V.

EXTINGUISHMENT OF OBLIGATION
F. Novation (Art. 1291-1304)
Requisites
Effect
G.R. No. 165116 August 4, 2009
MARIA SOLEDAD TOMIMBANG, Petitioner, vs.
ATTY. JOSE TOMIMBANG, Respondent.
DECISION
DEL CASTILLO, J.:

This resolves the petition for review on certiorari under Rule 45 of the Rules of Court, praying that the
Decision1 dated July 1, 2004 and Resolution2 dated August 31, 2004 promulgated by the Court of Appeals
(CA), be reversed and set aside.

The antecedent facts are as follows.

Petitioner and respondent are siblings. Their parents donated to petitioner an eight-door apartment
located at 149 Santolan Road, Murphy, Quezon City, with the condition that during the parents' lifetime,
they shall retain control over the property and petitioner shall be the administrator thereof.

In 1995, petitioner applied for a loan from PAG-IBIG Fund to finance the renovations on Unit H, of said
apartment which she intended to use as her residence. Petitioner failed to obtain a loan from PAG-IBIG
Fund, hence, respondent offered to extend a credit line to petitioner on the following conditions: (1)
petitioner shall keep a record of all the advances; (2) petitioner shall start paying the loan upon the
completion of the renovation; (3) upon completion of the renovation, a loan and mortgage agreement
based on the amount of the advances made shall be executed by petitioner and respondent; and (4) the
loan agreement shall contain comfortable terms and conditions which petitioner could have obtained from
PAG-IBIG.

Petitioner accepted respondent's offer of a credit line and work on the apartment units began. Renovations
on Units B to G were completed, and the work has just started on Unit A when an altercation broke out
between herein parties. In view of said conflict, respondent and petitioner, along with some family
members, held a meeting in the house of their brother Genaro sometime in the second quarter of 1997.
Respondent and petitioner entered into a new agreement whereby petitioner was to start making monthly
payments on her loan. Upon respondent's demand, petitioner turned over to respondent all the records of
the cash advances for the renovations. Subsequently, or from June to October of 1997, petitioner made
monthly payments of ₱18,700.00, or a total of ₱93,500.00. Petitioner never denied the fact that she
started making such monthly payments.

In October of 1997, a quarrel also occurred between respondent and another sister, Maricion, who was
then defending the actions of petitioner. Because of said incident, they had a hearing at the Barangay. At
said hearing, respondent had the occasion to remind petitioner of her monthly payment. Petitioner
allegedly answered, "Kalimutan mo na ang pera mo wala tayong pinirmahan. Hindi ako natatakot sa 'yo!"
Thereafter, petitioner left Unit H and could no longer be found. Petitioner being the owner of the
apartments, renovations on Unit A were discontinued when her whereabouts could not be located. She
also stopped making monthly payments and ignored the demand letter dated December 2, 1997 sent by
respondent's counsel.

On February 2, 1998, respondent filed a Complaint against petitioner, demanding the latter to pay the
former the net amount of ₱3,989,802.25 plus interest of 12% per annum from date of default.

At the pre-trial conference, the issues were narrowed down as follows:

1. Whether or not a loan was duly constituted between the plaintiff and the defendant in connection with
the improvements or renovations on apartment units A-H, which is in the name of the defendant [herein
petitioner];

2. Assuming that such a loan was duly constituted in favor of plaintiff [herein respondent], whether or not
the same is already due and payable;

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3. Assuming that said loan is already due and demandable, whether or not it is to be paid out of the rental
proceeds from the apartment units mentioned, presuming that such issue was raised in the Answer of the
Defendant;

4. Assuming that the said loan was duly constituted in favor of plaintiff [herein respondent], whether or
not it is in the amount of P3,909,802.20 and whether or not it will earn legal interest at the rate of 12%
per annum, compounded, as provided in Article 2212 of the Civil Code of the Philippines, from the date of
the extrajudicial demand; and

5. Whether or not the plaintiff [herein respondent] is entitled to the reliefs prayed for in his Complaint or
whether or not it is the defendant [herein petitioner] who is entitled to the reliefs prayed for in her Answer
with Counterclaim.

On November 15, 2002, the Regional Trial Court (RTC) of Quezon City, Branch 82, rendered a Decision,5
the dispositive portion of which reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the latter to pay the former the following:

1. The sum of ₱3,989,802.25 with interest thereon at the legal rate of 12% per annum computed from the
date of default until the whole obligation is fully paid;

2. The sum of ₱50,000.00 as and by way of attorney's fees; and

3. The cost of suit.

SO ORDERED.

Petitioner appealed the foregoing RTC Decision to the CA, but on July 1, 2004, the Court of Appeals
promulgated its Decision affirming in toto said RTC judgment. A motion for reconsideration of the CA
Decision was denied per Resolution dated August 31, 2004.

Hence, this petition where petitioner alleges that:

I. THE COURT OF APPEALS ACTED NOT IN ACCORD WITH LAW AND APPLICABLE JURISPRUDENCE OF THE
SUPREME COURT WHEN IT AFFIRMED THE LOWER COURT'S FINDING THAT THE LOAN BETWEEN
PETITIONER AND RESPONDENT IS ALREADY DUE AND DEMANDABLE.

II. THE COURT OF APPEALS ERRED BY DEPARTING FROM THE ACCEPTED AND USUAL COURSE OF
JUDICIAL PROCEEDINGS – OF AFFIRMING THE DUE AND DEMANDABILITY OF THE LOAN CONTRARY TO
THE EVIDENCE PRESENTED IN THE LOWER COURT – AND SANCTIONING SUCH DEPARTURE BY THE
LOWER COURT IN THE INSTANT CASE.

III. THE COURT OF APPEALS ERRED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS – OF AFFIRMING THE AWARD OF ATTORNEY'S FEES TO THE RESPONDENT WITHOUT ANY
BASIS – AND SANCTIONING SUCH DEPARTURE BY THE LOWER COURT IN THE INSTANT CASE.7

The main issues in this case boil down to (1) whether petitioner's obligation is due and demandable; (2)
whether respondent is entitled to attorney's fees; and (3) whether interest should be imposed on
petitioner's indebtedness and, if in the affirmative, at what rate.

Petitioner does not deny that she obtained a loan from respondent. She, however, contends that the loan
is not yet due and demandable because the suspensive condition – the completion of the renovation of the
apartment units - has not yet been fulfilled. She also assails the award of attorney's fees to respondent as
baseless.

For his part, respondent admits that initially, they agreed that payment of the loan shall be made upon
completion of the renovations. However, respondent claims that during their meeting with some family
members in the house of their brother Genaro sometime in the second quarter of 1997, he and petitioner

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entered into a new agreement whereby petitioner was to start making monthly payments on her loan,
which she did from June to October of 1997. In respondent's view, there was a novation of the original
agreement, and under the terms of their new agreement, petitioner's obligation was already due and
demandable.

Respondent also maintains that when petitioner disappeared from the family compound without leaving
information as to where she could be found, making it impossible to continue the renovations, petitioner
thereby prevented the fulfillment of said condition. He claims that Article 1186 of the Civil Code, which
provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment,"
is applicable to this case.

In his Comment to the present petition, respondent raised for the first time, the issue that the loan
contract between him and petitioner is actually one with a period, not one with a suspensive condition. In
his view, when petitioner began to make partial payments on the loan, the latter waived the benefit of the
term, making the loan immediately demandable.

Respondent also believes that he is entitled to attorney's fees, as petitioner allegedly showed bad faith by
absconding and compelling him to litigate.

The Court finds the petition unmeritorious.

It is undisputed that herein parties entered into a valid loan contract. The only question is, has petitioner's
obligation become due and demandable? The Court resolves the question in the affirmative.

The evidence on record clearly shows that after renovation of seven out of the eight apartment units had
been completed, petitioner and respondent agreed that the former shall already start making monthly
payments on the loan even if renovation on the last unit (Unit A) was still pending. Genaro Tomimbang,
the younger brother of herein parties, testified that a meeting was held among petitioner, respondent,
himself and their eldest sister Maricion, sometime during the first or second quarter of 1997, wherein
respondent demanded payment of the loan, and petitioner agreed to pay. Indeed, petitioner began to
make monthly payments from June to October of 1997 totalling ₱93,500.00.8 In fact, petitioner even
admitted in her Answer with Counterclaim that she had "started to make payments to plaintiff [herein
respondent] as the same was in accord with her commitment to pay whenever she was able; x x x ."9

Evidently, by virtue of the subsequent agreement, the parties mutually dispensed with the condition that
petitioner shall only begin paying after the completion of all renovations. There was, in effect, a
modificatory or partial novation, of petitioner's obligation. Article 1291 of the Civil Code provides, thus:

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. (Emphasis supplied)

In Iloilo Traders Finance, Inc. v. Heirs of Sps. Soriano,10 the Court expounded on the nature of novation,
to wit:

Novation may either 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; x x x .

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 new valid 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,

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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.11

In Ong v. Bogñalbal,12 the Court also stated, thus:

x x x the effect of novation may be partial or total. There is partial novation when there is only a
modification or change in some principal conditions of the obligation. It is total, when the obligation is
completely extinguished. Also, the term principal conditions in Article 1291 should be construed to include
a change in the period to comply with the obligation. Such a change in the period would only be a partial
novation since the period merely affects the performance, not the creation of the obligation.13

As can be gleaned from the foregoing, the aforementioned four essential elements and the requirement
that there be total incompatibility between the old and new obligation, apply only to extinctive novation.
In partial novation, only the terms and conditions of the obligation are altered, thus, the main obligation is
not changed and it remains in force.

Petitioner stated in her Answer with Counterclaim14 that she agreed and complied with respondent's
demand for her to begin paying her loan, since she believed this was in accordance with her commitment
to pay whenever she was able. Her partial performance of her obligation is unmistakable proof that indeed
the original agreement between her and respondent had been novated by the deletion of the condition
that payments shall be made only after completion of renovations. Hence, by her very own admission and
partial performance of her obligation, there can be no other conclusion but that under the novated
agreement, petitioner's obligation is already due and demandable.

With the foregoing finding that petitioner's obligation is due and demandable, there is no longer any need
to discuss whether petitioner's disappearance from the family compound prevented the fulfillment of the
original condition, necessitating application of Article 1186 of the Civil Code, or whether the obligation is
one with a condition or a period.1awphil

As to attorney's fees, however, the award therefor cannot be allowed by the Court. It is an oft-repeated
rule that the trial court is required to state the factual, legal or equitable justification for awarding
attorney's fees.15 The Court explained in Buñing v. Santos,16 to wit:

x x x While Article 2208 of the Civil Code allows attorney's fees to be awarded if the claimant is compelled
to litigate with third persons or to incur expenses to protect his interest by reason of an unjustified act or
omission of the party from whom it is sought, there must be a showing that the losing party acted willfully
or in bad faith and practically compelled the claimant to litigate and incur litigation expenses. In view of
the declared policy of the law that awards of attorney's fees are the exception rather than the rule, it is
necessary for the trial court to make express findings of facts and law that would bring the case within the
exception and justify the grant of such award. x x x.

Thus, the matter of attorney's fees cannot be touched upon only in the dispositive portion of the decision.
The text itself must state the reasons why attorney's fees are being awarded. x x x 17

In the above-quoted case, there was a finding that defendants therein had no intention of fulfilling their
obligation in complete disregard of the plaintiff’s right, and yet, the Court did not deem this as sufficient
justification for the award of attorney's fees. Verily, in the present case, where it is understandable that
some misunderstanding could arise as to when the obligation was indeed due and demandable, the Court
must likewise disallow the award of attorney's fees.

We now come to a discussion of whether interest should be imposed on petitioner's indebtedness. In Royal
Cargo Corp. v. DFS Sports Unlimited, Inc.,18 the Court reiterated the settled rule on imposition of
interest, thus:

As to computation of legal interest, the seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals
controls, to wit:

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

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

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

The foregoing rule on legal interest was explained in Sunga-Chan v. Court of Appeals,19 in this wise:

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."20

In accordance with the above ruling, since the obligation in this case involves a loan and there is no
stipulation in writing as to interest due, the rate of interest shall be 12% per annum computed from the
date of extrajudicial demand.

IN VIEW OF THE FOREGOING, the petition is AFFIRMED with the MODIFICATION that the award for
attorney's fees is DELETED.

SO ORDERED.
x-------------------------------------------------------------------------------------------------------------------x
G.R. No. 159097 July 5, 2010
METROPOLITAN BANK AND TRUST COMPANY, Petitioner, vs.
RURAL BANK OF GERONA, INC. Respondent.

DECISION
BRION, J.:

Petitioner Metropolitan Bank and Trust Company (Metrobank) filed this Petition for Review on Certiorari1
under Rule 45 of the Rules of Court to challenge the Court of Appeals (CA) decision dated December 17,
20022 and the resolution dated July 14, 20033 in CA-G.R. CV No. 46777. The CA decision set aside the
July 7, 1994 decision4 of the Regional Trial Court (RTC) of Tarlac, Branch 65, in Civil Case No. 6028 (a
collection case filed by Metrobank against respondent Rural Bank of Gerona, Inc. [RBG]), and ordered the
remand of the case to include the Central Bank of the Philippines5 (Central Bank) as a necessary party.

THE FACTUAL ANTECEDENTS

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RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In the
1970s, the Central Bank and the RBG entered into an agreement providing that RBG shall facilitate the
loan applications of farmers-borrowers under the Central Bank-International Bank for Reconstruction and
Development’s (IBRD’s) 4th Rural Credit Project. The agreement required RBG to open a separate bank
account where the IBRD loan proceeds shall be deposited. The RBG accordingly opened a special savings
account with Metrobank’s Tarlac Branch. As the depository bank of RBG, Metrobank was designated to
receive the credit advice released by the Central Bank representing the proceeds of the IBRD loan of the
farmers-borrowers; Metrobank, in turn, credited the proceeds to RBG’s special savings account for the
latter’s release to the farmers-borrowers.

On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and accordingly
credited Metrobank’s demand deposit account in the amount of ₱178,652.00, for the account of RBG. The
amount, which was credited to RBG’s special savings account represented the approved loan application of
farmer-borrower Dominador de Jesus. RBG withdrew the ₱178,652.00 from its account.

On the same date, the Central Bank approved the loan application of another farmer-borrower, Basilio
Panopio, for ₱189,052.00, and credited the amount to Metrobank’s demand deposit account. Metrobank,
in turn, credited RBG’s special savings account. Metrobank claims that the RBG also withdrew the entire
credited amount from its account.

On October 3, 1978, the Central Bank approved Ponciano Lagman’s loan application for ₱220,000.00. As
with the two other IBRD loans, the amount was credited to Metrobank’s demand deposit account, which
amount Metrobank later credited in favor of RBG’s special savings account. Of the ₱220,000.00, RBG only
withdrew ₱75,375.00.

On November 3, 1978, more than a month after RBG had made the above withdrawals from its account
with Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD loans.6 The
Central Bank implemented the reversal by debiting from Metrobank’s demand deposit account the amount
corresponding to all three IBRD loans.

Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following amounts
from RBG’s special savings account: ₱189,052.00, ₱115,000.00, and ₱8,000.41. Metrobank, however,
claimed that these amounts were insufficient to cover all the credit advices that were reversed by the
Central Bank. It demanded payment from RBG which could make partial payments. As of October 17,
1979, Metrobank claimed that RBG had an outstanding balance of ₱334,220.00. To collect this amount, it
filed a complaint for collection of sum of money against RBG before the RTC, docketed as Civil Case No.
6028.7

In its July 7, 1994 decision,8 the RTC ruled for Metrobank, finding that legal subrogation had ensued:

[Metrobank] had allowed releases of the amounts in the credit advices it credited in favor of [RBG’s special
savings account] which credit advices and deposits were under its supervision. Being faulted in these acts
or omissions, the Central Bank [sic] debited these amounts against [Metrobank’s] demand [deposit]
reserve; thus[, Metrobank’s] demand deposit reserves diminished correspondingly, [Metrobank as of this
time,] suffers prejudice in which case legal subrogation has ensued.9

It thus ordered RBG to pay Metrobank the sum of ₱334,200.00, plus interest at 14% per annum until the
amount is fully paid.

On appeal, the CA noted that this was not a case of legal subrogation under Article 1302 of the Civil Code.
Nevertheless, the CA recognized that Metrobank had a right to be reimbursed of the amount it had paid
and failed to recover, as it suffered loss in an agreement that involved only the Central Bank and the RBG.
It clarified, however, that a determination still had to be made on who should reimburse Metrobank.
Noting that no evidence exists why the Central Bank reversed the credit advices it had previously
confirmed, the CA declared that the Central Bank should be impleaded as a necessary party so it could
shed light on the IBRD loan reversals. Thus, the CA set aside the RTC decision, and remanded the case to
the trial court for further proceedings after the Central Bank is impleaded as a necessary party.10 After
the CA denied its motion for reconsideration, Metrobank filed the present petition for review on certiorari.

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THE PETITION FOR REVIEW ON CERTIORARI

Metrobank disagrees with the CA’s ruling to implead the Central Bank as a necessary party and to remand
the case to the RTC for further proceedings. It argues that the inclusion of the Central Bank as party to
the case is unnecessary since RBG has already admitted its liability for the amount Metrobank failed to
recover. In two letters,11 RBG’s President/Manager made proposals to Metrobank for the repayment of
the amounts involved. Even assuming that no legal subrogation took place, Metrobank claims that RBG’s
letters more than sufficiently proved its liability.

Metrobank additionally contends that a remand of the case would unduly delay the proceedings. The
transactions involved in this case took place in 1978, and the case was commenced before the RTC more
than 20 years ago. The RTC resolved the complaint for collection in 1994, while the CA decided the appeal
in 2002. To implead Central Bank, as a necessary party in the case, means a return to square one and the
restart of the entire proceedings.

THE COURT’S RULING

The petition is impressed with merit.

A basic first step in resolving this case is to determine who the liable parties are on the IBRD loans that
the Central Bank extended. The Terms and Conditions of the IBRD 4th Rural Credit Project12 (Project
Terms and Conditions) executed by the Central Bank and the RBG shows that the farmers-borrowers to
whom credits have been extended, are primarily liable for the payment of the borrowed amounts. The
loans were extended through the RBG which also took care of the collection and of the remittance of the
collection to the Central Bank. RBG, however, was not a mere conduit and collector. While the farmers-
borrowers were the principal debtors, RBG assumed liability under the Project Terms and Conditions by
solidarily binding itself with the principal debtors to fulfill the obligation.

How RBG profited from the transaction is not clear from the records and is not part of the issues before
us, but if it delays in remitting the amounts due, the Central Bank imposed a 14% per annum penalty rate
on RBG until the amount is actually remitted. The Central Bank was further authorized to deduct the
amount due from RBG’s demand deposit reserve should the latter become delinquent in payment. On
these points, paragraphs 5 and 6 of the Project Terms and Conditions read:

5. Collection received representing repayments of borrowers shall be immediately remitted to the Central
Bank, otherwise[,] the Rural Bank/SLA shall be charged a penalty of fourteen [percent] (14%) p.a. until
date of remittance.

6. In case the rural bank becomes delinquent in the payment of amortizations due[,] the Central Bank is
authorized to deduct the corresponding amount from the rural bank’s demand deposit reserve13 at any
time to cover any delinquency. [Emphasis supplied.]

Based on these arrangements, the Central Bank’s immediate recourse, therefore should have been against
the farmers-borrowers and the RBG; thus, it erred when it deducted the amounts covered by the debit
advices from Metrobank’s demand deposit account. Under the Project Terms and Conditions, Metrobank
had no responsibility over the proceeds of the IBRD loans other than serving as a conduit for their transfer
from the Central Bank to the RBG once credit advice has been issued. Thus, we agree with the CA’s
conclusion that the agreement governed only the parties involved – the Central Bank and the RBG.
Metrobank was simply an outsider to the agreement. Our disagreement with the appellate court is in its
conclusion that no legal subrogation took place; the present case, in fact, exemplifies the circumstance
contemplated under paragraph 2, of Article 1302 of the Civil Code which provides:

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;

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(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter’s share. [Emphasis supplied.]

As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest except as
a conduit, and was not legally answerable for the IBRD loans. Despite this, it was Metrobank’s demand
deposit account, instead of RBG’s, which the Central Bank proceeded against, on the assumption perhaps
that this was the most convenient means of recovering the cancelled loans. That Metrobank’s payment
was involuntarily made does not change the reality that it was Metrobank which effectively answered for
RBG’s obligations.

Was there express or tacit approval by RBG of the payment enforced against Metrobank? After Metrobank
received the Central Bank’s debit advices in November 1978, it (Metrobank) accordingly debited the
amounts it could from RBG’s special savings account without any objection from RBG.14 RBG’s President
and Manager, Dr. Aquiles Abellar, even wrote Metrobank, on August 14, 1979, with proposals regarding
possible means of settling the amounts debited by Central Bank from Metrobank’s demand deposit
account.15 These instances are all indicative of RBG’s approval of Metrobank’s payment of the IBRD loans.
That RBG’s tacit approval came after payment had been made does not completely negate the legal
subrogation that had taken place.

Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with all
the rights thereto appertaining, either against the debtor or against third persons. As the entity against
which the collection was enforced, Metrobank was subrogated to the rights of Central Bank and has a
cause of action to recover from RBG the amounts it paid to the Central Bank, plus 14% per annum
interest.

Under this situation, impleading the Central Bank as a party is completely unnecessary. We note that the
CA erroneously believed that the Central Bank’s presence is necessary "in order x x x to shed light on the
matter of reversals made by it concerning the loan applications of the end users and to have a complete
determination or settlement of the claim."16 In so far as Metrobank is concerned, however, the Central
Bank’s presence and the reasons for its reversals of the IBRD loans are immaterial after subrogation has
taken place; Metrobank’s interest is simply to collect the amounts it paid the Central Bank. Whatever
cause of action RBG may have against the Central Bank for the unexplained reversals and any undue
deductions is for RBG to ventilate as a third-party claim; if it has not done so at this point, then the
matter should be dealt with in a separate case that should not in any way further delay the disposition of
the present case that had been pending before the courts since 1980.

While we would like to fully and finally resolve this case, certain factual matters prevent us from doing so.
Metrobank contends in its petition that it credited RBG’s special savings account with three amounts
corresponding to the three credit advices issued by the Central Bank: the ₱178,652.00 for Dominador de
Jesus; the ₱189,052.00 for Basilio Panopio; and the ₱220,000.00 for Ponciano Lagman. Metrobank claims
that all of the three credit advices were subsequently reversed by the Central Bank, evidenced by three
debit advices. The records, however, contained only the credit and debit advices for the amounts set aside
for de Jesus and Lagman;17 nothing in the findings of fact by the RTC and the CA referred to the amount
set aside for Panopio.

Thus, what were sufficiently proven as credited and later on debited from Metrobank’s demand deposit
account were only the amounts of ₱178,652.00 and ₱189,052.00. With these amounts combined, RBG’s
liability would amount to ₱398,652.00 – the same amount RBG acknowledged as due to Metrobank in its
August 14, 1979 letter.18 Significantly, Metrobank likewise quoted this amount in its July 11, 197919 and
July 26, 197920 demand letters to RBG and its Statement of Account dated December 23, 1982.21

RBG asserts that it made partial payments amounting to ₱145,197.40,22 but neither the RTC nor the CA
made a conclusive finding as to the accuracy of this claim. Although Metrobank admitted that RBG indeed
made partial payments, it never mentioned the actual amount paid; neither did it state that the
₱145,197.40 was part of the ₱312,052.41 that, it admitted, it debited from RBG’s special savings account.

Deducting ₱312,052.41 (representing the amounts debited from RBG’s special savings account, as
admitted by Metrobank) from ₱398,652.00 amount due to Metrobank from RBG, the difference would only
be ₱86,599.59. We are, therefore, at a loss on how Metrobank computed the amount of ₱334,220.00 it

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claims as the balance of RBG’s loan. As this Court is not a trier of facts, we deem it proper to remand this
factual issue to the RTC for determination and computation of the actual amount RBG owes to Metrobank,
plus the corresponding interest and penalties.

WHEREFORE, we GRANT the petition for review on certiorari, and REVERSE the decision and the resolution
of the Court of Appeals, in CA-G.R. CV No. 46777, promulgated on December 17, 2002 and July 14, 2003,
respectively. We AFFIRM the decision of the Regional Trial Court, Branch 65, Tarlac, promulgated on July
7, 1994, insofar as it found respondent liable to the petitioner Metropolitan Bank and Trust Company, but
order the REMAND of the case to the trial court to determine the actual amounts due to the petitioner.
Costs against respondent Rural Bank of Gerona, Inc.

SO ORDERED.
x-------------------------------------------------------------------------------------------------------------------x
G.R. No. 163825 July 13, 2010
VIOLETA TUDTUD BANATE, MARY MELGRID M. CORTEL, BONIFACIO CORTEL, ROSENDO
MAGLASANG, and PATROCINIA MONILAR, Petitioners, vs.
PHILIPPINE COUNTRYSIDE RURAL BANK (LILOAN, CEBU), INC. and TEOFILO SOON, JR.,
Respondents.
DECISION
BRION, J.:

Before the Court is a petition for review on certiorari1 assailing the December 19, 2003 decision2 and the
May 5, 2004 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 74332. The CA decision reversed
the Regional Trial Court (RTC) decision4 of June 27, 2001 granting the petitioners’ complaint for specific
performance and damages against the respondent Philippine Countryside Rural Bank, Inc. (PCRB).5

THE FACTUAL ANTECEDENTS

On July 22, 1997, petitioner spouses Rosendo Maglasang and Patrocinia Monilar (spouses Maglasang)
obtained a loan (subject loan) from PCRB for ₱1,070,000.00. The subject loan was evidenced by a
promissory note and was payable on January 18, 1998. To secure the payment of the subject loan, the
spouses Maglasang executed, in favor of PCRB a real estate mortgage over their property, Lot 12868-H-3-
C, 6 including the house constructed thereon (collectively referred to as subject properties), owned by
petitioners Mary Melgrid and Bonifacio Cortel (spouses Cortel), the spouses Maglasang’s daughter and
son-in-law, respectively. Aside from the subject loan, the spouses Maglasang obtained two other loans
from PCRB which were covered by separate promissory notes7 and secured by mortgages on their other
properties.

Sometime in November 1997 (before the subject loan became due), the spouses Maglasang and the
spouses Cortel asked PCRB’s permission to sell the subject properties. They likewise requested that the
subject properties be released from the mortgage since the two other loans were adequately secured by
the other mortgages. The spouses Maglasang and the spouses Cortel claimed that the PCRB, acting
through its Branch Manager, Pancrasio Mondigo, verbally agreed to their request but required first the full
payment of the subject loan. The spouses Maglasang and the spouses Cortel thereafter sold to petitioner
Violeta Banate the subject properties for ₱1,750,000.00. The spouses Magsalang and the spouses Cortel
used the amount to pay the subject loan with PCRB. After settling the subject loan, PCRB gave the owner’s
duplicate certificate of title of Lot 12868-H-3-C to Banate, who was able to secure a new title in her name.
The title, however, carried the mortgage lien in favor of PCRB, prompting the petitioners to request from
PCRB a Deed of Release of Mortgage. As PCRB refused to comply with the petitioners’ request, the
petitioners instituted an action for specific performance before the RTC to compel PCRB to execute the
release deed.

The petitioners additionally sought payment of damages from PCRB, which, they claimed, caused the
publication of a news report stating that they "surreptitiously" caused the transfer of ownership of Lot
12868-H-3-C. The petitioners considered the news report false and malicious, as PCRB knew of the sale of
the subject properties and, in fact, consented thereto.

PCRB countered the petitioners’ allegations by invoking the cross-collateral stipulation in the mortgage
deed which states:

Page 9 of 189
1. That as security for the payment of the loan or advance in principal sum of one million seventy
thousand pesos only (₱1,070,000.00) and such other loans or advances already obtained, or still to be
obtained by the MORTGAGOR(s) as MAKER(s), CO-MAKER(s) or GUARANTOR(s) from the MORTGAGEE
plus interest at the rate of _____ per annum and penalty and litigation charges payable on the dates
mentioned in the corresponding promissory notes, the MORTGAGOR(s) hereby transfer(s) and convey(s)
to MORTGAGEE by way of first mortgage the parcel(s) of land described hereunder, together with the
improvements now existing for which may hereafter be made thereon, of which MORTGAGOR(s)
represent(s) and warrant(s) that MORTGAGOR(s) is/are the absolute owner(s) and that the same is/are
free from all liens and encumbrances;

TRANSFER CERTIFICATE OF TITLE NO. 827468

Accordingly, PCRB claimed that full payment of the three loans, obtained by the spouses Maglasang, was
necessary before any of the mortgages could be released; the settlement of the subject loan merely
constituted partial payment of the total obligation. Thus, the payment does not authorize the release of
the subject properties from the mortgage lien.

PCRB considered Banate as a buyer in bad faith as she was fully aware of the existing mortgage in its
favor when she purchased the subject properties from the spouses Maglasang and the spouses Cortel. It
explained that it allowed the release of the owner’s duplicate certificate of title to Banate only to enable
her to annotate the sale. PCRB claimed that the release of the title should not indicate the corresponding
release of the subject properties from the mortgage constituted thereon.

After trial, the RTC ruled in favor of the petitioners. It noted that the petitioners, as "necessitous men,"
could not have bargained on equal footing with PCRB in executing the mortgage, and concluded that it
was a contract of adhesion. Therefore, any obscurity in the mortgage contract should not benefit PCRB.9

The RTC observed that the official receipt issued by PCRB stated that the amount owed by the spouses
Maglasang under the subject loan was only about ₱1.2 million; that Mary Melgrid Cortel paid the subject
loan using the check which Banate issued as payment of the purchase price; and that PCRB authorized the
release of the title further indicated that the subject loan had already been settled. Since the subject loan
had been fully paid, the RTC considered the petitioners as rightfully entitled to a deed of release of
mortgage, pursuant to the verbal agreement that the petitioners made with PCRB’s branch manager,
Mondigo. Thus, the RTC ordered PCRB to execute a deed of release of mortgage over the subject
properties, and to pay the petitioners moral damages and attorney’s fees.10

On appeal, the CA reversed the RTC’s decision. The CA did not consider as valid the petitioners’ new
agreement with Mondigo, which would novate the original mortgage contract containing the cross-
collateral stipulation. It ruled that Mondigo cannot orally amend the mortgage contract between PCRB, and
the spouses Maglasang and the spouses Cortel; therefore, the claimed commitment allowing the release of
the mortgage on the subject properties cannot bind PCRB. Since the cross-collateral stipulation in the
mortgage contract (requiring full settlement of all three loans before the release of any of the mortgages)
is clear, the parties must faithfully comply with its terms. The CA did not consider as material the release
of the owner’s duplicate copy of the title, as it was done merely to allow the annotation of the sale of the
subject properties to Banate.11

Dismayed with the reversal by the CA of the RTC’s ruling, the petitioners filed the present appeal by
certiorari, claiming that the CA ruling is not in accord with established jurisprudence.

THE PETITION

The petitioners argue that their claims are consistent with their agreement with PCRB; they complied with
the required full payment of the subject loan to allow the release of the subject properties from the
mortgage.

Having carried out their part of the bargain, the petitioners maintain that PCRB must honor its
commitment to release the mortgage over the subject properties.

Page 10 of 189
The petitioners disregard the cross-collateral stipulation in the mortgage contract, claiming that it had
been novated by the subsequent agreement with Mondigo. Even assuming that the cross-collateral
stipulation subsists for lack of authority on the part of Mondigo to novate the mortgage contract, the
petitioners contend that PCRB should nevertheless return the amount paid to settle the subject loan since
the new agreement should be deemed rescinded.

The basic issues for the Court to resolve are as follows:

1. Whether the purported agreement between the petitioners and Mondigo novated the mortgage contract
over the subject properties and is thus binding upon PCRB.

2. If the first issue is resolved negatively, whether Banate can demand restitution of the amount paid for
the subject properties on the theory that the new agreement with Mondigo is deemed rescinded.

THE COURT’S RULING

We resolve to deny the petition.

The purported agreement did not novate the mortgage contract, particularly the cross- collateral
stipulation thereon

Before we resolve the issues directly posed, we first dwell on the determination of the nature of the cross-
collateral stipulation in the mortgage contract. As a general rule, a mortgage liability is usually limited to
the amount mentioned in the contract. However, the amounts named as consideration in a contract of
mortgage do not limit the amount for which the mortgage may stand as security if, from the four corners
of the instrument, the intent to secure future and other indebtedness can be gathered. This stipulation is
valid and binding between the parties and is known as the "blanket mortgage clause" (also known as the
"dragnet clause)."

In the present case, the mortgage contract indisputably provides that the subject properties serve as
security, not only for the payment of the subject loan, but also for "such other loans or advances already
obtained, or still to be obtained." The cross-collateral stipulation in the mortgage contract between the
parties is thus simply a variety of a dragnet clause. After agreeing to such stipulation, the petitioners
cannot insist that the subject properties be released from mortgage since the security covers not only the
subject loan but the two other loans as well.

The petitioners, however, claim that their agreement with Mondigo must be deemed to have novated the
mortgage contract. They posit that the full payment of the subject loan extinguished their obligation
arising from the mortgage contract, including the stipulated cross-collateral provision. Consequently,
consistent with their theory of a novated agreement, the petitioners maintain that it devolves upon PCRB
to execute the corresponding Deed of Release of Mortgage.

We find the petitioners’ argument unpersuasive. Novation, in its broad concept, may either be extinctive
or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation
that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent
that it remains compatible with the amendatory agreement. An extinctive novation results either by
changing the object or principal conditions (objective or real), or by substituting the person of the debtor
or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode,
novation would have dual functions – one to extinguish an existing obligation, the other to substitute a
new one in its place – requiring a conflux of four essential requisites: (1) a previous valid obligation; (2)
an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and
(4) the birth of a valid new obligation.13

The second requisite is lacking in this case. Novation presupposes not only the extinguishment or
modification of an existing obligation but, more importantly, the creation of a valid new obligation.14 For
the consequent creation of a new contractual obligation, consent of both parties is, thus, required. As a
general rule, no form of words or writing is necessary to give effect to a novation. Nevertheless, where
either or both parties involved are juridical entities, proof that the second contract was executed by
persons with the proper authority to bind their respective principals is necessary.15

Page 11 of 189
Section 23 of the Corporation Code16 expressly provides that the corporate powers of all corporations
shall be exercised by the board of directors. The power and the responsibility to decide whether the
corporation should enter into a contract that will bind the corporation are lodged in the board, subject to
the articles of incorporation, bylaws, or relevant provisions of law. In the absence of authority from the
board of directors, no person, not even its officers, can validly bind a corporation.

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 its officers, committees or
agents. The authority of these individuals to bind 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.

The authority of a corporate officer or agent in dealing with third persons may be actual or apparent.
Actual authority is either express or implied. The extent of an agent’s express authority is to be measured
by the power delegated to him by the corporation, while the extent of his implied authority is measured by
his prior acts which have been ratified or approved, or their benefits accepted by his principal.18 The
doctrine of "apparent authority," on the other hand, with special reference to banks, had long been
recognized in this jurisdiction. The existence of apparent authority may be ascertained through:

1) the general manner in which the corporation holds out an officer or agent as having the power to act,
or in other words, the apparent authority to act in general, with which it clothes him; or

2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within
or beyond the scope of his ordinary powers.

Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition
in other instances when the power was exercised without any objection from its board or shareholders.19

Notably, the petitioners’ action for specific performance is premised on the supposed actual or apparent
authority of the branch manager, Mondigo, to release the subject properties from the mortgage, although
the other obligations remain unpaid. In light of our discussion above, proof of the branch manager’s
authority becomes indispensable to support the petitioners’ contention. The petitioners make no claim that
Mondigo had actual authority from PCRB, whether express or implied. Rather, adopting the trial court’s
observation, the petitioners posited that PCRB should be held liable for Mondigo’s commitment, on the
basis of the latter’s apparent authority.

We disagree with this position.

Under the doctrine of apparent authority, acts and contracts of the agent, as are within the apparent
scope of the authority conferred on him, although no actual authority to do such acts or to make such
contracts has been conferred, bind the principal.20 The principal’s liability, however, is limited only to
third persons who have been led reasonably to believe by the conduct of the principal that such actual
authority exists, although none was given. In other words, apparent authority is determined only by the
acts of the principal and not by the acts of the agent.21 There can be no apparent authority of an agent
without acts or conduct on the part of the principal; such acts or conduct must have been known and
relied upon in good faith as a result of the exercise of reasonable prudence by a third party as claimant,
and such acts or conduct must have produced a change of position to the third party’s detriment.22

In the present case, the decision of the trial court was utterly silent on the manner by which PCRB, as
supposed principal, has "clothed" or "held out" its branch manager as having the power to enter into an
agreement, as claimed by petitioners. No proof of the course of business, usages and practices of the
bank about, or knowledge that the board had or is presumed to have of, its responsible officers’ acts
regarding bank branch affairs, was ever adduced to establish the branch manager’s apparent authority to
verbally alter the terms of mortgage contracts.23 Neither was there any allegation, much less proof, that
PCRB ratified Mondigo’s act or is estopped to make a contrary claim.24

Further, we would be unduly stretching the doctrine of apparent authority were we to consider the power
to undo or nullify solemn agreements validly entered into as within the doctrine’s ambit. Although a
branch manager, within his field and as to third persons, is the general agent and is in general charge of

Page 12 of 189
the corporation, with apparent authority commensurate with the ordinary business entrusted him and the
usual course and conduct thereof,25 yet the power to modify or nullify corporate contracts remains
generally in the board of directors.26 Being a mere branch manager alone is insufficient to support the
conclusion that Mondigo has been clothed with "apparent authority" to verbally alter terms of written
contracts, especially when viewed against the telling circumstances of this case: the unequivocal provision
in the mortgage contract; PCRB’s vigorous denial that any agreement to release the mortgage was ever
entered into by it; and, the fact that the purported agreement was not even reduced into writing
considering its legal effects on the parties’ interests. To put it simply, the burden of proving the authority
of Mondigo to alter or novate the mortgage contract has not been established.27

It is a settled rule that persons dealing with an agent are bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature and extent of the agent’s
authority, and in case either is controverted, the burden of proof is upon them to establish it.28 As parties
to the mortgage contract, the petitioners are expected to abide by its terms. The subsequent purported
agreement is of no moment, and cannot prejudice PCRB, as it is beyond Mondigo’s actual or apparent
authority, as above discussed.

