Obligations

3/28/24, 4:09 PM [ G.R. No. 128448.
February 01, 2001 ]
403 Phil. 760
SECOND DIVISION
[ G.R. No. 128448. February 01, 2001 ]
SPOUSES ALEJANDRO MIRASOL AND LILIA E. MIRASOL,
PETITIONERS, VS. THE COURT OF APPEALS, PHILIPPINE
NATIONAL BANK, AND PHILIPPINE EXCHANGE CO., INC.,
RESPONDENTS.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals dated July 22,
1996, in CA-G.R. CV No. 38607, as well as of its resolution of January 23, 1997, denying
petitioners' motion for reconsideration. The challenged decision reversed the judgment of the
Regional Trial Court of Bacolod City, Branch 42 in Civil Case No. 14725.
The factual background of this case, as gleaned from the records, is as follows:
The Mirasols are sugarland owners and planters. In 1973-1974, they produced 70,501.08
piculs[1] of sugar, 25,662.36 of which were assigned for export. The following crop year, their
acreage planted to the same crop was lower, yielding 65,100 piculs of sugar, with 23,696.40
piculs marked for export.
Private respondent Philippine National Bank (PNB) financed the Mirasols' sugar production
venture for crop years, 1973-1974 and 1974-1975 under a crop loan financing scheme. Under
said scheme, the Mirasols signed Credit Agreements, a Chattel Mortgage on Standing Crops,
and a Real Estate Mortgage in favor of PNB. The Chattel Mortgage empowered PNB as the
petitioners' attorney-in-fact to negotiate and to sell the latter's sugar in both domestic and export
markets and to apply the proceeds to the payment of their obligations to it.
Exercising his law-making powers under Martial Law, then President Ferdinand Marcos issued
Presidential Decree (P.D.) No. 579[2] in November, 1974. The decree authorized private
respondent Philippine Exchange Co., Inc. (PHILEX) to purchase sugar allocated for export to
the United States and to other foreign markets. The price and quantity was determined by the
Sugar Quota Administration, PNB, the Department of Trade and Industry, and finally, by the
Office of the President. The decree further authorized PNB to finance PHILEX's purchases.
Finally, the decree directed that whatever profit PHILEX might realize from sales of sugar
abroad was to be remitted to a special fund of the national government, after commissions,
overhead expenses and liabilities had been deducted. The government offices and entities tasked
by existing laws and administrative regulations to oversee the sugar export pegged the purchase
price of export sugar in crop years 1973-1974 and 1974-1975 at P180.00 per picul.
https://elibrary.judiciary.gov.ph/search 1/12
3/28/24, 4:09 PM [ G.R. No. 128448. February 01, 2001 ]
PNB continued to finance the sugar production of the Mirasols for crop years 1975-1976 and
1976-1977. These crop loans and similar obligations were secured by real estate mortgages over
several properties of the Mirasols and chattel mortgages over standing crops. Believing that the
proceeds of their sugar sales to PNB, if properly accounted for, were more than enough to pay
their obligations, petitioners asked PNB for an accounting of the proceeds of the sale of their
export sugar. PNB ignored the request. Meanwhile, petitioners continued to avail of other loans
from PNB and to make unfunded withdrawals from their current accounts with said bank. PNB
then asked petitioners to settle their due and demandable accounts. As a result of these demands
for payment, petitioners on August 4, 1977, conveyed to PNB real properties valued at
P1,410,466.00 by way of dacion en pago, leaving an unpaid overdrawn account of
P1,513,347.78.
On August 10, 1982, the balance of outstanding sugar crop and other loans owed by petitioners
to PNB stood at P15,964,252.93. Despite demands, the Mirasols failed to settle said due and
demandable accounts. PNB then proceeded to extrajudicially foreclose the mortgaged
properties. After applying the proceeds of the auction sale of the mortgaged realties, PNB still
had a deficiency claim of P12,551,252.93.
Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for
crop years 1973-1974 and 1974-1975, insisting that said proceeds, if properly liquidated, could
offset their outstanding obligations with the bank. PNB remained adamant in its stance that
under P.D. No. 579, there was nothing to account since under said law, all earnings from the
export sales of sugar pertained to the National Government and were subject to the disposition
of the President of the Philippines for public purposes.
On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and damages
against PNB with the Regional Trial Court of Bacolod City, docketed as Civil Case No. 14725.
On June 16, 1987, the complaint was amended to implead PHILEX as party-defendant.
The parties agreed at pre-trial to limit the issues to the following:
"1.
The constitutionality and/or legality of Presidential Decrees numbered 338,
579, and 1192;
"2. The determination of the total amount allegedly due the plaintiffs from the
defendants corresponding to the allege(d) unliquidated cost price of export
sugar during crop years 1973-1974 and 1974-1975."[3]
After trial on the merits, the trial court decided as follows:
"WHEREFORE, the foregoing premises considered, judgment is hereby rendered in

favor of the plaintiffs and against the defendants Philippine National Bank (PNB)
and Philippine Exchange Co., Inc. (PHILEX):
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(1) Declaring Presidential Decree 579 enacted on November 12, 1974 and all
circulars, as well as policies, orders and other issuances issued in
furtherance thereof, unconstitutional and therefore, NULL and VOID being
in gross violation of the Bill of Rights;
(2) Ordering defendants PNB and PHILEX to pay, jointly and severally,
plaintiffs the whole amount corresponding to the residue of the unliquidated
actual cost price of 25,662 piculs in export sugar for crop year 1973-1974 at
an average price of P300.00 per picul, deducting therefrom however, the
amount of P180.00 already paid in advance plus the allowable deductions in
service fees and other charges;
(3) And also, for the same defendants to pay, jointly and severally, same
plaintiffs the whole amount corresponding to the unpaid actual price of
14,596 piculs of export sugar for crop year 1974-1975 at an average rate of
P214.14 per picul minus however, the sum of P180.00 per picul already paid
by the defendants in advance and the allowable deducting (sic) in service
fees and other charges.
"The unliquidated amount of money due the plaintiffs but withheld by the
defendants, shall earn the legal rate of interest at 12% per annum computed
from the date this action was instituted until fully paid; and, finally -
(4) Directing the defendants PNB and PHILEX to pay, jointly and severally,
plaintiffs the sum of P50,000.00 in moral damages and the amount of
P50,000.00 as attorney's fees, plus the costs of this litigation.
"SO ORDERED."[4]
The same was, however, modified by a Resolution of the trial court dated May 14, 1992, which
added the following paragraph:
"This decision should however, be interpreted without prejudice to whatever benefits

that may have accrued in favor of the plaintiffs with the passage and approval of
Republic Act 7202 otherwise known as the `Sugar Restitution Law,' authorizing the
restitution of losses suffered by the plaintiffs from Crop year 1974-1975 to Crop year
1984-1985 occasioned by the actuations of government-owned and controlled
agencies. (Underscoring in the original).
"SO ORDERED."[5]
The Mirasols then filed an appeal with the respondent court, docketed as CA-G.R. CV No.
38607, faulting the trial court for not nullifying the dacion en pago and the mortgage contracts,
as well as the foreclosure of their mortgaged properties. Also faulted was the trial court's failure
to award them the full money claims and damages sought from both PNB and PHILEX.
On July 22, 1996, the Court of Appeals reversed the trial court as follows:
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"WHEREFORE, this Court renders judgment REVERSING the appealed Decision

and entering the following verdict:
"1. Declaring the dacion en pago and the foreclosure of the mortgaged
properties valid;
"2. Ordering the PNB to render an accounting of the sugar account of the
Mirasol[s] specifically stating the indebtedness of the latter to the former
and the proceeds of Mirasols' 1973-1974 and 1974-1975 sugar production
sold pursuant to and in accordance with P.D. 579 and the issuances
therefrom;
"3. Ordering the PNB to recompute in accordance with RA 7202 Mirasols'

indebtedness to it crediting to the latter payments already made as well as
the auction price of their foreclosed real estate and stipulated value of their
properties ceded to PNB in the dacon (sic) en pago;
"4. Whatever the result of the recomputation of Mirasols' account, the

outstanding balance or the excess payment shall be governed by the
pertinent provisions of RA 7202.
"SO ORDERED."[6]
On August 28, 1996, petitioners moved for reconsideration, which the appellate court denied on
January 23, 1997.
Hence, the instant petition, with petitioners submitting the following issues for our resolution:
"1. Whether the Trial Court has jurisdiction to declare a statute unconstitutional
without notice to the Solicitor General where the parties have agreed to
submit such issue for the resolution of the Trial Court.
"2. Whether PD 579 and subsequent issuances[7] thereof are unconstitutional.
"3. Whether the Honorable Court of Appeals committed manifest error in not
applying the doctrine of piercing the corporate veil between respondents
PNB and PHILEX.
"4. Whether the Honorable Court of Appeals committed manifest error in

upholding the validity of the foreclosure on petitioners property and in
upholding the validity of the dacion en pago in this case.
"5. Whether the Honorable Court of Appeals committed manifest error in not
awarding damages to petitioners grounds relied upon the allowance of the
petition. (Underscored in the original)"[8]
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to
consider the constitutionality of a statute, presidential decree, or executive order.[9] The
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Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or
regulation not only in this Court, but in all Regional Trial Courts.[10] In J.M. Tuason and Co. v.
Court of Appeals, 3 SCRA 696 (1961) we held:
"Plainly, the Constitution contemplates that the inferior courts should have
jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of
appellate review of final judgments of inferior courts in cases where such
constitutionality happens to be in issue."[11]
Furthermore, B.P. Blg. 129 grants Regional Trial Courts the authority to rule on the conformity
of laws or treaties with the Constitution, thus:
"SECTION 19. Jurisdiction in civil cases. - Regional Trial Courts shall exercise
exclusive original jurisdiction:
(1) In all civil actions in which the subject of the litigations is incapable of pecuniary
estimation;"
The pivotal issue, which we must address, is whether it was proper for the trial court to have
exercised judicial review.
Petitioners argue that the Court of Appeals erred in finding that it was improper for the trial
court to have declared P.D. No. 579[12] unconstitutional, since petitioners had not complied with
Rule 64, Section 3, of the Rules of Court. Petitioners contend that said Rule specifically refers
only to actions for declaratory relief and not to an ordinary action for accounting, specific
performance, and damages.
Petitioners' contentions are bereft of merit. Rule 64, Section 3 of the Rules of Court provides:
"SEC. 3. Notice to Solicitor General. - In any action which involves the validity of a
statute, or executive order or regulation, the Solicitor General shall be notified by the
party attacking the statute, executive order, or regulation, and shall be entitled to be
heard upon such question."
This should be read in relation to Section 1 [c] of P.D. No. 478,[13] which states in part:
"SECTION 1. Functions and Organizations - (1) The Office of the Solicitor General
shall...have the following specific powers and functions:
xxx
"[c] Appear in any court in any action involving the validity of any treaty, law,
executive order or proclamation, rule or regulation when in his judgment his
intervention is necessary or when requested by the court."
It is basic legal construction that where words of command such as "shall," "must," or "ought"
are employed, they are generally and ordinarily regarded as mandatory.[14] Thus, where, as in
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Rule 64, Section 3 of the Rules of Court, the word "shall" is used, a mandatory duty is imposed,
which the courts ought to enforce.
The purpose of the mandatory notice in Rule 64, Section 3 is to enable the Solicitor General to
decide whether or not his intervention in the action assailing the validity of a law or treaty is
necessary. To deny the Solicitor General such notice would be tantamount to depriving him of
his day in court. We must stress that, contrary to petitioners' stand, the mandatory notice
requirement is not limited to actions involving declaratory relief and similar remedies. The rule
itself provides that such notice is required in "any action" and not just actions involving
declaratory relief. Where there is no ambiguity in the words used in the rule, there is no room for
construction.[15] In all actions assailing the validity of a statute, treaty, presidential decree, order,
or proclamation, notice to the Solicitor General is mandatory.
In this case, the Solicitor General was never notified about Civil Case No. 14725. Nor did the
trial court ever require him to appear in person or by a representative or to file any pleading or
memorandum on the constitutionality of the assailed decree. Hence, the Court of Appeals did
not err in holding that lack of the required notice made it improper for the trial court to pass
upon the constitutional validity of the questioned presidential decrees.
As regards the second issue, petitioners contend that P.D. No. 579 and its implementing
issuances are void for violating the due process clause and the prohibition against the taking of
private property without just compensation. Petitioners now ask this Court to exercise its power
of judicial review.
Jurisprudence has laid down the following requisites for the exercise of this power: First, there
must be before the Court an actual case calling for the exercise of judicial review. Second, the
question before the Court must be ripe for adjudication. Third, the person challenging the
validity of the act must have standing to challenge. Fourth, the question of constitutionality must
have been raised at the earliest opportunity, and lastly, the issue of constitutionality must be the
very lis mota of the case. [16]
As a rule, the courts will not resolve the constitutionality of a law, if the controversy can be
settled on other grounds.[17] The policy of the courts is to avoid ruling on constitutional
questions and to presume that the acts of the political departments are valid, absent a clear and
unmistakable showing to the contrary. To doubt is to sustain. This presumption is based on the
doctrine of separation of powers. This means that the measure had first been carefully studied by
the legislative and executive departments and found to be in accord with the Constitution before
it was finally enacted and approved.[18]
The present case was instituted primarily for accounting and specific performance. The Court of
Appeals correctly ruled that PNB's obligation to render an accounting is an issue, which can be
determined, without having to rule on the constitutionality of P.D. No. 579. In fact there is
nothing in P.D. No. 579, which is applicable to PNB's intransigence in refusing to give an
accounting. The governing law should be the law on agency, it being undisputed that PNB acted
as petitioners' agent. In other words, the requisite that the constitutionality of the law in question
be the very lis mota of the case is absent. Thus we cannot rule on the constitutionality of P.D.
No. 579.
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Petitioners further contend that the passage of R.A. No. 7202[19] rendered P.D. No. 579
unconstitutional, since R.A. No. 7202 affirms that under P.D. 579, the due process clause of the
Constitution and the right of the sugar planters not to be deprived of their property without just
compensation were violated.
A perusal of the text of R.A. No. 7202 shows that the repealing clause of said law merely reads:
"SEC. 10. All laws, acts, executive orders and circulars in conflict herewith are hereby repealed
or modified accordingly."
The settled rule of statutory construction is that repeals by implication are not favored.[20] R.A.
No. 7202 cannot be deemed to have repealed P.D. No. 579. In addition, the power to declare a
law unconstitutional does not lie with the legislature, but with the courts.[21] Assuming
arguendo that R.A. No. 7202 did indeed repeal P.D. No. 579, said repeal is not a legislative
declaration finding the earlier law unconstitutional.
To resolve the third issue, petitioners ask us to apply the doctrine of piercing the veil of
corporate fiction with respect to PNB and PHILEX. Petitioners submit that PHILEX was a
wholly-owned subsidiary of PNB prior to the latter's privatization.
We note, however, that the appellate court made the following finding of fact:
"1.
PNB and PHILEX are separate juridical persons and there is no reason to
pierce the veil of corporate personality. Both existed by virtue of separate
organic acts. They had separate operations and different purposes and
powers."[22]
Findings of fact by the Court of Appeals are conclusive and binding upon this Court unless said
findings are not supported by the evidence.[23] Our jurisdiction in a petition for review under
Rule 45 of the Rules of Court is limited only to reviewing questions of law and factual issues are
not within its province.[24] In view of the aforequoted finding of fact, no manifest error is
chargeable to the respondent court for refusing to pierce the veil of corporate fiction.
On the fourth issue, the appellate court found that there were two sets of accounts between
petitioners and PNB, namely:
"1. The accounts relative to the loan financing scheme entered into by the Mirasols
with PNB (PNB's Brief, p. 16) On the question of how much the PNB lent the
Mirasols for crop years 1973-1974 and 1974-1975, the evidence recited by the lower
court in its decision was deficient. We are offered (sic) PNB the amount of FIFTEEN
MILLION NINE HUNDRED SIXTY FOUR THOUSAND TWO HUNDRED
FIFTY TWO PESOS and NINETY THREE Centavos (Ps15,964,252.93) but this is
the alleged balance the Mirasols owe PNB covering the years 1975 to 1982.
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"2. The account relative to the Mirasol's current account Numbers 5186 and 5177
involving the amount of THREE MILLION FOUR HUNDRED THOUSAND Pesos
(P3,400,000.00) PNB claims against the Mirasols. (PNB's Brief, p. 17)
"In regard to the first set of accounts, besides the proceeds from PNB's sale of sugar
(involving the defendant PHILEX in relation to the export portion of the stock), the
PNB foreclosed the Mirasols' mortgaged properties realizing therefrom in 1982
THREE MILLION FOUR HUNDRED THIRTEEN THOUSAND Pesos
(P3,413,000.00), the PNB itself having acquired the properties as the highest bidder.
"As to the second set of accounts, PNB proposed, and the Mirasols accepted, a
dacion en pago scheme by which the Mirasols conveyed to PNB pieces of property
valued at ONE MILLION FOUR HUNDRED TEN THOUSAND FOUR
HUNDRED SIXTY-SIX Pesos (Ps1,410,466.00) (PNB's Brief, pp. 16-17)."[25]
Petitioners now claim that the dacion en pago and the foreclosure of their mortgaged properties
were void for want of consideration. Petitioners insist that the loans granted them by PNB from
1975 to 1982 had been fully paid by virtue of legal compensation. Hence, the foreclosure was
invalid and of no effect, since the mortgages were already fully discharged. It is also averred that
they agreed to the dacion only by virtue of a martial law Arrest, Search, and Seizure Order
(ASSO).
We find petitioners' arguments unpersuasive. Both the lower court and the appellate court found
that the Mirasols admitted that they were indebted to PNB in the sum stated in the latter's
counterclaim.[26] Petitioners nonetheless insist that the same can be offset by the unliquidated
amounts owed them by PNB for crop years 1973-74 and 1974-75. Petitioners' argument has no
basis in law. For legal compensation to take place, the requirements set forth in Articles 1278
and 1279 of the Civil Code must be present. Said articles read as follows:
"Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
"Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor."
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In the present case, set-off or compensation cannot take place between the parties because:
First, neither of the parties are mutually creditors and debtors of each other. Under P.D. No. 579,
neither PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of
sugar sold by the two firms. P.D. No. 579 prescribed where the profits from the sales are to be
paid, to wit:
"SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%)

percent of gross sales, the balance of the proceeds of sugar trading operations for
every crop year shall be set aside by the Philippine Exchange Company, Inc,. as
profits which shall be paid to a special fund of the National Government subject to
the disposition of the President for public purposes."
Thus, as correctly found by the Court of Appeals, "there was nothing with which PNB was
supposed to have off-set Mirasols' admitted indebtedness."[27]
Second, compensation cannot take place where one claim, as in the instant case, is still the
subject of litigation, as the same cannot be deemed liquidated.[28]
With respect to the duress allegedly employed by PNB, which impugned petitioners' consent to
the dacion en pago, both the trial court and the Court of Appeals found that there was no
evidence to support said claim. Factual findings of the trial court, affirmed by the appellate
court, are conclusive upon this Court.[29]
On the fifth issue, the trial court awarded petitioners P50,000.00 in moral damages and
P50,000.00 in attorney's fees. Petitioners now theorize that it was error for the Court of Appeals
to have deleted these awards, considering that the appellate court found PNB breached its duty
as an agent to render an accounting to petitioners.
An agent's failure to render an accounting to his principal is contrary to Article 1891 of the Civil
Code.[30] The erring agent is liable for damages under Article 1170 of the Civil Code, which
states:
"Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages."
Article 1170 of the Civil Code, however, must be construed in relation to Article 2217 of said
Code which reads:
"Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendant's wrongful act or
omission."
Moral damages are explicitly authorized in breaches of contract where the defendant acted
fraudulently or in bad faith.[31] Good faith, however, is always presumed and any person who
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seeks to be awarded damages due to the acts of another has the burden of proving that the latter
acted in bad faith, with malice, or with ill motive. In the instant case, petitioners have failed to
show malice or bad faith[32] on the part of PNB in failing to render an accounting. Absent such
showing, moral damages cannot be awarded.
Nor can we restore the award of attorney's fees and costs of suit in favor of petitioners. Under
Article 2208 (5) of the Civil Code, attorney's fees are allowed in the absence of stipulation only
if "the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just, and demandable claim." As earlier stated, petitioners have not proven bad faith on the
part of PNB and PHILEX.
WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent court
in CA-G.R. CV 38607 AFFIRMED. Costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
[1] One picul is equivalent to 63.25 kilograms.
[2]The decree was entitled "Rationalizing and Stabilizing The Export of Sugar And For Other
Purposes."
[3] Rollo, p. 78.
[4] Id. at 104-105.
[5] Id. at 110.
[6]Id. at 88-89.
[7]These include Circular Letter No. 24 dated October 25, 1974 which designates PHILEX to
undertake the liquidation, buying and disposition of "B" sugar quedans; Circular Letter No. 13 s.
1974-1975 issued on May 5, 1975 which outlines the revision of the pricing policy for sugar for
crop year 1974-1975; and Circular Letter No. 24 s. 1974-1975 which outlines the fixing of the
price of sugar covering production starting May 5, 1975.
[8] Supra Note 6, at 32-33.
[9] Drilon v. Lim, 235 SCRA 135, 139 (1994).
[10] Const, Art. VIII, Sec. 5 (2).
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725 Phil. 94 ← click for PDF copy
SECOND DIVISION
[ G.R. No. 191555. January 20, 2014 ]
UNION BANK OF THE PHILIPPINES, PETITIONER, VS.
DEVELOPMENT BANK OF THE PHILIPPINES, RESPONDENT.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari[1] are the Decision[2] dated November 3, 2009
and Resolution[3] dated February 26, 2010 of the Court of Appeals (CA) in CA-G.R. SP No.
93833 which affirmed the Orders[4] dated November 9, 2005 and January 30, 2006 of the
Regional Trial Court of Makati, Branch 58[5] (RTC) in Civil Case No. 7648 denying the motion
to affirm legal compensation[6] filed by petitioner Union Bank of the Philippines (Union Bank)
against respondent Development Bank of the Philippines (DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s predecessor-in-
interest, Bancom Development Corporation (Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In
Payment of Debt[7] (dacion en pago) whereby the former ceded in favor of the latter certain
properties (including a processing plant in Marilao, Bulacan [processing plant]) in consideration
of the following: (a) the full and complete satisfaction of FI’s loan obligations to DBP; and (b)
the direct assumption by DBP of FI’s obligations to Bancom in the amount of
P17,000,000.00 (assumed obligations).[8]
On the same day, DBP, as the new owner of the processing plant, leased back[9] for 20 years the
said property to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be
shared by DBP and Bancom.
DBP also entered into a separate agreement[10] with Bancom (Assumption Agreement) whereby
the former: (a) confirmed its assumption of FI’s obligations to Bancom; and (b) undertook to
remit up to 30% of any and all rentals due from FI to Bancom (subject rentals) which would
serve as payment of the assumed obligations, to be paid in monthly installments. The pertinent
portions of the Assumption Agreement reads as follows:
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WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the
above obligations to Bancom which DBP has assumed shall be settled, paid
and/or liquidated by DBP out of a portion of the lease rentals or part of the
proceeds of sale of those properties of the Assignors conveyed to DBP pursuant to
the [Deed of Cession of Property in Payment of Debt dated May 21, 1979] and
which are the subject of [the Lease Agreement] made and executed by and between
DBP and [FI], the last hereafter referred to as the “Lessee” to be effective as of July
31, 1978.
xxxx
4. DBP hereby covenants and undertakes that the amount up to 30% of any and
all rentals due from the Lessee pursuant to the Lease Agreement shall be
remitted by DBP to Bancom at the latter’s offices at Pasay Road, Makati, Metro
Manila within five (5) days from due dates thereof, and applied in payment of
the Assumed Obligations. Likewise, the amount up to 30% of the proceeds from
any sale of the Leased Properties shall within the same period above, be remitted by
DBP to Bancom and applied in payment or prepayment of the Assumed Obligations.
x x x. Any balance of the Assumed Obligations after application of the entire
rentals and or the entire sales proceeds actually received by Bancom on the
Leased Properties shall be paid by DBP to Bancom not later than December 29,
1998. (Emphases supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to
Foodmasters Worldwide, Inc. (FW);[11] while on May 9, 1984, Bancom conveyed all its
receivables, including, among others, DBP’s assumed obligations, to Union Bank.[12]
Claiming that the subject rentals have not been duly remitted despite its repeated demands,
Union Bank filed, on June 20, 1984, a collection case against DBP before the RTC, docketed as
Civil Case No. 7648.[13]In opposition, DBP countered, among others, that the obligations it
assumed were payable only out of the rental payments made by FI. Thus, since FI had yet to pay
the same, DBP’s obligation to Union Bank had not arisen.[14] In addition, DBP sought to
implead FW as third party-defendant in its capacity as FI’s assignee and, thus, should be held
liable to Union Bank.[15]
In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it had
ceased to be a real-party-in-interest due to the supervening transfer of its rights, title and
interests over the subject matter to the Asset Privatization Trust (APT). Said motion was,
however, denied by the RTC in an Order dated May 27, 1988.[16]
The RTC Ruling in Civil Case No. 7648
Finding the complaint to be meritorious, the RTC, in a Decision[17] dated May 8, 1990, ordered:
(a) DBP to pay Union Bank the sum of P4,019,033.59, representing the amount of the subject
rentals (which, again, constitutes 30% of FI’s [now FW’s] total rental debt), including interest
until fully paid; and (b) FW, as third-party defendant, to indemnify DBP, as third-party plaintiff,
3/28/24, 4:10 PM [ G.R. No. 191555. January 20, 2014 ]
for its payments of the subject rentals to Union Bank. It ruled that there lies no evidence which
would show that DBP’s receipt of the rental payments from FW is a condition precedent to the
former’s obligation to remit the subject rentals under the Lease Agreement. Thus, when DBP
failed to remit the subject rentals to Union Bank, it defaulted on its assumed obligations.[18]
DBP then elevated the case on appeal before the CA, docketed as CA-G.R. CV No. 35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision[19] dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the RTC’s
ruling, and consequently ordered: (a) FW to pay DBP the amount of P32,441,401.85
representing the total rental debt incurred under the Lease Agreement, including P10,000.00 as
attorney’s fees; and (b) DBP, after having been paid by FW its unpaid rentals, to remit 30%
thereof (i.e., the subject rentals) to Union Bank. [20]
It rejected Union Bank’s claim that DBP has the direct obligation to remit the subject rentals not
only from FW’s rental payments but also out of its own resources since said claim contravened
the “plain meaning” of the Assumption Agreement which specifies that the payment of the
assumed obligations shall be made “out of the portion of the lease rentals or part of the
proceeds of the sale of those properties of [FI] conveyed to DBP.”[21] It also construed the
phrase under the Assumption Agreement that DBP is obligated to “pay any balance of the
Assumed Obligations after application of the entire rentals and/or the entire sales proceeds
actually received by [Union Bank] on the Leased Properties . . . not later than December 29,
1998” to mean that the lease rentals must first be applied to the payment of the assumed
obligations in the amount of P17,000,000.00, and that DBP would have to pay out of its own
money only in case the lease rentals were insufficient, having only until December 29, 1998
to do so. Nevertheless, the monthly installments in satisfaction of the assumed obligations
would still have to be first sourced from said lease rentals as stipulated in the assumption
agreement.[22] In view of the foregoing, the CA ruled that DBP did not default in its obligations
to remit the subject rentals to Union Bank precisely because it had yet to receive the rental
payments of FW.[23]
Separately, the CA upheld the RTC’s denial of DBP’s motion to dismiss for the reason that the
transfer of its rights, title and interests over the subject matter to the APT occurred pendente lite,
and, as such, the substitution of parties is largely discretionary on the part of the court.
At odds with the CA’s ruling, Union Bank and DBP filed separate petitions for review on
certiorari before the Court, respectively docketed as G.R. Nos. 115963 and 119112, which were
thereafter consolidated.
The Court’s Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution[24] dated December 13, 1995. First, it upheld
the CA’s finding that while DBP directly assumed FI’s obligations to Union Bank, DBP was
only obliged to remit to the latter 30% of the lease rentals collected from FW, from which any
deficiency was to be settled by DBP not later than December 29, 1998.[25] Similarly, the Court
agreed with the CA that the denial of DBP’s motion to dismiss was proper since substitution of
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parties, in case of transfers pendente lite, is merely discretionary on the part of the court, adding
further that the proposed substitution of APT will amount to a novation of debtor which cannot
be done without the consent of the creditor.[26]
On August 2, 2000, the Court’s resolution became final and executory.[27]
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for execution[28] before the RTC, praying that
DBP be directed to pay the amount of P9,732,420.555 which represents the amount of the
subject rentals (i.e., 30% of the FW’s total rental debt in the amount of P32,441,401.85). DBP
opposed[29] Union Bank’s motion, contending that it sought to effectively vary the dispositive
portion of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866. Also, on September 12,
2001, DBP filed its own motion for execution against FW, citing the same CA decision as its
basis.
In a Consolidated Order[30] dated October 15, 2001 (Order of Execution), the RTC granted both
motions for execution. Anent Union Bank’s motion, the RTC opined that the CA’s ruling that
DBP’s payment to Union Bank shall be demandable only upon payment of FW must be viewed
in light of the date when the same was rendered. It noted that the CA decision was promulgated
only on May 27, 1994, which was before the December 29, 1998 due date within which DBP
had to fully pay its obligation to Union Bank under the Assumption Agreement. Since the latter
period had already lapsed, “[i]t would, thus, be too strained to argue that payment by DBP of its
assumed obligation[s] shall be dependent on [FW’s] ability, if not availability, to pay.”[31] In
similar regard, the RTC granted DBP’s motion for execution against FW since its liability to
Union Bank and DBP remained undisputed.
As a result, a writ of execution[32] dated October 15, 2001 (October 15, 2001 Writ of Execution)
and, thereafter, a notice of garnishment[33] against DBP were issued. Records, however, do not
show that the same writ was implemented against FW.
DBP filed a motion for reconsideration[34] from the Execution Order, averring that the latter
issuance varied the import of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866 in that
it prematurely ordered DBP to pay the assumed obligations to Union Bank before FW’s
payment. The motion was, however, denied on December 5, 2001.[35] Thus, DBP’s deposits
were eventually garnished.[36] Aggrieved, DBP filed a petition for certiorari[37] before the CA,
docketed as CA-G.R. SP No. 68300.
The CA Ruling in CA-G.R. SP No. 68300
In a Decision[38] dated July 26, 2002, the CA dismissed DBP’s petition, finding that the RTC did
not abuse its discretion when it issued the October 15, 2001 Writ of Execution. It upheld the
RTC’s observation that there was “nothing wrong in the manner how [said writ] was
implemented,” as well as “in the zealousness and promptitude exhibited by Union Bank” in
moving for the same. DBP appealed the CA’s ruling before the Court, which was docketed as
3/28/24, 4:10 PM [ G.R. No. 191555. January 20, 2014 ]
G.R. No. 155838.
The Court’s Ruling in G.R. No. 155838
In a Decision[39] dated January 13, 2004 (January 13, 2004 Decision), the Court granted DBP’s
appeal, and thereby reversed and set aside the CA’s ruling in CA-G.R. SP No. 68300. It found
significant points of variance between the CA’s May 27, 1994 Decision in CA-G.R. CV No.
35866, and the RTC’s Order of Execution/October 15, 2001 Writ of Execution. It ruled that both
the body and the dispositive portion of the same decision acknowledged that DBP’s obligation
to Union Bank for remittance of the lease payments is contingent on FW’s prior payment to
DBP, and that any deficiency DBP had to pay by December 29, 1998 as per the Assumption
Agreement cannot be determined until after the satisfaction of FW’s own rental obligations to
DBP. Accordingly, the Court: (a) nullified the October 15, 2001 Writ of Execution and all
related issuances thereto; and (b) ordered Union Bank to return to DBP the amounts it received
pursuant to the said writ.[40]
Dissatisfied, Union Bank moved for reconsideration which was, however, denied by the Court in
a Resolution dated March 24, 2004 with finality. Thus, the January 13, 2004 Decision attained
finality on April 30, 2004.[41] Thereafter, DBP moved for the execution of the said decision
before the RTC. After numerous efforts on the part of Union Bank proved futile, the RTC issued
a writ of execution (September 6, 2005 Writ of Execution), ordering Union Bank to return to
DBP all funds it received pursuant to the October 15, 2001 Writ of Execution.[42]
Union Bank’s Motion to Affirm Legal Compensation
On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal
Compensation,[43] praying that the RTC apply legal compensation between itself and DBP in
order to offset the return of the funds it previously received from DBP. Union Bank anchored its
motion on two grounds which were allegedly not in existence prior to or during trial, namely: (a)
on December 29, 1998, DBP’s assumed obligations became due and demandable;[44] and (b)
considering that FWI became non-operational and non-existent, DBP became primarily liable to
the balance of its assumed obligation, which as of Union Bank’s computation after its claimed
set-off, amounted to P1,849,391.87.[45]
On November 9, 2005, the RTC issued an Order[46] denying the above-mentioned motion for
lack of merit, holding that Union Bank’s stated grounds were already addressed by the Court in
the January 13, 2004 Decision in G.R. No. 155838. With Union Bank’s motion for
reconsideration therefrom having been denied, it filed a petition for certiorari[47] with the CA,
docketed as CA-G.R. SP No. 93833.
Pending resolution, Union Bank issued Manager’s Check[48] No. 099-0003192363 dated April
21, 2006 amounting to P52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution
dated September 6, 2005 Writ of Execution. DBP, however, averred that Union Bank still has a
balance of P756,372.39 representing a portion of the garnished funds of DBP,[49] which means
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that said obligation had not been completely extinguished.
The CA Ruling in CA-G.R. SP No. 93833
In a Decision[50] dated November 3, 2009, the CA dismissed Union Bank’s petition, finding no
grave abuse of discretion on the RTC’s part. It affirmed the denial of its motion to affirm legal
compensation considering that: (a) the RTC only implemented the Court’s January 13, 2004
Decision in G.R. No. 155838 which by then had already attained finality; (b) DBP is not a
debtor of Union Bank; and (c) there is neither a demandable nor liquidated debt from DBP to
Union Bank.[51]
Undaunted, Union Bank moved for reconsideration which was, however, denied in a
Resolution[52] dated February 26, 2010; hence, the instant petition.
The Issue Before the Court
The sole issue for the Court’s resolution is whether or not the CA correctly upheld the denial of
Union Bank’s motion to affirm legal compensation.
The Court’s Ruling
The petition is bereft of merit.
Compensation is defined as a mode of extinguishing obligations whereby two persons in their

