against public
policy, must find that the contract as to the consideration or thing to be done, has a
tendency to injure the public, is against the public good, or contravenes some
established interests of society, or is inconsistent with sound policy and good morals, or
tends clearly to undermine the security of individual rights, whether of personal liability or
of private property. Examining the contract at bar, we are of the opinion that it does not in
anyway militate against the public good. Neither does it contravene the policy of the law
nor the established interests of society.
Petitioner also contends that the chattel mortgage in question is void because it lacks
consideration. A consideration, in the legal sense of the word, is some right, interest,
benefit, or advantage conferred upon the promisor, to which he is otherwise not lawfully
entitled, or any detriment, prejudice, loss, or disadvantage suffered or undertaken by the
promisee other than to such as he is at the time of consent bound to suffer. We think that
there is sufficient consideration in this contract, for accounting to the Court of Appeals, "it
has been satisfactorily established that it was executed voluntarily by the latter to
guarantee the deficiencies resulting from his erroneous appraisals of the jewels." A
preexisting admitted liability is a good consideration for a promise. The fact that the
bargain is a hard one will not deprived it of validity. The exception to this rule in modern
legislation is where the inadequacy is so gross as to amount to fraud, oppression or
undue influence, or when statutes require the consideration to be adequate. We are not
convinced that the instant case falls within the exception.

Another objection raised is that the requirement of section 5 of Act No. 1508 has not
been complied with. We think that there is substantial compliance with the requirements
of the Chattel Mortgage Law on this point. The wording of the affidavit under discussion,
as it appears from the record, is almost in the same language of the statute. Likewise, it
appears that it was signed by E. Marco, who was Director-General of the Monte de
Piedad at the time of the execution of the contract of chattel mortgage. The Court of
Appeals found that "the contention that director Marco had no authority to enter into the
agreement is without merit. It appears that there was confirmation of Exhibit A by
the Consejo de Administracion of the Monte de Piedad." Statutory requirements as to
forms or words of the affidavits in chattel mortgage contracts must be substantially, but
need not be literally, complied with.

The second assignment of error made by the petitioner is that the Court of Appeals erred
in not holding that the acquittal of the petitioner in criminal case No. 49078 of the Court of
First Instance of Manila bars the action to enforce any civil liability under said chattel
mortgage. We do not need to dwell at length on this assignment of error, for we find no
reason for distributing the conclusion reached by the Court of Appeals on this point:

The appellant claims that his acquittal in criminal case No. 49078 of the Court of
First Instance of Manila is a bar to the institution of the present case. The
evidence of record does not bear out this contention. There is no identity of
subject matter between the two cases; nor is the instant case defendant upon the
said criminal action. We agree with the trial court that the transactions involved in
this case are different from those involved in criminal case No. 49078. The
court's finding that the transactions involved in the case at the bar commenced in
August, 1932, can not be considered erroneous simply because Exhibit F-32 of
the plaintiff is allegedly dated August 20, 1931. Exhibit F-22 can not be given any
probative value, it was undated during the hearing of the case.

We do not find it necessary to discuss the last assignment of error.

The petition is hereby dismissed and the judgment sought to be reviewed is affirmed,
with costs against the petitioner. So ordered.

Imperial, Diaz, Moran, and Horrilleno, JJ., concur.

G.R. No. 61594 September 28, 1990 This agreement shall be construed and governed under and by the laws
of Pakistan, and only the Courts of Karachi, Pakistan shall have the
PAKISTAN INTERNATIONAL AIRLINES CORPORATION, petitioner, jurisdiction to consider any matter arising out of or under this agreement.
vs
HON. BLAS F. OPLE, in his capacity as Minister of Labor; HON. VICENTE Respondents then commenced training in Pakistan. After their training period, they
LEOGARDO, JR., in his capacity as Deputy Minister; ETHELYNNE B. FARRALES began discharging their job functions as flight attendants, with base station in Manila and
and MARIA MOONYEEN MAMASIG, respondents. flying assignments to different parts of the Middle East and Europe.

Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for petitioner. On 2 August 1980, roughly one (1) year and four (4) months prior to the expiration of the
contracts of employment, PIA through Mr. Oscar Benares, counsel for and official of the
Ledesma, Saludo & Associates for private respondents. local branch of PIA, sent separate letters both dated 1 August 1980 to private
respondents Farrales and Mamasig advising both that their services as flight
stewardesses would be terminated "effective 1 September 1980, conformably to clause 6
(b) of the employment agreement [they had) executed with [PIA]." 2

FELICIANO, J.:
On 2 December 1978, petitioner Pakistan International Airlines Corporation ("PIA"), a foreign corporation licensed to do
business in the Philippines, executed in Manila two (2) separate contracts of employment, one with private respondent
Ethelynne B. Farrales and the other with private respondent Ma. M.C. Mamasig. 1 The contracts, which became effective on
9 January 1979, provided in pertinent portion as follows:
On 9 September 1980, private respondents Farrales and Mamasig jointly instituted a
complaint, docketed as NCR-STF-95151-80, for illegal dismissal and non-payment of
company benefits and bonuses, against PIA with the then Ministry of Labor and
Employment ("MOLE"). After several unfruitful attempts at conciliation, the MOLE hearing
officer Atty. Jose M. Pascual ordered the parties to submit their position papers and
evidence supporting their respective positions. The PIA submitted its position paper,   but
3

5. DURATION OF EMPLOYMENT AND PENALTY

no evidence, and there claimed that both private respondents were habitual absentees;
that both were in the habit of bringing in from abroad sizeable quantities of "personal
This agreement is for a period of three (3) years, but can be extended by effects"; and that PIA personnel at the Manila International Airport had been discreetly
the mutual consent of the parties. warned by customs officials to advise private respondents to discontinue that practice.
PIA further claimed that the services of both private respondents were terminated
xxx xxx xxx pursuant to the provisions of the employment contract.

6. TERMINATION
xxx xxx xxx
Notwithstanding anything to contrary as herein provided, PIA reserves
the right to terminate this agreement at any time by giving the
EMPLOYEE notice in writing in advance one month before the intended
In his Order dated 22 January 1981, Regional Director Francisco L. Estrella ordered the
reinstatement of private respondents with full backwages or, in the alternative, the
payment to them of the amounts equivalent to their salaries for the remainder of the fixed
three-year period of their employment contracts; the payment to private respondent
Mamasig of an amount equivalent to the value of a round trip ticket Manila-USA Manila;
and payment of a bonus to each of the private respondents equivalent to their one-month
salary.   The Order stated that private respondents had attained the status of regular
4

termination or in lieu thereof, by paying the EMPLOYEE wages employees after they had rendered more than a year of continued service; that the
equivalent to one month's salary. stipulation limiting the period of the employment contract to three (3) years was null and
void as violative of the provisions of the Labor Code and its implementing rules and
xxx xxx xxx regulations on regular and casual employment; and that the dismissal, having been
carried out without the requisite clearance from the MOLE, was illegal and entitled
10. APPLICABLE LAW: private respondents to reinstatement with full backwages.
On appeal, in an Order dated 12 August 1982, Hon. Vicente Leogardo, Jr., Deputy
Minister, MOLE, adopted the findings of fact and conclusions of the Regional Director
and affirmed the latter's award save for the portion thereof giving PIA the option, in lieu of
reinstatement, "to pay each of the complainants [private respondents] their salaries
corresponding to the unexpired portion of the contract[s] [of employment] . . .". 5
In the instant Petition for Certiorari, petitioner PIA assails the award of the Regional
Director and the Order of the Deputy Minister as having been rendered without
jurisdiction; for having been rendered without support in the evidence of record since,
allegedly, no hearing was conducted by the hearing officer, Atty. Jose M. Pascual; and
for having been issued in disregard and in violation of petitioner's rights under the
employment contracts with private respondents.
1. Petitioner's first contention is that the Regional Director, MOLE, had no jurisdiction
over the subject matter of the complaint initiated by private respondents for illegal
dismissal, jurisdiction over the same being lodged in the Arbitration Branch of the
National Labor Relations Commission ("NLRC") It appears to us beyond dispute,
however, that both at the time the complaint was initiated in September 1980 and at the
time the Orders assailed were rendered on January 1981 (by Regional Director
Francisco L. Estrella) and August 1982 (by Deputy Minister Vicente Leogardo, Jr.), the
Regional Director had jurisdiction over termination cases.
Art. 278 of the Labor Code, as it then existed, forbade the termination of the services of
employees with at least one (1) year of service without prior clearance from the
Department of Labor and Employment:
Art. 278. Miscellaneous Provisions — . . .
(b) With or without a collective agreement, no employer may shut down
his establishment or dismiss or terminate the employment of employees
with at least one year of service during the last two (2) years, whether
such service is continuous or broken, without prior written authority
issued in accordance with such rules and regulations as the Secretary
may promulgate . . . (emphasis supplied)
Rule XIV, Book No. 5 of the Rules and Regulations Implementing the Labor
Code, made clear that in case of a termination without the necessary clearance,
the Regional Director was authorized to order the reinstatement of the employee
concerned and the payment of backwages; necessarily, therefore, the Regional
Director must have been given jurisdiction over such termination cases:
Sec. 2. Shutdown or dismissal without clearance. — Any shutdown or
dismissal without prior clearance shall be conclusively presumed to be
termination of employment without a just cause. The Regional Director
shall, in such case order the immediate reinstatement of the employee
and the payment of his wages from the time of the shutdown or dismissal
until the time of reinstatement. (emphasis supplied)
Policy Instruction No. 14 issued by the Secretary of Labor, dated 23 April 1976,
was similarly very explicit about the jurisdiction of the Regional Director over
termination of employment cases:
Under PD 850, termination cases — with or without CBA — are now
placed under the original jurisdiction of the Regional Director. Preventive
suspension cases, now made cognizable for the first time, are also
placed under the Regional Director. Before PD 850, termination cases
where there was a CBA were under the jurisdiction of the grievance
machinery and voluntary arbitration, while termination cases where there
was no CBA were under the jurisdiction of the Conciliation Section.
In more details, the major innovations introduced by PD 850 and its
implementing rules and regulations with respect to termination and
preventive suspension cases are:
1. The Regional Director is now required to rule on every application for
clearance, whether there is opposition or not, within ten days from receipt
thereof.
xxx xxx xxx
(Emphasis supplied)
2. The second contention of petitioner PIA is that, even if the Regional Director had
jurisdiction, still his order was null and void because it had been issued in violation of
petitioner's right to procedural due process .  This claim, however, cannot be given
6
serious consideration. Petitioner was ordered by the Regional Director to submit not only
its position paper but also such evidence in its favor as it might have. Petitioner opted to
rely solely upon its position paper; we must assume it had no evidence to sustain its
assertions. Thus, even if no formal or oral hearing was conducted, petitioner had ample
opportunity to explain its side. Moreover, petitioner PIA was able to appeal his case to
the Ministry of Labor and Employment.  7
There is another reason why petitioner's claim of denial of due process must be rejected.
At the time the complaint was filed by private respondents on 21 September 1980 and at
the time the Regional Director issued his questioned order on 22 January 1981,
applicable regulation, as noted above, specified that a "dismissal without prior clearance
shall be conclusively presumed to be termination of employment without a cause", and
the Regional Director was required in such case to" order the immediate reinstatement of
the employee and the payment of his wages from the time of the shutdown or dismiss
until . . . reinstatement." In other words, under the then applicable rule, the Regional
Director did not even have to require submission of position papers by the parties in view
of the conclusive (juris et de jure) character of the presumption created by such
applicable law and regulation. In Cebu Institute of Technology v. Minister of Labor and
Employment,   the Court pointed out that "under Rule 14, Section 2, of the Implementing
8
Rules and Regulations, the termination of [an employee] which was without previous
clearance from the Ministry of Labor is conclusively presumed to be without [just] cause .
. . [a presumption which] cannot be overturned by any contrary proof however strong."
3. In its third contention, petitioner PIA invokes paragraphs 5 and 6 of its contract of
employment with private respondents Farrales and Mamasig, arguing that its relationship
with them was governed by the provisions of its contract rather than by the general
provisions of the Labor Code.  9
Paragraph 5 of that contract set a term of three (3) years for that relationship, extendible
by agreement between the parties; while paragraph 6 provided that, notwithstanding any
other provision in the Contract, PIA had the right to terminate the employment agreement
at any time by giving one-month's notice to the employee or, in lieu of such notice, one-
months salary.
A contract freely entered into should, of course, be respected, as PIA argues, since a
contract is the law between the parties.   The principle of party autonomy in contracts is
10
not, however, an absolute principle. The rule in Article 1306, of our Civil Code is that the
contracting parties may establish such stipulations as they may deem
convenient, "provided they are not contrary to law, morals, good customs, public order or
public policy." Thus, counter-balancing the principle of autonomy of contracting parties is
the equally general rule that provisions of applicable law, especially provisions relating to
matters affected with public policy, are deemed written into the contract.   Put a little
11
differently, the governing principle is that parties may not contract away applicable
provisions of law especially peremptory provisions dealing with matters heavily
impressed with public interest. The law relating to labor and employment is clearly such
an area and parties are not at liberty to insulate themselves and their relationships from
the impact of labor laws and regulations by simply contracting with each other. It is thus
necessary to appraise the contractual provisions invoked by petitioner PIA in terms of
their consistency with applicable Philippine law and regulations.
As noted earlier, both the Labor Arbiter and the Deputy Minister, MOLE, in effect held
that paragraph 5 of that employment contract was inconsistent with Articles 280 and 281
of the Labor Code as they existed at the time the contract of employment was entered
into, and hence refused to give effect to said paragraph 5. These Articles read as follows:
Art. 280. Security of Tenure. — In cases of regular employment, the
employer shall not terminate the services of an employee except for a
just cause or when authorized by this Title An employee who is unjustly
dismissed from work shall be entitled to reinstatement without loss of
seniority rights and to his backwages computed from the time his
compensation was withheld from him up to the time his reinstatement.
Art. 281. Regular and Casual Employment. The provisions of written
agreement to the contrary notwithstanding and regardless of the oral
agreements of the parties, an employment shall be deemed to be regular
where the employee has been engaged to perform activities which are
usually necessary or desirable in the usual business or trade of the
employer, except where the employment has been fixed for a specific
project or undertaking the completion or termination of which has been
determined at the time of the engagement of the employee or where the
work or services to be performed is seasonal in nature and the
employment is for the duration of the season.
An employment shall be deemed to be casual if it is not covered by the
preceding paragraph: provided, that, any employee who has rendered at
least one year of service, whether such service is continuous or broken,
shall be considered as regular employee with respect to the activity in
which he is employed and his employment shall continue while such
actually exists. (Emphasis supplied)
In Brent School, Inc., et al. v. Ronaldo Zamora, etc., et al.,   the Court had occasion to
12
examine in detail the question of whether employment for a fixed term has been
outlawed under the above quoted provisions of the Labor Code. After an extensive
examination of the history and development of Articles 280 and 281, the Court reached
the conclusion that a contract providing for employment with a fixed period was not
necessarily unlawful:
There can of course be no quarrel with the proposition that where from
the circumstances it is apparent that periods have been imposed to
preclude acquisition of tenurial security by the employee, they should be
struck down or disregarded as contrary to public policy, morals, etc. But
where no such intent to circumvent the law is shown, or stated otherwise,
where the reason for the law does not exist e.g. where it is indeed the
employee himself who insists upon a period or where the nature of the
engagement is such that, without being seasonal or for a specific project,
a definite date of termination is a sine qua non would an agreement fixing
a period be essentially evil or illicit, therefore anathema Would such an
agreement come within the scope of Article 280 which admittedly was
 enacted "to prevent the circumvention of the right of the employee to be
secured in . . . (his) employment?"
As it is evident from even only the three examples already given
that Article 280 of the Labor Code, under a narrow and literal
interpretation, not only fails to exhaust the gamut of employment
contracts to which the lack of a fixed period would be an anomaly, but
would also appear to restrict, without reasonable distinctions, the right of
an employee to freely stipulate with his employer the duration of his
engagement, it logically follows that such a literal interpretation should be
eschewed or avoided. The law must be given reasonable interpretation,
to preclude absurdity in its application. Outlawing the whole concept of
term employment and subverting to boot the principle of freedom of
contract to remedy the evil of employers" using it as a means to prevent
their employees from obtaining security of tenure is like cutting off the
nose to spite the face or, more relevantly, curing a headache by lopping
off the head.
xxx xxx xxx
Accordingly, and since the entire purpose behind the development of
legislation culminating in the present Article 280 of the Labor Code clearly
appears to have been, as already observed, to prevent circumvention of
the employee's right to be secure in his tenure, the clause in said article
indiscriminately and completely ruling out all written or oral agreements
conflicting with the concept of regular employment as defined therein
should be construed to refer to the substantive evil that the Code itself
has singled out: agreements entered into precisely to circumvent security
of tenure. It should have no application to instances where a fixed period
of employment was agreed upon knowingly and voluntarily by the parties,
without any force, duress or improper pressure being brought to bear
upon the employee and absent any other circumstances vitiating his
consent, or where it satisfactorily appears that the employer and
employee dealt with each other on more or less equal terms with no
moral dominance whatever being exercised by the former over the
latter. Unless thus limited in its purview, the law would be made to apply
to purposes other than those explicitly stated by its framers; it thus
becomes pointless and arbitrary, unjust in its effects and apt to lead to
absurd and unintended consequences. (emphasis supplied)
It is apparent from Brent School that the critical consideration is the presence or
absence of a substantial indication that the period specified in an employment
agreement was designed to circumvent the security of tenure of regular
employees which is provided for in Articles 280 and 281 of the Labor Code. This
indication must ordinarily rest upon some aspect of the agreement other than the
mere specification of a fixed term of the ernployment agreement, or upon
evidence aliunde of the intent to evade.
Examining the provisions of paragraphs 5 and 6 of the employment agreement between
petitioner PIA and private respondents, we consider that those provisions must be read
together and when so read, the fixed period of three (3) years specified in paragraph 5
will be seen to have been effectively neutralized by the provisions of paragraph 6 of that
agreement. Paragraph 6 in effect took back from the employee the fixed three (3)-year
period ostensibly granted by paragraph 5 by rendering such period in effect a facultative
one at the option of the employer PIA. For petitioner PIA claims to be authorized to
shorten that term, at any time and for any cause satisfactory to itself, to a one-month
period, or even less by simply paying the employee a month's salary. Because the net
effect of paragraphs 5 and 6 of the agreement here involved is to render the employment
of private respondents Farrales and Mamasig basically employment at the pleasure of
petitioner PIA, the Court considers that paragraphs 5 and 6 were intended to prevent any
security of tenure from accruing in favor of private respondents even during the limited
period of three (3) years,  and thus to escape completely the thrust of Articles 280 and
13
281 of the Labor Code.
Petitioner PIA cannot take refuge in paragraph 10 of its employment agreement which
specifies, firstly, the law of Pakistan as the applicable law of the agreement and,
secondly, lays the venue for settlement of any dispute arising out of or in connection with
the agreement "only [in] courts of Karachi Pakistan". The first clause of paragraph 10
cannot be invoked to prevent the application of Philippine labor laws and regulations to
the subject matter of this case, i.e., the employer-employee relationship between
petitioner PIA and private respondents. We have already pointed out that the relationship
is much affected with public interest and that the otherwise applicable Philippine laws
and regulations cannot be rendered illusory by the parties agreeing upon some other law
to govern their relationship. Neither may petitioner invoke the second clause of
paragraph 10, specifying the Karachi courts as the sole venue for the settlement of
dispute; between the contracting parties. Even a cursory scrutiny of the relevant
circumstances of this case will show the multiple and substantive contacts between
Philippine law and Philippine courts, on the one hand, and the relationship between the
parties, upon the other: the contract was not only executed in the Philippines, it was also
performed here, at least partially; private respondents are Philippine citizens and
respondents, while petitioner, although a foreign corporation, is licensed to do business
(and actually doing business) and hence resident in the Philippines; lastly, private
respondents were based in the Philippines in between their assigned flights to the Middle
East and Europe. All the above contacts point to the Philippine courts and administrative
agencies as a proper forum for the resolution of contractual disputes between the
parties. Under these circumstances, paragraph 10 of the employment agreement cannot
be given effect so as to oust Philippine agencies and courts of the jurisdiction vested
upon them by Philippine law. Finally, and in any event, the petitioner PIA did not
undertake to plead and prove the contents of Pakistan law on the matter; it must
therefore be presumed that the applicable provisions of the law of Pakistan are the same
as the applicable provisions of Philippine law. 14

We conclude that private respondents Farrales and Mamasig were illegally dismissed
and that public respondent Deputy Minister, MOLE, had not committed any grave abuse
of discretion nor any act without or in excess of jurisdiction in ordering their reinstatement
with backwages. Private respondents are entitled to three (3) years backwages without
qualification or deduction. Should their reinstatement to their former or other substantially
equivalent positions not be feasible in view of the length of time which has gone by since
their services were unlawfully terminated, petitioner should be required to pay separation
pay to private respondents amounting to one (1) month's salary for every year of service
rendered by them, including the three (3) years service putatively rendered.

ACCORDINGLY, the Petition for certiorari is hereby DISMISSED for lack of merit, and
the Order dated 12 August 1982 of public respondent is hereby AFFIRMED, except that
(1) private respondents are entitled to three (3) years backwages, without deduction or
qualification; and (2) should reinstatement of private respondents to their former
positions or to substantially equivalent positions not be feasible, then petitioner shall, in
lieu thereof, pay to private respondents separation pay amounting to one (1)-month's
salary for every year of service actually rendered by them and for the three (3) years
putative service by private respondents. The Temporary Restraining Order issued on 13
September 1982 is hereby LIFTED. Costs against petitioner.