Rescission has no legal basis; there can be no restitution of the amount paid

The petitioners, nonetheless, invoke equity and alternatively pray for the restitution of the amount paid,
on the rationale that if PCRB’s branch manager was not authorized to accept payment in consideration of
separately releasing the mortgage, then the agreement should be deemed rescinded, and the amount paid
by them returned.

PCRB, on the other hand, counters that the petitioners’ alternative prayer has no legal and factual basis,
and insists that the clear agreement of the parties was for the full payment of the subject loan, and in
return, PCRB would deliver the title to the subject properties to the buyer, only to enable the latter to
obtain a transfer of title in her own name.

We agree with PCRB. Even if we were to assume that the purported agreement has been sufficiently
established, since it is not binding on the bank for lack of authority of PCRB’s branch manager, then the
prayer for restitution of the amount paid would have no legal basis. Of course, it will be asked: what then
is the legal significance of the payment made by Banate? Article 2154 of the Civil Code reads:

Art 2154. If something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.1avvphi1

Notwithstanding the payment made by Banate, she is not entitled to recover anything from PCRB under
Article 2154. There could not have been any payment by mistake to PCRB, as the check which Banate
issued as payment was to her co-petitioner Mary Melgrid Cortel (the payee), and not to PCRB. The same
check was simply endorsed by the payee to PCRB in payment of the subject loan that the Maglasangs
owed PCRB.

The mistake, if any, was in the perception of the authority of Mondigo, as branch manager, to verbally
alter the mortgage contract, and not as to whether the Cortels, as sellers, were entitled to payment. This
mistake (on Mondigo’s lack of authority to alter the mortgage) did not affect the validity of the payment
made to the bank as the existence of the loan was never disputed. The dispute was merely on the effect
of the payment on the security given.30

Consequently, no right to recover accrues in Banate’s favor as PCRB never dealt with her. The borrowers-
mortgagors, on the other hand, merely paid what was really owed. Parenthetically, the subject loan was
due on January 18, 1998, but was paid sometime in November 1997. It appears, however, that at the
time the complaint was filed, the subject loan had already matured. Consequently, recovery of the amount
paid, even under a claim of premature payment, will not prosper.

In light of these conclusions, the claim for moral damages must necessarily fail. On the alleged injurious
publication, we quote with approval the CA’s ruling on the matter, viz:

Page 13 of 189
Consequently, there is no reason to hold [respondent] PCRB liable to [petitioners] for damages. x x x
[Petitioner] Maglasang cannot hold [respondent] PCRB liable for the publication of the extra-judicial sale.
There was no evidence submitted to prove that [respondent] PCRB authored the words "Mortgagors
surreptitiously caused the transfer of ownership of Lot 12868-H-3-C x x x" contained in the publication
since at the bottom was x x x Sheriff Teofilo C. Soon, Jr.’s name. Moreover, there was not even an iota of
proof which shows damage on the part of [petitioner] Mary Melgrid M. Cortel.

WHEREFORE, we DENY the petitioners’ petition for review on certiorari for lack of merit, and AFFIRM the
decision of the Court of Appeals dated December 19, 2003 and its resolution dated May 5, 2004 in CA-
G.R. CV No. 74332. No pronouncement as to costs.

SO ORDERED.
x--------------------------------------------------------------------------------------------------------------------x
G.R. No. 179441 August 9, 2010
ST. JAMES COLLEGE OF PARAÑAQUE; JAIME T. TORRES, represented by his legal
representative, JAMES KENLEY M. TORRES; and MYRNA M. TORRES, Petitioners, vs.
EQUITABLE PCI BANK, Respondent.
DECISION
VELASCO, JR., J.:

Appealed via this petition for review under Rule 45 is the Decision1 dated January 17, 2007 of the Court of
Appeals (CA) in CA-G.R. SP No. 86587, as reiterated in its Resolution2 of August 28, 2007, reversing the
earlier orders in SCA No. 2569 of the Regional Trial Court (RTC), Branch 266 in Pasig City.

The Facts

Petitioners-spouses Jaime (now deceased) and Myrna Torres owned and operated St. James College of
Parañaque3 (St. James College), a sole proprietorship educational institution. Sometime in 1995, the
Philippine Commercial and International Bank (PCIB) granted the Torres spouses and/or St. James College
a credit line facility of up to PhP 25,000,000. This accommodation or any of its extension or renewal was
secured by a real estate mortgage4 (REM) over a parcel of land situated in Parañaque covered by Transfer
Certificate of Title (TCT) No. 745985 in the name of St. James College, particularly described as:

A parcel of Land (lot 2 of the cons. and subd. plan Pcs.-13-0008777, being a portion of the cons. of Lots
4654-B and 5654-C Psd.-13-002266. L.R.C. Rec. No. N-21332), situated in the Bo. of San Dionisio, Mun.
of Parañaque, Metro Manila. x x x containing an area of NINETEEN THOUSAND TWO HUNDRED TWENTY
FIVE (19,225) SQ. METERS.

St. James College used to occupy the above lot.

PCIB eventually merged with Equitable Bank with the surviving bank known as Equitable PCI Bank (EPCIB)
(now Banco de Oro). The credit line underwent several annual renewals, the last being effected in 2001.
As petitioners had defaulted in the payment of the loan obtained from the secured credit accommodation,
their total unpaid loan obligation, as of September 2001, stood at PhP 18,300,000.

In a bid to settle its loan availment, petitioners first proposed to EPCIB that they be allowed to pay their
account in equal quarterly installments for five years. This payment scheme was apparently not acceptable
to EPCIB, as another written letter later followed, this time petitioners proposing that their outstanding
credit be converted into a long term loan payable in 10 equal annual installments.

EPCIB responded via a letter of January 9, 2003.6 In it, EPCIB informed petitioners that it is denying their
request for the reinstatement of their credit line, but proposed a restructuring package with a soft
payment scheme for the outstanding loan balance of PhP 18,300,000. Under the counter-proposal, the
bank would book the accumulated past due loans to current status and charge interest at a fixed rate of
13.375% per annum, payable in either of the ensuing modes and level, at petitioners’ options: payment of
the PhP 18,300,000 principal either at a monthly rate of PhP 508,333.33; or equal annual amortizations of
PhP 6,100,000 payable every May. Petitioner Jaime Torres chose and agreed to the second option, i.e.,
the equal annual amortizations of PhP 6,100,000 payable every May, by affixing his conforme signature at
the bottom portion of EPCIB’s letter, writing the words "on annual amortization."

Page 14 of 189
May 2003 came, but petitioners failed to pay the stipulated annual amortization of PhP 6,100,000 agreed
upon. Whereupon, EPCIB addressed to petitioners a demand letter dated June 6, 2003 requiring them to
settle their obligation. On June 23, 2003, petitioners tendered, and EPCIB accepted, a partial payment of
PhP 2,521,609.62, broken down to cover the following items: PhP 1,000,000 principal, PhP 1,360,881.62
interest due on June 15, 2003, and PhP 160,728.00 insurance premium for the mortgaged property. In
the covering June 23, 2003 letter,8 which came with the tender, petitioners promised to make another
payment in October 2003 and that the account would be made current in June 2004. They manifested,
however, that St. James College is not subject to the 10% value-added tax (VAT) which EPCIB assessed
against the school in its June 15, 2003 statement of account. Petitioners accordingly requested the
deletion of the VAT portion.

Vis-à-vis the PhP 2,521,609.62 payment to which it issued an official receipt (OR)9 dated June 30, 2003,
EPCIB made it abundantly clear on the OR that: "THE RECEIPT OF PAYMENT IS WITHOUT PREJUDICE TO
THE BANK’S RIGHT AND CLAIMS ARISING FROM THE FACT THE ACCOUNT IS OVERDUE. NOR SHALL IT
RENDER THE BANK LIABLE FOR ANY DAMAGE BY ITS ACCEPTANCE OF PAYMENT." And in answer to
petitioners’ cover letter of June 23, 2003, EPCIB, through counsel, reminded and made it clear to
petitioners that their first partial payment did not detract from the past due character of their outstanding
loan for which reason it is demanding the remaining PhP 5,100,000 to complete the first PhP 6,100,000
principal payment. On August 27, 2003, EPCIB again sent another demand letter to petitioners, but to no
avail.

On September 15, 2003, petitioners requested that the bank allow a partial payment of the May 2003
amortization balance of PhP 5,100,000. Two days later, EPCIB responded denying petitioners’ request, but
nonetheless proposed a new repayment scheme to which petitioners were not amenable.

Petitioners made a second check remittance, this time in the amount of PhP 921,535.42,10 the PhP
500,000 portion of which represented payment of the principal and PhP 421,535.42 for interest due on
October 15, 2003. By letter dated November 5, 2003, EPCIB again reminded petitioners that its receipt of
the check payment for the amount of the PhP 921,535.42 is without prejudice to the bank’s rights
considering the overdue nature of petitioners’ loan.

On November 6, 2003, petitioners issued a Stop Payment Order12 for their PhP 921,535.42 check. And in
a November 8, 2003 letter, petitioner Jaime, adverting to EPCIB’s November 5, 2003 letter, told the bank,
"You cannot just unilaterally decide/announce that you did not approve our proposal/request for
restructuring of our loan after receiving our payment, which was based on said proposal/request."13

On November 10, 2003, EPCIB, through counsel, demanded full settlement of petitioners’ loan obligation
in the total amount of PhP 24,719,461.48. Appended to the demand letter which went unheeded was a
statement of account showing detailed principal obligation, interest, and penalties as well as payments
petitioners made and how they were applied.

On November 27, 2003, EPCIB filed before the Office of the Clerk of Court and Ex-Officio Sheriff of the
RTC in Parañaque City its Petition for Sale14 to extra-judicially foreclose the mortgaged property covered
by TCT No. 74598. After due publication, the foreclosure sale of the mortgaged property was set for
January 9 and 16, 2004.

On December 8, 2003, in the RTC, Branch 266 in Pasig City, petitioners instituted against EPCIB a
complaint for Declaratory Relief, Injunction and Damages, with application for a temporary restraining
order (TRO) and/or writ of preliminary injunction,15 docketed as SCA No. 2569.

On the very day of the scheduled foreclosure sale, January 9, 2004, the Pasig City RTC issued a TRO,16
enjoining EPCIB from proceeding with the scheduled foreclosure sale, and set a date for the hearing on
the application for a writ of preliminary injunction.

After the scheduled hearing on January 15, 2004, the trial court required the parties to file their respective
memoranda. EPCIB filed a motion praying for an additional time to file its memorandum which the RTC
eventually denied.

Page 15 of 189
On March 10, 2004, the RTC issued an Order granting a writ of preliminary injunction in favor of
petitioners, as plaintiffs a quo, thus effectively staying the rescheduled foreclosure sale of St. James
College’s mortgaged property. The dispositive portion of the RTC Order reads:

WHEREFORE, premises considered, finding plaintiffs’ application for writ of preliminary injunction to be
well-taken and legally justified, the same is hereby GRANTED.

Accordingly, in the interest of substantial justice, let therefore a writ of preliminary injunction be issued
enjoining the defendant EPCIB and/or any of its representative/s or any person acting in its behalf to
foreclose the mortgaged property of the plaintiffs until final order of the Court. Plaintiffs are directed to
post an injunction bond in the amount of ONE MILLION PESOS (PhP1,000,000.00) to answer for whatever
damages that said defendant may suffer in the event that it is finally determined by the Court that
plaintiffs are not entitled to the same.

SO ORDERED.

By Order18 of July 6, 2004, the RTC denied EPCIB’s Extremely Urgent Motion for Reconsideration.19

Aggrieved, EPCIB went to the CA on certiorari to nullify the RTC Orders dated March 10, 2004 and July 6,
2004, and necessarily to assail the propriety of the writ of preliminary injunction thus granted.

Meanwhile, petitioner Jaime passed away and was substituted by petitioner James Kenley M. Torres.

The Ruling of the CA

On January 17, 2007, the appellate court––while making short shrift of the jurisdictional challenge raised
by EPCIB, but finding that grave abuse of discretion attended the issuance of the assailed writ of
preliminary injunction––rendered the assailed decision nullifying and setting aside the RTC orders,
disposing as follows:

WHEREFORE, premises considered, the instant petition for certiorari is GRANTED. Accordingly, the March
10, 2004 and July 6, 2004 Orders of the Regional Trial Court of Pasig City, Branch 266, are hereby
REVERSED and SET ASIDE.

SO ORDERED.20

Their Motion for Reconsideration (Of the Decision dated 17 January 2007)21 having been denied in the
equally assailed resolution of August 28, 2007, petitioners interposed the instant recourse.

The Court, through its Resolution of December 12, 2007, issued a TRO,22 enjoining the Office of the Clerk
of Court and Ex-Officio Sheriff of the Parañaque City RTC, and EPCIB, their agents or representatives,
from enforcing the appealed decision and resolution of the CA, conditioned upon the posting by petitioners
of a PhP 1,000,000 surety bond. On January 29, 2008, petitioners submitted the necessary surety bond.

The Issues

Petitioners urge the setting aside of the appealed CA decision and resolution on the submission that the
appellate court committed grave and reversible error:

I. x x x IN RULING THAT THE PETITIONERS (PRIVATE RESPONDENTS IN CA-G.R. SP NO. 86587) FAILED
TO ESTABLISH THE ELEMENTS FOR THE ISSUANCE OF THE INJUNCTIVE WRIT CONTRARY TO THE
FINDINGS OF THE COURT A QUO BY MISAPPLYING THE CASE OF TOYOTA MOTOR PHILIPPINES
CORPORATION WORKERS’ ASSOCIATION VS COURT OF APPEALS, 412 SCRA 69.

II. x x x IN MISINTERPRETING THE DOCTRINE ENUNCIATED IN ESTARES VS. COURT OF APPEALS, 459
SCRA, 619 UPON WHICH IT LIKEWISE BASED ITS ASSAILED DECISION PROMULGATED ON JANUARY 17,
2007.

Page 16 of 189
III. x x x IN RULING THAT THERE WAS NO NOVATION AS PROVIDED FOR UNDER ARTICLE 1292 OF THE
NEW CIVIL CODE OF THE PHILIPPINES.23

The key issues tendered may be summarized, as follows: first, whether there was indeed a novation of the
contract between the parties; and second, whether the required ground or grounds for the issuance of a
preliminary injunction is/are present.

The Court’s Ruling

The petition is unmeritorious.

No Novation of Contract

Petitioners admit the existence of their unsettled loan obligation to EPCIB. They would insist, however,
that the full amount is still not due owing to the implied novation of the terms of payment previously
agreed upon. As petitioners assert in this regard that the acceptance by EPCIB, particularly of the June 23,
2003 PhP 2,521,609.62 payment, without any objection on the new terms set forth in their June 23, 2003
complementing covering letter, novated the terms of payment of the PhP 18,300,000 secured loan. To
petitioners, EPCIB veritably acquiesced to the new terms of payment being incompatible with the terms of
the January 9, 2003 counter-proposal of EPCIB affecting petitioners’ obligation of PhP 18,300,000.

We are not persuaded.

As a civil law concept, novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates it, either by changing its objects or principal conditions,
or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of
the creditor.24 Novation may be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new one that takes the place of the former; it is merely modificatory when
the old obligation subsists to the extent that it remains compatible with the amendatory agreement.25
Novation may either be express, when the new obligation declares in unequivocal terms that the old
obligation is extinguished, or implied, when the new obligation is on every point incompatible with the old
one.26 The test of incompatibility lies on whether the two obligations can stand together, each one with
its own independent existence.27

For novation, as a mode of extinguishing or modifying an obligation, to apply, 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.28

As correctly determined by the appellate court, certain circumstances or their interplay militates against
the application of novation.

First. The parties did not unequivocally declare, let alone agree, that the obligation had been modified as
to the terms of payment by the partial payments of the obligation. Petitioners indeed made known their
inability to pay in full the PhP 6,100,000 principal obligation due in May 2003 and tendered only partial
payments of PhP 1,000,000 on June 23, 2003 and PhP 500,000 on November 5, 2003. It should be
stressed, however, that EPCIB lost no time in demanding payment for the full PhP 6,100,000 principal
obligation due in May 2003. The following acts of EPCIB readily argue against the idea of its having agreed
to a modification in the stipulated terms of payment: (a) its letter-reply to petitioners’ June 23, 2003
letter; (b) the August 27, 2003 demand-letter of EPCIB for the full principal balance of PhP 5,100,000
from petitioners; (c) the September 17, 2003 letter of EPCIB denying petitioners’ request for a partial
payment; (d) the OR dated June 30, 2003 EPCIB issued where the following entries were written: "THE
RECEIPT OF PAYMENT IS WITHOUT PREJUDICE TO THE BANK’S RIGHTS AND CLAIMS ARISING FROM THE
FACT THE ACCOUNT IS OVERDUE. NOR SHALL IT RENDER THE BANK LIABLE FOR ANY DAMAGE BY ITS
ACCEPTANCE OF PAYMENT"; and (e) the letter of November 5, 2003 EPCIB sent reiterating that the
receipt of the second partial payment is without prejudice to the bank’s rights on the overdue loan.

Page 17 of 189
The underlying arrangement between petitioners and EPCIB, respecting the terms of payment of the loan
drawn against the credit facility, was that set forth in the January 9, 2003 agreement, which, for
reference, required petitioners to remit to the lending bank an annual amortization of PhP 6,100,000
payable every May until the entire loan obligation shall have been covered. Any suggestion that EPCIB is
precluded from asserting its legal rights after petitioners reneged on their part of the bargain etched in
said January 9, 2003 agreement owing alone to its acceptance of an amount less than PhP 6,100,000, is
too presumptuous for acceptance. Viewed otherwise, the notion of novation foisted by petitioners on the
Court cannot be plausibly deduced from EPCIB’s acceptance of such lesser amount.

Contrary to what petitioners would want the Court to believe, there is clearly no incompatibility between
EPCIB’s receipt of the partial payments of the principal amounts and what was due in May 2003, i.e., the
PhP 1,000,000 and PhP 500,000 payments vis-à-vis the PhP 6,100,000 due. As it were, EPCIB accepted
the partial payments remitted, but demanded, at the same time, the full payment of what was otherwise
due in May 2003, as the parties agreed upon. As the CA observed correctly, precisely EPCIB was
demanding the full payment of the PhP 5,100,000 principal due in May 2003 which had not yet been
settled.

Second. Novatio non praesumitur, or novation is never presumed,29 is a well-settled principle.

Consequently, that which arises from a purported modification in the terms and conditions of the
obligation must be clear and express. On petitioners thus rests the onus of showing clearly and
unequivocally that novation has indeed taken place. To us, petitioners have not discharged the burden.
Moreover, we fail to see the presence of the concurring requisites for a novation of contract, as
enumerated above. Indeed, petitioners have not shown an express modification of the terms of payment
of the obligation.

It has often been said that the minds that agree to contract can agree to novate. And the agreement or
consent to novate may well be inferred from the acts of a creditor, since volition may as well be expressed
by deeds as by words.30 In the instant case, however, the acts of EPCIB before, simultaneously to, and
after its acceptance of payments from petitioners argue against the idea of its having acceded or
acquiesced to petitioners’ request for a change of the terms of payments of the secured loan. Far from it.
Thus, a novation through an alleged implied consent by EPCIB, as proffered and argued by petitioners,
cannot be given imprimatur by the Court.

Propriety of the Grant of Injunctive Writ

We now come to the main issue in this case—the propriety of the issuance of the preliminary injunctive
writ.

Basically, petitioners fault the appellate court for citing and relying on Toyota Motor Philippines
Corporation Workers’ Association v. Court of Appeals (Toyota)31 and Estares v. Court of Appeals32 in
support of its disposition on their non-entitlement to a preliminary injunctive writ. Pursuing this point,
petitioners posit the inapplicability of Toyota, as that case involved the issuance of a writ of preliminary
mandatory injunction, not a writ of preliminary prohibitory injunction, as here. And Estares, they argue,
was cast against and revolved around a different factual issue, for the debtors Estares spouses in Estares,
unlike petitioners, did not question the statement of account given them by the lending institution and
failed to establish their entitlement to the injunctive writ.

Moreover, petitioners invite attention to the fact respecting the mortgaged lot being the site of St. James
College. As such, petitioners add, public interest demands that said educational institution be protected
from an undue operational disruption which would result in damages, in case of a foreclosure sale, that
are not only incapable of pecuniary estimation, but also well-nigh irreparable, affecting the employment of
the teaching staff and other school personnel and the displacement of thousands of students.

We are not persuaded.

Requisites for issuance of an injunctive writ

A writ of preliminary injunction issues to:

Page 18 of 189
prevent threatened or continuous irremediable injury to some of the parties before their claims can be
thoroughly studied and adjudicated. Its sole office is to preserve the status quo until the merits of the
case can be heard fully. Thus, its issuance is conditioned upon a showing of a clear and unmistakable right
that is violated. Moreover, an urgent necessity for its issuance must be shown by the applicant.33
(Emphasis supplied.)

Under Section 3, Rule 58 of the Rules of Court, an application for a writ of preliminary injunction may be
granted if the following grounds are established, thus:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the act or acts complained of, or in requiring the
performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts complained of during the
litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the
subject of the action or proceeding, and tending to render the judgment ineffectual.

And following jurisprudence, these requisites must be proved before a writ of preliminary injunction, be it
mandatory or prohibitory, will issue:

(1) The applicant must have a clear and unmistakable right to be protected, that is a right in esse;
(2) There is a material and substantial invasion of such right;
(3) There is an urgent need for the writ to prevent irreparable injury to the applicant; and
(4) No other ordinary, speedy, and adequate remedy exists to prevent the infliction of irreparable injury.

Thus, the question of applicability of Toyota as regards the requisites of a preliminary injunction is of no
moment, for there is no distinction in the requisites for either a mandatory or prohibitory injunctive writ.

Requisites for injunctive writ not present

A circumspect review of the parties’ pleadings and other records of the case readily yields the conclusion
that the minimum legal requisites for the issuance of a preliminary prohibitory injunction have not been
satisfied. Hence, the appellate court neither committed manifest error nor gravely abused its discretion in
setting aside the grant by the trial court of a writ of preliminary injunction in favor of petitioners.

For sure, the Court is aware that the matter of the propriety of the issuance of a writ of preliminary
injunction is addressed to the sound discretion of the trial court. It bears to stress, however, that the
injunctive writ is conditioned on the existence of a clear and positive right of the applicant which should be
protected, the writ being the strong arm of equity, an extraordinary peremptory remedy which can be
availed of only upon the existence of well-defined circumstances. Be that as it may, the writ must be used
with extreme caution, affecting as it does the respective rights of the parties.35 In fine, the writ should be
granted only when the court is fully satisfied that the law permits it and the emergency demands it,36 for
the very foundation of the jurisdiction to issue writ of injunction rests in the existence of a cause of action,
probability of irreparable injury, inadequacy of pecuniary compensation, and the prevention of the
multiplicity of suits. Where facts are not shown to bring the case within these conditions, the relief of
injunction should be refused.37

Petitioners failed to show a right in esse to be protected

We join the CA in its findings that the petitioners have not shown a right in esse to be protected. Indeed,
the Rules requires that the applicant’s right must be clear or unmistakable, that is, a right that is actual,
clear, and positive especially calling for judicial protection.38 An injunction will not issue to protect a right
not in esse and which may never arise, or to restrain an act which does not give rise to a cause of action.

An application for a preliminary injunction is a mere adjunct to the main action. While the instant
proceeding is only for the purpose of determining whether grave abuse of discretion indeed attended the

Page 19 of 189
issuance by the RTC of the writ in question, as the CA has determined positively, it is inevitable that our
pronouncements may have some unintended bearing on the main suit for declaratory relief. Nonetheless,
it behooves the Court to resolve the matter in keeping with the requirements of justice and fair play.

A judicious review of the records shows petitioners applying for and EPCIB granting the former credit
facilities and for which a bona fide REM over the St. James College lot had been constituted. EPCIB has
shown documentary evidence of how petitioners agreed to the credit line accomodation with a limit of PhP
25,000,000. Moreover, the late petitioner Jaime indeed agreed to the January 9, 2003 counter-proposal of
EPCIB for the payment of the PhP 18,300,000 outstanding loan, by signing his conforme on the counter-
proposal and voluntarily opting to pay the loan on equal annual payments of PhP 6,100,000 every May for
three years.

It bears stressing that the original renewable credit line was granted sometime in 1995, while the REM
over the land covered by TCT No. 74598 was executed on November 8, 1994. The records show that the
credit line was last renewed in 2001. There can be no quibbling that in September 2001, petitioners were
already in default, their overdue loan having an unpaid balance of PhP 18,300,000. The fact of default was
admitted by petitioners when they twice proposed ways of settling their account.

Verily, the January 9, 2003 counter-proposal of EPCIB was a gesture of liberality on its part, inasmuch as,
by that simple act, it deferred exercising its rights as REM-secured creditor, by affording petitioners the
opportunity to restructure their loan by make making the outstanding balance of PhP 18,300,000 current.
As events turned out, however, petitioners still breached the terms of the counter-proposal by which they
voluntarily agreed to abide.

We note that EPCIB did not immediately exercise its right to foreclose when the opportunity first
presented itself. From September 27, 2001, when petitioners were already in arrears, until November 27,
2003, or for more than two years, EPCIB let that opportunity pass by. The new terms of payment
pursuant to the January 9, 2003 agreement gave petitioners a fresh start to meet their obligation.

We further note that petitioners saw fit to commence SCA No. 2569 for declaratory relief only on
December 8, 2003 or after EPCIB filed its petition for sale to extra-judicially foreclose the subject
mortgaged property. With the view we take of things, petitioner instituted SCA No. 2569 as an
afterthought and a measure to thwart and forestall the imminent extrajudicial foreclosure proceedings.

Given the foregoing perspective, EPCIB has clearly established its status as unpaid mortgagee-creditor
entitled to foreclose the mortgage, a remedy provided by law39 and the mortgage contract itself. On the
other hand, petitioners can hardly claim a right, much less a clear and unmistakable one, which the
intended foreclosure sale would violate if not enjoined. Surely, the foreclosure of mortgage does not by
itself constitute a violation of the rights of a defaulting mortgagor.

The main purpose of the subsidiary contract of REM is to secure the principal obligation. Withal, when the
mortgagors-debtors has defaulted in the amortization payments of their loans, the superior legal right of
the secured unpaid creditors to exercise foreclosure proceedings on the mortgage property to answer for
the principal obligation arises. So it must be in this case.

Contrary to what the RTC wrote, there was no urgent necessity to issue the writ to protect the rights and
interest of petitioners as owners. First, they could participate in the foreclosure sale and get their property
back unencumbered by the payment of the obligations that they acknowledged in the first place. Second,
a foreclosure sale does not ipso facto pass title to the winning bidder over the mortgaged property.
Petitioners continue to own the mortgaged property sold in an auction sale until the expiration of the
redemption period. Third, petitioners have one year from the auction sale to redeem the mortgaged
property. The one-year redemption period is another grace period accorded petitioners to pay the
outstanding debt, which would be converted to the proceeds of the forced sale pursuant to the requisites
under Sec. 6 of Republic Act No. 3135, as amended, for the redemption of a property sold in an
extrajudicial sale, also in accordance with Sec. 78 of the General Banking Act, as amended by Presidential
Decree No. 1828.40 It is only upon the expiration of the redemption period, without the judgment debtors
having made use of their right of redemption, does ownership of the land sold become consolidated in the
purchaser or winning bidder.

Page 20 of 189
Petitioners contend that the proposed foreclosure sale would likely cause unemployment in, as well as the
displacement of thousands of students of, St. James College. Petitioners’ thesis of unemployment and
displacement provides a practical, not a legal reason, for the issuance of an injunctive writ. What they
conveniently refrained from saying is that it is within their power and to their interest to prevent the
occurrence of any of the two eventualities.

Finally, petitioners point to the fact that the mortgaged property has a value of over PhP 1 billion which is
many times over their unpaid loan obligation.

The disparity between what the mortgaged lot is worth and petitioners’ unpaid debt of PhP 24 million is
not, standing alone, a ground to enjoin a foreclosure sale. Neither would petitioners, as mortgagors, be
placed at a disadvantage by such state of things. The CA, citing decisional law, explains why:

Second, the fact that the outstanding obligation is only P24 million while the value of the mortgaged
property could be more than one billion pesos is not sufficient to enjoin the foreclosure sale of the said
property. We agree with [EPCIB] that the value of the mortgaged property has no bearing on the propriety
of the auction sale provided that the same is regularly and honestly conducted. This is because in a
foreclosure sale where there is a right to redeem, inadequacy of the bid price is of no moment for the
reason that the judgment debtor has always the chance to redeem and reacquire the property. In fact, the
property may be sold for less than its fair market value precisely because the lesser the price, the easier
for the owner to effect a redemption.42

Application for injunctive relief construed strictly

In all then, the preliminary evidence presented by petitioners and the allegations in their complaint did not
clearly make out any entitlement to the injunctive relief prayed for. Consequently, the RTC gravely abused
its discretion in granting the writ of preliminary injunction. Trial courts are reminded to see to it that
applications for preliminary injunction clearly allege facts and circumstances showing the existence of the
requisites.43 We need not stress that an application for injunctive relief is construed strictly against the
pleader.44 Here, petitioners have not sufficiently shown the presence of the requisites for their
entitlement to the writ. Perforce, the injunctive writ issued by the trial court must be recalled.1avvphi1

On the issue of petitioners’ contention on the alleged VAT imposed on the principal obligation, such can be
fully ventilated in the main action before the trial court.

One final word. The institution by petitioners of a suit for declaratory relief––after the petition for
extrajudicial petition has already been filed; and hoping in the process to block the bank’s legitimate effort
to collect an overdue account and demandable debt––is but a crude attempt to evade complying with their
just obligation. It cannot be countenanced. The antecedent facts in this case are quite simple: petitioners
opened a credit line secured by a REM. After drawing much from that line, they failed to pay, even after
the bank bent backwards in the matter of terms of payments. As a matter of justice and good conscience,
the bank’s right to a forced sale of the mortgaged property pursuant to the REM must be upheld absent
other weightier reasons.

WHEREFORE, the instant petition is hereby DENIED for lack of merit, and the Court of Appeals Decision
dated January 17, 2007 and Resolution dated August 28, 2007 in CA-G.R. SP No. 86587 are AFFIRMED.
The temporary restraining order issued by the Court pursuant to its Resolution of December 12, 2007 is
accordingly LIFTED.

Costs against petitioners.

SO ORDERED.
x--------------------------------------------------------------------------------------------------------------------x

Page 21 of 189
G.R. No. 178618 October 11, 2010
MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its Liquidator, THE
PHILIPPINE DEPOSIT INSURANCE CORPORATION, Petitioner, vs.
EDWARD WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS, in his capacity as the Deputy
Sheriff of Regional Trial Court, Branch 3, Iligan City; and the REGISTER OF DEEDS of Cagayan
de Oro City, Respondent.
DECISION
NACHURA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao Savings
and Loan Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit Insurance Corporation
(PDIC), against respondents Edward R. Willkom (Willkom); Gilda Go (Go); Remedios Uy (Uy); Malayo
Bantuas (sheriff Bantuas), in his capacity as sheriff of the Regional Trial Court (RTC), Branch 3 of Iligan
City; and the Register of Deeds of Cagayan de Oro City. MSLAI seeks the reversal and setting aside of the
Court of Appeals1 (CA) Decision2 dated March 21, 2007 and Resolution3 dated June 1, 2007 in CA-G.R.
CV No. 58337.

The controversy stemmed from the following facts:

The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan Association,
Inc. (DSLAI) are entities duly registered with the Securities and Exchange Commission (SEC) under
Registry Nos. 34869 and 32388, respectively, primarily engaged in the business of granting loans and
receiving deposits from the general public, and treated as banks.4

Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation.5
The articles of merger were not registered with the SEC due to incomplete documentation.6 On August 12,
1985, DSLAI changed its corporate name to MSLAI by way of an amendment to Article 1 of its Articles of
Incorporation, but the amendment was approved by the SEC only on April 3, 1987.7

Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board Resolution No.
86-002, assigning its assets in favor of DSLAI which in turn assumed the former’s liabilities.8

The business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of the Philippines
ordered its closure and placed it under receivership per Monetary Board Resolution No. 922 dated August
31, 1990. The Monetary Board found that MSLAI’s financial condition was one of insolvency, and for it to
continue in business would involve probable loss to its depositors and creditors. On May 24, 1991, the
Monetary Board ordered the liquidation of MSLAI, with PDIC as its liquidator.9

It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an action for
collection of sum of money against FISLAI, docketed as Civil Case No. 111-697. On October 19, 1989, the
RTC issued a summary decision in favor of Uy, directing defendants therein (which included FISLAI) to pay
the former the sum of ₱136,801.70, plus interest until full payment, 25% as attorney’s fees, and the costs
of suit. The decision was modified by the CA by further ordering the third-party defendant therein to
reimburse the payments that would be made by the defendants. The decision became final and executory
on February 21, 1992. A writ of execution was thereafter issued.10

On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in Cagayan de
Oro City, and the notice of sale was subsequently published. During the public auction on May 17, 1993,
Willkom was the highest bidder. A certificate of sale was issued and eventually registered with the
Register of Deeds of Cagayan de Oro City. Upon the expiration of the redemption period, sheriff Bantuas
issued the sheriff’s definite deed of sale. New certificates of title covering the subject properties were
issued in favor of Willkom. On September 20, 1994, Willkom sold one of the subject parcels of land to
Go.11

On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan de Oro City, a
complaint for Annulment of Sheriff’s Sale, Cancellation of Title and Reconveyance of Properties against
respondents.12 MSLAI alleged that the sale on execution of the subject properties was conducted without
notice to it and PDIC; that PDIC only came to know about the sale for the first time in February 1995
while discharging its mandate of liquidating MSLAI’s assets; that the execution of the RTC decision in Civil

Page 22 of 189
Case No. 111-697 was illegal and contrary to law and jurisprudence, not only because PDIC was not
notified of the execution sale, but also because the assets of an institution placed under receivership or
liquidation such as MSLAI should be deemed in custodia legis and should be exempt from any order of
garnishment, levy, attachment, or execution.13

In answer, respondents averred that MSLAI had no cause of action against them or the right to recover
the subject properties because MSLAI is a separate and distinct entity from FISLAI. They further
contended that the "unofficial merger" between FISLAI and DSLAI (now MSLAI) did not take effect
considering that the merging companies did not comply with the formalities and procedure for merger or
consolidation as prescribed by the Corporation Code of the Philippines. Finally, they claimed that FISLAI is
still a SEC registered corporation and could not have been absorbed by petitioner.14

On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction. The RTC
declared that it could not annul the decision in Civil Case No. 111-697, having been rendered by a court of
coordinate jurisdiction.15

On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC resolution. The
dispositive portion of the assailed CA Decision reads:

WHEREFORE, premises considered, the instant appeal is DENIED. The decision assailed is AFFIRMED.

We REFER Sheriff Malayo B. Bantuas’ violation of the Supreme Court Administrative Circular No. 12 to the
Office of the Court Administrator for appropriate action. The Division Clerk of Court is hereby DIRECTED to
furnish the Office of the Court Administrator a copy of this decision.

SO ORDERED.

The appellate court sustained the dismissal of petitioner’s complaint not because it had no jurisdiction over
the case, as held by the RTC, but on a different ground. Citing Associated Bank v. CA,17 the CA ruled that
there was no merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure
laid down by the Corporation Code for a valid merger or consolidation. The CA then concluded that the two
corporations retained their separate personalities; consequently, the claim against FISLAI is warranted,
and the subsequent sale of the levied properties at public auction is valid. The CA went on to say that
even if there had been a de facto merger between FISLAI and MSLAI (formerly DSLAI), Willkom, having
relied on the clean certificates of title, was an innocent purchaser for value, whose right is superior to that
of MSLAI. Furthermore, the alleged assignment of assets and liabilities executed by FISLAI in favor of
MSLAI was not binding on third parties because it was not registered. Finally, the CA said that the validity
of the auction sale could not be invalidated by the fact that the sheriff had no authority to conduct the
execution sale.18

Petitioner’s motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence, the instant
petition anchored on the following grounds:

THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN:

(1) IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE SURVIVING ENTITY IN
THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE IN AN ACTION OTHER THAN IN A QUO
WARRANTO PROCEEDING UPON THE INSTITUTION OF THE SOLICITOR GENERAL AS MANDATED UNDER
SECTION 20 OF BATAS PAMBANSA BLG. 68.

(2) IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH DSLAI AS THE
SURVIVING CORPORATION.

(3) IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN CUSTODIA LEGIS AND
THEREFORE, EXEMPT FROM GARNISHMENT, LEVY, ATTACHMENT OR EXECUTION.

Page 23 of 189
To resolve this petition, we must address two basic questions: (1) Was the merger between FISLAI and
DSLAI (now MSLAI) valid and effective; and (2) Was there novation of the obligation by substituting the
person of the debtor?

We answer both questions in the negative.

Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and
continues the combined business, while the rest are dissolved and all their rights, properties, and liabilities
are acquired by the surviving corporation.20 Although there is a dissolution of the absorbed or merged
corporations, there is no winding up of their affairs or liquidation of their assets because the surviving
corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities.21

The merger, however, does not become effective upon the mere agreement of the constituent
corporations.22 Since a merger or consolidation involves fundamental changes in the corporation, as well
as in the rights of stockholders and creditors, there must be an express provision of law authorizing
them.23

The steps necessary to accomplish a merger or consolidation, as provided for in Sections 76,24 77,25
78,26 and 7927 of the Corporation Code, are:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any
amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of
consolidation, all the statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be
called and at least two (2) weeks’ notice must be sent to all stockholders or members, personally or by
registered mail. A summary of the plan must be attached to the notice. Vote of two-thirds of the members
or of stockholders representing two-thirds of the outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the
corporate officers of each constituent corporation. These take the place of the articles of incorporation of
the consolidated corporation, or amend the articles of incorporation of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks
before.
(6) Issuance of certificate of merger or consolidation.

Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC, subject
to its prior determination that the merger is not inconsistent with the Corporation Code or existing laws.29
Where a party to the merger is a special corporation governed by its own charter, the Code particularly
mandates that a favorable recommendation of the appropriate government agency should first be
obtained.