capacity as principals are mutual debtors and creditors of each other with respect to equally
liquidated and demandable obligations to which no retention or controversy has been timely
commenced and communicated by third parties.[53] The requisites therefor are provided under
Article 1279 of the Civil Code which reads as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor. (Emphases and
underscoring supplied)
The rule on legal[54] compensation is stated in Article 1290 of the Civil Code which provides
that “[w]hen all the requisites mentioned in Article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even though
3/28/24, 4:10 PM [ G.R. No. 191555. January 20, 2014 ]
the creditors and debtors are not aware of the compensation.”
In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken
place in order to effectively offset (a) its own obligation to return the funds it previously
received from DBP as directed under the September 6, 2005 Writ of Execution with (b) DBP’s
assumed obligations under the Assumption Agreement. However, legal compensation could not
have taken place between these debts for the apparent reason that requisites 3 and 4 under
Article 1279 of the Civil Code are not present. Since DBP’s assumed obligations to Union
Bank for remittance of the lease payments are – in the Court’s words in its Decision dated
January 13, 2004 in G.R. No. 155838 – “contingent on the prior payment thereof by [FW] to
DBP,” it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code).
Also, in the same ruling, the Court observed that any deficiency that DBP had to make up (by
December 29, 1998 as per the Assumption Agreement) for the full satisfaction of the assumed
obligations “cannot be determined until after the satisfaction of Foodmasters’ obligation to
DBP.” In this regard, it cannot be concluded that the same debt had already been liquidated, and
thereby became demandable (requisite 4 of Article 1279 of the Civil Code).
The aforementioned Court decision had already attained finality on April 30, 2004[55] and,
hence, pursuant to the doctrine of conclusiveness of judgment, the facts and issues actually
and directly resolved therein may not be raised in any future case between the same parties, even
if the latter suit may involve a different cause of action.[56] Its pertinent portions are hereunder
quoted for ready reference:[57]
Both the body and the dispositive portion of the [CA’s May 27, 1994 Decision in
CA-G.R. CV No. 35866] correctly construed the nature of DBP’s liability for the
lease payments under the various contracts, to wit:
x x x Construing these three contracts, especially the “Agreement” x x x

between DBP and Bancom as providing for the payment of DBP’s
assumed obligation out of the rentals to be paid to it does not mean
negating DBP’s assumption “for its own account” of the P17.0 million
debt x x x. It only means that they provide a mechanism for discharging
[DBP’s] liability. This liability subsists, since under the “Agreement” x x
x, DBP is obligated to pay “any balance of the Assumed Obligations after
application of the entire rentals and or the entire sales proceeds actually
received by [Union Bank] on the Leased Properties … not later than
December 29, 1998.” x x x It only means that the lease rentals must first
be applied to the payment of the P17 million debt and that [DBP] would
have to pay out of its money only in case of insufficiency of the lease
rentals having until December 29, 1998 to do so. In this sense, it is
correct to say that the means of repayment of the assumed obligation is
not limited to the lease rentals. The monthly installments, however, would
still have to come from the lease rentals since this was stipulated in the
“Agreement.”
xxxx
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Since, as already stated, the monthly installments for the payment of the
P17 million debt are to be funded from the lease rentals, it follows that if
the lease rentals are not paid, there is nothing for DBP to remit to
[Union Bank], and thus [DBP] should not be considered in default. It
is noteworthy that, as stated in the appealed decision, “as regards
plaintiff’s claim for damages against defendant for its alleged negligence
in failing and refusing to enforce a lessor’s remedies against Foodmasters
Worldwide, Inc., the Court finds no competent and reliable evidence of
such claim.”
xxxx
WHEREFORE, the decision appealed from is SET ASIDE and another

one is RENDERED,
(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc.

to pay defendant and third-party plaintiff-appellant Development
Bank of the Philippines the sum of P32,441,401.85, representing the
unpaid rentals from August 1981 to June 30, 1987, as well as
P10,000.00 for attorney’s fees; and
(ii) Ordering defendant and third-party plaintiff-appellant Development
Bank of the Philippines after having been paid by third-party
defendant-appellee the sum of P32,441,401.85, to remit 30% thereof
to plaintiff-appellee Union Bank of the Philippines.
SO ORDERED.
In other words, both the body and the dispositive portion of the aforequoted
decision acknowledged that DBP’s obligation to Union Bank for remittance of
the lease payments is contingent on the prior payment thereof by Foodmasters
to DBP.
A careful reading of the decision shows that the Court of Appeals, which was
affirmed by the Supreme Court, found that only the balance or the deficiency of the
P17 million principal obligation, if any, would be due and demandable as of
December 29, 1998. Naturally, this deficiency cannot be determined until after
the satisfaction of Foodmasters’ obligation to DBP, for remittance to Union
Bank in the proportion set out in the 1994 Decision. (Emphases and underscoring
supplied; citations omitted)
xxxx
In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this
case, no legal compensation could have taken place between the above-stated debts pursuant to
Article 1290 of the Civil Code. Perforce, the petition must be denied, and the denial of Union
Bank’s motion to affirm legal compensation sustained.
WHEREFORE, the petition is DENIED. The Decision dated November 3, 2009 and
3/28/24, 4:10 PM [ G.R. No. 191555. January 20, 2014 ]
Resolution dated February 26, 2010 of the Court of Appeals in CA-G.R. SP No. 93833 are
hereby AFFIRMED.
SO ORDERED.
Carpio, (Chairperson), Brion, Del Castillo, and Perez, JJ., concur.
[1] Rollo, pp. 32-50.
[2]Id. at 8-20. Penned by Associate Justice Romeo F. Barza, with Associate Justices Portia
Aliño-Hormachuelos and Remedios A. Salazar-Fernando, concurring.
[3] Id. at 30.
[4] Id. at 278-279 and 323, respectively. Penned by Presiding Judge Eugene C. Paras.
[5]
Erroneously stated as Branch 148 in the Complaint (see id. at 60) and Amended Third-Party
Complaint (see id. at 71).
[6] Id. at 271-277.
[7] Id. at 344-348.
[8] Id. at 87.
[9] Id. at 349-355.
[10] Id. at 356-359.
[11] Id. at 88.
[12] Id.
[13] Id. at 60-70.
[14] Id. at 72.
[15] Id. at 71-75.
[16] Id. at 90-91.
[17] Id. at 80-85.

3/28/24, 4:11 PM [ G.R. No. 204264. June 29, 2016 ]
SECOND DIVISION
[ G.R. No. 204264. June 29, 2016 ]
JENNEFER FIGUERA, AS SUBSTITUTED BY ENHANCE VISA
SERVICES, INC., REPRESENTED BY MA. EDEN R. DUMONT,
PETITIONER, VS. MARIA REMEDIOS ANG, RESPONDENT.
DECISION
BRION, J.:
We resolve the petition for review on certiorari[1] under Rule 45 of the Rules of Court filed by
petitioner Jennefer Figuera[2] (Figuera) assailing the June 29, 2012 decision[3] and the
September 28, 2012 resolution[4] of the Court of Appeals (CA) of Cebu City in CA-G.R. CV.
No. 02480.
The Facts
Maria Remedios Ang (Ang) is the registered owner of a single proprietorship business named
"Enhance Immigration and Documentation Consultants" (EIDC).
On December 16, 2004, Ang executed a "Deed of Assignment of Business Rights" (Deed)
transferring all of her business rights over the EIDC to Figuera for One Hundred Fifty Thousand
Pesos (P150,000.00).
In addition to the assignment of rights, the parties also agreed that Ang shall pay the bills for
electricity, telephone, office rentals, and the employees' salaries up to the month of December
2004.[5]
Without Ang's consent, Figuera paid all the utility bills amounting to P107,903.21 as of
December 2004. On January 17, 2005, Figuera tendered only the amount of P42,096.79 to Ang,
after deducting the amount paid for the utility bills from the P150,000.00 consideration of the
Deed.
Ang refused to accept Figuera's payment. Figuera mailed the Formal Tender of Payment and
gave Ang five (5) days to accept the amount. Despite the lapse of the 5-day period, however,
Ang still refused to accept the payment.
Thus, Figuera filed a complaint for specific performance before the Regional Trial Court (RTC),
Branch 9 of Cebu City against Ang. Figuera consigned the amount of P42,096.79 to the RTC.
In her answer, Ang maintained that the amount due pursuant to the Deed is P150,000.00 and not
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just P42,096.79. She argued that she cannot be compelled to accept the amount because it is not
what was agreed upon.
On May 19, 2005, Figuera conveyed all her rights, assets, interests, liabilities, and causes of
action over EIDC in favor of the Enhance Visa Services, Inc. (EVSI) through a "Deed of
Assignment Coupled with Interest." Thus, on June 14, 2005, EVSI substituted Figuera, on
motion, as plaintiff.
The RTC Ruling
The RTC ruled in Ang's favor in its decision dated December 28, 2007.
The RTC held that the unambiguous language of the Deed mandates Ang, as the Assignor, to
pay the December 2004 utility bills. Figuera, however, paid the utility bills without Ang's
consent.
The RTC explained that for the tender of payment and consignation to be valid, Figuera must
tender the full amount of P150,000.00 rather than just P42,096.79. Ang is not obliged to accept
an amount less than what is agreed upon in the Deed.
Figuera appealed the RTC decision to the CA and argued that by operation of law, legal
subrogation and compensation had taken place. Consequently, Figuera's obligation to the extent
of the amount of P107,903.21 is extinguished.
The CA Ruling
In its June 29, 2012 decision, the CA affirmed the RTC's ruling.
The CA held that there is nothing in the Deed that grants Figuera the option to pay the utility
bills and to deduct the payment from the agreed consideration in the Deed; thus, the amount of
P150,000.00 remains as the due consideration from Figuera. Moreover, Figuera failed to prove
that Ang consented to the payment of the bills.
The CA added that Figuera's payment of P42,096.79 cannot be considered as a valid tender of
payment or a valid consignation because it is insufficient to cover the consideration due to Ang.
As for the other issues and arguments which Figuera failed to raise before the RTC, the CA held
that these issues cannot be raised for the first time on appeal.
Figuera sought reconsideration of the CA's decision which the CA denied for lack of merit in its
September 28, 2012 resolution.
The Parties' Arguments
In the present petition for review, Figuera challenges the CA's decision and resolution affirming
the RTC ruling.
Figuera argues that the CA committed errors of law based on the following grounds: First,
Figuera was eager to pay the utility bills being the EIDC's new owner.
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Second, Figuera had been subrogated to the rights of Ang's creditor's (i.e., the Telephone
Company, electric company, office space lessor, and company employees) upon payment of the
utility bills even if the payment was made without Ang's knowledge. Consequently, Ang became
Figuera's debtor.
Third, Figuera and Ang became debtors and creditors of one another for a sum of money that is
liquidated, due, demandable, and without controversy.
Fourth, Figuera and Ang's obligations amounting to P107,903.21 were compensated against
each other by operation of law.
Fifth, Figuera's tender of the amount of P42,096.79 to Ang is a valid tender of payment.
Sixth, Figuera validly consigned the amount of P42,096.79.
Finally, Figuera presented the foregoing issues before the RTC and did not raise them for the
first time on appeal.
In her comment,[6] Ang argued that: first, a petition for review under Rule 45 of the Rules of
Court only allows questions of law. Figuera's contention that legal subrogation and
compensation took place requires proof that should have been established during the trial.
Second, Figuera admitted that the RTC was correct in ruling that there was nothing in the Deed
that grants her the option to pay the utilities nor allows any deduction from the agreed
consideration upon her payment of the utility bills.
Third, legal subrogation cannot take place because the situation of the parties under the Deed is
not among the instances provided by law for subrogation to take place.
Fourth and last, Figuera should not be allowed to raise issues regarding legal subrogation and
compensation because these were raised for the first time on appeal.
The Issue
The main issue to be resolved in this case is whether or not there was a valid tender of payment
and consignation.
Our Ruling
We grant the petition and reverse the CA's ruling.
The questions raised in this petition are one of law which the Court can properly review.
It is a settled rule that the Court cannot review questions of fact on a petition for review under
Rule 45 of the Rules of Court. A question of fact exists when the truth or falsity of the parties'
factual allegations is in dispute. A question of law, on the other hand, exists when the application
of the law on the stated facts is in controversy.[7]
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The parties' description of the questions raised does not determine whether these questions are
of fact or of law. The true test is whether the appellate court can resolve the issue without
reviewing or evaluating the evidence, in which case, it is a question of law; otherwise, it is a
question of fact.[8]
Contrary to Ang's allegation, the question involved in the present case is a question of law which
the Court can properly pass upon. There is no dispute regarding the existence of the Deed and its
consideration, and the provision that mandates Ang to pay the EIDC's bills until December
2004. Ang also did not refute Figuera's payment amounting to P107,903.21 to Ang's creditors
and Figuera's tender of payment to Ang amounting to P42,096.79.
The CA can assess Figuera's contention that legal subrogation and compensation had taken place
even without requiring Figuera to present further evidence. The issue on the validity, of
Figuera's tender of payment and consignation can be resolved through the application of the
relevant laws.
The Court may properly address the questions raised even though they are raised for the first
time on appeal.
Ang contends that the CA correctly dismissed Figuera's argument that her debt amounting to
P107,903.21 is extinguished through legal subrogation and compensation. Figuera's argument,
Ang insists, was not raised before the trial court and cannot be raised for the first time on appeal.
We disagree. The Court grants to consider and resolve the issues on the application of legal
subrogation and compensation, even though it was raised for the first time on appeal.
As a general rule, points of law, theories, and arguments not brought before the trial court cannot
be raised for the first time on appeal and will not be considered by this Court; otherwise, a
denial of the respondent's right to due process will result.[9]
In the interest of justice, however, the Court may consider and resolve issues not raised before
the trial court if it is necessary for the complete adjudication of the rights and obligations of the
parties, and it falls within the issues found by the parties.[10]
Thus, an appellate court is clothed with authority to review rulings even if they are not assigned
as errors in the appeal in the following instances:
(a) grounds not assigned as errors but affecting jurisdiction over the subject matter;
(b) matters not assigned as errors on appeal but are evidently plain or clerical errors within
contemplation of law;
(c) matters not assigned as errors on appeal but consideration of which is necessary in arriving
at a just decision and complete resolution of the case or to serve the interests of justice or to
avoid dispensing piecemeal justice;
(d) matters not specifically assigned as errors on appeal but raised in the trial court and are
matters of record having some bearing on the issue submitted which the parties failed to
raise or which the lower court ignored;
(e) matters not assigned as errors on appeal but closely related to an error assigned; and
3/28/24, 4:11 PM [ G.R. No. 204264. June 29, 2016 ]
(f) matters not assigned as errors on appeal but upon which the determination of a question
properly assigned, is dependent.[11]
Figuera's position falls under two of these exceptions, namely - that the determination of the
question newly raised is necessary in arriving at a just decision and complete resolution of
the case, and that the resolution of a question properly assigned is dependent on those
which were not assigned as errors on appeal.
For the CA to rule on whether there was a valid tender of payment and consignation, it must first
determine the amount that Figuera should have tendered. To do so, the appellate court must
examine whether the principles of legal subrogation and compensation, as Figuera argued,
should be applied.
To recall, Figuera claims that the consideration for the assignment worth P150,000.00 should be
reduced by P107,903.21, representing the amount that she paid for the EIDC's utility bills.
Figuera argues that her payment of the utility bills subrogated her to the rights of Ang's creditors
against Ang.
Article 1291 of the New Civil Code[12] provides that the subrogation of a third person to the
rights of the creditor is one of the means to modify obligations. Subrogation, sometimes referred
to as substitution, is "an arm of equity that may guide or even force one to pay a debt for which
an obligation was incurred but which was in whole or in part paid by another."[13] It transfers to
the person subrogated the credit, with all the rights appertaining thereto, either against the debtor
or against third persons.[14]
Subrogation of a third person in the rights of a creditor may either be legal or conventional.[15]
There is legal subrogation when: (a) a creditor pays another preferred creditor, even without the
debtor's knowledge; (b) a third person who is not interested in the obligation pays with the
express or tacit approval of the debtor; and (c) a person interested in the fulfilment of the
obligation pays, even without the knowledge of the debtor.[16]
In the present case, Figuera based her claim on the third type of subrogation. She claims that as
the EIDC's new owner, she is interested in fulfilling Ang's obligation to pay the utility bills.
Since the payment of the bills was long overdue prior to the assignment of business rights to
Figuera, the failure to settle the bills would eventually result in "the disconnection of the
electricity and telephone services, ejectment from the office premises, and resignation by some,
if not all, of the company's employees with the possibility of subsequent labor claims for sums
of money."[17] These utilities are obviously necessary for the continuation of Figuera's
business transactions.
A person interested in the fulfilment of the obligation is one who stands to be benefited or
injured in the enforcement of the obligation. The Court agrees with Figuera that it became
absolutely necessary for her to pay the bills since Ang did not do so when the obligation
became due.
We note that both the RTC and the CA held that Figuera failed to prove that Ang had consented
to the payment of the EIDC bills; therefore, Figuera cannot deduct the amount she paid for the
3/28/24, 4:11 PM [ G.R. No. 204264. June 29, 2016 ]
utility bills from the P150,000.00 consideration.
A clear reading, however, of Article 1302 of the New Civil Code would lead to a different
conclusion. The, consent or approval of the debtor is required only if a third person who is
not interested in the fulfilment of the obligation pays such. On the other hand, no such
requirement exists in cases of payment by a creditor to another creditor who is preferred,
and by a person interested in the fulfilment of the obligation. Notably, Article 1302 (1) and
(3) does not require the debtor's knowledge.
Therefore, legal subrogation took place despite the absence of Ang's consent to Figuera's
payment of the EIDC bills. Figuera is now deemed as Ang's creditor by operation of law.
On Figuera's argument that legal compensation took place, and in effect, extinguished her
obligation to Ang to the extent of the amount Figuera paid for the EIDC bills, Article 1278 of the
New Civil Code is instructive.
Article 1278 of the New Civil Code states that there is compensation when two persons, in their
own right, are creditors and debtors of one another. These elements must concur for legal
compensation to apply: (1) each one of the debtors is bound principally, and that the debtor is at
the same time a principal creditor of the other; (2) both debts consist of a sum of money, or if the
things due be consumable, they be of the same kind and also of the same quality if the latter has
been stated; (3) both debts are due; (4) both debts are liquidated and demandable; and (5) there
be no retention or controversy over both debts commenced by third persons and communicated
in due time to the debtor.[18] When all these elements are present, compensation takes effect by
operation of law and extinguishes both debts to the corresponding amount, even though both
parties are without knowledge of the compensation.[19] It operates even against the will of the
interested parties and even without their consent.[20]
We find that all the elements of legal compensation are present in this case.
First, in the assignment of business rights, Figuera stood as Ang's debtor for the consideration
amounting to P150,000.00. Figuera, on the other hand, became Ang's creditor for the amount of
P107,903.21 through Figuera's subrogation to the rights of Ang's creditors against the latter.
Second, both debts consist of a sum of money, which are both due, liquidated, and demandable.
Finally, neither party alleged that there was any claim raised by third persons against said
obligation.
In effect, even without the knowledge and consent of Ang or Figuera, their obligation as to
the amount of P107,903.21 had already been extinguished. Consequently, Figuera owes Ang
the remaining due amount of P42,096.79.
While the RTC and the CA correctly held that there was nothing in the Deed that grants Figuera
an option to pay the utility bills and to deduct the amount from the consideration, we stress that
although not expressly written, laws are deemed incorporated in every contract entered within
our territories. Thus, the Court reads into the Deed the provisions of law on subrogation and
compensation.
3/28/24, 4:11 PM [ G.R. No. 204264. June 29, 2016 ]
With the determination of the amount of Figuera's obligation to Ang, the question left to be
resolved is: Was there a valid tender of payment and consignation?
Tender of payment is the act of offering to the creditor what is due him, together with the
demand for the creditor to accept it. To be valid, the tender of payment must be a "fusion of
intent, ability, and capability to make good such offer, which must be absolute and must cover
the amount due."[21]
As earlier discussed, the remaining amount due in Figuera's obligation is P42,096.79. Thus,
Figuera's tender of the remaining amount to Ang is valid and Ang offered no valid
justification in refusing to accept the tender of payment. Due to the creditor's refusal,
without any just cause, to the valid tender of payment, the debtor is released from her
obligation by the consignation of the thing or sum due.[22]
WHEREFORE, the Court GRANTS the petition for review on certiorari. The decision dated
June 29, 2012 and resolution dated September 28, 2012 of the Court of Appeals in CA-G.R. CV.
No. 02480 are hereby REVERSED.
SO ORDERED.
Carpio, (Chairperson), Mendoza, and Leonen, JJ., concur.

Del Castillo, J., on leave.
[1] Rollo, pp. 3-33.
[2] Substituted by Enhance Visa Services, Inc. represented by Ma. Eden R. Dumont.
[3]
Rollo, pp. 38-48. Penned hy CA Executive Justice Pampio A. Abarintos and concurred in by
Associate Justices Gabriel T. Ingles and Melchor Q. C. Sadang.
[4] Id. at 66-67.
[5] Deed of Assignment of Business Rights, par. 3:
"3. X X X It is the essence therefore, that upon execution of this document, the
ASSIGNOR is freed by the ASSIGNEE, from all obligations whatsoever in relation
to [EIDC], any of its clientele, the government, and all other parties. However, the
ASSIGNOR shall pay for the following bills up to the month of December, 2004:
electricity, telephone, office rentals and salaries for the employees."
[6] Rollo, pp. 79-89
[7] Bognot v. RRI Lending Corp., G.R. No. 180144, September 24, 2004, sc.judiciary.gov.ph.
3/28/24, 4:11 PM [ G.R. No. 212327. November 17, 2021 ]
THIRD DIVISION
[ G.R. No. 212327. November 17, 2021 ]
LINEAR CONSTRUCTION CORPORATION, PETITIONER, VS.
DOLMAR PROPERTY VENTURES, INC., RESPONDENT.
DECISION
ZALAMEDA, J.:
This resolves the Petition for Review on Certiorari (Petition)[1] seeking to reverse and set aside
the Decision[2] dated 29 April 2014 of the Court of Appeals (CA) in CA-G.R. CV No. 101201.
The CA reversed the Decision[3] dated 22 January 2013 of Branch 213, Regional Trial Court
(RTC) of Mandaluyong City in Civil Case No. MC07-3385.
Antecedents
In 1998, respondent Dolmar Property Ventures, Inc.[4] (Dolmar) contracted petitioner Linear
Construction Corporation (Linear) to construct the drainage system of Dolmar Golden Hills
Subdivision at Brgy. Loma De Gato, Marilao, Bulacan (Marilao Project). The Marilao Project
was covered by several contracts, including separate agreements for its Phases 1 and 2
(collectively, the Marilao Contracts).[5]
Subsequently, in 2003, Linear and Dolinar entered into a contract for the construction of the
Dolmar Golden Hills Subdivision at San Vicente, Sta. Maria, Bulacan (Sta. Maria Project). The
engagement was covered by a service contract, as well as two (2) supplemental agreements
(collectively, the Sta. Maria Contracts).[6] Under the Sta. Maria Contracts, Dolmar would pay
Linear Php40,820,000.00 for construction works to be undertaken by the latter.[7] Payments
were to be made on a progress billing basis, as determined and accepted by Dolmar, less eight
percent (8%) retention.[8]
Articles 6 and 8 of the Sta. Maria Contracts specified the conditions for the final payment of the
retention money. It shall be paid within forty-five (45) days from Dolmar's final written
acceptance of the Sta. Maria Project. The final certificate of acceptance shall be issued after
submission of proof of payment of all project-related debts and the as-built plans of the
completed work.[9]
Meanwhile, Dolmar engaged the services of R.S. Caparros and Associates (R.S. Caparros) to
manage the construction of the Marilao Project, among others.[10] R.S. Caparros invited Linear
to attend a joint inspection of the construction works at the Marilao Project, preparatory to the
issuance of the certificate of acceptance in Linear's favor.[11]
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Linear did not send a representative to the inspection. Nonetheless, Dolmar proceeded with the
inspection and inventory.[12] In the course of inspection and inventory conducted on several
dates, R.S. Caparros allegedly discovered numerous defects and irregularities in the construction
of the drainage system, such as missing drainage pipes and discrepancies between existing
layouts and as-built drawings.[13] These were duly communicated to Linear in separate letters.
[14]
Thus, Linear conducted some rectification works, but Dolmar claimed that these were
insufficient.[15] R.S. Caparros then prepared reports, specifying that the works necessary to
correct the defects and irregularities cost Php6,379,935.00.[16] Dolmar engaged the services of
Mr. Elpidio D. Agapito for the Marilao Project's drainage rehabilitation and repair.[17]
In the interim, Linear completed the Sta. Maria Project and demanded in writing the payment of
the retention money in the amount of Php3,766,292.12.[18] In a letter dated 7 June 2007, Dolmar
required the submission of the requisite proof of non-indebtedness and as-built plans,[19] which
Linear submitted.[20]
In a separate letter likewise dated 07 June 2007, Dolmar demanded from Linear
Php6,379,875.00, corresponding to the claimed rectification cost for the alleged defective works
in the Marilao Project.[21] This led to an exchange of correspondence between the parties.
Linear maintained its demand for the retention money which, after a review of its records, was
increased to Php3,823,997.96.[22] Meanwhile, Dolmar acknowledged Linear's entitlement to the
final certification of completion and acceptance but withheld the release of the retention money,
asserting that the parties' respective liabilities for the Marilao and Sta. Maria Projects had been
offset through legal compensation.[23] The offset supposedly left Linear owing Dolmar
Php2,613,642.88.[24] Linear denied liability.[25]
Impasse in the negotiations prompted Linear to file a complaint for collection of a sum of
money with damages against Dolmar.[26]
Ruling of the RTC
In a Decision dated 22 January 2013, the RTC ruled in favor of Linear and denied Dolmar's
counterclaims, to wit:
WHEREFORE, premises considered, judgment is hereby rendered in favor of

plaintiff, Linear Construction Corporation, and against defendant, Dolmar Property
Ventures, Inc.
In view thereof, defendant, Dolmar Property Ventures, Inc., is order [sic] to pay
plaintiff, Linear Construction Corporation[,] the following:
1. the amount of THREE MILLION EIGHT HUNDRED TWENTY THREE

THOUSAND NINE HUNDRED NINETY SEVEN PESOS AND 96/100
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(P3,823,997.96) covering plaintiff's unpaid retention money with 12% interest per
annum commencing from the date of filing the complaint;
2. the amount of FOUR HUNDRED THOUSAND PESOS (P418,000.00) [sic]

covering the acceptance fee and appearance fees;
3. the amount of NINE HUNDRED FIFTY SIX THOUSAND PESOS (P956,000.00)

as by way of [sic] attorney's fee[s];
4. the amount of TWENTY THOUSAND PESOS (P20,000.00) as and by way of

exemplary damages; and
5. to pay the costs of suit.
SO ORDERED.[27]
The RTC held that the elements of legal compensation were not present since Dolmar had yet to
establish that Linear was legally indebted to the former.[28] Dolmar failed to squarely meet
Linear's cause of action because the former presented evidence on the latter's liabilities for the
Marilao Project, when Linear's cause of action was based on the Sta. Maria Project.[29] All of
Dolmar's witnesses testified on the Marilao Project.[30]
The lower court also found that Dolmar acted in bad faith when it refused to issue a certificate
of acceptance for the Sta. Maria project.[31] According to the RTC, Dolmar neither acted with
justice nor observed honesty and good faith in the performance of its duties under the
construction contract.[32]
Dolmar moved for reconsideration, but it was denied by the RTC in an Order dated 24 June
2013.[33]
Ruling of the CA
On appeal, the CA reversed the RTC Decision and ruled in favor of Dolmar. The dispositive
portion of the Decision dated 29 April 2014 reads:
WHEREFORE, in view of the foregoing premises, the instant appeal is hereby