SO ORDERED.
G.R. No. L-15127             May 30, 1961
EMETERIO CUI, plaintiff-appellant,
vs.
ARELLANO UNIVERSITY, defendant-appellee.
G.A.S. Sipin, Jr., for plaintiff-appellant.
E. Voltaire Garcia for defendant-appellee.
CONCEPCION, J.:
Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila,
absolving defendant Arellano University from plaintiff's complaint, with costs against the
plaintiff, and dismissing defendant's counter claim, for insufficiency of proof thereon.
In the language of the decision appealed from:
The essential facts of this case are short and undisputed. As established by the
agreement of facts Exhibits X and by the respective oral and documentary
evidence introduced by the parties, it appears conclusive that plaintiff, before the
school year 1948-1949 took up preparatory law course in the defendant
University. After finishing his preparatory law course plaintiff enrolled in the
College of Law of the defendant from the school year 1948-1949. Plaintiff
finished his law studies in the defendant university up to and including the first
semester of the fourth year. During all the school years in which plaintiff was
studying law in defendant law college, Francisco R. Capistrano, brother of the
mother of plaintiff, was the dean of the College of Law and legal counsel of the
defendant university. Plaintiff enrolled for the last semester of his law studies in
the defendant university but failed to pay his tuition fees because his uncle Dean
Francisco R. Capistrano having severed his connection with defendant and
having accepted the deanship and chancellorship of the College of Law of Abad
Santos University, plaintiff left the defendant's law college and enrolled for the
last semester of his fourth year law in the college of law of the Abad Santos
University graduating from the college of law of the latter university. Plaintiff,
during all the time he was studying law in defendant university was awarded
scholarship grants, for scholastic merit, so that his semestral tuition fees were
returned to him after the ends of semester and when his scholarship grants were
awarded to him. The whole amount of tuition fees paid by plaintiff to defendant
and refunded to him by the latter from the first semester up to and including the
first semester of his last year in the college of law or the fourth year, is in total
P1,033.87. After graduating in law from Abad Santos University he applied to
take the bar examination. To secure permission to take the bar he needed the
transcripts of his records in defendant Arellano University. Plaintiff petitioned the
latter to issue to him the needed transcripts. The defendant refused until after he
had paid back the P1,033 87 which defendant refunded to him as above stated.
As he could not take the bar examination without those transcripts, plaintiff paid
to defendant the said sum under protest. This is the sum which plaintiff seeks to
recover from defendant in this case.
Before defendant awarded to plaintiff the scholarship grants as above stated, he
was made to sign the following contract covenant and agreement:
"In consideration of the scholarship granted to me by the University, I hereby
waive my right to transfer to another school without having refunded to the
University (defendant) the equivalent of my scholarship cash.
(Sgd.) Emeterio Cui".
It is admitted that, on August 16, 1949, the Director of Private Schools issued
Memorandum No. 38, series of 1949, on the subject of "Scholarship," addressed to "All
heads of private schools, colleges and universities," reading:
1. School catalogs and prospectuses submitted to this, Bureau show that some
schools offer full or partial scholarships to deserving students — for excellence in
scholarship or for leadership in extra-curricular activities. Such inducements to
poor but gifted students should be encouraged. But to stipulate the condition that
such scholarships are good only if the students concerned continue in the same
school nullifies the principle of merit in the award of these scholarships.
2. When students are given full or partial scholarships, it is understood that such
scholarships are merited and earned. The amount in tuition and other fees
corresponding to these scholarships should not be subsequently charged to the
recipient students when they decide to quit school or to transfer to another
institution. Scholarships should not be offered merely to attract and keep
students in a school.
3. Several complaints have actually been received from students who have
enjoyed scholarships, full or partial, to the effect that they could not transfer to
other schools since their credentials would not be released unless they would
pay the fees corresponding to the period of the scholarships. Where the Bureau
believes that the right of the student to transfer is being denied on this ground, it
reserves the right to authorize such transfer.
that defendant herein received a copy of this memorandum; that plaintiff asked the
Bureau of Private Schools to pass upon the issue on his right to secure the transcript of
his record in defendant University, without being required to refund the sum of
P1,033.87; that the Bureau of Private Schools upheld the position taken by the plaintiff
and so advised the defendant; and that, this notwithstanding, the latter refused to issue
said transcript of records, unless said refund were made, and even recommended to said
Bureau that it issue a written order directing the defendant to release said transcript of
record, "so that the case may be presented to the court for judicial action." As above
stated, plaintiff was, accordingly, constrained to pay, and did pay under protest, said sum
of P1,033.87, in order that he could take the bar examination in 1953. Subsequently, he
brought this action for the recovery of said amount, aside from P2,000 as moral
damages, P500 as exemplary damages, P2,000 as attorney's fees, and P500 as
expenses of litigation.
In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private
Schools, namely, that the provisions of its contract with plaintiff are valid and binding and
that the memorandum above-referred to is null and void. It, likewise, set up a
counterclaim for P10,000.00 as damages, and P3,000 as attorney's fees.
The issue in this case is whether the above quoted provision of the contract between
plaintiff and the defendant, whereby the former waived his right to transfer to another
school without refunding to the latter the equivalent of his scholarships in cash, is valid or
not. The lower court resolved this question in the affirmative, upon the ground that the
aforementioned memorandum of the Director of Private Schools is not a law; that the
provisions thereof are advisory, not mandatory in nature; and that, although the
contractual provision "may be unethical, yet it was more unethical for plaintiff to quit
studying with the defendant without good reasons and simply because he wanted to
follow the example of his uncle." Moreover, defendant maintains in its brief that the
aforementioned memorandum of the Director of Private Schools is null and void because
said officer had no authority to issue it, and because it had been neither approved by the
corresponding department head nor published in the official gazette.
We do not deem it necessary or advisable to consider as the lower court did, the
question whether plaintiff had sufficient reasons or not to transfer from defendant
University to the Abad Santos University. The nature of the issue before us, and its far
reaching effects, transcend personal equations and demand a determination of the case
from a high impersonal plane. Neither do we deem it essential to pass upon the validity
of said Memorandum No. 38, for, regardless of the same, we are of the opinion that the
stipulation in question is contrary to public policy and, hence, null and void. The aforesaid
memorandum merely incorporates a sound principle of public policy. As the Director of
Private Schools correctly pointed, out in his letter, Exhibit B, to the defendant,
There is one more point that merits refutation and that is whether or not the
contract entered into between Cui and Arellano University on September 10,
1951 was void as against public policy. In the case of Zeigel vs. Illinois Trust and
Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the court said: 'In determining a
public policy of the state, courts are limited to a consideration of the Constitution,
the judicial decisions, the statutes, and the practice of government officers.' It
might take more than a government bureau or office to lay down or establish a
public policy, as alleged in your communication, but courts consider the practices
of government officials as one of the four factors in determining a public policy of
the state. It has been consistently held in America that under the principles
relating to the doctrine of public policy, as applied to the law of contracts, courts
of justice will not recognize or uphold a transaction which its object, operation, or
tendency is calculated to be prejudicial to the public welfare, to sound morality or
to civic honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heding vs.
Gallaghere 64 L.R.A. 811; Veazy vs. Allen, 173 N.Y. 359). If Arellano University
understood clearly the real essence of scholarships and the motives which
prompted this office to issue Memorandum No. 38, s. 1949, it should have not
entered into a contract of waiver with Cui on September 10, 1951, which is a
direct violation of our Memorandum and an open challenge to the authority of the
Director of Private Schools because the contract was repugnant to sound
morality and civic honesty. And finally, in Gabriel vs. Monte de Piedad, Off.
Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In order to declare a contract void as
against public policy, a court must find that the contract as to consideration or the
thing to be done, contravenes some established interest of society, or
is inconsistent with sound policy and good morals or tends clearly to undermine
the security of individual rights. The policy enunciated in Memorandum No. 38, s.
1949 is sound policy. Scholarship are awarded in recognition of merit not to keep
outstanding students in school to bolster its prestige. In the understanding of that
university scholarships award is a business scheme designed to increase the
business potential of an education institution. Thus conceived it is not only
inconsistent with sound policy but also good morals. But what is morals?
Manresa has this definition. It is good customs; those generally accepted
principles of morality which have received some kind of social and practical
confirmation. The practice of awarding scholarships to attract students and keep
them in school is not good customs nor has it received some kind of social and
practical confirmation except in some private institutions as in Arellano University.
The University of the Philippines which implements Section 5 of Article XIV of the
Constitution with reference to the giving of free scholarships to gifted children,
does not require scholars to reimburse the corresponding value of the
scholarships if they transfer to other schools. So also with the leading colleges
and universities of the United States after which our educational practices or
policies are patterned. In these institutions scholarships are granted not to attract
and to keep brilliant students in school for their propaganda mine but to reward
merit or help gifted students in whom society has an established interest or a first
lien. (Emphasis supplied.)
WHEREFORE, the decision appealed from is hereby reversed and another one shall be
entered sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with
interest thereon at the legal rate from September 1, 1954, date of the institution of this
case, as well as the costs, and dismissing defendant's counterclaim. It is so ordered.
G.R. No. L-10551            March 3, 1917
IGNACIO ARROYO, plaintiff-appellant,
vs.
ALFRED BERWIN, defendant-appellee.
J. M. Arroyo for appellant.
No appearance for appellee.
CARSON, J.:
The complaint filed in this action is as follows:
1. That both the plaintiff and the defendant are residents of the municipality of
Iloilo, Province of Iloilo, Philippine Islands.
2. That the defendant is a procurador judicial in the law office of the Attorney
John Bordman, and is duly authorized by the court to practice in justice of the
peaces courts of the Province of Iloilo.
3. That the defendant, as such procurador judicial, represented Marcela Juanesa
in the justice of the peace court of Iloilo in proceeding for theft prosecuted by the
plaintiff Ignacio Arroyo; that said cause was decided by the said justice of the
peace against the accused, and the latter appealed to the Court of First Instance
of Iloilo.
4. That on August 14, 1914, which was the day set for the hearing of the appeal
of the said cause against Marcela Juaneza for theft, Case No. 3120, the
defendant requested the plaintiff to agree to dismiss the said criminal proceeding,
and, on August 14, 1914, stipulated with the plaintiff in the presence of Roque
Samson, among other things, that his client Marcela Juaneza would recognize
the plaintiff's ownership in the land situated on Calle San Juan, suburb of Molo,
municipality of Iloilo, Province of Iloilo, where his said client ordered the cane cut,
which land and which cut cane are referred to in the cause for theft above-
mentioned; and the defendant furthermore agreed that the plaintiff should obtain
a Torrens title to the said land during the next term of the court for the trial of
cadastral cases, and that the defendant's client, Marcela Juaneza, would not
oppose the application for registration to be filed by the said applicant; provided
that the plaintiff would ask the prosecuting attorney to dismiss the said
proceedings filed against Marcela Juaneza and Alejandro Castro for the crime of
theft.
5. That the plaintiff on his part complied with the agreement, and requested the
prosecuting attorney to dismiss the above-mentioned criminal cause; that the
latter petitioned the court and the court did dismiss the said cause; that in
exchange the defendant does not wish to comply with the above-mentioned
agreement; that the plaintiff delivered to the defendant for the signature of the
said Marcela Juaneza a written agreement stating that the defendant's said client
recognized the plaintiff's ownership in the described land and that she would not
oppose the plaintiff's application for registration; and that up to the present time,
the defendant has not returned to the plaintiff the said written agreement,
notwithstanding the plaintiff's many demands.
Therefore, the plaintiff prays the court to render judgment ordering the defendant
to comply with the agreement by causing the latter's said client Marcela Juaneza
to sign the document in which she recognizes the plaintiff's ownership of the land
on which she ordered the cane cut and states that she will not oppose the
plaintiff's application for the registration of the said land, and, further, by awarding
to the plaintiff the costs of the present suit, as well as any other relief that justice
and equity require.
The trial judge dismissed this complaint on the ground of the illegality of the
consideration of the alleged contract, and without stopping to consider any other
objection to the complaint than that indicated by the court below, we are of opinion that
the order appealed from must be affirmed. An agreement by the owner of stolen goods to
stifle the prosecution of the person charged with the theft, for a pecuniary or other
valuable consideration, is manifestly contrary to public policy and the due administration
of justice. In the interest of the public it is of the utmost importance that criminals should
be prosecuted, and that all criminal proceedings should be instituted and maintained in
the form and manner prescribed by law; and to permit an offender to escape the
penalties prescribed by law by the purchase of immunity from private individuals would
result in a manifest perversion of justice.
Article 1255 of the Civil Code provides that:
The contracting parties may make the agreement and establish the clauses and
conditions which they may dream advisable, provided they are not in
contravention of law, morals, or public order.
Article 1275 provides that:
Contracts without consideration or with an illicit one have no effect whatsoever. A
consideration is illicit when it is contrary to law and good morals.The order
 entered in the court below should, therefore, be affirmed, with the costs of the
instance against the appellant. So ordered.
FIRST DIVISION
[G. R. No. 126800. November 29, 1999]
NATALIA P. BUSTAMANTE, petitioner vs. SPOUSES RODITO F. ROSEL and
NORMA A. ROSEL, Respondents.
RESOLUTION
PARDO, J.:
The case before the Court is a petition for review on certiorari1 to annul
the decision of the Court of Appeals,2 reversing and setting aside the
decision of the Regional Trial Court,3, dated November 10, 1992, Judge
Teodoro P. Regino. 3 Quezon City, Branch 84, in an action for specific
performance with consignation.
On March 8, 1987, at Quezon City, Norma Rosel entered into a loan
agreement with petitioner Natalia Bustamante and her late husband
Ismael C. Bustamante, under the following terms and conditions:
1. That the borrowers are the registered owners of a parcel of land,
evidenced by TRANSFER CERTIFICATE OF TITLE No. 80667, containing an
area of FOUR HUNDRED TWENTY THREE (423) SQUARE Meters, more or
less, situated along Congressional Avenue.
2. That the borrowers were desirous to borrow the sum of ONE HUNDRED
THOUSAND (P100,000.00) PESOS from the LENDER, for a period of two
(2) years, counted from March 1, 1987, with an interest of EIGHTEEN
(18%) PERCENT per annum, and to guaranty the payment thereof, they
are putting as a collateral SEVENTY (70) SQUARE METERS portion,
inclusive of the apartment therein, of the aforestated parcel of land,
however, in the event the borrowers fail to pay, the lender has the option
to buy or purchase the collateral for a total consideration of TWO
HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed
amount and interest therein;
3. That the lender do hereby manifest her agreement and conformity to
the preceding paragraph, while the borrowers do hereby confess receipt
of the borrowed amount.4
When the loan was about to mature on March 1, 1989, respondents
proposed to buy at the pre-set price of P200,000.00, the seventy (70)
square meters parcel of land covered by TCT No. 80667, given as
collateral to guarantee payment of the loan. Petitioner, however, refused
to sell and requested for extension of time to pay the loan and offered to
sell to respondents another residential lot located at Road 20, Project 8,
Quezon City, with the principal loan plus interest to be used as down
payment. Respondents refused to extend the payment of the loan and to
accept the lot in Road 20 as it was occupied by squatters and petitioner
and her husband were not the owners thereof but were mere land
developers entitled to subdivision shares or commission if and when they
developed at least one half of the subdivision area.5
Hence, on March 1, 1989, petitioner tendered payment of the loan to
respondents which the latter refused to accept, insisting on petitioners
signing a prepared deed of absolute sale of the collateral.
On February 28, 1990, respondents filed with the Regional Trial Court,
Quezon City, Branch 84, a complaint for specific performance with
consignation against petitioner and her spouse. 6
Nevertheless, on March 4, 1990, respondents sent a demand letter
asking petitioner to sell the collateral pursuant to the option to buy
embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial
Court, Quezon City a petition for consignation, and deposited the amount
of P153,000.00 with the City Treasurer of Quezon City on August 10,
1990.7
When petitioner refused to sell the collateral and barangay conciliation
failed, respondents consigned the amount of P47,500.00 with the trial
court.8 In arriving at the amount deposited, respondents considered the
principal loan of P100,000.00 and 18% interest per annum thereon,
which amounted to P52,500.00.9 The principal loan and the interest
taken together amounted to P152,500.00, leaving a balance of P
47,500.00.10
After due trial, on November 10, 1992, the trial court rendered decision
holding:
WHEREFORE, premises considered, judgment is hereby rendered as
follows:
1. Denying the plaintiffs prayer for the defendants execution of the Deed
of Sale to Convey the collateral in plaintiffs favor;
2. Ordering the defendants to pay the loan of P100,000.00 with interest
thereon at 18% per annum commencing on March 2, 1989, up to and
until August 10, 1990, when defendants deposited the amount with the
Office of the City Treasurer under Official Receipt No. 0116548 (Exhibit
2); and
3. To pay Attorneys Fees in the amount of P 5,000.00, plus costs of suit.
SO ORDERED.
Quezon City, Philippines, November 10, 1992.
TEODORO P. REGINO
Judge11
On November 16, 1992, respondents appealed from the decision to the
Court of Appeals.12 On July 8, 1996, the Court of Appeals rendered
decision reversing the ruling of the Regional Trial Court. The dispositive
portion of the Court of Appeals decision reads:
IN VIEW OF THE FOREGOING, the judgment appeal (sic) from
is REVERSED and SET ASIDE and a new one entered in favor of the
plaintiffs ordering the defendants to accept the amount of P 47,000.00
deposited with the Clerk of Court of Regional Trial Court of Quezon City
under Official Receipt No. 0719847, and for defendants to execute the
necessary Deed of Sale in favor of the plaintiffs over the 70 SQUARE
METER portion and the apartment standing thereon being occupied by
the plaintiffs and covered by TCT No. 80667 within fifteen (15) days from
finality hereof. Defendants, in turn, are allowed to withdraw the amount
of P153,000.00 deposited by them under Official Receipt No. 0116548 of
the City Treasurers Office of Quezon City. All other claims and
counterclaims are DISMISSED, for lack of sufficient basis. No costs.
SO ORDERED.13
Hence, this petition.14
On January 20, 1997, we required respondents to comment on the
petition within ten (10) days from notice.15 On February 27, 1997,
respondents filed their comment.16
On February 9, 1998, we resolved to deny the petition on the ground that
there was no reversible error on the part of respondent court in ordering
the execution of the necessary deed of sale in conformity the with the
parties stipulated agreement. The contract is the law between the
parties thereof (Syjuco v. Court of Appeals, 172 SCRA 111, 118,
citing Phil. American General Insurance v. Mutuc, 61 SCRA 22; Herrera v.
Petrophil Corporation, 146 SCRA 360).17
On March 17, 1998, petitioner filed with this Court a motion for
reconsideration of the denial alleging that the real intention of the
parties to the loan was to put up the collateral as guarantee similar to an
equitable mortgage according to Article 1602 of the Civil Code. 18
On April 21, 1998, respondents filed an opposition to petitioners motion
for reconsideration. They contend that the agreement between the
parties was not a sale with right of re-purchase, but a loan with interest
at 18% per annum for a period of two years and if petitioner fails to pay,
the respondent was given the right to purchase the property or
apartment for P200,000.00, which is not contrary to law, morals, good
customs, public order or public policy. 19
Upon due consideration of petitioners motion, we now resolve to grant
the motion for reconsideration.
The questions presented are whether petitioner failed to pay the loan at
its maturity date and whether the stipulation in the loan contract was
valid and enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989. On said date, petitioner
tendered payment to settle the loan which respondents refused to
accept, insisting that petitioner sell to them the collateral of the loan.
When respondents refused to accept payment, petitioner consigned the
amount with the trial court.
We note the eagerness of respondents to acquire the property given as
collateral to guarantee the loan. The sale of the collateral is an obligation
with a suspensive condition.20 It is dependent upon the happening of an
event, without which the obligation to sell does not arise. Since the
event did not occur, respondents do not have the right to demand
fulfillment of petitioners obligation, especially where the same would not
only be disadvantageous to petitioner but would also unjustly enrich
respondents considering the inadequate consideration (P200,000.00) for
a 70 square meter property situated at Congressional Avenue, Quezon
City.
Respondents argue that contracts have the force of law between the
contracting parties and must be complied with in good faith.21 There are,
however, certain exceptions to the rule, specifically Article 1306 of the
Civil Code, which provides:
Article 1306. The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or
public policy.
A scrutiny of the stipulation of the parties reveals a subtle intention of
the creditor to acquire the property given as security for the loan. This is
embraced in the concept of pactum commissorium, which is proscribed
by law.22
The elements of pactum commissorium are as follows: (1) there should
be a property mortgaged by way of security for the payment of the
principal obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-
payment of the principal obligation within the stipulated period. 23
In Nakpil vs. Intermediate Appellate Court,24 we said:
The arrangement entered into between the parties, whereby Pulong
Maulap was to be considered sold to him (respondent) xxx in case
petitioner fails to reimburse Valdes, must then be construed as
tantamount to pactum commissorium which is expressly prohibited by
Art. 2088 of the Civil Code. For, there was to be automatic appropriation
of the property by Valdes in the event of failure of petitioner to pay the
value of the advances. Thus, contrary to respondents manifestation, all
the elements of a pactum commissorium were present: there was a
creditor-debtor relationship between the parties; the property was used
as security for the loan; and there was automatic appropriation by
respondent of Pulong Maulap in case of default of petitioner.
A significant task in contract interpretation is the ascertainment of the
intention of the parties and looking into the words used by the parties to
project that intention. In this case, the intent to appropriate the property
given as collateral in favor of the creditor appears to be evident, for the
debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the loan. In
effect, the creditor acquires the collateral in the event of non payment of
the loan. This is within the concept of pactum commissorium. Such
stipulation is void.25
All persons in need of money are liable to enter into contractual
relationships whatever the condition if only to alleviate their financial
burden albeit temporarily. Hence, courts are duty bound to exercise
caution in the interpretation and resolution of contracts lest the lenders
devour the borrowers like vultures do with their prey.
WHEREFORE, we GRANT petitioners motion for reconsideration and SET
ASIDE the Courts resolution of February 9, 1998. We REVERSE the
decision of the Court of Appeals in CA-G. R. CV No. 40193. In lieu thereof,
we hereby DISMISS the complaint in Civil Case No. Q-90-4813.
No costs.
SO ORDERED.
G.R. No. 120554 September 21, 1999 increase was later on reduced to 20% effective January 1, 1990, upon other lessees'
demand. Again on December 1, 1990, the lessor implemented a 30% rent increase.
SO PING BUN, petitioner, Enclosed in these letters were new lease contracts for signing. DCCSI warned that
vs. failure of the lessee to accomplish the contracts shall be deemed as lack of interest on
COURT OF APPEALS, TEK HUA ENTERPRISES CORP. and MANUEL C. the lessee's part, and agreement to the termination of the lease. Private respondents did
TIONG, respondents. not answer any of these letters. Still, the lease contracts were not rescinded.

  On March 1, 1991, private respondent Tiong sent a letter to petitioner which reads as
follows:
QUISUMBING, J.:
March 1, 1991
This petition for certiorari challenges the Decision   of the Court of Appeals dated October
1

10, 1994, and the Resolution 2 dated June 5, 1995, in CA-G.R. CV No. 38784. The appellate Mr. So Ping Bun
court affirmed the decision of the Regional Trial Court of Manila, Branch 35, except for the
award of attorney's fees, as follows: 930 Soler Street

WHEREFORE, foregoing considered, the appeal of respondent-appellant Binondo, Manila