In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered
with the SEC due to incomplete documentation. Consequently, the SEC did not issue the required
certificate of merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines
recognized such merger, the fact remains that no certificate was issued by the SEC. Such merger is still
incomplete without the certification.

The issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval but it
also marks the moment when the consequences of a merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation ceases to exist but its rights and properties, as well as
liabilities, shall be taken and deemed transferred to and vested in the surviving corporation.31

The same rule applies to consolidation which becomes effective not upon mere agreement of the members
but only upon issuance of the certificate of consolidation by the SEC.32 When the SEC, upon processing
and examining the articles of consolidation, is satisfied that the consolidation of the corporations is not
inconsistent with the provisions of the Corporation Code and existing laws, it issues a certificate of
consolidation which makes the reorganization official.33 The new consolidated corporation comes into
existence and the constituent corporations are dissolved and cease to exist.34

Page 24 of 189
There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as respondents, the
two corporations shall not be considered as one but two separate corporations. A corporation is an
artificial being created by operation of law. It possesses the right of succession and such powers,
attributes, and properties expressly authorized by law or incident to its existence.35 It has a personality
separate and distinct from the persons composing it, as well as from any other legal entity to which it may
be related.36 Being separate entities, the property of one cannot be considered the property of the other.

Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as its assets
and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment
wherein FISLAI assigned its assets and properties to DSLAI, and the latter assumed all the liabilities of the
former. As provided in Article 1625 of the Civil Code, "an assignment of credit, right or action shall
produce no effect as against third persons, unless it appears in a public instrument, or the instrument is
recorded in the Registry of Property in case the assignment involves real property." The certificates of title
of the subject properties were clean and contained no annotation of the fact of assignment. Respondents
cannot, therefore, be faulted for enforcing their claim against FISLAI on the properties registered under its
name. Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the
execution sale over the properties of FISLAI. With more reason can it not cause the cancellation of the
title to the subject properties of Willkom and Go.

Petitioner cannot also anchor its right to annul the execution sale on the principle of novation.1avvphi1
While it is true that DSLAI (now MSLAI) assumed all the liabilities of FISLAI, such assumption did not
result in novation as would release the latter from liability, thereby exempting its properties from
execution. Novation is the extinguishment of an obligation by the substitution or change of the obligation
by a subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, by substituting another in place of the debtor, or by subrogating a third person in the rights of
the creditor.

It is a rule that novation by substitution of debtor must always be made with the consent of the
creditor.38 Article 1293 of the Civil Code is explicit, thus:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.

In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that DSLAI
(now MSLAI) would assume the liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the
assets that FISLAI transferred to DSLAI remained subject to execution to satisfy the judgment claim of Uy
against FISLAI. The subsequent sale of the properties by Uy to Willkom, and of one of the properties by
Willkom to Go, cannot, therefore, be questioned by MSLAI.

The consent of the creditor to a novation by change of debtor is as indispensable as the creditor’s consent
in conventional subrogation in order that a novation shall legally take place.39 Since novation implies a
waiver of the right which the creditor had before the novation, such waiver must be express.40

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated March 21,
2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are AFFIRMED.

SO ORDERED.
x------------------------------------------------------------------------------------------------------------------x

Page 25 of 189
G.R. No. 171998 October 20, 2010
ANAMER SALAZAR, Petitioner, vs.
J.Y. BROTHERS MARKETING CORPORATION, Respondent.
DECISION
PERALTA, J.:

Before us is a petition for review seeking to annul and set aside the Decision1 dated September 29, 2005
and the Resolution2 dated March 2, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 83104.

The facts, as found by the Court of Appeals, are not disputed, thus:

J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar,
rice and other commodities. On October 15, 1996, Anamer Salazar, a freelance sales agent, was
approached by Isagani Calleja and Jess Kallos, if she knew a supplier of rice. Answering in the positive,
Salazar accompanied the two to J.Y. Bros. As a consequence, Salazar with Calleja and Kallos procured
from J. Y. Bros. 300 cavans of rice worth ₱214,000.00. As payment, Salazar negotiated and indorsed to
J.Y. Bros. Prudential Bank Check No. 067481 dated October 15, 1996 issued by Nena Jaucian Timario in
the amount of ₱214,000.00 with the assurance that the check is good as cash. On that assurance, J.Y.
Bros. parted with 300 cavans of rice to Salazar. However, upon presentment, the check was dishonored
due to "closed account."

Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement
cross Solid Bank Check No. PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in
the amount of ₱214,000.00 but which, just the same, bounced due to insufficient funds. When despite the
demand letter dated February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter
charged Salazar and Timario with the crime of estafa before the Regional Trial Court of Legaspi City,
docketed as Criminal Case No. 7474.

After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to
evidence. On November 19, 2001, the court a quo rendered an Order, the dispositive portion of which
reads:

WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the crime
charged but is hereby held liable for the value of the 300 bags of rice. Accused Anamer D. Salazar is
therefore ordered to pay J.Y. Brothers Marketing Corporation the sum of ₱214,000.00. Costs against the
accused.

SO ORDERED.

Aggrieved, accused attempted a reconsideration on the civil aspect of the order and to allow her to
present evidence thereon. The motion was denied. Accused went up to the Supreme Court on a petition
for review on certiorari under Rule 45 of the Rules of Court. Docketed as G.R. 151931, in its Decision
dated September 23, 2003, the High Court ruled:

IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED. The Orders dated November 19, 2001 and
January 14, 2002 are SET ASIDE and NULLIFIED. The Regional Trial Court of Legaspi City, Branch 5, is
hereby DIRECTED to set Criminal Case No. 7474 for the continuation of trial for the reception of the
evidence-in-chief of the petitioner on the civil aspect of the case and for the rebuttal evidence of the
private complainant and the sur-rebuttal evidence of the parties if they opt to adduce any.

SO ORDERED.

The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with the trial on the civil aspect
of the criminal case.

On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:

WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D. Salazar the
civil aspect of the above-entitled case. No pronouncement as to costs.

Page 26 of 189
Place into the files (archive) the record of the above-entitled case as against the other accused Nena
Jaucian Timario. Let an alias (bench) warrant of arrest without expiry dated issue for her apprehension,
and fix the amount of the bail bond for her provisional liberty at 59,000.00 pesos.

SO ORDERED.

The RTC found that the Prudential Bank check drawn by Timario for the amount of ₱214,000.00 was
payable to the order of respondent, and such check was a negotiable order instrument; that petitioner was
not the payee appearing in the check, but respondent who had not endorsed the check, much less
delivered it to petitioner. It then found that petitioner’s liability should be limited to the allegation in the
amended information that "she endorsed and negotiated said check," and since she had never been the
holder of the check, petitioner's signing of her name on the face of the dorsal side of the check did not
produce the technical effect of an indorsement arising from negotiation. The RTC ruled that after the
Prudential Bank check was dishonored, it was replaced by a Solid Bank check which, however, was also
subsequently dishonored; that since the Solid Bank check was a crossed check, which meant that such
check was only for deposit in payee’s account, a condition that rendered such check non-negotiable, the
substitution of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an essential
change which had the effect of discharging from the obligation whoever may be the endorser of the
negotiable check. The RTC concluded that the absence of negotiability rendered nugatory the obligation
arising from the technical act of indorsing a check and, thus, had the effect of novation; and that the
ultimate effect of such substitution was to extinguish the obligation arising from the issuance of the
Prudential Bank check.

Respondent filed an appeal with the CA on the sole assignment of error that:

IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR BY INDORSING THE
CHECK (A) DID NOT BECOME A HOLDER OF THE CHECK, (B) DID NOT PRODUCE THE TECHNICAL EFFECT
OF AN INDORSEMENT ARISING FROM NEGOTIATION; AND (C) DID NOT INCUR CIVIL LIABILITY.6

After petitioner filed her appellees' brief, the case was submitted for decision. On September 29, 2005,
the CA rendered its assailed Decision, the decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged Decision is REVERSED
and SET ASIDE, and a new one entered ordering the appellee to pay the appellant the amount of
₱214,000.00, plus interest at the legal rate from the written demand until full payment. Costs against the
appellee.7

In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later replaced by
a Solid Bank check issued by Timario, also indorsed by petitioner as payment for the 300 cavans of rice
bought from respondent. The CA, applying Sections 63,8 669 and 2910 of the Negotiable Instruments
Law, found that petitioner was considered an indorser of the checks paid to respondent and considered
her as an accommodation indorser, who was liable on the instrument to a holder for value,
notwithstanding that such holder at the time of the taking of the instrument knew her only to be an
accommodation party.

Respondent filed a motion for reconsideration, which the CA denied in a Resolution dated March 2, 2006.

Hence this petition, wherein petitioner raises the following assignment of errors:

1. THE COURT OF APPEALS ERRED IN IGNORING THE RAMIFICATIONS OF THE ISSUANCE OF THE
SOLIDBANK CHECK IN REPLACEMENT OF THE PRUDENTIAL BANK CHECK WHICH WOULD HAVE RESULTED
TO THE NOVATION OF THE OBLIGATION ARISING FROM THE ISSUANCE OF THE LATTER CHECK.

2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT OF
LEGASPI CITY, BRANCH 5, DISMISSING AS AGAINST THE PETITIONER THE CIVIL ASPECT OF THE
CRIMINAL ACTION ON THE GROUND OF NOVATION OF OBLIGATION ARISING FROM THE ISSUANCE OF
THE PRUDENTIAL BANK CHECK.

Page 27 of 189
3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR
EXCESS OF JURISDICTION WHEN IT DENIED THE MOTION FOR RECONSIDERATION OF THE PETITIONER
ON THE GROUND THAT THE ISSUE RAISED THEREIN HAD ALREADY BEEN PASSED UPON AND
CONSIDERED IN THE DECISION SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND IN FACT SUCH
ISSUE HAD NOT BEEN RESOLVED AS YET.

Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the
respondent, in replacement of the dishonored Prudential Bank check, amounted to novation that
discharged the latter check; that respondent's acceptance of the Solid Bank check, notwithstanding its
eventual dishonor by the drawee bank, had the effect of erasing whatever criminal responsibility, under
Article 315 of the Revised Penal Code, the drawer or indorser of the Prudential Bank check would have
incurred in the issuance thereof in the amount of ₱214,000.00; and that a check is a contract which is
susceptible to a novation just like any other contract.

Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto.

We find no merit in this petition.

Section 119 of the Negotiable Instrument Law provides, thus:

SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the instrument is made or accepted for
his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.
(Emphasis ours)

And, under Article 1231 of the Civil Code, obligations are extinguished:

(6) By novation.

Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the dishonored
Prudential bank check resulted to novation which discharged the latter check is unmeritorious.

In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.,12 we
stated the concept of novation, thus:

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

Page 28 of 189
agreement will not have the effect of extinguishing the first but would merely supplement it or supplant
some but not all of its provisions.)

The obligation to pay a sum of money 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.13

In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's claim that
novation took place when the dishonored BPI check it endorsed to BA Finance Corporation was
subsequently replaced by a Security Bank check,15 and said:

There are only two ways which indicate the presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the same. First, novation must be explicitly
stated and declared in unequivocal terms as novation is never presumed. Secondly, the old and the new
obligations must be incompatible on every point.1avvphi1 The test of incompatibility is whether or not the
two obligations can stand together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. In the instant case, there was no express
agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from liability. Neither is
there incompatibility because both checks were given precisely to terminate a single obligation arising
from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is
inapplicable to this case.16

In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential
Bank check, did not result to novation as there was no express agreement to establish that petitioner was
already discharged from his liability to pay respondent the amount of ₱214,000.00 as payment for the 300
bags of rice. As we said, novation is never presumed, there must be an express intention to novate. In
fact, when the Solid Bank check was delivered to respondent, the same was also indorsed by petitioner
which shows petitioner’s recognition of the existing obligation to respondent to pay ₱214,000.00 subject of
the replaced Prudential Bank check.

Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since the
two checks − Prudential and Solid Bank checks − were precisely for the purpose of paying the amount of
₱214,000.00, i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed,
there was no substantial change in the object or principal condition of the obligation of petitioner as the
indorser of the check to pay the amount of ₱214,000.00. It would appear that respondent accepted the
Solid Bank check to give petitioner the chance to pay her obligation.

Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being a
crossed check, which replaced the dishonored Prudential Bank check, a negotiable check, is a new
obligation in lieu of the old obligation arising from the issuance of the Prudential Bank check, since there
was an essential change in the circumstance of each check.

Such argument deserves scant consideration.

Among the different types of checks issued by a drawer is the crossed check.17 The Negotiable
Instruments Law is silent with respect to crossed checks,18 although the Code of Commerce makes
reference to such instruments.19 We have taken judicial cognizance of the practice that a check with two
parallel lines in the upper left hand corner means that it could only be deposited and could not be
converted into cash.20 Thus, the effect of crossing a check relates to the mode of payment, meaning that
the drawer had intended the check for deposit only by the rightful person, i.e., the payee named
therein.21 The change in the mode of paying the obligation was not a change in any of the objects or
principal condition of the contract for novation to take place.22

Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for
payment, the same was again dishonored; thus, the obligation which was secured by the Prudential Bank
check was not extinguished and the Prudential Bank check was not discharged. Thus, we found no
reversible error committed by the CA in holding petitioner liable as an accommodation indorser for the
payment of the dishonored Prudential Bank check.

Page 29 of 189
WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution dated
March 2, 2006, of the Court of Appeals in CA-G.R. CV No. 83104, are AFFIRMED.

SO ORDERED.
x--------------------------------------------------------------------------------------------------------------------x
G.R. No. 179446 January 10, 2011
LOADMASTERS CUSTOMS SERVICES, INC., Petitioner, vs.
GLODEL BROKERAGE CORPORATION and R&B INSURANCE CORPORATION, Respondents.
DECISION
MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court assailing the August
24, 2007 Decision of the Court of Appeals (CA) in CA-G.R. CV No. 82822, entitled "R&B Insurance
Corporation v. Glodel Brokerage Corporation and Loadmasters Customs Services, Inc.," which held
petitioner Loadmasters Customs Services, Inc. (Loadmasters) liable to respondent Glodel Brokerage
Corporation (Glodel) in the amount of ₱1,896,789.62 representing the insurance indemnity which R&B
Insurance Corporation (R&B Insurance) paid to the insured-consignee, Columbia Wire and Cable
Corporation (Columbia).

THE FACTS:

On August 28, 2001, R&B Insurance issued Marine Policy No. MN-00105/2001 in favor of Columbia to
insure the shipment of 132 bundles of electric copper cathodes against All Risks. On August 28, 2001, the
cargoes were shipped on board the vessel "Richard Rey" from Isabela, Leyte, to Pier 10, North Harbor,
Manila. They arrived on the same date.

Columbia engaged the services of Glodel for the release and withdrawal of the cargoes from the pier and
the subsequent delivery to its warehouses/plants. Glodel, in turn, engaged the services of Loadmasters for
the use of its delivery trucks to transport the cargoes to Columbia’s warehouses/plants in Bulacan and
Valenzuela City.

The goods were loaded on board twelve (12) trucks owned by Loadmasters, driven by its employed
drivers and accompanied by its employed truck helpers. Six (6) truckloads of copper cathodes were to be
delivered to Balagtas, Bulacan, while the other six (6) truckloads were destined for Lawang Bato,
Valenzuela City. The cargoes in six truckloads for Lawang Bato were duly delivered in Columbia’s
warehouses there. Of the six (6) trucks en route to Balagtas, Bulacan, however, only five (5) reached the
destination. One (1) truck, loaded with 11 bundles or 232 pieces of copper cathodes, failed to deliver its
cargo.

Later on, the said truck, an Isuzu with Plate No. NSD-117, was recovered but without the copper
cathodes. Because of this incident, Columbia filed with R&B Insurance a claim for insurance indemnity in
the amount of ₱1,903,335.39. After the requisite investigation and adjustment, R&B Insurance paid
Columbia the amount of ₱1,896,789.62 as insurance indemnity.

R&B Insurance, thereafter, filed a complaint for damages against both Loadmasters and Glodel before the
Regional Trial Court, Branch 14, Manila (RTC), docketed as Civil Case No. 02-103040. It sought
reimbursement of the amount it had paid to Columbia for the loss of the subject cargo. It claimed that it
had been subrogated "to the right of the consignee to recover from the party/parties who may be held
legally liable for the loss."2

On November 19, 2003, the RTC rendered a decision3 holding Glodel liable for damages for the loss of the
subject cargo and dismissing Loadmasters’ counterclaim for damages and attorney’s fees against R&B
Insurance. The dispositive portion of the decision reads:

WHEREFORE, all premises considered, the plaintiff having established by preponderance of evidence its
claims against defendant Glodel Brokerage Corporation, judgment is hereby rendered ordering the latter:

1. To pay plaintiff R&B Insurance Corporation the sum of ₱1,896,789.62 as actual and compensatory
damages, with interest from the date of complaint until fully paid;

Page 30 of 189
2. To pay plaintiff R&B Insurance Corporation the amount equivalent to 10% of the principal amount
recovered as and for attorney’s fees plus ₱1,500.00 per appearance in Court;

3. To pay plaintiff R&B Insurance Corporation the sum of ₱22,427.18 as litigation expenses.

WHEREAS, the defendant Loadmasters Customs Services, Inc.’s counterclaim for damages and attorney’s
fees against plaintiff are hereby dismissed.

With costs against defendant Glodel Brokerage Corporation.

SO ORDERED.

Both R&B Insurance and Glodel appealed the RTC decision to the CA.

On August 24, 2007, the CA rendered the assailed decision which reads in part:

Considering that appellee is an agent of appellant Glodel, whatever liability the latter owes to appellant
R&B Insurance Corporation as insurance indemnity must likewise be the amount it shall be paid by
appellee Loadmasters.

WHEREFORE, the foregoing considered, the appeal is PARTLY GRANTED in that the appellee Loadmasters
is likewise held liable to appellant Glodel in the amount of ₱1,896,789.62 representing the insurance
indemnity appellant Glodel has been held liable to appellant R&B Insurance Corporation.

Appellant Glodel’s appeal to absolve it from any liability is herein DISMISSED.

SO ORDERED.

Hence, Loadmasters filed the present petition for review on certiorari before this Court presenting the
following

ISSUES

1. Can Petitioner Loadmasters be held liable to Respondent Glodel in spite of the fact that the latter
respondent Glodel did not file a cross-claim against it (Loadmasters)?

2. Under the set of facts established and undisputed in the case, can petitioner Loadmasters be legally
considered as an Agent of respondent Glodel?

To totally exculpate itself from responsibility for the lost goods, Loadmasters argues that it cannot be
considered an agent of Glodel because it never represented the latter in its dealings with the consignee. At
any rate, it further contends that Glodel has no recourse against it for its (Glodel’s) failure to file a cross-
claim pursuant to Section 2, Rule 9 of the 1997 Rules of Civil Procedure.

Glodel, in its Comment,7 counters that Loadmasters is liable to it under its cross-claim because the latter
was grossly negligent in the transportation of the subject cargo. With respect to Loadmasters’ claim that it
is already estopped from filing a cross-claim, Glodel insists that it can still do so even for the first time on
appeal because there is no rule that provides otherwise. Finally, Glodel argues that its relationship with
Loadmasters is that of Charter wherein the transporter (Loadmasters) is only hired for the specific job of
delivering the merchandise. Thus, the diligence required in this case is merely ordinary diligence or that of
a good father of the family, not the extraordinary diligence required of common carriers.

R&B Insurance, for its part, claims that Glodel is deemed to have interposed a cross-claim against
Loadmasters because it was not prevented from presenting evidence to prove its position even without
amending its Answer. As to the relationship between Loadmasters and Glodel, it contends that a contract
of agency existed between the two corporations.8

Subrogation is the substitution of one person in the place of another with reference to a lawful claim or
right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim,

Page 31 of 189
including its remedies or securities.9 Doubtless, R&B Insurance is subrogated to the rights of the insured
to the extent of the amount it paid the consignee under the marine insurance, as provided under Article
2207 of the Civil Code, which reads:

ART. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrong-doer or the person who has
violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss,
the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

As subrogee of the rights and interest of the consignee, R&B Insurance has the right to seek
reimbursement from either Loadmasters or Glodel or both for breach of contract and/or tort.

The issue now is who, between Glodel and Loadmasters, is liable to pay R&B Insurance for the amount of
the indemnity it paid Columbia.

At the outset, it is well to resolve the issue of whether Loadmasters and Glodel are common carriers to
determine their liability for the loss of the subject cargo. Under Article 1732 of the Civil Code, common
carriers are persons, corporations, firms, or associations engaged in the business of carrying or
transporting passenger or goods, or both by land, water or air for compensation, offering their services to
the public.

Based on the aforecited definition, Loadmasters is a common carrier because it is engaged in the business
of transporting goods by land, through its trucking service. It is a common carrier as distinguished from a
private carrier wherein the carriage is generally undertaken by special agreement and it does not hold
itself out to carry goods for the general public.10 The distinction is significant in the sense that "the rights
and obligations of the parties to a contract of private carriage are governed principally by their
stipulations, not by the law on common carriers."11

In the present case, there is no indication that the undertaking in the contract between Loadmasters and
Glodel was private in character. There is no showing that Loadmasters solely and exclusively rendered
services to Glodel.

In fact, Loadmasters admitted that it is a common carrier.

In the same vein, Glodel is also considered a common carrier within the context of Article 1732. In its
Memorandum,13 it states that it "is a corporation duly organized and existing under the laws of the
Republic of the Philippines and is engaged in the business of customs brokering." It cannot be considered
otherwise because as held by this Court in Schmitz Transport & Brokerage Corporation v. Transport
Venture, Inc.,14 a customs broker is also regarded as a common carrier, the transportation of goods being
an integral part of its business.

Loadmasters and Glodel, being both common carriers, are mandated from the nature of their business and
for reasons of public policy, to observe the extraordinary diligence in the vigilance over the goods
transported by them according to all the circumstances of such case, as required by Article 1733 of the
Civil Code. When the Court speaks of extraordinary diligence, it is that extreme measure of care and
caution which persons of unusual prudence and circumspection observe for securing and preserving their
own property or rights.15 This exacting standard imposed on common carriers in a contract of carriage of
goods is intended to tilt the scales in favor of the shipper who is at the mercy of the common carrier once
the goods have been lodged for shipment.16 Thus, in case of loss of the goods, the common carrier is
presumed to have been at fault or to have acted negligently.17 This presumption of fault or negligence,
however, may be rebutted by proof that the common carrier has observed extraordinary diligence over
the goods.

With respect to the time frame of this extraordinary responsibility, the Civil Code provides that the
exercise of extraordinary diligence lasts from the time the goods are unconditionally placed in the
possession of, and received by, the carrier for transportation until the same are delivered, actually or
constructively, by the carrier to the consignee, or to the person who has a right to receive them.

Page 32 of 189
Premises considered, the Court is of the view that both Loadmasters and Glodel are jointly and severally
liable to R & B Insurance for the loss of the subject cargo. Under Article 2194 of the New Civil Code, "the
responsibility of two or more persons who are liable for a quasi-delict is solidary."

Loadmasters’ claim that it was never privy to the contract entered into by Glodel with the consignee
Columbia or R&B Insurance as subrogee, is not a valid defense. It may not have a direct contractual
relation with Columbia, but it is liable for tort under the provisions of Article 2176 of the Civil Code on
quasi-delicts which expressly provide:

ART. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.

Pertinent is the ruling enunciated in the case of Mindanao Terminal and Brokerage Service, Inc. v. Phoenix
Assurance Company of New York,/McGee & Co., Inc.19 where this Court held that a tort may arise despite
the absence of a contractual relationship, to wit:

We agree with the Court of Appeals that the complaint filed by Phoenix and McGee against Mindanao
Terminal, from which the present case has arisen, states a cause of action. The present action is based on
quasi-delict, arising from the negligent and careless loading and stowing of the cargoes belonging to Del
Monte Produce. Even assuming that both Phoenix and McGee have only been subrogated in the rights of
Del Monte Produce, who is not a party to the contract of service between Mindanao Terminal and Del
Monte, still the insurance carriers may have a cause of action in light of the Court’s consistent ruling that
the act that breaks the contract may be also a tort. In fine, a liability for tort may arise even under a
contract, where tort is that which breaches the contract. In the present case, Phoenix and McGee are not
suing for damages for injuries arising from the breach of the contract of service but from the alleged
negligent manner by which Mindanao Terminal handled the cargoes belonging to Del Monte Produce.
Despite the absence of contractual relationship between Del Monte Produce and Mindanao Terminal, the
allegation of negligence on the part of the defendant should be sufficient to establish a cause of action
arising from quasi-delict. [Emphases supplied]

In connection therewith, Article 2180 provides:

ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom one is responsible.

Employers shall be liable for the damages caused by their employees and household helpers acting within
the scope of their assigned tasks, even though the former are not engaged in any business or industry.

It is not disputed that the subject cargo was lost while in the custody of Loadmasters whose employees
(truck driver and helper) were instrumental in the hijacking or robbery of the shipment. As employer,
Loadmasters should be made answerable for the damages caused by its employees who acted within the
scope of their assigned task of delivering the goods safely to the warehouse.

Whenever an employee’s negligence causes damage or injury to another, there instantly arises a
presumption juris tantum that the employer failed to exercise diligentissimi patris families in the selection
(culpa in eligiendo) or supervision (culpa in vigilando) of its employees.20 To avoid liability for a quasi-
delict committed by its employee, an employer must overcome the presumption by presenting convincing
proof that he exercised the care and diligence of a good father of a family in the selection and supervision
of his employee.21 In this regard, Loadmasters failed.

Glodel is also liable because of its failure to exercise extraordinary diligence. It failed to ensure that
Loadmasters would fully comply with the undertaking to safely transport the subject cargo to the
designated destination. It should have been more prudent in entrusting the goods to Loadmasters by
taking precautionary measures, such as providing escorts to accompany the trucks in delivering the
cargoes. Glodel should, therefore, be held liable with Loadmasters. Its defense of force majeure is
unavailing.

Page 33 of 189
At this juncture, the Court clarifies that there exists no principal-agent relationship between Glodel and
Loadmasters, as erroneously found by the CA. Article 1868 of the Civil Code provides: "By the contract of
agency a person binds himself to render some service or to do something in representation or on behalf of
another, with the consent or authority of the latter." The elements of a contract of agency are: (1)
consent, express or implied, of the parties to establish the relationship; (2) the object is the execution of a
juridical act in relation to a third person; (3) the agent acts as a representative and not for himself; (4)
the agent acts within the scope of his authority.22

Accordingly, there can be no contract of agency between the parties. Loadmasters never represented
Glodel. Neither was it ever authorized to make such representation. It is a settled rule that the basis for
agency is representation, that is, the agent acts for and on behalf of the principal on matters within the
scope of his authority and said acts have the same legal effect as if they were personally executed by the
principal. On the part of the principal, there must be an actual intention to appoint or an intention
naturally inferable from his words or actions, while on the part of the agent, there must be an intention to
accept the appointment and act on it.23 Such mutual intent is not obtaining in this case.

What then is the extent of the respective liabilities of Loadmasters and Glodel? Each wrongdoer is liable
for the total damage suffered by R&B Insurance. Where there are several causes for the resulting
damages, a party is not relieved from liability, even partially. It is sufficient that the negligence of a party
is an efficient cause without which the damage would not have resulted. It is no defense to one of the
concurrent tortfeasors that the damage would not have resulted from his negligence alone, without the
negligence or wrongful acts of the other concurrent tortfeasor. As stated in the case of Far Eastern
Shipping v. Court of Appeals,24

X x x. Where several causes producing an injury are concurrent and each is an efficient cause without
which the injury would not have happened, the injury may be attributed to all or any of the causes and
recovery may be had against any or all of the responsible persons although under the circumstances of
the case, it may appear that one of them was more culpable, and that the duty owed by them to the
injured person was not the same. No actor's negligence ceases to be a proximate cause merely because it
does not exceed the negligence of other actors. Each wrongdoer is responsible for the entire result and is
liable as though his acts were the sole cause of the injury.

There is no contribution between joint tortfeasors whose liability is solidary since both of them are liable
for the total damage. Where the concurrent or successive negligent acts or omissions of two or more
persons, although acting independently, are in combination the direct and proximate cause of a single
injury to a third person, it is impossible to determine in what proportion each contributed to the injury and
either of them is responsible for the whole injury. Where their concurring negligence resulted in injury or
damage to a third party, they become joint tortfeasors and are solidarily liable for the resulting damage
under Article 2194 of the Civil Code. [Emphasis supplied]

The Court now resolves the issue of whether Glodel can collect from Loadmasters, it having failed to file a
cross-claim against the latter.1avvphi1

Undoubtedly, Glodel has a definite cause of action against Loadmasters for breach of contract of service as
the latter is primarily liable for the loss of the subject cargo. In this case, however, it cannot succeed in
seeking judicial sanction against Loadmasters because the records disclose that it did not properly
interpose a cross-claim against the latter. Glodel did not even pray that Loadmasters be liable for any and
all claims that it may be adjudged liable in favor of R&B Insurance. Under the Rules, a compulsory
counterclaim, or a cross-claim, not set up shall be barred.25 Thus, a cross-claim cannot be set up for the
first time on appeal.

For the consequence, Glodel has no one to blame but itself. The Court cannot come to its aid on equitable
grounds. "Equity, which has been aptly described as ‘a justice outside legality,’ is applied only in the
absence of, and never against, statutory law or judicial rules of procedure."26 The Court cannot be a
lawyer and take the cudgels for a party who has been at fault or negligent.

WHEREFORE, the petition is PARTIALLY GRANTED. The August 24, 2007 Decision of the Court of Appeals
is MODIFIED to read as follows:

Page 34 of 189
WHEREFORE, judgment is rendered declaring petitioner Loadmasters Customs Services, Inc. and
respondent Glodel Brokerage Corporation jointly and severally liable to respondent R&B Insurance
Corporation for the insurance indemnity it paid to consignee Columbia Wire & Cable Corporation and
ordering both parties to pay, jointly and severally, R&B Insurance Corporation a] the amount of
₱1,896,789.62 representing the insurance indemnity; b] the amount equivalent to ten (10%) percent
thereof for attorney’s fees; and c] the amount of ₱22,427.18 for litigation expenses.

The cross-claim belatedly prayed for by respondent Glodel Brokerage Corporation against petitioner
Loadmasters Customs Services, Inc. is DENIED.

SO ORDERED.
x--------------------------------------------------------------------------------------------------------------------x
G.R. No. 171165 February 14, 2011
CAROLINA HERNANDEZ-NIEVERA, DEMETRIO P. HERNANDEZ, JR., and MARGARITA H. MALVAR,
Petitioners, vs.
WILFREDO HERNANDEZ, HOME INSURANCE AND GUARANTY CORPORATION, PROJECT MOVERS
REALTY AND DEVELOPMENT CORPORATION, MARIO P. VILLAMOR and LAND BANK OF THE
PHILIPPINES, Respondents.
DECISION
PERALTA, J.:

This Rule 45 petition for review assails the October 19, 2005 Decision of the Court of Appeals in CA-G.R.
CV No. 83852,2 as well as the January 11, 2006 Resolution3 in the same case which denied
reconsideration. The said decision had reversed and set aside the August 30, 2004 judgment4 rendered by
the Regional Trial Court (RTC) of San Pablo City, Laguna, Branch 32 in Civil Case No. SP-5742(2000) –
one for rescission of a memorandum of agreement and declaration of nullity of a deed of assignment and
conveyance, with prayer for preliminary injunction and damages.

The facts follow.

Project Movers Realty & Development Corporation (PMRDC), one of the respondents herein, is a duly
organized domestic corporation engaged in real estate development. Sometime in 1995, it entered
through its president, respondent Mario Villamor (Villamor), into various agreements with co-respondents
Home Insurance & Guaranty Corporation (HIGC)5 and Land Bank of the Philippines (LBP), in connection
with the construction of the Isabel Homes housing project in Batangas and of the Monumento Plaza
commercial and recreation complex in Caloocan City. In its Asset Pool Formation Agreement, PMRDC
conveyed to HIGC the constituent assets of the two projects,6 whereas LBP agreed to act as trustee of the
resulting Asset Pool7 for a consideration.8 The execution of the projects would be funded largely through
securitization, a method of sourcing development funds by the issuance of participation certificates against
the direct backing assets of the projects,9 whereby LBP would act as the nominal issuer of such
certificates with the Asset Pool itself acting as the real issuer.10 HIGC, in turn, would provide guaranty
coverage to these participation certificates in accordance with its Contract of Guaranty with PMRDC and
LBP. 11

On November 13, 1997, PMRDC entered into a Memorandum of Agreement (MOA) whereby it was given
the option to buy pieces of land owned by petitioners Carolina Hernandez-Nievera (Carolina), Margarita H.
Malvar (Margarita) and Demetrio P. Hernandez, Jr. (Demetrio). Demetrio, under authority of a Special
Power of Attorney to Sell or Mortgage,12 signed the MOA also in behalf of Carolina and Margarita. In the
aggregate, the realty measured 4,580,451 square meters and was segregated by agreement into Area I
and Area II, respectively pertaining to the parcels covered by Transfer Certificate of Title (TCT) Nos. T-
3137, T-3138, T-3139 and T-3140 on the one hand, and on the other by TCT Nos. T-3132, T-3133, T-
3134, T-3135 and T-3136, all issued by the Register of Deeds of Laguna. The MOA materially provides:

1. THAT, the consideration for the sale of the parcels of land (Areas I and II) shall be TWENTY-FIVE
PESOS (Php 25.00) per square meter or a total of PESOS: ONE HUNDRED FOURTEEN MILLION FIVE
HUNDRED ELEVEN TWO HUNDRED SEVENTY (Php114,511,270.00);

Page 35 of 189
1. THAT, the VENDEE shall have the option to purchase the above-described parcels of land within a
period of twelve (12) months from the date of this instrument and that the VENDEE shall pay the vendor
option money in the following amounts and on the dates herein specified:

Area I
PESOS: SIX MILLION (Php6,000,000.00) payable in two (2) equal installments of PESOS: THREE MILLION
(Php3,000,000.00), the first installment due on or before November 20, 1997; the second installment due
on or before December 15, 1997, both installments to be covered by postdated checks upon signing of
this Agreement.

Area II
Option money of PESOS: EIGHT MILLION FIVE HUNDRED THOUSAND (Php8,500,000.00) payable within
thirty (30) days after conveyance to the Isabel Homes Asset Pool.

2. THAT, should the VENDEE exercise the option to purchase the parcels of land within the stipulated
period, the VENDEE shall complete the TWENTY-FIVE (25%) PERCENT downpayment inclusive of the
option money within the said stipulated period. Balance of the TWENTY FIVE (25%) PERCENT
downpayment exclusive of the option money for Area I is PESOS: TEN MILLION FOUR HUNDRED EIGHTY-
TWO THOUSAND TWO HUNDRED SIXTY-TWO (Php10,482,262.00) and for Area II is PESOS: THREE
MILLION SIX HUNDRED FORTY-FIVE THOUSAND FIVE HUNDRED FIFTY- SIX (Php3,645,556.00).

The balance of the purchase price in the amount of PESOS: EIGHTY-FIVE MILLION EIGHT HUNDRED
EIGHTY-THREE FOUR HUNDRED FIFTY-SIX (Php85,883,456.00) shall be payable within two (2) years in
eight (8) quarterly installments covered by postdated checks. Schedule of payments shall be as follows:
January 31, 1999 Php 10,735,432.00

April 30, 1999 10,735,432.00

July 31, 1999 10,735,432.00

October 31, 1999 10,735,432.00

January 31, 2000 10,735,432.00

April 30, 2000 10,735,432.00

July 30, 2000 10,735,432.00

October 31, 2000 10,735,432.00

3. THAT, should the VENDEE fail to exercise its option to purchase the said described parcels of land
within the stipulated period, the option money shall be forfeited in favor of the VENDOR and that the
VENDEE shall return to the VENDOR all the Transfer Certificates of Title covering the said described
parcels of land within a period of THIRTY (30) DAYS from the stipulated period, FREE FROM ALL LIENS
AND ENCUMBRANCES;

4. THAT, the VENDOR, at the request of the VENDEE, shall agree to convey the parcels of land to any
bank or financial institution by way of mortgage or to a Trustee by way of a Trust Agreement at any time
from the date of this instrument, PROVIDED, HOWEVER, that the VENDOR is not liable for any mortgage
or loans or obligations that will be incurred by way of mortgage of Trust Agreement that the VENDEE
might enter into;

5. It is agreed that the VENDOR shall have the sole responsibility in the settlement of the tenants and
eviction of the tenants and eviction of the occupants of the described parcels of land after all consideration
have been fully paid by the VENDEE to the VENDOR;

6. THAT, all taxes including capital gains tax, transfer tax and documentary stamps tax shall be for the
account of the VENDOR;

7. THAT, the VENDOR hereby warrants valid title to, and peaceful possession of the said described parcels
of land after all considerations have been fully paid.13

Page 36 of 189
As an implementation of the MOA, the lands within Area I were then mortgaged to Solid Bank for which
petitioners received consideration from PMRDC.

Later on, PMRDC saw the need to convey additional properties to and augment the value of its Asset Pool
to support the collateralization of additional participation certificates to be issued.15 Thus, on March 23,
1998, it entered with LBP and Demetrio – the latter purportedly acting under authority of the same special
power of attorney as in the MOA – into a Deed of Assignment and Conveyance (DAC)16 whereby the lands
within Area II covered by TCT Nos. T-3132, T-3133, T-3134, T-3135 and T-3136 were transferred and
assigned to the Asset Pool in exchange for a number of shares of stock which supposedly had already
been issued in the name and in favor of Demetrio. These pieces of land are the subject of the present
controversy as far as they are affected by the explicit provision in the DAC which dispensed with the
stipulated obligation of PMRDC in the MOA to pay option money should it opt to buy the properties.17

PMRDC admittedly did not avail of its option to purchase the lands in Area II in the twelve months that
passed after the execution of the MOA. Although PMRDC delivered to petitioners certain checks
representing the money, the same however allegedly bounced.18 Hence, on January 8, 1999, petitioners
demanded the return of the corresponding TCTs.19 In its January 21, 1999 letter to Demetrio, however,
PMRDC, through Villamor, stated that the TCTs could no longer be delivered back to petitioners as the
covered properties had already been conveyed and assigned to the Asset Pool pursuant to the March 23,
1998 DAC. In the correspondence that ensued, petitioners disowned Demetrio’s signature in the DAC and
labeled it a mere forgery. They explained that Demetrio could not have entered into the said agreement
as his power of attorney was limited only to selling or mortgaging the properties and not conveying the
same to the Asset Pool. Boldly, they asserted that the fraudulent execution of the DAC was made possible
through the connivance of all the respondents.