GRANTED. The assailed Decision dated January 22, 2013 issued by the Regional
Trial Court (RTC), Branch 213, Mandaluyong City, in Civil Case No. MC07-3385, is
REVERSED and SET ASIDE. Instead, plaintiff-appellee Linear is ordered to pay
defendant-appellant Dolmar the following:
a) the amount of TWO MILLION FIVE HUNDRED FIFTY-FIVE THOUSAND

NINE HUNDRED THIRTY SEVEN PESOS AND 4/100 PESOS
(Php2,555,937.04), representing the balance after deducting the retention money in
the amount of Three Million Eight Hundred Twenty Three Thousand Nine Hundred
Ninety-Seven PESOS and 96/100 (Php3,823,997.96), being claimed by plaintiff-
appellee Linear in the Sta. Maria Project from the cost of rectification works in the
3/28/24, 4:11 PM [ G.R. No. 212327. November 17, 2021 ]
amount of Six Million Three Hundred Seventy-Nine Thousand Nine Hundred Thirty
Five Pesos (Php6,379,935.00) incurred by defendant-appellant Dolmar in the
Marilao Project with 6% interest per annum commencing from the date of the filing
of the complaint until fully paid;
b) the amount of ONE HUNDRED THOUSAND PESOS (Php100,000.00) as

exemplary damages;
c) the amount of ONE MILLION TWO HUNDRED THOUSAND PESOS

(Php1,200,000.00) as and by way of attorney's fees and litigation expenses; and
d) cost[s] of suit.
SO ORDERED.[34]
The CA found that Dolmar sufficiently proved Linear's obligation to pay Php6,379,935.00 for
the defective works in the Marilao Project.[35] On the other hand, Linear did not present any
countervailing evidence negating its liability for the reconstruction cost.[36]
Moreover, according to the CA, all the elements of legal compensation were present. Linear and
Dolmar became mutual creditors and debtors of each other due to their respective obligations in
the Marilao and Sta. Maria Projects.[37] By operation of law, Dolmar's obligation was
extinguished to the concurrent amount.[38] That the obligations did not spring from the same
contract or transaction was deemed immaterial, contrary to the ruling of the RTC.[39]
The CA further held that Linear acted in bad faith because it tried to conceal from the trial court
the circumstances surrounding the Marilao Project, and failed to finish or pay for the requisite
rectification works.[40] Hence, the CA adjudged Linear liable for exemplary damages, attorney's
fees, and litigation expenses.[41] The CA refused to award moral damages, citing the doctrine
that a juridical person is generally not entitled to the same.[42]
Hence, this Petition.
Issues
The issues for this Court's resolution are: (1) whether or not the petition should be dismissed for
Linear's failure to strictly comply with procedural requirements; and (2) whether or not Linear's
claim over the retention money has already been extinguished ipso jure through legal
compensation.
Ruling of the Court
Notwithstanding
Linear's
procedural lapses,
the merits of the
3/28/24, 4:11 PM [ G.R. No. 212327. November 17, 2021 ]
petition call for the

resolution of the
substantive issue
presented
The Court recognizes that the petition did not strictly conform to certain procedural
requirements, such as the attachment of a certified true copy of the assailed decision and
material portions of the record,[43] a duly dated affidavit of service,[44] and proof of authority of
Linear's corporation to sign the verification for and on behalf of the corporation. No soft copy of
the petition was also submitted.[45] Dolmar claims that these procedural errors warrant the
outright denial of the petition.[46]
Nonetheless, Linear submitted the relevant records and soft copy of the petition two (2) days
after the filing of the petition.[47] Following Our 17 July 2014 Resolution, Linear also complied
with all the other procedural requirements, except the duly dated affidavit of service.[48] Due to
Linear's failure to comply with our subsequent Resolution requiring submission of the affidavit
of service,[49] Dolmar filed a Motion to Dismiss,[50] which We noted without action in a
Resolution dated 08 April 2019.[51]
Subsequently, Linear's counsel withdrew his appearance due to ill health, and shortly after,
passed away during the pendency of this case.[52] He has since been substituted by another
counsel.
While it is true that rules of procedure are intended to promote rather than frustrate the ends of
justice, and while the swift unclogging of the dockets of the courts is a laudable objective, these
rules nevertheless must not be met at the expense of substantial justice. The Court has allowed
some meritorious cases to proceed despite inherent procedural defects and lapses. This is in
keeping with the principle that rules of procedure are mere tools designed to facilitate the
attainment of justice, and that strict and rigid application of rules which should result in
technicalities that tend to frustrate rather than promote substantial justice must always be
avoided.[53]
The merits of this petition move Us to resolve the substantive issue elevated before the Court.
After an exhaustive review of the records, We are convinced that dismissing the petition on a
mere technicality would amount to a miscarriage of justice. Besides, Linear has already
complied with the requirements and, in lieu of the affidavit of service, submitted proof of
service and the original registry return card.[54] Both the CA and Dolmar received the petition,
and Dolmar was able to fully ventilate its position before the Court. The rationale behind the
rules, i.e., to ensure receipt by the concerned parties, has been served.
Notably, Linear's petition raises a question of fact, specifically, the factual basis of the CA's
conclusion that Linear owed Dolmar Php6,379,935.00 as reconstruction costs.[55] An appeal
under Rule 45 must raise only questions of law, unless the factual findings are not supported by
evidence or the judgment is based on a misapprehension of facts.[56] We find these exceptions
present in this case. Hence, We will rule on the factual issue presented.
3/28/24, 4:11 PM [ G.R. No. 212327. November 17, 2021 ]
Legal compensation is inapplicable
Dolmar's obligation to pay the retention money for the Marilao project is no longer at issue.
Dolmar did not contest the CA Decision finding it liable for the retention money in the amount
of Php3,823,997.96.[57] Based on the records, it even wrote to Linear that a certificate of
completion for the Marilao project would be issued, only that it is refusing to release the
retention money based on its claim of legal compensation. Indeed, by insisting on the
application of legal compensation, Dolmar necessarily conceded and admitted that it is Linear's
debtor. The record is replete with Dolmar's judicial admissions on its indebtedness to Linear.[58]
The remaining issue is whether Dolmar validly withheld the retention money through the
invocation of legal compensation.
Compensation is a mode of extinguishing obligations of two persons who, in their own right, are
creditors and debtors of each other.[59] Legal compensation requires the concurrence of several
conditions: (1) each one of the obligors is bound principally and a principal creditor of the other;
(2) both debts consist in a sum of money, or if the things due are consumable, they are of the
same kind, and also of the same quality if the latter has been stated; (3) the two debts are due;
(4) the debts are liquidated and demandable; and (5) over neither of them is there any retention
or controversy, commenced by third persons and communicated in due time to the debtor.[60]
Linear denies its alleged indebtedness to Dolmar. It claims that the Marilao Project has long
been completed and fully paid.[61] Linear further maintains that the warranty for the Marilao
Project and the period to raise defects in its construction had already expired.[62] These
arguments mainly bear on the fourth requisite of legal compensation - that the debts are
liquidated and demandable.
A debt is considered liquidated when the amount and time of payment is fixed,[63] and its exact
amount is known.[64] The exact amount of the debt may be expressed already in definite figures
or determinable through a simple arithmetical operation.[65] Compensation cannot extend to
unliquidated, disputed claims arising from breach of contract.[66]
Meanwhile, a debt is demandable when it is enforceable in court, there being no apparent

defenses inherent in it. For instance, debts which are subject to suspensive conditions or those
barred by prescription are not considered demandable.[67]
In this case, Dolmar's claim is neither liquidated nor demandable because, first, it is disputed by
Linear. From the parties' early correspondence[68] all the way to this Court, Linear has
consistently maintained that it has no liability for the amount being demanded by Dolmar. That
Dolmar had to present several witnesses to establish the alleged defects highlights the
contentious nature of its claim.
Second, the amount of Php6,379,935.00 was self-determined by Dolmar and not binding on
Linear. This amount was based solely on cost estimates prepared by R.S. Caparros for Dolmar,
[69] and not on actual expenses incurred. The claimed amount is not supported by receipts or
3/28/24, 4:11 PM [ G.R. No. 212327. November 17, 2021 ]
other evidence of expense. The testimony of Dolmar's own witness, Ms. Teodorica S. Perida,
confirms the foregoing:
Q: In connection with the rectification works undertaken by Dolmar, how much was
paid to the contractor for such works?
A: As of date, defendant Dolmar paid the other contractors approximately over

Seven Hundred Thousand Pesos (P700,000.00).
Q: Where did Dolmar source the cost of initial rectification works?
A: From the retention money of Linear.
Q: You said that the retention money of Linear for Sta. Maria Project is
approximately Three Million Eight Hundred Thousand Pesos (P3,800,000.00)
and the cost of initial rectification works is over Seven Hundred Thousand Pesos
already (P700,000.00). Why does Dolmar continue to withhold the balance from
the retention money?
A: Because the rectification works in Marilao Project is still ongoing. Based on the
estimate prepared by R.S. Caparros, the cost of the rectification works in
Marilao would amount to around Six Million Five Hundred Thousand Pesos
(P6,500,000.00).[70]
The cash vouchers presented in evidence merely reflect an amount of over Php700,000.00
supposedly paid by Dolmar to Mr. Elpidio D. Agapito.[71] Even then, it has yet to be
conclusively established whether these payments pertain to the allegedly defective works of
Linear, and whether Linear should reimburse these amounts. Linear asserts apparent defenses
inherent in Dolmar's claim, that it has completed the Marilao Project, and the period to question
defects in the construction has already prescribed.[72] These defenses, if proved, would bar
recovery by Dolmar.
Moreover, since the vouchers only evince payments of around Php700,000.00, the records do
not show that Dolmar has already spent Php6,379,935.00 at the time it withheld the retention
money. Hence, assuming that there was indeed a debt, the same was not yet due. This negates
the third requisite of legal compensation.
Dolmar's insistence that Linear is "deemed to have admitted" the defects in the Marilao Project,
as well as the costs of rectification,[73] has no factual, contractual, or legal basis. As mentioned,
the records bear Linear's consistent disavowal of its alleged liability. Linear did not also signify
its conformity with the reports and cost estimates prepared by R.S. Caparros.
Clearly, the amount of Php6,379,935.00 is merely a claim and not a demandable debt that may
be the subject of legal compensation. Dolmar cannot take the law into its own hands and
withhold the retention money based on a unilateral declaration and determination of damages.
Dolmar's entitlement to and the amount of recoverable rectification costs must be judicially
ascertained and proved. At most, the amount of Php6,379,935.00 represents an unliquidated
claim that Dolmar may attempt to collect from Linear through the appropriate action.
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On this score, We have ruled that when the defendant, who has an unliquidated claim, sets it up
by way of counterclaim, and a judgment is rendered liquidating such claim, it can be
compensated against the plaintiff's claim from the moment it is liquidated by judgment.[74] This
is pursuant to the principle of judicial compensation, as articulated in Article 1283 of the Civil
Code: "If one of the parties to a suit over an obligation has a claim for damages against the
other, the former may set it off by proving his right to said damages and the amount thereof."
While legal compensation takes effect ipso jure upon the concurrence of all its requisites,
judicial compensation only takes place upon final judgment.[75]
Here, Dolmar pleaded the rectification costs as a compulsory counterclaim.[76] If We were to

rule on Dolmar's unliquidated claim, the same may be liquidated by final judgment, and judicial
compensation may ensue. However, several factors proscribe Us from ruling on the merits of
Dolmar's claim.
First, the main issue brought before Us is the applicability of legal compensation, and not
judicial compensation. Second, the claim for rectification costs was merely pleaded by way of
compulsory counterclaim in the context of the theorized legal compensation. Ruling on the
merits of Dolmar's claim, as an independent cause of action, would be akin to resolving a
permissive counterclaim; the Marilao Project is an entirely different transaction from the Sta.
Maria Project and gives rise to issues that are unrelated to Linear's principal claim.[77] Doing so
would ignore the varying procedural rules governing compulsory vis-a-vis permissive
counterclaims, including those on the requirements for an initiatory pleading,[78] payment of
docket fees,[79] necessity for an answer, and order of trial.[80] In fact, several issues on the
Marilao Project have yet to be fully threshed out due to the position of Linear and the RTC that
the Marilao Project is irrelevant to this case.
Third, and of equal importance, to rule on Dolmar's claim would be to validate or legalize
Dolmar's improper act of unilaterally withholding the retention money. We have refused to
countenance such unwarranted shortcuts, as they amount to a mockery of Our judicial processes.
[81]
Monetary awards and damages
In view of the foregoing, We reinstate the RTC Decision with modifications. Linear is entitled to
actual damages in the amount of Php3,823,997.96, representing its unpaid retention money. The
award of interest should be modified to 12% per annum from the date of judicial demand,[82] or
on 06 December 2007,[83] until 30 June 2013, and 6% per annum from 01 July 2013 until fully
paid.[84]
We likewise affirm the award of exemplary damages because Dolmar acted in an oppressive or
malevolent manner.[85] It withheld the retention money lawfully due to Linear based on its self-
proclaimed entitlement to reimbursement of expenses not yet incurred. It sought to secure its
unliquidated claim for the Marilao Project by taking the law into its own hands. In light of the
scheme employed by Dolmar and the considerable period that Linear was deprived of its lawful
claim, We find that the award of Php50,000.00 as exemplary damages is justified.
3/28/24, 4:11 PM [ G.R. No. 212327. November 17, 2021 ]
Since exemplary damages are awarded and because Linear was compelled to litigate to protect
its interests, the award of attorney's fees is also proper.[86] Considering the protracted litigation
of this dispute, rendered more complex by the inclusion of Dolmar's unliquidated claim in a
relatively straightforward collection suit, the award of Php100,000.00 as attorney's fees is
proper. The award representing acceptance and appearance fees of counsel is deleted, since these
are already encompassed by the award for attorney's fees.
WHEREFORE, premises considered, the Petition for Review on Certiorari is GRANTED.

The Decision dated 29 April 2014 of the Court of Appeals in CA-G.R. CV No. 101201 is
REVERSED and SET ASIDE. The Decision dated 22 January 2013 of Branch 213, Regional
Trial Court of Mandaluyong City in Civil Case No. MC07-3385 is AFFIRMED with
MODIFICATIONS. Respondent Dolmar Property Ventures, Inc. (also known as Dolmar
Property Ventures, Incorporated) is ORDERED to pay petitioner Linear Construction
Corporation:
(1) Php3,823,997.96 representing petitioner's unpaid retention money, with legal interest at
twelve percent (12%) per annum from judicial demand, or on 06 December 2007, until 30 June
2013, and six percent (6%) per annum from 01 July 2013 until fully paid;
(2) Php50,000.00 as exemplary damages;
(3) Php100,000.00 as attorney's fees; and
(4) Costs of suit.
The total judgment award shall earn legal interest at six percent (6%) per annum from the
finality of this Decision until fully paid.
SO ORDERED.
Leonen, (Chairperson), Carandang, Rosario, and Dimaampao,* JJ., concur.
* Designated additional member per Special Order No. 2839.
[1] Rollo, pp. 3-31.
[2]Id. at 89-110; penned by Associate Justice Stephen C. Cruz and concurred in by Associate
Justices Magdangal M. De Leon and Eduardo B. Peralta, Jr.
[3] Id. at 68-88; penned by Presiding Judge Carlos A. Valenzuela.
[4] Also referred to as Dolmar Property Ventures, Incorporated in other portions of the rollo (pp.
35, 42, 89, 112, 171, 358, 359, 362, 364, 367, 369, 373, 376, and 382).
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
414 Phil. 857
THIRD DIVISION
[ G.R. No. 142838. August 09, 2001 ]
ABELARDO B. LICAROS, PETITIONER, VS. 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.
The facts of the case, as stated in the Decision of the Court of Appeals dated February 10, 2000, are as
follows:
“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
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
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:
‘Memorandum of Agreement
KNOW ALL MEN BY THESE PRESENTS:
This MEMORANDUM OF AGREEMENT made and executed this 29th day of July 1988, at
Makati by and between:
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,
WITNESSETH THAT:
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;
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:
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
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
OF THE FIRST PART upon execution of this MEMORANDUM OF AGREEMENT, which

promissory note shall form part as ANNEX A hereof.
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;
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:

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
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
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’.
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.
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.
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,
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
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:
‘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;
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.
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]
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
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:
“Under our Code, however, conventional subrogation is not identical to assignment

of credit. In the former, the debtor’s 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.”
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:
“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:
“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.
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
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).
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.
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
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
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.
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 representative of
Anglo-Asean Bank. These provisions in the aforementioned Memorandum of Agreement may not simply
be disregarded or dismissed as superfluous.
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.
3/28/24, 4:12 PM [ G.R. No. 142838. August 09, 2001 ]
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.
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.
Melo, (Chairman), Vitug, and Panganiban, JJ., concur.

Sandoval-Gutierrez, J., on leave.
Penned by Associate Justice Cancio Garcia and concurred in by Associate Justices Romeo J.
[1]
Callejo and Presbitero J. Velasco, Jr.; Rollo, pp. 38-53.

[2] Rollo, pp. 55-56.
[3] Penned by Judge Francisco Donato Villanueva; Rollo, pp. 77-92.
[4] Court of Appeals Decision dated February 10, 2000, pp. 1-7; Rollo, pp. 39-45.
[5]
Rollo, p. 92.
[6]
Rollo, p. 78.
3/28/24, 4:13 PM [ G.R. No. 136729. September 23, 2003 ]
SECOND DIVISION
[ G.R. No. 136729. September 23, 2003 ]
ASTRO ELECTRONICS CORP. AND PETER ROXAS, PETITIONER, VS.
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.
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 Surety ship 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 Philguanrantee
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:
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 Asro, 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.
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 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 Surety ship
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 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 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 the 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.
SO ORDERED.
Bellosillo, (Chairman), Callejo, Sr., and Tinga, JJ., concur.

Quisumbing, J., in the result.
[1] Justice Portia Aliño-Hormachuelos, ponente; JJ. Presbitero J. Velasco, Jr. and Buenaventura
J. Guerrero, concurring.
[2] Original Records, pp. 6-8, Exhibits "3", "4" and "5".
[3] Id., pp. 10-13, Exhibit "D".
[4] Id., pp. 14-19, Exhibits "F" and "E".
[5] Id., p. 18.
[6] Id., pp. 62-64.
[7] Id., p. 217; RTC Decision dated July 20, 1989, p. 4.
[8] Ibid.
[9] Rollo, p. 25; CA Decision, p. 7.
[10] Negotiable Instrument Law (Act No. 2031), Section 184.
[11] Id., Section 60.
[12] Supra., Note 2.
[13]
Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992, 216
SCRA 738, 744.
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
THIRD DIVISION
[ G.R. No. 206806. June 25, 2014 ]
ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS,
PETITIONERS, VS. DAN T. LIM, DOING BUSINESS UNDER THE NAME
AND STYLE OF QUALITY PAPERS & PLASTIC PRODUCTS
ENTERPRISES, RESPONDENT.
DECISION
LEONEN, J.:
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and new contracts are incompatible on every point.
Before us is a petition for review on certiorari[1] assailing the Court of Appeals’ decision[2] in
CA-G.R. CV No. 95709, which stemmed from a complaint[3] filed in the Regional Trial Court
of Valenzuela City, Branch 171, for collection of sum of money.
The facts are as follows:
Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials,
under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the
paper mill business.[4] From February 2007 to March 2007, he delivered scrap papers worth
P7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief
Executive Officer and President, Candida A. Santos.[5] The parties allegedly agreed that Arco
Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him
their finished products of equivalent value.[6]
Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-
dated check dated April 18, 2007[7] in the amount of P1,487,766.68 as partial payment, with the
assurance that the check would not bounce.[8] When he deposited the check on April 18, 2007, it
was dishonored for being drawn against a closed account.[9]
On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement[10] where Arco Pulp and Paper bound themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by Dan T. Lim, through his company,
Quality Paper and Plastic Products. The memorandum of agreement reads as follows:
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between
Mrs. Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner
150/175 GSM, full width 76 inches at the price of P18.50 per kg. to Megapack
Container for Mr. Eric Sy’s account. Schedule of deliveries are as follows:
....
It has been agreed further that the Local OCC materials to be used for the production
of the above Test Liners will be supplied by Quality Paper & Plastic Products Ent.,
total of 600 Metric Tons at P6.50 per kg. (price subject to change per advance
notice). Quantity of Local OCC delivery will be based on the quantity of Test Liner
delivered to Megapack Container Corp. based on the above production schedule.[11]
On May 5, 2007, Dan T. Lim sent a letter[12] to Arco Pulp and Paper demanding payment of the
amount of ?7,220,968.31, but no payment was made to him.[13]
Dan T. Lim filed a complaint[14] for collection of sum of money with prayer for attachment with
the Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper
filed its answer[15] but failed to have its representatives attend the pre-trial hearing. Hence, the
trial court allowed Dan T. Lim to present his evidence ex parte.[16]
On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s
obligation to Dan T. Lim.[17]
Dan T. Lim appealed[18] the judgment with the Court of Appeals. According to him, novation
did not take place since the memorandum of agreement between Arco Pulp and Paper and Eric
Sy was an exclusive and private agreement between them. He argued that if his name was
mentioned in the contract, it was only for supplying the parties their required scrap papers,
where his conformity through a separate contract was indispensable.[19]
On January 11, 2013, the Court of Appeals[20] rendered a decision[21] reversing and setting
aside the judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and
severally pay Dan T. Lim the amount of P7,220,968.31 with interest at 12% per annum from the
time of demand; P50,000.00 moral damages; P50,000.00 exemplary damages; and P50,000.00
attorney’s fees.[22]
The appellate court ruled that the facts and circumstances in this case clearly showed the
existence of an alternative obligation.[23] It also ruled that Dan T. Lim was entitled to damages
and attorney’s fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its
undertaking.[24]
Its motion for reconsideration[25] having been denied,[26] Arco Pulp and Paper and its President
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
and Chief Executive Officer, Candida A. Santos, bring this petition for review on certiorari.
On one hand, petitioners argue that the execution of the memorandum of agreement constituted
a novation of the original obligation since Eric Sy became the new debtor of respondent. They
also argue that there is no legal basis to hold petitioner Candida A. Santos personally liable for
the transaction that petitioner corporation entered into with respondent. The Court of Appeals,
they allege, also erred in awarding moral and exemplary damages and attorney’s fees to
respondent who did not show proof that he was entitled to damages. [27]
Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there
was no proper novation in this case. He argues that the Court of Appeals was correct in ordering
the payment of ?7,220,968.31 with damages since the debt of petitioners remains unpaid.[28] He
also argues that the Court of Appeals was correct in holding petitioners solidarily liable since
petitioner Candida A. Santos was “the prime mover for such outstanding corporate liability.”[29]
In their reply, petitioners reiterate that novation took place since there was nothing in the
memorandum of agreement showing that the obligation was alternative. They also argue that
when respondent allowed them to deliver the finished products to Eric Sy, the original obligation
was novated.[30]
A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No.
99-2-04-SC dated November 21, 2000.[31]
The issues to be resolved by this court are as follows:
1. Whether the obligation between the parties was extinguished by novation
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co.,
Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded
The petition is denied.
The obligation between the

parties was an alternative
obligation
The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by different prestations shall completely

perform one of them.
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The creditor cannot be compelled to receive part of one and part of the other
undertaking.
“In an alternative obligation, there is more than one object, and the fulfillment of one is
sufficient, determined by the choice of the debtor who generally has the right of election.”[32]
The right of election is extinguished when the party who may exercise that option categorically
and unequivocally makes his or her choice known.[33] The choice of the debtor must also be
communicated to the creditor who must receive notice of it since:
The object of this notice is to give the creditor . . . opportunity to express his consent,
or to impugn the election made by the debtor, and only after said notice shall the
election take legal effect when consented by the creditor, or if impugned by the latter,
when declared proper by a competent court.[34]
According to the factual findings of the trial court and the appellate court, the original contract
between the parties was for respondent to deliver scrap papers worth P7,220,968.31 to petitioner
Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s
obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either
(1) pay the price or (2) deliver the finished products of equivalent value to respondent.[35]
The appellate court, therefore, correctly identified the obligation between the parties as an
alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials
from respondent, would either pay him the price of the raw materials or, in the alternative,
deliver to him the finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the
scrap papers, they exercised their option to pay the price. Respondent’s receipt of the check and
his subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s
option to pay.
This choice was also shown by the terms of the memorandum of agreement, which was
executed on the same day. The memorandum declared in clear terms that the delivery of
petitioner Arco Pulp and Paper’s finished products would be to a third person, thereby
extinguishing the option to deliver the finished products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The trial court erroneously ruled that the execution of the memorandum of agreement
constituted a novation of the contract between the parties. When petitioner Arco Pulp and Paper
opted instead to deliver the finished products to a third person, it did not novate the original
obligation between the parties.
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
The rules on novation are outlined in the Civil Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)
Article 1292. In order that an obligation may be extinguished by another which

substitute the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.
(1204)
Article 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him the rights mentioned in Articles 1236 and 1237. (1205a)
Novation extinguishes an obligation between two parties when there is a substitution of objects
or debtors or when there is subrogation of the creditor. It occurs only when the new contract
declares so “in unequivocal terms” or that “the old and the new obligations be on every point
incompatible with each other.”[36]
Novation was extensively discussed by this court in Garcia v. Llamas:[37]
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 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 third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
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 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 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.
Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied
when the new obligation is incompatible with the old one on every point. The test of
incompatibility is whether the two obligations can stand together, each one with
its own independent existence.[38] (Emphasis supplied)
Because novation requires that it be clear and unequivocal, it is never presumed, thus:
In the civil law setting, novatio is literally construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence, the principle — novatio non
praesumitur — that novation is never presumed. At bottom, for novation to be a
jural reality, its animus must be ever present, debitum pro debito — basically
extinguishing the old obligation for the new one.[39] (Emphasis supplied)
There is nothing in the memorandum of agreement that states that with its execution, the
obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does
not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s
debtor. It merely shows that petitioner Arco Pulp and Paper opted to deliver the finished
products to a third person instead.
The consent of the creditor must also be secured for the novation to be valid:
Novation must be expressly consented to. Moreover, the conflicting intention and
acts of the parties underscore the absence of any express disclosure or circumstances
with which to deduce a clear and unequivocal intent by the parties to novate the old
agreement.[40] (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to
the contract need not be secured. This is clear from the first line of the memorandum, which
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
states:
Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between
Mrs. Candida A. Santos and Mr. Eric Sy. . . .[41]
If the memorandum of agreement was intended to novate the original agreement between the
parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and unequivocal terms that it has replaced
the original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these
circumstances is present in this case.
Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts
with their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of
demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his new debtor. These acts, when taken together,
clearly show that novation did not take place.
Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains
valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full
amount of P7,220,968.31.
Petitioners are liable for damages
Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of
contract where the breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant
acted fraudulently or in bad faith. (Emphasis supplied)
Moral damages are not awarded as a matter of right but only after the party claiming it proved
that the breach was due to fraud or bad faith. As this court stated:
Moral damages are not recoverable simply because a contract has been breached.
They are recoverable only if the party from whom it is claimed acted fraudulently or
in bad faith or in wanton disregard of his contractual obligations. The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive.[42]
Further, the following requisites must be proven for the recovery of moral damages:
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
An award of moral damages would require certain conditions to be met, to wit: (1)
first, there must be an injury, whether physical, mental or psychological, clearly
sustained by the claimant; (2) second, there must be culpable act or omission
factually established; (3) third, the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) fourth, the award of
damages is predicated on any of the cases stated in Article 2219 of the Civil Code.
[43]
Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has
remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and
Paper’s act of refusing to pay its obligations.
When the obligation became due and demandable, petitioner Arco Pulp and Paper not only
issued an unfunded check but also entered into a contract with a third person in an effort to
evade its liability. This proves the third requirement.
As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be
awarded in the following instances:
Article 2219. Moral damages may be recovered in the following and analogous
cases:
(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape, or other lascivious acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in Article 309;
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
Breaches of contract done in bad faith, however, are not specified within this enumeration.
When a party breaches a contract, he or she goes against Article 19 of the Civil Code, which
states:
Article 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.
Persons who have the right to enter into contractual relations must exercise that right with
honesty and good faith. Failure to do so results in an abuse of that right, which may become the
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
basis of an action for damages. Article 19, however, cannot be its sole basis:
Article 19 is the general rule which governs the conduct of human relations. By
itself, it is not the basis of an actionable tort. Article 19 describes the degree of care
required so that an actionable tort may arise when it is alleged together with Article
20 or Article 21.[44]
Article 20 and 21 of the Civil Code are as follows:
Article 20. Every person who, contrary to law, wilfully or negligently causes damage
to another, shall indemnify the latter for the same.
Article 21. Any person who wilfully causes loss or injury to another in a manner that
is contrary to morals, good customs or public policy shall compensate the latter for
the damage.
To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with
lawful acts that are contrary to morals, good customs, and public policy:
Article 20 concerns violations of existing law as basis for an injury. It allows

recovery should the act have been willful or negligent. Willful may refer to the
intention to do the act and the desire to achieve the outcome which is considered by
the plaintiff in tort action as injurious. Negligence may refer to a situation where the
act was consciously done but without intending the result which the plaintiff
considers as injurious.
Article 21, on the other hand, concerns injuries that may be caused by acts which are
not necessarily proscribed by law. This article requires that the act be willful, that is,
that there was an intention to do the act and a desire to achieve the outcome. In cases
under Article 21, the legal issues revolve around whether such outcome should be
considered a legal injury on the part of the plaintiff or whether the commission of the
act was done in violation of the standards of care required in Article 19.[45]
When parties act in bad faith and do not faithfully comply with their obligations under contract,
they run the risk of violating Article 1159 of the Civil Code:
Article 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be
recovered since it only specifies, among others, Article 21. When a party reneges on his or her
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obligations arising from contracts in bad faith, the act is not only contrary to morals, good
customs, and public policy; it is also a violation of Article 1159. Breaches of contract become
the basis of moral damages, not only under Article 2220, but also under Articles 19 and 20 in
relation to Article 1159.
Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220
requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala:[46]
To recover moral damages in an action for breach of contract, the breach must be
palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive. Hence,
the person claiming bad faith must prove its existence by clear and convincing
evidence for the law always presumes good faith.
Bad faith does not simply connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of known duty through some motive or interest or ill will that partakes
of the nature of fraud. It is, therefore, a question of intention, which can be
inferred from one’s conduct and/or contemporaneous statements.[47] (Emphasis
supplied)
Since a finding of bad faith is generally premised on the intent of the doer, it requires an
examination of the circumstances in each case.
When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to
respondent, it was presumably with the knowledge that it was being drawn against a closed
account. Worse, it attempted to shift their obligations to a third person without the consent of
respondent.
Petitioner Arco Pulp and Paper’s actions clearly show “a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of known duty through some motive or
interest or ill will that partakes of the nature of fraud.”[48] Moral damages may, therefore, be
awarded.
Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in
the following circumstances:
Article 2232. In contracts and quasi-contracts, the court may award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.
Article 2233. Exemplary damages cannot be recovered as a matter of right; the court
will decide whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the
plaintiff must show that he is entitled to moral, temperate or compensatory damages
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before the court may consider the question of whether or not exemplary damages
should be awarded.
In Tankeh v. Development Bank of the Philippines,[49] we stated that:
The purpose of exemplary damages is to serve as a deterrent to future and