So Ping Bun for lack of merit is DISMISSED. The appealed decision
dated April 20, 1992 of the court a quo is modified by reducing the Dear Mr. So,
attorney's fees awarded to plaintiff Tek Hua Enterprising Corporation
from P500,000.00 to P200,000.00. 3
Due to my closed (sic) business associate (sic) for three decades with
your late grandfather Mr. So Pek Giok and late father, Mr. So Chong Bon,
The facts are as follows: I allowed you temporarily to use the warehouse of Tek Hua Enterprising
Corp. for several years to generate your personal business.
In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into
lease agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) Since I decided to go back into textile business, I need a warehouse
lease contracts were premises located at Nos. 930, 930-Int., 924-B and 924-C, Soler immediately for my stocks. Therefore, please be advised to vacate all
Street, Binondo, Manila. Tek Hua used the areas to store its textiles. The contracts each your stocks in Tek Hua Enterprising Corp. Warehouse. You are hereby
had a one-year term. They provided that should the lessee continue to occupy the given 14 days to vacate the premises unless you have good reasons that
premises after the term, the lease shall be on a month-to-month basis. you have the right to stay. Otherwise, I will be constrained to take
measure to protect my interest.
When the contracts expired, the parties did not renew the contracts, but Tek Hua
continued to occupy the premises. In 1976, Tek Hua Trading Co. was dissolved. Later, Please give this urgent matter your preferential attention to avoid
the original members of Tek Hua Trading Co. including Manuel C. Tiong, formed Tek inconvenience on your part.
Hua Enterprising Corp., herein respondent corporation.
Very truly yours,
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's
grandson, petitioner So Ping Bun, occupied the warehouse for his own textile business,
(Sgd) Manuel C. Tiong
Trendsetter Marketing.
MANUEL C. TIONG
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises,
informing the latter of the 25% increase in rent effective September 1, 1989. The rent
 President 4
Petitioner refused to vacate. On March 4, 1992, petitioner requested formal contracts of lease
with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed that after the death of his
grandfather, So Pek Giok, he had been occupying the premises for his textile business and
religiously paid rent. DCCSI acceded to petitioner's request. The lease contracts in favor of
Trendsetter were executed.
In the suit for injunction, private respondents pressed for the nullification of the lease
contracts between DCCSI and petitioner. They also claimed damages.
After trial, the trial court ruled:
WHEREFORE, judgment is rendered:
1. Annulling the four Contracts of Lease
(Exhibits A, A-1 to A-3, inclusive) all dated
March 11, 1991, between defendant So
Ping Bun, doing business under the name
and style of "Trendsetter Marketing", and
defendant Dee C. Chuan & Sons, Inc.
over the premises located at Nos. 924-B,
924-C, 930 and 930, Int., respectively,
Soler Street, Binondo Manila;
2. Making permanent the writ of
preliminary injunction issued by this Court
on June 21, 1991;
3. Ordering defendant So Ping Bun to pay
the aggrieved party, plaintiff Tek Hua
Enterprising Corporation, the sum of
P500,000.00, for attorney's fees;
4. Dismissing the complaint, insofar as
plaintiff Manuel C. Tiong is concerned,
and the respective counterclaims of the
defendant;
5. Ordering defendant So Ping Bun to pay
the costs of this lawsuit;
This judgment is without prejudice to the rights of plaintiff Tek Hua
Enterprising Corporation and defendant Dee C. Chuan & Sons, Inc. to
negotiate for the renewal of their lease contracts over the premises
located at Nos. 930, 930-Int., 924-B and 924-C Soler Street, Binondo,
Manila, under such terms and conditions as they agree upon, provided
they are not contrary to law, public policy, public order, and morals.
SO ORDERED. 5
Petitioner's motion for reconsideration of the above decision was denied.
On appeal by So Ping Bun, the Court of Appeals upheld the trial court. On motion for
reconsideration, the appellate court modified the decision by reducing the award of
attorney's fees from five hundred thousand (P500,000.00) pesos to two hundred
thousand (P200,000.00) pesos.
Petitioner is now before the Court raising the following issues:
I. WHETHER THE APPELLATE COURT ERRED
IN AFFIRMING THE TRIAL COURT'S DECISION
FINDING SO PING BUN GUILTY OF
TORTUOUS INTERFERENCE OF CONTRACT?
II. WHETHER THE APPELLATE COURT ERRED
IN AWARDING ATTORNEY'S FEES OF
P200,000.00 IN FAVOR OF PRIVATE
RESPONDENTS.
The foregoing issues involve, essentially, the correct interpretation of the applicable law
on tortuous conduct, particularly unlawful interference with contract. We have to begin,
obviously, with certain fundamental principles on torts and damages.
Damage is the loss, hurt, or harm which results from injury, and damages are the
recompense or compensation awarded for the damage suffered. 6 One becomes liable in
an action for damages for a nontrespassory invasion of another's interest in the private use
and enjoyment of asset if (a) the other has property rights and privileges with respect to the
use or enjoyment interfered with, (b) the invasion is substantial, (c) the defendant's conduct is
a legal cause of the invasion, and (d) the invasion is either intentional and unreasonable or
unintentional and actionable under general negligence rules. 7
The elements of tort interference are: (1) existence of a valid contract; (2) knowledge on the
part of the third person of the existence of contract; and (3) interference of the third person is
without legal justification or excuse. 8
A duty which the law of torts is concerned with is respect for the property of others, and a
cause of action ex delicto may be predicated upon an unlawful interference by one person of
the enjoyment by the other of his private
property.9 This may pertain to a situation where a third person induces a party to renege on or
violate his undertaking under a contract. In the case before us, petitioner's Trendsetter
Marketing asked DCCSI to execute lease contracts in its favor, and as a result petitioner
deprived respondent corporation of the latter's property right. Clearly, and as correctly viewed
by the appellate court, the three elements of tort interference above-mentioned are present in
the instant case.
Authorities debate on whether interference may be justified where the defendant acts for
the sole purpose of furthering his own financial or economic interest. 10 One view is that,
as a general rule, justification for interfering with the business relations of another exists
where the actor's motive is to benefit himself. Such justification does not exist where his sole
motive is to cause harm to the other. Added to this, some authorities believe that it is not
necessary that the interferer's interest outweigh that of the party whose rights are invaded,
and that an individual acts under an economic interest that is substantial, not merely de
minimis, such that wrongful and malicious motives are negatived, for he acts in self-
protection. 11 Moreover justification for protecting one's financial position should not be made
to depend on a comparison of his economic interest in the subject matter with that of
others. 12 It is sufficient if the impetus of his conduct lies in a proper business interest rather
than in wrongful motives. 13
As early as Gilchrist vs. Cuddy, 14 we held that where there was no malice in the interference
of a contract, and the impulse behind one's conduct lies in a proper business interest rather
than in wrongful motives, a party cannot be a malicious interferer. Where the alleged
interferer is financially interested, and such interest motivates his conduct, it cannot be said
that he is an officious or malicious intermeddler. 15
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the
warehouse to his enterprise at the expense of respondent corporation. Though petitioner took
interest in the property of respondent corporation and benefited from it, nothing on record
imputes deliberate wrongful motives or malice on him.
Sec. 1314 of the Civil Code categorically provides also that, "Any third person who
induces another to violate his contract shall be liable for damages to the other
contracting party." Petitioner argues that damage is an essential element of tort
interference, and since the trial court and the appellate court ruled that private
respondents were not entitled to actual, moral or exemplary damages, it follows that he
ought to be absolved of any liability, including attorney's fees.
It is true that the lower courts did not award damages, but this was only because the
extent of damages was not quantifiable. We had a similar situation in Gilchrist, where it
was difficult or impossible to determine the extent of damage and there was nothing on
record to serve as basis thereof. In that case we refrained from awarding damages. We
believe the same conclusion applies in this case.
While we do not encourage tort interferers seeking their economic interest to intrude into
existing contracts at the expense of others, however, we find that the conduct herein
complained of did not transcend the limits forbidding an obligatory award for damages in
the absence of any malice. The business desire is there to make some gain to the
detriment of the contracting parties. Lack of malice, however, precludes damages. But it
does not relieve petitioner of the legal liability for entering into contracts and causing
breach of existing ones. The respondent appellate court correctly confirmed the
permanent injunction and nullification of the lease contracts between DCCSI and
Trendsetter Marketing, without awarding damages. The injunction saved the respondents
from further damage or injury caused by petitioner's interference.
Lastly, the recovery of attorney's fees in the concept of actual or compensatory
damages, is allowed under the circumstances provided for in Article 2208 of the Civil
Code. 16 One such occasion is when the defendant's act or omission has compelled the
plaintiff to litigate with third persons or to incur expenses to protect his interest. 17 But we have
consistently held that the award of considerable damages should have clear factual and legal
bases. 18 In connection with attorney's fees, the award should be commensurate to the
benefits that would have been derived from a favorable judgment. Settled is the rule that
fairness of the award of damages by the trial court calls for appellate review such that the
award if far too excessive can be reduced. 19 This ruling applies with equal force on the award
of attorney's fees. In a long line of cases we said, "It is not sound policy to place in penalty on
the right to litigate. To compel the defeated party to pay the fees of counsel for his successful
opponent would throw wide open the door of temptation to the opposing party and his
counsel to swell the fees to undue proportions." 20
Considering that the respondent corporation's lease contract, at the time when the cause
of action accrued, ran only on a month-to-month basis whence before it was on a yearly
basis, we find even the reduced amount of attorney's fees ordered by the Court of
Appeals still exorbitant in the light of prevailing jurisprudence. 21 Consequently, the amount
of two hundred thousand (P200,000.00) awarded by respondent appellate court should be
reduced to one hundred thousand (P100,000.00) pesos as the reasonable award or
attorney's fees in favor of private respondent corporation.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 38784 are hereby AFFIRMED, with
MODIFICATION that the award of attorney's fees is reduced from two hundred thousand
(P200,000.00) to one hundred thousand (P100,000.00) pesos. No pronouncement as to
costs.1âwphi1.nêt
SO ORDERED.
G.R. No. 195567 November 25, 1993
GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS), petitioner,
vs.
HONORABLE COURT OF APPEALS and SPOUSES RAUL and ESPERANZA
LEUTERIO, respondents.
The Legal Services Group for petitioner.
Jaime M. Posadas for private respondents.
PUNO, J.:
This is a petition for review on certiorari to set aside the Decision of the 10th Division of
the Court of Appeals ordering the petitioner GSIS to execute a Final Deed of Sale in
favor of the spouses Raul and Esperanza Leuterio involving a house and lot in the GSIS
Village, Project 8-C, Quezon City.  1
The facts show that on December 18, 1963, the petitioner GSIS conducted a lottery draw
for the allocation of lots and housing units in Project 8-C of GSIS Village. Private
respondent Esperanza Leuterio won and was issued a Certificate of Acknowledgment to
purchase the subject house and lot   on December 27, 1963. In 1965, the parties entered
2
into a Deed of Conditional Sale evidencing the conveyance of the subject property and
all improvements thereon to the Leuterio spouses for the purchase price of P19,740.00,
payable over a fifteen-year period, in 180 equal monthly installments of P168.53 each.
Paragraph 11 of the Deed of Conditional Sale provides:
Upon the full payment by the Vendee of the purchase price of the lot and
dwelling/improvement above referred to together with all the interest due
thereon, taxes and other charges and upon his faithful compliance with all
the conditions of the Contract, the Vendor agrees to execute in favor of
the Vendee, or his/their heirs and successors-in-interest a final Deed of
Sale of the aforementioned land and dealing/improvements. . . . 3
Three years elapsed before the Deed was notarized, and a copy of the same was given
to the private respondents.
After the land development and housing construction of Project 8-C were completed in
1966, petitioner's Board of Trustees increased the purchase price indicated in the Deed
of Conditional Sale covering houses and lots therein. The new price was based on the
alleged final cost of construction of the GSIS Village. It is noted that, on the face of the
Leuterio's Conditional Deed of Sale is the marginal notation "subject to adjustment
pending approval of the Board of Trustees." The Leuterio spouses alleged that this
notation was not in the Deed when they signed the same in 1965. Resolving this factual
issue, the trial court found that the appended words were inserted into the document
without the knowledge or consent of the Leuterio spouses. This finding of fact went
undisturbed on appeal to the respondent court.  4
Sometime in the early 1970's, a group (not including the Leuterios) of conditional
vendees of houses and lots in Project 8-C of GSIS Village brought suit   against herein
5
petitioner, questioning the increase in purchase price. They likewise wrote a "A Plea For
Justice" to then President Ferdinand E. Marcos, requesting for a directive to petitioner's
management to "accept payments of amortization installments on the original amounts
stated in the Deed(s) of Conditional Sale."
As a result, the Office of the President created a three-man Ad Hoc committee,
composed of representatives of the Office of the President, the petitioner System, and
the GSIS Village Association. The committee found that the final cost of the Village
justified a higher price range for the houses and lots in the project.
Based on the ad hoc committee's findings, the petitioner System, with the approval of its
Board of Trustees, increased the purchase prices of the houses and lots in the GSIS
Village.
On May 30, 1973, however, then Presidential Executive Assistant Jacobo C. Clave,
through a memorandum, advised petitioner that then President Marcos has approved the
"Plea" and wanted its "immediate implementation." The attempt by petitioner to have the
presidential endorsement reconsidered was denied on December 18, 1980.
Meanwhile, after years of diligently paying the monthly amortizations  and real estate
6
taxes on the subject property, the private respondents spouses informed  petitioner that
7
the payments   for the property had been completed, and hence, the execution of an
8
absolute deed of sale in their favor was in order. No action on the matter was taken by
petitioner.
The instant case was initiated on May 20, 1984 in the RTC of Manila, Br. 11, with the
filing of a Complaint for Specific Performance With Damages to compel petitioner to
execute in private respondents' favor, the final Deed of Sale over the subject
property.   The trial court found for the Leuterios.
9
On January 24, 1992, the Court of Appeals , in its impugned Decision, upheld the trial
10
court solely on the basis of estoppel. It held that petitioner cannot increase the price of
the subject house and lot after it failed, through the years, to protest against private
respondents' P200.00-amortization or to require the payment by them of bigger monthly
installments.11
Petitioner now urges the setting aside of the impugned Decision of the Court of Appeals,
alleging that it erred in:
I. . . . HOLDING THAT THE PETITIONER GSIS IS
ESTOPPED FROM ENFORCING THE ADJUSTMENT
OF THE SELLING PRICE.
II. . . . NOT HOLDING THAT THE SPOUSES LEUTERIO
MUST BE BOUND BY THE RECOMMENDATION MADE
BY THE AD HOC COMMITTEE
III. . . . FAILING TO CONSIDER THE JUSTIFICATION
FOR THE ADJUSTMENT IN THE SELLING PRICE OF
THE LOTS AND HOUSING UNITS.
IV. . . . AFFIRMING THE DECISION OF THE TRIAL
COURT WHICH ORDERED THE PETITIONER GSIS TO
EXECUTE THE FINAL DEED OF SALE.  12
Upon the other hand, private respondents, in their Comment,  contend that the Petition
13
only raises in factual issues, which cannot be settled by this Court in the instant
proceedings. They further contend that no reversible errors were committed by the Court
of Appeals in its impugned Decision.
We find no merit in the petition, but for reasons different from those espoused by the
respondent Court of Appeals.
The decisive issue really involves a question of fact — whether or not the spouses
Leuterio agreed to the notation "subject to adjustment pending approval of the Board of
Trustees" appearing on the margin of the parties' Conditional Deed of Sale. If there was
no agreement, the Leuterio spouses are only obligated to pay the purchase price of
P19,740.00 as stipulated in the main body of the Conditional Deed of Sale.
Trite to state, this Court is not a trier of facts. In a multitude of cases, we have laid down
the unbending rule that findings of fact of lower courts are binding on us unless they are
marred by manifest errors. The pleadings before us do not demonstrate that the trial
court grossly erred when it found that the purchase price agreed upon by the parties was
P19,740.00 and this agreement was not made subject to any posterior event or
condition. This finding of fact was based on the explicit testimony of private respondent
Raul Leuterio that when he and his wife signed the Deed of Conditional Sale in 1965, the
notation "subject to adjustment pending approval of the Board of Trustees" was not in the
Deed.  Likewise, the Answer of petitioner to the Complaint of the private respondents
14
admitted the non-existence of this notation at the time the Deed of Conditional Sale was
signed, albeit, it called the omission an honest mistake.  We quote paragraph 5 of said
15
answer, viz:
5. The omission of the marginal notation reading "(x) subject to
adjustment pending approval of the Board of Trustees" (Annexes B to B-
1-b of the Complaint) on the Deed of Conditional Sale signed by the
plaintiffs, as alleged in paragraph VII of the Complaint, must have been
an honest mistake on the part of the clerk who typed the document.
This was also confirmed by the petitioner in the instant Petition for Review
on Certiorari where it is alleged that ". . . the respondents-spouses Leuterio were
not required to sign a new contract as provided in Resolution No. 966 but
instead, the words 'subject to adjustment pending approval of the Board of
Trustees' were inserted in the Deed of Conditional Sale executed in 1965."
Petitioner is bound by these judicial admission.
Quite clearly, therefore, the purchase price mutually agreed upon by the parties was
P19,740.00. The spouses Leuterio did not give their consent for petitioner to make a
unilateral upward adjustment of this purchase price depending on the final cost of
construction of the subject house and lot. It is illegal for petitioner to claim this
prerogative, for Article 1473 of the Civil Code provides that "the fixing of the price can
never be left to the discretion of one of the contracting parties. . . ."
We also reject petitioner's contention that the spouses Leuterio are bound by the
recommendation of the ad hoc committee as this was set aside by then President
Ferdinand E. Marcos.  The rejection was communicated by then Presidential Assistant
16
Jacobo Clave to petitioner in a Memorandum dated May 30, 1973.  Petitioner moved for
17
reconsideration but the motion was denied by the former President thru Presidential
Assistant Joaquin Venus, in a letter dated December 18, 1990.  18
Next, petitioner would impress on us the need to adjust the purchase price of the
spouses' house and lot in view of the change in the final cost of construction. If petitioner
failed to factor this increase in the cost of the construction in the purchase price of the
subject house and lot, it has nobody to blame but itself and it alone should suffer the
loss. To be sure, given the expertise of its technical people, it has no reason to be
shortsighted. In any event, our law on contracts does not excuse a party from specifically
performing his obligation on the ground that he made a bad business judgment.
IN VIEW WHEREOF, the petition for review on certiorari is DISMISSED. Costs against
petitioner.
[G.R. NO. 148599. March 14, 2005]
PROFESSIONAL ACADEMIC PLANS, INC., FRANCISCO COLAYCO and
BENJAMIN DINO, Petitioners, v. DINNAH L. CRISOSTOMO, Respondents.
DECISION
CALLEJO, SR., J.:
Before us is a Petition for Review of the Decision1 of the Court of Appeals (CA)
affirming the decision of the Regional Trial Court in Civil Case No. 93-197, and its
Resolution denying the motion for reconsideration thereof filed by petitioner
Professional Academic Plans, Inc. (PAPI).
The Antecedents
Respondent Dinnah L. Crisostomo was the PAPI District Manager for Metro
Manila. As such officer, she did not receive any salary but was entitled to a
franchise commission equivalent to 10% of the payments on remittances of
clients whose contracts or agreements had been negotiated by her, for and in
behalf of PAPI. She was later promoted as Regional Manager.
On May 17, 1988, petitioner PAPI wrote Col. Noe S. Andaya, the President of the
Armed Forces of the Philippines Savings and Loan Association, Inc. (AFPSLAI)
offering an Academic Assistance Program for its members, their children and
dependents.
Noel Rueda, a sales consultant of petitioner PAPI, initiated negotiations for the
sale of pre-need educational plans under the said program with the AFPSLAI.
However, before an agreement was reached, Rueda's services were terminated.
Respondent Crisostomo, as the district manager and the immediate supervisor of
Rueda, continued the negotiation of the account together with Guillermo R.
Macariola, the Assistant Vice-President for Sales.2 The AFPSLAI agreed to the
proposal.
On November 9, 1988, the AFPSLAI and PAPI executed a Memorandum of
Agreement (MOA)3 in connection with scholarship funding agreements to be
entered into by PAPI and the AFPSLAI members. These agreements shall then
embody the provisions of the Professional Academic Program Agreement. The
parties agreed that all support services would be provided by PAPI and that any
amendments and/or modifications to the MOA would be effective only upon
approval of the parties thereto.
By then, Rueda was no longer connected with the petitioner corporation, hence,
was disqualified to receive the franchise commission. Thus, the said commission
was offered to Macariola who, however, declined and waived his right thereto in
favor of respondent Crisostomo, Rueda's immediate supervisor. The Executive
Committee of petitioner PAPI agreed to give the franchise commission to
respondent Crisostomo.4
Initially, respondent Crisostomo received the 10% franchise commission from
December 1988 until April 1989. Later, upon the instance of petitioner Benjamin
Dino, then Assistant Vice-President for Marketing, respondent Crisostomo's
franchise commission was reduced to 5% to support the operational expenses of
PAPI. After a few months, the said commission was again reduced to 4%. Two
months later, petitioner PAPI asked for another .25% reduction; hence,
respondent Crisostomo's franchise commission was further reduced to 3.75%.
Finally, in January 1991, petitioner PAPI again asked for a final reduction of the
commission to 2% to which respondent Crisostomo agreed, on the condition that
it be reduced into writing.5
Thus, on February 7, 1991, petitioner Dino, and Angelito B. Cruz, Vice-President
for Finance and Administration, signed a Memorandum which reads as follows:
This will confirm your company franchise on all AFPSLAI business with
Professional Academic Plans, Inc. under the following terms and conditions:
1. Your franchise commission shall remain at 2% excluding Entrance and Service
Fees of the first year premium for as long as you are connected with the
company at whatever capacity.
2. This franchise is not transferable.
For your guidance.
(Sgd.) (Sgd.)
BENJAMIN S. DINO ANGELITO B. CRUZ6
Crisostomo received her 2% commission until October 1991.7 In the meantime,
Col. Victor M. Punzalan succeeded Col. Noe S. Andaya as President of the
AFPSLAI.8 In a Letter dated December 16, 1991, Col. Punzalan informed PAPI of
the AFPSLAI's decision to review the 1988 MOA.
As an aftermath of the negotiation, petitioner PAPI and the AFPSLAI executed a
MOA in April 1992, amending their prior MOA.9
The AFPSLAI resumed its remittances of the installment payments of its members
to petitioner PAPI in June 1992.10 This time, however, Crisostomo was not paid
her commission. In an Inter-Office Memorandum11 dated June 1, 1992,
respondent Crisostomo's franchise commission on sales transacted with the
AFPSLAI was terminated, for the following reasons: (1) the new AFPSLAI
management cancelled the old MOA in October 1991 due to various anomalies
and the misrepresentation committed by PAPI's sales force; (2) the new MOA is
largely due to management's effort; hence, no franchise would be granted to any
sales associates; and (3) the franchise guidelines as per the Memorandum dated
November 1988 prescribed that in order to maintain her franchise, 100 new paid
plans should be completed on a month to month basis and respondent
Crisostomo was not able to meet these parameters for the period of November
1991 to May 1992.
Nonetheless, respondent Crisostomo insisted on the release of her 2% franchise
commission.12 She first approached her immediate supervisor, Mrs. Editha
Bayoneta, the Senior Assistant Vice-President, but to no avail. She then went to
petitioner Dino, who allegedly threatened her with termination if she persisted
with her demand. Unfazed, she sought a dialogue with the President himself,
petitioner Francisco Colayco. They, however, failed to arrive at a settlement. 13 On
July 6, 1992, respondent Crisostomo sent a demand letter to petitioner PAPI. The
latter informed her that it could not accede to her demand for the reasons stated
in the Inter-Office Memorandum dated June 1, 1992.
Thereafter, Crisostomo again approached Colayco who advised her to make a
formal proposal. She complied and submitted a letter 14 on August 13, 1992 where
she made the following proposal:
Option 1: That I am willing to settle for a P5 Million amount settlement and an
immediate irrevocable resignation from your good company,
Option 2: That the 2% franchise fee/commission be retained even if and when
the undersigned is no longer connected with Professional Group, Inc. for as long
as the AFPSLAI is still doing business with the Professional Group. This is
considered as the royalty fee.15
However, in a Letter16 dated August 17, 1992, petitioner Colayco informed the
respondent that her settlement proposal was totally unacceptable and that she
was being placed under preventive suspension in order to abort any untoward
reaction resulting from the denial of her request, which may be detrimental to the
company's interest. Worse, she was advised not to come back after the
suspension. Thus, her services in the company were terminated.
On January 21, 1993, respondent Crisostomo filed a complaint for sum of money
and damages against petitioners PAPI, Colayco and Dino. She alleged therein that
as of October 2, 1992, petitioner PAPI's sales of pre-need plans to the AFPSLAI
amounted to P9,193,367.20; that she was entitled to 2% of such amount or the
sum of P183,867.34 as franchise commission; and that notwithstanding the said
franchise, petitioner PAPI refused to give her the said commissions. She, likewise,
prayed for the grant of moral and exemplary damages, plus attorney's fees.17
The petitioners averred in their answer to the complaint that Crisostomo was not
entitled to the franchise commission because she did not participate in the
execution of the 1988 MOA. They pointed out that under the December 1989
company guidelines, a franchise holder shall be maintained only when 100 new
paid plans are completed on a month-to-month basis. They argued that since
respondent Crisostomo was unable to meet this requirement for the period of
November 1991 to May 1992, her franchise was terminated. The petitioners also
claimed that the AFPSLAI did not resume payments in 1992 but entered into a
new MOA after it undertook new negotiations. They maintained that under the
new MOA, no one is entitled to a franchise, much less respondent Crisostomo. 18
The petitioners adduced testimonial evidence to show that respondent Crisostomo
had no participation whatsoever in the negotiations which culminated in the
execution of the two MOAs between petitioner PAPI and the AFPSLAI. Petitioner
Dino testified that before respondent Crisostomo became the regional manager,
she was not an employee of PAPI. According to him, after the termination of
Rueda's employment for cause, the franchise commission should revert back to
petitioner PAPI as a rule. While the Executive Committee agreed to award the
commission, it agreed to give respondent Crisostomo only a 5% commission,
which was reduced to 2% until June 1992 under the 1992 MOA. Moreover,
Crisostomo had no participation whatsoever in the negotiations of the two
agreements.
After due proceedings, the trial court rendered a Decision on November 20, 1997,
the dispositive portion of which reads:
Premises considered, judgment is hereby rendered in favor of the plaintiff and as
against defendants. Wherefore, defendants are hereby ordered to release to
plaintiff:
1. the sum of one hundred eighty-three thousand eight hundred sixty-seven
thousand and twenty-five centavos (P183,867.25) which constitutes her
commission from the AFPSLAI contract as of October 1992, and the sum
equivalent to 2% of all future remittances by AFPSLAI to defendant PAPI;
2. moral damages in the amount of P200,000.00;
3. exemplary [damages] of P50,000.00;
4. attorney's fees of P50,000.00;
5. cost of suit.
SO ORDERED.19
The petitioners appealed the decision to the CA which rendered judgment 20 on
August 31, 2000 affirming in toto the decision of the trial court.
The Ruling of the Court of Appeals
According to the CA, the letter of Col. Punzalan did not indicate any intention to
abrogate the first MOA. At most, it merely suspended the acceptance of the
application for pre-need plans while a thorough review of the terms and
conditions of the first MOA was being made. The CA held that the second MOA did
not disclose any incompatibility with the first MOA that would amount to an
implied extinguishment of the latter; nor did the new MOA use any word
suggesting the cancellation of the first. The CA then ruled that what was
executed in 1992 was a mere modification of the first MOA.21
The CA further held that the fact that military and political support intervened in
facilitating the revival of the AFPSLAI account did not diminish the respondent's
right to the franchise commission, considering that it was awarded to her by the
executive committee for successfully initiating the deal with the AFPSLAI in
1988.22
The CA ruled that the requirement of completing 100 new plans monthly as a
condition for a franchisee to be entitled to the commission was superseded by the
Memorandum dated February 7, 1991, which reduced the commission to 2%
from the earlier 10%. Respondent Crisostomo was entitled to receive such
reduced commission as long as she was connected with the petitioner corporation
in whatever capacity. Moreover, assuming that such condition was still in effect,
its non-fulfillment from November 1991 to May 1992 could not be imputed to the
respondent since it was brought about by Col. Punzalan's order to suspend the
acceptance of plan applications pending a review of the first MOA.23
The CA found that the award of moral and exemplary damages, attorney's fees
and the costs of the suit, in favor of the respondent, was fully supported by the
evidence on record and was justified, in light of the petitioner corporation's
wanton disregard of respondent's claim for her franchise commission. 24
On June 13, 2001, the CA denied the petitioners' motion for reconsideration for
lack of merit. Hence, they filed this Petition for Review on Certiorari .
The Present Petition
The petitioners submit the following issues for our consideration:
A) WHETHER OR NOT THE OLD MEMORANDUM OF AGREEMENT HAD BEEN
CANCELLED AND RESCINDED BY AFPSLAI;
B) WHETHER OR NOT RESPONDENT IS ENTITLED TO THE FRANCHISE FEE OR
COMMISSION UNDER THE NEW MEMORANDUM OF AGREEMENT UNDER WHICH
SHE HAD NO PARTICIPATION WHATSOEVER IN THE NEGOTIATION AND
EXECUTION;
C) WHETHER OR NOT PETITIONERS, IN DENYING RESPONDENT'S CLAIM, HAVE
COMMITTED ACTS THAT RENDER THEM LEGALLY LIABLE FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY'S FEES AND COST OF SUIT.25
Primarily, the petitioners assert that the respondent is not entitled to a franchise
commission. They aver that the respondent did not participate in initiating,
conceptualizing, and negotiating the first MOA with the AFPSLAI, except that she
was present during its signing. The franchise commission for the AFPSLAI account
under the old MOA should have been granted to Noel Rueda, who initiated and
conceptualized the transaction. The petitioners maintain that the franchise
commission was only awarded to the respondent because those who were
entitled to it were disqualified to be franchise holders - Rueda was disqualified for
being no longer connected with the petitioner company, while Macariola was
disqualified for being an employee.26
Assuming that the respondent was entitled to the franchise commission under the
old MOA, the petitioners argue that such privilege was already extinguished,
considering that the old MOA was cancelled by the AFPSLAI thru the Letter dated
December 16, 1991. They maintain that in writing the said letter, Col. Punzalan
intended to abrogate the old MOA and not merely suspend the same, otherwise,
the intention to enter into "a new agreement mutually beneficial" to both parties
would not have been mentioned therein.27 They conclude that since there has
already been an express cancellation of the old MOA, there is no longer a need to
delve into the issue of whether the new MOA declared in unequivocal terms that
the old MOA was being cancelled, or whether the new MOA is incompatible with
the old one.28
The petitioners point out that the respondent had no participation whatsoever in
the negotiation or execution of the new MOA. Considering this and the fact that
the old MOA had been duly cancelled, the respondent, therefore, had no right to
the franchise commission on the AFPSLAI account under the new MOA.29
The petitioners assert that the award of moral and exemplary damages and
attorney's fees has no basis since they did not act in bad faith in denying the
respondent's claim.30
In her Comment on the petition, the respondent counters that regardless of the
execution of the new MOA and her non-participation in its negotiation and
execution, her right to the commissions from all sales emanating from the
AFPSLAI transactions subsists as long as she remained connected with PAPI. She
asserts that the petitioners are now in estoppel to question the grant of her
commission since it was granted through the petitioner corporation's authority
and it was reduced into writing.31
In their Reply, the petitioners stress that the respondent's entitlement to the
commission was not absolute. It was subject to certain conditions, i.e., the fact
that the respondent must be connected with the company in order to be entitled
to it, and that the old MOA must remain effective, since it was the basis for the
grant of the commission. With its cancellation, the right of respondent to the
commission, likewise, ceased to exist. Without the new MOA, there would no
longer be any applications for academic plans from the AFPSLAI and,
consequently, no commission to be earned.32
The Ruling of the Court
Rule 45 of the Rules of Court provides that only legal issues may be raised.
Factual issues are beyond the province of the Supreme Court in a Petition for
Review , for it is not the Court's function to weigh the evidence all over
again.33 While the Court may, in exceptional cases, resolve factual issues, the
petitioners herein failed to establish any such exceptional circumstances.
Moreover, it is doctrinal that findings of facts of the CA upholding those of the
trial court are binding upon the Supreme Court.34
Even after a review of the factual issues raised by the petitioners, we find and so
rule that the CA was correct in declaring that the first MOA had not been
cancelled, but was merely modified by the second MOA.
A reading of the letter of Col. Punzalan to the petitioner corporation indicates that
it merely signified the suspension of the acceptance of new applications under the
first MOA, until such time that a thorough study was undertaken, and a new
agreement mutually beneficial to both parties was entered into. By his letter, Col.
Punzalan did not unilaterally cancel or rescind the first MOA. Indeed, the
petitioners failed to adduce a morsel of evidence to prove that AFPSLAI had
agreed to such cancellation or rescission of the first MOA. It bears stressing that
abandonment of contract rights requires proof of actual intent to abandon.35
Once a contract is entered into, no party can renounce it unilaterally or without
the consent of the other.36 This is the essence of the principle of mutuality of
contracts entombed in Article 130837 of the Civil Code. To effectuate
abandonment of a contract, mutual assent is always required.38 The mere fact
that one has made a poor bargain may not be a ground for setting aside the
agreement.39
As can be gleaned from the second MOA, the parties merely made substantial
modifications to the first MOA, and agreed that only those provisions inconsistent
with those of the second were considered rescinded, modified and/or
superseded.40
As graphically shown below, the parties agreed to continue with the
implementation of the Academic Assistance Program under the acronym "LOVES"
(Loans to Offset Very Expensive Schooling) and to continue implementing the
same. The rights and obligations of the parties under the first MOA were
maintained albeit with modifications, to wit:
1988 MOA 1992 MOA
IN GENERAL IN GENERAL
'Agreement between PAPI and 'Agreement between AFPSLAI and the PAPI to
AFPSLAI to implement the terms implement the terms and conditions of the Loans to
and conditions of the Academic Offset Very Expensive Schooling (LOVES) Program
Assistance Program
'Benefits to accrue directly to the
member and the designated heirs
IMPLEMENTATION
'Assistance by PAPI to AFPSLAI in
terms of support services
'Creation of a Committee to
supervise the initial implementation
of the program
'Benefits to accrue directly to the member and the 'AFPSLAI to become the receiver of 'AFPSLAI to automatically become the receiver of the
designated heirs the contract in case of failure to pay contract in case of failure to pay the monthly
3 monthly amortizations amortization(s), with dispositive right over the plan
'AFPSLAI to acquire all interests
IMPLEMENTATION from the contract in case the 1st
year assistance is not fully paid by
'Putting up of an extension office near the AFPSLAI the member
building at the expense of PAPI
  IN CASE OF CANCELLATION
'Support and services by PAPI in the implementation
of the program 'Due to fraud, forgery or misrepresentation of PAPI
personnel