With that final word, petitioners instituted an action before the RTC of San Pablo City, Laguna, Branch 32
for the rescission of the MOA, as well as for the declaration of nullity of the DAC. They prayed for the
issuance of a writ of preliminary injunction and for the payment of damages.21

Ruling for petitioners, the trial court, on August 30, 2004, declared the MOA to be an option contract and
ordered its rescission. It, likewise, declared the DAC null and void as it made a definite finding of forgery
of Demetrio’s signature as well as fraud in its execution, and accordingly, adjudged respondents PMRDC
and Villamor liable to petitioner for damages.22 The dispositive portion of the decision reads:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in the favor of the plaintiffs and
against the defendants as follows:

1. Rescinding the Memorandum of Agreement (MOA) executed between the plaintiffs and Project Movers
Realty [&] Development Corporation (PMRDC);

2. Declaring null and void the Deed of Assignment and Conveyance (DAC) executed between Project
Movers Realty [&] Development Corporation, Land Bank of the Philippines and Demetrio Hernandez whose
signature is forged;

3. Ordering Transfer Certificate of Title Nos. T-3132, T-3133, T-3134 and T-3135, all in the names of the
plaintiffs, which are in the custody of the Court, to be delivered to plaintiffs immediately and the plaintiffs
are ordered to issue a corresponding receipt of said certificates of title signed by all the plaintiffs to be
submitted to the OIC-Branch Clerk of Court of this Court within five (5) days from receipt of said titles;

4. Ordering defendants Mario Villamor and Wilfredo Hernandez to pay plaintiffs, jointly and severally, the
following:

a. Actual damages of ₱500,000.00;

b. Moral damages of ₱200,000.00;
c. Exemplary damages of ₱200,000.00;
d. Attorney’s fees in the amount of ₱300,000.00;
e. And the costs of the suit.

SO ORDERED.23

Page 37 of 189
Aggrieved, respondents filed a notice of appeal and elevated the matter to the Court of Appeals. On
October 19, 2005, the Court of Appeals issued the assailed Decision reversing and setting aside the trial
court’s decision as follows:

WHEREFORE, based on the foregoing, the appeal is GRANTED. The decision dated August 30, 2004 of the
Regional Trial Court, Branch 32, San Pablo City in Civil Case No. SP-5742 (2000) is REVERSED and SET
ASIDE and a new one is entered declaring the Deed of Conveyance valid and thus, the Transfer
Certificates of Title subject of this case are ordered returned to HIGC. No costs.

SO ORDERED.

Central to the ruling of the Court of Appeals is its contrary finding that the allegation of forgery of
Demetrio’s signature in the DAC was not established by the evidence and, hence, following the legal
presumption of regularity in the execution of notarized deeds, it upheld the validity of the DAC.25 The
Court of Appeals noted that the incompatibility in the terms of the MOA and the DAC clearly signified the
intention of the parties to have the MOA novated by subsequent agreement and have the properties
conveyed to the Asset Pool in exchange for PMRDC shares to be issued to Demetrio. This, according to the
appellate court, completely changed the original obligations of PMRDC as provided in the MOA. It noted
further that it was premature to order the release of the subject TCTs to petitioners at this stage of the
proceedings, because that would amount to an execution of the decision.

With the denial of their motion for reconsideration, petitioners filed the instant petition for review
attributing error to the Court of Appeals in declining to rescind the MOA and declare the DAC null and void.

Petitioners insist that the obligation of PMRDC to deliver back the TCTs arises on its failure to exercise the
option to purchase the lands according to the terms of the MOA, and that the deliberate refusal of PMRDC
to perform such obligation gives ground for the rescission of the MOA. This thesis is perched on
petitioners’ argument that the MOA could not have possibly been novated by the DAC because first,
Demetrio’s signature therein has been forged, and second, Demetrio could not have validly assented to
the DAC in behalf of Carolina and Margarita because his special power was limited only to selling or
mortgaging the properties and excludes conveying and assigning the said properties to the Asset Pool for
consideration.28 They also point out that the DAC itself is infirm insofar as it stipulated to convey the
lands to the Asset Pool as the latter supposedly is neither a registered corporation nor a partnership and
does not possess a legal personality.

Commenting on the petition, PMRDC and Villamor advance that petitioners’ allegation of fraud and forgery
are all factual matters that are inappropriate in a Rule 45 petition.30 More importantly, they aver that the
novation of the MOA by the DAC is unmistakable as the DAC itself has made an express reference to the
MOA provisions on the payment of option money and, hence, has expressly modified the pertinent terms
thereof.

HIGC and its president, Wilfredo Hernandez, both represented by the Office of the Government Corporate
Counsel (OGCC),32 and LBP33 are of the same view.34 In addition, HIGC explains that contrary to
petitioners’ belief, the transfer of the properties under the DAC is valid as the conveyance has been made
to the Asset Pool with LBP, an entity with juridical entity, acting as trustee thereof.35 Addressing the issue
of forgery and fraud in the execution of the DAC, HIGC maintains that these factual matters remain to be
mere allegations which nothing in the records of the case could conclusively prove, except the self-serving
testimony of petitioners themselves.

The Court denies the petition.

Petitioners’ cause stems from the failure of PMRDC to restore to petitioners the possession of the TCTs of
the lands within Area II upon its failure to exercise the option to purchase within the 12-month period
stipulated in the MOA. Respondents maintain, however, that said obligation, dependent as it is on the
exercise of the option to purchase, has altogether been expressly obliterated by the terms of the DAC
whereby petitioners, through Demetrio as attorney-in-fact, have agreed to novate the terms of the MOA
by extinguishing the core obligations of PMRDC on the payment of option money. This seems to suggest
that with the execution of the DAC, PMRDC has already entered into the exercise of its option except that
its obligation to deliver the option money has, by subsequent agreement embodied in the DAC, been

Page 38 of 189
substituted instead by the obligation to issue participation certificates in Demetrio’s name but which,
likewise, has not yet been performed by PMRDC. But petitioners stand against the validity of the DAC on
the ground that the signature of Demetrio therein was spurious.

Firmly settled is the jurisprudential rule that forgery cannot be presumed from a mere allegation but
rather must be proved by clear, positive and convincing evidence by the party alleging the same.37 The
burden to prove the allegation of forgery in this case has not been conclusively discharged by petitioners
because first, nothing in the records supports the allegation except only perhaps Demetrio’s explicit self-
serving disavowal of his signature in open court. Second, while in fact Demetrio at the trial of the case had
committed to have the subject signature examined by an expert, nevertheless, the trial had terminated
without the results of the examination being submitted in evidence. Third, the claim of forgery,
unsubstantiated as it is, becomes even more unremarkable in light of the fact that the DAC involved in
this case is a notarized deed guaranteed by public attestation in accordance with law, such that the
execution thereof enjoys the legal presumption of regularity in the absence of compelling proof to the
contrary.

Yet the inquiry on the validity of the DAC does not terminate with the finding alone of the genuineness of
Demetrio’s signature therein, because petitioners also stand against its validity on the ground of
Demetrio’s non-authority to execute the same. They claim that the execution of the DAC would be beyond
the power of Demetrio to perform as his authority is limited only to selling or mortgaging the properties
and does not include assigning and conveying said properties to the Asset Pool in consideration of shares
of stocks for his lone benefit. For their part, respondents, who believe Demetrio’s power of attorney was
broad enough to effectuate a novation of PMRDC’s core obligations in the MOA or, at the least, implement
the provisions thereof through the DAC, invoke the 4th and 5th whereas-clauses in the DAC which, in
relation to each other, supposedly pertain to that certain provision in the MOA which authorizes the
conveyance of the properties to the Asset Pool in exchange for corporate shares.

The 4th and 5th whereas-clauses in the DAC read as follows:

WHEREAS, on November 3, 1997, PMRDC and LANDOWNER have entered into a Memorandum of
Agreement whereby the former agreed to convey to the Isabel Homes Asset Pool certain real properties
located at Sta. Maria, Laguna;

[WHEREAS], the LANDOWNER and PMRDC have agreed to revise and modify the said Memorandum of
Agreement, whereby the LANDOWNER shall dispense with the option money as a requisite to the sale and
purchase of the properties by PMRDC, and agreed to convey absolutely and unqualifiedly the same
properties directly to the Isabel Homes Asset Pool for and in exchange of shares of stock or equity in
PMRDC.42

While indeed we find no provision in the MOA such as that alluded to in the aforequoted 4th whereas-
clause in the DAC which purportedly embodies an agreement by the parties to assign and convey the
subject properties to the Asset Pool, we surmise that the clause could be referring to paragraph 5 of the
MOA which stipulates a commitment on the part of petitioners to give their consent to an assignment and
conveyance of the properties to the Asset Pool but only once a request therefor is made by PMRDC.
Paragraph 5 reads:

5. THAT, the VENDOR at the request of the VENDEE shall agree to convey the parcels of land to any bank
or financial institution by way of mortgage or to a Trustee by way of a Trust Agreement at any time from
the date of this instrument, PROVIDED, HOWEVER, that the VENDOR is not liable for any mortgage or
loans or obligations that will be incurred by way of mortgage of Trust Agreement that the VENDEE might
enter into;

Petitioners profess, however, that no such request was ever intimated to them at any time during the
subsistence of the PMRDC’s right to exercise the option to buy. But respondents are quick to reason that a
request is unnecessary because Demetrio has been legally enabled by his special power to give such
consent and accordingly execute the DAC, effect a novation of the MOA, and extinguish the stipulated
obligations of PMRDC therein, or at least that he could assent to the implementation of the MOA provisions
in the way that transpired. We agree.

Page 39 of 189
Demetrio’s special power of attorney granting the powers to sell and/or mortgage reads in part:

1. To sell and/or mortgage in favor of any person, corporation, partnership, private banking or financial
institution, government or semi-government banking or financial institution for such price or amount and
under such terms and conditions as our aforesaid attorney-in-fact may deem just and proper, parcels of
land more particularly described as follows:

2. To carry out the authority aforestated, to sign, execute and deliver such deeds, instruments and other
papers that may be required or necessary;

3. To further attain the authority herein given, to do and perform such acts and things that may be
necessary or incidental to fully carry out the authority herein granted.44

It is in the context of this vesture of power that Demetrio, representing his shared interest with Carolina
and Margarita, entered into the MOA with PMRDC. It is likewise within this same context that Demetrio
later on entered into the DAC and accordingly extinguished the previously subsisting obligation of PMRDC
to deliver the stipulated option money and replaced said obligation with the delivery instead of
participation certificates in favor of Demetrio.

The powers conferred on Demetrio were exclusive only to selling and mortgaging the properties. Between
these two specific powers, the power to sell is quite controversial because it is the sale transaction which
bears close resemblance to the deal contemplated in the DAC. In fact, part of the testimony of Atty.
Danilo Javier, counsel for respondent HIGC and head of its legal department at the time, is that in the
execution of the DAC, respondents had relied on Demetrio’s special power of attorney and also on his
supposed agreement to be paid in kind, i.e., in shares of stock, as consideration for the assignment and
conveyance of the subject properties to the Asset Pool.45 What petitioners miss, however, is that the
power conferred on Demetrio to sell "for such price or amount"46 is broad enough to cover the exchange
contemplated in the DAC between the properties and the corresponding corporate shares in PMRDC, with
the latter replacing the cash equivalent of the option money initially agreed to be paid by PMRDC under
the MOA. Suffice it to say that "price" is understood to mean "the cost at which something is obtained, or
something which one ordinarily accepts voluntarily in exchange for something else, or the consideration
given for the purchase of a thing."

Thus, it becomes clear that Demetrio’s special power of attorney to sell is sufficient to enable him to make
a binding commitment under the DAC in behalf of Carolina and Margarita. In particular, it does include the
authority to extinguish PMRDC’s obligation under the MOA to deliver option money and agree to a more
flexible term by agreeing instead to receive shares of stock in lieu thereof and in consideration of the
assignment and conveyance of the properties to the Asset Pool. Indeed, the terms of his special power of
attorney allow much leeway to accommodate not only the terms of the MOA but also those of the
subsequent agreement in the DAC which, in this case, necessarily and consequently has resulted in a
novation of PMRDC’s integral obligations. On this score, we quote with approval the decision of the Court
of Appeals, aptly citing the case of California Bus Lines, Inc. v. State Investment House, Inc.48 thus –

There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect
of extinguishing an obligation by another which substitutes the same. The first is when novation has been
explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether the two obligations can stand
together, each one having its independent existence. If they cannot, they are incompatible, and the latter
obligation novates the first. Corollarily, changes that breed incompatibility must be essential in nature and
not merely accidental. The incompatibility must take place in any of the essential elements of the
obligation such as its object, cause or principal conditions thereof; otherwise, the change would be merely
modificatory in nature and insufficient to extinguish the original obligation.

In view of the foregoing, the Court finds no useful purpose in addressing all the other issues raised in this
petition.

A final note. Section 10, Book IV, Title III, Chapter 350 of the Revised Administrative Code of 1987 has
designated the OGCC to act as the principal law office of government-owned or controlled corporations
(GOCCs) in connection with any judicial or quasi-judicial proceeding. Yet between the two respondents

Page 40 of 189
GOCCs in this case – LBP and HIGC – it is only the latter for which the OGCC has entered its appearance.
Nowhere in the records is it shown that the OGCC has ever entered its appearance in this case as principal
legal counsel of respondent LBP, or that at the very least it has given express conformity to the LBP legal
department’s representation.

In Land Bank of the Philippines v. Martinez, citing Land Bank of the Philippines v. Panlilio-Luciano,53 we
explained that the legal department of LBP is not expressly authorized by its charter to appear in behalf of
the corporation in any proceeding as the mandate of the law is explicit enough to place the said
department under the OGCC’s power of control and supervision.1avvphi1 We held in that case:

[Section 10] mandates the OGCC, and not the LBP Legal Department, as the principal law office of the
LBP. Moreover, it establishes the proper hierarchical order in that the LBP Legal Department remains
under the control and supervision of the OGCC.

At the same time, the existence of the OGCC does not render the LBP Legal Department a superfluity. We
do not doubt that the LBP Legal Department carries out vital legal services to LBP. However, the
performance of such functions cannot deprive the OGCC’s role as overseer of the LBP Legal Department
and its mandate of exercising control and supervision over all GOCC legal departments. For the purpose of
filing petitions and making submissions before this Court, such control and supervision imply express
participation by the OGCC as principal legal counsel of LBP.

It should also be noted that the aforementioned Section 10, Book IV, Title III, Chapter 3 of the
Administrative Code of 1987 authorizes the OGCC to receive the attorney's fees adjudged in favor of their
client GOCCs, such fees accruing to a special fund of the OGCC. Evidently, the non-participation of the
OGCC in litigations pursued by GOCCs would deprive the former of its due funding as authorized by law.
Hence, this is another reason why we cannot sustain Attys. Beramo and Berbaño's position that the OGCC
need not participate in litigations pursued by LBP.

It may strike as disruptive to the flow of a GOCC’s daily grind to require the participation of the OGCC as
its principal law office, or the exercise of control and supervision by the OGCC over the acts of the GOCC’s
legal departments. For reasons such as proximity and comfort, the GOCC may find it convenient to rely
instead on its in-house legal departments, or more irregularly, on private practitioners. Yet the statutory
role of the OGCC as principal law office of GOCCs is one of long-standing, and we have to recognize such
function as part of public policy. Since the jurisdiction of the OGCC includes all GOCCs, its perspective is
less myopic than that maintained by a particular legal department of a GOCC. It is not inconceivable that
left to its own devices, the legal department of a given GOCC may adopt a legal position inconsistent with
or detrimental to other GOCCs. Since GOCCs fall within the same governmental framework, it would be
detrimental to have GOCCs foisted into adversarial positions by their respective legal departments. Hence,
there is indubitable wisdom in having one overseer over all these legal departments which would ensure
that the legal positions adopted by the GOCCs would not conflict with each other or the government.

Certainly, Section 10, Book IV, Title III, Chapter 3 of the Administrative Code of 1987 can be invoked by
adverse parties or by the courts in citing as deficient the exclusive representation of LBP by its Legal
Department. Then again, if neither the adverse parties nor the courts of jurisdiction choose to contest this
point, there would be no impediment to the litigation to maintain.

WHEREFORE, the Petition is DENIED. The October 19, 2005 Decision and January 11, 2006 Resolution of
the Court of Appeals, in CA- G.R. CV No. 83852, are hereby AFFIRMED.

SO ORDERED.
x------------------------------------------------------------------------------------------------------------------x

Page 41 of 189
G.R. No. 165487 July 13, 2011
COUNTRY BANKERS INSURANCE CORPORATION, Petitioner, vs.
ANTONIO LAGMAN, Respondent.
DECISION
PEREZ, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, assailing the
Decision1 and Resolution2 of the Court of Appeals dated 21 June 2004 and 24 September 2004,
respectively.

These are the undisputed facts.

Nelson Santos (Santos) applied for a license with the National Food Authority (NFA) to engage in the
business of storing not more than 30,000 sacks of palay valued at ₱5,250,000.00 in his warehouse at
Barangay Malacampa, Camiling, Tarlac. Under Act No. 3893 or the General Bonded Warehouse Act, as
amended, 3 the approval for said license was conditioned upon posting of a cash bond, a bond secured by
real estate, or a bond signed by a duly authorized bonding company, the amount of which shall be fixed
by the NFA Administrator at not less than thirty-three and one third percent (33 1/3%) of the market
value of the maximum quantity of rice to be received.

Accordingly, Country Bankers Insurance Corporation (Country Bankers) issued Warehouse Bond No.
033044 for ₱1,749,825.00 on 5 November 1989 and Warehouse Bond No. 023555 for ₱749,925.00 on 13
December 1989 (1989 Bonds) through its agent, Antonio Lagman (Lagman). Santos was the bond
principal, Lagman was the surety and the Republic of the Philippines, through the NFA was the obligee. In
consideration of these issuances, corresponding Indemnity Agreements6 were executed by Santos, as
bond principal, together with Ban Lee Lim Santos (Ban Lee Lim), Rhosemelita Reguine (Reguine) and
Lagman, as co-signors. The latter bound themselves jointly and severally liable to Country Bankers for any
damages, prejudice, losses, costs, payments, advances and expenses of whatever kind and nature,
including attorney’s fees and legal costs, which it may sustain as a consequence of the said bond; to
reimburse Country Bankers of whatever amount it may pay or cause to be paid or become liable to pay
thereunder; and to pay interest at the rate of 12% per annum computed and compounded monthly, as
well as to pay attorney’s fees of 20% of the amount due it.7

Santos then secured a loan using his warehouse receipts as collateral.8 When the loan matured, Santos
defaulted in his payment. The sacks of palay covered by the warehouse receipts were no longer found in
the bonded warehouse.9 By virtue of the surety bonds, Country Bankers was compelled to pay
₱1,166,750.37.10

Consequently, Country Bankers filed a complaint for a sum of money docketed as Civil Case No. 95-73048
before the Regional Trial Court (RTC) of Manila. In his Answer, Lagman alleged that the 1989 Bonds were
valid only for 1 year from the date of their issuance, as evidenced by receipts; that the bonds were never
renewed and revived by payment of premiums; that on 5 November 1990, Country Bankers issued
Warehouse Bond No. 03515 (1990 Bond) which was also valid for one year and that no Indemnity
Agreement was executed for the purpose; and that the 1990 Bond supersedes, cancels, and renders no
force and effect the 1989 Bonds.11

The bond principals, Santos and Ban Lee Lim, were not served with summons because they could no
longer be found.12 The case was eventually dismissed against them without prejudice.13 The other co-
signor, Reguine, was declared in default for failure to file her answer.14

On 21 September 1998, the trial court rendered judgment declaring Reguine and Lagman jointly and
severally liable to pay Country Bankers the amount of ₱2,400,499.87.15 The dispositive portion of the
RTC Decision16 reads:

WHEREFORE, premises considered, judgment is hereby rendered, ordering defendants Rhomesita [sic]
Reguine and Antonio Lagman, jointly and severally liable to pay plaintiff, Country Bankers Assurance
Corporation, the amount of ₱2,400,499.87, with 12% interest from the date the complaint was filed until
fully satisfied plus 20% of the amount due plaintiff as and for attorney’s fees and to pay the costs.

Page 42 of 189
As the Court did not acquire jurisdiction over the persons of defendants Nelson Santos and Ban Lee Lim
Santos, let the case against them be DISMISSED. Defendant Antonio Lagman’s counterclaim is likewise
DISMISSED, for lack of merit.17

In holding Lagman and Reguine solidarily liable to Country Bankers, the trial court relied on the express
terms of the Indemnity Agreement that they jointly and severally bound themselves to indemnify and
make good to Country Bankers any liability which the latter may incur on account of or arising from the
execution of the bonds.18

The trial court rationalized that the bonds remain in force unless cancelled by the Administrator of the NFA
and cannot be unilaterally cancelled by Lagman. The trial court emphasized that for the failure of Lagman
to comply with his obligation under the Indemnity Agreements, he is likewise liable for damages as a
consequence of the breach.

Lagman filed an appeal to the Court of Appeals, docketed as CA G.R. CV No. 61797. He insisted that the
lifetime of the 1989 Bonds, as well as the corresponding Indemnity Agreements was only 12 months.
According to Lagman, the 1990 Bond was not pleaded in the complaint because it was not covered by an
Indemnity Agreement and it superseded the two prior bonds.19

On 21 June 2004, the Court of Appeals rendered the assailed Decision reversing and setting aside the
Decision of the RTC and ordering the dismissal of the complaint filed against Lagman.20

The appellate court held that the 1990 Bond superseded the 1989 Bonds. The appellate court observed
that the 1990 Bond covers 33.3% of the market value of the palay, thereby manifesting the intention of
the parties to make the latter bond more comprehensive. Lagman was also exonerated by the appellate
court from liability because he was not a signatory to the alleged Indemnity Agreement of 5 November
1990 covering the 1990 Bond. The appellate court rejected the argument of Country Bankers that the
1989 bonds were continuing, finding, as reason therefor, that the receipts issued for the bonds indicate
that they were effective for only one-year.

Country Bankers sought reconsideration which was denied in a Resolution dated 24 September 2004.21

Expectedly, Country Bankers filed the instant petition attributing two (2) errors to the Court of Appeals, to
wit:

A. THE HONORABLE COURT OF APPEALS seriously erred in disregarding the express provisions of Section
177 of the insurance code when it held that the subject surety bonds were superseded by a subsequent
bond notwithstanding the non-cancellation thereof by the bond obligee.

B. The honorable court of appeals seriously erred in holding that receipts for the payment of premiums
prevail over the express provision of the surety bond that fixes the term thereof.22

Country Bankers maintains that by the express terms of the 1989 Bonds, they shall remain in full force
until cancelled by the Administrator of the NFA. As continuing bonds, Country Bankers avers that Section
177 of the Insurance Code applies, in that the bond may only be cancelled by the obligee, by the
Insurance Commissioner or by a competent court.

Country Bankers questions the existence of a third bond, the 1990 Bond, which allegedly cancelled the
1989 Bonds on the following grounds: First, Lagman failed to produce the original of the 1990 Bond and
no basis has been laid for the presentation of secondary evidence; Second, the issuance of the 1990 Bond
was not approved and processed by Country Bankers; Third, the NFA as bond obligee was not in
possession of the 1990 Bond. Country Bankers stresses that the cancellation of the 1989 Bonds requires
the participation of the bond obligee. Ergo, the bonds remain subsisting until cancelled by the bond
obligee. Country Bankers further assert that Lagman also failed to prove that the NFA accepted the 1990
Bond in replacement of the 1989 Bonds.

Country Bankers notes that the receipts issued for the 1989 Bonds are mere evidence of premium
payments and should not be relied on to determine the period of effectivity of the bonds. Country Bankers

Page 43 of 189
explains that the receipts only represent the transactions between the bond principal and the surety, and
does not involve the NFA as bond obligee.

Country Bankers calls this Court’s attention to the incontestability clause contained in the Indemnity
Agreements which prohibits Lagman from questioning his liability therein.

In his Comment, Lagman raises the issue of novation by asserting that the 1989 Bonds were superseded
by the 1990 Bond, which did not include Lagman as party. Therefore, Lagman argues, Country Bankers
has no cause of action against him. Lagman also reiterates that because of novation, the 1989 bonds are
neither perpetual nor continuing.

Lagman anchors his defense on two (2) arguments: 1) the 1989 Bonds have expired and 2) the 1990
Bond novates the 1989 Bonds.

The Court of Appeals held that the 1989 bonds were effective only for one (1) year, as evidenced by the
receipts on the payment of premiums.

We do not agree.

The official receipts in question serve as proof of payment of the premium for one year on each surety
bond. It does not, however, automatically mean that the surety bond is effective for only one (1) year. In
fact, the effectivity of the bond is not wholly dependent on the payment of premium. Section 177 of the
Insurance Code expresses:

Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond
is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding
unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in
which case the bond becomes valid and enforceable irrespective of whether or not the premium has been
paid by the obligor to the surety: Provided, That if the contract of suretyship or bond is not accepted by,
or filed with the obligee, the surety shall collect only reasonable amount, not exceeding fifty per centum of
the premium due thereon as service fee plus the cost of stamps or other taxes imposed for the issuance of
the contract or bond: Provided, however, That if the non-acceptance of the bond be due to the fault or
negligence of the surety, no such service fee, stamps or taxes shall be collected. (Emphasis supplied)

The 1989 Bonds have identical provisions and they state in very clear terms the effectivity of these bonds,
viz:

NOW, THEREFORE, if the above-bounded Principal shall well and truly deliver to the depositors PALAY
received by him for STORAGE at any time that demand therefore is made, or shall pay the market value
therefore in case he is unable to return the same, then this obligation shall be null and void; otherwise it
shall remain in full force and effect and may be enforced in the manner provided by said Act No. 3893 as
amended by Republic Act No. 247 and P.D. No. 4. This bond shall remain in force until cancelled by the
Administrator of National Food Authority.23

This provision in the bonds is but in compliance with the second paragraph of Section 177 of the Insurance
Code, which specifies that a continuing bond, as in this case where there is no fixed expiration date, may
be cancelled only by the obligee, which is the NFA, by the Insurance Commissioner, and by the court.
Thus:

In case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the
contract of suretyship is cancelled by the obligee or by the Commissioner or by a court of competent
jurisdiction, as the case may be.

By law and by the specific contract involved in this case, the effectivity of the bond required for the
obtention of a license to engage in the business of receiving rice for storage is determined not alone by
the payment of premiums but principally by the Administrator of the NFA. From beginning to end, the
Administrator’s brief is the enabling or disabling document.

Page 44 of 189
The clear import of these provisions is that the surety bonds in question cannot be unilaterally cancelled
by Lagman. The same conclusion was reached by the trial court and we quote:

As there appears no record of cancellation of the Warehouse Bonds No. 03304 and No. 02355 either by
the administrator of the NFA or by the Insurance Commissioner or by the Court, the Warehouse Bonds are
valid and binding and cannot be unilaterally cancelled by defendant Lagman as general agent of the
plaintiff.24

While the trial court did not directly rule on the existence and validity of the 1990 Bond, it upheld the
1989 Bonds as valid and binding, which could not be unilaterally cancelled by Lagman. The Court of
Appeals, on the other hand, acknowledged the 1990 Bond as having cancelled the two previous bonds by
novation. Both courts however failed to discuss their basis for rejecting or admitting the 1990 Bond,
which, as we indicated, is bone to pick in this case.

Lagman’s insistence on novation depends on the validity, nay, existence of the allegedly novating 1990
Bond. Country Bankers understandably impugns both. We see the point. Lagman presented a mere
photocopy of the 1990 Bond. We rule as inadmissible such copy.

Under the best evidence rule, the original document must be produced whenever its contents are the
subject of inquiry.25 The rule is encapsulated in Section 3, Rule 130 of the Rules of Court, as follow:

Sec. 3. Original document must be produced; exceptions. — When the subject of inquiry is the contents of
a documents, no evidence shall be admissible other than the original document itself, except in the
following cases:

(a) When the original has been lost or destroyed, or cannot be produced in court, without bad faith on the
part of the offeror;

(b) When the original is in the custody or under the control of the party against whom the evidence is
offered, and the latter fails to produce it after reasonable notice;

(c) When the original consists of numerous accounts or other documents which cannot be examined in
court without great loss of time and the fact sought to be established from them is only the general result
of the whole; and

(d) When the original is a public record in the custody of a public officer or is recorded in a public office.26

A photocopy, being a mere secondary evidence, is not admissible unless it is shown that the original is
unavailable.27 Section 5, Rule 130 of the Rules of Court states:

SEC.5 When original document is unavailable. — When the original document has been lost or destroyed,
or cannot be produced in court, the offeror, upon proof of its execution or existence and the cause of its
unavailability without bad faith on his part, may prove its contents by a copy, or by a recital of its
contents in some authentic document, or by the testimony of witnesses in the order stated.

Before a party is allowed to adduce secondary evidence to prove the contents of the original, the offeror
must prove the following: (1) the existence or due execution of the original; (2) the loss and destruction
of the original or the reason for its non-production in court; and (3) on the part of the offeror, the absence
of bad faith to which the unavailability of the original can be attributed. The correct order of proof is as
follows: existence, execution, loss, and contents.

In the case at bar, Lagman mentioned during the direct examination that there are actually four (4)
duplicate originals of the 1990 Bond: the first is kept by the NFA, the second is with the Loan Officer of
the NFA in Tarlac, the third is with Country Bankers and the fourth was in his possession.29 A party must
first present to the court proof of loss or other satisfactory explanation for the non-production of the
original instrument.30 When more than one original copy exists, it must appear that all of them have been
lost, destroyed, or cannot be produced in court before secondary evidence can be given of any one. A
photocopy may not be used without accounting for the other originals.

Page 45 of 189
Despite knowledge of the existence and whereabouts of these duplicate originals, Lagman merely
presented a photocopy. He admitted that he kept a copy of the 1990 Bond but he could no longer produce
it because he had already severed his ties with Country Bankers. However, he did not explain why
severance of ties is by itself reason enough for the non-availability of his copy of the bond considering
that, as it appears from the 1989 Bonds, Lagman himself is a bondsman. Neither did Lagman explain why
he failed to secure the original from any of the three other custodians he mentioned in his testimony.
While he apparently was able to find the original with the NFA Loan Officer, he was merely contented with
producing its photocopy. Clearly, Lagman failed to exert diligent efforts to produce the original.

Fueling further suspicion regarding the existence of the 1990 Bond is the absence of an Indemnity
Agreement. While Lagman argued that a 1990 Bond novates the 1989 Bonds, he raises the defense of
"non-existence of an indemnity agreement" which would conveniently exempt him from liability. The trial
court deemed this defense as indicia of bad faith, thus:

To the observation of the Court, defendant Lagman contended that being a general agent (which requires
a much higher qualification than an ordinary agent), he is expected to have attended seminars and
workshops on general insurance wherein he is supposed to have acquired sufficient knowledge of the
general principles of insurance which he had fully practised or implemented from experience. It somehow
appears to the Court’s assessment of his reneging liability of the bonds in question, that he is still short of
having really understood the principle of suretyship with reference to the transaction of indemnity in which
he is a signatory. If, as he alleged, that he is well-versed in insurance, the Court finds no excuse for him
to stand firm in denying his liability over the claim against the bonds with indemnity provision. If he insists
in not recognizing that liability, the more that this Court is convinced that his knowledge that insurance
operates under the principle of good faith is inadequate. He missed the exception provided by Section 177
of the Insurance Code, as amended, wherein non-payment of premium would not have the same essence
in his mind that the agreements entered into would not have full force or effect. It could be glimpsed,
therefore, that the mere fact of cancelling bonds with indemnity agreements and replacing them (absence
of the same) to escape liability clearly manifests bad faith on his part.32 (Emphasis supplied.)

Having discounted the existence and/or validity of the 1990 Bond, there can be no novation to speak of.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights
of the creditor. 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; and 4) There must be a valid new contract.33

In this case, only the first element of novation exists. Indeed, there is a previous valid obligation, i.e., the
1989 Bonds. There is however neither a valid new contract nor a clear agreement between the parties to a
new contract since the very existence of the 1990 Bond has been rendered dubious. Without the new
contract, the old contract is not extinguished.

Implied novation necessitates a new obligation with which the old is in total incompatibility such that the
old obligation is completely superseded by the new one.34 Quite obviously, neither can there be implied
novation. In this case, there is no new obligation.

The liability of Lagman is expressed in Indemnity Agreements executed in consideration of the 1989 Bonds
which we have considered as continuing contracts. Under both Indemnity Agreements, Lagman, as co-
signor, together with Santos, Ban Lee Lim and Reguine, bound themselves jointly and severally to Country
Bankers to indemnify it for any damage or loss sustained on the account of the execution of the bond,
among others. The pertinent identical stipulations of the Indemnity Agreements state:

INDEMNITY: ─ To indemnify and make good to the COMPANY jointly and severally, any damages,
prejudice, loss, costs, payments advances and expenses of whatever kind and nature, including attorney’s
fees and legal costs, which the COMPANY may, at any time, sustain or incur, as well as to reimburse to
said COMPANY all sums and amounts of money which the COMPANY or its representatives shall or may
pay or cause to be paid or become liable to pay, on account of or arising from the execution of the above-
mentioned BOND or any extension, renewal, alteration or substitution thereof made at the instance of the
undersigned or anyone of them.

Page 46 of 189
Moreover, the Indemnity Agreements also contained identical Incontestability Clauses which provide:

INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: ─ Any payment or disbursement made by the
COMPANY on account of the above-mentioned Bond, its renewals, extensions, alterations or substitutions
either in the belief that the COMPANY was obligated to make such payment or in the belief that said
payment was necessary or expedient in order to avoid greater losses or obligations for which the
COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions,
alterations, or substitutions, shall be final and shall not be disputed by the undersigned, who hereby
jointly and severally bind themselves to indemnify [Country Bankers] of any and all such payments, as
stated in the preceding clauses.

In case the COMPANY shall have paid[,] settled or compromised any liability, loss, costs, damages,
attorney’s fees, expenses, claims[,] demands, suits, or judgments as above-stated, arising out of or in
connection with said bond, an itemized statement thereof, signed by an officer of the COMPANY and other
evidence to show said payment, settlement or compromise, shall be prima facie evidence of said payment,
settlement or compromise, as well as the liability of the undersigned in any and all suits and claims
against the undersigned arising out of said bond or this bond application.361awphil

Lagman is bound by these Indemnity Agreements. Payments made by Country Bankers by virtue of the
1989 Bonds gave rise to Lagman’s obligation to reimburse it under the Indemnity Agreements. Lagman,
being a solidary debtor, is liable for the entire obligation.

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals in CA-
G.R. CV No. 61797 are SET ASIDE and the Decision dated 21 September 1998 of the RTC is hereby
REINSTATED.

SO ORDERED.
x--------------------------------------------------------------------------------------------------------------------x
G.R. No. 193629 August 17, 2011
RCJ BUS LINES, INCORPORATED, Petitioner, vs.
STANDARD INSURANCE COMPANY, INCORPORATED, Respondent.
CARPIO, J.:

The Case

G.R. No. 193629 is a petition for review[1] assailing the Decision[2] promulgated on 11 March 2010 as
well as the Resolution[3] promulgated on 3 September 2010 by the Court of Appeals (appellate court) in
CA-G.R. SP No. 105338. The appellate court affirmed with modification the 27 May 2008 Decision[4] of
Branch 37 of the Regional Trial Court of Manila (RTC) in Civil Case No. 00-99410. The RTC dismissed RCJ
Bus Lines' appeal from the 12 July 2000 Decision[5] of the Metropolitan Trial Court of Manila (MeTC) in
Civil Case No. 153566. The MeTC rendered judgment in favor of Standard Insurance Company,
Incorporated (Standard) and ordered Flor Bola Mangoba (Mangoba) and RCJ Bus Lines, Incorporated
(RCJ) to pay damages.

The Facts

The appellate court narrated the facts as follows:

On 01 December 2000, respondent Standard Insurance Co., Inc. (STANDARD) filed an amended complaint
against the petitioners Flor Bola Mangoba and RCJ Bus Lines, Inc. (docketed as Civil Case No. 153566-CV
before the Metropolitan Trial Court of Manila, Branch 29). Said amended complaint alleged, among others:

"2. On June 19, 1994 along the National Highway at Brgy. Amlang, Rosario, La Union, defendant Flor B.
Mangoba while driving [sic] an RCJ HINO BLUE RIBBON PASSENGER BUS bearing Plate No. NYG-363 in a
reckless and imprudent manner, bumped and hit a 1991 Mitsubishi Lancer GLX bearing Plate No. TAJ-796,
a photocopy of the police report is attached hereto and made an integral part hereof as Annex `A.'

Page 47 of 189
3. The subject Mitsubishi Lancer which is owned by Rodelene Valentino was insured for loss and damage
with plaintiff [Standard Insurance Co. Inc.] for P450,000.00, a photocopy of the insurance policy is
attached hereto and made an integral part hereof as Annex `B.'

4. Defendant RCJ Bus Lines, Inc. is the registered owner of the Passenger Bus bearing Plate No. NYG-363
while defendant Flor Mangoba was the driver of the subject Passenger Bus when the accident took place.

5. As a direct and proximate cause of the vehicular accident, the Mitsubishi Lancer was extensively
damaged, the costs of repairs of which were borne by the plaintiff [Standard Insurance Co. Inc.] at a cost
of P162,151.22.

6. By virtue of the insurance contract, plaintiff [Standard Insurance Co. Inc.] paid Rodelene Valentino the
amount of P162,151.22 for the repair of the Mitsubishi Lancer car.

7. After plaintiff [Standard Insurance Co. Inc.] has complied with its obligation under the policy mentioned
above, plaintiff's assured executed in plaintiff's favor a Release of Claim thereby subrogating the latter to
all his rights of recovery on all claims, demands and rights of action on account of loss, damage or injury
as a consequence of the accident from any person liable therefor.

8. Despite demands, defendants have failed and refused and still continue to fail and refuse to reimburse
plaintiff the sum of P162,151.22. A photocopy of the demand letter is attached hereto and made an
integral part hereof as Annex `C.'