subsequent parties from the commission of a similar offense. The case of People
v. Rante citing People v. Dalisay held that:
Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or

corrective damages are intended to serve as a deterrent to serious
wrong doings, and as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a punishment for those guilty
of outrageous conduct. These terms are generally, but not always, used
interchangeably. In common law, there is preference in the use of
exemplary damages when the award is to account for injury to feelings
and for the sense of indignity and humiliation suffered by a person as a
result of an injury that has been maliciously and wantonly inflicted, the
theory being that there should be compensation for the hurt caused by the
highly reprehensible conduct of the defendant—associated with such
circumstances as willfulness, wantonness, malice, gross negligence or
recklessness, oppression, insult or fraud or gross fraud—that intensifies
the injury. The terms punitive or vindictive damages are often used to
refer to those species of damages that may be awarded against a person to
punish him for his outrageous conduct. In either case, these damages are
intended in good measure to deter the wrongdoer and others like him
from similar conduct in the future.[50] (Emphasis supplied; citations
omitted)
The requisites for the award of exemplary damages are as follows:
(1) they may be imposed by way of example in addition to compensatory damages,

and only after the claimant's right to them has been established;
(2) that they cannot be recovered as a matter of right, their determination depending
upon the amount of compensatory damages that may be awarded to the claimant;
and
(3) the act must be accompanied by bad faith or done in a wanton, fraudulent,
oppressive or malevolent manner.[51]
Business owners must always be forthright in their dealings. They cannot be allowed to renege
on their obligations, considering that these obligations were freely entered into by them.
Exemplary damages may also be awarded in this case to serve as a deterrent to those who use
fraudulent means to evade their liabilities.
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be
recovered. Article 2208 of the Civil Code states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded[.]
Petitioner Candida A. Santos

is solidarily liable with petitioner
corporation
Petitioners argue that the finding of solidary liability was erroneous since no evidence was
adduced to prove that the transaction was also a personal undertaking of petitioner Santos. We
disagree.
In Heirs of Fe Tan Uy v. International Exchange Bank,[52] we stated that:
Basic is the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or employee of a corporation
is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues.
....
Before a director or officer of a corporation can be held personally liable for

corporate obligations, however, the following requisites must concur: (1) the
complainant must allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) the complainant must clearly and convincingly
prove such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances
that would warrant the piercing of the veil of corporate fiction is a question of fact
which cannot be the subject of a petition for review on certiorari under Rule 45, this
Court can take cognizance of factual issues if the findings of the lower court are not
supported by the evidence on record or are based on a misapprehension of facts.[53]
(Emphasis supplied)
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
As a general rule, directors, officers, or employees of a corporation cannot be held personally

liable for obligations incurred by the corporation. However, this veil of corporate fiction may be
pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence
or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her capacity as the President
and Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial
payment of petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp
and Paper. This is clear on the face of the check bearing the account name, “Arco Pulp & Paper,
Co., Inc.”[54] Any obligation arising from these acts would not, ordinarily, be petitioner Santos’
personal undertaking for which she would be solidarily liable with petitioner Arco Pulp and
Paper.
We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:
[55]
Piercing the veil of corporate fiction is an equitable doctrine developed to address

situations where the separate corporate personality of a corporation is abused or used
for wrongful purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate purposes,
such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other
unjustifiable aims or intentions, in which case, the fiction will be disregarded
and the individuals composing it and the two corporations will be treated as
identical.[56] (Emphasis supplied)
According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco
Pulp and Paper, stating that:
In the present case, We find bad faith on the part of the [petitioners] when they
unjustifiably refused to honor their undertaking in favor of the [respondent]. After
the check in the amount of P1,487,766.68 issued by [petitioner] Santos was
dishonored for being drawn against a closed account, [petitioner] corporation denied
any privity with [respondent]. These acts prompted the [respondent] to avail of the
remedies provided by law in order to protect his rights.[57]
We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the
corporate veil. When petitioner Arco Pulp and Paper’s obligation to respondent became due and
demandable, she not only issued an unfunded check but also contracted with a third party in an
effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor
petitioner corporation’s obligations to respondent. These acts clearly amount to bad faith. In this
instance, the corporate veil may be pierced, and petitioner Santos may be held solidarily liable
with petitioner Arco Pulp and Paper.
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
The rate of interest due on

the obligation must be reduced
in view of Nacar v. Gallery
Frames[58]
In view, however, of the promulgation by this court of the decision dated August 13, 2013 in
Nacar v. Gallery Frames,[59] the rate of interest due on the obligation must be modified from
12% per annum to 6% per annum from the time of demand.
Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,[60] and
we have laid down the following guidelines with regard to the rate of legal interest:
To recapitulate and for future guidance, the guidelines laid down in the case of
Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular
No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on “Damages” of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3/28/24, 4:13 PM [ G.R. No. 206806. June 25, 2014 ]
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
And, in addition to the above, judgments that have become final and executory prior
to July 1, 2013, shall not be disturbed and shall continue to be implemented applying
the rate of interest fixed therein.[61] (Emphasis supplied; citations omitted.)
According to these guidelines, the interest due on the obligation of P7,220,968.31 should now
be at 6% per annum, computed from May 5, 2007, when respondent sent his letter of demand to
petitioners. This interest shall continue to be due from the finality of this decision until its full
satisfaction.
WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is
AFFIRMED.
Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to
pay respondent Dan T. Lim the amount of P7,220,968.31 with interest of 6% per annum at the
time of demand until finality of judgment and its full satisfaction, with moral damages in the
amount of P50,000.00, exemplary damages in the amount of P50,000.00, and attorney’s fees in
the amount of P50,000.00.
SO ORDERED.
Peralta, (Acting Chairperson),* Villarama, Jr.** Mendoza, and Reyes*** JJ., concur.
July 25, 2014
N O T I C E OF J U D G M E N T
Sirs/Mesdames:
Please take notice that on ___June 25, 2014___ a Decision, copy attached herewith, was
rendered by the Supreme Court in the above-entitled case, the original of which was received by
this Office on July 25, 2014 at 10:37 a.m.
Very truly yours,

(SGD)
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
THIRD DIVISION
[ G.R. No. 194664. June 15, 2016 ]
FLORITA LIAM, PETITIONER, VS. UNITED COCONUT PLANTERS
BANK, RESPONDENT.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court seeking to
annul and set aside the Decision[2] dated September 24, 2010 of the Court of Appeals (CA) in
CA-G.R. SP No. 112195 holding that United Coconut Planters Bank (UCPB) was wrongly
impleaded in Florita Liam's (Liam) complaint for specific performance before the Housing and
Land Use Regulatory Board (HLURB).
The Facts
On April 11, 1996, Liam entered into a contract to sell[3] with developer Primetown Property
Group, Inc. (PPGI) for the purchase of Condominium Unit No. 603, Hongkong Tower, of the
latter's Makati Prime City (MPC) condominium project in San Antonio Village, Makati City for
the price of P2,614,652.66. The parties also stipulated that the unit will be delivered not later
than 35 months from the start of actual construction.
To finance the construction of the condominium project, PPGI obtained a loan from UCPB.
PPGI thereafter partially settled its loan by transferring to UCPB its right to collect all
receivables from condominium buyers, including Liam. For this purpose, PPGI and UCPB
executed a Memorandum of Agreement (MOA)[4] and a document denominated as Sale of
Receivables and Assignment of Rights and Interests (Deed of Sale/Assignment)[5] both dated
April 23, 1998.
On May 29, 1998, PPGI notified Liam of the sale of its receivables to UCPB. PPGI directed her
to remit any remaining balance of the condominium unit's purchase price to UCPB. PPGI
further stated that "[the] payment arrangement shall in no way cause any amendment of [the]
terms and conditions, nor the cancellation of the Contract to Sell [she] executed with PPGI."[6]
Liam heeded the notice and forthwith remitted her payments to UCPB. However, on March 9,
1999, Liam wrote UCPB asking for the deferment of her amortization payments until such time
that the unit is ready for delivery.[7] At that point, Liam stopped making payments. On February
28, 2001, Liam again wrote UCPB complaining of the delayed delivery of the unit and
reiterating that she will only resume making payments once the unit is delivered. Liam also
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
requested the waiver of interests and penalties for the period prior to UCPB's assumption as the
payee of her amortizations.[8]
Pier requests, however, were left unanswered. Thus, on April 14, 2004, Liam demanded for the
refund of all the payments she made for PPGI's failure to deliver the unit on the stipulated date.
[9]
On July 1, 2005, UCPB proposed to Liam a financing package for the full settlement of the
balance of the purchase price.[10]
On October 17, 2005, Liam saw UCPB's newspaper advertisement offering to the public the sale
of 'ready for occupancy' units in the Palm Tower of MPC condominium project at a much lower
price.[11]
On November 14, 2005, Liam requested UCPB to suspend the restructuring of her loan and
instead asked for the downgrading of her purchased two-bedroom condominium unit to another
unit equivalent in value to the P1,223,000.00 total payments she already made. She also
questioned the realty tax and documentary stamp tax imposed by UCPB in the proposed
financing package.[12]
Her requests, however, remained unheeded. Thus, on April 10, 2006, Liam filed a Complaint[13]
for specific performance before the HLURB against PPGI and UCPB. The complaint recounted
the foregoing episodes and alleged that UCPB promised to deliver the unit within six months.
Liam prayed that she be given first priority to choose among the available units at Palm Tower
which has a minimum price of P24,984.15 per square meter and that her total payments of
P1,232,259.91 be credited to the contract for her newly chosen unit. To justify her plea, Liam
averred that UCPB has already devaluated the market values of the condominium units from the
original purchase price of P43,089.00 per sq m to P24,984.15 per sq m.
Liam also claimed that she is not liable for the realty taxes on her unit because she is neither in
possession thereof nor the holder of its title.
Liam further complained that UCPB has been biased in charging the interest rates to its buyers
at 13% per annum as against the 11% per annum rate imposed on auction buyers. UCPB was
also allegedly unfair in charging buyers with realty taxes and capital gains tax when the same
should be shouldered by the developer.
In its Answer,[14] PPGI denied receiving any demand from Liam and averred that she is already
estopped from making any claims against PPGI because she agreed to the substitution of PPGI
by UCPB. In the same pleading, PPGI moved for the deferment of the proceedings in view of its
pending petition for corporate rehabilitation before Branch 138 of the Regional Trial Court of
Makati City, which ordered on August 15, 2003, that the enforcement of all claims against PPGI
be suspended.[15] Finally, PPGI counterclaimed for attorney's fees and litigation expenses.
Meanwhile, UCPB averred that it had no legal obligation to deliver the unit to Liam because it is
not the developer of the condominium project. UCPB maintained that it is merely a creditor of
PPGI. UCPB explained that it only acquired PPGI's right to collect its receivables from Liam
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
and other condominium buyers. UCPB denied giving a specific date for the completion of
Liam's unit because such matter was beyond its control but rather devolved upon PPGI as the
developer.
UCPB further declared that the units are already complete, hence, Liam should resume payment
of her amortizations. UCPB contended that it already acted favorably on Liam's request for
waiver of penalties and interests.
UCPB explained that the newspaper advertisements pertained to the units it acquired from PPGI
as payment for the latter's loan. The advertisements did not have any connection to the contract
to sell between Liam and PPGI, the purchase price of which was the prevailing market price at
the time of its signing.
Finally, UCPB tagged the complaint as a malicious and unnecessary suit and demanded for
indemnification of its legal expenses in the amount of P50,000.00.[16]
Ruling of the HLURB
In a Decision[17] dated August 16, 2007, HLURB Arbiter Marino Bernardo M. Torres (Torres)
ruled in favor of Liam, to wit:
WHEREFORE, premises considered, it is hereby ordered that:
1. UCPB give [Liam] the privilege to choose among the available units at Palm
Tower, San Antonio Village, or in the alternative[,] to maintain the previous unit
subject of the Contract to Sell;
2. The Realty Tax must be [for] the account of the respondent UCPB, the unit being
in the possession of the respondent;
3. The Capital Gains Tax having been waived, [the] documentary stamp tax must
also be charged to respondent UCPB.
It is so ordered.[18]
Upon the appeal filed by PPGI and UCPB, the above ruling was affirmed with modification by
the HLURB Board of Commissioners in a Decision[19] dated May 22, 2008, thus:
WHEREFORE, premises considered, the appeal is PARTIALLY GRANTED.

Accordingly[,] the judgment appealed from is MODIFIED to read as follows:
1. Ordering the parties to continue with their contract and upon [Liam's] full payment
of the purchase price of P2,614,652.66, ordering respondent UCPB to deliver [U]nit
603 of HongKong Tower and to execute the corresponding deed of sale in [Liam's]
favor. In the alternative, at the option of [Liam], [UCPB] is ordered to refund to her
the total installment payments made with interest at 6% per annum until fully paid
reckoned from the filing of the complaint.
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
2. Declaring that the [R]ealty [T]ax must be for the account of the respondent UCPB,
the unit being in the possession of the respondent.
3. Declaring that [Liam] is liable for the payment of the documentary stamp tax.
SO ORDERED.[20]
In so ruling, the HLURB Board of Commissioners ratiocinated that Liam cannot complain about
the lower purchase price of other units or demand for the amendment of the stipulated price in
her Contract to Sell with PPGI. Liam and PPGI have long agreed on the purchase price before
the lower price of the other units was even advertised. Liam was, however, held entitled to a
refund because the unit was not completed within the period stipulated in the contract.[21]
Liam was held not liable for realty tax because she was never in possession of the condominium
unit. She was nevertheless held liable to pay the documentary stamp taxes for the registration of
the deed of sale.[22]
Ruling of the Office of the President
UCPB thereafter appealed to the Office of the President (OP) arguing that it should not be
obligated to refund Liam's alleged total installment payments because it did not step into the
shoes of PPGI.[23] In the Decision[24] dated May 7, 2009, the OP, through the Deputy Executive
Secretary for Legal Affairs, rejected UCPB's argument. The OP held that the Deed of
Sale/Assignment between UCPB and PPGI covered all the rights and interests arising from or
out of the contract to sell between Liam and PPGI. The OP ruling disposed thus:
WHEREFORE, premises considered, the appeal is DISMISSED. The Decision

dated May 22, 2008 rendered by the Board of Commissioners of the Housing and
Land Use Regulatory Board is hereby AFFIRMED.
SO ORDERED.[25]
On UCPB's motion for reconsideration, the OP reiterated its findings in a Resolution[26] dated
December 10, 2009, by stressing that since PPGI assigned all its rights and interests to UCPB,
the latter is deemed subrogated to and bound by exactly the same conditions to which PPGI was
bound under the contract to sell. Thus, UPCB is obligated to return the payments of Liam after
the project was not completed on time.
Ruling of the CA
Unwavering, UCPB sought recourse before the CA contending that it was merely an agent of
PPGI in collecting the receivables from Liam and was never a party to the contract to sell.
Hence, it cannot be made to assume the liabilities of PPGI as owner, developer or project
manager of the condominium unit. Even assuming that UCPB is liable, its liability must be
limited to the amount it actually received from Liam in behalf of PPGI.[27]
In a Decision[28] dated September 24, 2010, the CA ruled in favor of UCPB. The CA limited the
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
issue to the liability of UCPB for specific performance under the contract to sell between PPGI
and Liam.
The CA ruled that Liam had no right to demand for specific performance from UCPB because it
was not a privy to the contract to sell. The obligations of PPGI to Liam remained subsisting and
it continued to be Liam's obligor with respect to the delivery of the condominium units even
after the assignment. Thus, UCPB cannot be held liable for PPGI's breach of its obligation to
Liam. The CA concluded that UCPB was wrongly impleaded in the complaint for specific
performance. Accordingly, the CA ruling disposed as follows:
IN VIEW OF THE FOREGOING, the assailed 7 May 2009 Decision of the Office
of the President is hereby REVERSED and SET ASIDE.
SO ORDERED.[29]
Liam moved for the reconsideration[30] of the foregoing judgment but her motion was denied in
the Resolution[31] dated December 3, 2010 of the CA. Hence, the present petition submitting the
following issues for resolution, viz:
WHETHER OR NOT THE HONORABLE SUPREME COURT, ALBEIT NOT A

TRIER OF FACTS, BUT BEING THE FINAL ARBITER OF ANY JUSTIFIABLE
CONTROVERSIES, HAS THE POWER AND AUTHORITY TO REVIEW THE
FACTS AND EVIDENCE OBTAINING IN THIS CASE DUE TO THE
EXISTENCE OF WELL RECOGNIZED EXCEPTIONS TO THE RULE[;]
WHETHER OR NOT THE [CA] ERRED IN REVERSING AND SETTING ASIDE

THE DECISIONS OF THE OFFICES A QUO[;]
WHE[T]HER OR NOT THE [CA] ERRED IN NOT HOLDING THAT THE

DECISION OF THE HLURB HAS BECOME FINAL AND EXECUTORY BY THE
[UCPB'S] FAILURE TO POST THE REQUIRED APPEAL BOND PURSUANT TO
SECTION 2 OF RULE XVI[,] IN RELATION [TO SECTION] 1 OF RULE XVIII,
OF THE RULES OF PROCEDURE OF THE [HLURB] BOARD OF
COMMISSIONERS.[32]
Ruling of the Court
The Court denies the petition.
Preliminary Considerations
Contrary to Liam's submissions, there are no factual issues in this appeal since the following
circumstances and events are not disputed by the parties: a) PPGI and Liara have a subsisting
Contract to Sell; b) PPGI executed agreements with UCPB without Liam's consent; c) PPGI
failed to deliver the condominium unit subject of the Contract to Sell within the stipulated
period.
The crucial point of contention is actually the correct interpretation of the nature of the
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
agreements between PPGI and UCPB and their repercussions to the Contract to Sell between
PPGI and Liam. These matters are legal questions[33] as they do not require an examination of
the probative value of the evidence presented by the parties but rather the determination of the
applicable law on the given state of facts.[34] The Court has delineated the distinctions between
a question of law and a question of fact as follows:
A question of law arises when there is doubt as to what the law is on a certain state of
facts, while there is a question of fact when the doubt arises as to the truth or falsity
of the alleged facts. For a question to be one of law, the same must not involve an
examination of the probative value of the evidence presented by the litigants or any
of them. 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 questioned posed is one of fact. Thus, the test of whether a
question is one of law or of fact is not the appellation given to such question by the
party raising the same; rather, it is whether the appellate court can determine the
issue raised without reviewing or evaluating the evidence, in which case, it is a
question of law; otherwise, it is a question of fact.[35] (Italics in the original)
Thus, the petition is the proper subject of the Court's review under Rule 45 of the Rules of
Court.
The transaction between UCPB and PPGI was an assignment of credit and not
subrogation.
"An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without
the consent of the debtor, transfers his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it
against the debtor. It may be in the form of sale, but at times it may constitute a dation in
payment, such as when a debtor, in order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person."[36]
Simply, an assignment of credit is 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 either gratuitously or onerously, in which case, the assignment has an effect similar to that
of a sale.[37]
On the other hand, subrogation is a process by which the third party pays the obligation of the
debtor to the creditor with the latter's consent. As a consequence, the paying third party steps
into the shoes of the original creditor as subrogee of the latter.[38] It results in a subjective
novation of the contract in that a third person is subrogated to the rights of the creditor.[39]
The crucial distinction between assignment and subrogation actually 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. 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. A creditor may,
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
therefore, validly assign his credit and its accessories without the debtor's consent.[40]
Meanwhile, 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.[41]
The terms of the MOA and Deed of Sale/Assignment between PPGI and UCPB unequivocally
show that the parties intended an assignment of PPGPs credit in favor of UCPB.
Section 1 of the MOA is explicit that as partial settlement of its loan, PPGI sold in favor of
UCPB its unsold condominium units in MPC as well as its outstanding receivables from the 539
units covered by Contracts to Sell, viz:
ARTICLE I
SUBJECT
Section 1.01 In partial settlement of FIRST PARTY'S [PPGI] outstanding and/or

maturing obligation with SECOND PARTY [UCPB], to the extent of
P1,160,965,734.33, FIRST PARTY has offered the following modes of settlement,
viz:
a. Absolute Sale over unsold condominium units/parking spaces of

Makati Prime City (hereinafter referred as "MPC) including all
existing and future improvements thereon situated at St. Pauls Road,
Antonio Village, Makati City, and covered by Condominium
Certificates of Titles (CCTs) registered with the Register of Deeds for
Makati City, the technical description of which are listed in Annex
"A" and made integral part hereof;
xxxx
c. Sale of outstanding receivables due or payable to SECOND
PARTY over 538 "MPC" sold units and 176 "KIENER" sold
units, from Buyers who have purchased said units and the
Assignment of Rights and Interests arising out of the units
pertinent [to] Contract to Sell (CTS) as evidenced by pertinent
and individual Contracts to Sell (CTS), hereto attached as Annex
"C;
x x x x[42] (Emphasis supplied)
"This agreement was implemented through the Deed of Sale/Assignment whereby the parties
reiterated and emphasized that they intended an assignment of PPGI's receivables thus giving
UCPB the right to run after the former's condominium buyers with outstanding balances under a
Contract to Sell, like herein petitioner Liam."[43] The operative provisions of the Deed of
Sale/Assignment provide thus:
WHEREAS, under the terms and conditions of the Memorandum of Agreement, the
FIRST PARTY [PPGI] had agreed to sell, transfer, convey and set over unto
SECOND PARTY [UCPB], all the Accounts Receivables accruing from FIRST
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
PARTY'S Makati Prime City Condominium Project ("MPC" for brevity) and Kiener
Hills Condominium Project ("KIENER" for brevity), as enumerated in a list hereto
attached as Annexes "A" and "B", respectively and forms an integral part hereof,
together with all the incidental rights, titles, interests and participations over the units
covered by the Contracts to Sell from which the Accounts] Receivables have arisen;
WHEREAS, the parties have agreed that the consideration of this [Deed of
Sale/Assignment] shall be the aggregate amount of PESOS: SEVEN HUNDRED
FORTY-EIGHT MILLION (P748,000,000.00), Philippine currency broken down as
follows:
xxxx
NOW, THEREFORE, for and in consideration of the foregoing premises and the
aggregate amount of PESOS : SEVEN HUNDRED FORTY-EIGHT MIL[L]ION
(P748,000,000.00) Philippine currency, FIRST PARTY [PPGI] hereby sells,
transfers, conveys and set over as by these presents it has assigned, transferred,
conveyed and set over unto SECOND PARTY [UCPB] all Accounts Receivables
accruing from FIRST PARTY'S "MPC" and "KIENER" as enumerated in a list
hereto attached as Annexes "A" and "B" respectively together with the assignment of
all its rights, titles, interests and participations over the units covered by or arising
from the Contracts to Sell from which the Accounts Receivables have arisen, under
the following terms and conditions:
1. The FIRST PARTY hereby sells, transfers, conveys, assigns and sets over unto the
SECOND PARTY [HLURB]:
a. all the Account Receivables or moneys due which may grow due
upon the said receivables pursuant to the list attached as Annexes
"A" and "B";
b. all its rights and interest arising from or out of the Contract to Sell
of its respective receivable[s]/condominium unit.
x x x x[44]
"The primary consideration in determining the true nature of a contract is the intention of the
parties. If the words of a contract appear to contravene the evident intention of the parties, the
latter shall prevail. Such intention is determined not only from the express terms of their
agreement, but also from the contemporaneous and subsequent acts of the parties."[45] However,
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.[46]
The provisions of the foregoing agreements between PPGI and UCPB are clear, explicit and
unambiguous as to leave no doubt about their objective of executing an assignment of credit
instead of subrogation. The MOA and the Deed of Sale/Assignment clearly state that UCPB
became an assignee of PPGI's outstanding receivables of its condominium buyers. The Court
perceives no proviso or any extraneous factor that incites a contrary interpretation. Even the
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
simultaneous and subsequent acts of the parties accentuate their intention to treat their
agreements as assignment of credit.
As Liam herself submits, her consent to the MOA and Deed of Sale/Assignment was not secured
and she only learned about them when PPGI informed her to remit her payments to UCPB in a
letter dated May 29, 1998, which reads:
This refers to your purchase of Unit #603 of Hongkong Tower, [MPC], a project of
[PPGI], the development of which has been partially financed by [UCPB] wherein
the rights, title and interest over the said unit(s); which includes among others your
installment payments have been assigned to them.
In connection with Section 18 of Presidential Decree No. 957, x x x, we hereby

direct your goodself to remit all payments under your Contract to Sell directly to
[UCPB] x x x.
This payment arrangement shall in no way cause any amendment of the other terms
and conditions, nor the cancellation of the Contract to Sell you have executed with
PPGI.[47]
The absence of Liam's consent to the transactions between PPGI and UCPB affirms their nature
as assignment of credit. As already mentioned, the consent of the debtor is not essential in
assignment of credit. What the law requires is merely notice to him. A creditor may, therefore,
validly assign his credit and its accessories without the debtor's consent. The purpose of the
notice is only to inform the debtor that from the date of the assignment, payment should be
made to the assignee and not to the original creditor.[48]
The last paragraph of the letter also confirms that UCPB's acquisition of PPGI's receivables did
not involve any changes in the Contract to Sell between PPGI and Liam; neither did it vary the
rights and the obligations of the parties therein. Thus, no novation by subrogation could have
taken place.
The CA was therefore correct in ruling that the agreement between PPGI and UCPB was an
assignment of credit. UCPB acquired PPGI's right to demand, collect and receive Liam's
outstanding balance; UCPB was not subrogated into PPGI's place as developer under the
Contract to Sell.
UCPB was improperly impleaded in Liam's complaint.
The CA is correct when it concluded that as a mere assignee, UCPB cannot be impleaded in
Liam's complaint for specific performance. It is clear that the intention of the parties was merely
to assign the receivables; and therefore, there is no ground to hold UCPB solidarily liable with
PPGI.
In the recent case of Chin Kong Wong Choi v. UCPB,[49] the Court reiterated the rulings of the
CA in the cases of UCPB v. O'Halloran[50] and UCPB v. Ho,[51] thus:
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
In UCPB v. O'Halloran, docketed as CA.-G.R. S.P. No. 101699, respondent

O'Halloran's accounts with Primetown were also assigned by Prirnetown to UCPB,
under the same Agreement as in this case. Since Primetown failed to deliver the
condominium units upon full payment of the purchase price, O'Halloran likewise
sued both Primetown and UCPB for cancellation of the contracts to sell, and the case
eventually reached the CA. The CA held UCPB liable to refund the amount it
actually received from O'Halloran. The CA held that there is no legal, statutory or
contractual basis to hold UCPB solidarily liable with Primetown for the full
reimbursement of the payments made by O'Halloran. The CA found that based on the
Agreement, UCPB is merely the assignee of the receivables under the contracts
to sell to the extent that the assignment is a manner adopted by which
Primetown can pay its loan to the bank. The CA held that the assignment of
receivables did not make UCPB the owner or developer of the unfinished project to
make it solidarily liable with Primetown. The CA decision dated 23 July 2009 in
C.A.-G.R. S.P. No. 101699 became final and executory upon Entry of Judgment on
17 August 2009 for O'Halloran and 18 August 2009 for UCPB.
In UCPB v. Ho, docketed as C.A.-G.R. S.P. No. 113446, respondent Ho was

similarly situated with O'Halloran and Spouses Choi. Upon reaching the CA, the CA
considered the Agreement between UCPB and Primetown as an assignment of credit,
because: 1) the parties entered into the Agreement without the consent of the debtor;
2) UCPB's obligation "to deliver to the buyer the title over the condominium unit
upon their full payment" signifies that the title to the condominium unit remained
with Primetown; 3) UCPB's prerogative "to rescind the contract to sell and transfer
the title of condominium unit to its name upon failure of the buyer to pay the full
purchase price" indicates that UCPB was merely given the right to transfer title in its
name to apply the property as partial payment of Primetown's obligation; and 4) the
Agreement clearly states that the assignment is limited to the receivables and does
not include "any and all liabilities which [Primetown] may have assumed under the
individual contract to sell." Thus, the CA ruled that UCPB was a mere assignee of
the right of Primetown to eollect on its contract to sell with Ho. The CA, then,
applied the ruling in UCPB v. O'Halloran in finding UCPB jointly liable with
Primetown only for the payments UCPB had actually received from Ho.
On 4 December 2013, this Court issued a Resolution denying Ho's petition for
review for failure to show any reversible error on the part of the CA. On 2 April
2014, this Court likewise denied the motion for reconsideration with finality. Thus,
the 9 May 2013 Decision of the Special Fifteenth Division of the CA in CA-G.R. SP
No. 113446 became final and executory.[52] (Citations omitted and emphasis in the
original)
Following our pronouncement in the case of Chin Kong Wong Choi, which finds application in
the present case, UCPB should not be held liable for the obligations and liabilities of PPGI
under its contract to sell with Liam, considering that the bank is a mere assignee of the rights
and receivables under the Agreement it executed with PPGI. There being no other grounds to
hold UCPB solidarity liable with PPGI, the instant petition must be denied for lack of merit.
The lack of an appeal bond before the HLURB Board of Commissioners did not render
3/28/24, 4:14 PM [ G.R. No. 194664. June 15, 2016 ]
final and executory the appealed judgment of the HLURB Arbiter.
It is incorrect for Liam to argue that the Decision dated August 16, 2007 of HLURB Arbiter
Torres has become final and executory in view of UCPB's failure to post a bond when it
appealed to the HLURB Board of Commissioners. Section 2, Rule XVI of the 2004 HLURB
Rules of Procedure,[53] provides:
Sec. 2. Contents of the Appeal Memorandum. - The appeal memorandum shall state
the date when the appellant received a copy of the decision, the grounds relied upon,
the arguments in support thereof, and the relief prayed for.
In addition, the appellant shall attach to the appeal memorandum the following:
a. Affidavit of service of the appeal memorandum executed jointly by the

appellant and his counsel, which substantially complies with Supreme Court
Circular No. 19-91, stating in essence the date of such service, copies of the
registry return receipt shall likewise be attached;
b. A verified certification jointly executed by the appellant and his counsel in

accord with Supreme Court Circular No. 28-91 as amended, attesting that they
have not commenced a similar, related or any other proceeding involving the
same subject matter or causes of action before any other court or administrative
tribunal in the Philippines; and
c. In case of money judgment, an appeal bond satisfactory to the Board

equivalent to the amount of the award excluding interests, damages and
attorney's fees.[54] (Emphasis ours)
Evidently, the HLURB Rules of Procedure mandates the posting of an appeal bond only in cases
where the appealed judgment involves a monetary award. The Decision dated August 16, 2007
of HLURB Arbiter Torres was not a judgment for a specific sum of money. Instead, it ordered
UCPB to give Liana the privilege to choose among the available units at Palm Tower, San
Antonio Village, or in the alternative, to maintain the previous unit subject of the Contract to
Sell.[55]
WHEREFORE, premises considered, the petition is DENIED. The Decision dated September
24, 2010 of the Court of Appeals in CA-G.R. SP No. 112195 is hereby AFFIRMED.
SO ORDERED.
Velasco, Jr., (Chairperson), Peralta, and Perez, JJ., concur.