PAYMENT and COLLECTION PAYMENT and COLLECTION - AFPSLAI to act on it and notify PAPI

'Financing of the 1st annual 'Financing in the form of a 5-year loan in favor of the - Member's loan to be deducted from the amounts
payment by AFPSLAI in the form of member equivalent to the Gross Contract Price due to PAPI, or to be billed to PAPI, in case the
educational loan to the member (GCP) of the plan former is insufficient

'AFPSLAI as the authorized
collecting agent of monthly
installments of the members
'Remittance of collections to the
PAPI from the 2nd year until the
plan is fully paid
'Direct payment to PAPI of the 1st
year assistance granted by AFPSLAI
to the member
BENEFITS TO AFPSLAI
'47.5% of the net Initial Cash
Brought-In of all the 1st year
assistance
'5% of all total collections from the
2nd year up to the 5th year
IN CASE OF NON-PAYMENT
'Schedule of drawing out the loan proceeds within 5
years
- 20% of GCP upon submission of the complete
documentation by PAPI and upon approval of the
loan
- 80% of the GCP to be drawn out in 48 equal
monthly installments to start upon receipt by
AFPSLAI of the 13th monthly amortization of the
member
BENEFITS TO AFPSLAI
'53.5% out of the 20% of the GCP as service fee and
discount
'5% out of the 80% of the GCP as service fee
IN CASE OF NON-PAYMENT
MISCELLANEOUS
'AFPSLAI to be free from any legal
implication that may arise as to the
agreement between the member
and PAPI
'Effectivity of the MOA immediately
upon signing
- no rebate on the service fee and discount
'Due to death of either the member or beneficiary
- the plan shall be deemed fully paid for
- to be acted upon by PAPI
- outstanding accounts to be deducted from
AFPSLAI's future releases or to be billed to PAPI
subject to certain conditions.
MISCELLANEOUS
'AFPSLAI to be free from any liability
arising between the member and PAPI
 
'Effectivity of the MOA immediately
upon signing
'Amendments and modifications to

'Amendments and modifications to
become effective only upon
approval of the parties
court did not make any finding that any of the instances enumerated in Art. 2208
of the Civil Code exists.
become effective only upon approval
of the parties
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with
MODIFICATION. The awards for moral and exemplary damages and attorney's
'Prior inconsistent agreements
fees are DELETED. No pronouncement as to costs.
deemed rescinded, modified, or
superseded.
SO ORDERED.

The fact that the respondent did not participate in the negotiations of the new
MOA is of no moment. As culled from the petitioners' testimonial evidence, the
franchise commission was awarded as an incentive to the one who initiated and
successfully negotiated the AFPSLAI account within a certain period.41 The
franchise commission was granted subject to two conditions only: (1) that the
respondent must remain connected with the company, and (2) that it is not
transferable. At the time the new MOA was executed, the respondent was still
connected with the petitioner corporation; hence, she was still entitled to her
commission. Even with the modification of the first MOA by the second one, the
respondent had the right to continue receiving her franchise commission from the
petitioner corporation.

We agree with the respondent that the petitioners are now in estoppel to
question her entitlement to the franchise commission under the old MOA. It must
be noted that from December 1988 until October 1991 the respondent was
continuously receiving her franchise commission from the petitioner corporation.
It was only when the remittances for AFPSLAI were suspended that the
respondent stopped receiving her commission.

On the issue of damages, we rule for the petitioners. Moral damages are
recoverable for breach of contract where the breach was wanton, reckless,
malicious or in bad faith, oppressive or abusive.42 However, moral damages are
improperly awarded, absent a specific finding and pronouncement from the trial
court that petitioners acted in such manner.43 In the instant case, despite the trial
court's award of moral damages, it did not make any pronouncement as to the
basis of such award. Therefore, the award of moral damages must be deleted.

As a consequence, the award for exemplary damages is also vacated. Exemplary

damages are not recoverable as a matter of right, and although such damages
need not be proved, the plaintiff must first show that he is entitled to moral,
temperate or compensatory damages before a court can favorably consider an
award of exemplary damages.44 In this case, there was no finding that the
respondent is entitled to any such damages; hence, no exemplary damages may
be awarded. Finally, we also vacate the award of attorney's fees since the trial
G.R. No. L-11318             October 26, 1918
THE MANILA RAILROAD CO., plaintiff-appellant,
vs.
LA COMPAÑIA TRANSATLANTICA, defendant-appellee. and
THE ATLANTIC GULF & PACIFIC CO., defendant-appellant.
William A. Kincaid & Thomas L. Hartigan for plaintiff-appellant.
Lawrence, Ross & Block for defendant-appellant Atlantic, Gulf & Pacific Co.
Gilbert, Cohn & Fisher for defendant-appellee Compañia Transatlantica.
STREET, J.:
In March 1914, the steamship Alicante, belonging to the Compañia Transatlantica de
Barcelona, arrived at Manila with two locomotive boilers aboard, the property of The
Manila Railroad Company. The equipment of the ship for discharging heavy cargo was
not sufficiently strong to handle these boilers, and it was therefore necessary for the
Steamship Company to procure assistance in the port of Manila.
The Atlantic, Gulf and Pacific Company (hereafter called the Atlantic Company) was
accordingly employed by the Steamship Company, as having probably the best
equipment for this purpose of any contracting company in the city. The service to be
performed by the Atlantic Company consisted in bringing it s floating crane alongside
the Alicante, lifting the boilers our of the ship's hold, and transferring them to a barge
which would be placed ready to receive them.
Upon the arrival of the Alicante, the Atlantic company sent out its crane in charge of one
Leyden. In preparing to hoist the first boiler the sling was unfortunately adjusted near the
middle of the boiler, and it was thus raised nearly in an horizontal position. The boiler
was too long to clear the hatch in this position, and after one end of the boiler had
emerged on one side of the hatch, the other still remained below on the other side. When
the boiler had been gotten into this position and was being hoisted still further, a river
near the head of the boiler was caught under the edge of the hatch. The weight on the
crane was thus increased by a strain estimated at fifteen tons with the result that the
cable of the sling parted and the boiler fell to the bottom of the ship's hold. The sling was
again adjusted to the boiler but instead of being placed near the middle it was now slung
nearer one of the ends, as should have been done at first. The boiler was gain lifted; but
as it was being brought up, the bolt at the end of the derrick book broke, and again the
boiler fell.
The crane was repaired and the boiler discharged, but it was found to be so badly
damaged that it had to be reshipped to England where it was rebuilt, and afterwards was
returned to Manila. The Railroad Company's damage by reason of the cost of repairs,
expenses and loss of the use of the boiler proved to be P23,343.29; and as to the
amount of the damage so resulting there is practically no dispute. To recover these
damages the present action was instituted by the Railroad Company against the
Steamship Company. the latter caused the Atlantic Company to be brought in as a
codefendant, and insisted that whatever liability existed should be fixed upon the Atlantic
Company as an independent contractor who had undertaken to discharge the boilers and
had become responsible for such damage as had been done.
The judge of the Court of First Instance gave judgment in favor of the plaintiff against the
Atlantic Company, but the absolved the Steamship Company from the complaint. The
plaintiff has appealed from the action of the court in failing to give judgment against the
Steamship company, while the Atlantic company has appealed from the judgment
against it.
The mishap was undoubtedly due, as the lower court found, to the negligence of one
Leyden, the foreman in charge; and we may add that the evidence tends to show that his
negligence was of a type which may without exaggeration be denominated gross. The
sling was in the first place improperly adjusted, and the attention of Leyden was at once
called to this by the man in charge of the stevedores. Nevertheless he proceeded and,
instead of lowering the boiler when it was seen that it could not readily pass through the
hatch, he attempted to force it through; and the ship's tackle was brought into use to
assist in this maneuver. The second fall was, it appears, caused by the weakening of the
bolt at the head of the derrick boom, due to the shock incident to the first accident. This
defect was possibly such as not to be patent to external observation but we are of the
opinion that a person of sufficient skill to be trusted with the operation of machinery of
this character should be trusted with the operation of machinery of this character should
have known that the crane had possibly been weakened by the jar received in the first
accident. The foreman was therefore guilty of negligence in attempting to hoist the boiler
the second time under the conditions that had thus developed. It should be noted that the
operation was at all its states entirely under Leyden's control; and, although in the first lift
he utilized the ship's tackle to aid in hoisting the boiler, everything was done under his
immediate supervision. There is no evidence tending to show that the first fall of the
boiler might have been due to any hidden defect in the lifting apparatus; and if it had not
been for the additional strain caused by one end of the boiler catching under the hatch,
the operation would doubtless have been accomplished without difficulty. The accident is
therefore to be attributed to the failure of Leyden to exercise the degree of care which an
ordinarily competent and prudent person would have exhibited under the circumstances
which then confronted him. This conclusion of fact cannot be refuted; and, indeed, no
attempt is here made by the appellant to reverse this finding of the trial court.
Three questions are involved in the case, namely: (1) Is the steamship company liable to
the plaintiff by reason of having delivered the boiler in question in a damaged condition?
(2) Is the atlantic company liable to be made to respond to the steamship company for
the amount the latter may be required to pay to the plaintiff for the damage done? Is the
Atlantic company directly liable to the plaintiff, as the trial court held?
It will be observed that the contractual relation existed between the railroad company and
the steamship company; and the duties of the latter with respect to the carrying and
delivery of the boilers are to be discovered by considering the terms and legal effect of
that contract. A contractual relation also existed between the Steamship company and
the atlantic company; and the duties owing by the latter to the former with respect to the
lifting and the transferring of the boiler are likewise to be discovered by considering the
terms and legal effect of the contract between these parties. On the other hand, no
contractual relation existed directly between the Railroad Company and the Atlantic
Company.
We are all agreed, that, under the contract for transportation from England to Manila, the
Steamship company is liable to the plaintiff for the injury done to the boiler while it was
being discharged from the ship. The obligation to transport the boiler necessarily involves
the duty to convey and deliver it in a proper condition according to its nature, and
conformably with good faith, custom, and the law (art. 1258, Civ. Code). The contract to
convey import the duty to convey and deliver safely and securely with reference to the
degree of care which, under the circumstances, are required by law and custom
applicable to the case. The duty to carry and to carry safely is all one.
Such being the contract of the Steamship Company, said company is necessarily liable,
under articles 1103 and 1104 of the Civil Code, for the consequences of the omission of
the care necessary to the proper performance of this obligation. The contact to transport
and deliver at the port of Manila a locomotive boiler, which was received by it in proper
condition, is not complied with the delivery at the port of destination of a mass of iron the
utility of which had been destroyed.
Nor does the Steamship Company escape liability by reason of the fact that it employed
a competent independent contractor to discharge the boilers. The law applicable to this
feature of the case will be more fully discussed further on in this opinion. At this point we
merely observe that in the performance of this service the Atlantic company, and it has
never yet been held that the failure to comply with a contractual obligation can be
excused by showing that such delinquency was due to the negligence of one to whom
the contracting party had committed the performance of the contract.
Coming to the question of the liability of the Atlantic Company to respond to the
Steamship Company for the damages which the latter will be compelled to pay to the
plaintiff, we observe that the defense of the Atlantic company comprises two contentions,
to-wit, first, that by the terms of the engagement in accordance with which the Atlantic
company agreed to render the service, all risk incident to the discharge of the boilers was
assumed by the steamship company, and secondly, that the atlantic company should be
absolved under the last paragraph of article 1903 of the civil code, inasmuch as it had
used due care in the selection of the employee whose negligent act caused the damage
in question.
At the hearing in first instance the Atlantic Company introduced four witnesses to prove
that at the time said company agreed to lift the boilers out of the Alicante, as upon other
later occasions, the steamship company not be responsible for damage. The vice-
president of the atlantic company testified that hew as present upon the occasion when
the agent of the Steamship company made arrangements for the discharge of the boilers
and he heard the conversation between the president and said agent. According to this
witness the substance of the agreement was that, while the Atlantic Company would use
all due care in getting the boilers out, no responsibility was assumed for damage done
either to ship or cargo. The intermediary who acted as agent for the Steamship Company
in arranging for the performance of this service stoutly denied that any such terms were
announced by the officials or anybody else connected with the Atlantic Company at any
time while the arrangements were pending.
In the conflict of the evidence, we recognize that, by a preponderance of the evidence,
some reservation or other was made as to the responsibility of the Atlantic Company;
was made to the responsibility of the atlantic company and though the agent who acted
on behalf of the steamship company possibly never communicated this reservation to his
principal, the latter should nevertheless be held bound thereby. It thus becomes
necessary to discover what the exact terms of this supposed reservation were.
We think that we must put aside at once the words of studies precision with which the
president of the Atlantic company could exclude the possibility of any liability attaching to
his company, though we may accept his statement as showing that the excepted risk
contemplated breakage of the lifting equipment. There is undoubtedly a larger element of
truth in the more reasonable statement by the vice-president of the company. According
to this witness the contract combined two features, namely, an undertaking on the part of
the Atlantic Company to use all due care, combined with a reservation concerning the
company's liability for damage.
The Atlantic Company offered in evidence, a number of letters which had been written by
it at different times, extending over a period of years, in response to inquiries made by
other firms and person in Manila concerning the terms upon which the Atlantic Company
was not accustomed to assume the risk incident to such work and required the parties for
whom the service might be rendered either to carry the risk or insure against it. One such
letter, dated nearly four years prior to the occurrence such letter, dated nearly four years
prior to the occurrences which gave rise to this lawsuit, was addressed to the Compañia
Transatlantica de Barcelona one of the defendants in this case. It was stated in this
communication that the company's derrick would be subject to inspection prior to making
the lift but that the Atlantic Company would not assume responsibility for damage that
might occur either to ship or cargo from any whatsoever. The steamship company
rejected the services of the Atlantic company in that instance as being too onerous.
The letters directed to this parties, it may observed, would not, generally speaking, be
admissible as against the plaintiff for the purpose of proving that a similar reservation
was inserted in the contract with it on this occasion; but if knowledge of such custom is
brought home to the steamship company, the fact that such reservation was commonly
made is of some probative force. Reference to a number of these letters will show that
no particular formula was used by the Atlantic Company in defining its exemption, and
the tenor of these various communications differs materially. We think, however, that
some of the letters are of value as an aid in interpreting the reservation which the Atlantic
Company may have intended to make. We therefore quote from some of these letters as
follows:
We will use our best endeavors to carry out the work successfully and will ask
you to inspect our plant but we wish it distinctly understood that we cannot
assume responsibility for damage which may occur . . . while the lift is being
made. (To Rear Admiral, U.S.N., Oct. 4, 1909.)
Our quotation is based on the understanding that we assume no responsibility
from any accident which may happen during our operations. We always insert
this clause as precautionary measure, but we have never had to avail ourselves
of it as yet and do not expect to now. (To "El Varadero de Manila," Nov. 1, 1913.)
As is customary in these cases, we will use all precaution as necessary to handle
the gun in a proper manner. Our equipment has been tested and will be again,
before making the lift, but we do not assume any responsibility for damage to the
gun ship, or cargo. (To Warner, Barnes & Co., June 7, 1909.)
The idea expressed in these letters is, we think entirely consonant with the interpretation
which the vice-president of the company placed upon the contract which was made with
the steamship company upon this occasion, that is, the company recognized its duty to
exercise due supervisory care; and the exemption from liability, whatever may have been
its precise words had reference to disasters which might result from some inherent
hidden defect in the lifting apparatus or other unforeseen occurrence not directly
attributable to negligence of the company in the lifting operations. Neither party could
have supposed for a moment that it was intended to absolve the Atlantic Company from
its duty to use due care in the work.
It is not pretended that negligence on the part of the Atlantic Company or its employees
was expressly included in the excepted risk, and we are of the opinion that the contract
should not be understood as covering such an exemption. It is a rudimentary principle
that the contractor is responsible for the work executed by persons whom he employees
in its performance, and this expressed in the Civil Code in the form of a positive rule of
law (art. 1596). It is also expressly declared by law that liability arising from negligence is
demandable in the fulfillment of all kinds of obligations (art. 1103, Civil Code). Every
contract for the presentation of service therefore has annexed to it, as an inseparable
implicit obligation, the duty to exercise due care in the accomplishment of the work; and
no reservation whereby the person rendering the services seeks to escape from the
consequences of a violation of this obligations can viewed with favor.
Contracts against liability for negligence are not favored by law. In some
instances, such as common carriers, they are prohibited as against public policy.
In all cases such contracts should be construed strictly, with every intendment
against the party seeking its protection. (Crew vs. Bradstreet Company, 134 Pa.
St., 161; 7 L. R. A., 661; 19 Am. St. Rep., 681.)
The strictness with which contracts conferring such an unusual exemption are construed
is illustrated in Bryan vs. Eastern & Australian S. S. Co. (28 Phil. Rep., 310). The
decision in that case is not precisely applicable to the case at bar, since the court was
there applying the law of a foreign jurisdiction, and the question at issue involved a
doctrine peculiar to contracts of common carriers. Nevertheless the case is instructive as
illustrating the universal attitude of courts upon the right of a contracting party to stipulate
against the consequences of his own negligence. It there appeared that the plaintiff had
purchased from the defendant company a ticket for the transportation of himself and
baggage from Hongkong to Manila By the terms of the contract printed in legible type
upon the back of the ticket it was provided that the company could not hold itself
responsible for any loss or damage to luggage, under any circumstances whatsoever,
unless it had been paid for as freight. It was held that this limitation upon the liability of
the defendant company did not relieve it from liability of the defendant company for
negligence of its servants by which the baggage of the passenger was lost. Said the
court: Ordinarily this language would seem to be broad enough to cover every possible
contingency, including the negligent act of the defendant's servants. To so hold,
however, would run counter to the established law of England and the United States on
that subject. The court then quoted the following proposition from the decision of the
King's Bench Division in Price & Co. vs. Union Lighterage Co. ([1903], 1 K. B. D., 750,
754):
"An exemption in general words not expressly relating to negligence, even
though the words are wide enough to include loss by negligence or default of
carriers' servants' must be construed as limiting the liability of the carrier as
assurer, and not as relieving from the duty of the exercising reasonable skill and
care."
Even admitting that, generally speaking, a person may stipulate against liability for the
consequences of negligence, at least in those cases where the negligence is not gross
or willful, the contract conferring such exemption must be so clear as to leave no room
for the operation of the ordinary rules of liability consecrated by experience and
sanctioned by the express provisions of law.
If the exemption should be understood in the scene that counsel for the Atlantic
Company now insists it should bear, that is, as an absolute exemption from all
responsibility for negligence, it is evident that the agreement was a most inequitable and
unfair one, and hence it is one that the steamship company can not be lightly assumed to
have made. Understood in that sense it is the equivalent of licensing the Atlantic
Company to perform its tasks in any manner and fashion that it might please, and to hold
it harmless from the consequences.
It is true that, in these days insurance can usually be obtained in the principal ports of
commerce by parties circumstanced as was the steamship company in the case now
before us. But the best insurance against disasters of this kind is found in the exercise of
due care; and the chief incentive to the exercise of care is a feeling of responsibility on
the part of him who undertakes the work. Naturally the courts are little inclined to aid tin
the efforts of contractors to evade this responsibility.
There may have been in the minds of the officials of the Atlantic Company an idea that
the promise to use due care in the lifting operations was not accompanied by a legal
obligation, such promise being intended merely for its moral effect as an assurance to
the steamship company that the latter might rely upon competence and diligence of the
employees of the Atlantic Company to accomplish the work in a proper way. The contract
can not be permitted to operate in this one-sided manner. The two features of the
engagement, namely, the promise to use due care and the exemption from liability for
damage should be so construed as to give some legal effect to both. The result is, as
already indicated, that the Atlantic Company was bound by its undertaking to use due
care and that he exemption was intended to cover accidents use to hidden defects in the
apparatus or other unforeseeable occurrences not having their origin in the immediate
personal negligence of the party in charge of the operations.
We now proceed to consider the contention that the Atlantic Company under the last
paragraph of article 1903 of the Civil Code, which declares that the liability there referred
to shall cease when the persons mentioned therein prove that they employed all the
diligence of a good father of a family to avoid the damage. In this connection the
conclusion of fact must be conceded in favor of the Atlantic Company that it had used
proper care in the selection of Leyden and that , so far as the company was aware, he
was a person to whom might properly be committed the task of discharging the boilers.
The answer to the contention, however is the obligation of the Atlantic Company was
created by contract, and article 1903 is not applicable to negligence arising in the course
of the performance of a contractual obligation. Article 1903 is exclusively concerned with
cases where the negligence arises in the absence of agreement.
In discussing the liability of the Steamship Company to the plaintiff Railroad Company we
have already shown that a party is bound to the full performance of his contractual
engagements under articles 1101 et seq. of the Civil Code, and other special provisions
of the Code relative to contractual obligations; and if he falls short of complete
performance by reason of his own negligence or that of any person to whom he may
commit the work, he is liable for the damages resulting therefrom. What was there said is
also applicable with reference to the liability of the Atlantic Company upon its contract
with the Steamship Company, and the same need not be here repeated. It is desirable,
however, in this connection, to bring out somewhat more fully the distinction between
negligence in the performance of a contractual obligation (culpa contractual) and
neligence considered as an independent source of obligation between parties not
previously bound (culpa aquiliana).
This distinction is well established in legal jurisprudence and is fully recognized in the
provisions of the Civil Code. As illustrative of this, we quote the following passage from
the opinion of this Court in the well-known case of Rakes vs. Atlantic, Gulf & Pacific Co.
(7 Phil. Rep., 359, 365), and in this quotation we reproduce the first paragraph of here
presenting a more correct English version of said passage.
The acts to which these articles are applicable are understood to be those not
growing out of preexisting duties of the parties to one another. But where
relations already formed give arise to duties, whether springing form contract or
quasi-contract, then breaches of those duties are subject to articles 1101, 1103,
and 1104 of the same code. A typical application of this distinction may be found
in the consequences of a railway accident due to defective machinery supplied
by the employer. His liability to his employee would arise out of the contract for
passage, while that of the injured by-stander would originate in the negligent act
itself. This distinction is thus clearly set forth by Manresa in his commentary on
article 1093:
"We see with reference to such obligations, that culpa, or negligence,
may be understood in two different senses, either
as culpa, substantive and independent, which of itself constitutes the
source of an obligation between two person not formerly bound by any
other obligation; or as an incident in the performance of an obligation
which already existed, and which increases the liability arising from the
already existing obligation."
Justice Tracey, the author of the opinion from which we have quoted, proceeds to
observe that Manresa, in commenting on articles 1101 and 1104, has described these
two species of negligence as contractual and extra-contractual, the latter being the culpa
aquiliana of the Roman law. "This terminology is unreservedly accepted by Sanchez
Roman (Derecho Civil, fourth section, chapter XI, article II, No. 12), and the principle
stated is supported by decisions of the supreme court of Spain,. among them those of
November 29, 11896 (80 Jurisprudencia Civil, No. 151), and June 27, 1894
(75 Jurisprudencia Civil, No. 182.)"
The principle that negligence in the performance of a contract is not governed by article
of the Civil Code but rather by article 1104 of the same Code was directly applied by this
court in the case of Baer Senior & Co.'s successors vs. Compañía Maritima (6 Phil. Rep.,
215); and the same idea has been impliedly if not expressly recognized in other cases
(N. T. Hashim & Co. vs. Rocha & Co., 18 Phil. Rep., 315; Tan Chiong Sian vs. Inchausti
& Co., 22 Phil. Rep., 152).
What has been said suffices in our opinion to demonstrate that the Atlantic Company is
liable to the Steamship Company for the damages brought upon the latter by the failure
of the Atlantic company to use due care in discharging the boiler, regardless of the fact
that the damage was caused by the negligence of an employee who was qualified for the
work and who had been chosen by the Atlantic Company with due care.
This brings us to the last question here to be answered, which is, Can the Atlantic
Company be held directly liable to the Railroad Company? In other words, can the
judgement entered in the trial court directly in favor of the plaintiff against the Atlantic
Company be sustained? To answer this it is necessary to examine carefully the legal
relations existing between the Atlantic Company and the Railroad Company with
reference to this affair; and we shall for a moment ignore the existence of the contract
between the steamship company and the atlantic company, to which the railroad
company was not a party.
Having regard then to the bare fact that the Atlantic Company undertook to remove the
boiler from the ship's hold and for this purpose took the property into its power and
control, there arose a duty to the owner to use due care in the performance of that
service and to avoid damaging was obviously in existence before the negligent act may,
if we still ignore the existence of the express contract, be considered as an act done in
violation of this duty.
The duty thus to use due care is an implied obligation, of a quasi contractual nature,
since it is created by implication of liability with which we are here confronted is
somewhat similar to that which is revealed in the case of the depositary, or
commodatary, whose legal duty with respect to the property committed to their care is
defined by law even in the absence of express contract; and it can not be doubted that a
person who takes possession of the property of another for the purpose of moving or
conveying it from one place to another, or for the purpose of performing any other
service in connection therewith (locatio operis faciendi), owes to the owner a positive
duty to refrain from damaging it, to the same extent as if an agreement for the
performance of such service had been expressly made with the owner. The obligation as
if an agreement made with the owner. The obligation here is really a species of
contract re, and it has its source and explanation in vital fact, that the active party has
taken upon himself to do something with or to the property and has taken it into his
power and control for the purpose of performing such service. (Compare art. 1889, Civil
Code.)
In the passage which we have already from the decision in the Rakes case this Court
recognized the fact that the violation of a quasi-contractual duty is subject to articles
1101, 1103, 1104 of the Civil Code, and not within the purview of article 1903. Manresa
also, in the paragraph reproduced above is of the opinion that negligence, considered a
substantive and independent source of liability, does not include cases where the parties
are previously bound by any other obligation. Again, it is instructive in this connection to
refer to the contents of article 1103 of the Civil Code, where it is demandable in the
fulfillment of all kinds of obligations. These words evidently comprehend both forms of
positive obligations, whether arising from express contract or from implied contract (quasi
contract).
In this connection it is instructive to recall celebrate case of Coggs vs. Bernard (2 Ld.
Raym, 909), decided in the court of the King's Bench of England in the year of 1803. The
action was brought by the owner of certain casks of brandy to recover damages from a
person who had undertaken to transport them from one place to another. It was alleged
that in so doing the defendant so negligently and improvidently put then down that one of
the casks was staved and the brandy lost. The complaint did not allege that the
defendant was a common carrier or that he was to be paid for his services. It was
therefore considered that the compliant did not state facts sufficient to support an action
for breach of any express contract. This made it necessary for the court to go back to
fundamental principles and to place liability on the ground of a violation of the legal duty
incident to the mere fact of carriage. Said Powell, J.: "An action indeed will not lie for not
doing the thing, for want of a sufficient consideration; but yet if the bailee will take the
goods into his custody, he shall be answerable for them; for the taking of the goods into
his custody is his own act." S9 Gould, J.: ". . . any man that undertakes to carry goods in
liable to an action, be he a common carrier or whatever he is, if through his neglect they
are lost or come to any damage: . . . . " Behind these expressions was an unbroken line
of ancient English precedents holding persons liable for damage inflicted by reason of a
misfeasance in carrying out an undertaking. The principle determined by the court in the
case cited is expressed in the syllabus in these words: 'If a man undertakes to carry
goods safely and securely, he is responsible for any damage they may sustain in the
carriage through his neglect, though he was not a common carrier and was to have
nothing for the carriage." Though not stated in so many words, this decision recognizes
that from the mere fact that a person takes the property of another into his possession
and control there arises an obligation in the nature of an assumpsit that he will use due
care with respect thereto. This must be considered a principle of universal jurisprudence,
for it is consonant with justice and common sense and as we have already seen
harmonizes with the doctrine above deduced from the provisions of the Civil Code.
The conclusion must therefore be that if there had been no contract of any sort between
the Atlantic company and the Steamship Company, an action could have been
maintained by the Railroad Company, as owner, against the Atlantic Company to recover
the damages sustained by the former. Such damages would have been demandable
under article 1103 of the Civil Code and the action would not have been subject to the
qualification expressed in the last paragraph of article 1903.
The circumstance that a contract was made between the Atlantic Company and the
Steamship company introduces, however, an important, and in our opinion controlling
factor into this branch of the case. It cannot be denied that the Steamship company has
possession of this boiler in the capacity of carrier and that as such it was authorized to
make a contract with Atlantic Company to discharge the same from the ship. Indeed, it
appears in evidence that even before the contract of affreightment was made the
Railroad Company was informed that it would necessary for steamship company to
procure the services of some contractor in the port of Manila to handle the discharge, as
the ship's tackle was inadequate to handle heavy cargo. It is therefore to be assumed
that the Railroad Company had in fact assented to the employment of a contractor to
perform this service.
contract. The rights of the plaintiff can only be made effective through the Compañia
Trasatlantica de Barcelona with whom the contract of affreightment was made.
The judgment entered in the Court of First Instance must, therefore be reversed not only
with respect to the judgment entered in favor of the plaintiff directly against the Atlantic
company but also with respect to the absolution of the steamship company and the
further failure of the court to enter judgment in favor of the latter against the Atlantic
Company. The Compañía Transatlantic de Barcelona should be and is hereby adjudged
to pay to the Manila Railroad Company the sum of twenty nine thousand three hundred
forty three pesos and twenty nine centavos (P23,343.29) with interest from May 11,
1914, until paid; and when this judgment is satisfied, the Compañia Transatlantic de
Barcelona is declared to be entitled to recover the same amount from the Atlantic &
Pacific Gulf Company, against whom judgment is to this end hereby rendered in favor of
the Compañia Transatlantica de Barcelona. No express adjudication of costs of either
instance will be made. So ordered.
Arellano, C.J., Torres, Araullo and Avanceña, JJ., concur.