9. As a consequence, plaintiff [Standard Insurance Co. Inc.] has been compelled to resort to court action
and thereby hire the services of counsel as well as incur expenses of litigation for all of which it should be
indemnified by the defendant in the amount of at least P30,000.00.

10. In order that it may serve as a deterrent for others and by way of example for the public good,
defendants should be adjudged to pay plaintiff [Standard Insurance Co. Inc.] exemplary damages in the
amount of P20,000.00."

Thus, STANDARD prayed:

"WHEREFORE, plaintiff respectfully prays that after due trial on the issues, this court render judgment
against the defendants adjudging them jointly and severally liable to pay plaintiff the following amounts:

1. The principal claim of P162,151.22 with interest at 12% per annum from September 1, 1995 until fully
paid.
2. P30,000.00 as and by way of indemnification for attorney's fees.
3. P25,000.00 as exemplary damages.
Plaintiff prays for such further or other reliefs as may be deemed just and equitable under the premises."

In its answer, RCJ Bus Lines, Inc. maintained:

"1. That the complaint states no cause of action against it;

2. That venue was improperly laid; and,
3. That the direct, immediate and proximate cause of the accident was the negligence of the driver of the
Mitsubishi Lancer when, for no reason at all, it made a sudden stop along the National Highway, as if to
initiate and/or create an accident."

Flor Bola Mangoba, in his own answer to the complaint, also pointed his finger at the driver of the
Mitsubishi Lancer as the one who caused the vehicular accident on the time, date and place in question.

For his failure to appear at the pre-trial despite notice, Flor Bola Mangoba was declared in default on 14
November 1997. Accordingly, trial proceeded sans his participation.

At the trial, the evidence adduced by the parties established the following facts:

Page 48 of 189
In the evening of 19 June 1994, at around 7:00 o'clock, a Toyota Corolla with Plate No. PHU-185 driven
by Rodel Chua, cruised along the National Highway at Barangay Amlang, Rosario, La Union, heading
towards the general direction of Bauan, La Union. The Toyota Corolla travelled at a speed of 50 kilometers
per hour as it traversed the downward slope of the road, which curved towards the right.

The Mitsubishi Lancer GLX with Plate No. TAJ-796, driven by Teodoro Goki, and owned by Rodelene
Valentino, was then following the Toyota Corolla along the said highway. Behind the Mitsubishi Lancer GLX
was the passenger bus with Plate No. NYG-363, driven by Flor Bola Mangoba and owned by RCJ Bus Lines,
Inc. The bus followed the Mitsubishi Lancer GLX at a distance of ten (10) meters and traveled at the speed
of 60 to 75 kilometers per hour.

Upon seeing a pile of gravel and sand on the road, the Toyota Corolla stopped on its tracks. The Mitsubishi
Lancer followed suit and also halted. At this point, the bus hit and bumped the rear portion of the
Mitsubishi Lancer causing it to move forward and hit the Toyota Corolla in front of it.

As a result of the incident, the Mitsubishi Lancer sustained damages amounting to P162,151.22,
representing the costs of its repairs. Under the comprehensive insurance policy secured by Rodelene
Valentino, owner of the Mitsubishi Lancer, STANDARD reimbursed to the former the amount she expended
for the repairs of her vehicle. Rodelene then executed a Release of Claim and Subrogation Receipt,
subrogating STANDARD to all rights, claims and actions she may have against RCJ Bus Lines, Inc. and its
driver, Flor Bola Mangoba.

The MeTC's Ruling

On 12 July 2000, the MeTC rendered its decision in favor of Standard, the dispositive portion of which
reads:

WHEREFORE, consistent with Section 1, Rule 131 and Section 1, Rule 133 of the Revised Rules on
Evidence, judgment is hereby rendered in favor of the plaintiff, ordering defendants Flor Bola Mangoba
and RCJ Bus Lines, Inc.:

1. To pay the principal sum of ONE HUNDRED SIXTY TWO THOUSAND ONE HUNDRED FIFTY ONE PESOS
and 22/100 (P162,151.22), with legal rate of interest at 12% per annum from September 1, 1995 until
full payment;
2. To pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as exemplary damages;
3. To pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorney's fees; and
4. To pay the costs of suit.

For want of merit, the separate Counterclaim is hereby DISMISSED.

In an Order[8] dated 2 May 2002, the RTC dismissed Mangoba and RCJ's appeal for filing their pleading
beyond the reglementary period. The appellate court, however, in a Decision in CA-G.R. SP No. 77598
dated 23 April 2004, granted RCJ's petition and remanded the case to the RTC for further proceedings.

The RTC's Ruling

In its Decision dated 27 May 2008, the RTC affirmed with modification the MeTC's Decision dated 12 July
2000. The RTC deleted the award for exemplary damages.

RCJ failed to convince the RTC that it observed the diligence of a good father of a family to prevent
damages sustained by the Mitsubishi Lancer. The RTC ruled that the testimony of Conrado Magno, RCJ's
Operations Manager, who declared that all applicants for employment in RCJ were required to submit
clearances from the barangay, the courts and the National Bureau of Investigation, is insufficient to show
that RCJ exercised due diligence in the selection and supervision of its drivers. The allegation of the
conduct of seminars and training for RCJ's drivers is not proof that RCJ examined Mangoba's qualifications,
experience and driving history. Moreover, the testimony of Noel Oalog, the bus conductor, confirmed that
the bus was travelling at a speed of 60 to 75 kilometers per hour, which was beyond the maximum
allowable speed of 50 kilometers per hour for a bus on an open country road. The RTC, however, deleted
the award of exemplary damages because it found no evidence that Mangoba acted with gross negligence.

Page 49 of 189
In an Order dated 27 August 2008, the RTC partially reconsidered its 27 May 2008 Decision and modified
the MeTC's Decision to read as follows:

WHEREFORE, the Decision dated May 27, 2008 is partially reconsidered and the Decision of the court a
quo dated July 12, 2000 is MODIFIED. Appellant RCJ Bus Lines, Inc. and defendant Flor Bola Mangoba are
ordered to pay jointly and severally the appellee [Standard Insurance Co., Inc.] the following:

1. ONE HUNDRED SIXTY TWO THOUSAND ONE FIFTY ONE PESOS and 22/100 (P162,151.22), with legal
rate of interest at 6% per annum from September 1, 1995 until full payment;

2. TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorney's fees; and

3. Cost of suit.

SO ORDERED.

The Appellate Court's Ruling

Mangoba and RCJ filed a petition for review before the appellate court. The appellate court found that the
RTC committed no reversible error in affirming RCJ's liability as registered owner of the bus and employer
of Mangoba, as well as Mangoba's negligence in driving the passenger bus. The appellate court, however,
deleted the award for attorney's fees and modified the legal interest imposed by the MeTC.

The dispositive portion of the appellate court's decision reads:

WHEREFORE, the instant petition for review is DENIED. The assailed Decision of the Regional Trial Court of
Manila, Branch 37, in Civil Case No. 00-99410 is hereby AFFIRMED with MODIFICATION that the legal
interest that should be imposed on the actual damages awarded in favor of respondent Standard
Insurance, Co., Inc. should be at the rate of 6% per annum computed from the time of extra judicial
demand until the finality of the 12 July 2000 Decision of the MeTC and thereafter, the legal interest shall
be at the rate of 12% per annum until the full payment of the actual damages. The award of attorney's
fees is DELETED.

SO ORDERED.

The appellate court denied RCJ's Motion for Reconsideration for lack of merit.

The Issues

RCJ assigns the following as errors of the appellate court:

1. The Court of Appeals erroneously awarded the amount of P162,151.22 representing actual damages
based merely on the proof of payment of policy/insurance claim and not on an official receipt of payment
of actual cost of repair;

2. The Court of Appeals erroneously disregarded the point that petitioner RCJ's defense of extraordinary
diligence in the selection and supervision of its driver was made as an alternative defense;

3. The Court of Appeals erroneously disregarded the legal principle that the supposed violation of Sec. 35
of R.A. 4136 merely results in a disputable presumption; and

4. The Court of Appeals erroneously held that petitioner RCJ is vicariously liable for the claim of supposed
actual damages incurred by respondent Standard Insurance.

The Court's Ruling

The petition has no merit. We see no reason to overturn the findings of the lower courts. We affirm the
ruling of the appellate court.

Page 50 of 189
RCJ's Liability

RCJ argues that its defense of extraordinary diligence in the selection and supervision of its employees is a
mere alternative defense. RCJ's initial claim was that Standard's complaint failed to state a cause of action
against RCJ.

Standard may hold RCJ liable for two reasons, both of which rely upon facts uncontroverted by RCJ. One,
RCJ is the registered owner of the bus driven by Mangoba. Two, RCJ is Mangoba's employer.

Standard's allegation in its amended complaint that RCJ is the registered owner of the passenger bus with
plate number NYG 363 was sufficient to state a cause of action against RCJ. The registered owner of a
vehicle should be primarily responsible to the public for injuries caused while the vehicle is in use.[16] The
main aim of motor vehicle registration is to identify the owner so that if any accident happens, or that any
damage or injury is caused by the vehicle on the public highways, responsibility therefor can be fixed on a
definite individual, the registered owner.[17]

Moreover, in its efforts to extricate itself from liability, RCJ proffered the defense of the exercise of the
diligence of a good father of a family. The MeTC characterized RCJ's defense against negligence in this
manner:

To repel the idea of negligence, defendant [RCJ] bus company's operations manager at the Laoag City
Terminal was presented on the witness stand on January 5, 2000 in regard to the company's seminars and
dialogues with respect to its employees, and the absence of any record of a vehicular accident involving
the co-defendant driver [Mangoba] (TSN, January 5, 2000, pp. 2-17; TSN, February 16, 2000, pp. 2-9).
As the last witness of defendant [RCJ] bus company, Noel Oalog, bus conductor who was allegedly seated
to the right side of the bus driver during the incident, was presented on March 22, 2000 (TSN, March 22,
2000, page 2). He confirmed on direct examination and cross examination that it was defendant's bus,
then running at 60-75 [kph] and at a distance of 10 meters, which bumped a Mitsubishi Lancer without a
tail light. According to him, the incident occurred when the driver of the Toyota Corolla, which was ahead
of the Lancer, stepped on the brakes due to the pile of gravel and sand in sight (TSN, Vide at pp. 3-11).
Subsequent to the proffer of exhibits (TSN, Vide, at page 14), and in default of any rebuttal, the parties
were directed to file the Memoranda within thirty days from March 23, 2000.

RCJ, by presenting witnesses to testify on its exercise of diligence of a good father of a family in the
selection and supervision of its bus drivers, admitted that Mangoba is its employee. Article 2180[19] of
the Civil Code, in relation to Article 2176,[20] makes the employer vicariously liable for the acts of its
employees. When the employee causes damage due to his own negligence while performing his own
duties, there arises the juris tantum presumption that the employer is negligent, rebuttable only by proof
of observance of the diligence of a good father of a family. For failure to rebut such legal presumption of
negligence in the selection and supervision of employees, the employer is likewise responsible for
damages, the basis of the liability being the relationship of pater familias or on the employer's own
negligence.

Mangoba, per testimony of his conductor, was ten meters away from the Mitsubishi Lancer before the
collision and was driving 60 to 75 kilometers per hour when the speed limit was 50 kilometers per
hour.[22] The presumption under Article 2185[23] of the Civil Code was thus proven true: Mangoba, as
driver of the bus which collided with the Mitsubishi Lancer, was negligent since he violated a traffic
regulation at the time of the mishap. We see no reason to depart from the findings of the MeTC, RTC and
appellate court that Mangoba was negligent. The appellate court stated:

To be sure, had not the passenger bus been speeding while traversing the downward sloping road, it
would not have hit and bumped the Mitsubishi Lancer in front of it, causing the latter vehicle to move
forward and hit and bump, in turn, the Toyota Corolla. Had the bus been moving at a reasonable speed, it
could have avoided hitting and bumping the Mitsubishi Lancer upon spotting the same, taking into account
that the distance between the two vehicles was ten (10) meters. As fittingly opined by the MeTC, the
driver of the passenger bus, being the rear vehicle, had full control of the situation as he was in a position
to observe the vehicle in front of him. Had he observed the diligence required under the circumstances,
the accident would not have occurred.

Page 51 of 189
Subrogation

In the present case, it cannot be denied that the Mitsubishi Lancer sustained damages. Moreover, it
cannot also be denied that Standard paid Rodelene Valentino P162,151.22 for the repair of the Mitsubishi
Lancer pursuant to a Release of Claim and Subrogation Receipt. Neither RCJ nor Mangoba cross-examined
Standard's claims evaluator when he testified on his duties, the insurance contract between Rodelene
Valentino and Standard, Standard's payment of insurance proceeds, and RCJ and Mangoba's refusal to pay
despite demands. After being lackadaisical during trial, RCJ cannot escape liability now. Standard's right of
subrogation accrues simply upon its payment of the insurance claim.[25]

Article 2207 of the Civil Code reads:

Art. 2207. If the plaintiff's property has been insured and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss,
the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that
he who substitutes another succeeds to the rights of the other in relation to a debt or claim, including its
remedies or securities. The principle covers a situation wherein an insurer who has paid a loss under an
insurance policy is entitled to all the rights and remedies belonging to the insured against a third party
with respect to any loss covered by the policy.[26]

WHEREFORE, we DENY the petition. We AFFIRM the Decision of the Court of Appeals in CA-G.R. SP No.
105338 promulgated on 11 March 2010 as well as the Resolution promulgated on 3 September 2010.

SO ORDERED.
x-----------------------------------------------------------------------------------------------------------------x
G.R. No. 152313 October 19, 2011
REPUBLIC FLOUR MILLS CORPORATION, Petitioner,vs.
FORBES FACTORS, INC. Respondent.
DECISION
SERENO, J.:

Petitioner filed this present Petition for Review1 under Rule 45 of the Rules of Court, seeking a reversal of
the Court of Appeals Decision,2 the dispositive portion of which states:

WHEREFORE, premises considered, the Decision dated April 15, 1996 rendered by the Regional Trial Court
of Makati City, Branch 60, is hereby AFFIRMED, with MODIFICATIONS, as follows:

1) The legal interest rate of six percent (6%) per annum should be computed from the date of the filing of
the complaint which shall become twelve percent (12%) per annum from the time the judgment becomes
final and executory until its satisfaction.
2) The award of ₱300,000.00 as exemplary damages is reduced to ₱50,000.00;
3) The award of ₱400,00.00 as attorney’s fees is likewise reduced to ₱75,000.00;
4) The Decision is hereby affirmed in all other respects.

SO ORDERED.

The case arose when petitioner refused to pay the demurrage being collected by respondent.

The facts are as follows:

In a contract dated 26 April 1983, respondent was appointed as the exclusive Philippine indent
representative of Richco Rotterdam B.V. (Richco), a foreign corporation, in the sale of the latter’s
commodities. Under one of the terms of the contract, respondent was to assume the liabilities of all the
Philippine buyers, should they fail to honor the commitments on the discharging operations of each vessel,
including the payment of demurrage and other penalties. In such instances, Richco shall have the option

Page 52 of 189
to debit the account of respondent corresponding to the liabilities of the buyers, and respondent shall then
be deemed to be subrogated to all the rights of Richco against these defaulting buyers.3

Sometime in 1987, petitioner purchased Canadian barley and soybean meal from Richco. The latter
thereafter chartered four (4) vessels to transport the products to the Philippines. Each of the carrier bulk
cargoes was covered by a Contract of Sale executed between respondent as the seller and duly authorized
representative of Richco and petitioner as the buyer. The four contracts specifically referred to the charter
party in determining demurrage or dispatch rate. The contract further provided that petitioner guarantees
to settle any demurrage due within one (1) month from respondent’s presentation of the statement.

Upon delivery of the barley and soybean meal, petitioner failed to discharge the cargoes from the four (4)
vessels at the computed allowable period to do so. Thus, it incurred a demurrage amounting to a total of
US$193,937.41.

On numerous occasions, on behalf of Richco, respondent demanded from petitioner the payment of the
demurrage, to no avail. Consequently, on 20 October 1991, Richco sent a communication to respondent,
informing it that the demurrage due from petitioner had been debited from the respondent’s account.

Thereafter, on 12 February 1992, respondent filed with the Regional Trial Court (RTC), National Capital
Judicial Region, Makati City, a Complaint for demurrage and damages against petitioner. Meanwhile, the
latter raised the defense that the delay was due to respondent’s inefficiency in unloading the cargo.

On 15 April 1996, after trial on the merits, the RTC rendered a Decision4 holding petitioner liable to pay
demurrage and damages to respondent, to wit:

34. WHEREFORE, the Court hereby renders judgment as follows:

34.1 The defendant REPUBLIC FLOUR MILLS CORPORATION is ordered to pay the plaintiff FORBES
FACTORS, INC. the following:

34.1.1. US$193,937.41 or its Philippine PESO equivalent at the rate of exchange at the time of payment –
As demurrage.

34.1.2 Six (6) percent of the amount in the preceding paragraph 34.1.1 – Per annum from October 29,
1991 until the said amount is fully paid – As damages.

34.1.3. ₱300,000.00 – As exemplary damages.

34.1.4. ₱ 400,000.00 – As attorney’s fees.

34.2. The COUNTERCLAIM is DISMISSED; and

34.3. Cost is taxed against the defendant.

The RTC found that the delay in discharging the cargoes within the allowable period was due to
petitioner’s failure to provide enough barges on which to load the goods. It likewise found that petitioner
in fact acknowledged that the latter had incurred demurrage when it alleged that the computation was
bloated. Petitioner was thus liable to pay demurrage based on the sales contracts executed with
respondent and on the contract executed between respondent and Richco.

Finally, the court ruled that respondent was entitled to damages from petitioner’s "wanton, fraudulent,
reckless, oppressive or malevolent" refusal to pay the latter’s liabilities despite repeated demands.

Subsequently, petitioner appealed to the Court of Appeals (CA), alleging that respondent was not a real
party-in-interest to bring the collection suit. Petitioner insisted that the payment of demurrage should be
made to the owner of the vessels that transported the goods, and not to respondent who was merely the
indent representative of Richco, the charterer of the vessel. In addition, petitioner claimed that it was
denied due process when the RTC refused to reset the hearing for the presentation of Reynaldo Santos,

Page 53 of 189
petitioner’s witness and export manager. Finally, petitioner contested the RTC’s award of exemplary
damages and attorney’s fees.

On 18 February 2002, the CA promulgated the assailed Decision. It upheld the validity of the Contracts of
Sale and held that these had the force of law between the contracting parties and must be complied with
in good faith. However, the appellate court modified the trial court’s award of damages. It held that
exemplary damages are not intended to enrich anyone, thus, reducing the amount from ₱300,000 to
₱50,000. It also found the award of attorney’s fees to be excessive, and consequently reduced it from
₱400,000 to ₱75,000.

Hence this Petition.

Three issues are raised for the resolution by this Court. First, petitioner assails the right of respondent to
demand payment of demurrage. Petitioner asserts that, by definition, demurrage is the sum fixed by the
contract of carriage as remuneration to the ship owner for the detention of the vessel beyond the number
of days allowed by the charter party.5 Thus, since respondent is not the ship owner, it has no right to
demand the payment of demurrage and has no personality to bring the claim against petitioner. Second,
petitioner questions the propriety of the award of damages in favor of respondent. And third, the former
insists that it was denied due process when the RTC denied its Motion to reset the hearing to present its
witness.

We find the petition without merit.

The facts are undisputed. The delay incurred by petitioner in discharging the cargoes from the vessels was
due to its own fault. Its obligation to demurrage is established by the Contracts of Sale it executed,
wherein it agreed to the conditions to provide all discharging facilities at its expense in order to effect the
immediate discharge of cargo; and to place for its account all discharging costs, fees, taxes, duties and all
other charges incurred due to the nature of the importation.6

Meanwhile, respondent unequivocally established that Richco charged to it the demurrage due from
petitioner. Thus, at the moment that Richco debited the account of respondent, the latter is deemed to
have subrogated to the rights of the former, who in turn, paid demurrage to the ship owner. It is therefore
immaterial that respondent is not the ship owner, since it has been able to prove that it has stepped into
the shoes of the creditor.

Subrogation is either "legal" or "conventional." Legal subrogation is an equitable doctrine and arises by
operation of the law, without any agreement to that effect executed between the parties; conventional
subrogation rests on a contract, arising where "an agreement is made that the person paying the debt
shall be subrogated to the rights and remedies of the original creditor."7 The case at bar is an example of
legal subrogation, the petitioner and respondent having no express agreement on the right of subrogation.
Thus, it is of no moment that the Contracts of Sale did not expressly state that demurrage shall be paid to
respondent. By operation of law, respondent has become the real party-in-interest to pursue the payment
of demurrage. As aptly stated by the RTC:

19. True it is that demurrage is, as a rule, an amount payable to a shipowner by a charterer for the
detention of the vessel beyond the period allowed for the loading or unloading or sailing. This however,
does not mean that a party cannot stipulate with another who is not a shipowner, on demurrage. In this
case, FORBES stipulated under the charter parties on demurrage with the shipowners. This stipulation
could be the basis of the provisions on demurrage in the four (4) Contracts of Sale (Exhs. B, N, X, and CC)
and contract between FORBES and RICHCO (Exh. A).

20. RICHCO debited the US$193,937.41 from the accounts of FORBES as evidenced by Exh. OO. Hence,
FORBES was subrogated to the right of RICHCO to collect the said amount from RFM pursuant to the
contract between RICHCO and FORBES (Exh. A).

21. Under Exh. A, FORBES guaranteed its "…buyers (sic) payment schedule…" Consequently, it was
subrogated to the rights of RICHCO arising from the failure of RFM to pay its demurrage and FORBES paid
for it. The subrogation was pursuant to Articles 1302 and 2067, New Civil Code, which read:

Page 54 of 189
"Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter’s share."

"Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had
against the debtor.

If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he
has really paid."

As we held in Fireman’s Fund Insurance Company v. Jamila & Company, Inc.:

…Subrogation has been referred to as the doctrine of substitution. It "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" (83 C.J.S. 576, 678, note 16, citing Fireman's Fund Indemnity Co. vs. State
Compensation Insurance Fund, 209 Pac. 2d 55).

"Subrogation is founded on principles of justice and equity, and its operation is governed by principles of
equity. It rests on the principle that substantial justice should be attained regardless of form, that is, its
basis is the doing of complete, essential, and perfect justice between all the parties without regard to
form"(83 C.J.S. 579- 80)81avvphi1

Anent the second issue, we have previously held in Pepsi Cola Products Phil., Inc. v. Court of Appeals,9
that a motion for continuance of postponement is not a matter of right. Rather, the motion is addressed to
the sound discretion of the court, whose action thereon will not be disturbed by appellate courts in the
absence of clear and manifest abuse of discretion, resulting in a denial of substantial justice.

On the last issue, we find that the award of exemplary damages proper. Petitioner refused to honor the
contract despite respondent’s repeated demands and its proof of payment to Richco; and despite its
repeated promise to settle its outstanding obligations in the span of almost five years. Petitioner indeed
acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Because respondent was also
forced to initiate the present Complaint, it was only proper that it was awarded attorney’s fees. Lastly, the
CA was correct in reducing the award of exemplary damages or attorney’s fees, since neither is meant to
enrich anyone.

WHEREFORE, in view of the foregoing, the assailed Decision of the Court of Appeals is hereby AFFIRMED.
The present Petition is DENIED.

SO ORDERED.
x------------------------------------------------------------------------------------------------------------------x
G.R. No. 177498 January 18, 2012
STOLT-NIELSEN TRANSPORTATION GROUP, INC. AND CHUNG GAI SHIP MANAGEMENT,
Petitioners, vs.
SULPECIO MEDEQUILLO, JR., Respondent.
DECISION
PEREZ, J.:

Before the Court is a Petition for Review on Certiorari1 of the Decision2 of the First Division of the Court of
Appeals in CA-G.R. SP No. 91632 dated 31 January 2007, denying the petition for certiorari filed by Stolt-
Nielsen Transportation Group, Inc. and Chung Gai Ship Management (petitioners) and affirming the
Resolution of the National Labor Relations Commission (NLRC). The dispositive portion of the assailed
decision reads:

Page 55 of 189
WHEREFORE, the petition is hereby DENIED. Accordingly, the assailed Decision promulgated on February
28, 2003 and the Resolution dated July 27, 2005 are AFFIRMED.

The facts as gathered by this Court follow:

On 6 March 1995, Sulpecio Madequillo (respondent) filed a complaint before the Adjudication Office of the
Philippine Overseas Employment Administration (POEA) against the petitioners for illegal dismissal under a
first contract and for failure to deploy under a second contract. In his complaint-affidavit,4 respondent
alleged that:

On 6 November 1991(First Contract), he was hired by Stolt-Nielsen Marine Services, Inc on behalf of its
principal Chung-Gai Ship Management of Panama as Third Assistant Engineer on board the vessel "Stolt
Aspiration" for a period of nine (9) months;

He would be paid with a monthly basic salary of $808.00 and a fixed overtime pay of $404.00 or a total of
$1,212.00 per month during the employment period commencing on 6 November 1991;

On 8 November 1991, he joined the vessel MV "Stolt Aspiration";

On February 1992 or for nearly three (3) months of rendering service and while the vessel was at
Batangas, he was ordered by the ship’s master to disembark the vessel and repatriated back to Manila for
no reason or explanation;

Upon his return to Manila, he immediately proceeded to the petitioner’s office where he was transferred
employment with another vessel named MV "Stolt Pride" under the same terms and conditions of the First
Contract;

On 23 April 1992, the Second Contract was noted and approved by the POEA;

The POEA, without knowledge that he was not deployed with the vessel, certified the Second Employment
Contract on 18 September 1992.

Despite the commencement of the Second Contract on 21 April 1992, petitioners failed to deploy him with
the vessel MV "Stolt Pride";

He made a follow-up with the petitioner but the same refused to comply with the Second Employment
Contract.

On 22 December 1994, he demanded for his passport, seaman’s book and other employment documents.
However, he was only allowed to claim the said documents in exchange of his signing a document;

He was constrained to sign the document involuntarily because without these documents, he could not
seek employment from other agencies.

He prayed for actual, moral and exemplary damages as well as attorney’s fees for his illegal dismissal and
in view of the Petitioners’ bad faith in not complying with the Second Contract.

The case was transferred to the Labor Arbiter of the DOLE upon the effectivity of the Migrant Workers and
Overseas Filipinos Act of 1995.

The parties were required to submit their respective position papers before the Labor Arbiter. However,
petitioners failed to submit their respective pleadings despite the opportunity given to them.5

On 21 July 2000, Labor Arbiter Vicente R. Layawen rendered a judgment6 finding that the respondent was
constructively dismissed by the petitioners. The dispositive portion reads:

WHEREFORE, premises considered, judgment is hereby rendered, declaring the respondents guilty of
constructively dismissing the complainant by not honoring the employment contract. Accordingly,
respondents are hereby ordered jointly and solidarily to pay complainant the following:

Page 56 of 189
$12,537.00 or its peso equivalent at the time of payment.

The Labor Arbiter found the first contract entered into by and between the complainant and the
respondents to have been novated by the execution of the second contract. In other words, respondents
cannot be held liable for the first contract but are clearly and definitely liable for the breach of the second
contract.8 However, he ruled that there was no substantial evidence to grant the prayer for moral and
exemplary damages.9

The petitioners appealed the adverse decision before the National Labor Relations Commission assailing
that they were denied due process, that the respondent cannot be considered as dismissed from
employment because he was not even deployed yet and the monetary award in favor of the respondent
was exorbitant and not in accordance with law.10

On 28 February 2003, the NLRC affirmed with modification the Decision of the Labor Arbiter. The
dispositive portion reads:

WHEREFORE, premises considered, the decision under review is hereby, MODIFIED BY DELETING the
award of overtime pay in the total amount of Three Thousand Six Hundred Thirty Six US Dollars (US
$3,636.00).

In all other respects, the assailed decision so stands as, AFFIRMED.

Before the NLRC, the petitioners assailed that they were not properly notified of the hearings that were
conducted before the Labor Arbiter. They further alleged that after the suspension of proceedings before
the POEA, the only notice they received was a copy of the decision of the Labor Arbiter.12

The NLRC ruled that records showed that attempts to serve the various notices of hearing were made on
petitioners’ counsel on record but these failed on account of their failure to furnish the Office of the Labor
Arbiter a copy of any notice of change of address. There was also no evidence that a service of notice of
change of address was served on the POEA.13

The NLRC upheld the finding of unjustified termination of contract for failure on the part of the petitioners
to present evidence that would justify their non-deployment of the respondent.14 It denied the claim of
the petitioners that the monetary award should be limited only to three (3) months for every year of the
unexpired term of the contract. It ruled that the factual incidents material to the case transpired within
1991-1992 or before the effectivity of Republic Act No. 8042 or the Migrant Workers and Overseas
Filipinos Act of 1995 which provides for such limitation.15

However, the NLRC upheld the reduction of the monetary award with respect to the deletion of the
overtime pay due to the non-deployment of the respondent.16

The Partial Motion for Reconsideration filed by the petitioners was denied by the NLRC in its Resolution
dated 27 July 2005.17

The petitioners filed a Petition for Certiorari before the Court of Appeals alleging grave abuse of discretion
on the part of NLRC when it affirmed with modification the ruling of the Labor Arbiter. They prayed that
the Decision and Resolution promulgated by the NLRC be vacated and another one be issued dismissing
the complaint of the respondent.

Finding no grave abuse of discretion, the Court of Appeals AFFIRMED the Decision of the labor tribunal.

The Court’s Ruling

The following are the assignment of errors presented before this Court:

I.
THE COURT A QUO ERRED IN FINDING THAT THE SECOND CONTRACT NOVATED THE FIRST CONTRACT.

Page 57 of 189
THERE WAS NO NOVATION OF THE FIRST CONTRACT BY THE SECOND CONTRACT; THE ALLEGATION OF
ILLEGAL DISMISSAL UNDER THE FIRST CONTRACT MUST BE RESOLVED SEPARATELY FROM THE
ALLEGATION OF FAILURE TO DEPLOY UNDER THE SECOND CONTRACT.

THE ALLEGED ILLEGAL DISMISSAL UNDER THE FIRST CONTRACT TRANSPIRED MORE THAN THREE (3)
YEARS AFTER THE CASE WAS FILED AND THEREFORE HIS CASE SHOULD HAVE BEEN DISMISSED FOR
BEING BARRED BY PRESCRIPTION.

II.
THE COURT A QUO ERRED IN RULING THAT THERE WAS CONSTRUCTIVE DISMISSAL UNDER THE SECOND
CONTRACT.
IT IS LEGALLY IMPOSSIBLE TO HAVE CONSTRUCTIVE DISMISSAL WHEN THE EMPLOYMENT HAS NOT YET
COMMENCED.
ASSUMING THERE WAS OMISSION UNDER THE SECOND CONTRACT, PETITIONERS CAN ONLY BE FOUND
AS HAVING FAILED IN DEPLOYING PRIVATE RESPONDENT BUT WITH VALID REASON.

III.
THE COURT A QUO ERRED IN FAILING TO FIND THAT EVEN ASSUMING THERE WAS BASIS FOR HOLDING
PETITIONER LIABLE FOR "FAILURE TO DEPLOY" RESPONDENT, THE POEA RULES PENALIZES SUCH
OMISSION WITH A MERE "REPRIMAND."18

The petitioners contend that the first employment contract between them and the private respondent is
different from and independent of the second contract subsequently executed upon repatriation of
respondent to Manila.

We do not agree.

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a

subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or, by substituting another in place of the debtor, or by subrogating a third person in the rights
of the creditor. In order for novation to take place, the concurrence of the following requisites is
indispensable:

1. There must be a previous valid obligation,

2. There must be an agreement of the parties concerned to a new contract,
3. There must be the extinguishment of the old contract, and
4. There must be the validity of the new contract.19

In its ruling, the Labor Arbiter clarified that novation had set in between the first and second contract. To
quote:

xxx [T]his office would like to make it clear that the first contract entered into by and between the
complainant and the respondents is deemed to have been novated by the execution of the second
contract. In other words, respondents cannot be held liable for the first contract but are clearly and
definitely liable for the breach of the second contract.20

This ruling was later affirmed by the Court of Appeals in its decision ruling that:

Guided by the foregoing legal precepts, it is evident that novation took place in this particular case. The
parties impliedly extinguished the first contract by agreeing to enter into the second contract to placate
Medequillo, Jr. who was unexpectedly dismissed and repatriated to Manila. The second contract would not
have been necessary if the petitioners abided by the terms and conditions of Madequillo, Jr.’s employment
under the first contract. The records also reveal that the 2nd contract extinguished the first contract by
changing its object or principal. These contracts were for overseas employment aboard different vessels.
The first contract was for employment aboard the MV "Stolt Aspiration" while the second contract involved
working in another vessel, the MV "Stolt Pride." Petitioners and Madequillo, Jr. accepted the terms and
conditions of the second contract. Contrary to petitioners’ assertion, the first contract was a "previous
valid contract" since it had not yet been terminated at the time of Medequillo, Jr.’s repatriation to Manila.
The legality of his dismissal had not yet been resolved with finality. Undoubtedly, he was still employed

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under the first contract when he negotiated with petitioners on the second contract. As such, the NLRC
correctly ruled that petitioners could only be held liable under the second contract.21

We concur with the finding that there was a novation of the first employment contract.

We reiterate once more and emphasize the ruling in Reyes v. National Labor Relations Commission,22 to
wit:

x x x [F]indings of quasi-judicial bodies like the NLRC, and affirmed by the Court of Appeals in due course,
are conclusive on this Court, which is not a trier of facts.

x x x Findings of fact of administrative agencies and quasi-judicial bodies, which have acquired expertise
because their jurisdiction is confined to specific matters, are generally accorded not only respect, but
finality when affirmed by the Court of Appeals. Such findings deserve full respect and, without justifiable
reason, ought not to be altered, modified or reversed.(Emphasis supplied)23

With the finding that respondent "was still employed under the first contract when he negotiated with
petitioners on the second contract",24 novation became an unavoidable conclusion.

Equally settled is the rule that factual findings of labor officials, who are deemed to have acquired
expertise in matters within their jurisdiction, are generally accorded not only respect but even finality by
the courts when supported by substantial evidence, i.e., the amount of relevant evidence which a
reasonable mind might accept as adequate to justify a conclusion.25 But these findings are not infallible.
When there is a showing that they were arrived at arbitrarily or in disregard of the evidence on record,
they may be examined by the courts.26 In this case, there was no showing of any arbitrariness on the
part of the lower courts in their findings of facts. Hence, we follow the settled rule.

We need not dwell on the issue of prescription. It was settled by the Court of Appeals with its ruling that
recovery of damages under the first contract was already time-barred. Thus:

Accordingly, the prescriptive period of three (3) years within which Medequillo Jr. may initiate money
claims under the 1st contract commenced on the date of his repatriation. xxx The start of the three (3)
year prescriptive period must therefore be reckoned on February 1992, which by Medequillo Jr.’s own
admission was the date of his repatriation to Manila. It was at this point in time that Medequillo Jr.’s cause
of action already accrued under the first contract. He had until February 1995 to pursue a case for illegal
dismissal and damages arising from the 1st contract. With the filing of his Complaint-Affidavit on March 6,
1995, which was clearly beyond the prescriptive period, the cause of action under the 1st contract was
already time-barred.

The issue that proceeds from the fact of novation is the consequence of the non-deployment of
respondent.

The petitioners argue that under the POEA Contract, actual deployment of the seafarer is a suspensive
condition for the commencement of the employment.28 We agree with petitioners on such point.
However, even without actual deployment, the perfected contract gives rise to obligations on the part of
petitioners.

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service.29 The contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary
to law, morals, good customs, public order, or public policy.30

The POEA Standard Employment Contract provides that employment shall commence "upon the actual
departure of the seafarer from the airport or seaport in the port of hire."31 We adhere to the terms and
conditions of the contract so as to credit the valid prior stipulations of the parties before the controversy
started. Else, the obligatory force of every contract will be useless. Parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law.

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Thus, even if by the standard contract employment commences only "upon actual departure of the
seafarer", this does not mean that the seafarer has no remedy in case of non-deployment without any
valid reason. Parenthetically, the contention of the petitioners of the alleged poor performance of
respondent while on board the first ship MV "Stolt Aspiration" cannot be sustained to justify the non-
deployment, for no evidence to prove the same was presented.

We rule that distinction must be made between the perfection of the employment contract and the
commencement of the employer-employee relationship. The perfection of the contract, which in this case
coincided with the date of execution thereof, occurred when petitioner and respondent agreed on the
object and the cause, as well as the rest of the terms and conditions therein. The commencement of the
employer-employee relationship, as earlier discussed, would have taken place had petitioner been actually
deployed from the point of hire. Thus, even before the start of any employer-employee relationship,
contemporaneous with the perfection of the employment contract was the birth of certain rights and
obligations, the breach of which may give rise to a cause of action against the erring party. Thus, if the
reverse had happened, that is the seafarer failed or refused to be deployed as agreed upon, he would be
liable for damages.

Further, we do not agree with the contention of the petitioners that the penalty is a mere reprimand.

The POEA Rules and Regulations Governing Overseas Employment35 dated 31 May 1991 provides for the
consequence and penalty against in case of non-deployment of the seafarer without any valid reason. It
reads:

Section 4. Worker’s Deployment. — An agency shall deploy its recruits within the deployment period as
indicated below:

b. Thirty (30) calendar days from the date of processing by the administration of the employment
contracts of seafarers.

Failure of the agency to deploy a worker within the prescribed period without valid reasons shall be a
cause for suspension or cancellation of license or fine. In addition, the agency shall return all documents
at no cost to the worker.(Emphasis and underscoring supplied)

The appellate court correctly ruled that the penalty of reprimand36 provided under Rule IV, Part VI of the
POEA Rules and Regulations Governing the Recruitment and Employment of Land-based Overseas
Workers is not applicable in this case. The breach of contract happened on February 1992 and the law
applicable at that time was the 1991 POEA Rules and Regulations Governing Overseas Employment. The
penalty for non-deployment as discussed is suspension or cancellation of license or fine.

Now, the question to be dealt with is how will the seafarer be compensated by reason of the unreasonable
non-deployment of the petitioners?