Jardeleza, J., on leave.
July 12, 2016
NOTICE OF JUDGMENT
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
SECOND DIVISION
[ G.R. No. 193068. February 01, 2017 ]
DEVELOPMENT BANK OF THE PHILIPPINES, PETITIONER, V. STA.
INES MELALE FOREST PRODUCTS CORPORATION, RODOLFO
CUENCA, MANUEL TINIO, CUENCA INVESTMENT CORPORATION
AND UNIVERSAL HOLDINGS CORPORATION, RESPONDENTS.
[G.R. No. 193099, February 1, 2017]
NATIONAL DEVELOPMENT CORPORATION, PETITIONER, V. STA.
INES MELALE FOREST PRODUCTS CORPORATION, RODOLFO M.
CUENCA, MANUEL I. TINIO, CUENCA INVESTMENT CORPORATION
AND UNIVERSAL HOLDINGS CORPORATION, RESPONDENTS.
DECISION
LEONEN, J.:
A condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfilment and a
debtor loses the right to make use of the period when a condition is violated, making the
obligation immediately demandable.[1]
This resolves the consolidated Petitions for Review filed by the Development Bank of the
Philippines (DBP)[2] and the National Development Corporation (NEDC)[3] assailing the Court
of Appeals Decision[4] dated March 24, 2010 and Court of Appeals Resolution[5] dated July 21,
2010, which affirmed with modifications the Decision[6] dated September 16, 2003 of Branch
137, Regional Trial Court of Makati City.[7]
Sometime in 1977, National Galleon Shipping Corporation (Galleon), "formerly known as

Galleon Shipping Corporation, was organized to operate a liner service between the Philippines
and its ... trading partners."[8] Galleon's major stockholders were respondents Sta. Ines Melale
Forest Products Corporation (Sta. Ines), Cuenca Investment Corporation (Cuenca Investment),
Universal Holdings Corporation (Universal Holdings), Galleon's President Rodolfo M. Cuenca
(Cuenca), Manuel I. Tinio (Tinio), and the Philippine National Construction Corporation
(PNCC).[9]
Galleon experienced financial difficulties and had to take out several loans from different
sources such as foreign financial institutions, its shareholders (Sta. Ines, Cuenca Investment,
Universal Holdings, Cuenca, and Tinio), and other entities "with whom it had ongoing
commercial relationships."[10]
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
DBP guaranteed Galleon's foreign loans.[11] In return, Galleon and its stockholders Sta. Ines,
Cuenca Investment, Universal Holdings, Cuenca, and Tinio, executed a Deed of Undertaking[12]
on October 10, 1979 and obligated themselves to guarantee DBP's potential liabilities.[13]
To secure DBP's guarantee, Galleon undertook to secure a first mortgage on its five new vessels
and two second-hand vessels.[14] However, despite the loans extended to it, "[Galleon's]
financial condition did not improve."[15]
Cuenca, as Galleon's president, wrote to the members of the Cabinet Standing Committee "for
the consideration of a policy decision to support a liner service."[16] Cuenca also wrote then
President Ferdinand Marcos and asked for assistance.[17]
On July 21, 1981, President Marcos issued Letter of Instructions No. 1155[18] addressed to the
NDC, DBP, and the Maritime Industry Authority. Letter of Instructions No. 1155 reads:
TO : Development Bank of the Philippines

National Development Company
Maritime Industry Authority
DIRECTING A REHABILITATION PLAN FOR

GALLEON SHIPPING CORPORATION
WHEREAS, Galleon Shipping Corporation is presently in a distressed state in view

of the unfavorable developments in the liner shipping business;
WHEREAS, the exposure of the Philippine government financial institutions is

substantial;
WHEREAS, it is a policy of government to provide a reliable liner service between

the Philippines and its major trading partners;
WHEREAS, it is a policy to have a Philippine national flag liner service to compete

with other heavily subsidized national shipping companies of other countries;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines,

do hereby direct the following:
1. NDC shall acquire 100% of the shareholdings of Galleon Shipping Corporation

from its present owners for the amount of P46.7 million which is the amount
originally contributed by the present shareholders, payable after five years with
no interest cost.
2. NDC to immediately infuse P30 million into Galleon Shipping Corporation in

lieu of its previously approved subscription to Philippine National Lines. In
addition, NDC is to provide additional equity to Galleon as may be required.
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
3. DBP to advance for a period of three years from date hereof both the principal
and the interest on Galleon's obligations falling due and to convert such
advances into 12% preferred shares in Galleon Shipping Corporation.
4. DBP and NDC to negotiate a restructuring of loans extended by foreign

creditors of Galleon.
5. MARINA to provide assistance to Galleon by mandating a rational liner

shipping schedule considering existing freight volume and to immediately
negotiate a bilateral agreement with the United States in accordance with
UNCTAD resolutions.
These instructions are to take effect immediately.[19]
On August 10, 1981,[20] pursuant to Letter of Instructions No. 1155, Galleon's stockholders,
represented by Cuenca, and NDC, through its then Chairman of the Board of Directors, Roberto
V. Ongpin (Ongpin) entered into a Memorandum of Agreement,[21] where NDC and Galleon
undertook to prepare and sign a share purchase agreement covering 100% of Galleon's equity
for P46,740,755.00.[22] The purchase price was to be paid after five years from the execution of
the share purchase agreement.[23] The share purchase agreement also provided for the release of
Sta. Ines, Cuenca, Tinio and Construction Development Corporation of the Philippines from the
personal counter-guarantees they issued in DBP's favor under the Deed of Undertaking.[24]
The Memorandum of Agreement reads:
KNOW ALL MEN BY THESE PRESENTS:
This Memorandum of Agreement made and entered into this day of August, 1981, at
Makati, Metro Manila, Philippines, by and between the stockholders of Galleon
Shipping Corporation listed in Annex A hereof, represented herein by their duly
authorized attorney-in-fact, Mr. Rodolfo M. Cuenca (hereinafter called "Sellers") and
National Development Company, represented herein by its Chairman of the Board,
Hon. Minister Roberto V. Ongpin (hereinafter called "Buyer").
WITNESSETH: That —
WHEREAS, Sellers and Buyer desire to implement immediately Letter of

Instructions No. 1155, dated July 21, 1981, which directs that Buyer acquire 100% of
the shareholdings of Galleon Shipping Corporation ("GSC") from Sellers who are
the present owners.
WHEREAS, Sellers have consented to allow Buyer to assume actual control over the
management and operations of GSC prior to the execution of a formal share purchase
agreement and the transfer of all the shareholdings of Sellers to Buyer.
NOW, THEREFORE, the parties agree as follows:
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
1. Within seven (7) days after the signing hereof, Sellers shall take all steps
necessary to cause five (5) persons designated by Buyer to be elected directors of
GSC, it being understood that Sellers shall retain the remaining two (2) seats in the
GSC board subject to the condition hereafter stated in clause 7(b).
2. The new board to be created pursuant to clause 1 above shall elect Antonio L.
Carpio as Chairman and Chief Executive Officer and Rodolfo M. Cuenca as
President. All other officers will be nominated and appointed by Buyer.
3. As soon as possible, but not more than 60 days after the signing hereof, the parties
shall endeavor to prepare and sign a share purchase agreement covering 100% of the
shareholdings of Sellers in GSC to be transferred to Buyer, i.e. 10,000,000 fully paid
common shares of the par value of P1.00 per share and subscription of an additional
100,000,000 common shares of the par value of P1.00 per share of which
P36,740,755.00 has been paid, but not yet issued.
4. Sellers hereby warrant that P46,740,755[.00] had been actually paid to Galleon
Shipping Corporation, which amount represents payment of Sellers for 46,740,755
common shares of said Corporation. This warranty shall be verified by Buyer, the
results of which will determine the final purchase price to be paid to Sellers. The
purchase price directed by LOI 1155 to be paid to Sellers shall be paid after five (5)
years from date of the share purchase agreement with no interest cost to buyer.
5. As security for the payment of the aforementioned purchase price, Buyer shall
issue to each of the GSC stockholders listed in Annex A a negotiable promissory note
in the amount corresponding to the respective paid-up capital in GSC of each of such
stockholders and with maturity on the date of the fifth annual anniversary of the
share purchase agreement.
6. Notwithstanding the provisions of clauses 4 and 5 above, upon the signing of the
share purchase agreement, it is understood that Sellers shall deliver to Buyer all the
stock certificates covering 10,000,000 common shares of GSC, and duly and validly
endorsed for transfer, free from any and all Hens and encumbrances whatsoever. It is
likewise understood that Buyer shall at that time acquire all the subscription rights to
100,000,000 common shares of which P36,740,755.00 has been paid by Sellers, and
shall assume the obligation to pay the unpaid portion of such subscription.
7. The stock purchase agreement to be prepared and signed by the parties within
sixty (60) days from date hereof shall contain, among other things:
(a) standard warranties of seller including, but not limited to, warranties
pertaining to the accuracy of financial and other statements of GSC;
disclosure of liabilities; payment of all taxes, duties, licenses and
fees; non-encumbrance of corporate assets; valid contracts with third
parties, etc. including an indemnity clause covering any breach
thereof.
(b) provisions that Buyer shall retain 2 representatives of Sellers in the

board of GSC only for as long as Sellers have not been paid, or have
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
not negotiated or discounted any of the promissory notes referred to

in clause 5 above.
(c) provisions whereby Construction Development Corporation of the

Philippines, Sta. Ines Melale Forest Products Corporation, Mr.
Rodolfo M. Cuenca and Mr. Manuel I. Tinio shall be released from
counter-guarantees they have issued in favor of DBP and other
financial institutions in connection with GSC's various credit
accommodations.
(d) provisions for arbitration as a means of settling disputes and

differences of opinion regarding the stock purchase agreement.
8. Sellers hereby make a special warranty that:
(a) any and all liabilities and obligations as disclosed in the financial
statements of Galleon Shipping Corporation are valid, regular, normal and
incurred in the ordinary course of business of Galleon Shipping
Corporation, and Buyer will verify this warranty and conduct an audit of
Galleon Shipping Corporation as of March 31 and July 31, 1981; liabilities
that do not fall under the above definition are to be for the account of the
Seller; and
(b) from July 31, 1981 to the date of the election of Buyers' representatives to
the Board of GSC, GSC has not and shall not enter into any contract and
has not and shall not incur any liability except what is normal and usual in
the ordinary course of shipping business.
9. Valid and duly authorized liabilities of GSC which are the subject of a
meritorious lawsuit, or which have been arranged and guaranteed by Mr.
Rodolfo M. Cuenca, may be considered by Buyer for priority in the repayment
of accounts, provided that, upon review, the Buyer shall determine these to be
legitimate and were validly incurred in the ordinary course of GSC's principal
business.
IN WITNESS HEREOF, the parties have signed this Memorandum of Agreement

this day of August 1981, in Makati, Metro Manila.
STOCKHOLDERS
OF GALLEON
SHIPPING
CORPORATION
By:
(signed)
RODOLFO M.
CUENCA
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
NATIONAL DEVELOPMENT
COMPANY
By:
(signed)
ROBERTO V.
ONGPIN[25]
Acting as Galleon's guarantor, DBP paid off Galleon's debts to its foreign bank creditor and, on
January 25, 1982, pursuant to the Deed of Undertaking, Galleon executed a mortgage
contract[26] over seven of its vessels in favor of DBP.
NDC took over Galleon's operations "even prior to the signing of a share purchase agreement."
[27] However, despite NDC's takeover, the share purchase agreement was never formally
executed.[28]
On February 10, 1982, or barely seven months from the issuance of Letter of Instructions No.
1155, President Marcos issued Letter of Instructions No. 1195,[29] which reads:
TO : Development Bank of
the Philippines
National Development
Company
RE : Galleon Shipping
Corporation
WHEREAS, NDC has assumed management of Galleon's operations pursuant to LOI

No. 1155;
WHEREAS, the original terms under which Galleon acquired or leased the vessels
were such that Galleon would be unable to pay from its cash flows the resulting debt
service burden;
WHEREAS, in such a situation the financial exposure of the Government will

continue to increase and therefore the appropriate steps must be taken to limit and
protect the Government's exposure;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines,

do hereby direct the following:
1) The DBP and the NDC shall take immediate steps, including
foreclosure of Galleon vessels and other assets, as may be deemed
necessary to limit and protect the Government's exposure;
2) NDC shall discharge such maritime liens as it may deem necessary to

allow the foreclosed vessels to engage in the international shipping
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
business;
3) Any provision of LOI No. 1155 inconsistent with this Letter of

Instructions is hereby rescinded.
These instructions are to take effect immediately.[30]
On April 22, 1985, respondents Sta. Ines, Cuenca, Tinio, Cuenca Investment and Universal
Holdings filed a Complaint with Application for the Issuance of a Temporary Restraining Order
or Writ of Preliminary Injunction.[31] The Complaint was amended several times to implead new
parties and to include new claims/counterclaims.[32]
In their Complaint, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings
alleged that NDC, "without paying a single centavo, took over the complete, total, and absolute
ownership, management, control, and operation of defendant [Galleon] and all its assets, even
prior to the formality of signing a share purchase agreement, which was held in abeyance
because the defendant NDC was verifying and confirming the amounts paid by plaintiffs to
Galleon, and certain liabilities of Galleon to plaintiffs[.]"[33]
Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings also alleged that NDC
tried to delay 'the formal signing of the share purchase agreement in order to interrupt the
running of the 5-year period to pay ... the purchase of the shares in the amount of
P46,740,755[.00] and the execution of the negotiable promissory notes to secure payment[.][34]
As for DBP, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings claimed that
"DBP can no longer go after [them] for any deficiency judgment [since] NDC had been
subrogated [in their place] as borrower[s], hence the Deed of Undertaking between [Sta. Ines,
Cuenca Investment, Universal Holdings, Cuenca, and Tinio and DBP] had been extinguished
and novated[.]"[35]
Meanwhile, on December 8, 1986, Proclamation No. 50 created the Asset Privatization Trust.[36]
The Asset Privatization Trust was tasked to "take title to and possession of, conserve,
provisionally manage and dispose of, assets which have been identified for privatization or
disposition and transferred to the TI-List for [that] purpose."[37]
Under Administrative Order No. 14 issued by then President Corazon C. Aquino, certain assets
of DBP, which included Galleon's loan accounts, "were identified for transfer to the National
Government."[38]
On February 27, 1987, a Deed of Transfer was executed providing for the transfer of the Galleon
loan account from DBP to the National Government.[39] The Asset Privatization Trust was
"constituted as [the National Government's] trustee over the transferred accounts and assets[.]"
[40]
On September 16, 2003, the Regional Trial Court upheld the validity of Letter of Instructions
No. 1155 and the Memorandum of Agreement executed by NDC and Galleon's stockholders,
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
pursuant to Letter of Instructions No. 1155.[41]
The Regional Trial Court also held that Letter of Instructions No. 1195 did not supersede or
impliedly repeal Letter of Instructions No. 1155, and assuming that it did impliedly repeal Letter
of Instructions No. 1155, it would be void and unconstitutional for violating the non-impairment
clause.[42]
As regards NDC's argument that Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal
Holdings had no basis to compel it to pay Galleon's shares of stocks because no share purchase
agreement was executed, the Regional Trial Court held that the NDC was in estoppel since it
prevented the execution of the share purchase agreement and had admitted to being Galleon's
owner.[43]
The Regional Trial Court also ruled that Sta. Ines, Cuenca, Tinio, Cuenca Investment, and
Universal Holdings' liability to DBP under the Deed of Undertaking had been extinguished due
to novation, with NDC replacing them and PNCC as debtors.[44] The dispositive of the Regional
Trial Court's Decision reads:
WHEREFORE, judgment is hereby rendered (1) ordering defendants National

Development Corporation and National Galleon Shipping Corporation, jointly and
severally, to pay plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M.
Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and Universal Holdings
Corporation, the amounts of P15,150,000.00 and US$2.3 million, representing the
amount of advances made by plaintiffs in behalf of defendant Galleon, plus legal
interest at the rate of 6% per annum from the date of filing of this case on 22 April
1985 up to full payment;
(2) ordering defendants National Development Corporation and National Galleon

Shipping Corporation, jointly and severally, to pay plaintiffs Sta. Ines Melale Forest
Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment
Corporation and Universal Holdings Corporation, the amount of P46,740,755.00,
representing the price of the shares of stock of plaintiffs and defendant PNCC in
defendant Galleon, plus legal interest at the rate of 6% per annum from the date of
filing of this case on 22 April 1985 up to full payment;

Corporation and Universal Holdings Corporation, attorney's fees equivalent to 10%
of the amount due; and costs of suit; and
(4) ordering defendants National Development Corporation, Development Bank of

the Philippines and National Galleon Shipping Corporation, jointly and severally, to
pay each plaintiff and defendant Philippine National Construction Corporation,
P10,000.00 as moral damages; and P10,000.00 as exemplary damages.
SO ORDERED.[45]
3/28/24, 4:14 PM [ G.R. No. 193068. February 01, 2017 ]
On February 23, 2003, the Regional Trial Court issued an Order[46] partially reconsidering and
modifying the September 16, 2003 Decision by categorically declaring Sta. Ines, Cuenca, Tinio,
Cuenca Investment, and Universal Holdings free from liability under the mortgage contract with
DBP and the deficiency claim of DBP.[47] The Regional Trial Court also deleted the award of
US$2.3 million to Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings since
they failed to Include the same in their fourth amended complaint.[48] The dispositive portion of
the Regional Trial Court Order, as amended, reads:
WHEREFORE, judgment is hereby rendered (1) ordering defendants National

Development Corporation and National Galleon Shipping Corporation, jointly and
severally, to pay plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M.
Corporation, the amount of P15,150,000.00 representing the amount of advances
made by plaintiffs in behalf of defendant NGSC, plus legal interest at the rate of 6%
per annum from the date of filing of this case on 22 April 1985 up to full payment;

Corporation and Universal Holdings Corporation, the amount of P46,740,755.00,
representing the price of the shares of stock of plaintiffs and defendant PNCC in
defendant NGSC, plus legal interest at the rate of 6% per annum from the date of
filing of this case on 22 April 1985 up to full payment;

Corporation and Universal Holdings Corporation, attorney's fees equivalent to 10%
of the amount due; and costs of suit;

Shipping Corporation, jointly and severally, to pay to each plaintiff and defendant
Philippine National Construction Corporation, P10,000.00 as moral damages; and
P10,000.00 as exemplary damages; and
(5) declaring plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M.
Corporation and defendant Philippine National Construction Corporation to be no
longer liable to defendants National Development Corporation, Development Bank
of the Philippines and Asset Privatization Trust under the deed of undertaking,
pledge, mortgages, and other accessory contracts between the parties; and
consequently, permanently enjoining defendant DBP or APT from filing a deficiency
claim against plaintiffs and defendant PNCC.
SO ORDERED.[49]
On March 9, 2004 and March 16, 2004, DBP and NDC filed their respective notices of appeal to
the Court of Appeals.[50]
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In its assailed Decision dated March 24, 2010, the Court of Appeals upheld the Regional Trial
Court's findings that the Memorandum of Agreement between NDC and Cuenca (representing
Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings) was a perfected contract,
which bound the parties,[51] thus:
Although the Supreme Court ruled in the Poliand case that LOI No. 1155 is a mere
administrative issuance and, as such, cannot be a valid source of obligation, the
defendant-appellant NDC cannot escape its liabilities to the plaintiffs-appellees
considering that the Memorandum of Agreement that it executed with the plaintiffs-
appellees created certain rights and obligations between the parties which may be
enforced by the parties against each other. The situation in the Poliand case is
different because Poliand was not a party to the Memorandum of Agreement.[52]
The Court of Appeals ruled that NDC is estopped from claiming that there was no agreement
between it and Cuenca since the agreement had already been partially executed after NDC took
over the control and management of Galleon.[53]
The Court of Appeals also rejected NDC's argument that it should not be held liable for the
payment of Galleon's shares.[54] The Court of Appeals held that NDC "voluntarily prevented the
execution of a share purchase agreement when it reneged on its various obligations under the
Memorandum of Agreement."[55]
The Court of Appeals likewise affirmed the Regional Trial Court's ruling that novation took
place when NDC agreed to be substituted in place of Sta. Ines, Cuenca, Tinio, Cuenca
Investment, and Universal Holdings in the counter-guarantees they issued in favor of DBP.[56]
The Court of Appeals ruled that DBP was privy to the Memorandum of Agreement between
NDC and Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings, since Ongpin
was concurrently Governor of DBP and chairman of the NDC Board at the time the
Memorandum of Agreement was signed.[57]
The Court of Appeals further held that DBF was no longer the real party-in-interest as the loan
accounts of Galleon were transferred to the Asset Privatization Trust.[58]
The fallo of the Court of Appeals Decision reads:
WHEREFORE, in view of the foregoing premises, the assailed Decision, as well as,
assailed Order, appealed from is hereby AFFIRMED with MODIFICATIONS
such that, as modified, the dispositive portion thereof shall now read as follows:
"WHEREFORE, judgment is hereby rendered (1) ordering defendants

National Development Corporation and National Galleon Shipping
Corporation jointly and severally, to pay plaintiffs Sta. Ines Melale Forest
Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca
Investment Corporation and Universal Holdings Corporation, the amount
of P15,150,000.00 representing the amount of advances made by
plaintiffs in behalf of defendant NGSC, plus interest at the rate of twelve
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percent (12%) per annum from the date of filing of this case on 22 April
1985 until instant Decision becomes final and executory, thereafter the
said amount shall earn an interest at the rate of twelve (12%) percent per
annum from such finality until its satisfaction;
(2) ordering the defendants National Development Corporation and

National Galleon Shipping [C]orporation, jointly and severally, to pay
plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M.
Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and Universal
Holdings Corporation, the amount of P46,740,755.00, representing the
price of the shares of stock of plaintiffs and defendant PNCC in defendant
NGSC, plus interest at the rate of twelve percent (12%) per annum from
the date of filing of this case on 22 April 1985 until instant Decision
becomes final and executory, thereafter the said amount shall earn an
interest at the rate of twelve percent (12%) per annum from such finality
until its satisfaction;

National Galleon Shipping Corporation, jointly and severally, to pay
plaintiffs Sta. Ines Melale Forest Products Corporation, Rodolfo M.
Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and Universal
Holdings Corporation, attorney's fees equivalent to 10% of the amount
due; and costs of suit;

National Galleon Shipping Corporation, jointly and severally, to pay to
each plaintiffs and defendant Philippine National Construction
Corporation, P10,000.00 as moral damages; and P10,000.00 as exemplary
damages; and
(5) declaring plaintiffs Sta. Ines Melale Forest Products Corporation,

Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca Investment Corporation and
Universal Holdings Corporation and defendant Philippine National
Construction Corporation to be no longer liable to defendants National
Development Corporation, Development Bank of the Philippines and
Asset Privatization Trust under the deed of undertaking, pledge,
mortgages, and other accessory contracts between the parties; and
consequently, permanently enjoining defendant DBP or APT from filing a
deficiency claim against plaintiffs and defendant PNCC.
SO ORDERED.[59] (Emphasis and underscoring in the original)
On September 16, 2010, NDC appealed the Court of Appeals Decision to this Court. In its
Petition for Review,[60] NDC maintains that the Memorandum of Agreement does not bind it,
since Ongpin was not equipped with authority from the NDC Board to sign the Memorandum of
Agreement on NDC's behalf.[61] NDC also denies that it took over the control and management
of Galleon or that it "prevented the execution of the [s]hare [p]urchase [a]greement[.]"[62]
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NDC asserts that even assuming that the Memorandum of Agreement was binding, what was
agreed upon was that the parties shall execute a share purchase agreement within a certain
period of time.[63] The Memorandum of Agreement was only a preliminary agreement between
Cuenca and Ongpin for NDC's "intended purchase of Galleon's equity[,] pursuant to [Letter of
Instructions No.] 1155."[64] The Memorandum of Agreement cannot "be considered as the
executing agreement or document for the purchase of the shares."[65]
On September 13, 2010, DBP filed its Petition for Review[66] before this Court. DBP insisted
that novation did not take place because: (a) there was no second binding contract designed to
replace the Deed of Undertaking; (b) it did not give its consent to the substitution of debtors
under the Memorandum of Agreement; and (c) there was no agreement that unequivocally
declared novation by substitution of debtors.[67]
The issues raised for the resolution of this Court are as follows:
a) Whether the Memorandum of Agreement obligates NDC to purchase Galleon's

shares of stocks and pay the advances made by respondents in Galleon's favor;
[68]
b) Whether the Memorandum of Agreement novated the Deed of Undertaking

executed between DBP and respondents;[69] and
c) Whether the computation of legal interest should be at the rate of 6% per annum,
instead of the 12% per annum pegged by the Court of Appeals.[70]
When 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."[71]
Bautista v. Court of Appeals[72] instructs that where the language of a contract is plain and
unambiguous, the contract must be taken at its face value, thus:
The rule is that where the language of a contract is plain and unambiguous, its
meaning should be determined without reference to extrinsic facts or aids. The
intention of the parties must be gathered from that language, and from that language
alone. Stated differently, where the language of a written contract is clear and
unambiguous, the contract must be taken to mean that which, on its face, it purports
to mean, unless some good reason can be assigned to show that the words used
should be understood in a different sense. Courts cannot make for the parties better
or more equitable agreements than they themselves have been satisfied to make, or
rewrite contracts because they operate harshly or inequitably as to one of the parties,
or alter them for the benefit of one party and to the detriment of the other, or by
construction, relieve one of the parties from terms which he voluntarily consented to,
or impose on him those which he did not.[73]
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It is not disputed that NDC and respondents Sta. Ines, Cuenca, Tinio, Cuenca Investment, and
Universal Holdings executed a Memorandum of Agreement pursuant to the directives of Letter
of Instructions No. 1155.
Under the Memorandum of Agreement, NDC, as the Buyer, undertook to:
a) implement Letter of Instructions No. 1155 and acquire 100% of Galleon's

shareholdings;
b) assume actual control over Galleon's management and operations prior to the
execution of a formal share purchase agreement and prior to the transfer to NDC
of Galleon's shareholdings;
c) designate five persons to sit in Galleon's Board of Directors;
d) pay Galleon's stockholders the share purchase price after five years from the
date of the share purchase agreement;
e) issue each Galleon stockholder a negotiable promissory note with maturity on

the date of the fifth annual anniversary of the share purchase agreement;
f) verify Galleon's special warranty on its liabilities and obligations by conducting

an audit; and
g) consider for priority in the repayment of accounts, Galleon's valid and duly
authorized liabilities which are the subject of meritorious lawsuit or which have
been arranged and guaranteed by Cuenca.
While respondents, Galleon's stockholders, as the Sellers, undertook to:
a) implement Letter of Instructions No. 1155 by allowing NDC to purchase 100%

of their shareholdings;
b) consent for NDC to assume actual control over Galleon's management and
operations prior to the execution of a formal share purchase agreement and prior
to the transfer to NDC of Galleon's shareholdings;
c) elect NDC's designated five persons to Galleon's Board of Directors;
d) warrant that P46,740,755.00 had been actually paid to Galleon, representing

payment of 46,740,755 common shares to Galleon;
e) deliver to NDC, upon signing of the share purchase agreement, 10,000,000

common shares of Galleon, duly and validly endorsed for transfer, free from any
and all liens and encumbrances whatsoever; and
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f) make special warranties under clause 8.
As parties to the Memorandum of Agreement, NDC and respondents jointly undertook to:
a) immediately implement Letter of Instructions No. 1155;
b) endeavor to prepare and sign a share purchase agreement covering 100% of

Galleon's shareholdings not more than 60 days after the signing of the
Memorandum of Agreement; and
c) incorporate the conditions listed down in clause 7 in the share purchase

agreement.
The law is categorical that "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."[74]
Fernandez v. Court of Appeals[75] further emphasizes that "[t]he important task in contract
interpretation is always the ascertainment of the intention of the contracting parties and that task
is of course to be discharged by looking to the words they used to project that intention in their
contract, all the words not just a particular word or two, and words in context not words standing
alone."[76]
The Court of Appeals found that the Memorandum of Agreement between NDC and Galleon
was a perfected contract for NDC to purchase 100% of Galleon's shareholdings. However, a
careful reading of the Memorandum of Agreement shows that what the parties agreed to was the
execution of a share purchase agreement to effect the transfer of 100% of Galleon's
shareholdings to NDC, as seen in clause 3:
The second paragraph of clause 4 likewise makes the execution of a share purchase agreement a
condition before the purchase price can be paid to respondents, since the payment of the
purchase price becomes due only after five years from the date of execution of the share
purchase agreement:
4. Sellers hereby warrant that P46,740,755[.00] had been actually paid to Galleon
Shipping Corporation, which amount represents payment of Sellers for 46,740,755
common shares of said Corporation. This warranty shall be verified by Buyer, the
results of which will determine the final purchase price to be paid to Sellers.
The purchase price directed by LOI 1155 to be paid to Sellers shall be paid after five
(5) years from date of the share purchase agreement with no interest cost to buyer.
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(Emphasis supplied)
NDC asserts that the Memorandum of Agreement was only a preliminary agreement between
Galleon, represented by Cuenca, and NDC, represented by Ongpin, for the intended purchase of
Galleon's equity pursuant to Letter of Instructions No. 1155,[77] thus:
It merely prescribed the manner, terms and conditions of said purchase. In fact, the
[Memorandum of Agreement] provided for a time frame for the execution of the
share purchase agreement which is within sixty (60) days from the signing thereof.
By no means can it be considered as the executing agreement or document for the
purchase of the shares.[78]
NDC's assertion that the Memorandum of Agreement was merely a preliminary agreement that
was separate and distinct from the share purchase agreement, finds support in clause 7 of the
Memorandum of Agreement, which lists down the terms and conditions to be included in the
share purchase agreement as follows:
7. The stock purchase agreement to be prepared and signed by the parties within
sixty (60) days from date hereof shall contain, among other things:
(a) standard warranties of seller including, but not limited to, warranties
pertaining to the accuracy of financial and other statements of GSC;
disclosure of liabilities; payment of all taxes, duties, licenses and
fees; non-encumbrance of corporate assets; valid contracts with third
parties, etc. including an indemnity clause covering any breach
thereof.
(b) provisions that Buyer shall retain 2 representatives of Sellers in the

board of GSC only for as long as Sellers have not been paid, or have
not negotiated or discounted any of the promissory notes referred to
in clause 5 above.
(c) provisions whereby Construction Development Corporation of the