Now, it cannot be admitted that a person who contract to do a service like that rendered
by the Atlantic company in this case incurs a double responsibility upon entering upon
performance, namely, a responsibility to the party with whom he contracted, and another
entirely different responsibility to the owner, based on an implied contract. The two
liabilities can not in our opinion coexist. It is a general rule that an implied conract never
arises where an express contract has been made.

If double responsibility existed in such case as this, it would result that a person who had
limited his liability by express stipulation might find himself liable to the owner without
regard to the limitation which he had seen fit to impose by contract. There appears to be
no possibility of reconciling the conflict that would be developed in attempting to give
effect to those inconsistent liabilities. The contract which was in fact made, in our
opinion, determine not only the character and extent of the liability of the Atlantic
company but also the person or entity by whom the obligation is eligible. It is of course
quite clear that if the Atlantic company had refused to carry out its agreement to
discharge the cargo, the plaintiff could have enforced specific performance and could not
have recovered damages for non-performance. (Art. 1257, Civil Code; Donaldson, Sim &
Co. vs. Smith, Bell & Co., 2 Phil. Rep., 766; Uy Tam and Uy Yet vs. Leonard, 30 Phil.
Rep., 471.) In view of the preceding discussion it is equally obvious that, for lack of privity
with the contract, the Railroad Company can have no right of action to recover damages
from the Atlantic Company for the wrongful act which constituted the violation of said
G.R. No. 118248             April 5, 2000
DKC HOLDINGS CORPORATION,petitioner,
vs.
COURT OF APPEALS, VICTOR U. BARTOLOME and REGISTER OF DEEDS FOR
METRO MANILA, DISTRICT III, respondents.
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari seeking the reversal of the December 5, 1994
Decision of the Court of Appeals in CA-G.R. CV No. 40849 entitled "DKC Holdings
Corporation vs. Victor U. Bartolome, et al.", affirming in toto the January 4, 1993
1  property. Although respondent Register of Deeds accepted the required fees, he
Decision of the Regional Trial Court of Valenzuela, Branch 172, which dismissed Civil
2  nevertheless refused to register or annotate the same or even enter it in the day book or
Case No. 3337-V-90 and ordered petitioner to pay P30,000.00 as attorney's fees.
The subject of the controversy is a 14,021 square meter parcel of land located in Malinta,
Valenzuela, Metro Manila which was originally owned by private respondent Victor U.
Bartolome's deceased mother, Encarnacion Bartolome, under Transfer Certificate of Title
No. B-37615 of the Register of Deeds of Metro Manila, District III. This lot was in front of
one of the textile plants of petitioner and, as such, was seen by the latter as a potential
warehouse site.
On March 16, 1988, petitioner entered into a Contract of Lease with Option to Buy with
Encarnacion Bartolome, whereby petitioner was given the option to lease or lease with
purchase the subject land, which option must be exercised within a period of two years
counted from the signing of the Contract. In turn, petitioner undertook to pay P3,000.00 a
month as consideration for the reservation of its option. Within the two-year period,
petitioner shall serve formal written notice upon the lessor Encarnacion Bartolome of its
desire to exercise its option. The contract also provided that in case petitioner chose to
lease the property, it may take actual possession of the premises. In such an event, the
lease shall be for a period of six years, renewable for another six years, and the monthly
rental fee shall be P15,000.00 for the first six years and P18,000.00 for the next six
years, in case of renewal.
Petitioner regularly paid the monthly P3,000.00 provided for by the Contract to
Encarnacion until her death in January 1990. Thereafter, petitioner coursed its payment
to private respondent Victor Bartolome, being the sole heir of Encarnacion. Victor,
however, refused to accept these payments.
Meanwhile, on January 10, 1990, Victor executed an Affidavit of Self-Adjudication over
all the properties of Encarnacion, including the subject lot. Accordingly, respondent
Register of Deeds cancelled Transfer Certificate of Title No. B-37615 and issued
Transfer Certificate of Title No. V-14249 in the name of Victor Bartolome.
On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was
exercising its option to lease the property, tendering the amount of P15,000.00 as rent
for the month of March. Again, Victor refused to accept the tendered rental fee and to
surrender possession of the property to petitioner.
Petitioner thus opened Savings Account No. 1-04-02558-I-1 with the China Banking
Corporation, Cubao Branch, in the name of Victor Bartolome and deposited therein the
P15,000.00 rental fee for March as well as P6,000.00 reservation fees for the months of
February and March.
Petitioner also tried to register and annotate the Contract on the title of Victor to the
primary register.1âwphi1.nêt
Thus, on April 23, 1990, petitioner filed a complaint for specific performance and
damages against Victor and the Register of Deeds, docketed as Civil Case No. 3337-V-
3 
90 which was raffled off to Branch 171 of the Regional Trial Court of Valenzuela.
Petitioner prayed for the surrender and delivery of possession of the subject land in
accordance with the Contract terms; the surrender of title for registration and annotation
thereon of the Contract; and the payment of P500,000.00 as actual damages,
P500,000.00 as moral damages, P500,000.00 as exemplary damages and P300,000.00
as attorney's fees.
Meanwhile, on May 8, 1990, a Motion for Intervention with Motion to Dismiss was filed by
4 
one Andres Lanozo, who claimed that he was and has been a tenant-tiller of the subject
property, which was agricultural riceland, for forty-five years. He questioned the
jurisdiction of the lower court over the property and invoked the Comprehensive Agrarian
Reform Law to protect his rights that would be affected by the dispute between the
original parties to the case.
On May 18, 1990, the lower court issued an Order referring the case to the Department
5 
of Agrarian Reform for preliminary determination and certification as to whether it was
proper for trial by said court.
On July 4, 1990, the lower court issued another Order referring the case to Branch 172
6 
of the RTC of Valenzuela which was designated to hear cases involving agrarian land,
after the Department of Agrarian Reform issued a letter-certification stating that referral
to it for preliminary determination is no longer required.
On July 16, 1990, the lower court issued an Order denying the Motion to
Intervene, holding that Lanozo's rights may well be ventilated in another proceeding in
7 
due time.
After trial on the merits, the RTC of Valenzuela, Branch 172 rendered its Decision on THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT
January 4, 1993, dismissing the Complaint and ordering petitioner to pay Victor PLAINTIFF-APPELLANT WAS LIABLE TO DEFENDANT-APPELLEE FOR
P30,000.00 as attorney's fees. On appeal to the CA, the Decision was affirmed in toto. ATTORNEY'S FEES. 8

Hence, the instant Petition assigning the following errors: The issue to be resolved in this case is whether or not the Contract of Lease with Option
to Buy entered into by the late Encarnacion Bartolome with petitioner was terminated
(A) upon her death or whether it binds her sole heir, Victor, even after her demise.

FIRST ASSIGNMENT OF ERROR Both the lower court and the Court of Appeals held that the said contract was terminated
upon the death of Encarnacion Bartolome and did not bind Victor because he was not a
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE party thereto.
PROVISION ON THE NOTICE TO EXERCISE OPTION WAS NOT
TRANSMISSIBLE. Art. 1311 of the Civil Code provides, as follows —

(B) Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
SECOND ASSIGNMENT OF ERROR transmissible by their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the decedent.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
NOTICE OF OPTION MUST BE SERVED BY DKC UPON ENCARNACION x x x           x x x          x x x
BARTOLOME PERSONALLY.
The general rule, therefore, is that heirs are bound by contracts entered into by their
(C) predecessors-in-interest except when the rights and obligations arising therefrom are not
transmissible by (1) their nature, (2) stipulation or (3) provision of law.
THIRD ASSIGNMENT OF ERROR
In the case at bar, there is neither contractual stipulation nor legal provision making the
rights and obligations under the contract intransmissible. More importantly, the nature of
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
the rights and obligations therein are, by their nature, transmissible.
CONTRACT WAS ONE-SIDED AND ONEROUS IN FAVOR OF DKC.
The nature of intransmissible rights as explained by Arturo Tolentino, an eminent civilist,
(D)
is as follows:
FOURTH ASSIGNMENT OF ERROR
Among contracts which are intransmissible are those which are purely personal,
either by provision of law, such as in cases of partnerships and agency, or by the
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE very nature of the obligations arising therefrom, such as those requiring special
EXISTENCE OF A REGISTERED TENANCY WAS FATAL TO THE VALIDITY personal qualifications of the obligor. It may also be stated that contracts for the
OF THE CONTRACT. payment of money debts are not transmitted to the heirs of a party, but constitute
a charge against his estate. Thus, where the client in a contract for professional
(E) services of a lawyer died, leaving minor heirs, and the lawyer, instead of
presenting his claim for professional services under the contract to the probate
FIFTH ASSIGNMENT OF ERROR court, substituted the minors as parties for his client, it was held that the contract
could not be enforced against the minors; the lawyer was limited to a recovery on
the basis of quantum meruit. 9
In American jurisprudence, "(W)here acts stipulated in a contract require the exercise of
special knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity,
or other personal qualification of one or both parties, the agreement is of a personal
nature, and terminates on the death of the party who is required to render such
service."  10
It has also been held that a good measure for determining whether a contract terminates
upon the death of one of the parties is whether it is of such a character that it may be
performed by the promissor's personal representative. Contracts to perform personal
acts which cannot be as well performed by others are discharged by the death of the
promissor. Conversely, where the service or act is of such a character that it may as well
be performed by another, or where the contract, by its terms, shows that performance by
others was contemplated, death does not terminate the contract or excuse
nonperformance.  11
In the case at bar, there is no personal act required from the late Encarnacion Bartolome.
Rather, the obligation of Encarnacion in the contract to deliver possession of the subject
property to petitioner upon the exercise by the latter of its option to lease the same may
very well be performed by her heir Victor.
As early as 1903, it was held that "(H)e who contracts does so for himself and his
heirs."  In 1952, it was ruled that if the predecessor was duty-bound to reconvey land to
12 
another, and at his death the reconveyance had not been made, the heirs can be
compelled to execute the proper deed for reconveyance. This was grounded upon the
principle that heirs cannot escape the legal consequence of a transaction entered into by
their predecessor-in-interest because they have inherited the property subject to the
liability affecting their common ancestor. 13
It is futile for Victor to insist that he is not a party to the contract because of the clear
provision of Article 1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is
privity of interest between him and his deceased mother. He only succeeds to what rights
his mother had and what is valid and binding against her is also valid and binding as
against him.  This is clear from Parañaque Kings Enterprises vs. Court of
14 
Appeals,  where this Court rejected a similar defense —
15 
With respect to the contention of respondent Raymundo that he is not privy to the
lease contract, not being the lessor nor the lessee referred to therein, he could
thus not have violated its provisions, but he is nevertheless a proper party.
Clearly, he stepped into the shoes of the owner-lessor of the land as, by virtue of
his purchase, he assumed all the obligations of the lessor under the lease
contract. Moreover, he received benefits in the form of rental payments.
Furthermore, the complaint, as well as the petition, prayed for the annulment of
the sale of the properties to him. Both pleadings also alleged collusion between
him and respondent Santos which defeated the exercise by petitioner of its right
of first refusal.
In order then to accord complete relief to petitioner, respondent Raymundo was a
necessary, if not indispensable, party to the case. A favorable judgment for the
petitioner will necessarily affect the rights of respondent Raymundo as the buyer
of the property over which petitioner would like to assert its right of first option to
buy.
In the case at bar, the subject matter of the contract is likewise a lease, which is a
property right. The death of a party does not excuse nonperformance of a contract which
involves a property right, and the rights and obligations thereunder pass to the personal
representatives of the deceased. Similarly, nonperformance is not excused by the death
of the party when the other party has a property interest in the subject matter of the
contract.  16
Under both Article 1311 of the Civil Code and jurisprudence, therefore, Victor is bound by
the subject Contract of Lease with Option to Buy.
That being resolved, we now rule on the issue of whether petitioner had complied with its
obligations under the contract and with the requisites to exercise its option. The payment
by petitioner of the reservation fees during the two-year period within which it had the
option to lease or purchase the property is not disputed. In fact, the payment of such
reservation fees, except those for February and March, 1990 were admitted by
Victor.  This is clear from the transcripts, to wit —
17 
ATTY. MOJADO:
One request, Your Honor. The last payment which was allegedly made in
January 1990 just indicate in that stipulation that it was issued November of 1989
and postdated January 1990 and then we will admit all.
COURT:
All reservation fee?
ATTY. MOJADO:
Yes, Your Honor.
COURT:
 All as part of the lease? (b) surrender and deliver his copy of Transfer Certificate of Title No. V-14249 to
respondent Register of Deeds for registration and annotation thereon of the
ATTY. MOJADO: subject Contract of Lease with Option to Buy;

Reservation fee, Your Honor. There was no payment with respect to payment of (c) pay costs of suit.
rentals. 
18

Petitioner also paid the P15,000.00 monthly rental fee on the subject property by
depositing the same in China Bank Savings Account No. 1-04-02558-I-1, in the name of
Victor as the sole heir of Encarnacion Bartolome,  for the months of March to July 30,
19 
Respondent Register of Deeds is, accordingly, ordered to register and annotate the
subject Contract of Lease with Option to Buy at the back of Transfer Certificate of Title
No. V-14249 upon submission by petitioner of a copy thereof to his office.

1990, or a total of five (5) months, despite the refusal of Victor to turn over the subject SO ORDERED. 1

property. 
20

Likewise, petitioner complied with its duty to inform the other party of its intention to
exercise its option to lease through its letter dated Match 12, 1990,  well within the two-
21 

year period for it to exercise its option. Considering that at that time Encarnacion
Bartolome had already passed away, it was legitimate for petitioner to have addressed
its letter to her heir.
1âwphi1

It appears, therefore, that the exercise by petitioner of its option to lease the subject
property was made in accordance with the contractual provisions. Concomitantly, private
respondent Victor Bartolome has the obligation to surrender possession of and lease the
premises to petitioner for a period of six (6) years, pursuant to the Contract of Lease with
Option to Buy.

Coming now to the issue of tenancy, we find that this is not for this Court to pass upon in
the present petition. We note that the Motion to Intervene and to Dismiss of the alleged
tenant, Andres Lanozo, was denied by the lower court and that such denial was never
made the subject of an appeal. As the lower court stated in its Order, the alleged right of
the tenant may well be ventilated in another proceeding in due time.

WHEREFORE, in view of the foregoing, the instant Petition for Review is GRANTED.
The Decision of the Court of Appeals in CA-G.R. CV No. 40849 and that of the Regional
Trial Court of Valenzuela in Civil Case No. 3337-V-90 are both SET ASIDE and a new
one rendered ordering private respondent Victor Bartolome to:

(a) surrender and deliver possession of that parcel of land covered by Transfer
Certificate of Title No. V-14249 by way of lease to petitioner and to perform all
obligations of his predecessor-in-interest, Encarnacion Bartolome, under the
subject Contract of Lease with Option to Buy;
 [G.R. No. 158649, February 18, 2013]
SPOUSES QUIRINO V. DELA CRUZ AND GLORIA DELA
CRUZ, Petitioners, v. PLANTERS PRODUCTS, INC., Respondents.
DECISION
BERSAMIN, J.:
If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.1 In
determining their intention, their contemporaneous and subsequent acts shall be
principally considered.2
Under review on certiorari are the Decision promulgated on April 11, 2003 in
C.A.-G.R. No. CV No. 57446,3 whereby the Court of Appeals (CA) affirmed the
judgment rendered on October 29, 1997 by the Regional Trial Court, Branch 66,
(RTC) in Makati City (ordering the petitioners liable to pay the respondent the
amount of P240,335.10 plus 16% interest per annum commencing from July 9,
1985 until full payment, and the sum of P20,000.00 as attorney’s fees and cost of
litigation);4 and the resolution promulgated on June 9, 2003, whereby the CA
denied the motion for reconsideration of the petitioners.5
Antecedents
Spouses Quirino V. Dela Cruz and Gloria Dela Cruz, petitioners herein, operated
the Barangay Agricultural Supply, an agricultural supply store in Aliaga, Nueva
Ecija engaged in the distribution and sale of fertilizers and agricultural chemical
products, among others. At the time material to the case, Quirino, a lawyer, was
the Municipal Mayor of Aliaga, Nueva Ecija.6
On March 23, 1978, Gloria applied for and was granted by respondent Planters
Products, Inc. (PPI) a regular credit line of P200,000.00 for a 60-day term, with
trust receipts as collaterals.7 Quirino and Gloria submitted a list of their assets in
support of her credit application for participation in the Special Credit Scheme
(SCS) of PPI.8 On August 28, 1978, Gloria signed in the presence of the PPI
distribution officer/assistant sales representative two documents 9 labelled “Trust
Receipt/Special Credit Scheme,” indicating the invoice number, quantity, value,
and names of the agricultural inputs (i.e., fertilizer or agricultural chemicals) she
received “upon the trust” of PPI. Gloria thereby subscribed to specific
undertakings, as follows:
For and in consideration thereof, I/We hereby agree to hold said goods in trust
for PPI, as its property, with liberty to deliver and sell the same for PPI’s account,
in favor of farmers accepted to participate in PPI’s Special Credit Scheme within
60 days from receipt of inputs from PPI. In case of such delivery and sale, I/We
agree to require the execution of a Trust Agreement by the farmer-participants in
my/our favor, which Agreement will in turn be Assigned by me/us in favor of PPI
with Recourse. In  the event, I/We cannot deliver/serve to the farmer-
participants all the inputs as enumerated above within 60 days, then I/We agree
that the undelivered inputs will be charged to my/our credit line, in which case,
the corresponding adjustment of price and interests shall be made by PPI.10
Gloria expressly agreed to: (a) “supervise the collection of the equivalent number
of cavanes of palay and/or corn from the farmer-participant” and to “turn over
the proceeds of the sale of the deposited palay and corn as soon as received, to
PPI to be applied against the listed invoices”; (b) “keep said fertilizer and
pesticides insured at their full value against fire and other casualties prior to
delivery to farmer-participants, the sum insured to be payable in case of loss to
PPI, with the understanding that PPI is not to be chargeable with the storage,
insurance premium, or any other expenses incurred on said goods”; (c) “keep the
said fertilizer and pesticides, prior to delivery to the farmer-participants, separate
and capable of identification as the property of PPI inside my/our warehouse”;
and (d) “require the farmer-participants to deposit the palay or corn sufficient to
cover their respective accounts within 72 hours after the harvest of the farmer-
participants” and should the farmer-participants refuse to make the required
deposit, Gloria would notify PPI thereof within 24 hours. For that purpose,
negligence on her part would make her obligation under the Trust Receipt “direct
and primary.”11
Gloria further expressly agreed that her obligation as stipulated in the contract
would “continue in force and be applicable to all transactions, notwithstanding
any change in the individuals composing any firm, parties to or concerned x x x
whether such change shall arise from accession of one or more new partners or
from the death or cession of any partner or partners;” that her “liability for
payment at maturity of the invoice(s)  x x x shall not be extinguished or
modified” by the following, namely: (a) “any priority, act of war, or restriction on
the use, transportation, hypothecation, or disposal thereof imposed by any
administrative, political or legislative enactments, regulations or orders
whatsoever”; (b) “government appropriation of the same, or of any seizure or
destruction thereof or damage thereto, whether insured against or not”; and (c)
“any acts or regulation affecting this Trust Receipt or the inputs subject
thereto.”12