The POEA Rules Governing the Recruitment and Employment of Seafarers do not provide for the award of
damages to be given in favor of the employees. The claim provided by the same law refers to a valid
contractual claim for compensation or benefits arising from employer-employee relationship or for any
personal injury, illness or death at levels provided for within the terms and conditions of employment of
seafarers. However, the absence of the POEA Rules with regard to the payment of damages to the
affected seafarer does not mean that the seafarer is precluded from claiming the same. The sanctions
provided for non-deployment do not end with the suspension or cancellation of license or fine and the
return of all documents at no cost to the worker. As earlier discussed, they do not forfend a seafarer from
instituting an action for damages against the employer or agency which has failed to deploy him.37

We thus decree the application of Section 10 of Republic Act No. 8042 (Migrant Workers Act) which
provides for money claims by reason of a contract involving Filipino workers for overseas deployment. The
law provides:

Sec. 10. Money Claims. – Notwithstanding any provision of law to the contrary, the Labor Arbiters of the
National Labor Relations Commission (NLRC) shall have the original and exclusive jurisdiction to hear and
decide, within ninety (90) calendar days after the filing of the complaint, the claims arising out of an

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employer-employee relationship or by virtue of any law or contract involving Filipino workers for overseas
deployment including claims for actual, moral, exemplary and other forms of damages. x x x
(Underscoring supplied)

Following the law, the claim is still cognizable by the labor arbiters of the NLRC under the second phrase
of the provision.

Applying the rules on actual damages, Article 2199 of the New Civil Code provides that one is entitled to
an adequate compensation only for such pecuniary loss suffered by him as he has duly proved.
Respondent is thus liable to pay petitioner actual damages in the form of the loss of nine (9) months’
worth of salary as provided in the contract.38 This is but proper because of the non-deployment of
respondent without just cause.

WHEREFORE, the appeal is DENIED. The 31 January 2007 Decision of the Court of Appeals in CA-G.R. SP.
No. 91632 is hereby AFFIRMED. The Petitioners are hereby ordered to pay Sulpecio Medequillo, Jr., the
award of actual damages equivalent to his salary for nine (9) months as provided by the Second
Employment Contract.

SO ORDERED.
x-------------------------------------------------------------------------------------------------------------------x
G.R. No. 171750 January 25, 2012
UNITED PULP AND PAPER CO., INC., Petitioner, vs.
ACROPOLIS CENTRAL GUARANTY CORPORATION, Respondent.
DECISION
MENDOZA, J.:

This is a petition for review under Rule 45 praying for the annulment of the November 17, 2005 Decision1
and the March 2, 2006 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 89135 entitled
Acropolis Central Guaranty Corporation (formerly known as the Philippine Pryce Assurance Corp.) v. Hon.
Oscar B. Pimentel, as Presiding Judge, RTC of Makati City, Branch 148 (RTC), and United Pulp and Paper
Co., Inc.

The Facts

On May 14, 2002, United Pulp and Paper Co., Inc. (UPPC) filed a civil case for collection of the amount of
₱42,844,353.14 against Unibox Packaging Corporation (Unibox) and Vicente Ortega (Ortega) before the
Regional Trial Court of Makati, Branch 148 (RTC).3 UPPC also prayed for a Writ of Preliminary Attachment
against the properties of Unibox and Ortega for the reason that the latter were on the verge of insolvency
and were transferring assets in fraud of creditors.4 On August 29, 2002, the RTC issued the Writ of
Attachment5 after UPPC posted a bond in the same amount of its claim. By virtue of the said writ, several
properties and assets of Unibox and Ortega were attached.6

On October 10, 2002, Unibox and Ortega filed their Motion for the Discharge of Attachment,7 praying that
they be allowed to file a counter-bond in the amount of ₱42,844,353.14 and that the writ of preliminary
attachment be discharged after the filing of such bond. Although this was opposed by UPPC, the RTC, in
its Order dated October 25, 2002, granted the said motion for the discharge of the writ of attachment
subject to the condition that Unibox and Ortega file a counter-bond.8 Thus, on November 21, 2002,
respondent Acropolis Central Guaranty Corporation (Acropolis) issued the Defendant’s Bond for Dissolution
of Attachment9 in the amount of ₱42,844,353.14 in favor of Unibox.

Not satisfied with the counter-bond issued by Acropolis, UPPC filed its Manifestation and Motion to
Discharge the Counter-Bond10 dated November 27, 2002, claiming that Acropolis was among those
insurance companies whose licenses were set to be cancelled due to their failure to put up the minimum
amount of capitalization required by law. For that reason, UPPC prayed for the discharge of the counter-
bond and the reinstatement of the attachment. In its December 10, 2002 Order,11 the RTC denied UPPC’s
Motion to Discharge Counter-Bond and, instead, approved and admitted the counter-bond posted by
Acropolis. Accordingly, it ordered the sheriff to cause the lifting of the attachment on the properties of
Unibox and Ortega.

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On September 29, 2003, Unibox, Ortega and UPPC executed a compromise agreement,12 wherein Unibox
and Ortega acknowledged their obligation to UPPC in the amount of ₱35,089,544.00 as of August 31,
2003, inclusive of the principal and the accrued interest, and bound themselves to pay the said amount in
accordance with a schedule of payments agreed upon by the parties. Consequently, the RTC promulgated
its Judgment dated October 2, 2003 approving the compromise agreement.

For failure of Unibox and Ortega to pay the required amounts for the months of May and June 2004
despite demand by UPPC, the latter filed its Motion for Execution14 to satisfy the remaining unpaid
balance. In the July 30, 2004 Order,15 the RTC acted favorably on the said motion and, on August 4,
2004, it issued the requested Writ of Execution.16

The sheriff then proceeded to enforce the Writ of Execution. It was discovered, however, that Unibox had
already ceased its business operation and all of its assets had been foreclosed by its creditor bank.
Moreover, the responses of the selected banks which were served with notices of garnishment indicated
that Unibox and Ortega no longer had funds available for garnishment. The sheriff also proceeded to the
residence of Ortega to serve the writ but he was denied entry to the premises. Despite his efforts, the
sheriff reported in his November 4, 2008 Partial Return17 that there was no satisfaction of the remaining
unpaid balance by Unibox and Ortega.

On the basis of the said return, UPPC filed its Motion to Order Surety to Pay Amount of Counter-Bond18
directed at Acropolis. On November 30, 2004, the RTC issued its Order19 granting the motion and
ordering Acropolis to comply with the terms of its counter-bond and pay UPPC the unpaid balance of the
judgment in the amount of ₱27,048,568.78 with interest of 12% per annum from default.

Thereafter, on December 13, 2004, Acropolis filed its Manifestation and Very Urgent Motion for
Reconsideration,20 arguing that it could not be made to pay the amount of the counter-bond because it
did not receive a demand for payment from UPPC. Furthermore, it reasoned that its obligation had been
discharged by virtue of the novation of its obligation pursuant to the compromise agreement executed by
UPPC, Unibox and Ortega. The motion, which was set for hearing on December 17, 2004, was received by
the RTC and UPPC only on December 20, 2004.21 In the Order dated February 22, 2005, the RTC denied
the motion for reconsideration for lack of merit and for having been filed three days after the date set for
the hearing on the said motion.

Aggrieved, Acropolis filed a petition for certiorari before the CA with a prayer for the issuance of a
Temporary Restraining Order and Writ of Preliminary Injunction.23 On November 17, 2005, the CA
rendered its Decision24 granting the petition, reversing the February 22, 2005 Order of the RTC, and
absolving and relieving Acropolis of its liability to honor and pay the amount of its counter-attachment
bond. In arriving at said disposition, the CA stated that, firstly, Acropolis was able to comply with the
three-day notice rule because the motion it filed was sent by registered mail on December 13, 2004, four
days prior to the hearing set for December 17, 2004;25 secondly, UPPC failed to comply with the following
requirements for recovery of a judgment creditor from the surety on the counter-bond in accordance with
Section 17, Rule 57 of the Rules of Court, to wit: (1) demand made by creditor on the surety, (2) notice to
surety and (3) summary hearing as to his liability for the judgment under the counter-bond;26 and,
thirdly, the failure of UPPC to include Acropolis in the compromise agreement was fatal to its case.27

UPPC then filed a motion for reconsideration but it was denied by the CA in its Resolution dated March 1,
2006.28

Hence, this petition.

The Issues

For the allowance of its petition, UPPC raises the following

GROUNDS
I.
The Court of Appeals erred in not holding respondent liable on its counter-attachment bond which it
posted before the trial court inasmuch as:

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A. The requisites for recovering upon the respondent-surety were clearly complied with by petitioner and
the trial court, inasmuch as prior demand and notice in writing was made upon respondent, by personal
service, of petitioner’s motion to order respondent surety to pay the amount of its counter-attachment
bond, and a hearing thereon was held for the purpose of determining the liability of the respondent-
surety.

B. The terms of respondent’s counter-attachment bond are clear, and unequivocally provide that
respondent as surety shall jointly and solidarily bind itself with defendants to secure and pay any
judgment that petitioner may recover in the action. Hence, such being the terms of the bond, in
accordance with fair insurance practices, respondent cannot, and should not be allowed to, evade its
liability to pay on its counter-attachment bond posted by it before the trial court.

II.
The Court of Appeals erred in holding that the trial court gravely abused its discretion in denying
respondent’s manifestation and motion for reconsideration considering that the said motion failed to
comply with the three (3)-day notice rule under Section 4, Rule 15 of the Rules of Court, and that it had
lacked substantial merit to warrant a reversal of the trial court’s previous order.

Simply put, the issues to be dealt with in this case are as follows:

(1) Whether UPPC failed to make the required demand and notice upon Acropolis; and
(2) Whether the execution of the compromise agreement between UPPC and Unibox and Ortega was
tantamount to a novation which had the effect of releasing Acropolis from its obligation under the counter-
attachment bond.

The Court’s Ruling

UPPC complied with the twin requirements of notice and demand

On the recovery upon the counter-bond, the Court finds merit in the arguments of the petitioner.

UPPC argues that it complied with the requirement of demanding payment from Acropolis by notifying it,
in writing and by personal service, of the hearing held on UPPC’s Motion to Order Respondent-Surety to
Pay the Bond.30 Moreover, it points out that the terms of the counter-attachment bond are clear in that
Acropolis, as surety, shall jointly and solidarily bind itself with Unibox and Ortega to secure the payment of
any judgment that UPPC may recover in the action.31

Section 17, Rule 57 of the Rules of Court sets forth the procedure for the recovery from a surety on a
counter-bond:

Sec. 17. Recovery upon the counter-bond. – When the judgment has become executory, the surety or
sureties on any counter-bond given pursuant to the provisions of this Rule to secure the payment of the
judgment shall become charged on such counter-bond and bound to pay the judgment obligee upon
demand the amount due under the judgment, which amount may be recovered from such surety or
sureties after notice and summary hearing on the same action.

From a reading of the abovequoted provision, it is evident that a surety on a counter-bond given to secure
the payment of a judgment becomes liable for the payment of the amount due upon: (1) demand made
upon the surety; and (2) notice and summary hearing on the same action. After a careful scrutiny of the
records of the case, the Court is of the view that UPPC indeed complied with these twin requirements.

This Court has consistently held that the filing of a complaint constitutes a judicial demand.32 Accordingly,
the filing by UPPC of the Motion to Order Surety to Pay Amount of Counter-Bond was already a demand
upon Acropolis, as surety, for the payment of the amount due, pursuant to the terms of the bond. In said
bond, Acropolis bound itself in the sum of ₱ 42,844,353.14 to secure the payment of any judgment that
UPPC might recover against Unibox and Ortega.

Furthermore, an examination of the records reveals that the motion was filed by UPPC on November 11,
2004 and was set for hearing on November 19, 2004.34 Acropolis was duly notified of the hearing and it

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was personally served a copy of the motion on November 11, 2004,35 contrary to its claim that it did not
receive a copy of the motion.

On November 19, 2004, the case was reset for hearing on November 30, 2004. The minutes of the
hearing on both dates show that only the counsel for UPPC was present. Thus, Acropolis was given the
opportunity to defend itself. That it chose to ignore its day in court is no longer the fault of the RTC and of
UPPC. It cannot now invoke the alleged lack of notice and hearing when, undeniably, both requirements
were met by UPPC.

No novation despite compromise agreement; Acropolis still liable under the terms of the counter-bond

UPPC argues that the undertaking of Acropolis is to secure any judgment rendered by the RTC in its favor.
It points out that because of the posting of the counter-bond by Acropolis and the dissolution of the writ of
preliminary attachment against Unibox and Ortega, UPPC lost its security against the latter two who had
gone bankrupt.36 It cites the cases of Guerrero v. Court of Appeals37 and Martinez v. Cavives38 to
support its position that the execution of a compromise agreement between the parties and the
subsequent rendition of a judgment based on the said compromise agreement does not release the surety
from its obligation nor does it novate the obligation.39

Acropolis, on the other hand, contends that it was not a party to the compromise agreement. Neither was
it aware of the execution of such an agreement which contains an acknowledgment of liability on the part
of Unibox and Ortega that was prejudicial to it as the surety. Accordingly, it cannot be bound by the
judgment issued based on the said agreement.40 Acropolis also questions the applicability of Guerrero
and draws attention to the fact that in said case, the compromise agreement specifically stipulated that
the surety shall continue to be liable, unlike in the case at bench where the compromise agreement made
no mention of its obligation to UPPC.41

On this issue, the Court finds for UPPC also.

The terms of the Bond for Dissolution of Attachment issued by Unibox and Acropolis in favor of UPPC are
clear and leave no room for ambiguity:

WHEREAS, the Honorable Court in the above-entitled case issued on _____ an Order dissolving / lifting
partially the writ of attachment levied upon the defendant/s personal property, upon the filing of a
counterbond by the defendants in the sun of PESOS FORTY TWO MILLION EIGHT HUNDRED FORTY FOUR
THOUSAND THREE HUNDRED FIFTY THREE AND 14/100 ONLY (P 42,844,353.14) Philippine Currency.

NOW, THEREFORE, we UNIBOX PACKAGING CORP. as Principal and PHILIPPINE PRYCE ASSURANCE
CORP., a corporation duly organized and existing under and by virtue of the laws of the Philippines, as
Surety, in consideration of the dissolution of said attachment, hereby jointly and severally bind ourselves
in the sum of FORTY TWO MILLION EIGHT HUNDRED FORTY FOUR THOUSAND THREE HUNDRED FIFTY
THREE AND 14/100 ONLY (P 42,844,353.14) Philippine Currency, in favor of the plaintiff to secure the
payment of any judgment that the plaintiff may recover against the defendants in this action.42
[Emphasis and underscoring supplied]

Based on the foregoing, Acropolis voluntarily bound itself with Unibox to be solidarily liable to answer for
ANY judgment which UPPC may recover from Unibox in its civil case for collection. Its counter-bond was
issued in consideration of the dissolution of the writ of attachment on the properties of Unibox and Ortega.
The counter-bond then replaced the properties to ensure recovery by UPPC from Unibox and Ortega. It
would be the height of injustice to allow Acropolis to evade its obligation to UPPC, especially after the
latter has already secured a favorable judgment.

This issue is not novel. In the case of Luzon Steel Corporation v. Sia,43 Luzon Steel Corporation sued
Metal Manufacturing of the Philippines and Jose Sia for breach of contract and damages. A writ of
preliminary attachment was issued against the properties of the defendants therein but the attachment
was lifted upon the filing of a counter-bond issued by Sia, as principal, and Times Surety & Insurance Co.,
as surety. Later, the plaintiff and the defendants entered into a compromise agreement whereby Sia
agreed to settle the plaintiff’s claim. The lower court rendered a judgment in accordance with the terms of
the compromise. Because the defendants failed to comply with the same, the plaintiff obtained a writ of

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execution against Sia and the surety on the counter-bond. The surety moved to quash the writ of
execution on the ground that it was not a party to the compromise and that the writ was issued without
giving the surety notice and hearing. Thus, the court set aside the writ of execution and cancelled the
counter-bond. On appeal, this Court, speaking through the learned Justice J.B.L. Reyes, discussed the
nature of the liability of a surety on a counter-bond:

Main issues posed are (1) whether the judgment upon the compromise discharged the surety from its
obligation under its attachment counterbond and (2) whether the writ of execution could be issued against
the surety without previous exhaustion of the debtor's properties.

Both questions can be solved by bearing in mind that we are dealing with a counterbond filed to discharge
a levy on attachment. Rule 57, section 12, specifies that an attachment may be discharged upon the
making of a cash deposit or filing a counterbond "in an amount equal to the value of the property attached
as determined by the judge"; that upon the filing of the counterbond "the property attached ... shall be
delivered to the party making the deposit or giving the counterbond, or the person appearing on his
behalf, the deposit or counterbond aforesaid standing in place of the property so released."

The italicized expressions constitute the key to the entire problem. Whether the judgment be rendered
after trial on the merits or upon compromise, such judgment undoubtedly may be made effective upon the
property released; and since the counterbond merely stands in the place of such property, there is no
reason why the judgment should not be made effective against the counterbond regardless of the manner
how the judgment was obtained.

As declared by us in Mercado v. Macapayag, 69 Phil. 403, 405-406, in passing upon the liability of counter
sureties in replevin who bound themselves to answer solidarily for the obligations of the defendants to the
plaintiffs in a fixed amount of ₱ 912.04, to secure payment of the amount that said plaintiff be adjudged
to recover from the defendants,

the liability of the sureties was fixed and conditioned on the finality of the judgment rendered regardless
of whether the decision was based on the consent of the parties or on the merits. A judgment entered on
a stipulation is nonetheless a judgment of the court because consented to by the parties.44

[Emphases and underscoring supplied]

The argument of Acropolis that its obligation under the counter-bond was novated by the compromise
agreement is, thus, untenable. In order for novation to extinguish its obligation, Acropolis must be able to
show that there is an incompatibility between the compromise agreement and the terms of the counter-
bond, as required by Article 1292 of the Civil Code, which provides that:

Art. 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)

Nothing in the compromise agreement indicates, or even hints at, releasing Acropolis from its obligation to
pay UPPC after the latter has obtained a favorable judgment. Clearly, there is no incompatibility between
the compromise agreement and the counter-bond. Neither can novation be presumed in this case. As
explained in Duñgo v. Lopena:45

Novation by presumption has never been favored. To be sustained, it need be established that the old and
new contracts are incompatible in all points, or that the will to novate appears by express agreement of
the parties or in acts of similar import.46

All things considered, Acropolis, as surety under the terms of the counter-bond it issued, should be held
liable for the payment of the unpaid balance due to UPPC.

Three-day notice rule, not a hard and fast rule

Page 65 of 189
Although this issue has been obviated by our disposition of the two main issues, the Court would like to
point out that the three-day notice requirement is not a hard and fast rule and substantial compliance is
allowed.

Pertinently, Section 4, Rule 15 of the Rules of Court reads:

Sec. 4. Hearing of motion. – Except for motions which the court may act upon without prejudicing the
rights of the adverse party, every written motion shall be set for hearing by the applicant.

Every written motion required to be heard and the notice of the hearing thereof shall be served in such a
manner as to insure its receipt by the other party at least three (3) days before the date of hearing,
unless the court for good cause sets the hearing on shorter notice. [Emphasis supplied]1âwphi1

The law is clear that it intends for the other party to receive a copy of the written motion at least three
days before the date set for its hearing. The purpose of the three (3)-day notice requirement, which was
established not for the benefit of the movant but rather for the adverse party, is to avoid surprises upon
the latter and to grant it sufficient time to study the motion and to enable it to meet the arguments
interposed therein.47 In Preysler, Jr. v. Manila Southcoast Development Corporation,48 the Court restated
the ruling that "the date of the hearing should be at least three days after receipt of the notice of hearing
by the other parties."

It is not, however, a hard and fast rule. Where a party has been given the opportunity to be heard, the
time to study the motion and oppose it, there is compliance with the rule. This was the ruling in the case
of Jehan Shipping Corporation v. National Food Authority,49 where it was written:

Purpose Behind the Notice Requirement

This Court has indeed held time and time again that, under Sections 4 and 5 of Rule 15 of the Rules of
Court, mandatory is the notice requirement in a motion, which is rendered defective by failure to comply
with the requirement. As a rule, a motion without a notice of hearing is considered pro forma and does not
affect the reglementary period for the appeal or the filing of the requisite pleading.

As an integral component of procedural due process, the three-day notice required by the Rules is not
intended for the benefit of the movant. Rather, the requirement is for the purpose of avoiding surprises
that may be sprung upon the adverse party, who must be given time to study and meet the arguments in
the motion before a resolution by the court. Principles of natural justice demand that the right of a party
should not be affected without giving it an opportunity to be heard.

The test is the presence of the opportunity to be heard, as well as to have time to study the motion and
meaningfully oppose or controvert the grounds upon which it is based. Considering the circumstances of
the present case, we believe that the requirements of procedural due process were substantially complied
with, and that the compliance justified a departure from a literal application of the rule on notice of
hearing.50 [Emphasis supplied]

In the case at bench, the RTC gave UPPC sufficient time to file its comment on the motion. On January 14,
2005, UPPC filed its Opposition to the motion, discussing the issues raised by Acropolis in its motion. Thus,
UPPC’s right to due process was not violated because it was afforded the chance to argue its position.

WHEREFORE, the petition is GRANTED. The November 17, 2005 Decision and the March 1, 2006
Resolution of the Court of Appeals, in CA-G.R. SP No. 89135, are hereby REVERSED and SET ASIDE. The
November 30, 2004 Order of the Regional Trial Court, Branch 148, Makati City, ordering Acropolis to
comply with the terms of its counter-bond and pay UPPC the unpaid balance of the judgment in the
amount of ₱27,048,568.78 with interest of 12% per annum from default is REINSTATED.
x-------------------------------------------------------------------------------------------------------------------x

Page 66 of 189
G.R. No. 188726 January 25, 2012
CRESENCIO C. MILLA, Petitioner, vs.
PEOPLE OF THE PHILIPPINES and MARKET PURSUITS, INC. represented by CARLO V. LOPEZ,
Respondents.
DECISION
SERENO, J.:

This is a Petition for Certiorari assailing the 22 April 2009 Decision1 and 8 July 2009 Resolution2 of the
Court of Appeals, affirming the Decision of the trial court finding petitioner Cresencio C. Milla (Milla) guilty
of two counts of estafa through falsification of public documents.

Respondent Carlo Lopez (Lopez) was the Financial Officer of private respondent, Market Pursuits, Inc.
(MPI). In March 2003, Milla represented himself as a real estate developer from Ines Anderson
Development Corporation, which was engaged in selling business properties in Makati, and offered to sell
MPI a property therein located. For this purpose, he showed Lopez a photocopy of Transfer Certificate of
Title (TCT) No. 216445 registered in the name of spouses Farley and Jocelyn Handog (Sps. Handog), as
well as a Special Power of Attorney purportedly executed by the spouses in favor of Milla.3 Lopez verified
with the Registry of Deeds of Makati and confirmed that the property was indeed registered under the
names of Sps. Handog. Since Lopez was convinced by Milla’s authority, MPI purchased the property for ₱2
million, issuing Security Bank and Trust Co. (SBTC) Check No. 154670 in the amount of ₱1.6 million. After
receiving the check, Milla gave Lopez (1) a notarized Deed of Absolute Sale dated 25 March 2003
executed by Sps. Handog in favor of MPI and (2) an original Owner’s Duplicate Copy of TCT No. 216445.4

Milla then gave Regino Acosta (Acosta), Lopez’s partner, a copy of the new Certificate of Title to the
property, TCT No. 218777, registered in the name of MPI. Thereafter, it tendered in favor of Milla SBTC
Check No. 15467111 in the amount of ₱400,000 as payment for the balance.5

Milla turned over TCT No. 218777 to Acosta, but did not furnish the latter with the receipts for the transfer
taxes and other costs incurred in the transfer of the property. This failure to turn over the receipts
prompted Lopez to check with the Register of Deeds, where he discovered that (1) the Certificate of Title
given to them by Milla could not be found therein; (2) there was no transfer of the property from Sps.
Handog to MPI; and (3) TCT No. 218777 was registered in the name of a certain Matilde M. Tolentino.6

Consequently, Lopez demanded the return of the amount of ₱2 million from Milla, who then issued
Equitable PCI Check Nos. 188954 and 188955 dated 20 and 23 May 2003, respectively, in the amount of
₱1 million each. However, these checks were dishonored for having been drawn against insufficient funds.
When Milla ignored the demand letter sent by Lopez, the latter, by virtue of the authority vested in him by
the MPI Board of Directors, filed a Complaint against the former on 4 August 2003. On 27 and 29 October
2003, two Informations for Estafa Thru Falsification of Public Documents were filed against Milla and were
raffled to the Regional Trial Court, National Capital Judicial Region, Makati City, Branch 146 (RTC Br.
146).7 Milla was accused of having committed estafa through the falsification of the notarized Deed of
Absolute Sale and TCT No. 218777 purportedly issued by the Register of Deeds of Makati, viz:

CRIMINAL CASE NO. 034167

That on or about the 25th day of March 2003, in the City of Makati, Philippines and within the jurisdiction
of this Honorable Court, the above-named accused, a private individual, did then and there, wilfully,
unlawfully and feloniously falsify a document denomindated as "Deed of Absolute Sale", duly notarized by
Atty. Lope M. Velasco, a Notary Public for and in the City of Makati, denominated as Doc. No. 297, Page
No. 61, Book No. 69, Series of 2003 in his Notarial Register, hence, a public document, by causing it to
appear that the registered owners of the property covered by TCT No. 216445 have sold their land to
complainant Market Pursuits, Inc. when in truth and in fact the said Deed of Absolute Sale was not
executed by the owners thereof and after the document was falsified, accused, with intent to defraud
complainant Market Pursuits, Inc. presented the falsified Deed of Sale to complainant, herein represented
by Carlo V. Lopez, and complainant believing in the genuineness of the Deed of Absolute Sale paid
accused the amount of P1,600,000.00 as partial payment for the property, to the damage and prejudice of
complainant in the aforementioned amount of P1,600,000.00

CONTRARY TO LAW.

Page 67 of 189
CRIMINAL CASE NO. 034168

That on or about the 3rd day of April 2003, in the City of Makati, Philippines and within the jurisdiction of
this Honorable Court, the above-named accused, a private individual, did then and there wilfully,
unlawfully and feloniously falsify a document denominated as Transfer Certificate of Title No. 218777
purportedly issued by the Register of Deeds of Makati City, hence, a public document, by causing it to
appear that the lot covered by TCT No. 218777 was already registered in the name of complainant Market
Pursuits, Inc., herein represented by Carlo V. Lopez, when in truth and in fact, as said accused well knew
that the Register of Deeds of Makati did not issue TCT No. 218777 in the name of Market Pursuits Inc.,
and after the document was falsified, accused with intent to defraud complainant and complainant
believing in the genuineness of Transfer Certificate of Title No. 218777 paid accused the amount of
P400,000.00, to the damage and prejudice of complainant in the aforementioned amount of P4000,000.00
(sic).

CONTRARY TO LAW.

After the prosecution rested its case, Milla filed, with leave of court, his Demurrer to Evidence.9 In its
Order dated 26 January 2006, RTC Br. 146 denied the demurrer and ordered him to present evidence, but
he failed to do so despite having been granted ample opportunity.10 Though the court considered his right
to present evidence to have been consequently waived, it nevertheless allowed him to file a
memorandum.

In its Joint Decision dated 28 November 2006,12 RTC Br. 146 found Milla guilty beyond reasonable doubt
of two counts of estafa through falsification of public documents, thus:

WHEREFORE, judgment is rendered finding the accused Cresencio Milla guilty beyond reasonable doubt of
two (2) counts of estafa through falsification of public documents. Applying the indeterminate sentence
law and considering that the amount involved is more than P22,000,00 this Court should apply the
provision that an additional one (1) year should be imposed for every ten thousand (P10,000.00) pesos in
excess of P22,000.00, thus, this Court is constrained to impose the Indeterminate (sic) penalty of four (4)
years, two (2) months one (1) day of prision correccional as minimum to twenty (20) years of reclusion
temporal as maximum for each count.

Accused is adjudged to be civilly liable to the private complainant and is ordered pay (sic) complainant the
total amount of TWO MILLION (P2,000,000.00) PESOS with legal rate of interest from the filing of the
Information until the same is fully paid and to pay the costs. He is further ordered to pay attorney’s fees
equivalent to ten (10%) of the total amount due as and for attorney’s fees. A lien on the monetary award
is constituted in favor of the government, the private complainant not having paid the required docket fee
prior to the filing of the Information.

SO ORDERED.

On appeal, the Court of Appeals, in the assailed Decision dated 22 April 2009, affirmed the findings of the
trial court.14 In its assailed Resolution dated 8 July 2009, it also denied Milla’s subsequent Motion for
Reconsideration.15

In the instant Petition, Milla alleges that the Decision and the Resolution of the Court of Appeals were not
in accordance with law and jurisprudence. He raises the following issues:

I. Whether the case should be reopened on the ground of negligence of counsel;

II. Whether the principle of novation is applicable;

III. Whether the principle of simple loan is applicable;

IV. Whether the Secretary’s Certificate presented by the prosecution is admissible in evidence;

V. Whether the supposed inconsistent statements of prosecution witnesses cast a doubt on the guilt of
petitioner.

Page 68 of 189
In its Comment, MPI argues that (1) Milla was not deprived of due process on the ground of gross
negligence of counsel; (2) under the Revised Penal Code, novation is not one of the grounds for the
extinction of criminal liability for estafa; and (3) factual findings of the trial court, when affirmed by the
Court of Appeals, are final and conclusive.17

On the other hand, in its Comment, the Office of the Solicitor General contends that (1) Milla was
accorded due process of law; (2) the elements of the crime charged against him were established during
trial; (3) novation is not a ground for extinction of criminal liability for estafa; (4) the money received by
Milla from Lopez was not in the nature of a simple loan or cash advance; and (5) Lopez was duly
authorized by MPI to institute the action.18

In his Consolidated Reply, Milla reiterates that the negligence of his former counsel warrants a reopening
of the case, wherein he can present evidence to prove that his transaction with MPI was in the nature of a
simple loan.19

In the disposition of this case, the following issues must be resolved:

I. Whether the negligence of counsel deprived Milla of due process of law

II. Whether the principle of novation can exculpate Milla from criminal liability

III. Whether the factual findings of the trial court, as affirmed by the appellate court, should be reviewed
on appeal

We resolve to deny the Petition.

Milla was not deprived of due process.

Milla argues that the negligence of his former counsel, Atty. Manuel V. Mendoza (Atty. Mendoza), deprived
him of due process. Specifically, he states that after the prosecution had rested its case, Atty. Mendoza
filed a Demurrer to Evidence, and that the former was never advised by the latter of the demurrer. Thus,
Milla was purportedly surprised to discover that RTC Br. 146 had already rendered judgment finding him
guilty, and that it had issued a warrant for his arrest. Atty. Mendoza filed an Omnibus Motion for Leave to
File Motion for New Trial, which Milla claims to have been denied by the trial court for being an
inappropriate remedy, thus, demonstrating his counsel’s negligence. These contentions cannot be given
any merit.

The general rule is that the mistake of a counsel binds the client, and it is only in instances wherein the
negligence is so gross or palpable that courts must step in to grant relief to the aggrieved client.20 In this
case, Milla was able to file a Demurrer to Evidence, and upon the trial court’s denial thereof, was allowed
to present evidence.21 Because of his failure to do so, RTC Br. 146 was justified in considering that he
had waived his right thereto. Nevertheless, the trial court still allowed him to submit a memorandum in
the interest of justice. Further, contrary to his assertion that RTC Br. 146 denied the Motion to Recall
Warrant of Arrest thereafter filed by his former counsel, a reading of the 2 August 2007 Order of RTC Br.
146 reveals that it partially denied the Omnibus Motion for New Trial and Recall of Warrant of Arrest, but
granted the Motion for Leave of Court to Avail of Remedies under the Rules of Court, allowing him to file
an appeal and lifting his warrant of arrest.22

It can be gleaned from the foregoing circumstances that Milla was given opportunities to defend his case
and was granted concomitant reliefs. Thus, it cannot be said that the mistake and negligence of his former
counsel were so gross and palpable to have deprived him of due process.

The principle of novation cannot be applied to the case at bar.

Milla contends that his issuance of Equitable PCI Check Nos. 188954 and 188955 before the institution of
the criminal complaint against him novated his obligation to MPI, thereby enabling him to avoid any
incipient criminal liability and converting his obligation into a purely civil one. This argument does not
persuade.

Page 69 of 189
The principles of novation cannot apply to the present case as to extinguish his criminal liability. Milla cites
People v. Nery23 to support his

contention that his issuance of the Equitable PCI checks prior to the filing of the criminal complaint
averted his incipient criminal liability. However, it must be clarified that mere payment of an obligation
before the institution of a criminal complaint does not, on its own, constitute novation that may prevent
criminal liability. This Court’s ruling in Nery in fact warned:

It may be observed in this regard that novation is not one of the means recognized by the Penal Code
whereby criminal liability can be extinguished; hence, the role of novation may only be to either prevent
the rise of criminal liability or to cast doubt on the true nature of the original petition, whether or not it
was such that its breach would not give rise to penal responsibility, as when money loaned is made to
appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; Villareal,
27 Phil. 481).

Even in Civil Law the acceptance of partial payments, without further change in the original relation
between the complainant and the accused, can not produce novation. For the latter to exist, there must
be proof of intent to extinguish the original relationship, and such intent can not be inferred from the mere
acceptance of payments on account of what is totally due. Much less can it be said that the acceptance of
partial satisfaction can effect the nullification of a criminal liability that is fully matured, and already in the
process of enforcement. Thus, this Court has ruled that the offended party’s acceptance of a promissory
note for all or part of the amount misapplied does not obliterate the criminal offense (Camus vs. Court of
Appeals, 48 Off. Gaz. 3898).24 (Emphasis supplied.)

Further, in Quinto v. People,25 this Court exhaustively explained the concept of novation in relation to
incipient criminal liability, viz:

Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express
agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.

The extinguishment of the old obligation by the new one is a necessary element of novation which may be
effected either expressly or impliedly. The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon
the other hand, no specific form is required for an implied novation, and all that is prescribed by law would
be an incompatibility between the two contracts. While there is really no hard and fast rule to determine
what might constitute to be a sufficient change that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.

There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect
of extinguishing an obligation by another which substitutes the same. The first is when novation has been
explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first. Corollarily, changes that breed incompatibility must be essential in nature and
not merely accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be
merely modificatory in nature and insufficient to extinguish the original obligation.

The changes alluded to by petitioner consists only in the manner of payment. There was really no
substitution of debtors since private complainant merely acquiesced to the payment but did not give her
consent to enter into a new contract. The appellate court observed:

The acceptance by complainant of partial payment tendered by the buyer, Leonor Camacho, does not
evince the intention of the complainant to have their agreement novated. It was simply necessitated by
the fact that, at that time, Camacho had substantial accounts payable to complainant, and because of the
fact that appellant made herself scarce to complainant. (TSN, April 15, 1981, 31-32) Thus, to obviate the
situation where complainant would end up with nothing, she was forced to receive the tender of Camacho.
Moreover, it is to be noted that the aforesaid payment was for the purchase, not of the jewelry subject of
this case, but of some other jewelry subject of a previous transaction. (Ibid. June 8, 1981, 10-11)

Page 70 of 189
Art. 315 of the Revised Penal Code defines estafa and penalizes any person who shall defraud another by
"misappropriating or converting, to the prejudice of another, money, goods, or any other personal
property received by the offender in trust or on commission, or for administration, or under any other
obligation involving the duty to make delivery of or to return the same, even though such obligation be
totally or partially guaranteed by a bond; or by denying having received such money, goods, or other
property. It is axiomatic that the gravamen of the offense is the appropriation or conversion of money or
property received to the prejudice of the owner. The terms "convert" and "misappropriate" have been held
to connote "an act of using or disposing of another’s property as if it were one’s own or devoting it to a
purpose or use different from that agreed upon." The phrase, "to misappropriate to one’s own use" has
been said to include "not only conversion to one’s personal advantage, but also every attempt to dispose
of the property of another without right. Verily, the sale of the pieces of jewelry on installments (sic) in
contravention of the explicit terms of the authority granted to her in Exhibit "A" (supra) is deemed to be
one of conversion. Thus, neither the theory of "delay in the fulfillment of commission" nor that of novation
posed by petitioner, can avoid the incipient criminal liability. In People vs. Nery, this Court held:

The criminal liability for estafa already committed is then not affected by the subsequent novation of
contract, for it is a public offense which must be prosecuted and punished by the State in its own
conation. (Emphasis supplied.)26

In the case at bar, the acceptance by MPI of the Equitable PCI checks tendered by Milla could not have
novated the original transaction, as the checks were only intended to secure the return of the ₱2 million
the former had already given him. Even then, these checks bounced and were thus unable to satisfy his
liability. Moreover, the estafa involved here was not for simple misappropriation or conversion, but was
committed through Milla’s falsification of public documents, the liability for which cannot be extinguished
by mere novation.

The Court of Appeals was correct in affirming the trial court’s finding of guilt.

Finally, Milla assails the factual findings of the trial court. Suffice it to say that factual findings of the trial
court, especially when affirmed by the appellate court, are binding on and accorded great respect by this
Court.27

There was no reversible error on the part of the Court of Appeals when it affirmed the finding of the trial
court that Milla was guilty beyond reasonable doubt of the offense of estafa through falsification of public
documents. The prosecution was able to prove the existence of all the elements of the crime charged. The
relevant provisions of the Revised Penal Code read:

Art. 172. Falsification by private individual and use of falsified documents. – The penalty of prision
correccional in its medium and maximum periods and a fine of not more than 5,000 shall be imposed
upon:

1. Any private individual who shall commit any of the falsification enumerated in the next preceding article
in any public or official document or letter of exchange or any other kind of commercial document

Art. 315. Swindling (estafa). – Any person who shall defraud another by any of the means mentioned
hereinbelow shall be punished by:

2. By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneously
with the commission of the fraud:

(a) By using a fictitious name, or falsely pretending to possess power, influence, qualifications, property,
credit, agency, business or imaginary transactions; or by means of other similar deceits.

It was proven during trial that Milla misrepresented himself to have the authority to sell the subject
property, and it was precisely this misrepresentation that prompted MPI to purchase it.1âwphi1 Because
of its reliance on his authority and on the falsified Deed of Absolute Sale and TCT No. 218777, MPI parted
with its money in the amount of ₱2 million, which has not been returned until now despite Milla’s
allegation of novation. Clearly, he is guilty beyond reasonable doubt of estafa through falsification of
public documents.