Philippines, Sta. Ines Melale Forest Products Corporation, Mr.
Rodolfo M. Cuenca and Mr. Manuel I. Tinio shall be released from
counter-guarantees they have issued in favor of DBP and other
financial institutions in connection with GSC's various credit
accommodations.
(d) provisions for arbitration as a means of settling disputes and

differences of opinion regarding the stock purchase agreement.
Under clause 7 of the Memorandum of Agreement, NDC and respondents agreed to include in
the still-to-be-executed share purchase agreement, provisions on: (a) standard warranties,
including warranties on the accuracy of Galleon's financials, disclosure of liabilities, etc; (b) the
retention of Galleon's representatives in Galleon's board of directors prior to the payment of the
share purchase price; (c) the release of respondents from the counter-guarantees they made in
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favor of DBP and other financial institutions in connection with Galleon's various credit
accommodations; and (d) arbitration as a means of settling disputes and differences of opinion
regarding the stock purchase agreement.
Taking the provisions of the Memorandum of Agreement as a whole, it is clear that while there
was an intention to follow the directives of Letter of Instructions No. 1155, the transfer of shares
from respondents to NDC was to be effected only with the execution of the share purchase
agreement, the terms and conditions of which were laid out in the Memorandum of Agreement.
NDC and the respondents undertook to prepare and sign a share purchase agreement over 100%
of respondents' shares in Galleon not more than sixty days after the signing of the Memorandum
of Agreement:
The execution of a share purchase agreement was a condition precedent to the transfer of
Galleon's shares to NDC. However, the Court of Appeals found that the NDC prevented its
execution by deliberately delaying its review of Galleon's financial accounts:
From the foregoing, it is evident that the period for the payment of the purchase price
is entirely dependent on the execution of a share purchase agreement by the parties.
The evidence on record, however, show that the defendant-appellant NDC itself
voluntarily prevented the execution of a share purchase agreement when it reneged
on its various obligations under the Memorandum of Agreement. The evidence on
record show that the share purchase agreement was not formally executed because
then Minister Roberto Ongpin claimed that the accounts of defendant Galleon had to
be reviewed and cleared up before the share purchase agreement is signed. While
defendant Galleon made its financial records available to defendant-appellant NDC
for their review, the latter never made any serious effort to review the financial
accounts of the defendant Galleon, hence, effectively preventing the execution of the
share purchase agreement. Consequently, the condition for the running of the period
for the payment of the purchase price of the shares of stocks in defendant Galleon by
the defendant-appellant NDC, i.e., the execution of the Share Purchase Agreement,
was deemed fulfilled as it was the defendant-appellant NDC itself which prevented it
from happening. Under Article 1186 of the Civil Code, a "condition shall be deemed
fulfilled when the obligor voluntarily prevents its fulfilment." This applies in the
instant case.[79] (Emphasis supplied)
The Regional Trial Court likewise found that respondent Cuenca, as Galleon's representative,
initiated moves for the preparation and execution of the share purchase agreement and NDC's
takeover of Galleon.[80] Nonetheless, despite Cuenca's efforts, the share purchase agreement
was never formally executed:
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Assuming that the share purchase agreement was a condition for the effectivity of the
Memorandum of Agreement (dated 10 August 1981), said condition is deemed
fulfilled by virtue of Art. 1186 of the Civil Code, which provides that "the condition
shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment."
Plaintiff Cuenca, as representative of the former shareholders of defendant Galleon,
in order to clear up the accounts preparatory to the execution of the share purchase
agreement, created a team to prepare a statement of defendant Galleon's outstanding
accounts which statement of account was intended to be included as part of the
annexes of the said share purchase agreement. Another team with representatives
from both parties, that is, the former stockholders of defendant Galleon and
defendant NDC, had to be created for a smoother turnover. However, despite said
efforts done by plaintiff Cuenca the share purchase agreement was not formally
executed.[81] (Emphasis in the original)
NDC denies that it caused the delay in the execution of the share purchase agreement and argues
that it was Cuenca who caused the delay for insisting on the payment first of the advances made
in Galleon's favor before executing the share purchase agreement and relinquishing control over
Galleon.[82]
NDC's bare denials cannot succeed in light of the preponderance of evidence submitted by
respondents.
In his Affidavit[83] dated June 17, 1999, Cuenca narrated the preparations the Galleon
stockholders undertook for the execution of the share purchase agreement with NDC:
168. Q : What happened to the share purchase agreement referred to in the

Memorandum of Agreement dated August 1981 (Exhibit "J")?
A : The share purchase agreement was never drawn up despite persistent

attempts by myself to see it prepared and executed. In fact, we
continually negotiated with NDC and DBP throughout 1982 and 1983
on the matter.
169. Q : Why was it never executed?
A : Minister Ongpin kept claiming that the accounts had to be cleared up

before any formal agreement could be signed.
170. Q : What steps, if any, did the parties take to clear up the accounts
preparatory to the signing of the share purchase agreement?
A : During the transition period, prior to the signing of the share purchase
agreement, I created a team to prepare a statement of Galleon's
outstanding accounts which we intended to include as part of the
annexes of the share purchase agreement. Another team with
representatives from both parties, i.e., the former stockholders of
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Galleon and NDC, had to be created for a smoother turn-over. In short,

we did all that was possible and required of us under the Memorandum
of Agreement. We negotiated with NDC in good faith for years but NDC
kept stonewalling the execution of the share purchase agreement.[84]
(Emphasis supplied)
On April 26, 1982, Antonio L. Carpio, NDC's General Manager,[85] sent Ongpin a
Memorandum,[86] where Carpio acknowledged reviewing Galleon's outstanding accounts
submitted by Cuenca.[87] This supports Cuenca's statement that they submitted a statement of
Galleon's outstanding accounts for NDC's review, as per Ongpin's request, a fact not denied by
NDC.
Upon receiving Galleon's outstanding accounts, NDC and Sta. Ines, Cuenca, Tinio, Cuenca
Investment and Universal Holdings should have initiated the execution of the share purchase
agreement. However, the share purchase agreement was never executed, through no fault of
Galleon's stockholders.
In clause 4 of the Memorandum of Agreement, NDC as the buyer was to verify the warranty of
the Galleon shareholders that P46,740,755.00 was paid for Galleon's 46,740,755 common shares
with par value of P1.00 per share. The results of the verification would have determined the final
purchase price to be paid to the Galleon shareholders. Nonetheless, despite the verification still
to be done, both parties agreed to execute the share purchase agreement as soon as possible but
not more than sixty days from the signing of the Memorandum of Agreement.
We uphold the Court of Appeals' finding that the failure to execute the share purchase agreement
was brought about by NDC's delay in reviewing the financial accounts submitted by Galleon's
stockholders. The Memorandum of Agreement was executed on August 10, 1981, giving the
parties no more than sixty days or up to October 9, 1981, to prepare and sign the share purchase
agreement. However, it was only on April 26, 1982, or more than eight months after the
Memorandum of Agreement was signed, did NDC's General Director submit his
recommendation on Galleon's outstanding account. Even then, there was no clear intention to
execute a share purchase agreement as compliance with the Memorandum of Agreement. Article
1186 of the Civil Code is categorical that a "condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfilment." Considering NDC's delay, the execution of the share
purchase agreement should be considered fulfilled with NDC as the new owner of 100% of
Galleon's shares of stocks.
The due execution of the share purchase agreement is further bolstered by Article 1198(4) of the
Civil Code, which states that the debtor loses the right to make use of the period when a
condition is violated, making the obligation immediately demandable:
Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless he
gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which he has
promised;
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(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the creditor
agreed to the period;
(5) When the debtor attempts to abscond. (Emphasis supplied)
Well-settled is the rule that findings of fact made by a trial court and the Court of Appeals are
accorded the highest degree of respect by this Court, and, absent a clear disregard of the
evidence before it that can otherwise affect the results of the case, those findings should not be
ignored.[88]
II
The Regional Trial Court found that the advances made by respondents in Galleon's behalf
covered legitimate expenses in the ordinary course of business,[89] making NDC liable under
clause 9 of the Memorandum of Agreement, which states:
9. Valid and duly authorized liabilities of GSC which are the subject of a meritorious
lawsuit, or which have been arranged and guaranteed by Mr. Rodolfo M. Cuenca,
may be considered by Buyer for priority in the repayment of accounts, provided that,
upon review, the Buyer shall determine these to be legitimate and were validly
incurred in the ordinary course of GSC's principal business.
NDC's liability for the advances made in Galleon's behalf was upheld by the Court of Appeals,
which held that the advances made were valid and authorized liabilities incurred by Galleon in
the course of its business, thus:
In the instant case, the advances being claimed by [respondents] are in the nature of
guarantee fees in consideration for the personal undertakings of the [respondents] to
secure the potential liabilities of defendant-appellant DBP in favor of defendant
Galleon's foreign creditors, advances to cover payments of interest, security and
management fees arising out of a mortgage contract, charter line payments, bare boat
hire payments, fuel and ship franchise payments, salaries and wages and advertising
expenses[.][90]
Ordinary and necessary business expenses are those that are "directly attributable to, the
development, management, operation and/or conduct of the trade, business or exercise of a
profession[.]"[91]
In Carpio's Memorandum to Ongpin dated April 26, 1982, he recommended that the guarantee
fees being claimed by Galleon's stockholders should not be paid. Carpio also questioned the
P1,400,000.00 interest being charged by Sta. Ines from the ]P6,650,000.00 cash advances it
made in Galleon's behalf. Carpio likewise questioned the charge of P600,000.00 being claimed
as Galleon's share for the Construction Development Corporation of the Philippine’s basketball
team with the Philippine Basketball Association.[92]
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We see no reason to disturb the findings of fact made by the trial court and the Court of Appeals
considering that the same are duly supported by substantial evidence.
III
Novation is a mode of extinguishing an obligation by "[c]hanging [its] object or principal

conditions[,] [substituting the person of the debtor [or] [s]ubrogating a third person in the rights
of the creditor."[93] While 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, [it
must be with] the consent of the creditor."[94]
Testate Estate of Mota v. Serra[95] instructs that for novation to have legal effect, the creditor
must expressly consent to the substitution of the new debtor:
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 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 that renuntiatio non præsumitur, recognized by the law in
declaring that a waiver of right may not be performed unless the will to waive is
indisputably shown by him who holds the right.[96] (Emphasis supplied)
The Court of Appeals erred when it ruled that DBP was privy to the Memorandum of Agreement
since Ongpin was concurrently Governor of DBP and chairman of NDC Board of Directors at
the time the Memorandum of Agreement was signed.[97]
The general rule is that, "[i]n the absence of an authority from the board of directors, no person,
not even the officers of the corporation, can validly bind the corporation."[98] A corporation is a
juridical person, separate and distinct from its stockholders and members, having "powers,
attributes and properties expressly authorized by law or incident to its existence."[99]
Section 23[100] of the Corporation Code provides that "the corporate powers of all corporations .
. . shall be exercised, all business conducted and all property of such corporations [shall] be
controlled and held by the board of directors[.]"
People's Aircargo and Warehousing Co. Inc. v. Court of Appeals[101] explains that under Section
23 of the Corporation Code, the power and responsibility to bind a corporation can be delegated
to its officers, committees, or agents. Such delegated authority is derived from law, corporate
bylaws, or authorization from the board:
Under this provision, the power and the responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged in the
board, subject to the articles of incorporation, bylaws, or relevant provisions of law.
However, just as a natural person may authorize another to do certain acts for and on
his behalf, the board of directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of such individuals to bind
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the corporation is generally derived from law, corporate bylaws or authorization

from the board, either expressly or impliedly by habit, custom or acquiescence in the
general course of business, viz.:
"A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that [the] authority to do so
has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of
the particular business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused persons dealing with the officer or
agent to believe that it has conferred."[102] (Emphasis supplied)
Aside from Ongpin being the concurrent head of DBP and NDC at the time the Memorandum of
Agreement was executed, there was no proof presented that Ongpin was duly authorized by the
DBP to give consent to the substitution by NDC as a co-guarantor of Galleon's debts. Ongpin is
not DBP, therefore, it is wrong to assume that DBP impliedly gave its consent to the substitution
simply by virtue of the personality of its Governor.
Novation is never presumed. The animus novandi, whether partial or total, "must appear by
express agreement of the parties, or by their acts which are too clear and unequivocal to be
mistaken."[103]
There was no such animus novandi in the case at bar between DBP and respondents, thus,
respondents have not been discharged as Galleon's co-guarantors under the Deed of Undertaking
and they remain liable to DBP.
IV
On the issue of attorney's fees and moral and exemplary damages awarded to Sta. Ines, Cuenca,
Tinio, Cuenca Investment, and Universal Holdings, the Court of Appeals upheld the findings of
the Regional Trial Court for being just, reasonable, and supported by the evidence on record.
[104]
We see no reason to disturb the findings of the lower courts.
However, on the issue of compensatory interest as damages, where the Regional Trial Court
imposed an interest rate of six percent (6%) per annum on the advances made and the payment
due for the shares of stock,[105] the Court of Appeals modified the Regional Trial Court's ruling
insofar as the interest rate to be imposed was concerned.[106] The Court of Appeals ruled that the
advances made by Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings and the
payment due them for the Galleon shares of stocks were loans or forbearances of money that
should earn interest of 12% from the date the case was filed.[107] Furthermore, the Court of
Appeals held that these amounts should likewise earn an additional 12% interest per annum
from finality until its satisfaction.[108]
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Estores v. Spouses Supangan[109] defined forbearance as an arrangement other than a loan where
a person agrees to the temporary use of his money, goods, or credits subject to the fulfilment of
certain conditions.[110]
In this case, Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings advanced
money in Galleon's favor and agreed to turn over management and control of Galleon to NDC
even before receiving payment for their shares of stocks. They were deprived of the use of their
money in both cases for the periods pending fulfillment of the agreed conditions. When those
conditions were not met, they became entitled not only to the return of their advances and
payment of their shares of stocks, but also to the compensation for the use of their money and
property. The unwarranted withholding of the money, which rightfully pertains to Sta. Ines,
Cuenca, Tinio, Cuenca Investment, and Universal Holdings, amounts to forbearance of money.
Sunga-Chan v. Court of Appeals,[111] citing Eastern Shipping Lines, Inc. v. Court of Appeals,
[112] reiterated the rule on application of interest:
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if
proper, and the applicable rate, as follows: The 12% per annum rate under CB
Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits,
as well as to judgments involving such loan or forbearance of money, goods, or
credit, while the 6% per annum under Art. 2209 of the Civil Code applies "when the
transaction involves the payment of indemnities in the concept of damage arising
from the breach or a delay in the performance of obligations in general," with the
application of both rates reckoned "from the time the complaint was filed until the
[adjudged] amount is fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to the condition
"that the courts are vested with discretion, depending on the equities of each case, on
the award of interest."
Otherwise formulated, the norm to be followed in the future on the rates and
application thereof is:
I. When an obligation, regardless of its source, is breached, the contravenor can

be held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages.
1. When the obligation breached 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.
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...
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.[113] (Emphasis supplied, citations
omitted)
On May 16, 2013, the Monetary Board of the Bangko Sentral ng Pilipinas issued Resolution No.
796, which revised the interest rate to be imposed for the loan or forbearance of any money,
goods, or credits. This was implemented by Bangko Sentral ng Pilipinas Circular No. 799,[114]
Series of 2013, which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the
following revisions governing the rate of interest in the absence of stipulation in loan
contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Nacar v. Gallery Frames, et al.[115] then modified the guidelines laid down in Eastern Shipping
Lines to embody Bangko Sentral ng Pilipinas Circular No. 799, thus:

The provisions under Title XVIII on "Damages" of the Civil Code govern in
1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
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2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall
be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
the rate of interest fixed therein.[116]
Applying these guidelines, the Court of Appeals' ruling must be modified to reflect the ruling in
Nacar. The award of the advances made by Sta. Ines, Cuenca, Tinio, Cuenca Investment, and
Universal Holdings in Galleon's favor and payment for their shares of stocks in Galleon shall
earn an interest rate of 12% per annum from the date of filing of this case on April 22, 1985[117]
until June 30, 2013. After June 30, 2013, these amounts shall earn interest at six percent (6%)
per annum until the Decision becomes final and executory. An interest of six percent (6%) per
annum shall be imposed on such amounts from the finality of the Decision until its satisfaction.
Finally, DBP's claims for damages are denied since it failed to support its claims of malicious
prosecution and a deliberate act of Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal
Holdings to cause loss or injury to DBP.
WHEREFORE, the March 24, 2010 Decision and July 21, 2010 Resolution of the Court of
Appeals in CA-G.R. CV No. 85385 are AFFIRMED with the following MODIFICATIONS:
(1) Sta. Ines Melale Forest Products Corporation, Rodolfo M. Cuenca, Manuel I. Tinio, Cuenca
Investment Corporation, Universal Holdings Corporation, and the Philippine National
Construction Corporation are declared LIABLE to the National Development Corporation, the
Development Bank of the Philippines, and the Asset Privatization Trust under the deed of
undertaking, pledge, mortgages, and other accessory contracts among the parties; and
(2) The award of the advances made by Sta. Ines Melale Forest Products Corporation, Rodolfo
M. Cuenca, Manuel L. Tinio, Cuenca Investment Corporation, and Universal Holdings
Corporation in Galleon's favour, as well as the award of the payment for their shares of stocks in
Galleon, shall earn an interest rate of 12% per annum from the date of the filing of this case on
3/28/24, 4:16 PM [ G.R. No. 186196. August 15, 2018 ]
838 Phil. 688; 115 OG No. 19, 4775 (May 13, 2019) ← click for PDF copy
SECOND DIVISION
[ G.R. No. 186196. August 15, 2018 ]
BENEDICTO V. YUJUICO[*], PETITIONER, V. FAR EAST BANK AND

TRUST COMPANY (NOW BANK OF THE PHILIPPINE ISLANDS),
SUBSTITUTED BY PHILIPPINE INVESTMENT ONE (SPV-AMC), INC.
[**], RESPONDENT.
RESOLUTION
CAGUIOA, J:
This is a Petition for Review on Certiorari[1] (Petition) under Rule 45 of the Rules of Court
assailing the Decision[2] of the Court of Appeals[3] (CA) dated January 23, 2009 in CA-G.R. CV
No. 87836. The CA Decision partially granted the appeal and affirmed with modification the
Decision[4] dated October 6, 2004 of the Regional Trial Court, Branch 146, Makati City (RTC)
in Civil Case No. 97-2522.
Facts and Antecedent Proceedings
The CA Decision narrates the following antecedent facts of the case:
On May 14, 1993, appellant then Far East Bank and Trust Company (appellant bank,
for brevity) approved the renewal of appellee GTI Sportswear Corporation's
Omnibus Credit Line (OCL) with a total amount of P35,000,000.00. The credit line
was available in the form of letters of credit, trust receipts, margin loan, export
packing credit line, bills purchase line and export bills purchase line. This was
secured by a Comprehensive Surety Agreement executed by appellee Benedicto V.
Yujuico in his personal capacity. He was also the president of appellee GTI.
Sometime in May 1995, negotiations were undertaken to settle appellee GTI's trust
receipt obligation under the OCL. During these negotiations, appellee GTI made
known to appellant bank its request for the conversion of its peso loan to US dollar-
denominated loan. An exchange of communications concerning the conversion
transpired but no definite agreement on the said conversion was put into writing.
On June 26, 1995, appellee Yujuico, in behalf of appellee GTI and in his personal
capacity as surety, and appellant's First Vice President Ricardo G. Lazatin, in behalf
of appellant bank, signed a Loan Restructuring Agreement (LRA), the subject of
which was appellee GTI's outstanding balance on its Omnibus Credit Line in the
amount of P25,208,[874].84[5] as of May 31, 1995. The agreement expressly stated
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that the restructured loan continues to be secured by the Comprehensive Surety

Agreement previously executed by appellee Yujuico in favor of appellant bank.
After the signing of the restructuring agreement, appellee GTI, reiterated its request
for the re-denomination of its loan obligation to US dollars. Appellant bank,
however, denied the request and informed appellees that the conversion was not
deemed workable in view of the following considerations: appellant bank requires
long-term FCDU loans to be fully collateralized and appellee GTI, as borrower, must
have adequate FCDU placements with appellant bank as well as maintain substantial
deposit ADB levels.
In a letter dated September 22, 1997, appellant bank demanded that appellee GTI
update all its unpaid amortizations on the outstanding restructured loan with a
principal balance of P11,376,666.25 not later than September 30, 1997 and to settle
all its other past due obligations to avert any legal action.
On October 29, 1997, appellees filed against appellant bank a Complaint for Specific
Performance with Preliminary Injunction with the Regional Trial Court of Makati
City. Appellees alleged that during the signing of the loan restructuring agreement,
they were assured by the officers of appellant bank, namely: Paul Regondola and
Jacqueline Fernandez, that after a few payments on its obligation, appellee GTI's
peso loan would be converted to US dollars. Also, sometime in October 1996, Paul
Regondola confirmed by phone that the conversion of appellee GTI's loan from peso
to US Dollars had been approved by appellant bank. This prompted appellee GTFs
financial consultant Bermundo to send appellant bank a letter dated October 31, 1996
acknowledging appellant bank's alleged confirmation of the approval of the
conversion of the restructured loan. This letter was not denied by appellant bank until
December 18, 1996 when it informed appellees that the conversion of the
restructured loan to US dollars was not deemed workable because of certain
considerations. These considerations, however, were not conveyed to appellees
beforehand.
Appellees averred further that under the US dollar-denominated loan, appellee GTI
would be paying lower interest and would save the total amount of P2,844,228.00.
Hence, appellees prayed that appellant bank be directed to convert GTI's loan to US
dollars retroactively effective October 1, 1996 and that appellant bank be directed to
pay appellees P2,844,228.00 representing savings that could have accrued in favor of
appellees in terms of the difference in interest payments. They also prayed for
exemplary damages and attorney's fees.
In an Answer dated December 4, 1997, appellant bank denied that it made assurances
to appellees that it would approve the latter's request for conversion of the peso loan
to US dollar. Appellant bank informed appellees that the request for conversion
would be considered depending on appellee's performance on the restructuring
agreement and their compliance with the requisites set by appellant bank. Sometime
in October 1996, Regondola informed appellee GTI's financial consultant, Pablito
Bermundo, that the request was approved in principle, subject to some conditions
which appellant bank imposes before approving similar requests for conversion.
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Appellee GTI, however, was not able to comply with the requirements resulting in
the denial of their request for conversion. Hence, appellant bank prayed that the
complaint be dismissed.
By way of counterclaim, appellant bank prayed that appellees be ordered to jointly

and severally pay their obligations under the loan restructuring agreement amounting
to P15,798,642.39 as well as appellees' other obligations under the Export Packing
Credit Facility in the amount of P2,333,531.11 and Trust Receipt Agreements in the
amount of P1,922,646.60.
In a Decision dated October 6, 2004, the court a quo ruled that appellant bank indeed
agreed to convert to US dollar appellee GTI's peso loan obligation. The conversion
also resulted in the novation of appellee GTI's loan obligation. As a result, appellee
Yujuico was accordingly released from his obligations as surety pursuant to Article
1215 of the New Civil Code in conjunction with paragraph 1 of Article 1291 of the
same Code. In addition, the court a quo dismissed without prejudice appellant bank's
counterclaims for failure to pay the required filing fees. x x x
xxxx
[The dispositive portion of the RTC Decision dated October 6, 2004 states:
PREMISES CONSIDERED, judgment is rendered in favor of the

plaintiffs and against the defendant Bank of the Philippine Island (sic),
directing the latter to acknowledge and confirm its obligation to convert
the restructured Omnibus Credit Line of plaintiff GTI from Philippine
Peso loan account into a US Dollar denominated loan obligation; and
finding the original Omnibus Credit Line entered into by plaintiff GTI
with defendant BPI to have been novated, the Comprehensive Surety
Agreement executed by plaintiff Yujuico covering said loan is deemed
extinguished and the latter is released from his obligation as surety.
The compulsory counterclaims of the defendant which are actually

permissive counterclaims are not admitted and are therefore DISMISSED
without prejudice for failure of the defendant to pay the required filing
fees.
SO ORDERED.[6]]
Appellant bank then filed a Motion for Reconsideration. x x x
[In the Motion for Reconsideration[7] dated November 2, 2004, appellant bank
manifested that:
x x x Anent the first ground, defendant hereby manifests its acceptance of

and willingness to abide by the decision of the [RTC]. As mandated by
the [RTC], defendant BPI acknowledges and confirms its obligation to
convert the restructured Omnibus Line of plaintiff GTI Sportswear from a
peso account into a US Dollar denominated loan obligation. In support
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thereof, defendant attaches herewith and makes an integral part hereof as

Annex "A" the Statement of Account[8] of the plaintiffs under the
restructured Omnibus Line as of October 31, 2004. The Statement of
Account reflects defendant's computation of the outstanding obligation of
the plaintiffs on the basis of a peso-dollar rate of exchange at [$1] =
P26.30, then the prevailing rate[.]
x x x With the submission of the foregoing computation, plaintiffs should

now be directed to pay defendant under the restructured Omnibus Line
the amount of US$1,132,795.31 plus the stipulated interests and penalty
charges thereon from October 31, 20[0]4 until the same is fully paid in
US dollar currency[.][9]
The appellant bank raised as second ground, the correctness of the release of Yujuico
from his obligation as a surety of the loan obtained by appellee GTI and took the
position that there was no novation.[10] As third ground, appellant bank argued that
its permissive counterclaim against plaintiffs should not have been dismissed for
failure to pay the required docket fees.[11]]
The motion for reconsideration was denied in an Order dated March 4, 2005.
Aggrieved, appellant bank filed [an] appeal [before the CA].[12]
In a Decision[13] dated January 23, 2009, the CA partially granted the appeal. The CA no longer
delved on the issue of whether or not the parties perfected a contract on the conversion of the
restructured loan to US dollars in view of appellant bank's acknowledgment and confirmation of
its obligation to convert the restructured loan to US dollars in its Motion for Reconsideration
dated November 2, 2004.[14] The lone issue left for determination as far as the CA was
concerned was whether or not the conversion of the peso-denominated loan is tantamount to
novation warranting the extinguishment of appellee Yujuico's obligations as a surety.[15] On the
said issue, the CA ruled that the Omnibus Credit Line and the Loan Restructuring Agreement
between appellee GTI Sportswear Corporation (GTI) and appellant bank were not novated and
appellee Yujuico remained to be liable as a surety under the Comprehensive Surety Agreement.
[16]
The dispositive portion of the CA Decision states:
WHEREFORE, the instant appeal is hereby PARTIALLY GRANTED. Accordingly,

the Decision dated October 6, 2004 of the Regional Trial Court, Branch 146, Makati
City is AFFIRMED WITH MODIFICATION in that the Omnibus Credit Line and
the Loan Restructuring Agreement between appellee GTI and appellant were not
novated and appellee Yujuico remains to be liable as surety under the Comprehensive
Surety Agreement.
SO ORDERED.[17]
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Hence, the present Rule 45 Petition dated March 12, 2009 filed by petitioner Benedicto V.
Yujuico (Yujuico). GTI, petitioner Yujuico's co-plaintiff before the RTC and co-appellee before
the CA, did not join as co-petitioner in the Petition. Respondent Far East Bank and Trust
Company (now Bank of the Philippine Islands), substituted by Philippine Asset Investment
(SPV-AMC), Inc. (PAI) filed a Comment[18] dated December 7, 2009. Petitioner Yujuico filed a
Reply[19] dated May 20, 2010. Pursuant to the Court's Resolution[20] dated January 15, 2014,
which granted the Motion for Substitution[21] filed by Philippine Investment One (SPV-AMC),
Inc. (PIO) as the assignee of all the rights, title and interest over the Non-Performing Loan of
GTI of the assignor PAI by virtue of the Deed of Assignment[22] dated May 11, 2007 executed
by PAI and PIO[23], PIO (respondent) was allowed to substitute for PAI as new party respondent
in this case.
Issues
Petitioner Yujuico raises the following issues in the Petition:
1. whether the CA has legal basis to resolve and declare that there was no novation between
GTI and respondent;
2. whether the CA has legal basis to resolve and declare that petitioner Yujuico remains liable
as surety of the obligation of GTI; and
3. whether the CA has legal basis to entertain the appeal as respondent had already performed
a partial execution of the Decision of the RTC which prevents and/or precludes respondent
from questioning and/or appealing the judgment/Decision of the RTC.[24]
The Court's Ruling
Petitioner Yujuico fails to convince the Court that the CA erred. His Petition is not meritorious.
The third issue will be resolved first because it directly impacts on the other two issues.
Petitioner Yujuico takes the position that pursuant to the leading case of Verches v. Rios[25]
(Verches), "in x x x converting the restructured Omnibus Credit Line/loan of GTI Sportswear
Corporation from Philippine Peso to United States Dollar denominated [respondent] has clearly
and definitely partially executed the judgment/decision of the Trial Court and/or has voluntarily
acquiesced or ratified partially the execution of the judgment/decision of the Trial Court."[26]
Petitioner Yujuico entirely misses the import of the Court's ruling in Verches, which is
extensively reproduced below:
There is no dispute about any material fact. Plaintiffs complaint is founded upon an
indivisible cause of action to recover the sum of P2,400 arising out of a fraudulent
breach of a contract, upon which the lower court rendered judgment in favor of the
plaintiff for the sum of P1,000, from which the plaintiff appealed assigning the
following errors:
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"The lower court erred in sentencing the defendant to pay the plaintiff only the sum
of P1,000 instead of sentencing her to the payment of the sum of P2,400 with legal
interest thereon."
After his appeal was taken and perfected, the plaintiff filed a motion in this court for
leave to have an execution issued out of the court below on the judgment in his favor
against the defendant for P1,000. That motion was granted by the vacation Justice x
x x and this order of the vacation Justice was approved by the court in banc x x x.
Based upon the order of the vacation Justice x x x, the plaintiff applied to the lower
court and obtained leave to issue an execution on his judgment for P1,000, and that
execution was issued out of the lower court, and eventually the defendant was forced
to, and did, pay the P1,000 to plaintiff, who signed the receipt x x x.
The proof is conclusive that, through an execution issued on his motion, the plaintiff
has obtained satisfaction in full of his judgment for P1,000. xxx
Although the amount involved is small, the question presented is one of first
impression in this court, and is important to the legal profession.
The case of Paine vs. Woolley (80 Ky., 568), is a leading, well written case on the
question presented, the syllabus of which is as follows:
"1. A party who has recovered a judgment upon a claim which is indivisible, and has,
after its rendition, coerced by execution full satisfaction, cannot maintain an appeal
in this court, against the objections of the judgment debtor, upon the ground that he
has not recovered enough.
"2. This rule applies to judgments in equity as well as at law.
"3. Having elected to collect his judgment, appellant ratified it, and should be
estopped from prosecuting the appeal as inconsistent with his collection of the
amount adjudged to him."
And on page 573, the opinion says:
"We may, therefore, conclude with perfect confidence that the general principle is
that a party who has recovered judgment on a claim which cannot be split up and
made the basis of several causes of action, and afterwards coerced full satisfaction by
writ of execution or authority of the court, cannot maintain an appeal from the
judgment against the objections of the judgment debtor.
"Counsel for appellants have cited a number of authorities which, it is contended,