In addition, Gloria’s obligation included the following terms and conditions, to wit:
All obligations of the undersigned under this Trust Receipt shall bear interest at
the rate of twelve per cent (12%) per annum plus two percent (2%) service
charges, reckoned from the date Dealer delivers to farmer-participants the
fertilizer and agchem products. Where I/We have not delivered within 60 days,
interest and service charges shall become effective on the 61st day.
If there are two or more signatories, our obligations hereunder shall in all cases
be joint and several.
All expenses and charges incurred by PPI in re-possession of said fertilizer and
agchem products, and in securing delivery of the same to a bodega or storage
place in Manila or at some other place selected by it shall be for my/our account
and shall be repaid to PPI by me/us.
Should it become necessary for PPI to avail of the services of an attorney-at-law
to initiate legal steps to enforce any or all of its rights under this contract, we
jointly and severally, shall pay to PPI for and as attorney’s fees a sum equivalent
to twenty per cent (20%) per annum of the total amount involved, principal and
interest, then unpaid, but in no case less than FIVE HUNDRED PESOS (P500.00),
exclusive of all costs or fees allowed by law.
In consideration of PPI complying with the foregoing we jointly and severally
agree and undertake to pay on demand to PPI all sums of money which PPI may
call upon us to pay arising out of or pertaining to and/or in any event connected
with the default of and/or non-fulfillment in any respect of the undertaking of the
aforesaid.13
Gloria executed three more documents on September 14, 1978,14 and one
document each on September 28, 1978,15 September 18, 1978,16 and September
20, 1978.17 On the corresponding dates, Gloria filled up customer order forms for
fertilizer and agricultural chemical products. 18 Written at the upper portion of
each order form was the following:
This invoice is subject to the terms and conditions stipulated in our contract.
Under no circumstance is this invoice to be used as a receipt for payment.
Interest at 14% per annum plus service and handling charges at the rate of 10%
per annum shall be charged on all overdue accounts, and in the event of judicial
proceedings to enforce collection, customer shall pay the Company an amount
equivalent to 25% of the amount due for and as attorney’s fees which in no case
shall be less than P200 in addition to cost of suit.
The products were released to Gloria under the supervision of Cristina G. Llanera
of PPI.
The 60-day credit term lapsed without Gloria paying her obligation under the
Trust Receipt/SCS. Hence, PPI wrote collection letters to her on April 24, 1979
and May 22, 1979. Receiving no response from her, Inocencio E. Ortega, PPI
District Distribution Manager, sent her on June 8, 1979 a demand letter on her
“long overdue account” of P191,205,25.19
On February 24, 1979, PPI sent Gloria a credit note for P127,930.60 with these
particulars: “To transfer to dealer’s regular line inputs withdrawn VS. SCS line
still undelivered to farmers after 60 days.”20 Another credit note, also dated
February 24, 1979 and with the same particulars, indicated the amount of
P46,622.80.21
The follow-up letter of October 11, 1979 culminated in the final demand letter of
May 30, 1980 from Atty. R. M. Rivera, PPI Collection Officer,22 stating that the
total accountability of Gloria as of April 25, 1980 was P156,755.00 “plus interest,
service charges, and penalty charges,” all of which she should pay by June 18,
1980. PPI warned that should she fail to do so, PPI would file the “necessary civil
and criminal cases” against her “based on the Trust Receipts.”
On November 17, 1981, PPI brought against Quirino and Gloria in the erstwhile
Court of First Instance in Pasig, Metro Manila a complaint for the recovery of a
sum of money with prayer for a writ of preliminary attachment. 23 PPI alleged that
Gloria had violated the “fiduciary undertaking in the Trust Receipt agreement
covering product withdrawals under the Special Credit Scheme which were
subsequently charged to defendant dealer’s regular credit line; therefore, she is
guilty of fraudulently misapplying or converting to her own use the items
delivered to her as contained in the invoices.” It charged that Gloria did not
return the goods indicated in the invoices and did not remit the proceeds of sales.
PPI prayed for judgment holding the petitioners liable for the principal amount of
P161,203.60 as of October 25, 1981, “inclusive of interest and service charges”;
additional “daily interest of P80.60 from October 26, 1981 until fully paid”; and
20% of the total amount due as attorney’s fees. As of July 9, 1985, the
statement of account showed a grand total liability of P240,355.10.24
In her answer, the petitioners alleged that Gloria was only a marketing outlet of
PPI under its SCS Program, not a dealer primarily obligated to PPI for the
products delivered to her; that she had not collected from the farmers
participating in the SCS Program because of the October 27-28, 1979
typhoon Kading that had destroyed the participating farmers’ crops; and that she
had paid P50,000.00 to PPI despite the failure of the farmers to pay.25
Decision of the RTC
On October 29, 1997, the trial court, then already the RTC, rendered its
judgment ordering the petitioners “to pay the plaintiff the amount of P240,335.10
plus 16% interest per annum commencing from July 9, 1985 until fully paid and
the sum of P20,000.00 as attorney’s fees and cost of litigation.” 26
The RTC found that based on the terms and conditions of the SCS Program, a
creditor-debtor relationship was created between Gloria and PPI; that her liability
was predicated on Section 4 of the Trust Receipts Law (Presidential Decree No.
115) and on the ruling in Robles v. Court of Appeals27 to the effect that the failure
of the entrustee (Gloria) to turn over to the entruster (plaintiff) the proceeds of
the sale of goods covered by the delivery trust receipts or to return the goods
constituted estafa punishable under Article 315(1)(b) of the Revised Penal Code;
and that the petitioners could not use as a defense the occurrence of
typhoon Kading because there was no privity of contract between the
participating farmers and PPI.
Ruling of the CA
The petitioners appealed to the CA28 upon the following assignment of errors, to
wit:
THE LOWER COURT ERRED IN HOLDING THAT DEFENDANT GLORIA DELA CRUZ
WAS AN ACCREDITED DEALER UNDER THE SPECIAL CREDIT SCHEME AND
PURCHASED ON CREDIT FERTILIZERS AND CHEMICALS FROM PLAINTIFF.
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANTS ARE PRIMARILY
LIABLE FOR THE FERTILIZERS AND CHEMICALS COVERED BY THE ORDER
FORMS, DELIVERY RECEIPTS AND TRUST RECEIPTS.
THE TRIAL COURT ERRED IN HOLDING THAT THE SPECIAL CREDIT SCHEME/LINE
GRANTED TO DEFENDANT GLORIA DELA CRUZ WAS CONVERTED TO A REGULAR
LINE.
THE TRIAL COURT ERRED IN FINDING FOR THE PLAINTIFF AND NOT FOR THE
DEFENDANTS-APPELLANTS.
On April 11, 2003, the CA affirmed the judgment of the RTC,29viz:
WHEREFORE, premises considered, the instant appeal is hereby DENIED, and
the impugned Decision dated 29 October 1997 of Regional Trial Court of Makati
City, Branch 66 is hereby AFFIRMED in toto. Costs against Defendants-
appellants.
SO ORDERED.
The CA held the petitioners liable to PPI “for the value of the fertilizers and
agricultural chemical products covered by the trust receipts” because a creditor-
debtor relationship existed between the parties when, pursuant to the credit line
of P200,000.00 and the SCS Program, the petitioners “withdrew several fertilizers
and agricultural chemical products on credit;” that the petitioners then came
under obligation to pay the equivalent value of the withdrawn goods, “or to
return the undelivered and/or unused products within the specified period.” It
elucidated thus:
The trust receipts covering the said fertilizers and agricultural chemical products
under the special credit scheme, and signed by defendant-appellant Gloria de la
Cruz specifically provides for their direct and primary liability over the same, to
wit:
“x x x. In the event, I/We cannot deliver/serve to the farmer-participants all the
inputs as enumerated above within 60 days, then I/We agree that the
undelivered inputs will be charged to my/our regular credit line, in which case,
the corresponding adjustment of price and interest shall be made by PPI.”
and in case of failure on the part of Defendants-appellants to liquidate within the
specified period the undelivered or unused fertilizers and agricultural chemical
products, its corresponding value will be charged to the regular credit line of
Defendants-appellants, which was eventually done by Plaintiff-appellee, when it
converted and/or credited Defendants-appellants’ accounts payable under the
special credit scheme to their regular credit line as per “credit notes.”
Pursuant to said credit line account and trust receipts, plaintiff-appellee Planters
Products, Inc. and defendants-appellants Spouses de la Cruz are bound to fulfill
what has been expressly stipulated therein. It is well-settled in Barons Marketing
Corporation v. Court of Appeals,30 to wit:
“It may not be amiss to state that petitioner’s contract with private
respondent has the force of law between them. Petitioner is thus bound
to fulfill what has been expressly stipulated therein. In the absence of any
abuse of right, private respondent cannot be allowed to perform its obligation
under such contract in parts. Otherwise, private respondent’s right under Article
1248 will be negated, the sanctity of its contract with petitioner defiled. The
principle of autonomy of contracts must be respected.” (Emphasis supplied)
Moreover, Defendants-appellants cannot pass their obligation to pay the
equivalent value of the undelivered and/or unused fertilizers and agricultural
chemical products under the trust receipts to the farmers-participants considering
that the “contract” was between plaintiff-appellee Planters Products Inc. and
defendants-appellants Quirino and Gloria Dela Cruz, and the farmers-participants
were never privy to the said transaction.”31
In their motion for reconsideration,32 the petitioners mainly contended that the
farmers as participants in the SCS, not Gloria, were liable because the inputs had
been delivered to them; that such was the tenor of the demand letters they had
sent to the farmers; that PPI would not have made a second delivery if it had not
been satisfied that they (petitioners) had delivered the products to the farmers,
who, however, had not paid their “loan” because of typhoon Kading destroying
their crops; that in the aftermath of the typhoon, PPI representatives led by one
Noel David had inspected the Municipality of Aliaga, and had forged an
agreement with the petitioners whereby they bound themselves to help PPI “in
collecting from the farmers in the succeeding palay crop their indebtedness;” and
that PPI had subsequently made them the “principal debtor” notwithstanding that
they had not incurred any account with PPI because all the transactions had been
“on a cash on delivery basis or cash withdrawal basis.”
On June 9, 2003, the CA denied the petitioners’ motion for reconsideration.
Issues
Hence, the petitioners are now before the Court via their petition for review
on certiorari.
The petitioners ascribe to the CA grave reversible error in affirming the decision
of the RTC notwithstanding that the award to PPI of the amount of P240,335.10
plus 16% interest per annum was based on hearsay evidence, leaving absolutely
no other evidence to support the award. They assail the award of attorney’s fees
for its lack of factual and legal bases; and insist that the CA did not consider
“certain facts and circumstances on record which would otherwise justify a
different decision.”
Ruling
The appeal has no merit.
I.
Parties entered into a creditor-debtor relationship
The petitioners did not deny that Gloria applied with PPI for a credit line of
P200,000.00; and that Gloria signed up for the SCS Program of PPI.  The
principal issue they now raise is whether the two transaction documents signed
by Gloria expressed the intent of the parties to establish a creditor-debtor
relationship between them. The resolution of the issue is necessary to resolve the
corollary issue of whether the petitioners were liable to PPI for the value of the
fertilizers and agricultural chemical products delivered to Gloria, and, if so, by
how much.
It is apparent, however, that the petitioners are focusing on the evidentiary value
of Exhibit V, the statement of account showing that Gloria was liable in the total
amount of P240,355.10 as of July 9, 1985, and are in the process avoiding the
pivotal issue concerning the nature of the contract between them and PPI.
Nonetheless, the issue of liability sprang from the terms of the contractual
documents Gloria had signed. For them to question the amount of their liabilities
without explaining why they should not be held liable veritably constituted their
tacit admission of the existence of the loan but assailing only how much they
should repay to PPI.
The petitioners aver that “in a surprising turn of events, when it appeared that no
further collection could be had, [PPI] unilaterally and arbitrarily converted and
charged its receivables from the farmers-participants against petitioner’s regular
credit line,” and PPI thereafter sent the demand letters to Gloria.33 Considering
that the documents signed by Gloria governed the relationship between her and
PPI, the controversy can be resolved only by an examination of the contractual
documents.
As earlier mentioned, Gloria signed the application for credit facilities on March
23, 1978, indicating that a trust receipt would serve as collateral for the credit
line. On August 4, 1978, Gloria, as “dealer,” signed together with Quirino the list
of their assets having a total value of P260,000.00 (consisting of a residential
house and lot, 10-hectare agricultural lands in Aliaga and Talavera, and two
residential lots) that they tendered to PPI “to support our credit application in
connection with our participation to your Special Credit Scheme.”34 Gloria further
signed the Trust Receipt/SCS documents defining her obligations under the
agreement, and also the invoices pursuant to the agreement with PPI, indicating
her having received PPI products on various dates.
These established circumstances comprised by the contemporaneous and
subsequent acts of Gloria and Quirino that manifested their intention to enter into
the creditor-debtor relationship with PPI show that the CA properly held the
petitioners fully liable to PPI. The law of contracts provides that in determining
the intention of the parties, their contemporaneous and subsequent acts shall be
principally considered.35 Consequently, the written terms of their contract with
PPI, being clear upon the intention of the contracting parties, should be literally
applied.36
The first circumstance was the credit line of P200,000.00 that commenced the
business relationship between the parties. A credit line is really a loan agreement
between the parties. According to Rosario Textile Mills Corporation v. Home
Bankers Savings and Trust Co.:37
x x x [A] credit line is “that amount of money or merchandise which a banker, a
merchant, or supplier agrees to supply to a person on credit and generally agreed
to in advance.” It is a fixed limit of credit granted by a bank, retailer, or credit
card issuer to a customer, to the full extent of which the latter may avail himself
of his dealings with the former but which he must not exceed and is usually
intended to cover a series of transactions in which case, when the customer’s line
of credit is nearly exhausted, he is expected to reduce his indebtedness by
payments before making any further drawings. 38
The second circumstance was the offer by Gloria of trust receipts as her collateral
for securing the loans that PPI extended to her.39 A trust receipt is “a security
transaction intended to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased.” 40 It is a
security agreement that “secures an indebtedness and there can be no such thing
as security interest that secures no obligation.”41
The third circumstance was the offer of Gloria and Quirino to have their conjugal
real properties beef up the collaterals for the credit line. Gloria signed the list of
the properties involved as “dealer,” thereby ineluctably manifesting that Gloria
considered herself a dealer of the products delivered by PPI under the credit line.
In this connection, a dealer is “a person who makes a business of buying and
selling goods, especially as distinguished from a manufacturer, without altering
their condition.” In other words, a dealer is “one who buys to sell again.” 42
The fourth circumstance had to do with the undertakings under the trust receipts.
The position of the petitioners was that the farmers-participants alone were
obligated to pay for the goods delivered to them by Gloria. However, such
position had no factual and legal legs to prop it up. A close look at the Trust
Receipt/SCS indicates that the farmer-participants were mentioned therein only
with respect to the duties and responsibilities that Gloria personally assumed to
undertake in holding goods “in trust for PPI.” Under the notion of relativity of
contracts embodied in Article 1311 of the Civil Code, contracts take effect only
between the parties, their assigns and heirs. Hence, the farmer-participants, not
being themselves parties to the contractual documents signed by Gloria, were not
to be thereby liable.
At this juncture, the Court clarifies that the contract, its label notwithstanding,
was not a trust receipt transaction in legal contemplation or within the purview of
the Trust Receipts Law (Presidential Decree No. 115) such that its breach would
render Gloria criminally liable for estafa. Under Section 4 of the Trust Receipts
Law, the sale of goods by a person in the business of selling goods for profit who,
at the outset of the transaction, has, as against the buyer, general property
rights in such goods, or who sells the goods to the buyer on credit, retaining title
or other interest as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and coverage of
the law, to wit:
Section. 4. What constitutes a trust receipt transaction. – A trust receipt
transaction, within the meaning of this Decree, is any transaction by and between
a person referred to in this Decree as the entruster, and another person referred
to in this Decree as the entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the
latter’s execution and delivery to the entruster of a signed document called a
“trust receipt” wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell  or otherwise
dispose of the goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for
other purposes substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or procure their sale;
or (b) to manufacture or process the goods with the purpose of ultimate sale:
Provided, That, in the case of goods delivered under trust receipt for the purpose
of manufacturing or processing before its ultimate sale, the entruster shall retain
its title over the goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the trust receipt; or (c) to
load, unload, ship or tranship or otherwise deal with them in a manner
preliminary or necessary to their sale; or
2. In case of instruments x x x.
The sale of goods, documents or instruments by a person in the business
of selling goods, documents or instruments for profit who, at the outset
of the transaction, has, as against the buyer, general property rights in
such goods, documents or instruments, or who sells the same to the
buyer on credit, retaining title or other interest as security for the
payment of the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of this Decree. (Bold
emphasis supplied.)
In Land Bank v. Perez,43 the Court has elucidated on the coverage of Section
4, supra, to wit:
There are two obligations in a trust receipt transaction. The first is covered by the
provision that refers to money under the obligation to deliver it (entregarla) to
the owner of the merchandise sold. The second is covered by the provision
referring to merchandise received under the obligation to return it (devolverla) to
the owner. Thus, under the Trust Receipts Law, intent to defraud is presumed
when (1) the entrustee fails to turn over the proceeds of the sale of goods
covered by the trust receipt to the entruster; or (2) when the entrustee fails to
return the goods under trust, if they are not disposed of in accordance with the
terms of the trust receipts.
In all trust receipt transactions, both obligations on the part of the trustee exist
in the alternative – the return of the proceeds of the sale or the return or
recovery of the goods, whether raw or processed. When both parties enter
into an agreement knowing that the return of the goods subject of the
trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under Section 13 of
P.D. 115; the only obligation actually agreed upon by the parties would
be the return of the proceeds of the sale transaction. This transaction
becomes a mere loan, where the borrower is obligated to pay the bank
the amount spent for the purchase of the goods. (Bold emphasis supplied)
It is not amiss to point out that the RTC even erred in citing Section 4 of
the Trust Receipts Law as its basis for ordering Gloria to pay the total amount of
P240,355.10. Section 13 of the Trust Receipts Law considers the “failure of an
entrustee to turn over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of
the trust receipt” as constituting the crime of estafa under Article 315 (b) of
the Revised Penal Code. However, had PPI intended to charge Gloria with estafa,
it could have then done so. Instead, it brought this collection suit, a clear
indication that the trust receipts were only collaterals for the credit line as agreed
upon by the parties.
To be clear, the obligation assumed by Gloria under the Trust Receipt/SCS
involved “the execution of a Trust Agreement by the farmer-participants” in her
favor, which, in turn, she would assign “in favor of PPI with recourse” in case of
delivery and sale to the farmer-participants. The term recourse as thus used
means “resort to a person who is secondarily liable after the default of the person
who is primarily liable.”44 An indorsement “with recourse” of a note, for instance,
makes the indorser a general indorser, because the indorsement is without
qualification. Accordingly, the term with recourse confirms the obligation of a
general indorser, who has the same liability as the original obligor.45 As the
assignor “with recourse” of the Trust Agreement executed by the farmer
participating in the SCS, therefore, Gloria made herself directly liable to PPI for
the value of the inputs delivered to the farmer-participants. Obviously, the
signature of the representative of PPI found in the demand letters Gloria sent to
the farmer-participants only indicated that the Trust Agreement was part of the
SCS of PPI.
The petitioners could not validly justify the non-compliance by Gloria with her
obligations under the Trust Receipt/SCS by citing the loss of the farm outputs due
to typhoon Kading. There is no question that she had expressly agreed that her
liability would not be extinguished by the destruction or damage of the crops. The
use of the term with recourse was, in fact, consonant with the provision of the
Trust Receipt/SCS stating that if Gloria could not deliver or serve “all the inputs”
to the farmer-participants within 60 days, she agreed that “the undelivered
inputs will be charged” to her “regular credit line.” Under her arrangement with
PPI, the trust receipts were mere securities for the credit line granted by
PPI,46 having in fact indicated in her application for the credit line that the trust
receipts were “collaterals” or separate obligations “attached to any other contract
to guaranty its performance.”47
It is worthwhile to note that the application for credit facilities was a form
contract that Gloria filled out only with respect to her name, address, credit limit,
term, and collateral. Her act of signing the application signified her agreement to
be bound by the terms of the application, specifically her acquiescence to use
trust receipts as collaterals, as well as by the terms and conditions of the Trust
Receipt/SCS.
In this regard, whether or not the Trust Receipt/SCS was a contract of adhesion
apparently prepared by PPI would neither dilute nor erase her liabilities. A
contract of adhesion prepared by one party, usually a corporation, is generally
not a one-sided document as long as the signatory is not prevented from
studying it before signing. Gloria did not show that she was deprived of that
opportunity to study the contract. At any rate, the social stature of the parties,
the nature of the transaction, and the amount involved were also factors to be
considered in determining whether the aggrieved party “exercised adequate care
and diligence in studying the contract prior to its execution.” 48 Thus, “[u]nless a
contracting party cannot read or does not understand the language in which the
agreement is written, he is presumed to know the import of his contract and is
bound thereby.”49 Here, Gloria was married to a lawyer who was also then the
Municipal Mayor of Aliaga. Both of them signed the list of conjugal assets that
they used to support the application for the credit line.
The last circumstance was that the petitioners now focus on the amount of
liabilities adjudged against them by the lower courts. They thereby bolster the
finding that they fully knew and accepted the legal import of the documents
Gloria had signed of rendering them personally liable towards PPI for the value of
the inputs granted to the farmer-participants through them. The finding is further
confirmed by her admission of paying to PPI the amount of P50,000.00, which
payment, albeit allegedly made grudgingly, solidified the existence of a creditor-
debtor relationship between them. Indeed, Gloria would not have paid that
amount except in acknowledgement of an indebtedness towards PPI.
II.
Statement of account was not hearsay
The petitioners insist that they could not be held liable for the balance stated in
Exhibit V due to such document being hearsay as a “mere statement of
account.”50 They argue that Cristina Llanera, the witness of PPI on the matter,
was only a warehouse assistant who was not shown to be either an accountant,
or bookkeeper, or auditor or a person knowledgeable in accounting. They posit
that Llanera’s testimony on Exhibit V was limited to stating that she had prepared
the statement of account contained therein; that she did not affirm the
correctness or veracity of the contents of the document;51 and that,
consequently, Exhibit V had no evidentiary value as proof of their total liability for
P240,355.10, the amount stated therein.
We do not agree with the petitioners.
With Exhibit V being a private document, authentication pursuant to the rules on
evidence was a condition for its admissibility. 52 Llanera, admittedly the person
who had prepared the document, was competent to testify on the due execution
and authenticity of Exhibit V. Such authentication was done in accordance with
Rule 132 of the Rules of Court, whose Section 20 states:
Section 20. Proof of private document. – Before any private document offered as
authentic is received in evidence, its due execution and authenticity must be
proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to
be.
Further, the petitioners dispute the contents of Exhibit V by invoking Section 43,
Rule 130 of the Rules of Court, to wit:
Section 43. Entries in the course of business. – Entries made at, or near the time
of the transactions to which they refer, by a person deceased, or unable to
testify, who was in a position to know the facts therein stated, may be received
as prima facie evidence, if such person made the entries in his professional
capacity or in the performance of duty and in the ordinary or regular course of
business.
The invocation of the rule is misplaced, however, because the rule speaks of a
situation where the person who made the entries is dead or unable to testify,
which was not the situation here. Regardless, we have to point out that entries
made in the course of business enjoy the presumption of regularity.53 If properly
authenticated, the entries serve as evidence of the status of the account of the
petitioners. In Land Bank v. Monet’s Export and Manufacturing Corporation, 54 the
Court has explained that such entries are accorded unusual reliability because
their regularity and continuity are calculated to discipline record keepers in the
habit of precision; and that if the entries are financial, the records are routinely
balanced and audited; hence, in actual experience, the whole of the business
world function in reliance of such kind of records.
Nor have the petitioners proved that the entries contained in Exhibit V were
incorrect and untruthful. They cannot be permitted to do so now at this stage of
final appeal, especially after the lower courts found and accepted the statement
of account contained therein to be properly authenticated and trustworthy.
Indeed, the Court is in no position to review and overturn the lower courts’
unanimous finding and acceptance without strong and valid reasons because they
involved an issue of fact.55
III.
Interest of 16% per annum,
being usurious, must be reversed
The statement of account discloses that the interest rate was 14% per annum for
the “SCS Account – from the invoice date to 7/09/85”; and that  the interest rate
was 16% per annum for the “Reg. Account – from 8/16/80 to 7/09/85.” The
petitioners assail the interest charged on the principal obligation as usurious.
The matter of interest, being a question of law, must have to dealt with and
resolved.
In 1978, when Gloria and PPI entered into the credit line agreement, the Usury
Law (Act No. 2655) was still in effect. Section 2 of the Usury Law prescribed an
interest rate of 12% per annum on secured loans, while Section 1 provided that
“[t]he rate of interest for the loan or forbearance of any money, goods, or credits
and the rate allowed in judgments, in the absence of express contract as to such
rate of interest, shall be six per centum per annum or such rate as may be
prescribed by the Monetary Board of the Central Bank.”
It is noted, of course, that the Usury Law allowed the parties in a loan agreement
to exercise discretion on the interest rate to be charged. Once a judicial demand
for payment has been made, however, Article 2212 of the Civil Code should
apply, that is: “Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.”
The Central Bank circulars on interest rates granted to the parties leeway on the
rate of interest agreed upon. In this regard, the Court has said:
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated
3 December 1982 of the Monetary Board of the Central Bank, and later by
Central Bank Circular No. 905 which took effect on 1 January 1983. These
circulars removed the ceiling on interest rates for secured and unsecured loans
regardless of maturity. The effect of these circulars is to allow the parties to
agree on any interest that may be charged on a loan. The virtual repeal of the
Usury Law is within the range of judicial notice which courts are bound to take
into account. Although interest rates are no longer subject to a ceiling, the lender
does not have an unbridled license to impose increased interest rates. The lender
and the borrower should agree on the imposed rate, and such imposed rate
should be in writing.56
Accordingly, the interest rate agreed upon should not be “excessive, iniquitous,
unconscionable and exorbitant;” otherwise, the Court may declare the rate
illegal.57
Considering that the credit line agreement was entered into in 1978, the rate of
interest was still governed by the Usury Law. The 16% per annum interest
imposed by the RTC was erroneous, therefore, because the loan was secured by
the Trust Receipt/SCS. In view of this, 12% per annum is the legal rate of
interest that should apply, to be reckoned from the filing of the action. This rate
accords with Eastern Shipping Lines, Inc. v. Court of Appeals,58 whereby the
Court has defined the following formula for the computation of legal interest for
the guidance of the Bench and the Bar, viz:
TOTAL AMOUNT DUE = [principal – partial payments made] + [interest + interest
on interest], where
Interest = remaining balance x 12% per annum x no. of years from due date
until date of sale to a third party (payment).
Interest on interest = interest computed as of the filing of the complaint x no. of
years until date of sale to a third party (payment). 59
Relevantly, the likelihood of the aggregate interest charged exceeding the
principal indebtedness is not remote. In Apo Fruits Corporation v. Land Bank of
the Philippines,60 a case involving just compensation for landholdings with legal
interest, however, the Court has appropriately observed that the realization of
such likelihood was not necessarily inequitable or unconscionable due to its
resulting directly from the application of law and jurisprudence, to wit:
That the legal interest due is now almost equivalent to the principal to be paid is
not per se an inequitable or unconscionable situation, considering the length of
time the interest has remained unpaid – almost twelve long years. From the
perspective of interest income, twelve years would have been sufficient for the
petitioners to double the principal, even if invested conservatively, had they been
promptly paid the principal of the just compensation due them. Moreover, the
interest, however enormous it may be, cannot be inequitable and unconscionable
because it resulted directly from the application of law and jurisprudence –
standards that have taken into account fairness and equity in setting the interest
rates due for the use or forbearance of money.
That is true herein. Although this case was commenced in 1981, the decision of
the trial court was rendered only in 1997, or more than 15 years ago. By
appealing to the CA and then to this Court, the petitioners chose to prolong the
final resolution of the case; hence, they cannot complain, but must bear the
consequences to them of the application of the pertinent law and jurisprudence,
no matter how unfavorable to them.
IV.
Attorney’s fees to be deleted
In granting attorney’s fees, the RTC merely relied on and adverted to PPI’s
allegation that the failure of the petitioners to comply with their obligations under
the contracts had “compelled [them] to hire the services of a counsel for which it
had agreed to an attorney’s fee equivalent to 25% of the total amount recovered
exclusive of appearance fee of P1,500.00” as its sole basis for holding the
petitioners liable to pay P20,000.00 “as attorneys’ fee and cost of litigation.” In
affirming the RTC thereon, the CA did not even mention or deal with the matter
of attorney’s fees in its own decision.
The award of attorney’s fees is deleted because of the absence of any factual and
legal justification being expressly stated by the CA as well as by the RTC. To start
with, the Court has nothing to review if the CA did not tender in its decision any
justification of why it was awarding attorney’s fees. The award of attorney’s fees
must rest on a factual basis and legal justification stated in the body of the
decision under review. Absent the statement of factual basis and legal
justification, attorney’s fees are to be disallowed.61  In Abobon v. Abobon,62 the
Court has expounded on the requirement for factual basis and legal justification
in order to warrant the grant of attorney’s fees to the winning party, viz:
“facts and circumstances” pertained to details relevant to the nature of the
agreement of the petitioners, and to the amount of their liabilities. However, an
examination reveals that the “facts and circumstances” do not warrant a
conclusion that they were not debtors of PPI under the credit line agreement.
WHEREFORE, the Court AFFIRMS the Decision promulgated on April 11, 2003
by the Court of Appeals, subject to the MODIFICATIONS that: (a) the rate of
interest is 12% per annum reckoned from the filing of the complaint until full
payment; and (b) the award of attorney’s fees is deleted.
The petitioners shall pay the costs of suit.
SO ORDERED.