Page 71 of 189
WHEREFORE, we resolve to DENY the Petition. The assailed Decision and Resolution of the Court of
Appeals are hereby AFFIRMED.

SO ORDERED.
x------------------------------------------------------------------------------------------------------------------x
G.R. No. 194320 February 1, 2012
MALAYAN INSURANCE CO., INC., Petitioner, vs.
RODELIO ALBERTO and ENRICO ALBERTO REYES, Respondents.
DECISION
VELASCO, JR., J.:

The Case

Before Us is a Petition for Review on Certiorari under Rule 45, seeking to reverse and set aside the July
28, 2010 Decision1 of the Court of Appeals (CA) and its October 29, 2010 Resolution2 denying the motion
for reconsideration filed by petitioner Malayan Insurance Co., Inc. (Malayan Insurance). The July 28, 2010
CA Decision reversed and set aside the Decision3 dated February 2, 2009 of the Regional Trial Court,
Branch 51 in Manila.

The Facts

At around 5 o’clock in the morning of December 17, 1995, an accident occurred at the corner of EDSA and
Ayala Avenue, Makati City, involving four (4) vehicles, to wit: (1) a Nissan Bus operated by Aladdin Transit
with plate number NYS 381; (2) an Isuzu Tanker with plate number PLR 684; (3) a Fuzo Cargo Truck with
plate number PDL 297; and (4) a Mitsubishi Galant with plate number TLM 732.

Based on the Police Report issued by the on-the-spot investigator, Senior Police Officer 1 Alfredo M.
Dungga (SPO1 Dungga), the Isuzu Tanker was in front of the Mitsubishi Galant with the Nissan Bus on
their right side shortly before the vehicular incident. All three (3) vehicles were at a halt along EDSA
facing the south direction when the Fuzo Cargo Truck simultaneously bumped the rear portion of the
Mitsubishi Galant and the rear left portion of the Nissan Bus. Due to the strong impact, these two vehicles
were shoved forward and the front left portion of the Mitsubishi Galant rammed into the rear right portion
of the Isuzu Tanker.5

Previously, particularly on December 15, 1994, Malayan Insurance issued Car Insurance Policy No. PV-
025-00220 in favor of First Malayan Leasing and Finance Corporation (the assured), insuring the
aforementioned Mitsubishi Galant against third party liability, own damage and theft, among others.
Having insured the vehicle against such risks, Malayan Insurance claimed in its Complaint dated October
18, 1999 that it paid the damages sustained by the assured amounting to PhP 700,000.6

Maintaining that it has been subrogated to the rights and interests of the assured by operation of law upon
its payment to the latter, Malayan Insurance sent several demand letters to respondents Rodelio Alberto
(Alberto) and Enrico Alberto Reyes (Reyes), the registered owner and the driver, respectively, of the Fuzo
Cargo Truck, requiring them to pay the amount it had paid to the assured. When respondents refused to
settle their liability, Malayan Insurance was constrained to file a complaint for damages for gross
negligence against respondents.7

In their Answer, respondents asserted that they cannot be held liable for the vehicular accident, since its
proximate cause was the reckless driving of the Nissan Bus driver. They alleged that the speeding bus,
coming from the service road of EDSA, maneuvered its way towards the middle lane without due regard to
Reyes’ right of way. When the Nissan Bus abruptly stopped, Reyes stepped hard on the brakes but the
braking action could not cope with the inertia and failed to gain sufficient traction. As a consequence, the
Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant, which, in turn, hit the rear end of the vehicle in
front of it. The Nissan Bus, on the other hand, sideswiped the Fuzo Cargo Truck, causing damage to the
latter in the amount of PhP 20,000. Respondents also controverted the results of the Police Report,
asserting that it was based solely on the biased narration of the Nissan Bus driver.8

After the termination of the pre-trial proceedings, trial ensued. Malayan Insurance presented the
testimony of its lone witness, a motor car claim adjuster, who attested that he processed the insurance

Page 72 of 189
claim of the assured and verified the documents submitted to him. Respondents, on the other hand, failed
to present any evidence.

In its Decision dated February 2, 2009, the trial court, in Civil Case No. 99-95885, ruled in favor of
Malayan Insurance and declared respondents liable for damages. The dispositive portion reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff against defendants jointly and severally
to pay plaintiff the following:

1. The amount of P700,000.00 with legal interest from the time of the filing of the complaint;
2. Attorney’s fees of P10,000.00 and;
3. Cost of suit.

SO ORDERED.

Dissatisfied, respondents filed an appeal with the CA, docketed as CA-G.R. CV No. 93112. In its Decision
dated July 28, 2010, the CA reversed and set aside the Decision of the trial court and ruled in favor of
respondents, disposing:

WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the assailed Decision
dated 2 February 2009 REVERSED and SET ASIDE. The Complaint dated 18 October 1999 is hereby
DISMISSED for lack of merit. No costs.

SO ORDERED.

The CA held that the evidence on record has failed to establish not only negligence on the part of
respondents, but also compliance with the other requisites and the consequent right of Malayan Insurance
to subrogation.11 It noted that the police report, which has been made part of the records of the trial
court, was not properly identified by the police officer who conducted the on-the-spot investigation of the
subject collision. It, thus, held that an appellate court, as a reviewing body, cannot rightly appreciate
firsthand the genuineness of an unverified and unidentified document, much less accord it evidentiary
value.12

Subsequently, Malayan Insurance filed its Motion for Reconsideration, arguing that a police report is a
prima facie evidence of the facts stated in it. And inasmuch as they never questioned the presentation of
the report in evidence, respondents are deemed to have waived their right to question its authenticity and
due execution.13

In its Resolution dated October 29, 2010, the CA denied the motion for reconsideration. Hence, Malayan
Insurance filed the instant petition.

The Issues

In its Memorandum14 dated June 27, 2011, Malayan Insurance raises the following issues for Our
consideration:

I WHETHER THE CA ERRED IN REFUSING ADMISSIBILITY OF THE POLICE REPORT SINCE THE POLICE
INVESTIGATOR WHO PREPARED THE SAME DID NOT ACTUALLY TESTIFY IN COURT THEREON.

II WHETHER THE SUBROGATION OF MALAYAN INSURANCE IS IMPAIRED AND/OR DEFICIENT.

On the other hand, respondents submit the following issues in its Memorandum15 dated July 7, 2011:

I WHETHER THE CA IS CORRECT IN DISMISSING THE COMPLAINT FOR FAILURE OF MALAYAN INSURANCE
TO OVERCOME THE BURDEN OF PROOF REQUIRED TO ESTABLISH THE NEGLIGENCE OF RESPONDENTS.

II WHETHER THE PIECES OF EVIDENCE PRESENTED BY MALAYAN INSURANCE ARE SUFFICIENT TO CLAIM
FOR THE AMOUNT OF DAMAGES.

Page 73 of 189
III WHETHER THE SUBROGATION OF MALAYAN INSURANCE HAS PASSED COMPLIANCE AND REQUISITES
AS PROVIDED UNDER PERTINENT LAWS.

Essentially, the issues boil down to the following: (1) the admissibility of the police report; (2) the
sufficiency of the evidence to support a claim for gross negligence; and (3) the validity of subrogation in
the instant case.

Our Ruling

The petition has merit.

Admissibility of the Police Report

Malayan Insurance contends that, even without the presentation of the police investigator who prepared
the police report, said report is still admissible in evidence, especially since respondents failed to make a
timely objection to its presentation in evidence.16 Respondents counter that since the police report was
never confirmed by the investigating police officer, it cannot be considered as part of the evidence on
record.17

Indeed, under the rules of evidence, a witness can testify only to those facts which the witness knows of
his or her personal knowledge, that is, which are derived from the witness’ own perception.18
Concomitantly, a witness may not testify on matters which he or she merely learned from others either
because said witness was told or read or heard those matters.19 Such testimony is considered hearsay
and may not be received as proof of the truth of what the witness has learned. This is known as the
hearsay rule.20

As discussed in D.M. Consunji, Inc. v. CA,21 "Hearsay is not limited to oral testimony or statements; the
general rule that excludes hearsay as evidence applies to written, as well as oral statements."

There are several exceptions to the hearsay rule under the Rules of Court, among which are entries in
official records.22 Section 44, Rule 130 provides:

Entries in official records made in the performance of his duty by a public officer of the Philippines, or by a
person in the performance of a duty specially enjoined by law are prima facie evidence of the facts therein
stated.

In Alvarez v. PICOP Resources,23 this Court reiterated the requisites for the admissibility in evidence, as
an exception to the hearsay rule of entries in official records, thus: (a) that the entry was made by a
public officer or by another person specially enjoined by law to do so; (b) that it was made by the public
officer in the performance of his or her duties, or by such other person in the performance of a duty
specially enjoined by law; and (c) that the public officer or other person had sufficient knowledge of the
facts by him or her stated, which must have been acquired by the public officer or other person personally
or through official information.

Notably, the presentation of the police report itself is admissible as an exception to the hearsay rule even
if the police investigator who prepared it was not presented in court, as long as the above requisites could
be adequately proved.24

Here, there is no dispute that SPO1 Dungga, the on-the-spot investigator, prepared the report, and he did
so in the performance of his duty. However, what is not clear is whether SPO1 Dungga had sufficient
personal knowledge of the facts contained in his report. Thus, the third requisite is lacking.

Respondents failed to make a timely objection to the police report’s presentation in evidence; thus, they
are deemed to have waived their right to do so.25 As a result, the police report is still admissible in
evidence.

Sufficiency of Evidence

Page 74 of 189
Malayan Insurance contends that since Reyes, the driver of the Fuzo Cargo truck, bumped the rear of the
Mitsubishi Galant, he is presumed to be negligent unless proved otherwise. It further contends that
respondents failed to present any evidence to overturn the presumption of negligence.26 Contrarily,
respondents claim that since Malayan Insurance did not present any witness who shall affirm any
negligent act of Reyes in driving the Fuzo Cargo truck before and after the incident, there is no evidence
which would show negligence on the part of respondents.27

We agree with Malayan Insurance. Even if We consider the inadmissibility of the police report in evidence,
still, respondents cannot evade liability by virtue of the res ipsa loquitur doctrine. The D.M. Consunji, Inc.
case is quite elucidating:

Petitioner’s contention, however, loses relevance in the face of the application of res ipsa loquitur by the
CA. The effect of the doctrine is to warrant a presumption or inference that the mere fall of the elevator
was a result of the person having charge of the instrumentality was negligent. As a rule of evidence, the
doctrine of res ipsa loquitur is peculiar to the law of negligence which recognizes that prima facie
negligence may be established without direct proof and furnishes a substitute for specific proof of
negligence.

The concept of res ipsa loquitur has been explained in this wise:

While negligence is not ordinarily inferred or presumed, and while the mere happening of an accident or
injury will not generally give rise to an inference or presumption that it was due to negligence on
defendant’s part, under the doctrine of res ipsa loquitur, which means, literally, the thing or transaction
speaks for itself, or in one jurisdiction, that the thing or instrumentality speaks for itself, the facts or
circumstances accompanying an injury may be such as to raise a presumption, or at least permit an
inference of negligence on the part of the defendant, or some other person who is charged with
negligence.

x x x where it is shown that the thing or instrumentality which caused the injury complained of was under
the control or management of the defendant, and that the occurrence resulting in the injury was such as
in the ordinary course of things would not happen if those who had its control or management used proper
care, there is sufficient evidence, or, as sometimes stated, reasonable evidence, in the absence of
explanation by the defendant, that the injury arose from or was caused by the defendant’s want of care.

One of the theoretical bases for the doctrine is its necessity, i.e., that necessary evidence is absent or not
available.

The res ipsa loquitur doctrine is based in part upon the theory that the defendant in charge of the
instrumentality which causes the injury either knows the cause of the accident or has the best opportunity
of ascertaining it and that the plaintiff has no such knowledge, and therefore is compelled to allege
negligence in general terms and to rely upon the proof of the happening of the accident in order to
establish negligence. The inference which the doctrine permits is grounded upon the fact that the chief
evidence of the true cause, whether culpable or innocent, is practically accessible to the defendant but
inaccessible to the injured person.

It has been said that the doctrine of res ipsa loquitur furnishes a bridge by which a plaintiff, without
knowledge of the cause, reaches over to defendant who knows or should know the cause, for any
explanation of care exercised by the defendant in respect of the matter of which the plaintiff complains.
The res ipsa loquitur doctrine, another court has said, is a rule of necessity, in that it proceeds on the
theory that under the peculiar circumstances in which the doctrine is applicable, it is within the power of
the defendant to show that there was no negligence on his part, and direct proof of defendant’s negligence
is beyond plaintiff’s power. Accordingly, some courts add to the three prerequisites for the application of
the res ipsa loquitur doctrine the further requirement that for the res ipsa loquitur doctrine to apply, it
must appear that the injured party had no knowledge or means of knowledge as to the cause of the
accident, or that the party to be charged with negligence has superior knowledge or opportunity for
explanation of the accident.

The CA held that all the requisites of res ipsa loquitur are present in the case at bar:

Page 75 of 189
There is no dispute that appellee’s husband fell down from the 14th floor of a building to the basement
while he was working with appellant’s construction project, resulting to his death. The construction site is
within the exclusive control and management of appellant. It has a safety engineer, a project
superintendent, a carpenter leadman and others who are in complete control of the situation therein. The
circumstances of any accident that would occur therein are peculiarly within the knowledge of the
appellant or its employees. On the other hand, the appellee is not in a position to know what caused the
accident. Res ipsa loquitur is a rule of necessity and it applies where evidence is absent or not readily
available, provided the following requisites are present: (1) the accident was of a kind which does not
ordinarily occur unless someone is negligent; (2) the instrumentality or agency which caused the injury
was under the exclusive control of the person charged with negligence; and (3) the injury suffered must
not have been due to any voluntary action or contribution on the part of the person injured. x x x.

No worker is going to fall from the 14th floor of a building to the basement while performing work in a
construction site unless someone is negligent[;] thus, the first requisite for the application of the rule of
res ipsa loquitur is present. As explained earlier, the construction site with all its paraphernalia and human
resources that likely caused the injury is under the exclusive control and management of appellant[;]
thus[,] the second requisite is also present. No contributory negligence was attributed to the appellee’s
deceased husband[;] thus[,] the last requisite is also present. All the requisites for the application of the
rule of res ipsa loquitur are present, thus a reasonable presumption or inference of appellant’s negligence
arises. x x x.

Petitioner does not dispute the existence of the requisites for the application of res ipsa loquitur, but
argues that the presumption or inference that it was negligent did not arise since it "proved that it
exercised due care to avoid the accident which befell respondent’s husband."

Petitioner apparently misapprehends the procedural effect of the doctrine. As stated earlier, the
defendant’s negligence is presumed or inferred when the plaintiff establishes the requisites for the
application of res ipsa loquitur. Once the plaintiff makes out a prima facie case of all the elements, the
burden then shifts to defendant to explain. The presumption or inference may be rebutted or overcome by
other evidence and, under appropriate circumstances a disputable presumption, such as that of due care
or innocence, may outweigh the inference. It is not for the defendant to explain or prove its defense to
prevent the presumption or inference from arising. Evidence by the defendant of say, due care, comes
into play only after the circumstances for the application of the doctrine has been established.28

In the case at bar, aside from the statement in the police report, none of the parties disputes the fact that
the Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant, which, in turn, hit the rear end of the
vehicle in front of it. Respondents, however, point to the reckless driving of the Nissan Bus driver as the
proximate cause of the collision, which allegation is totally unsupported by any evidence on record. And
assuming that this allegation is, indeed, true, it is astonishing that respondents never even bothered to
file a cross-claim against the owner or driver of the Nissan Bus.

What is at once evident from the instant case, however, is the presence of all the requisites for the
application of the rule of res ipsa loquitur. To reiterate, res ipsa loquitur is a rule of necessity which
applies where evidence is absent or not readily available. As explained in D.M. Consunji, Inc., it is partly
based upon the theory that the defendant in charge of the instrumentality which causes the injury either
knows the cause of the accident or has the best opportunity of ascertaining it and that the plaintiff has no
such knowledge, and, therefore, is compelled to allege negligence in general terms and to rely upon the
proof of the happening of the accident in order to establish negligence.

As mentioned above, the requisites for the application of the res ipsa loquitur rule are the following: (1)
the accident was of a kind which does not ordinarily occur unless someone is negligent; (2) the
instrumentality or agency which caused the injury was under the exclusive control of the person charged
with negligence; and (3) the injury suffered must not have been due to any voluntary action or
contribution on the part of the person injured.29

In the instant case, the Fuzo Cargo Truck would not have had hit the rear end of the Mitsubishi Galant
unless someone is negligent. Also, the Fuzo Cargo Truck was under the exclusive control of its driver,
Reyes. Even if respondents avert liability by putting the blame on the Nissan Bus driver, still, this
allegation was self-serving and totally unfounded. Finally, no contributory negligence was attributed to the

Page 76 of 189
driver of the Mitsubishi Galant. Consequently, all the requisites for the application of the doctrine of res
ipsa loquitur are present, thereby creating a reasonable presumption of negligence on the part of
respondents.

It is worth mentioning that just like any other disputable presumptions or inferences, the presumption of
negligence may be rebutted or overcome by other evidence to the contrary. It is unfortunate, however,
that respondents failed to present any evidence before the trial court. Thus, the presumption of negligence
remains. Consequently, the CA erred in dismissing the complaint for Malayan Insurance’s adverted failure
to prove negligence on the part of respondents.

Validity of Subrogation

Malayan Insurance contends that there was a valid subrogation in the instant case, as evidenced by the
claim check voucher30 and the Release of Claim and Subrogation Receipt31 presented by it before the
trial court. Respondents, however, claim that the documents presented by Malayan Insurance do not
indicate certain important details that would show proper subrogation.

As noted by Malayan Insurance, respondents had all the opportunity, but failed to object to the
presentation of its evidence. Thus, and as We have mentioned earlier, respondents are deemed to have
waived their right to make an objection. As this Court held in Asian Construction and Development
Corporation v. COMFAC Corporation:

The rule is that failure to object to the offered evidence renders it admissible, and the court cannot, on its
own, disregard such evidence. We note that ASIAKONSTRUCT’s counsel of record before the trial court,
Atty. Bernard Dy, who actively participated in the initial stages of the case stopped attending the hearings
when COMFAC was about to end its presentation. Thus, ASIAKONSTRUCT could not object to COMFAC’s
offer of evidence nor present evidence in its defense; ASIAKONSTRUCT was deemed by the trial court to
have waived its chance to do so.

Note also that when a party desires the court to reject the evidence offered, it must so state in the form of
a timely objection and it cannot raise the objection to the evidence for the first time on appeal. Because of
a party’s failure to timely object, the evidence becomes part of the evidence in the case. Thereafter, all
the parties are considered bound by any outcome arising from the offer of evidence properly presented.32
(Emphasis supplied.)

Bearing in mind that the claim check voucher and the Release of Claim and Subrogation Receipt presented
by Malayan Insurance are already part of the evidence on record, and since it is not disputed that the
insurance company, indeed, paid PhP 700,000 to the assured, then there is a valid subrogation in the case
at bar. As explained in Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety Corporation:

Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that
he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its
remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an
insurance policy is entitled to all the rights and remedies belonging to the insured against a third party
with respect to any loss covered by the policy. It contemplates full substitution such that it places the
party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to
enforce payment.1âwphi1

We have held that payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose negligence or wrongful
act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine
of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the
mode that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and
good conscience, ought to pay.33

Considering the above ruling, it is only but proper that Malayan Insurance be subrogated to the rights of
the assured.

Page 77 of 189
WHEREFORE, the petition is hereby GRANTED. The CA’s July 28, 2010 Decision and October 29, 2010
Resolution in CA-G.R. CV No. 93112 are hereby REVERSED and SET ASIDE. The Decision dated February
2, 2009 issued by the trial court in Civil Case No. 99-95885 is hereby REINSTATED.

No pronouncement as to cost.

SO ORDERED.
x------------------------------------------------------------------------------------------------------------------x
G.R. No. 159709 June 27, 2012
HEIRS OF SERVANDO FRANCO, Petitioners, vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents.
DECISION
BERSAMIN, J.:

There is novation when there is an irreconcilable incompatibility between the old and the new obligations.
There is no novation in case of only slight modifications; hence, the old obligation prevails.

The petitioners challenge the decision promulgated on March 19, 2003,1 whereby the Court of Appeals
(CA) upheld the issuance of a writ of execution by the Regional Trial Court (RTC), Branch 16, in Malolos,
Bulacan.

Antecedents

The Court adopts the following summary of the antecedents rendered by the Court in Medel v. Court of
Appeals,2 the case from which this case originated, to wit:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a
loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business
under the name "Gonzales Credit Enterprises", in the amount of ₱50,000.00, payable in two months.
Veronica gave only the amount of ₱47,000.00, to the borrowers, as she retained ₱3,000.00, as advance
interest for one month at 6% per month. Servado and Leticia executed a promissory note for ₱50,000.00,
to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount of
₱90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to
evidence the loan, maturing on January 19, 1986. They received only ₱84,000.00, out of the proceeds of
the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of
₱300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to
Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel, authorizing
her to execute the mortgage. Servando and Leticia executed a promissory note in favor of Veronica to pay
the sum of ₱300,000.00, after a month, or on July 11, 1986. However, only the sum of ₱275,000.00, was
given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their
previous unpaid loans totaling ₱440,000.00, and sought from Veronica another loan in the amount of
₱60,000.00, bringing their indebtedness to a total of ₱500,000.00, payable on August 23, 1986. They
executed a promissory note, reading as follows:

"Baliwag, Bulacan July 23, 1986

"Maturity Date August 23, 1986

"₱500,000.00

Page 78 of 189
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R. GONZALES
doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to
Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND .....
(P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2%
service charge per annum from date hereof until fully paid according to the amortization schedule
contained herein. (Underscoring supplied)

"Payment will be made in full at the maturity date.

"Should I/WE fail to pay any amortization or portion hereof when due, all the other installments together
with all interest accrued shall immediately be due and payable and I/WE hereby agree to pay an additional
amount equivalent to one per cent (1%) per month of the amount due and demandable as penalty
charges in the form of liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT
(25%) thereof in full, without deductions as Attorney's Fee whether actually incurred or not, of the total
amount due and demandable, exclusive of costs and judicial or extra judicial expenses. (Underscoring
supplied)

"I, WE further agree that in the event the present rate of interest on loan is increased by law or the
Central Bank of the Philippines, the holder shall have the option to apply and collect the increased interest
charges without notice although the original interest have already been collected wholly or partially unless
the contrary is required by law.

"It is also a special condition of this contract that the parties herein agree that the amount of peso-
obligation under this agreement is based on the present value of peso, and if there be any change in the
value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the peso-
obligation herein contracted shall be adjusted in accordance with the value of the peso then prevailing at
the time of the complete fulfillment of obligation.

"Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of this
note or extension of payments, reserving rights against each and all indorsers and all parties to this note.

"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their rights
under the provisions of Section 12, Rule 39, of the Revised Rules of Court."

On maturity of the loan, the borrowers failed to pay the indebtedness of ₱500,000.00, plus interests and
penalties, evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the
Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full
amount of the loan including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that
he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who
borrowed from the plaintiffs the sum of ₱500,000.00, and actually received the amount and benefited
therefrom; that the loan was secured by a real estate mortgage executed in favor of the plaintiffs, and
that he (Servando Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that the loan
was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel
of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with
additional service charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for
attorney's fees of 25% of the amount due is unconscionable, illegal and excessive, and that substantial
payments made were applied to interest, penalties and other charges.

After due trial, the lower court declared that the due execution and genuineness of the four promissory
notes had been duly proved, and ruled that although the Usury Law had been repealed, the interest
charged by the plaintiffs on the loans was unconscionable and "revolting to the conscience". Hence, the
trial court applied "the provision of the New [Civil] Code" that the "legal rate of interest for loan or
forbearance of money, goods or credit is 12% per annum."

Page 79 of 189
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which
reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the
amount of ₱47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as
penalty, until the entire amount is paid in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the
amount of ₱84,000.00 with 12% interest per annum and 1% per cent per month as penalty from
November 19,1985 until the whole amount is fully paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of ₱285,000.00 plus
12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is fully
paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of ₱50,000.00 as attorney's
fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants."

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid
loans of the defendants, is the law that governs the parties. They further argued that Circular No. 416 of
the Central Bank prescribing the rate of interest for loans or forbearance of money, goods or credit at
12% per annum, applies only in the absence of a stipulation on interest rate, but not when the parties
agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having
become ‘legally inexistent’ with the promulgation by the Central Bank in 1982 of Circular No. 905, the
lender and borrower could agree on any interest that may be charged on the loan". The Court of Appeals
further held that "the imposition of ‘an additional amount equivalent to 1% per month of the amount due
and demandable as penalty charges in the form of liquidated damages until fully paid’ was allowed by
law".

Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of the
Regional Trial Court, disposing as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to
pay the plaintiffs the sum of ₱500,000.00, plus 5.5% per month interest and 2% service charge per
annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty
charges effective August 24, 1986, until the entire amount is fully paid.

"The award to the plaintiffs of ₱50,000.00 as attorney's fees is affirmed. And so is the imposition of costs
against the defendants.

"SO ORDERED."

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By
resolution dated November 25, 1997, the Court of Appeals denied the motion.3

On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the interest for
being iniquitous or unconscionable, and revived the judgment of the RTC rendered on December 9, 1991,
viz:

Page 80 of 189
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of
Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties.

No pronouncement as to costs in this instance.

SO ORDERED.

Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for execution.5
Servando Franco opposed,6 claiming that he and the respondents had agreed to fix the entire obligation
at ₱775,000.00.7 According to Servando, their agreement, which was allegedly embodied in a receipt
dated February 5, 1992,8 whereby he made an initial payment of ₱400,000.00 and promised to pay the
balance of ₱375,000.00 on February 29, 1992, superseded the July 23, 1986 promissory note.

The RTC granted the motion for execution over Servando’s opposition, thus:

There is no doubt that the decision dated December 9, 1991 had already been affirmed and had already
become final and executory. Thus, in accordance with Sec. 1 of Rule 39 of the 1997 Rules of Civil
Procedure, execution shall issue as a matter of right. It has likewise been ruled that a judgment which has
acquired finality becomes immutable and unalterable and hence may no longer be modified at any respect
except only to correct clerical errors or mistakes (Korean Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In this
respect, the decision deserves to be respected.

The argument about the modification of the contract or non-participation of defendant Servando Franco in
the proceedings on appeal on the alleged belief that the payment he made had already absolved him from
liability is of no moment. Primarily, the decision was for him and Leticia Medel to pay the plaintiffs jointly
and severally the amounts stated in the Decision. In other words, the liability of the defendants
thereunder is solidary. Based on this aspect alone, the new defense raised by defendant Franco is
unavailing.

WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for Execution of
Judgment.

Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriff of this Court.

SO ORDERED.

On March 8, 2001, the RTC issued the writ of execution.

Servando moved for reconsideration,11 but the RTC denied his motion.12

On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that the execution was
proper because of Servando’s failure to comply with the terms of the compromise agreement, stating:13

Petitioner cannot deny the fact that there was no full compliance with the tenor of the compromise
agreement. Private respondents on their part did not disregard the payments made by the petitioner.
They even offered that whatever payments made by petitioner, it can be deducted from the principal
obligation including interest. However, private respondents posit that the payments made cannot alter,
modify or revoke the decision of the Supreme Court in the instant case.

In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the Supreme Court
ruled that:

"When the terms of the compromise judgment is violated, the aggrieved party must move for its
execution, not its invalidation."

Page 81 of 189
It is clear from the aforementioned jurisprudence that even if there is a compromise agreement and the
terms have been violated, the aggrieved party, such as the private respondents, has the right to move for
the issuance of a writ of execution of the final judgment subject of the compromise agreement.

Moreover, under the circumstances of this case, petitioner does not stand to suffer any harm or prejudice
for the simple reason that what has been asked by private respondents to be the subject of a writ of
execution is only the balance of petitioner’s obligation after deducting the payments made on the basis of
the compromise agreement.

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE and consequently
DISMISSED for lack of merit.

SO ORDERED.

His motion for reconsideration having been denied,14 Servando appealed. He was eventually substituted
by his heirs, now the petitioners herein, on account of his intervening death. The substitution was
pursuant to the resolution dated June 15, 2005.15

Issue

The petitioners submit that the CA erred in ruling that:

I THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF MALOLOS,
BULACAN WAS NOT NOVATED BY THE COMPROMISE AGREEMENT BETWEEN THE PARTIES ON 5
FEBRUARY 1992.

II THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON THE DECEMBER 1991
DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF MALOLOS, BULACAN AND NOT ON THE
COMPROMISE AGREEMENT EXECUTED IN 1992.

The petitioners insist that the RTC could not validly enforce a judgment based on a promissory note that
had been already novated; that the promissory note had been impliedly novated when the principal
obligation of ₱500,000.00 had been fixed at ₱750,000.00, and the maturity date had been extended from
August 23, 1986 to February 29, 1992.

In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final and
executory decision of the Court; that novation did not take place because there was no complete
incompatibility between the promissory note and the memorandum receipt; that Servando’s previous
payment would be deducted from the total liability of the debtors based on the RTC’s decision.

Issue

Was there a novation of the August 23, 1986 promissory note when respondent Veronica Gonzales issued
the February 5, 1992 receipt?

Ruling

The petition lacks merits.

I Novation did not transpire because no irreconcilable incompatibility existed between the promissory note
and the receipt

To buttress their claim of novation, the petitioners rely on the receipt issued on February 5, 1992 by
respondent Veronica whereby Servando’s obligation was fixed at ₱750,000.00. They insist that even the
maturity date was extended until February 29, 1992. Such changes, they assert, were incompatible with
those of the original agreement under the promissory note.

The petitioners’ assertion is wrong.

Page 82 of 189
A novation arises when there is a substitution of an obligation by a subsequent one that extinguishes the
first, either by changing the object or the principal conditions, or by substituting the person of the debtor,
or by subrogating a third person in the rights of the creditor.16 For a valid novation to take place, there
must be, therefore: (a) a previous valid obligation; (b) an agreement of the parties to make a new
contract; (c) an extinguishment of the old contract; and (d) a valid new contract.17 In short, the new
obligation extinguishes the prior agreement only when the substitution is unequivocally declared, or the
old and the new obligations are incompatible on every point. A compromise of a final judgment operates
as a novation of the judgment obligation upon compliance with either of these two conditions.18

The receipt dated February 5, 1992, excerpted below, did not create a new obligation incompatible with
the old one under the promissory note, viz:

February 5, 1992

Received from SERVANDO FRANCO BPI Manager’s Check No. 001700 in the amount of ₱400,00.00 as
partial payment of loan. Balance of ₱375,000.00 to be paid on or before FEBRUARY 29, 1992. In case of
default an interest will be charged as stipulated in the promissory note subject of this case.

(Sgd)
V. Gonzalez19

To be clear, novation is not presumed. This means that the parties to a contract should expressly agree to
abrogate the old contract in favor of a new one. In the absence of the express agreement, the old and the
new obligations must be incompatible on every point.20 According to California Bus Lines, Inc. v. State
Investment House, Inc.:21

The extinguishment of the old obligation by the new one is a necessary element of novation which may be
effected either expressly or impliedly.1âwphi1 The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon
the other hand, no specific form is required for an implied novation, and all that is prescribed by law would
be an incompatibility between the two contracts. While there is really no hard and fast rule to determine
what might constitute to be a sufficient change that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.

There is incompatibility when the two obligations cannot stand together, each one having its independent
existence. If the two obligations cannot stand together, the latter obligation novates the first.22 Changes
that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must
affect any of the essential elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change is merely modificatory in nature and insufficient to extinguish the original
obligation.23

In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the respondents
only thereby recognized the original obligation by stating in the receipt that the ₱400,000.00 was "partial
payment of loan" and by referring to "the promissory note subject of the case in imposing the interest."
The loan mentioned in the receipt was still the same loan involving the ₱500,000.00 extended to
Servando. Advertence to the interest stipulated in the promissory note indicated that the contract still
subsisted, not replaced and extinguished, as the petitioners claim.

The receipt dated February 5, 1992 was only the proof of Servando’s payment of his obligation as
confirmed by the decision of the RTC. It did not establish the novation of his agreement with the
respondents. Indeed, the Court has ruled that an obligation to pay a sum of money is not novated by an
instrument that expressly recognizes the old, or changes only the terms of payment, or adds other
obligations not incompatible with the old ones, or the new contract merely supplements the old one.24 A
new contract that is a mere reiteration, acknowledgment or ratification of the old contract with slight
modifications or alterations as to the cause or object or principal conditions can stand together with the
former one, and there can be no incompatibility between them.25 Moreover, a creditor’s acceptance of
payment after demand does not operate as a modification of the original contract.26

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Worth noting is that Servando’s liability was joint and solidary with his co-debtors. In a solidary obligation,
the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.27
The choice to determine against whom the collection is enforced belongs to the creditor until the obligation
is fully satisfied.28 Thus, the obligation was being enforced against Servando, who, in order to escape
liability, should have presented evidence to prove that his obligation had already been cancelled by the
new obligation or that another debtor had assumed his place. In case of change in the person of the
debtor, the substitution must be clear and express,29 and made with the consent of the creditor.30 Yet,
these circumstances did not obtain herein, proving precisely that Servando remained a solidary debtor
against whom the entire or part of the obligation might be enforced.

Lastly, the extension of the maturity date did not constitute a novation of the previous agreement. It is
settled that an extension of the term or period of the maturity date does not result in novation.31

II Total liability to be reduced by ₱400,000.00

The petitioners argue that Servando’s remaining liability amounted to only ₱375,000.00, the balance
indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet due because the
respondents did not yet make a demand for payment.

The petitioners cannot be upheld.

The balance of ₱375,000.00 was premised on the taking place of a novation. However, as found now,
novation did not take place. Accordingly, Servando’s obligation, being solidary, remained to be that
decreed in the December 9, 1991 decision of the RTC, inclusive of interests, less the amount of
₱400,000.00 that was meanwhile paid by him.

WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on March 19, 2003;
ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to proceed with the execution based on
its decision rendered on December 9, 1991, deducting the amount of ₱400,000.00 already paid by the late
Servando Franco; and DIRECTS the petitioners to pay the costs of suit.

SO ORDERED.
x-------------------------------------------------------------------------------------------------------------------x
G.R. No. 190755 November 24, 2010
LAND BANK OF THE PHILIPPINES, Petitioner, vs.
ALFREDO ONG, Respondent.
DECISION
VELASCO, JR., J.:

This is an appeal from the October 20, 2009 Decision of the Court of Appeals (CA) in CA-G.R. CR-CV No.
84445 entitled Alfredo Ong v. Land Bank of the Philippines, which affirmed the Decision of the Regional
Trial Court (RTC), Branch 17 in Tabaco City.

The Facts

On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land Bank Legazpi City in
the amount of PhP 16 million. The loan was secured by three (3) residential lots, five (5) cargo trucks, and
a warehouse. Under the loan agreement, PhP 6 million of the loan would be short-term and would mature
on February 28, 1997, while the balance of PhP 10 million would be payable in seven (7) years. The Notice
of Loan Approval dated February 22, 1996 contained an acceleration clause wherein any default in
payment of amortizations or other charges would accelerate the maturity of the loan.1

Subsequently, however, the Spouses Sy found they could no longer pay their loan. On December 9, 1996,
they sold three (3) of their mortgaged parcels of land for PhP 150,000 to Angelina Gloria Ong,
Evangeline’s mother, under a Deed of Sale with Assumption of Mortgage. The relevant portion of the
document2 is quoted as follows:

WHEREAS, we are no longer in a position to settle our obligation with the bank;

Page 84 of 189
NOW THEREFORE, for and in consideration of the sum of ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000.00) Philippine Currency, we hereby these presents SELL, CEDE, TRANSFER and CONVEY, by
way of sale unto ANGELINA GLORIA ONG, also of legal age, Filipino citizen, married to Alfredo Ong, and
also a resident of Tabaco, Albay, Philippines, their heirs and assigns, the above-mentioned debt with the
said LAND BANK OF THE PHILIPPINES, and by reason hereof they can make the necessary representation
with the bank for the proper restructuring of the loan with the said bank in their favor;

That as soon as our obligation has been duly settled, the bank is authorized to release the mortgage in
favor of the vendees and for this purpose VENDEES can register this instrument with the Register of
Deeds for the issuance of the titles already in their names.

IN WITNESS WHEREOF, we have hereunto affixed our signatures this 9th day of December 1996 at
Tabaco, Albay, Philippines.

(signed)
EVANGELINE O. SY
Vendor (signed)
JOHNSON B. SY
Vendor
Evangeline’s father, petitioner Alfredo Ong, later went to Land Bank to inform it about the sale and
assumption of mortgage.3 Atty. Edna Hingco, the Legazpi City Land Bank Branch Head, told Alfredo and
his counsel Atty. Ireneo de Lumen that there was nothing wrong with the agreement with the Spouses Sy
but provided them with requirements for the assumption of mortgage. They were also told that Alfredo
should pay part of the principal which was computed at PhP 750,000 and to update due or accrued
interests on the promissory notes so that Atty. Hingco could easily approve the assumption of mortgage.
Two weeks later, Alfredo issued a check for PhP 750,000 and personally gave it to Atty. Hingco. A receipt
was issued for his payment. He also submitted the other documents required by Land Bank, such as
financial statements for 1994 and 1995. Atty. Hingco then informed Alfredo that the certificate of title of
the Spouses Sy would be transferred in his name but this never materialized. No notice of transfer was
sent to him.4

Alfredo later found out that his application for assumption of mortgage was not approved by Land Bank.
The bank learned from its credit investigation report that the Ongs had a real estate mortgage in the
amount of PhP 18,300,000 with another bank that was past due. Alfredo claimed that this was fully paid
later on. Nonetheless, Land Bank foreclosed the mortgage of the Spouses Sy after several months. Alfredo
only learned of the foreclosure when he saw the subject mortgage properties included in a Notice of
Foreclosure of Mortgage and Auction Sale at the RTC in Tabaco, Albay. Alfredo’s other counsel, Atty.
Madrilejos, subsequently talked to Land Bank’s lawyer and was told that the PhP 750,000 he paid would
be returned to him.5

On December 12, 1997, Alfredo initiated an action for recovery of sum of money with damages against
Land Bank in Civil Case No. T-1941, as Alfredo’s payment was not returned by Land Bank. Alfredo
maintained that Land Bank’s foreclosure without informing him of the denial of his assumption of the
mortgage was done in bad faith. He argued that he was lured into believing that his payment of PhP
750,000 would cause Land Bank to approve his assumption of the loan of the Spouses Sy and the transfer
of the mortgaged properties in his and his wife’s name.6 He also claimed incurring expenses for attorney’s
fees of PhP 150,000, filing fee of PhP 15,000, and PhP 250,000 in moral damages.7

Testifying for Land Bank, Atty. Hingco claimed during trial that as branch manager she had no authority to
approve loans and could not assure anybody that their assumption of mortgage would be approved. She
testified that the breakdown of Alfredo’s payment was as follows:
PhP 101,409.59 applied to principal

216,246.56 accrued interests receivable

396,571.77 interests

18,766.10 penalties

Page 85 of 189
 16,805.98 accounts receivable

----------------
Total: 750,000.00
According to Atty. Hingco, the bank processes an assumption of mortgage as a new loan, since the new
borrower is considered a new client. They used character, capacity, capital, collateral, and conditions in
determining who can qualify to assume a loan. Alfredo’s proposal to assume the loan, she explained, was
referred to a separate office, the Lending Center.