establish a different rule; but after a patient and thorough examination of each case,
we are unable to find that any of them go further than to hold that neither a voluntary
payment by the defendant of the judgment, nor a partial satisfaction thereof under
coercion, will constitute a waiver of the appeal or a release of errors. But the weight
of authority is to the effect that an acceptance of full satisfaction of the judgment
annihilates the right to further prosecute the appeal, while there are cases holding the
contrary view."
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The following authorities are also square in point:
"One who complains of a judgment must be consistent in his conduct with reference
to it. If he recognizes its validity, he will not be heard to say that it is erroneous."
(Babbit vs. Corby, 13 Kan., 612; Merchant's Nat. Bank vs. Quinton, 9 Kan. App.,
882; 57 Pac, 261.)
"A party who is dissatisfied with a decree in his favor has the option to have it
reviewed by proper proceedings, or to enforce it and receive its benefits; but he
cannot pursue both courses, since one is inconsistent with the other." (Harte vs.
Castetter, 38 Neb., 571; 57 N. W., 381.)
"If one desires to appeal from an order made in a litigation in which he is a party, he
should accept no benefit under it, for he cannot do both." (Cogswell vs. Colley, 22
Wis., 381.)
"The right to accept the fruits of a judgment, and the right of appeal therefrom are
not concurrent. On the contrary, they are totally inconsistent. An election to take one
of these courses is, therefore, a renunciation of the other." (Estate of Shaver, 131
Cal., 219.)
"When an appellee has paid, and the appellant has accepted payment of a judgment
from which an appeal has been taken, there is nothing more in controversy, and the
court will not entertain or permit the prosecution of the appeal." (State ex rel. Neal
vs. Kamp, 111 Ind., 56.)
"The right to proceed upon a judgment or decree, and invoke the process of the court,
and thus acquire or otherwise secure and enjoy the fruits of such judgment or decree,
is wholly inconsistent with the right to appeal from it." (Merriam vs. Victory Mining
Co., 37 Or., 321.)
"It is manifestly unjust to permit a partly successful litigant to take all the money the
decree gives him, and then speculate upon the possibilities of getting more by means
of a writ of error." (Holt vs. Rees, 46 Ill., 181.)
"The receipt of money due upon a decree, and the allowance of its satisfaction in
consequence of the payment in full before an appeal, is a waiver of all errors, unless
the money thus received is returned or tendered to the appellee before the proceeding
to assign errors in the appellate court." (Murphy's Heirs vs. Murphy's Adm'r., 45 Ala.,
123.)
The rule is also sustained by the supreme court of Louisiana, where it is held:
"An appellant from a judgment in his favor for a less amount than he claimed, who,
after taking his appeal, causes a fi.fa.[27] to be issued upon the judgment, will be
considered voluntarily to have executed such judgment, and to have abandoned his
appeal." (Campbell vs. Orillion, 3 La. Ann., 115.)
"A party in whose favor a judgment appealed from was rendered, who partially
executes the same by compulsory legal process, must be considered as having
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acquiesced in such judgment, and cannot afterwards, by appeal or answer to his

adversary's appeal, or otherwise, ask that the judgment be amended." (Wiemann's
Succession, 112 La., 293; 36 So., 354.)
"It cannot be controverted, declared the court in De Egana's Succession, supra, that
under the laws and jurisprudence of this state, the party who voluntarily executes,
either partially or in toto, a judgment rendered for or against him, or who voluntarily
acquiesces in or ratifies, either partially or in toto, the execution of that judgment, is
not permitted to appeal from it." De Egana's Succession, 18 La. Ann., 59.)
"To receive the amount of a judgment, in whole or in part, is, in its natural
significance, as well as under the Louisiana jurisprudence, an acquiescence in the
judgment. And to receive a part of a judgment is as significant of an acquiescence of
the judgment as would be the reception of the whole." (Flowers vs. Hughes, 46 La.
Ann., 436; 15 So., 14.)
Owing to the similarity of the jurisprudence of that State with the law of the
Philippine Islands, the Louisiana decisions are important and should have great
weight in this court.
Plaintiff’s cause of action is indivisible.
The plaintiff, having applied to this court for leave to issue an execution out of the
lower court on his judgment for P1,000, and, through coercion, having collected that
judgment and receipted for it in full, ought not to be heard in this Court to say that
the judgment of the lower court was erroneous. It may be, as plaintiff claims, that in
the collection of a judgment for P1,000 on an execution, it never was his purpose or
intent to waive or abandon his appeal from that judgment.
His cause of action being indivisible, and the judgment from which plaintiffs appeal
was taken having been satisfied by an execution issued on his own motion, there is
nothing left from which to appeal. Upon an indivisible cause of action, plaintiff,
through an execution, cannot collect a judgment in his favor and at the same time
prosecutes an appeal from that judgment upon the ground that it was erroneous and
should have been for more money.[28]
To distill the foregoing, the party, who is barred from appealing and claiming that he has not
recovered enough, must have recovered a judgment upon a claim which is indivisible and, after
its rendition, has coerced by execution full or partial satisfaction. Thus, having elected to collect
from the judgment by execution, he has ratified it, either in toto or partially, and should be
estopped from prosecuting an appeal inconsistent with his collection of the amount adjudged to
him.
In fine, the claim must be one which is indivisible and there must be an execution of the
judgment, either partially or fully. Indeed, the claim of respondent against GTI and petitioner
Yujuico is indivisible since it cannot be split up and made the basis for several causes of action.
However, there is yet no execution of the RTC Decision, either fully or partially. Respondent
merely acceded to the directive of the RTC "to acknowledge and confirm its obligation to
convert the restructured Omnibus Credit Line of x x x GTI from Philippine Peso loan account
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into a US Dollar denominated loan obligation."[29] In fact, the RTC, while it recognized that
GTI is indebted to respondent, ruled that "[t]he liquidation of this obligation is however subject
to a condition that the bank [(respondent)] must first comply with its obligation to convert the
Peso loan account into a US Dollar denominated loan and thereafter [compute] the outstanding
obligation of [GTI and petitioner Yujuico] to it."[30] Even in the Motion for Reconsideration[31]
dated November 2, 2004 filed by respondent wherein it manifested its acceptance of and
willingness to abide by the RTC directive, respondent alleged that "[w]ith the submission of the
x x x computation [of the outstanding obligation of GTI and petitioner Yujuico pursuant to the
Statement of Account it attached as Annex 'A' thereof, they] should now be directed to pay
[respondent] under the restructured Omnibus Line the amount of US$1,132,795.31 plus the
stipulated interests and penalty charges thereon from October 31, 20[0]4 until the same is fully
paid in US dollar currency."[32] Thus, GTI or petitioner Yujuico has not been coerced by
execution to satisfy the RTC judgment; and respondent is not precluded to appeal the resolution
of the RTC that there is novation and petitioner Yujuico is released from his obligation as a
surety. Additionally, respondent questioned the release of petitioner Yujuico as surety and the
ruling on the presence of novation in the said Motion for Reconsideration.
Tañada v. Court of Appeals[33] cited by petitioner Yujuico is not persuasive. In that case, the
assailed order of the lower court dated April 8, 1941, which was subsequently opposed by
Narcisa Mendoza (Mendoza), the defendant therein, "had become final and executory, [and] it
could no longer be disturbed, not even by the very court which rendered it" because "Mendoza
did not question the reasonableness of said order before the court, much less did she interpose an
appeal therefrom."[34] The actuations of Mendoza after the issuance of the said order —
surrender to the Register of Deeds the certificates of title covering the lands involved for
annotation of therein petitioners' lien; delivery to the petitioners their one-half share of the
yearly produce from 1941 to 1958 — were tantamount to virtual acquiescence to the assailed
order and she could not subsequently be allowed to repudiate her representations or assume an
inconsistent posture.[35] It is within this context that the principle being raised by petitioner
Yujuico was invoked by the Court.
Regarding the first issue, novation is governed principally by Articles 1291 and 1292 of the
Civil Code, which provide:
ART. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
ART. 1292. In order that an obligation may be extinguished by another which

substitutes the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.
Noted civilist Justice Eduardo P. Caguioa elucidated on the concept of novation as follows:
3/28/24, 4:16 PM [ G.R. No. 186196. August 15, 2018 ]
x x x Novation has been defined as the substitution or alteration of an obligation by a

subsequent one that cancels or modifies the preceding one.[36] Unlike other modes of
extinction of obligations, novation is a juridical act of dual function, in that at the
time it extinguishes an obligation, it creates a new one in lieu of the old.[37] xxx This
is not to say however, that in every case of novation the old obligation is necessarily
extinguished. Our Civil Code now admits of the so-called imperfect or modificatory
novation where the original obligation is not extinguished but modified or changed
in some of the principal conditions of the obligation. Thus, article 1291 provides that
obligations may be modified.[38]
As to its essence, novation may be classified into: (a) objective or real, (b) subjective or
personal, or (c) mixed.[39] Article 1291(1) contemplates an objective or real novation where
there is a change in the cause, object or principal conditions of the obligations while (2) and (3)
of said Article contemplate a passive one where there is a substitution of the person of the debtor
and an active one where there is subrogation of a third person in the rights of the creditor.[40]
Mixed novation, on the other hand, refers to a combination of objective and subjective novation.
[41]
As to its form or constitution, novation may be express, when it is declared in unequivocal terms
that the old obligation is extinguished by a new one which substitutes the same, or implied or
tacit, when the old and the new obligations are incompatible with each other on every point.[42]
As to extent or effect, novation may be total or extinctive[43], when there is an absolute

extinguishment of the old obligation, or partial, when there is merely a modification of the old
obligation.[44]
The Court agrees with the finding of the CA that "[t]he attendant facts do not make out a case of
novation"[45] in the sense of a total or extinctive novation. As explained by the CA:
A perusal of the records reveals that there is no document that states in unequivocal
terms that the agreement to convert the loan from peso to US dollar would abrogate
the loan restructuring agreement or the omnibus credit line. Instead what is readily
apparent from the exchange of communications concerning the request for
conversion is that the parties recognize the subsistence of the loan restructuring
agreement. In fact, in the letter dated September 5, 1995 sent by x x x GTI to
[respondent] reiterating the former's request to re-dominate its loan obligation from
peso to US dollar, x x x GTI even assured [respondent] that the other terms of the
restructuring agreement would be complied with. Verily, where the parties to the new
obligation expressly recognize the continuing existence and validity of the old one,
there can be no novation.[46]
Neither do We see any substantial incompatibility between the obligations of the

parties under the restructuring agreement and the agreement to convert the loan as to
warrant a finding of an implied novation. Implied novation necessitates that the
incompatibility between the old and new obligations be total on every point such that
the old obligation is completely superseded by the new one.[47] This is not the case
3/28/24, 4:16 PM [ G.R. No. 186196. August 15, 2018 ]
here. The only modification that the conversion agreement introduced was that
[GTI's and petitioner Yujuico's] loan obligation would be payable in US dollars
instead of Philippine pesos. Incidentally, the applicable interest rate is lower on
account of the change in currency. These alterations, however, do not suffice to
constitute novation. The well-settled rule is that, with respect to obligations to pay a
sum of money, the obligation is not novated by an instrument that expressly
recognizes the old, changes only the terms of payment, adds other obligations not
incompatible with the old ones, or the new contract merely supplements the old one.
[48] At most, the changes introduced by the conversion of the loan obligation amount
merely to modificatory novation, which results from the alteration of the terms and
conditions of an obligation without altering its essence.[49]
In the 1912 case of Zapanta v. De Rotaeche,[50] the plaintiff therein commenced an action
against Zapanta for the purpose of recovering the sum of 7,179.48 pesos Mexican currency; the
trial court rendered a judgment in favor of the plaintiff therein and against Zapanta for the said
sum of 7,179.48 pesos Mexican currency, which equaled the sum of P6,353.52. Subsequent to
the judgment, the plaintiff therein and Zapanta entered into an agreement or contract whereby
Zapanta acknowledged his indebtedness in the sum of P6,353.52 as declared in the judgment
and as Zapanta was unable to pay said amount in a lump sum, he promised to pay at the end of
each month to the plaintiff therein P150 per month; the sum owed was to bear interest at 3% per
annum; and in case of nonfulfillment of Zapanta's promise, said plaintiff would be at liberty to
enter suit against him. When Zapanta failed to punctually comply with the provisions of the
agreement, the plaintiff therein sued for the issuance of a writ of execution of the judgment.[51]
In resolving the issue of whether the plaintiff therein had lost his right to the writ of the
execution under the said judgment and the remedy was for the said plaintiff to commence an
action against Zapanta upon said agreement, the Court ruled as follows:
x x x The Civil Code[52], in article 1156[53], provides the method by which all civil
obligations may be extinguished. One of the methods recognized by said code for the
extinguishment of obligations is that by novation. (Civil Code, arts. 1156, 1203 to
1213[54].) In order, however, that an obligation shall be extinguished by another
obligation (by novation) which substitutes it, the law requires that the novation or
extinguishment shall be expressly declared or that the old and new obligations shall
be absolutely incompatible. (Civil Code, art. 1204.) In the present case, the contract
referred to does not expressly extinguish the obligations existing in said judgment.
Upon the contrary it expressly recognizes the obligations existing between the parties
in said judgment and expressly provides a method by which the same shall be
extinguished, which method is, as is expressly indicated in said contract, by monthly
payments. The contract, instead of containing provisions "absolutely incompatible"
with the obligations of the judgment, expressly ratifies such obligations and contains
provisions for satisfying them. The said agreement simply gave the plaintiff a
method and more time for the satisfaction of [the] judgment. It did not extinguish the
obligations contained in the judgment, until the terms of said contract had been fully
complied with. Had the plaintiff continued to comply with the conditions of said
contract, he might have successfully invoked its provisions against the issuance of an
execution upon the said judgment. The contract and the punctual compliance with its
terms only delayed the right of the defendant to an execution upon the judgment. The
3/28/24, 4:16 PM [ G.R. No. 186196. August 15, 2018 ]
judgment was not satisfied and the obligations existing thereunder still subsisted
until the terms of the agreement had been fully complied with. The plaintiff was
bound to perform the conditions mentioned in said contract punctually and fully, in
default of which the defendant was remitted to the original rights under his
judgment.[55]
The Court observed in Sandico, Sr. v. Piguing[56] that:
Novation results in two stipulations — one to extinguish an existing obligation, the

other to substitute a new one in its place.[57] Fundamental it is that novation effects a
substitution or modification of an obligation by another or an extinguishment of one
obligation by the creation of another. In the case at hand, we fail to see what new or
modified obligation arose out of the payment by the respondent of the reduced
amount of P4,000 and substituted the monetary liability for P6,000 of the said
respondent under the appellate court's judgment. Additionally, to sustain novation
necessitates that the same be so declared in unequivocal terms — clearly and
unmistakably shown by the express agreement of the parties or by acts of equivalent
import — or that there is complete and substantial incompatibility between the two
obligations.[58]
From the foregoing, it can be gathered that, at best, the agreement to convert the Peso-
denominated restructured loan into a US Dollar-denominated one is an implied or tacit, partial,
modificatory novation. There was merely a change in the method of payment.
As to the second issue, without a total or extinctive novation, the surety agreement subsists.
Aside from the absence of a "perfect" novation, the CA said that "another circumstance that
militates against the release of [petitioner] Yujuico as surety is the fact that he executed a
comprehensive or continuing surety, one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an
indefinite time or until revoked."[59] The CA added:
x x x The comprehensive characteristic of the surety is evident in the Comprehensive

Surety Agreement by which [petitioner] Yujuico guaranteed in joint and several
capacity, the punctual payment at maturity of any and all indebtedness of every kind
which, at the time of execution was or may thereafter become due or owing [to
respondent by the Borrower, GTI]. Indubitably, these provisions are broad enough to
include the loan obligation under the loan restructuring agreement even after its
conversion to US dollar. x x x[60]
The Court fully agrees with the CA. While Article 1215 of the Civil Code provides that
novation, compensation or remission of the debt, made by any of the solidary creditors or with
any of the solidary debtors, shall extinguish the obligation, the novation contemplated therein is
a total or extinctive novation of the old obligation. Also, the Comprehensive Surety Agreement
that petitioner Yujuico executed in favor of respondent is so worded that it covers "any and all
other indebtedness of every kind which is now or may hereafter become due or owing to
[respondent] by the Borrower."[61]
3/28/24, 4:16 PM [ G.R. No. 215691. November 21, 2018 ]
843 Phil. 732; 115 OG No. 41, 11309 (October 14, 2019) ← click for PDF copy
FIRST DIVISION
[ G.R. No. 215691. November 21, 2018 ]
SPOUSES FRANCIS N. CELONES AND FELICISIMA CELONES,
PETITIONERS, VS. METROPOLITAN BANK AND TRUST COMPANY
AND ATTY. CRISOLITO O. DIONIDO, RESPONDENTS.
DECISION
TIJAM, J.:
Before Us is a petition for review on certiorari[1] filed by petitioners Spouses Francis N.

Celones and Felicisima Celones (Spouses Celones), against respondents Metropolitan Bank and
Trust Company (Metrobank) and Atty. Crisolito O. Dionido (Atty. Dionido), assailing the
Decision[2] dated April 14, 2014 and the Resolution[3] dated December 11, 2014 of the Court of
Appeals (CA) in CA-G.R. CV No. 96236, reversing the Order[4] dated September 1, 2010 of the
Regional Trial Court (RTC) of Pasig City, Branch 154, declaring the Memorandum of
Agreement[5] (MOA) without force and effect and declaring that Spouses Celones were the ones
who redeemed the mortgaged properties.
Antecedent Facts
The Spouses Celones together with their company, Processing Partners and Packaging
Corporation (PPPC), obtained various loans from Metrobank and for which they mortgaged
various properties.[6] The total obligation of Spouses Celones with Metrobank was
P64,474,058.73.[7]
The Spouses Celones defaulted in paying their loan, as such, Metrobank foreclosed all the
mortgaged properties. During the foreclosure sale, Metrobank was declared as the winning
bidder. The certificates of sale were issued on July 2007. Prior to the expiration of the one year
redemption period, Metrobank filed petitions for issuance of writs of possession before several
courts to take possession of the foreclosed properties.[8]
Sometime in 2007, the spouses Celones offered to redeem the properties from Metrobank. The
latter issued a Conditional Notice of Approval for Redemption[9] (CNAR) dated December 13,
2007 stating that the offer of Spouses Celones to redeem the property in the amount of P55
Million has been approved to be paid on or before December 20, 2007.[10] Pressed for time,
Spouses Celones sought the help of banking and financing institutions who are willing to extend
them a loan. Finally, they found Atty. Dionido who agreed to loan them the said amount.[11]
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Atty. Dionido then issued two (2) manager's check, one amounting to P35 Million and another
amounting to P20 Million.[12]
In lieu of executing a loan agreement, Spouses Celones, PPPC, Metrobank and Atty. Dionido
executed a MOA, wherein the parties agreed for the subrogation of Atty. Dionido to all the
rights, interests of Metrobank over the loan obligation of Spouses Celones and the foreclosed
properties.[13]
Upon receipt of the two manager's checks, Metrobank issued Payment Slips in favor of Spouses
Celones.[14] It likewise caused the dismissal of the petitions for issuance of writs of possession
on the ground that Spouses Celones had already redeemed the properties.[15]
On the belief that they have redeemed the foreclosed properties, the Spouses Celones demanded
from Metrobank the issuance of a Certificate of Redemption. However, the latter refused to
issue the same on the ground that all its rights and interests over the foreclosed properties had
been transferred to Atty. Dionido, as such, he should be the one to issue the said certificate.[16]
Meanwhile, Atty. Dionido sent several demand letters to Spouses Celones to vacate the
foreclosed properties in view of the expiration of the redemption period without Spouses
Celones redeeming the same.[17]
Aggrieved, Spouses Celones filed before the trial court a case for Declaratory Relief and
Injunction to compel Metrobank to issue the certificates of redemption and to deliver to them the
certificates of title over the foreclosed properties.[18]
On September 1, 2010, the RTC issued an Order[19] in favor of Spouses Celones, thus:
WHEREFORE, judgment is hereby rendered declaring the questioned [MOA]

without force and effect as the same has not been fully executed. The Court further
declares the [Spouses Celones] to be the redemptioners of their foreclosed properties
and directs defendant Metrobank to execute and deliver the corresponding
certificates of redemption over the said properties and turn-over all the Transfer
Certificates of Titles covering the same to [Spouses Celones] so that they could be
registered in accordance with Section 29, Rule 39 of the Revised Rules of Court.
On the other second transaction, the Court hereby finds that the transaction between
the [Spouses Celones] and defendant [Atty.] Dionido is one of a simple loan.
Lastly, the writ of preliminary injunction is hereby made permanent.
SO ORDERED.[20]
Upon appeal to the CA, the latter reversed the RTC Order and rendered a Decision[21] dated
April 14, 2014, thus:
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WHEREFORE, premises considered, the instant appeal is hereby GRANTED. The

Order dated September 1, 2010 issued by the [RTC] of Pasig City, Branch 154, in the
case for Declaratory Relief and Injunction, docketed as SCA No. 3270-PSG is
hereby REVERSED and SET ASIDE.
Accordingly, the [MOA] dated December 20, 2007 entered into by [Metrobank],
[PPPC], [Spouses Celones] and [Atty. Dionido], is declared a Contract of
Subrogation which entitles Atty. Dionido to be subrogated to the rights of Metrobank
as a foreclosure buyer. And having failed to redeem the property within the
redemption period, the [Spouses] Celones are hereby DIRECTED to immediately
and voluntarily surrender the possession of the foreclosed properties to Atty. Dionido
in accordance with the provisions of the said [MOA].
The [Spouses] Celones are ORDERED to pay Atty. Dionido the loan amount of Two
Million Five Hundred Thousand (P2,500,000.00) Pesos as payment for the loan they
contracted from the latter with legal interest thereon at the rate of six (6%) percent
per annum from the time of its availment, December 20, 2007, until fully paid.
Additionally, the [Spouses] Celones are ordered to pay Atty. Dionido moral damages
in the amount of Five Hundred Thousand (P500,000.00) Pesos, the amount of Three
Hundred Thousand (P300,000.00) Pesos, as exemplary damages, and Fifty Thousand
(P50,000.00) Pesos by way of attorney's fees. The [Spouses] Celones are likewise
ORDERED to pay Metrobank the amount of Three Hundred Thousand
(P300,000.00) Pesos as exemplary damages and Fifty Thousand (P50,000.00) Pesos
as attorney's fees.
With Costs.
SO ORDERED.[22]
The Motion for Reconsideration[23] filed by the spouses Celones was likewise denied by the CA
in its Resolution[24] dated December 11, 2014.
Hence, this petition.
Issue
Whether or not Spouses Celones were able to redeem the foreclosed properties from Metrobank
using the loan acquired from Atty. Dionido.
Petitioners' Arguments
Spouses Celones claimed that the transaction between them and Atty. Dionido was that of a
loan.[25] Further, Metrobank's subsequent acts shows that spouses Celones has redeemed the
property, such as the issuance of payment slips in the name of Spouses Celones and the filing of
several motions to dismiss in the civil cases for issuance of a writ of possession pending before
different courts due to the Spouses Celones' redemption of the foreclosed properties.
3/28/24, 4:16 PM [ G.R. No. 215691. November 21, 2018 ]
Respondents' Arguments
On the other hand, Metrobank and Atty. Dionido both argued that the Spouses Celones were not
able to redeem the property because the CNAR has been novated by the MOA executed by the
parties on December 20, 2007. Under the MOA, the P55 Million paid by Atty. Dionido to
Metrobank was in consideration of the transfer and assignment of rights of Metrobank to Atty.
Dionido over the foreclosed properties. Metrobank claimed that if there was indeed a
redemption that occurred, it should be Atty. Dionido who should issue a Certificate of
Redemption in view of the transfer and assignment of its rights to the latter.
Ruling of the Court
The petition is impressed with merit.
It is undisputed that the amount of P55 Million paid to Metrobank came from Atty. Dionido. The
controversy lies as to what transaction occurred between spouses Celones and Atty. Dionido.
Spouses Celones claimed that it was a loan transaction while Atty. Dionido claimed that it was
in consideration of his subrogation to the rights and interests of Metrobank over the foreclosed
properties.
Under the CNAR dated December 13, 2007, Metrobank approved the offer of Spouses Celones
to redeem the property in the amount of P55 Million and that the same should be paid on or
before December 20, 2007.[26]
In order to finance the said amount, Spouses Celones sought the help of banking and financing
institutions to pay off the said amount. Their search led them to Atty. Dionido who agreed to
loan them the amount of P55 Million. On December 20, 2007, to finalize their transaction and
with the participation of Metrobank, the parties executed a MOA. Under the MOA, the
following terms are stipulated:
1. DIONIDO shall pay Metrobank the amount of FIFTY-FIVE MILLION PESOS

(P55,000,000.00) upon execution of this Agreement. The said amount shall be
exclusive of all taxes, fees and charges, which shall likewise be exclusively assumed
by DIONIDO that may be incurred arising from the execution and subsequent
consummation of this Agreement, including friction costs and expenses associated
with the redemption transaction; and all realty taxes, dues and other assessments on
the Subject Properties from date of foreclosure. The payment shall be made in the
form of Manager's Check in the name of METROBANK and shall be deposited via
METROBANK's bills payment facility.
2. For and in consideration of the said payment by DIONIDO, METROBANK,

PPPC, and SPS. CELONES agree to fully and absolutely assign and transfer all of
METROBANK's rights, interests, and authorities over the Assumed Obligation and
the Subject Properties to DIONIDO, including those arising from the foreclosure
proceedings and foreclosure sale made by METROBANK over the Subject
Properties, and the authority to sign the Deed of Redemption over the Subject
Properties. METROBANK agree to the full subrogation of its rights in favor of
DIONIDO, and to free PPPC and SPS. CELONES from the Assumed Obligation.[27]
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Metrobank and Atty. Dionido claimed that the MOA being of a later date, superseded and
novated the CNAR. As such, the redemption agreed upon by Metrobank and Spouses Celones
was no longer controlling.
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.[28] In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible with each other.[29] Thus, "[n]ovation
must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed
and may be implied only if the old and new contracts are incompatible on every point."[30]
As held in the case of Salazar v. J.Y. Brothers Marketing Corp.:[31]
x x x Novation is done by the substitution or change of the obligation by a

subsequent one which extinguishes the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or by subrogating a
third person in the rights of the creditor. Novation may:
[E]ither be extinctive or modificatory, much being dependent on the

nature of the change and the intention of the parties. Extinctive novation
is never presumed; there must be an express intention to novate; in
cases where it is implied, the acts of the parties must clearly
demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation
necessitates that the incompatibility between the old and new
obligation be total on every point such that the old obligation is
completely superceded by the new one. The test of incompatibility is
whether they can stand together, each one having an independent
existence; if they cannot and are irreconcilable, the subsequent
obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new one in its
stead. This kind of novation presupposes a confluence 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. Novation is merely
modificatory where the change brought about by any subsequent
agreement is merely incidental to the main obligation (e.g., a change in
interest rates or an extension of time to pay; in this instance, the new
agreement will not have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of its provisions.)[32]
(Emphasis ours)
Examination of the MOA showed no express stipulation as to the novation or extinction of the
CNAR. Thus, for implied novation to exist, it is necessary to determine whether the CNAR and
3/28/24, 4:16 PM [ G.R. No. 215691. November 21, 2018 ]
the MOA are incompatible on every point such that they cannot be reconciled and stand
together.
Under the CNAR, it is provided that Metrobank approved the offer of Spouses Celones to
redeem the property in the amount of P55 Million. While under the MOA, Metrobank assigned
all its rights and interests to Atty. Dionido over the foreclosed properties including the issuance
of a certificate of redemption.
After careful scrutiny of the records, we find that the CNAR only deals with the redemption
right of Spouses Celones while the MOA deals with the assignment of credit of Metrobank to
Atty. Dionido. As such, the CNAR and the MOA can be reconciled and can both stand together.
Under the MOA, Metrobank assigned all its rights and interests over the foreclosed properties to
Atty. Dionido. "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."[33]
Atty. Dionido being an assignee of Metrobank, he merely steps into the shoes of the assignor,
Metrobank. Atty. Dionido can acquire no greater right than that pertaining to his assignor. Thus,
when Atty. Dionido agreed to the assignment of Metrobank's rights and interests over the
foreclosed properties under the MOA, he acquires exactly the rights and interests over the
foreclosed properties as of the date of the signing of the MOA.
Unfortunately for Atty. Dionido, he merely acquired what right Metrobank has, as of the date of
the signing of the MOA, which was the issuance of a Certificate of Redemption, because as of
that date, the foreclosed properties have already been redeemed by Spouses Celones from
Metrobank. The fact that Spouses Celones had already redeemed the foreclosed properties was
evidenced by the fact that as soon as Metrobank was paid the redemption amount, the latter
issued payment slips in the name of Spouses Celones. Further, after the payment of the P55
Million, Metrobank caused the dismissal of the civil cases it filed for issuance of writ of
possession due to the fact that the foreclosed properties had already been redeemed by the
Spouses Celones. Had the P55 Million been paid by Atty. Dionido to Metrobank as a
consideration for the assigment of credit, the receipt should have been under the name of Atty.
Dionido and not under the name of Spouses Celones.
Finding that the foreclosed properties had already been redeemed by Spouses Celones, the
Certificate of Redemption should naturally be issued by the assignee, Atty. Dionido. To accept
his contention that the redemption period of the foreclosed properties had already lapsed and
that Spouses Celones has lost their right over the foreclosed properties is to go against the basic
principle of assigment of credit that the assignee cannot acquire no greater right than the
assignor.
Atty. Dionido however is not left without any remedy or recourse against Spouses Celones.
Under Article 1236 of the Civil Code, it is provided that:
Art. 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid,
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except that if he paid without the knowledge or against the will of the debtor, he
can recover only insofar as the payment has been beneficial to the debtor.
(Emphasis ours)
Thus, Atty. Dionido has the right to demand payment of the amount of P55 Million from
Spouses Celones since it is undisputed that such amount came from Atty. Dionido. It is unjust
enrichment on the part of Spouses Celones to acquire the amount ofP55 Million and not be
required to pay the same. To save on the time and resources of this Court and because of the
possibility that this case will once again reach this Court, although this case is not an action to
recover a sum of money, we deem it proper to rule on the propriety of Atty. Dionido's right to
recover the said sum from Spouses Celones. Thus, Spouses Celones should pay the amount of
P55 Million to Atty. Dionido with legal interest counted from the date of finality of this
Decision.
WHEREFORE, premises considered, the petition is GRANTED. The Decision dated April 14,
2014 and the Resolution dated December 11, 2014 of the Court of Appeals in CA-G.R. CV No.
96236 are hereby REVERSED and SET ASIDE.
Accordingly, a new one is entered ORDERING Atty. Crisolito O. Dionido to issue a Certificate
of Redemption in favor of Spouses Francis N. Celones and Felicisima Celones.
The Spouses Francis N. Celones and Felicisima Celones are hereby ORDERED to pay the
amount of P55 Million plus legal interest of six percent (6%) per annum to Atty. Crisolito O.
Dionido counted from finality of this Decision until full payment thereof.
SO ORDERED.
Bersamin,* (Acting Chairperson), Del Castillo, Jardeleza, and Gesmundo,** JJ., concur.
* Designated Acting Chairperson per Special Order No. 2606 dated October 10, 2018.
** Designated Additional Member per Special Order No. 2607 dated October 10, 2018.
[1] Rollo, pp. 9-54.
[2]
Penned by Associate Justice Stephen C. Cruz, concurred in by Associate Justices Magdangal
M. De Leon and Eduardo B. Peralta, Jr.; id. at 58-87.
[3] Id. at 117-120.
[4] Rendered by Judge Abraham B. Borreta; id. at 150-158.
[5] Id. at 141-146.
[6] Id. at 58-59.