As to attorney’s fees, the general rule is that such fees cannot be recovered by a
successful litigant as part of the damages to be assessed against the losing party
because of the policy that no premium should be placed on the right to litigate.
Indeed, prior to the effectivity of the present Civil Code, such fees could be
recovered only when there was a stipulation to that effect. It was only under the
present Civil Code that the right to collect attorney’s fees in the cases mentioned
in Article 2208 of the Civil Code came to be recognized. Such fees are now
included in the concept of actual damages.

Even so, whenever attorney’s fees are proper in a case, the decision rendered
therein should still expressly state the factual basis and legal justification for
granting them.  Granting them in the dispositive portion of the judgment is not
enough; a discussion of the factual basis and legal justification for them must be
laid out in the body of the decision. Considering that the award of attorney’s fees
in favor of the respondents fell short of this requirement, the Court disallows the
award for want of the factual and legal premises in the body of the decision. The
requirement for express findings of fact and law has been set in order to bring
the case within the exception and justify the award of the attorney’s fees.
Otherwise, the award is a conclusion without a premise, its basis being
improperly left to speculation and conjecture.

The lack of any assignment of error upon the matter of attorney’s fees is of no
moment, for the award, being devoid of any legal and factual basis, can be
corrected and removed as a matter of law.

Finally, the petitioners charge that the CA “failed to consider certain facts and
circumstances on record which would otherwise justify a different decision.” The
G.R. No. L-27696 September 30, 1977
MIGUEL FLORENTINO, ROSARIO ENCARNACION de FLORENTINO, MANUEL
ARCE, JOSE FLORENTINO, VICTORINO FLORENTINO, ANTONIO FLORENTINO,
REMEDION ENCARNACION and SEVERINA ENCARNACION, petitioners-appellants,
vs.
SALVADOR ENCARNACION, SR., SALVADOR ENCARNACION, JR., and ANGEL
ENCARNACION, oppositors to encumbrance-petitioners-appelles.
Jose F. Singson and Miguel Florentino for appellants.
Pedro Singson for appellees.
GUERRERO, J.:
Appeal from the decision of the Court of First Instance of Ilocos Sur, acting as a land
registration court, in Land Registration case No. N-310.
On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios Encarnacion
de Florentino, Manuel Arce, Jose Florentino, Victorino Florentino, Antonio Florentino,
Remedior, Encarnacion and Severina Encamacion, and the Petitiners-appellees
Salvador Encamacion, Sr., Salvador Encamacion, Jr. and Angel Encarnacion filed with
the Court of First Instance of ilocos Sur an application for the registration under Act 496
of a parcel of agricultural land located at Barrio Lubong Dacquel Cabugao Ilocos Sur.
The application alleged among other things that the applicants are the common and pro-
indiviso owners in fee simple of the said land with the improvements existing thereon;
that to the best of their knowledge and belief, there is no mortgage, lien or encumbrance
of any kind whatever affecting said land, nor any other person having any estate or
interest thereon, legal or equitable, remainder, reservation or in expectancy; that said
applicants had acquired the aforesaid land thru and by inheritance from their
predecessors in interest, lately from their aunt, Doña Encarnacion Florentino who died in
Vigan, Ilocos Sur in 1941, and for which the said land was adjudicated to them by virtue
of the deed of extrajudicial partition dated August 24, 1947; that applicants Salvador
Encarnacion, Jr. and Angel Encarnacion acquired their respective shares of the land thru
purchase from the original heirs, Jesus, Caridad, Lourdes and Dolores surnamed
Singson one hand and from Asuncion Florentino on the other.
After due notice and publication, the Court set the application for hearing. No Opposition
whatsoever was filed except that of the Director of Lands which was later withdrawn,
thereby leaving the option unopposed. Thereupon, an order of general default was
withdrawn against the whole world. Upon application of the asets the Clerk Of court was
commission will and to have the evidence of the agents and or to submit the for the
Court's for resolution.
The crucial point in controversy in this registration case is centered in the stipulation
marked Exhibit O-1 embodied in the deed of extrajudicial partition (Exhibit O) dated
August 24, 1947 which states:
Los productos de esta parcela de terreno situada en el Barrio Lubong
Dacquel Cabugao Ilocos Sur, se destination para costear los tos de
procesio de la Tercera Caida celebration y sermon de Siete Palbras Seis
Estaciones de Cuaresma, procesion del Nino Jesus, tilaracion y
conservacion de los mismos, construction le union camarin en conde se
depositan los carros mesas y otras cosas que seven para lot leiracion de
Siete Palabras y otras cosas mas Lo que sobra de lihos productos
despues de descontados todos los gastos se repartira nosotros los
herederos.
In his testimony during the trial, applicant Miguel Florentino asked the court to include the
said stipulation (Exhibit O-1) as an encumbrance on the land sought to be registered,
and cause the entry of the same on the face of the title that will finally be issued.
Opposing its entry on the title as an encumbrance, petitionersappellee Salvador
Encamacion, Sr., Salvador Encarnaciori, Jr. and Angel Encarriacion filed on October 3,
1966 a manifestation seeking to withdraw their application on their respective shares of
the land sought to be registered. The withdrawal was opposed by the petitioners-
appellants.
The Court after hearing the motion for withdrawal and the opposition thereto issued on
November 17, 1966 an order and for the purpose of ascertaining and implifying the
issues therein stated that all the applicants admit the truth of the following;
(1) That just after the death of Encarnacion FIorentino in 1941 up to last
year and as had always been the case since time immomorial the
products of the land made subiect matter of this land has been used in
answering for the payment for the religious functions specified in the
Deed Extrajudicial Partition belated August 24, 1947:
(2) That this arrangement about the products answering for the comment
of experisence for religions functions as mentioned above was not
registered in the office of the Register of Deeds under Act No 3344, Act
496 or and, other system of registration;
(3) That all the herein applicants know of the existence of his
arrangement as specified in the Deed of Extra judicial Partition of A
adjust 24, 1947;
(4) That the Deed of Extrajudicial Partition of August 24, 194-, not signed
by Angel Encarnacion or Salvador Encarnacion, Jr,.
The court denied the petitioners-appellee motion to withdraw for lack of
merit, and rendered a decision under date of November 29, 1966
confirming the title of the property in favor of the f appoints with their
respective shares as follows:
Spouses Miguel Florentino and Rosario Encarnacion de Florentino, both
of legal age, Filipinos, and residents of Vigan, Ilocos Sur, consisting of an
undivided 31/297 and 8.25/297 portions, respectively;
Manuel Arce, of legal age, Filipino, married to Remedios Pichay and
resident of Vigan, Ilocos Sur, consisting of an undivided 66/297 portion;
Salvador Encarnacion, Jr., of legal age, Filipino, married to Angelita
Nagar and resident of Vigan, Ilocos Sur, consisting of an undivided
66/297; Jose Florentino, of legal age, Filipino, married to Salvacion
Florendo and resident of 16 South Ninth Diliman, Quezon City, consisting
of an undivided 33/297 portion;
Angel Encarnacion, of legal age, Filipino, single and resident of 1514
Milagros St., Sta. Cruz, Manila, consisting of an undivided 33/297 portion;
Victorino Florentino, of legal age, Filipino, married to Mercedes L.
Encarnacion and resident of Vigan, Ilocos Sur, consisting of an undivided
17.5/297 portion;
Antonio Florentino, of legal age, Filipino, single and resident of Vigan,
Ilocos Sur, consisting of an undivided 17.5/297;
Salvador Encarnacion, Sr., of legal age, Filipino, married to Dolores
Singson, consisting of an undivided 8.25/297;
Remedios Encarnacion, of legal age, Filipino, single and resident of
Vigan, Ilocos Sur, consisting of an undivided 8.25/297 portion; and
Severina Encarnacion, of legal age, Filipino, single and resident of Vigan,
Ilocos Sur, consisting of 8.25/297 undivided portion.
The court, after ruling "that the contention of the proponents of encumbrance is without
merit bemuse, taking the self-imposed arrangement in favor of the Church as a pure and
simple donation, the same is void for the that the donee here has riot accepted the
donation (Art. 745, Civil Code) and for the further that, in the case of Salvador
Encarnacion, Jr. and Angel Encarnacion, they had made no oral or written grant at all
(Art. 748) as in fact they are even opposed to it," 1 held in the Positive portion, as follows:
In view of all these, therefore, and insofar as the question of
encumbrance is concerned, let the religious expenses as herein specified
be made and entered on the undivided shares, interests and
participations of all the applicants in this case, except that of Salvador
Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel Encarnacion.
On January 3, 1967, petitioners-appellants filed their Reply to the Opposition reiterating
their previous arguments, and also attacking the junction of the registration court to pass
upon the validity or invalidity of the agreement Exhibit O-1, alleging that such is specified
only in an ordinary action and not proper in a land registration proceeding.
The Motion for Reconsideration and of New Trial was denied on January 14, 1967 for
lack of merit, but the court modified its earlier decision of November 29, 1966, to wit:
This Court believes, and so holds, that the contention of the movants
(proponents of the encumbrance) is without merit because the
arrangement, stipulation or grant as embodied in Exhibit O (Escritura de
Particion Extrajudicial), by whatever name it may be (called, whether
donation, usufruct or ellemosynary gift, can be revoked as in fact the
oppositors Salvador Encarnacion, Sr., who is the only one of the three
oppositors who is a party to said Exhibit O (the two others, Salvador
Encarnacion, Jr. and Angel Encarnacion no parties to it) did revoke it as
shown by acts accompanying his refusal to have the same appear as an
encumbrance on the title to be issued. In fact, legally, the same can also
be ignored or discararded by will the three oppositors. The reasons are:
First, if the said stipulation is pour bodies in Exhibit O-1 is to be viewed as
a stipulation pour autrui the same cannot now be enforced because the
Church in whose favor it was made has not communicated its acceptance
to the oppositors before the latter revoked it. Says the 2nd par. of Art.
1311 of the New Civil Code:
"If a contract should contain some stipulation in favor of a third person he
may demand its fulfillment provided he communicated his acceptance to
 the obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person." No evide nee has
ever been submitted by the Church to show its clear acceptance of the
grant before its revocation by the oppositor Salvador Encarnacion, Sr. (or
of the two other oppositors, Salvador Encarnacion, Jr. and Angel
Encarnacion, who didn't even make any giant, in the first place), and so
not even the movants who have officiously taken into themselves the
right to enforce the grant cannot now maintain any action to compel
compliance with it. (Bank of the P.I. v. Concepcion y Hijos, Inc., 53 Phil.
806). Second, the Church in whose favor the stipulation or grant had
apparently been made ought to be the proper party to compel the herein
three oppositors to abide with the stipulation. But it has not made any
appearance nor registered its opposition to the application even before
Oct. 18, 1965 when an order of general default was issued. Third, the
movants are not, in the contemplation of Section 2, Rule 3 of the Rules of
Court, the real party in interest to raise the present issue; and Fourth, the
movants having once alleged in their application for registration that the
land is without encumbrance (par. 3 thereof), cannot now be alloted by
the rules of pleading to contradict said allegation of theirs. (McDaniel v.
Apacible, 44 Phil. 248)
SO ORDERED. 2
After Motions for Reconsideration were denied by the court, the petitioners- appellants
appealed directly to this Court pursuant to Rule 4 1, Rules of Court, raising the following
assign of error:
I. The lower court erred in concluding that the stipulation embodied in
Exhibit O on religious expenses is just an arrangement stipulation, or
grant revocable at the unilateral option of the coowners.
II. The lower court erred in finding and concluding that the encumbrance
or religious expenses embodied in Exhibit O, the extrajudicial partition
between the co-heirs, is binding only on the appoints Miguel Florentino,
Rosario Encarnacion de Florentino, Manuel Arce, Jose Florentino,
Antonio Florentino, Victorino Florentino, Remedios Encarnacion and
Severina Encarnacion.
III. The lower court as a registration court erred in passing upon the
merits of the encumbrance (Exhibit O-1) as the sanie was never put to
issue and as the question involved is an adjudication of rights of the
parties.
We find the first and second assignments of error impressed with merit and, therefore,
tenable. The stipulation embodied in Exhibit O-1 on religious expenses is not revocable
at the unilateral option of the co-owners and neither is it binding only on the petitioners-
appellants Miguel Florentino, Rosario Encarnacion de Florentino Manuel Arce, Jose
Florentino, Victorino Florentino Antonio Florentino, Remedios Encarnacion and Severina
E It is also binding on the oppositors-appellees Angel Encarnacion,
The stipulation (Exhibit 411) in pan of an extrajudicial partition (Exh. O) duly agreed and
signed by the parties, hence the sanie must bind the contracting parties thereto and its
validity or compliance cannot be left to the with of one of them (Art. 1308, N.C.C.). Under
Art 1311 of the New Civil Code, this stipulation takes effect between the parties, their
assign and heirs. The article provides:
Art. 1311. — Contracts take effect only between the parties, their assigns
and heirs, except in cases where the rights and obligations arising from
the contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain a stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.
The second paragraph of Article 1311 above-quoted states the law on stipulations pour
autrui. Consent the nature and purpose of the motion (Exh. O-1), We hold that said
stipulation is a station pour autrui. A stipulation pour autrui is a stipulation in favor of a
third person conferring a clear and deliberate favor upon him, and which stipulation is
merely a part of a contract entered into by the parties, neither of whom acted as agent of
the third person, and such third person and demand its fulfillment provoked that he
communicates his to the obligor before it is revoked. 3 The requisites are: (1) that the
stipulation in favor of a third person should be a part, not the whole, of the contract; (2) that
the favorable stipulation should not be conditioned or compensated by any kind of obligation
whatever; and (3) neither of the contracting bears the legal represented or authorization of
third person.
To constitute a valid stipulation pour autrui it must be the purpose and intent of the
stipulating parties to benefit the third and it is not sufficient that the third person may be
incidentally benefited by the stipulation. The fairest test to determine whether the interest
of 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. In applying this
test, it meters not whether the stipulation is in the nature of a gift or whether there is an
obligation owing from the promisee to the third person. That no such obsorption exists
may in some degree assist in determining whether the parties intended to benefit a third
person.4
In the case at bar, the determining point is whether the co-owners intended to benefit the
Church when in their extrajudicial partition of several parcels of land inherited by them
from Doña Encarnacion Florendo they agreed that with respect to the land situated in
Barrio Lubong Dacquel Cabugao Ilocos Sur, the fruits thereof shall serve to defray the
religious expenses specified in Exhibit O-1. The evidence on record shows that the true
intent of the parties is to confer a direct and material benefit upon the Church. The fruits
of the aforesaid land were used thenceforth to defray the expenses of the Church in the
preparation and celebration of the Holy Week, an annual Church function. Suffice it to
say that were it not for Exhibit O-1, the Church would have necessarily expended for this
religious occasion, the annual relisgious procession during the Holy Wock and also for
the repair and preservation of all the statutes, for the celebration of the Seven Last Word.
We find that the trial court erred in holding that the stipulation, arrangement or grant
(Exhibit O-1) is revocable at the option of the co-owners. While a stipulation in favor of a
third person has no binding effect in itself before its acceptance by the party favored, the
law does not provide when the third person must make his acceptance. As a rule, there
is no time at such third person has after the time until the stipulation is revoked. Here,
We find that the Church accepted the stipulation in its favor before it is sought to be
revoked by some of the co-owners, namely the petitioners-appellants herein. It is not
disputed that from the time of the with of Doña Encarnacion Florentino in 1941, as had
always been the case since time immemorial up to a year before the firing of their
application in May 1964, the Church had been enjoying the benefits of the stipulation.
The enjoyment of benefits flowing therefrom for almost seventeen years without question
from any quarters can only be construed as an implied acceptance by the Church of the
stipulation pour autrui before its revocation.
The acceptance does not have to be in any particular form, even when
the stipulation is for the third person an act of liberality or generosity on
the part of the promisor or promise. 5
It need not be made expressly and formally. Notification of acceptance, other
than such as is involved in the making of demand, is unnecessary. 6
A trust constituted between two contracting parties for the benefit of a third
person is not subject to the rules governing donation of real property. The
beneficiary of a trust may demand performance of the obligation without
having formally accepted the benefit of the this in a public document, upon
mere acquiescence in the formation of the trust and acceptance under the
second paragraph of Art. 1257 of the Civil Code. 7
Hence, the stipulation (Exhibit O-1) cannot now be revoked by any of the stipulators at their
own option. This must be so because of Article 1257, Civil Code and the cardinal rule of
contracts that it has the force of law between the parties. 8 Thus, this Court ruled in Garcia v.
Rita Legarda, Inc., 9 "Article 1309 is a virtual reproduction of Article 1256 of the Civil Code, so
phrased to emphasize that the contract must bind both parties, based on the principles (1)
that obligation arising from contracts have the force of law between the contracting parties;
and (2) that there must be mutuality between the parties based on their principle equality, to
which is repugnant to have one party bound by the contract leaving the other free therefrom."
Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a signatory
to the Deed of Extrajudicial Partition embodying such beneficial stipualtion. Likewise,
with regards to Salvador, Jr. and Angel Encarnacion, they too are bound to the
agreement. Being subsequent purchasers, they are privies or successors in interest; it is
axiomatic that contracts are enforceable against the parties and their
privies. 10 Furthermore, they are shown to have given their conformity to such agreement
when they kept their peace in 1962 and 1963, having already bought their respective shares
of the subject land but did not question the enforcement of the agreement as against them.
They are also shown to have knowledge of Exhibit O-1 as they had admitted in a Deed of
Real Mortgage executed by them on March 8, 1962 involving their shares of the subject land
that, "This parcel of land is encumbered as evidenced by the document No. 420, page 94,
Book 1, series 1947, executed by the heirs of the late Encarnacion Florentino, on August 26,
1947, before M. Francisco Ante, Notwy Public of Vigan, Ilocos Sur, in its page 10 of the said
document of partition, and also by other documents."
The annotation of Exhibit O-1 on the face of the title to be issued in this case is merely a
guarantee of the continued enforcement and fulfillment of the beneficial stipulation. It is
error for the lower court to rule that the petitioners-appellants are not the real parties in
interest, but the Church. That one of the parties to a contract pour autrui is entitled to
bring an action for its enforcement or to prevent its breach is too clear to need any
extensive discussion. Upon the other hand, that the contract involved contained a
stipulation pour autrui amplifies this settled rule only in the sense that the third person for
whose benefit the contract was entered into may also demand its fulfillment provoked he
had communicated his acceptance thereof to the obligor before the stipulation in his
favor is revoked. 11
Petitioners-appellants' third assignment of error is not well-taken. Firstly, the otherwise rigid
rule that the jurisdiction of the Land Registration Court, being special and limited in character
and proceedings thereon summary in nature, does not extend to cases involving issues
properly litigable in other independent suits or ordinary civil actions, has time and again been
relaxed in special and exceptional circumstances. (See Government of the Phil. Islands v.
Serafica, 61 Phil. 93 (1934); Caoibes v. Sison, 102 Phil. 19 (1957); Luna v. Santos, 102 Phil.
588 (1957); Cruz v. Tan, 93 Phil. 348 (1953); Gurbax Singh Pabla & Co. v. Reyes, 92 Phil.
177 (1952). From these cases, it may be gleaned and gathered that the peculiarity of the
exceptions is based not only on the fact that Land Registration Courts are likewise the same
Courts of First Instance, but also the following premises (1) Mutual consent of the parties or
their acquired in submitting the at aforesaid determination by the court in the registration; (2)
Full opportunity given to the parties in the presentation of their respective skies of the issues
and of the evidence in support thereto; (3) Consideration by the court that the evidence
already of record is sufficient and adequate for rendering a decision upon these issues. 12 In
the case at bar, the records clearly show that the second and third premism enumerated
abow are fully mt. With regards to first premise, the petioners-appellants cannot claim that the
issues anent Exhibit O-1 were not put in issue because this is contrary to their stand before
the lower court where they took the initial step in praying for the court's determination of the
merits of Exhibit O-1 as an encumbrance to be annotated on the title to be issued by such
court. On the other hand, the petitioners-appellees who had the right to invoke the limited
jurisdiction of the registration court failed to do so but met the issues head-on.

Secondly, for this very special reason, We win uphold the actuation of the lower court in
determining the conflicting interests of the parties in the registration proceedings before
it. This case has been languishing in our courts for thirteen tong years. To require that it
be remanded to the lower court for another proceeding under its general jurisdiction is
not in consonance with our avowed policy of speedy justice. It would not be amiss to
note that if this case be remanded to the lower court, and should appeal again be made,
the name issues will once more be raised before us hence, Our decision to resolve at
once the issues in the instant petition.

IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of Ilocos Sur
in Land Registration Case No. N-310 is affirmed but modified to allow the annotation of
Exhibit O-1 as an encumbrance on the face of the title to be finally issued in favor of all
the applications (herein appellants and herein appellees) in the registration proceedings
below.

No pronouncement as to cost.

SO ORDERED.
G.R. No. 79734 December 8, 1988
MARMONT RESORT HOTEL ENTERPRISES, petitioner,
vs.
FEDERICO GUIANG, AURORA GUIANG, and COURT OF APPEALS, respondents.
Isagani M. Jungco for petitioner.
FELICIANO, J.:
The present Petition for Review seeks to set aside the Decision dated 9 December 1986 of the Court of Appeals in CA-G.R.
CV 03299. The appellate court affirmed a Decision dated 31 May 1983 of Branch 83 of the Regional Trial Court of Olongapo
City dismissing the complaint in Civil Case No. 2896-C filed by petitioner company against private respondent spouses.
On 2 May 1975, a Memorandum of Agreement was executed between Maris Trading
and petitioner Marmont Resort Hotel Enterprises, Inc. ("Marmont"), a corporation
engaged in the hotel and resort business with office and establishment at Olongapo City.
Under the agreement, Maris Trading undertook to drill for water and to provide all
equipment necessary to install and complete a water supply facility to service the
Marmont Resort Hotel in Olongapo, for a stipulated fee of P40,000.00. In fulfillment of its
contract, Maris Trading drilled a well and installed a water pump on a portion of a parcel
of land situated in Olongapo City, then occupied by respondent spouses Federico and
Aurora Guiang.
Five (5) months later, a second Memorandum of Agreement was executed between
Maris Trading and Aurora Guiang, with Federico Guiang signing as witness. This second
agreement in essential part read:  1
That the First Party [Maris Trading] has dug, drilled and tapped water
source for Marmont Resort, located at Bo. Barretto, Olongapo City in
accordance with their agreement executed on May 2, 1975 and notarized
before Isagani M. Jungco, Notary Public and entered as Doc. No. 166;
Page No. 135; Book No. XV; Series of 1975.
That the First Party has erected, built and drilled for the water source of
Marmont Resort on the land owned by the Second Party [Aurora Guiang]
at the corner of J. Montelibano Street and Maquinaya Drive (Provincial
Road) with the latter's permission.
That for and in consideration of the sum of P1,500.00 the Second Party
hereby Sell, Transfer and Cede all possessory rights, interest and claims
over that portion of the lot wherein the water source of Marmont Resort is
located unto and in favor of Maris Trading.
After some time, the water supply of the Marmont Resort Hotel became inadequate to
meet the hotel's water requirements. Petitioner Marmont secured the services of another
contractor (the name of which was not disclosed), which suggested that in addition to the
existing water pump, a submersible pump be installed to increase the pressure and
improve the flow of water to the hotel. Accordingly, Juan Montelibano, Jr., manager of
the Marmont Resort Hotel, sought permission from the Guiang spouses to inspect the
water pump which had been installed on the portion of the land previously occupied by
the spouses and to make the necessary additional installations thereon. No such
permission, however, was granted.
On 13 May 1980, petitioner Marmont filed a Complaint   against the Guiang spouses for
2
damages resulting from their refusal to allow representatives of petitioner and the second
contractor firm entry into the water facility site. The claimed damages were broken down
as follows: (a) P10,000.00 representing the amount advanced in payment to the second
contractor; (b) P40,000.00 representing the total project cost of the installation made by
Maris Trading: (c) P50,000.00 representing additional expenses incurred and incidental
losses resulting from failure of the original pump to cope with the water requirements of
the Marmont Resort Hotel; and (d) P10,000.00 for Attorney's fees.
In their Answer,   the Guiang spouses (defendants below) denied having had any
3
previous knowledge of the first Memorandum of Agreement and asserted that the second
Memorandum of Agreement was invalid for not having been executed in accordance with
law. The spouses added a counterclaim for damages in the amount of P200,000.00.
On 2 October 1980, at the pre-trial conference, the parties agreed on the following
stipulation of facts and issues embodied in a Pre-Trial Order: 4
III
In addition to the admission made elsewhere in their respective
pleadings, the parties entered into the following stipulation of facts:
1. Plaintiff is a corporation duly organized and existing
under the laws of the Philippines with office at
Montelibano Street, Barrio Barretto, Olongapo City;
 2. The contract referred to in paragraph 2 of the complaint
between the plaintiff and Maris Trading is contained in a
document captioned Memorandum Agreement executed
on May 2, 1975, a xerox copy of which is Annex 'A' of
plaintiffs complaint;
3. On October 7, 1975, the Maris Trading represented by
Ceferino Cabral and defendant Aurora Guiang entered
into a memorandum agreement;
4. The portion sold under Annex 'A' is still a part of the
public domain.
IV
The plaintiff marked the following exhibits in evidence:
Exhibit 'A'-Memorandum Agreement dated May 2, 1975
Exhibit 'B-Memorandum Agreement dated October 7,
1975
V
The issues left to be ventilated during the trial are the following:
1. Whether defendants has actually prohibited the plaintiff
[from) making repairs, [on] the pump constructed by Maris
Trading for the plaintiff under the agreement Exhibit 'A,' if
so;
2. Whether defendants [have] the right to prohibit the
Maris Trading from performing the repairs and if not
3. Whether defendants are liable for damages under the
human relations provision of the Civil Code.
On I January 1980, the Guiang spouses moved to dismiss the Complaint.  The spouses
5
there assailed the validity of the second Memorandum of Agreement, alleging that the
subject matter thereof involved conjugal property alienated by Aurora Guiang without the
marital consent of her husband, Federico Guiang. Further, it was alleged that the land
upon which the hotel's water supply facility was installed-and which the Guiang spouses
occupied-formed part of the public domain and was then still the subject of a
Miscellaneous Sales Application submitted by Federico Guiang. The Motion to Dismiss,
however, was denied by the trial court.
No evidence having been adduced by the Guiang spouses on their behalf, the case was
submitted for derision. On 31 May 1983, the trial court rendered a decision,   dismissing
6
the complaint. The trial court found that Aurora Guiang had validly alienated her rights
over the disputed portion of land to Maris Trading, but held that the evidence failed to
show that Maris Trading, in turn, had transferred such rights to petitioner Marmont.
Petitioner Marmont appealed to the Court of Appeals which affirmed the decision of the
trial court and dismissed the appeal for lack of merit.   The appellate court, citing Section
7
55, Rule 132 of the Revised Rules of Court, held that the first and second Memoranda of
Agreement could not legally be considered by the court as included in the body of
evidence of the case, as neither document had been formally offered in evidence by
either party. It also held that, in any event, neither document showed that Marmont had
in fact acquired from Maris Trading whatever rights the latter had over the land in
dispute.
In the instant Petition for Review, petitioner assigns the following errors: 8
1. The Court of Appeals erred in not considering the
Memorandum of Agreement of May 2, 1975 and 7
October 1975 as the same were already admitted in the
pre-trial order; and
2. The Court of Appeals erred in deciding that ownership
belongs to Maris Trading hence, private respondent
Guiang can prohibit Marmont Resort from entering the
land.
We find for the petitioner.
Both the trial and appellate courts held that the first and second Memoranda of
Agreement are not properly considered as forming part of the record of this case,
because neither had been formally presented and offered in evidence at the trial of Civil
Case No. 2896-C. The record shows, however, as noted earlier, that at the pre-trial
conference held on 2 October 1980, both petitioner Marmont and respondent spouses
had agreed upon a stipulation of facts and issues recognizing the existence of those
same two (2) agreements. Such stipulation of facts constitutes a judicial admission, the
veracity of which requires no further proof and which may be controverted only upon a
clear showing that such stipulation had been entered into through "palpable mistake." On
this point, Section 2, Rule 129 of the Revised Rules of Court provides:
 Section 2. Judicial Admissions.--Admission 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. (emphasis supplied)
There has been no showing and respondent spouses do not claim that "palpable
mistake" had intervened here, in respect of the formulation of the facts stipulated by the
parties at the pre-trial conference. Absent any such showing, that stipulation of facts is
incontrovertible,   and may be relied upon by the courts.   Respondent spouses are
9 10
estopped from raising as an issue in this case the existence and admissibility in evidence
of both the first and second Memoranda of Agreement which, having been marked as
exhibits during pre-trial, properly form part of the record of this case, even though not
formally offered in evidence after trial. 
11
We consider briefly respondent spouses' argument that the second Memorandum of
Agreement was invalid for having been executed by Aurora Guiang without the marital
consent of Federico, contrary to Articles 165 and 172 of the Civil Code.
Article 165 and 172 state the general principle under our civil law, that the wife may not
validly bind the conjugal partnership without the consent of the husband, who is legally
the administrator of the conjugal partnership. In this particular case, however, as noted
earlier, the second Memorandum of Agreement, although ostensibly contracted solely by
Aurora Guiang with Maris Trading, was also signed by her husband Federico, as one of
the witnesses thereto. This circumstance indicates not only that Federico was present
during the execution of the agreement but also that he had, in fact, given his consent to
the execution thereof by his wife Aurora. Otherwise, he should not have appended his
signature to the document as witness. Respondent spouses cannot now disown the
second Memorandum of Agreement as their effective consent thereto is sufficiently
manifested in the document itself.
That the land in dispute was, at the time of execution of the second Memorandum of
Agreement, public land, is of no consequence here. Pending approval of Federico's
Miscellaneous Sales Application over said land, respondent spouses enjoyed
possessory and other rights over the same which could validly be assigned or transferred
in favor of third persons. In this case, respondent spouses chose to transfer such rights
(over the portion upon which the water pump was installed) to Maris Trading, as
evidenced by the fourth paragraph of the second Memorandum of Agreement, quoted
earlier. Furthermore, assuming (though only for the sake of argument) that the alienation
to Maris Trading was legally objectionable, respondent spouses are not the proper
parties to raise the issue of invalidity, they and Maris Trading being in pari delicto. Only
the government may raise that issue.
Finally, respondent spouses allege that dismissal of the complaint by the trial court was
not improper as petitioner Marmont was not privy to the second Memorandum of
Agreement, and that accordingly, petitioner had no valid cause of action against
respondents.
A closer scrutiny of the second and third paragraphs of the second Memorandum of
Agreement discloses that the first Memorandum of Agreement, including the obligations
imposed thereunder upon Maris Trading, had been acknowledged therein:
That the First Party (i.e., Maris Trading) has dug, drilled and tapped
water source for Marmont Resort, located at Bo. Barretto, Olongapo City
in accordance with their agreement executed on May 2, 1975 and
notarized before Isagani M. Jungco, Notary Public and entered as Doc.
No. 166; Page No. 135; Book No. XV; Series of 1975.
That the First Party has erected, built and drilled for the water source of
Marmont Resort on the land owned by the Second Party [respondent
spouses] at the corner of J. Montelibano Street and Maquinaya Drive
(Provincial Road) with the latter's permission;... (Emphasis supplied)
The above paragraphs establish, among other things, that construction work had been
performed by Maris Trading on the land occupied by respondent spouses; that such
construction work had been performed in accordance with terms and conditions
stipulated in the first Memorandum of Agreement and that the purpose of the work was to
build a water supply facility for petitioner Marmont. The same excerpts also show that the
work so performed was with the knowledge and consent of the Guiang spouses, who
were then occupying the land.
It is clear from the foregoing stipulations that petitioner Marmont was to benefit from the
second Memorandum of Agreement. In fact, said stipulations appear to have been
designed precisely to benefit petitioner and, thus, partake of the nature of
stipulations pour autrui, contemplated in Article 1311 of the Civil Code.
A stipulation pour autrui is a stipulation in favor of a third person conferring a clear and
deliberate favor upon him, which stipulation is found in a contract entered into by parties
neither of whom acted as agent of the beneficiary.   We believe and so hold that the
12
purpose and intent of the stipulating parties (Maris Trading and respondent spouses) to
benefit the third person (petitioner Marmont) is sufficiently clear in the second
Memorandum of Agreement. Marmont was not of course a party to that second
Agreement but, as correctly pointed out by the trial court and the appellate court, the
respondent spouses could not have prevented Maris Trading from entering the property
possessory rights over which had thus been acquired by Maris Trading. That respondent
t spouses remained in physical possession of that particular bit of land, is of no moment;
they did so simply upon the sufferance of Maris Trading. Had Maris Trading, and not the
respondent spouses, been in physical possession, we believe that Marmont would have
been similarly entitled to compel Maris Trading to give it (Marmont) access to the site
involved. The two (2) courts below failed to take adequate account of the fact that the
sole purpose of Maris Trading in acquiring possessory rights over that specific portion of
the land where well and pump and piping had been installed, was to supply the water
requirements of petitioner's hotel. That said purpose was known by respondent spouses,
is made explicit by the second Memorandum of Agreement. Maris Trading itself had no
need for a water supply facility; neither did the respondent spouses. The water facility
was intended solely for Marmont Resort Hotel. The interest of Marmont cannot therefore
be regarded as merely "incidental ."   Finally, even if it be assumed (for purposes of
13

argument merely) that the second Memorandum of Agreement did not constitute a
stipulation pour autrui, still respondent spouses, in the circumstances of this case, must
be regarded as having acted contrary to the principles of honesty, good faith and fair
dealing embodied in Articles 19 and 21 of the Civil Code when they refused petitioner
Marmont access to the water facility to inspect and repair the same and to increase its
capacity and thereby to benefit from it. In so doing, respondent spouses forced petitioner
Marmont to locate an alternative source of water for its hotel which of course involved
expenditure of money and perhaps loss of hotel revenues. We believe they should
respond in damages.

The evidence on record, however, appears insufficient for determination of the amount of
damages for which respondent spouses should be liable. For this reason, the Court is
compelled to remand this case to the trial court for determination of such damages in
appropriate further proceedings.

WHEREFORE, the Petition for Review on certiorari is hereby GRANTED. The Decision
dated 9 December 1986 of the Court of Appeals in C.A. — G.R. CV No. 03299, as well
as the Decision dated 31 May 1983 of the Regional Trial Court of Olongapo City in Civil
Case No. 2896-C, are REVERSED. This case is REMANDED to the trial court for
determination, in further proceedings consistent with this decision, of the amount of
petitioner is entitled to receive from respondent spouses.

No pronouncement as to costs.

SO ORDERED.
G.R. No. L-9188 December 4, 1914
GUTIERREZ HERMANOS, plaintiff-appellee,
vs.
ENGRACIO ORENSE, defendant-appellant.
William A. Kincaid, Thos. L. Hartigan, and Ceferino M. Villareal for appellant.
Rafael de la Sierra for appellee.
TORRES, J.:
Appeal through bill of exceptions filed by counsel for the appellant from the judgment on
April 14, 1913, by the Honorable P. M. Moir, judge, wherein he sentenced the defendant
to make immediate delivery of the property in question, through a public instrument, by
transferring and conveying to the plaintiff all his rights in the property described in the
complaint and to pay it the sum of P780, as damages, and the costs of the suit.
On March 5, 1913, counsel for Gutierrez Hermanos filed a complaint, afterwards
amended, in the Court of First Instance of Albay against Engacio Orense, in which he set
forth that on and before February 14, 1907, the defendant Orense had been the owner of
a parcel of land, with the buildings and improvements thereon, situated in the pueblo of
Guinobatan, Albay, the location, area and boundaries of which were specified in the
complaint; that the said property has up to date been recorded in the new property
registry in the name of the said Orense, according to certificate No. 5, with the
boundaries therein given; that, on February 14, 1907, Jose Duran, a nephew of the
defendant, with the latter's knowledge and consent, executed before a notary a public
instrument whereby he sold and conveyed to the plaintiff company, for P1,500, the
aforementioned property, the vendor Duran reserving to himself the right to repurchase it
for the same price within a period of four years from the date of the said instrument; that
the plaintiff company had not entered into possession of the purchased property, owing
to its continued occupancy by the defendant and his nephew, Jose Duran, by virtue of a
contract of lease executed by the plaintiff to Duran, which contract was in force up to
February 14, 1911; that the said instrument of sale of the property, executed by Jose
Duran, was publicly and freely confirmed and ratified by the defendant Orense; that, in
order to perfect the title to the said property, but that the defendant Orense refused to do
so, without any justifiable cause or reason, wherefore he should be compelled to execute
the said deed by an express order of the court, for Jose Duran is notoriously insolvent
and cannot reimburse the plaintiff company for the price of the sale which he received,
nor pay any sum whatever for the losses and damages occasioned by the said sale,
aside from the fact that the plaintiff had suffered damage by losing the present value of
the property, which was worth P3,000; that, unless such deed of final conveyance were
executed in behalf of the plaintiff company, it would be injured by the fraud perpetrated
by the vendor, Duran, in connivance with the defendant; that the latter had been
occupying the said property since February 14, 1911, and refused to pay the rental
thereof, notwithstanding the demand made upon him for its payment at the rate of P30
per month, the just and reasonable value for the occupancy of the said property, the
possession of which the defendant likewise refused to deliver to the plaintiff company, in
spite of the continuous demands made upon him, the defendant, with bad faith and to the
prejudice of the firm of Gutierrez Hermanos, claiming to have rights of ownership and
possession in the said property. Therefore it was prayed that judgment be rendered by
holding that the land and improvements in question belong legitimately and exclusively to
the plaintiff, and ordering the defendant to execute in the plaintiff's behalf the said
instrument of transfer and conveyance of the property and of all the right, interest, title
and share which the defendant has therein; that the defendant be sentenced to pay P30
per month for damages and rental of the property from February 14, 1911, and that, in
case these remedies were not granted to the plaintiff, the defendant be sentenced to pay
to it the sum of P3,000 as damages, together with interest thereon since the date of the
institution of this suit, and to pay the costs and other legal expenses.
The demurrer filed to the amended complaint was overruled, with exception on the part
of the defendant, whose counsel made a general denial of the allegations contained in
the complaint, excepting those that were admitted, and specifically denied paragraph 4
thereof to the effect that on February 14, 1907, Jose Duran executed the deed of sale of
the property in favor of the plaintiff with the defendant's knowledge and consent. 1awphil.net
As the first special defense, counsel for the defendant alleged that the facts set forth in
the complaint with respect to the execution of the deed did not constitute a cause of
action, nor did those alleged in the other form of action for the collection of P3,000, the
value of the realty.
As the second special defense, he alleged that the defendant was the lawful owner of the
property claimed in the complaint, as his ownership was recorded in the property
registry, and that, since his title had been registered under the proceedings in
rem prescribed by Act No. 496, it was conclusive against the plaintiff and the pretended
rights alleged to have been acquired by Jose Duran prior to such registration could not
now prevail; that the defendant had not executed any written power of attorney nor given
any verbal authority to Jose Duran in order that the latter might, in his name and
representation, sell the said property to the plaintiff company; that the defendant's
knowledge of the said sale was acquired long after the execution of the contract of sale
between Duran and Gutierrez Hermanos, and that prior thereto the defendant did not
intentionally and deliberately perform any act such as might have induced the plaintiff to
believe that Duran was empowered and authorized by the defendant and which would
warrant him in acting to his own detriment, under the influence of that belief. Counsel
therefore prayed that the defendant be absolved from the complaint and that the plaintiff
be sentenced to pay the costs and to hold his peace forever.
After the hearing of the case and an examination of the evidence introduced by both
parties, the court rendered the judgment aforementioned, to which counsel for the
defendant excepted and moved for a new trial. This motion was denied, an exception
was taken by the defendant and, upon presentation of the proper bill of exceptions, the
same was approved, certified and forwarded to the clerk of his court.
This suit involves the validity and efficacy of the sale under right of redemption of a
parcel of land and a masonry house with the nipa roof erected thereon, effected by Jose
Duran, a nephew of the owner of the property, Engracio Orense, for the sum of P1,500
by means of a notarial instrument executed and ratified on February 14, 1907.
After the lapse of the four years stipulated for the redemption, the defendant refused to
deliver the property to the purchaser, the firm of Gutierrez Hermanos, and to pay the
rental thereof at the rate of P30 per month for its use and occupation since February 14,
1911, when the period for its repurchase terminated. His refusal was based on the
allegations that he had been and was then the owner of the said property, which was
registered in his name in the property registry; that he had not executed any written
power of attorney to Jose Duran, nor had he given the latter any verbal authorization to
sell the said property to the plaintiff firm in his name; and that, prior to the execution of
the deed of sale, the defendant performed no act such as might have induced the plaintiff
to believe that Jose Duran was empowered and authorized by the defendant to effect the
said sale.
The plaintiff firm, therefore, charged Jose Duran, in the Court of First Instance of the said
province, with estafa, for having represented himself in the said deed of sale to be the
absolute owner of the aforesaid land and improvements, whereas in reality they did not
belong to him, but to the defendant Orense. However, at the trial of the case Engracio
Orense, called as a witness, being interrogated by the fiscal as to whether he and
consented to Duran's selling the said property under right of redemption to the firm of
Gutierrez Hermanos, replied that he had. In view of this statement by the defendant, the
court acquitted Jose Duran of the charge of estafa.
As a result of the acquittal of Jose Duran, based on the explicit testimony of his uncle,
Engacio Orense, the owner of the property, to the effect that he had consented to his
nephew Duran's selling the property under right of repurchase to Gutierrez Hermanos,
counsel for this firm filed a complainant praying, among other remedies, that the
defendant Orense be compelled to execute a deed for the transfer and conveyance to
the plaintiff company of all the right, title and interest with Orense had in the property
sold, and to pay to the same the rental of the property due from February 14, 1911. itc-alf
Notwithstanding the allegations of the defendant, the record in this case shows that he
did give his consent in order that his nephew, Jose Duran, might sell the property in
question to Gutierrez Hermanos, and that he did thereafter confirm and ratify the sale by
means of a public instrument executed before a notary.
It having been proven at the trial that he gave his consent to the said sale, it follows that
the defendant conferred verbal, or at least implied, power of agency upon his nephew
Duran, who accepted it in the same way by selling the said property. The principal must
therefore fulfill all the obligations contracted by the agent, who acted within the scope of
his authority. (Civil Code, arts. 1709, 1710 and 1727.)
Even should it be held that the said consent was granted subsequently to the sale, it is
unquestionable that the defendant, the owner of the property, approved the action of his
nephew, who in this case acted as the manager of his uncle's business, and Orense'r
ratification produced the effect of an express authorization to make the said sale. (Civil
Code, arts. 1888 and 1892.)
Article 1259 of the Civil Code prescribes: "No one can contract in the name of another
without being authorized by him or without his legal representation according to law.
A contract executed in the name of another by one who has neither his
authorization nor legal representation shall be void, unless it should be ratified by
the person in whose name it was executed before being revoked by the other
contracting party.
The sworn statement made by the defendant, Orense, while testifying as a witness at the
trial of Duran for estafa, virtually confirms and ratifies the sale of his property effected by
his nephew, Duran, and, pursuant to article 1313 of the Civil Code, remedies all defects
which the contract may have contained from the moment of its execution.
The sale of the said property made by Duran to Gutierrez Hermanos was indeed null and
void in the beginning, but afterwards became perfectly valid and cured of the defect of
nullity it bore at its execution by the confirmation solemnly made by the said owner upon
his stating under oath to the judge that he himself consented to his nephew Jose Duran's
making the said sale. Moreover, pursuant to article 1309 of the Code, the right of action
for nullification that could have been brought became legally extinguished from the
moment the contract was validly confirmed and ratified, and, in the present case, it is
unquestionable that the defendant did confirm the said contract of sale and consent to its
execution.
On the testimony given by Engacio Orense at the trial of Duran for estafa, the latter was
acquitted, and it would not be just that the said testimony, expressive of his consent to
the sale of his property, which determined the acquittal of his nephew, Jose Duran, who
then acted as his business manager, and which testimony wiped out the deception that
in the beginning appeared to have been practiced by the said Duran, should not now
serve in passing upon the conduct of Engracio Orense in relation to the firm of Gutierrez
Hermanos in order to prove his consent to the sale of his property, for, had it not been for
the consent admitted by the defendant Orense, the plaintiff would have been the victim of
estafa.

If the defendant Orense acknowledged and admitted under oath that he had consented
to Jose Duran's selling the property in litigation to Gutierrez Hermanos, it is not just nor is
it permissible for him afterward to deny that admission, to the prejudice of the purchaser,
who gave P1,500 for the said property.

The contract of sale of the said property contained in the notarial instrument of February
14, 1907, is alleged to be invalid, null and void under the provisions of paragraph 5 of
section 335 of the Code of Civil Procedure, because the authority which Orense may
have given to Duran to make the said contract of sale is not shown to have been in
writing and signed by Orense, but the record discloses satisfactory and conclusive proof
that the defendant Orense gave his consent to the contract of sale executed in a public
instrument by his nephew Jose Duran. Such consent was proven in a criminal action by
the sworn testimony of the principal and presented in this civil suit by other sworn
testimony of the same principal and by other evidence to which the defendant made no
objection. Therefore the principal is bound to abide by the consequences of his agency
as though it had actually been given in writing (Conlu vs. Araneta and Guanko, 15 Phil.
Rep., 387; Gallemit vs. Tabiliran, 20 Phil. Rep., 241; Kuenzle & Streiff vs. Jiongco, 22
Phil. Rep., 110.)

The repeated and successive statements made by the defendant Orense in two actions,
wherein he affirmed that he had given his consent to the sale of his property, meet the
requirements of the law and legally excuse the lack of written authority, and, as they are
a full ratification of the acts executed by his nephew Jose Duran, they produce the
effects of an express power of agency.

The judgment appealed from in harmony with the law and the merits of the case, and the
errors assigned thereto have been duly refuted by the foregoing considerations, so it
should be affirmed.

The judgment appealed from is hereby affirmed, with the costs against the appellant.