3/28/24, 4:17 PM [ G.R. No. 242087. December 07, 2021 ]
FIRST DIVISION
[ G.R. No. 242087. December 07, 2021 ]
MA. JULIETA* B. BENDECIO AND MERLYN MASCARIÑAS,

PETITIONERS, VS. VIRGINIA B. BAUTISTA, RESPONDENT.
DECISION
LOPEZ, J., J.:
Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court
assailing the Decision[2] dated September 14, 2018 rendered by the Court of Appeals (CA) in
CA-GR CV No. 109378, which affirmed the Decision[3] dated May 4, 2017 of the Regional
Trial Court (RTC), Branch 59, Makati City in Civil Case No. 13-1126, granting the complaint
for collection of sum of money and damages filed by respondent Virginia B. Bautista (Bautista)
against petitioners Ma. Julieta B. Bendecio (Bendecio) and Merlyn Mascariñas (Mascariñas).
The Antecedents
In her complaint, Bautista alleged that on the 5th, 7th and 15th of February 2013, she lent
Bendecio, her niece, P400,000.00, P200,000.00, and P500,000.00, respectively. The loan,
totaling P1,100,000.00, was payable in May 2013 with monthly interest at 8%.[4]
According to Bautista, Bendecio informed her in May 2013 that Mascariñas, Bendecio's friend
and business partner, would be paying the loans by depositing a manager's check in her Banco
De Oro (BDO) account. But the same never materialized. Instead, Mascariñas executed a
promissory note in her favor promising to pay her the total amount of the loan on August 23,
2013, with the same interest rate. Still, neither Bendecio nor Mascariñas paid despite her oral
demands and the demand letter she sent to them on September 5, 2013.[5] This led her to file a
complaint before the RTC on September 25, 2013.[6]
On the one hand, Bendecio countered that on May 22, 2013, she informed Bautista that
Mascariñas would pay the loan by depositing the total amount to Bautista's BDO account. But
Bautista persuaded Mascariñas to pay her in cash, instead, and make it appear that Mascariñas
already assumed the loan obligation. Bautista further required Mascariñas to execute a
promissory note. As such, Bendecio insisted that she was no longer obligated to pay Bautista as
she was already substituted by Mascariñas. Bendecio further maintained that payment can be
presumed because the checks she issued in Bautista's favor as payment for the loan were already
returned to her.[7]
On the other hand, Mascariñas claimed that she was the business partner of Bendecio who asked
her to deposit P1,100,000.00 into Bautista's BDO account in the morning of May 22, 2013.
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Bautista first requested that she pay in cash but later turned down the offer to pay as such.
Instead, Bautista proposed that the loan be assumed by Mascariñas thereby relieving Bendecio
from her obligation and promising to return Bendecio's checks. According to Mascariñas, she
agreed to the arrangement on the condition that the loan be less than three months. To show her
good faith, she issued checks and executed a promissory note indicating that her loan will
mature on August 23, 2013.[8]
Mascariñas further claimed that she stopped payment because Bautista was calling her banks to
ask about her financial status. She then called Bautista to set up a meeting at her house on
August 3, 2013 so she could pay the loan. At the meeting, Mascariñas recalled that Bautista
promised to return all her checks and to issue a receipt for the payment she made but failed to
comply with said promise.[9]
On May 4, 2017, the RTC ruled in favor of Bautista and disposed of the case as follows:
WHEREFORE, in view of the foregoing evidence and in the lights (sic) of the
provisions of law and jurisprudence on the matter, judgment is hereby rendered in
favour of the plaintiff and against the defendants as follows:
1. Ordering defendants Ma. Julieta Bendecio and Merlyn Mascariñas jointly and
solidarily to pay plaintiff the amount of One Million One Hundred Thousand
Pesos (Php1,100,000.00) corresponding to the loan obtained plus interest of
12% per annum computed from the date of demand until fully paid;
solidarily to pay plaintiff the amount of One Hundred Thousand Pesos
(Php100,000.00) as moral damages;
solidarily to pay plaintiff the amount of One Hundred Thousand Pesos
(Php100,000.00) as and for attorney's fees;
4. To pay the costs of suit.
SO ORDERED.[10]
In its Decision dated September 14, 2018, the CA affirmed the RTC ruling. According to the
appellate court, the alleged payment made by Bendecio and Mascariñas was not proven by
preponderance of evidence. Moreover, their solidary liability is justified as evidence which
shows that the loan was actually obtained not by Bendecio alone, but by both parties in
furtherance of their business partnership.[11]
Aggrieved, petitioners Bendecio and Mascariñas filed the present petition on November 8, 2018,
seeking a reversal of the CA's Decision. They reiterated their claim that Bendecio's obligation
was already extinguished when Mascariñas offered to pay Bautista P1,100,000.00 on behalf of
Bendecio. This offer, however, was rejected by Bautista. Instead, the loan was assumed by
Mascariñas who issued a promissory note in Bautista's favor. Since Bendecio was not privy to
the promissory note, Bautista has no cause of action against Bendecio.[12]
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Issue
Whether the CA erred in finding Bendecio and Mascariñas liable to pay Bautista the loan
amounting to P1,100,000.00.
Our Ruling
Bendecio and Mascariñas essentially insist that Bautista can no longer claim from Bendecio
since she was already released from liability when Mascariñas assumed the same. In effect,
Bendecio's obligation was extinguished by novation when Mascariñas substituted her as debtor
in the loan agreement.
The contention is devoid of merit.
At the outset, it must be noted that the determination of the existence of novation[13] and
consent of a creditor to the substitution of debtors is a question of fact as it requires this Court to
examine the evidence on record.[14] But questions of fact are not proper subjects of the present
petition. Indeed, this Court is not a trier of facts, Our jurisdiction being limited to reviewing
errors of law. As such, the trial court's findings of fact are binding upon this Court especially
when they are affirmed by the appellate court. While there are recognized exceptions,[15] We
find that none of the same obtain herein.
Novation is one of the means to extinguish an obligation where a subsequent obligation

extinguishes or modifies the first.[16] It is a relative extinguishment whereby a new obligation is
created in lieu of the old.[17] But in order that an obligation may be extinguished by another
which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other.[18]
Under Article 1291 of the Civil Code, novation is done by: (1) changing the object or principal
conditions; (2) substituting the person of the debtor; or (3) subrogating a third person in the
rights of the creditor.[19]
On the second type of novation, by substituting the person of the debtor,[20] law and
jurisprudence recognize two forms: (1) expromision and (2) delegacion.[21] In expromision, the
initiative for the change does not come from the debtor and may even be made without his
knowledge, since it consists in a third person assuming the obligation. As such, it only requires
the consent of the third person and the creditor. In delegacion, the debtor offers and the creditor
accepts a third person who consents to the substitution and assumes the obligation. Hence, the
intervention and the consent of these three persons are necessary.[22]
But in either mode of substitution, the consent of the creditor is indispensable. After all,
substitution of one debtor for another may delay or prevent the fulfillment of the obligation by
reason of the financial inability or insolvency of the new debtor.[23] It is only just, therefore, that
the creditor expressly accepts the novation that extinguishes the obligation of the original debtor.
In the present case, Bendecio and Mascariñas insist that Bendecio, the first debtor, was already
released from responsibility because she was substituted by Mascariñas, the new debtor, who
3/28/24, 4:17 PM [ G.R. No. 242087. December 07, 2021 ]
assumed the loan and executed a promissory note therefor. The claim is untenable. The burden
of establishing a novation is on the party who asserts its existence,[24] or in this case, Bendecio
and Mascariñas. But apart from their bare allegation, nowhere in the records was it even
remotely suggested that Bautista, the creditor, consented to the alleged novation.
It bears stressing that novation is never presumed. The mere fact that the creditor receives a
guaranty or accepts payments from a third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be released from responsibility, does not
constitute novation.[25] This will, at best, result merely in the addition of debtors,[26] with the
creditor still being able to enforce the obligation against the original debtor. Indeed, just because
Bautista accepted Mascariñas' promissory note does not necessarily mean that Bendecio's
obligation was already extinguished. In the absence of clear and unmistakable consent on the
part of Bautista, her acceptance of Mascariñas' note does equate to the release of Bendecio from
her obligation.
Still, Bendecio and Mascariñas insist on extinguishment, this time by payment, relying merely
on the fact that the checks Bendecio issued were already returned to her. The argument is bereft
of merit. Settled is the rule that mere delivery of checks does not discharge the obligation under
a judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized.[27] As such, Article 1249 of the Civil Code expressly
provides that "the delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been cashed, or
when through the fault of the creditor they have been impaired."
As duly found by the RTC and CA, there was nothing in the records to show receipt by Bautista
of cash in exchange for the checks she returned. On the contrary, Mascariñas merely issued a
promissory note in favor of Bautista effectively extending the maturity date of the loan.
Certainly, this cannot result in the extinguishment of Bendecio's obligation. Indeed, once the
existence of an indebtedness is duly established by evidence, the burden of showing with legal
certainty that the obligation has been discharged by payment rests on the debtor.[28] We find that
Bendecio and Mascariñas failed in this regard.
In view of the foregoing, there is no cogent reason to deviate from the rulings of the courts
below rejecting Bendecio and Mascariñas' claims of extinguishment by payment and novation.
To repeat, the mere fact that Bautista accepted Mascariñas' note does not automatically result in
novation in the absence of an express agreement to release Bendecio from liability. Neither was
there any proof of payment herein. Since there was neither novation nor payment, case law
dictates that Bautista may still proceed to collect from Bendecio, the original debtor of the loan
agreement.[29]
Besides, it bears emphasis that Bendecio and Mascariñas cannot deny the fact that they were
business partners who used the proceeds of the loan in furtherance of their business. They
expressly admitted to this in their judicial affidavits and testimonies given during their
respective cross examinations.
Mascariñas revealed that she was partners with Bendecio, that she encashed the checks from
Bautista representing the loan, that she was tasked to pay back Bautista using the funds of the
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partnership, and that as partners, she and Bendecio equally share the profits and losses of the
partnership, to wit:
Q-2: What is your relationship with your co-defendant Ma. Julieta B. Bendecio?
A-2: She and I are business partners, for over ten years now, who offer, among
others, to our client's appliances, gadgets and other things they need by paying the
purchases in advance, while payments to us are on installment basis with interests. I
use my credit card to purchase the goods or items. When payment is due, we pay the
whole amount.
xxxx
Q-6: Aside from being a niece to plaintiff, do you know of other relations with Mary
and her aunt?
A-6: Yes, sir, because I learned later in February 2013 that Mary borrowed some
money from the plaintiff. I knew about this because Mary requested me to encash
the BDO check x x x.
Q-7: Were able to encash the said BDO check?

A-7: Yes, sir, only after the bank teller had verified from plaintiff that said check
can be encashed by me.
xxxx
A-17: Sir, in the morning of May 22, 2013, Mary called me and instructed me to
deposit the amount of P1,100,000.00 to the account of plaintiff at BDO to fully
pay her loan with her aunt. The money will be withdrawn from my account.
Q-18: Is amount your personal money?

A-18: No, sir. Those amounts were my collections from the various clients who
had dealing with us. My collections are being deposited to my account to
facilitate other transactions. If May will need money, then I will transfer or deposit
the amount so requested to her account.
Q-19: Was there a request from Mary regarding the amount of P1,100,00.00?
A-19: Yes, sir. But instead of depositing the said amount to her account, she
requested me to deposit the same to the account of plaintiff at BDO. x x x.[30]
Q: Is your partnership registered before the concern government agency or not?

A: No sir.
Q: Okay. Based on this answer when payment is due according to you, you both
pay the whole amount, meaning to say both of you with co-defendant Ma.
Julieta B. Bendecio will shoulder whatever is due for payment as stated in your
Judicial Affidavit, correct?
A: Yes, sir.
Q: Am I also correct Ms. Witness since you were business partners with co-
defendant Ma. Julieta B. Bendecio you are also sharing the profit out of
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entering into any transaction equally?

A: Yes sir.[31]
In a similar manner, Bendecio disclosed that Mascariñas was her business partner, that they used
the proceeds of the loan as capital for their business, and that Mascariñas was tasked to repay
the amount of the loan to Bautista on the date the same falls due. Bendecio recounted as follows:
Q-2: What is your relationship with your co-defendant Merlyn Mascariñas?

A-2: She and I are business partners, for over ten years now.
xxxx
Q-4: Did you have any business dealings with your aunt, the plaintiff in the present
case?
A-4: Yes, sir. I borrowed money from her to use as capital in the business of my
co-defendant and I.
xxxx
Q-14: Do you have an agreement how payment to the loan should be made?
A-14: Plaintiff and I agreed that I will pay my loan fully in cash. After payment, all
the checks I issued to her to secure my loan will be returned to me.
xxxx
A-25: Considering that plaintiff might really wanted to have the payment, I
instructed Merlyn Mascariñas to make the cash deposit to the account of the
plaintiff at BDO. x x x.[32]
Hence, Bendecio and Mascariñas may insist on denying their liability, but they can no longer
renounce their admissions that they were, indeed, business partners who obtained a loan for their
business. Article 1825[33] of the Civil Code provides that when a person represents himself to
anyone as a partner in a partnership, he is liable to such person who has given credit to the
partnership. As such, both Bendecio and Mascariñas must be held liable to Bautista. As to the
extent of their liability, again, this Court finds that the RTC and the CA correctly held Bendecio
and Mascariñas solidarily liable to pay the loan.
In Guy v. Gacott,[34] (Gacott) this Court explained that pursuant to Article 1816[35] of the Civil
Code, the general rule is that a partner's obligation to third persons with respect to the
partnership liability is pro rata or joint. This means that a debtor is liable for the payment only
of a proportionate part of the debt. The exception to this is found in Article 1207,[36] which
states that there is solidary liability when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity. Accordingly, a partner shall be solidarily liable to
third persons for the entire debt in the cases under Articles 1822, 1823 and 1824 of the Civil
Code, which state:
Article 1822. Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership or with the authority of his co-
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partners, loss or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act.
Article 1823. The partnership is bound to make good the loss:

(1) Where one partner acting within the scope of his apparent authority receives
money or property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of
a third person and the money or property so received is misapplied by any partner
while it is in the custody of the partnership.
Article 1824. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823.[37]
Gacott elucidates that in essence, it is the act of a partner which caused loss or injury to a third
person that makes all other partners solidarily liable with the partnership. The obligation is
solidary because the law protects the third person, who in good faith relied upon the authority of
a partner, whether such authority is real or apparent.[38]
In this case, records show that the loss or injury endured by Bautista was not only due to
Bendecio's non-payment of the loan on the initial due date, but also Mascariñas' failure to pay
the same loan on the extended due date despite several demands from Bautista. In fact, because
of these omissions committed by Bendecio and Mascariñas, Bautista is still experiencing the
consequences of said inactions by having to enforce her claim before the courts. As such, both
Bendecio and Mascariñas should be held solidarily liable for the loan, the proceeds of which
were used as capital for their lending business.[39]
With respect to the interest imposed by the RTC and CA, however, this Court deems it necessary
to adjust the rates thereof in accordance with prevailing jurisprudence. In this case, the monthly
interest rate of 8% agreed to by the parties was excessive, iniquitous, and unconscionable, and
must be equitably tempered. While the courts below correctly imposed a 12% per annum instead
of 8% a month, case law dictates the imposition of additional interest charges.
In Nacar v. Gallery Frames,[40] (Nacar) this Court enunciated the following guidelines
governing obligations and their corresponding interest rate:
To recapitulate and for future guidance, the guidelines laid down in the case of
Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No.
799, as follows:

The provisions under Title XVIII on "Damages" of the Civil Code govern in
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1. When the obligation is breached, and it consists in the payment of a

sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6%
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages, except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially
or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the demand is made, the interest
shall begin to nm only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes

final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
the rate of interest fixed therein.[41]
Accordingly, jurisprudence identifies two types of interest: (1) monetary interest; and (2)
compensatory interest. This springs from the fact that "the right to recover interest arises only
either by virtue of a contract (monetary interest) or as damages for delay or failure to pay the
principal loan on which the interest is demanded (compensatory interest)."[42]
On the one hand, monetary interest is the compensation fixed by the parties for the use or
forbearance of money. While parties are free to stipulate their preferred rate of interest, courts
are allowed to equitably temper those that are found to be excessive, iniquitous, unconscionable,
and/or exorbitant.[43]
In such instances, however, only the unconscionable interest rate is nullified and deemed not
written in the contract. But the parties' agreement on the payment of interest on the principal
loan obligation subsists, except only if they failed to specify the interest rate. Settled is the rule,
moreover, that in this scenario, this Court shall apply the legal rate of interest prevailing at the
time the agreement was entered into, being the presumptive reasonable compensation for
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borrowed money.[44] This rate at the time of the contract's execution shall persist regardless of
shifts in the legal rate.[45] As explained in Spouses Abella v. Spouses Abella:[46]
Thus, it remains that where interest was stipulated in writing by the debtor and
creditor in a simple loan or mutuum, but no exact interest rate was mentioned, the
legal rate of interest shall apply. At present, this is 6% per annum, subject to Nacar's
qualification on prospective application.
Applying this, the loan obtained by respondents from petitioners is deemed subjected
to conventional interest at the rate of 12% per annum, the legal rate of interest at the
time the parties executed their agreement. Moreover, should conventional interest
still be due as of July 1, 2013, the rate of 12% per annum shall persist as the rate of
conventional interest.
This is so because interest in this respect is used as a surrogate for the parties' intent,
as expressed as of the time of the execution of their contract. In this sense, the legal
rate of interest is an affirmation of the contracting parties' intent; that is, by their
contract's silence on a specific rate, the then prevailing legal rate of interest shall be
the cost of borrowing money. This rate, which by their contract the parties have
settled on, is deemed to persist regardless of shifts in the legal rate of interest. Stated
otherwise, the legal rate of interest, when applied as conventional interest, shall
always be the legal rate at the time the agreement was executed and shall not be
susceptible to shifts in rate.[47]
Monetary or conventional interest evinces the intention of the parties to impose interest on
account of the unavailability of the money owned by the creditor, as it is being used by the
debtor. During the execution of the agreement, the intention to impose interest is already present
considering that at this time, the creditor already parts with his own money, and from then, will
not be able to use the same. The interest rate, insofar as monetary interest is concerned, must
thus be that rate which has been agreed upon, or if declared void, the rate of legal interest
prevailing at the time of the execution of the agreement. Moreover, when an extrajudicial
demand is made, the creditor merely seeks the enforcement of the agreement, as approved by the
parties, and not to seek for damages. It is therefore the rate at the time of the agreement, which
is sought to be enforced, that should prevail.
On the other hand, compensatory interest is that imposed by law or by the courts as a penalty or
indemnity for damages. This is an interest imposed on the monetary or conventional interest
mentioned above. This is imposed as a penalty to the debtor, who is not able to pay the interest
agreed upon with the creditor, and contemplates a situation where the creditor still has to resort
to court action to collect the interest on the debt despite the agreement of the parties. As such,
this is reckoned from the date of judicial demand. It has its legal underpinning under Article
2212 of the Civil Code, which provides that "[i]nterest due shall earn legal interest from the time
it is judicially demanded, although the obligation may be silent upon this point."[48]
In this case, the parties intended and agreed on a stipulated monthly interest at 8% on the
P1,100,000.00 loan.[49] This translates to 96% interest per annum on the loan. In a long line of
cases, however, this Court did not hesitate to reduce interest rates similar to the rate agreed to by
the parties herein for being excessive, iniquitous, and unconscionable.[50] A stipulated interest
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rate of 3% per month or higher is generally considered by this Court as excessive and
unconscionable. In such instances, it is well to clarify that only the unconscionable interest rate
is nullified and deemed not written in the contract; whereas the parties' agreement on the
payment of interest on the principal loan obligation subsists. It is as if the parties failed to
specify the interest rate to be imposed on the principal amount, in which case the legal rate of
interest prevailing at the time the agreement was entered into would have to be applied by the
Court.[51]
Note that at the time the loan was contracted on February 5, 7, and 15, 2013,[52] the prevailing
rate of interest then was 12% per annum under Central Bank Circular No. 416[53] and not the
reduced rate of 6% per annum under Bangko Sentral ng Pilipinas Monetary Board (BSP-MB)
Circular No. 799, Series of 2013. This 12% rate shall apply pursuant to Our ruling in Nacar,[54]
which provides that the BSP-MB Circular No. 799, Series of 2013 shall only be prospectively
applied from its effectivity on July 1, 2013.
Thus, the principal amount of P1,100,000.00 shall earn a monetary/conventional interest of 12%
per annum reckoned from the date of default or from extrajudicial demand on September 5,
2013[55] until finality of this Decision.[56]
As for the compensatory interest, Nacar provides that the accrued monetary interest shall itself
earn compensatory interest at the legal rate from the date of judicial demand until finality of the
Decision.[57] Thus, the rate of this interest, imposed on the amount corresponding to 12%
interest of P1,100,000.00, shall be the prevailing rate at the time of the filing of the complaint on
September 25, 2013,[58] which is 6% per annum as provided under BSP-MB Circular No. 799,
Series of 2013.
Finally, all monetary awards shall earn interest at the rate of 6% per annum from finality of this
Decision until full payment.[59]
With respect to the award of moral damages, however, this Court finds the same improper for
lack of sufficient basis. In Arco Pulp and Paper Co., Inc. v. Lim,[60] this Court ruled that an
award of moral damages requires the claimant to satisfactorily prove the following conditions:
(1) an injury, whether physical, mental, or psychological, clearly sustained by the claimant; (2) a
culpable act or omission committed by the defendant; (3) the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by the claimant; and (4) the award of
damages is predicated on any of the cases stated in Article 2219[61] of the Civil Code.[62] Apart
from Article 2219, moral damages may also be awarded for breaches of contract under Articles
2220,[63] as well as Articles 19[64] and 20[65] in relation to Article 1159[66] of the Civil Code.
[67]
It bears stressing, however, that moral damages are neither recoverable on a mere breach of
contract nor awarded as a matter of right, but only after the party claiming it proves that the
party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his
contractual obligations.[68] To recover moral damages in an action for breach of contract, the
breach must be palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive.[69]
On this matter, We held that:
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Bad faith does not simply connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach
of known duty through some motive or interest or ill will that partakes of the nature
of fraud. It is, therefore, a question of intention, which can be inferred from one's
conduct and/or contemporaneous statements.[70]
Thus, a person claiming bad faith must prove its existence by clear and convincing evidence for
the law always presumes good faith.[71] Since a finding of bad faith is generally premised on the
intent of the doer, the court is then tasked to examine the circumstances of each case.[72]
In this case, this Court finds no clear and convincing evidence of fraud or bad faith on the part
of Bendecio and Mascariñas. The trial court awarded moral damages on the sole basis of
Bautista's testimony saying that she was sad, lost weight, and could not sleep because Bendecio
and Mascariñas did not pay her despite the fact that their obligation was already due and
demandable.[73] But as discussed above, mere breach of contract, without bad faith, cannot be
the basis for an award of moral damages.
Recall that upon maturity of the loan in May 2013, Bendecio's partner, Mascariñas met with
Bautista and executed a promissory note that extended the maturity date of the loan to August
2013. Bautista signed said note, consenting to the extension.[74] When Bendecio and Mascariñas
failed to pay in August, Bautista filed the collection case, without, however, proving that fraud
or bad faith attended said failure. To this Court, just because Bautista experienced sleepless
nights and lost her appetite does not necessarily mean that Bendecio and Mascariñas acted
fraudulently or in bad faith. The award of moral damages, therefore, cannot be sustained.
As regards the award of attorney's fees, however, this Court affirms the RTC's grant thereof in
the amount of P100,000.00. Settled is the rule that parties are free to stipulate in their agreement
the recovery of attorney's fees, subject however to the court's discretion to temper the amount
thereof if found unreasonable.[75] In this case, the parties agreed that Bautista shall be entitled to
attorney's fees in the event of judicial or extra-judicial enforcement of obligation in the amount
equivalent to 20% of the total amount due which in no case shall be less than P20,000.00.[76]
Nevertheless, in view of the absence of bad faith, this Court affirms the RTC's reduction of the
amount thereof from P220,000.00[77] to P100,000.00. Still, this award of attorney's fees shall
earn legal interest at the rate of 6% per annum from the finality of this Decision until full
payment in line with prevailing jurisprudence.[78]
WHEREFORE, premises considered, the instant petition is DENIED. The Decision dated
September 14, 2018 of the Court of Appeals in CA-GR CV No. 109378, which affirmed the
Decision dated May 4, 2017 of the Regional Trial Court, Branch 59, Makati City in Civil Case
No. 13-1126, is AFFIRMED with MODIFICATION. Accordingly, petitioners Ma. Julieta B.
Bendecio and Merlyn Mascariñas are ORDERED TO PAY respondent Virginia B. Bautista the
following amounts:
1. The principal obligation in the amount of P1,100,000.00 plus monetary interest at the rate
of twelve percent (12%) per annum from extrajudicial demand or on September 5, 2013,
until finality of this Decision;
3/28/24, 4:17 PM [ G.R. No. 242087. December 07, 2021 ]
2. Compensatory interest on the accrued monetary interest at the rate of six percent (6%) per
annum from the date of judicial demand or the filing of the complaint on September 25,
2013, until finality of this Decision;
3. Attorney's fees in the amount of P100,000.00;
4. Legal interest at the rate of six, percent (6%) per annum imposed on all the monetary
awards herein determined, from the finality of this Decision until full payment; and
5. Costs of suit.
SO ORDERED.
Gesmundo, C.J., (Chairperson), Caguioa, Lazaro-Javier, and M. Lopez, JJ., concur.
* Also appears as "Ma. Julieth" in CA Decision; rollo, p. 21.
[1] Rollo, pp. 9-19.
[2]Penned by Associate Justice Ronaldo Roberto B. Martin with Associate Justices Apolinario
D. Bruselas, Jr. and Myra V. Garcia-Fernandez, concurring; id. at 21-30.
[3] Penned by Judge Winlove M. Dumayas; records, pp. 411-423.
[4] Rollo, p. 22.
[5] Records, p. 4.
[6] Id. at 1-5.
[7] Rollo, pp. 22-23.
[8] Id. at 23.
[9] Id. at 23-24.
[10] Id. at 24-25.
[11] Id. at 28-29.
[12] Id. at 12-17.
[13] Heirs of Dragon v. The Manila Banking Corp., G.R. No. 205068, March 6, 2019.

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3/28/24, 4:09 PM [ G.R. No. 128448.

February 01, 2001 ]

403 Phil. 760

The parties agreed at pre-trial to limit the issues to the following:

After trial on the merits, the trial court decided as follows:

"WHEREFORE, the foregoing premises considered, judgment is hereby rendered in

"This decision should however, be interpreted without prejudice to whatever benefits

"WHEREFORE, this Court renders judgment REVERSING the appealed Decision

"3. Ordering the PNB to recompute in accordance with RA 7202 Mirasols'

"4. Whatever the result of the recomputation of Mirasols' account, the

"2. Whether PD 579 and subsequent issuances[7] thereof are unconstitutional.

"4. Whether the Honorable Court of Appeals committed manifest error in

"Art. 1279. In order that compensation may be proper, it is necessary:

(3) That the two debts are due;

(4) That they be liquidated and demandable;

"SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%)

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

[1] One picul is equivalent to 63.25 kilograms.

[3] Rollo, p. 78.

[4] Id. at 104-105.

[5] Id. at 110.

[8] Supra Note 6, at 32-33.

[9] Drilon v. Lim, 235 SCRA 135, 139 (1994).

[10] Const, Art. VIII, Sec. 5 (2).

725 Phil. 94 ← click for PDF copy

The RTC Ruling in Civil Case No. 7648

The CA Ruling in CA-G.R. CV No. 35866

The Court’s Ruling in G.R. Nos. 115963 & 119112

On August 2, 2000, the Court’s resolution became final and executory.[27]

The RTC Execution Proceedings

The CA Ruling in CA-G.R. SP No. 68300

G.R. No. 155838.

The Court’s Ruling in G.R. No. 155838

Union Bank’s Motion to Affirm Legal Compensation

that said obligation had not been completely extinguished.

The CA Ruling in CA-G.R. SP No. 93833

The Issue Before the Court

The Court’s Ruling

The petition is bereft of merit.

Compensation is defined as a mode of extinguishing obligations whereby two persons in their

Art. 1279. In order that compensation may be proper, it is necessary:

the creditors and debtors are not aware of the compensation.”

x x x Construing these three contracts, especially the “Agreement” x x x

WHEREFORE, the decision appealed from is SET ASIDE and another

(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc.

Carpio, (Chairperson), Brion, Del Castillo, and Perez, JJ., concur.

[1] Rollo, pp. 32-50.

[3] Id. at 30.

[6] Id. at 271-277.

[7] Id. at 344-348.

[8] Id. at 87.

[9] Id. at 349-355.

[10] Id. at 356-359.

[11] Id. at 88.

[13] Id. at 60-70.

[14] Id. at 72.

[15] Id. at 71-75.

[16] Id. at 90-91.

[17] Id. at 80-85.