During cross-examination, Atty. Hingco testified that several months after Alfredo made the tender of
payment, she received word that the Lending Center rejected Alfredo’s loan application. She stated that it
was the Lending Center and not her that should have informed Alfredo about the denial of his and his
wife’s assumption of mortgage. She added that although she told Alfredo that the agreement between the
spouses Sy and Alfredo was valid between them and that the bank would accept payments from him,
Alfredo did not pay any further amount so the foreclosure of the loan collaterals ensued. She admitted
that Alfredo demanded the return of the PhP 750,000 but said that there was no written demand before
the case against the bank was filed in court. She said that Alfredo had made the payment of PhP 750,000
even before he applied for the assumption of mortgage and that the bank received the said amount
because the subject account was past due and demandable; and the Deed of Assumption of Mortgage was
not used as the basis for the payment.

The Ruling of the Trial Court

The RTC held that the contract approving the assumption of mortgage was not perfected as a result of the
credit investigation conducted on Alfredo. It noted that Alfredo was not even informed of the disapproval
of the assumption of mortgage but was just told that the accounts of the spouses Sy had matured and
gone unpaid. It ruled that under the principle of equity and justice, the bank should return the amount
Alfredo had paid with interest at 12% per annum computed from the filing of the complaint. The RTC
further held that Alfredo was entitled to attorney’s fees and litigation expenses for being compelled to
litigate.10

The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, a decision is rendered, ordering defendant bank to pay plaintiff,
Alfredo Ong the amount of P750,000.00 with interest at 12% per annum computed from Dec. 12, 1997
and attorney’s fees and litigation expenses of P50,000.00.

Costs against defendant bank.

SO ORDERED.

The Ruling of the Appellate Court

On appeal, Land Bank faulted the trial court for (1) holding that the payment of PhP 750,000 made by
Ong was one of the requirements for the approval of his proposal to assume the mortgage of the Sy
spouses; (2) erroneously ordering Land Bank to return the amount of PhP 750,000 to Ong on the ground
of its failure to effect novation; and (3) erroneously affirming the award of PhP 50,000 to Ong as
attorney’s fees and litigation expenses.

The CA affirmed the RTC Decision.12 It held that Alfredo’s recourse is not against the Sy spouses.
According to the appellate court, the payment of PhP 750,000 was for the approval of his assumption of
mortgage and not for payment of arrears incurred by the Sy spouses. As such, it ruled that it would be
incorrect to consider Alfredo a third person with no interest in the fulfillment of the obligation under Article
1236 of the Civil Code. Although Land Bank was not bound by the Deed between Alfredo and the Spouses
Sy, the appellate court found that Alfredo and Land Bank’s active preparations for Alfredo’s assumption of
mortgage essentially novated the agreement.

On January 5, 2010, the CA denied Land Bank’s motion for reconsideration for lack of merit. Hence, Land
Bank appealed to us.

Page 86 of 189
The Issues

I Whether the Court of Appeals erred in holding that Art. 1236 of the Civil Code does not apply and in
finding that there is no novation.

II Whether the Court of Appeals misconstrued the evidence and the law when it affirmed the trial court
decision’s ordering Land Bank to pay Ong the amount of Php750,000.00 with interest at 12% annum.

III Whether the Court of Appeals committed reversible error when it affirmed the award of Php50,000.00
to Ong as attorney’s fees and expenses of litigation.

The Ruling of this Court

We affirm with modification the appealed decision.

Recourse is against Land Bank

Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should have sought
recourse against the Spouses Sy instead of Land Bank. Art. 1236 provides:

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, 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.

We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land Bank was not
bound to accept Alfredo’s payment, since as far as the former was concerned, he did not have an interest
in the payment of the loan of the Spouses Sy. However, in the context of the second part of said
paragraph, Alfredo was not making payment to fulfill the obligation of the Spouses Sy. Alfredo made a
conditional payment so that the properties subject of the Deed of Sale with Assumption of Mortgage would
be titled in his name. It is clear from the records that Land Bank required Alfredo to make payment before
his assumption of mortgage would be approved. He was informed that the certificate of title would be
transferred accordingly. He, thus, made payment not as a debtor but as a prospective mortgagor. But the
trial court stated:

[T]he contract was not perfected or consummated because of the adverse finding in the credit
investigation which led to the disapproval of the proposed assumption. There was no evidence presented
that plaintiff was informed of the disapproval. What he received was a letter dated May 22, 1997
informing him that the account of spouses Sy had matured but there [were] no payments. This was sent
even before the conduct of the credit investigation on June 20, 1997 which led to the disapproval of the
proposed assumption of the loans of spouses Sy.

Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the obligation of the
Spouses Sy, since his interest hinged on Land Bank’s approval of his application, which was denied. The
circumstances of the instant case show that the second paragraph of Art. 1236 does not apply. As Alfredo
made the payment for his own interest and not on behalf of the Spouses Sy, recourse is not against the
latter. And as Alfredo was not paying for another, he cannot demand from the debtors, the Spouses Sy,
what he has paid.

Novation of the loan agreement

Land Bank also faults the CA for finding that novation applies to the instant case. It reasons that a
substitution of debtors was made without its consent; thus, it was not bound to recognize the substitution
under the rules on novation.

On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance Corporation14 provides the
following discussion:

Page 87 of 189
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely
modificatory when the old obligation subsists to the extent it remains compatible with the amendatory
agreement. An extinctive novation results either by changing the object or principal conditions (objective
or real), or by substituting the person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal). Under this mode, novation would have dual functions ─ one to extinguish
an existing obligation, the other to substitute a new one in its place ─ requiring a conflux of four essential
requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract;
(3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. x x x

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. The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. x x x (Emphasis supplied.)

Furthermore, Art. 1293 of the Civil Code states:

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.

We do not agree, then, with the CA in holding that there was a novation in the contract between the
parties. Not all the elements of novation were present. 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.15 Land Bank is thus correct when it argues that there was no novation in the
following:

[W]hether or not Alfredo Ong has an interest in the obligation and payment was made with the knowledge
or consent of Spouses Sy, he may still pay the obligation for the reason that even before he paid the
amount of P750,000.00 on January 31, 1997, the substitution of debtors was already perfected by and
between Spouses Sy and Spouses Ong as evidenced by a Deed of Sale with Assumption of Mortgage
executed by them on December 9, 1996. And since the substitution of debtors was made without the
consent of Land Bank – a requirement which is indispensable in order to effect a novation of the
obligation, it is therefore not bound to recognize the substitution of debtors. Land Bank did not intervene
in the contract between Spouses Sy and Spouses Ong and did not expressly give its consent to this
substitution.

Unjust enrichment

Land Bank maintains that the trial court erroneously applied the principle of equity and justice in ordering
it to return the PhP 750,000 paid by Alfredo. Alfredo was allegedly in bad faith and in estoppel. Land Bank
contends that it enjoyed the presumption of regularity and was in good faith when it accepted Alfredo’s
tender of PhP 750,000. It reasons that it did not unduly enrich itself at Alfredo’s expense during the
foreclosure of the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the
Spouses Sy’s outstanding loan obligation. Alfredo’s recourse then, according to Land Bank, is to have his
payment reimbursed by the Spouses Sy.

We rule that Land Bank is still liable for the return of the PhP 750,000 based on the principle of unjust
enrichment. Land Bank is correct in arguing that it has no obligation as creditor to recognize Alfredo as a
person with interest in the fulfillment of the obligation. But while Land Bank is not bound to accept the
substitution of debtors in the subject real estate mortgage, it is estopped by its action of accepting
Alfredo’s payment from arguing that it does not have to recognize Alfredo as the new debtor. The
elements of estoppel are:

First, the actor who usually must have knowledge, notice or suspicion of the true facts, communicates
something to another in a misleading way, either by words, conduct or silence; second, the other in fact
relies, and relies reasonably or justifiably, upon that communication; third, the other would be harmed
materially if the actor is later permitted to assert any claim inconsistent with his earlier conduct; and

Page 88 of 189
fourth, the actor knows, expects or foresees that the other would act upon the information given or that a
reasonable person in the actor’s position would expect or foresee such action.17

By accepting Alfredo’s payment and keeping silent on the status of Alfredo’s application, Land Bank misled
Alfredo to believe that he had for all intents and purposes stepped into the shoes of the Spouses Sy.

The defense of Land Bank Legazpi City Branch Manager Atty. Hingco that it was the bank’s Lending Center
that should have notified Alfredo of his assumption of mortgage disapproval is unavailing. The Lending
Center’s lack of notice of disapproval, the Tabaco Branch’s silence on the disapproval, and the bank’s
subsequent actions show a failure of the bank as a whole, first, to notify Alfredo that he is not a
recognized debtor in the eyes of the bank; and second, to apprise him of how and when he could collect
on the payment that the bank no longer had a right to keep.

We turn then on the principle upon which Land Bank must return Alfredo’s payment. Unjust enrichment
exists "when a person unjustly retains a benefit to the loss of another, or when a person retains money or
property of another against the fundamental principles of justice, equity and good conscience."18 There is
unjust enrichment under Art. 22 of the Civil Code when (1) a person is unjustly benefited, and (2) such
benefit is derived at the expense of or with damages to another.19

Additionally, unjust enrichment has been applied to actions called accion in rem verso. In order that the
accion in rem verso may prosper, the following conditions must concur: (1) that the defendant has been
enriched; (2) that the plaintiff has suffered a loss; (3) that the enrichment of the defendant is without just
or legal ground; and (4) that the plaintiff has no other action based on contract, quasi-contract, crime, or
quasi-delict.20 The principle of unjust enrichment essentially contemplates payment when there is no duty
to pay, and the person who receives the payment has no right to receive it.21

The principle applies to the parties in the instant case, as, Alfredo, having been deemed disqualified from
assuming the loan, had no duty to pay petitioner bank and the latter had no right to receive it.

Moreover, the Civil Code likewise requires under Art. 19 that "[e]very 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." Land Bank, however, did not even bother to inform Alfredo that it was no longer
approving his assumption of the Spouses Sy’s mortgage. Yet it acknowledged his interest in the loan when
the branch head of the bank wrote to tell him that his daughter’s loan had not been paid.22 Land Bank
made Alfredo believe that with the payment of PhP 750,000, he would be able to assume the mortgage of
the Spouses Sy. The act of receiving payment without returning it when demanded is contrary to the
adage of giving someone what is due to him. The outcome of the application would have been different
had Land Bank first conducted the credit investigation before accepting Alfredo’s payment. He would have
been notified that his assumption of mortgage had been disapproved; and he would not have taken the
futile action of paying PhP 750,000. The procedure Land Bank took in acting on Alfredo’s application
cannot be said to have been fair and proper.

As to the claim that the trial court erred in applying equity to Alfredo’s case, we hold that Alfredo had no
other remedy to recover from Land Bank and the lower court properly exercised its equity jurisdiction in
resolving the collection suit. As we have held in one case:

Equity, as the complement of legal jurisdiction, seeks to reach and complete justice where courts of law,
through the inflexibility of their rules and want of power to adapt their judgments to the special
circumstances of cases, are incompetent to do so. Equity regards the spirit and not the letter, the intent
and not the form, the substance rather than the circumstance, as it is variously expressed by different
courts.23

Another claim made by Land Bank is the presumption of regularity it enjoys and that it was in good faith
when it accepted Alfredo’s tender of PhP 750,000.

The defense of good faith fails to convince given Land Bank’s actions. Alfredo was not treated as a mere
prospective borrower. After he had paid PhP 750,000, he was made to sign bank documents including a
promissory note and real estate mortgage. He was assured by Atty. Hingco that the titles to the properties

Page 89 of 189
covered by the Spouses Sy’s real estate mortgage would be transferred in his name, and upon payment of
the PhP 750,000, the account would be considered current and renewed in his name.24

Land Bank posits as a defense that it did not unduly enrich itself at Alfredo’s expense during the
foreclosure of the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the
Spouses Sy’s outstanding loan obligation. It is observed that this is the first time Land Bank is revealing
this defense. However, issues, arguments, theories, and causes not raised below may no longer be posed
on appeal.25 Land Bank’s contention, thus, cannot be entertained at this point.1avvphi1

Land Bank further questions the lower court’s decision on the basis of the inconsistencies made by Alfredo
on the witness stand. It argues that Alfredo was not a credible witness and his testimony failed to
overcome the presumption of regularity in the performance of regular duties on the part of Land Bank.

This claim, however, touches on factual findings by the trial court, and we defer to these findings of the
trial court as sustained by the appellate court. These are generally binding on us. While there are
exceptions to this rule, Land Bank has not satisfactorily shown that any of them is applicable to this
issue.26 Hence, the rule that the trial court is in a unique position to observe the demeanor of witnesses
should be applied and respected27 in the instant case.

In sum, we hold that Land Bank may not keep the PhP 750,000 paid by Alfredo as it had already
foreclosed on the mortgaged lands.

Interest and attorney’s fees

As to the applicable interest rate, we reiterate the guidelines found in Eastern Shipping Lines, Inc. v. Court
of Appeals:

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

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

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

No evidence was presented by Alfredo that he had sent a written demand to Land Bank before he filed the
collection suit. Only the verbal agreement between the lawyers of the parties on the return of the
payment was mentioned.29 Consequently, the obligation of Land Bank to return the payment made by
Alfredo upon the former’s denial of the latter’s application for assumption of mortgage must be reckoned
from the date of judicial demand on December 12, 1997, as correctly determined by the trial court and
affirmed by the appellate court.

Page 90 of 189
The next question is the propriety of the imposition of interest and the proper imposable rate of applicable
interest. The RTC granted the rate of 12% per annum which was affirmed by the CA. From the above-
quoted guidelines, however, the proper imposable interest rate is 6% per annum pursuant to Art. 2209 of
the Civil Code. Sunga-Chan v. Court of Appeals is illuminating in this regard:

In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank
(CB) Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for
transactions involving payment of indemnities in the concept of damages arising from default in the
performance of obligations in general and/or for money judgment not involving a loan or forbearance of
money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6%
interest. Art. 2209 pertinently provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

The term "forbearance," within the context of usury law, has been described as a contractual obligation of
a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to
repay the loan or debt then due and payable.

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."30
(Emphasis supplied.)

Based on our ruling above, forbearance of money refers to the contractual obligation of the lender or
creditor to desist for a fixed period from requiring the borrower or debtor to repay the loan or debt then
due and for which 12% per annum is imposed as interest in the absence of a stipulated rate. In the
instant case, Alfredo’s conditional payment to Land Bank does not constitute forbearance of money, since
there was no agreement or obligation for Alfredo to pay Land Bank the amount of PhP 750,000, and the
obligation of Land Bank to return what Alfredo has conditionally paid is still in dispute and has not yet
been determined. Thus, it cannot be said that Land Bank’s alleged obligation has become a forbearance of
money.

On the award of attorney’s fees, attorney’s fees and expenses of litigation were awarded because Alfredo
was compelled to litigate due to the unjust refusal of Land Bank to refund the amount he paid. There are
instances when it is just and equitable to award attorney’s fees and expenses of litigation.31 Art. 2208 of
the Civil Code pertinently states:

In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot
be recovered, except:

(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest.

Given that Alfredo was indeed compelled to litigate against Land Bank and incur expenses to protect his
interest, we find that the award falls under the exception above and is, thus, proper given the
circumstances.

On a final note. The instant case would not have been litigated had Land Bank been more circumspect in
dealing with Alfredo. The bank chose to accept payment from Alfredo even before a credit investigation
was underway, a procedure worsened by the failure to even inform him of his credit standing’s impact on
his assumption of mortgage. It was, therefore, negligent to a certain degree in handling the transaction

Page 91 of 189
with Alfredo. It should be remembered that the business of a bank is affected with public interest and it
should observe a higher standard of diligence when dealing with the public.32

WHEREFORE, the appeal is DENIED. The CA Decision in CA-G.R. CR-CV No. 84445 is AFFIRMED with
MODIFICATION in that the amount of PhP 750,000 will earn interest at 6% per annum reckoned from
December 12, 1997, and the total aggregate monetary awards will in turn earn 12% per annum from the
finality of this Decision until fully paid.

SO ORDERED.
x-----------------------------------------------------------------------------------------------------------------x
G.R. No. 165116 August 4, 2009
MARIA SOLEDAD TOMIMBANG, Petitioner, vs.
ATTY. JOSE TOMIMBANG, Respondent.
DECISION
DEL CASTILLO, J.:

This resolves the petition for review on certiorari under Rule 45 of the Rules of Court, praying that the
Decision dated July 1, 2004 and Resolution2 dated August 31, 2004 promulgated by the Court of Appeals
(CA), be reversed and set aside.

The antecedent facts are as follows.

Petitioner and respondent are siblings. Their parents donated to petitioner an eight-door apartment
located at 149 Santolan Road, Murphy, Quezon City, with the condition that during the parents' lifetime,
they shall retain control over the property and petitioner shall be the administrator thereof.

In 1995, petitioner applied for a loan from PAG-IBIG Fund to finance the renovations on Unit H, of said
apartment which she intended to use as her residence. Petitioner failed to obtain a loan from PAG-IBIG
Fund, hence, respondent offered to extend a credit line to petitioner on the following conditions: (1)
petitioner shall keep a record of all the advances; (2) petitioner shall start paying the loan upon the
completion of the renovation; (3) upon completion of the renovation, a loan and mortgage agreement
based on the amount of the advances made shall be executed by petitioner and respondent; and (4) the
loan agreement shall contain comfortable terms and conditions which petitioner could have obtained from
PAG-IBIG.3

Petitioner accepted respondent's offer of a credit line and work on the apartment units began. Renovations
on Units B to G were completed, and the work has just started on Unit A when an altercation broke out
between herein parties. In view of said conflict, respondent and petitioner, along with some family
members, held a meeting in the house of their brother Genaro sometime in the second quarter of 1997.
Respondent and petitioner entered into a new agreement whereby petitioner was to start making monthly
payments on her loan. Upon respondent's demand, petitioner turned over to respondent all the records of
the cash advances for the renovations. Subsequently, or from June to October of 1997, petitioner made
monthly payments of ₱18,700.00, or a total of ₱93,500.00. Petitioner never denied the fact that she
started making such monthly payments.

In October of 1997, a quarrel also occurred between respondent and another sister, Maricion, who was
then defending the actions of petitioner. Because of said incident, they had a hearing at the Barangay. At
said hearing, respondent had the occasion to remind petitioner of her monthly payment. Petitioner
allegedly answered, "Kalimutan mo na ang pera mo wala tayong pinirmahan. Hindi ako natatakot sa 'yo!"
Thereafter, petitioner left Unit H and could no longer be found. Petitioner being the owner of the
apartments, renovations on Unit A were discontinued when her whereabouts could not be located. She
also stopped making monthly payments and ignored the demand letter dated December 2, 1997 sent by
respondent's counsel.

On February 2, 1998, respondent filed a Complaint against petitioner, demanding the latter to pay the
former the net amount of ₱3,989,802.25 plus interest of 12% per annum from date of default.

At the pre-trial conference, the issues were narrowed down as follows:

Page 92 of 189
1. Whether or not a loan was duly constituted between the plaintiff and the defendant in connection with
the improvements or renovations on apartment units A-H, which is in the name of the defendant [herein
petitioner];

2. Assuming that such a loan was duly constituted in favor of plaintiff [herein respondent], whether or not
the same is already due and payable;

3. Assuming that said loan is already due and demandable, whether or not it is to be paid out of the rental
proceeds from the apartment units mentioned, presuming that such issue was raised in the Answer of the
Defendant;

4. Assuming that the said loan was duly constituted in favor of plaintiff [herein respondent], whether or
not it is in the amount of P3,909,802.20 and whether or not it will earn legal interest at the rate of 12%
per annum, compounded, as provided in Article 2212 of the Civil Code of the Philippines, from the date of
the extrajudicial demand; and

5. Whether or not the plaintiff [herein respondent] is entitled to the reliefs prayed for in his Complaint or
whether or not it is the defendant [herein petitioner] who is entitled to the reliefs prayed for in her Answer
with Counterclaim.4

On November 15, 2002, the Regional Trial Court (RTC) of Quezon City, Branch 82, rendered a Decision,5
the dispositive portion of which reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the latter to pay the former the following:

1. The sum of ₱3,989,802.25 with interest thereon at the legal rate of 12% per annum computed from the
date of default until the whole obligation is fully paid;

2. The sum of ₱50,000.00 as and by way of attorney's fees; and

3. The cost of suit.

SO ORDERED.

Petitioner appealed the foregoing RTC Decision to the CA, but on July 1, 2004, the Court of Appeals
promulgated its Decision affirming in toto said RTC judgment. A motion for reconsideration of the CA
Decision was denied per Resolution dated August 31, 2004.

Hence, this petition where petitioner alleges that:

I. THE COURT OF APPEALS ACTED NOT IN ACCORD WITH LAW AND APPLICABLE JURISPRUDENCE OF THE
SUPREME COURT WHEN IT AFFIRMED THE LOWER COURT'S FINDING THAT THE LOAN BETWEEN
PETITIONER AND RESPONDENT IS ALREADY DUE AND DEMANDABLE.

II. THE COURT OF APPEALS ERRED BY DEPARTING FROM THE ACCEPTED AND USUAL COURSE OF
JUDICIAL PROCEEDINGS – OF AFFIRMING THE DUE AND DEMANDABILITY OF THE LOAN CONTRARY TO
THE EVIDENCE PRESENTED IN THE LOWER COURT – AND SANCTIONING SUCH DEPARTURE BY THE
LOWER COURT IN THE INSTANT CASE.

III. THE COURT OF APPEALS ERRED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS – OF AFFIRMING THE AWARD OF ATTORNEY'S FEES TO THE RESPONDENT WITHOUT ANY
BASIS – AND SANCTIONING SUCH DEPARTURE BY THE LOWER COURT IN THE INSTANT CASE.

The main issues in this case boil down to (1) whether petitioner's obligation is due and demandable; (2)
whether respondent is entitled to attorney's fees; and (3) whether interest should be imposed on
petitioner's indebtedness and, if in the affirmative, at what rate.

Page 93 of 189
Petitioner does not deny that she obtained a loan from respondent. She, however, contends that the loan
is not yet due and demandable because the suspensive condition – the completion of the renovation of the
apartment units - has not yet been fulfilled. She also assails the award of attorney's fees to respondent as
baseless.

For his part, respondent admits that initially, they agreed that payment of the loan shall be made upon
completion of the renovations. However, respondent claims that during their meeting with some family
members in the house of their brother Genaro sometime in the second quarter of 1997, he and petitioner
entered into a new agreement whereby petitioner was to start making monthly payments on her loan,
which she did from June to October of 1997. In respondent's view, there was a novation of the original
agreement, and under the terms of their new agreement, petitioner's obligation was already due and
demandable.

Respondent also maintains that when petitioner disappeared from the family compound without leaving
information as to where she could be found, making it impossible to continue the renovations, petitioner
thereby prevented the fulfillment of said condition. He claims that Article 1186 of the Civil Code, which
provides that "the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment,"
is applicable to this case.

In his Comment to the present petition, respondent raised for the first time, the issue that the loan
contract between him and petitioner is actually one with a period, not one with a suspensive condition. In
his view, when petitioner began to make partial payments on the loan, the latter waived the benefit of the
term, making the loan immediately demandable.

Respondent also believes that he is entitled to attorney's fees, as petitioner allegedly showed bad faith by
absconding and compelling him to litigate.

The Court finds the petition unmeritorious.

It is undisputed that herein parties entered into a valid loan contract. The only question is, has petitioner's
obligation become due and demandable? The Court resolves the question in the affirmative.

The evidence on record clearly shows that after renovation of seven out of the eight apartment units had
been completed, petitioner and respondent agreed that the former shall already start making monthly
payments on the loan even if renovation on the last unit (Unit A) was still pending. Genaro Tomimbang,
the younger brother of herein parties, testified that a meeting was held among petitioner, respondent,
himself and their eldest sister Maricion, sometime during the first or second quarter of 1997, wherein
respondent demanded payment of the loan, and petitioner agreed to pay. Indeed, petitioner began to
make monthly payments from June to October of 1997 totalling ₱93,500.00.8 In fact, petitioner even
admitted in her Answer with Counterclaim that she had "started to make payments to plaintiff [herein
respondent] as the same was in accord with her commitment to pay whenever she was able; x x x ."9

Evidently, by virtue of the subsequent agreement, the parties mutually dispensed with the condition that
petitioner shall only begin paying after the completion of all renovations. There was, in effect, a
modificatory or partial novation, of petitioner's obligation. Article 1291 of the Civil Code provides, thus:

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. (Emphasis supplied)
In Iloilo Traders Finance, Inc. v. Heirs of Sps. Soriano,10 the Court expounded on the nature of novation,
to wit:

Novation may either 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; x x x .

Page 94 of 189
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 new valid 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.11

In Ong v. Bogñalbal, the Court also stated, thus:

x x x the effect of novation may be partial or total. There is partial novation when there is only a
modification or change in some principal conditions of the obligation. It is total, when the obligation is
completely extinguished. Also, the term principal conditions in Article 1291 should be construed to include
a change in the period to comply with the obligation. Such a change in the period would only be a partial
novation since the period merely affects the performance, not the creation of the obligation.13

As can be gleaned from the foregoing, the aforementioned four essential elements and the requirement
that there be total incompatibility between the old and new obligation, apply only to extinctive novation.
In partial novation, only the terms and conditions of the obligation are altered, thus, the main obligation is
not changed and it remains in force.

Petitioner stated in her Answer with Counterclaim14 that she agreed and complied with respondent's
demand for her to begin paying her loan, since she believed this was in accordance with her commitment
to pay whenever she was able. Her partial performance of her obligation is unmistakable proof that indeed
the original agreement between her and respondent had been novated by the deletion of the condition
that payments shall be made only after completion of renovations. Hence, by her very own admission and
partial performance of her obligation, there can be no other conclusion but that under the novated
agreement, petitioner's obligation is already due and demandable.

With the foregoing finding that petitioner's obligation is due and demandable, there is no longer any need
to discuss whether petitioner's disappearance from the family compound prevented the fulfillment of the
original condition, necessitating application of Article 1186 of the Civil Code, or whether the obligation is
one with a condition or a period.1awphil

As to attorney's fees, however, the award therefor cannot be allowed by the Court. It is an oft-repeated
rule that the trial court is required to state the factual, legal or equitable justification for awarding
attorney's fees.15 The Court explained in Buñing v. Santos,16 to wit:

x x x While Article 2208 of the Civil Code allows attorney's fees to be awarded if the claimant is compelled
to litigate with third persons or to incur expenses to protect his interest by reason of an unjustified act or
omission of the party from whom it is sought, there must be a showing that the losing party acted willfully
or in bad faith and practically compelled the claimant to litigate and incur litigation expenses. In view of
the declared policy of the law that awards of attorney's fees are the exception rather than the rule, it is
necessary for the trial court to make express findings of facts and law that would bring the case within the
exception and justify the grant of such award. x x x.

Thus, the matter of attorney's fees cannot be touched upon only in the dispositive portion of the decision.
The text itself must state the reasons why attorney's fees are being awarded. x x x 17

In the above-quoted case, there was a finding that defendants therein had no intention of fulfilling their
obligation in complete disregard of the plaintiff’s right, and yet, the Court did not deem this as sufficient
justification for the award of attorney's fees. Verily, in the present case, where it is understandable that
some misunderstanding could arise as to when the obligation was indeed due and demandable, the Court
must likewise disallow the award of attorney's fees.

We now come to a discussion of whether interest should be imposed on petitioner's indebtedness. In Royal
Cargo Corp. v. DFS Sports Unlimited, Inc.,18 the Court reiterated the settled rule on imposition of
interest, thus:

Page 95 of 189
As to computation of legal interest, the seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals
controls, to wit:

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:

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

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

The foregoing rule on legal interest was explained in Sunga-Chan v. Court of Appeals,19 in this wise:

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."20

In accordance with the above ruling, since the obligation in this case involves a loan and there is no
stipulation in writing as to interest due, the rate of interest shall be 12% per annum computed from the
date of extrajudicial demand.

IN VIEW OF THE FOREGOING, the petition is AFFIRMED with the MODIFICATION that the award for
attorney's fees is DELETED.

SO ORDERED.
x------------------------------------------------------------------------------------------------------------------x
G.R. No. 179441 August 9, 2010 *same with Case No.4 in this file*
ST. JAMES COLLEGE OF PARAÑAQUE; JAIME T. TORRES, represented by his legal
representative, JAMES KENLEY M. TORRES; and MYRNA M. TORRES, Petitioners, vs.
EQUITABLE PCI BANK, Respondent.
x------------------------------------------------------------------------------------------------------------------x

Page 96 of 189
G.R. No. 200602 December 11, 2013
ACE FOODS, INC., Petitioner, vs.
MICRO PACIFIC TECHNOLOGIES CO., LTD.1, Respondent.
DECISION
PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari2are the Decision3 dated October 21, 2011 and Resolution4
dated February 8, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 89426 which reversed and set
aside the Decision5 dated February 28, 2007 of the Regional Trial Court of Makati, Branch 148 (RTC) in
Civil Case No. 02-1248, holding petitioner ACE Foods, Inc. (ACE Foods) liable to respondent Micro Pacific
Technologies Co., Ltd. (MTCL) for the payment of Cisco Routers and Frame Relay Products (subject
products) amounting to ₱646,464.00 pursuant to a perfected contract of sale.

The Facts

ACE Foods is a domestic corporation engaged in the trading and distribution of consumer goods in
wholesale and retail bases,6 while MTCL is one engaged in the supply of computer hardware and
equipment.7

On September 26, 2001, MTCL sent a letter-proposal8 for the delivery and sale of the subject products to
be installed at various offices of ACE Foods. Aside from the itemization of the products offered for sale, the
said proposal further provides for the following terms, viz.:

TERMS : Thirty (30) days upon delivery

VALIDITY : Prices are based on current dollar rate and subject to changes without prior notice.

DELIVERY : Immediate delivery for items on stock, otherwise thirty (30) to forty-five days upon receipt of
[Purchase Order]

WARRANTY : One (1) year on parts and services. Accessories not included in warranty.

On October 29, 2001, ACE Foods accepted MTCL’s proposal and accordingly issued Purchase Order No.
10002310 (Purchase Order) for the subject products amounting to ₱646,464.00 (purchase price).
Thereafter, or on March 4, 2002, MTCL delivered the said products to ACE Foods as reflected in Invoice
No. 7733 11 (Invoice Receipt). The fine print of the invoice states, inter alia, that "[t]itle to sold property
is reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the terms and conditions
of above and payment of the price"12 (title reservation stipulation). After delivery, the subject products
were then installed and configured in ACE Foods’s premises. MTCL’s demands against ACE Foods to pay
the purchase price, however, remained unheeded.13 Instead of paying the purchase price, ACE Foods sent
MTCL a Letter14 dated September 19, 2002, stating that it "ha[s] been returning the [subject products] to
[MTCL] thru [its] sales representative Mr. Mark Anteola who has agreed to pull out the said [products] but
had failed to do so up to now."

Eventually, or on October 16, 2002, ACE Foods lodged a Complaint15 against MTCL before the RTC,
praying that the latter pull out from its premises the subject products since MTCL breached its "after
delivery services" obligations to it, particularly, to: (a) install and configure the subject products; (b)
submit a cost benefit study to justify the purchase of the subject products; and (c) train ACE Foods’s
technicians on how to use and maintain the subject products. 16 ACE Foods likewise claimed that the
subject products MTCL delivered are defective and not working.17

For its part, MTCL, in its Answer with Counterclaim,18 maintained that it had duly complied with its
obligations to ACE Foods and that the subject products were in good working condition when they were
delivered, installed and configured in ACE Foods’s premises. Thereafter, MTCL even conducted a training
course for ACE Foods’s representatives/employees; MTCL, however, alleged that there was actually no
agreement as to the purported "after delivery services." Further, MTCL posited that ACE Foods refused
and failed to pay the purchase price for the subject products despite the latter’s use of the same for a
period of nine (9) months. As such, MTCL prayed that ACE Foods be compelled to pay the purchase price,
as well as damages related to the transaction.

Page 97 of 189
The RTC Ruling

On February 28, 2007, the RTC rendered a Decision, 20 directing MTCL to remove the subject products
from ACE Foods’s premises and pay actual damages and attorney fees in the amounts of ₱200,000.00 and
₱100,000.00, respectively.21

At the outset, it observed that the agreement between ACE Foods and MTCL is in the nature of a contract
to sell. Its conclusion was based on the fine print of the Invoice Receipt which expressly indicated that
"title to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the
terms and conditions of above and payment of the price," noting further that in a contract to sell, the
prospective seller explicitly reserves the transfer of title to the prospective buyer, and said transfer is
conditioned upon the full payment of the purchase price.22 Thus, notwithstanding the execution of the
Purchase Order and the delivery and installation of the subject products at the offices of ACE Foods, by
express stipulation stated in the Invoice Receipt issued by MTCL and signed by ACE Foods, i.e., the title
reservation stipulation, it is still the former who holds title to the products until full payment of the
purchase price therefor. In this relation, it noted that the full payment of the price is a positive suspensive
condition, the non-payment of which prevents the obligation to sell on the part of the seller/vendor from
materializing at all.23 Since title remained with MTCL, the RTC therefore directed it to withdraw the
subject products from ACE Foods’s premises. Also, in view of the foregoing, the RTC found it unnecessary
to delve into the allegations of breach since the non-happening of the aforesaid suspensive condition ipso
jure prevented the obligation to sell from arising.24

Dissatisfied, MTCL elevated the matter on appeal.

The CA Ruling

In a Decision26 dated October 21, 2011, the CA reversed and set aside the RTC’s ruling, ordering ACE
Foods to pay MTCL the amount of ₱646,464.00, plus legal interest at the rate of 6% per annum to be
computed from April 4, 2002, and attorney’s fees amounting to ₱50,000.00.27

It found that the agreement between the parties is in the nature of a contract of sale, observing that the
said contract had been perfected from the time ACE Foods sent the Purchase Order to MTCL which, in
turn, delivered the subject products covered by the Invoice Receipt and subsequently installed and
configured them in ACE Foods’s premises.28 Thus, considering that MTCL had already complied with its
obligation, ACE Foods’s corresponding obligation arose and was then duty bound to pay the agreed
purchase price within thirty (30) days from March 5, 2002.29 In this light, the CA concluded that it was
erroneous for ACE Foods not to pay the purchase price therefor, despite its receipt of the subject products,
because its refusal to pay disregards the very essence of reciprocity in a contract of sale.30 The CA also
dismissed ACE Foods’s claim regarding MTCL’s failure to perform its "after delivery services" obligations
since the letter-proposal, Purchase Order and Invoice Receipt do not reflect any agreement to that effect.

Aggrieved, ACE Foods moved for reconsideration which was, however, denied in a Resolution 32 dated
February 8, 2012, hence, this petition.

The Issue Before the Court

The essential issue in this case is whether ACE Foods should pay MTCL the purchase price for the subject
products.

The Court’s Ruling

The petition lacks merit.

A contract is what the law defines it to be, taking into consideration its essential elements, and not what
the contracting parties call it.33 The real nature of a contract may be determined from the express terms
of the written agreement and from the contemporaneous and subsequent acts of the contracting parties.
However, in the construction or interpretation of an instrument, the intention of the parties is primordial
and is to be pursued. The denomination or title given by the parties in their contract is not conclusive of
the nature of its contents.34

Page 98 of 189
The very essence of a contract of sale is the transfer of ownership in exchange for a price paid or
promised. 35 This may be gleaned from Article 1458 of the Civil Code which defines a contract of sale as
follows:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its
equivalent.

A contract of sale may be absolute or conditional. (Emphasis supplied)

Corollary thereto, a contract of sale is classified as a consensual contract, which means that the sale is
perfected by mere consent. No particular form is required for its validity. Upon perfection of the contract,
the parties may reciprocally demand performance, i.e., the vendee may compel transfer of ownership of
the object of the sale, and the vendor may require the vendee to pay the thing sold.36

In contrast, a contract to sell is defined as a bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the property despite delivery thereof to the prospective buyer, binds
himself to sell the property exclusively to the prospective buyer upon fulfillment of the condition agreed
upon, i.e., the full payment of the purchase price. A contract to sell may not even be considered as a
conditional contract of sale where the seller may likewise reserve title to the property subject of the sale
until the fulfillment of a suspensive condition, because in a conditional contract of sale, the first element of
consent is present, although it is conditioned upon the happening of a contingent event which may or may
not occur.

In this case, the Court concurs with the CA that the parties have agreed to a contract of sale and not to a
contract to sell as adjudged by the RTC. Bearing in mind its consensual nature, a contract of sale had
been perfected at the precise moment ACE Foods, as evinced by its act of sending MTCL the Purchase
Order, accepted the latter’s proposal to sell the subject products in consideration of the purchase price of
₱646,464.00. From that point in time, the reciprocal obligations of the parties – i.e., on the one hand, of
MTCL to deliver the said products to ACE Foods, and, on the other hand, of ACE Foods to pay the purchase
price therefor within thirty (30) days from delivery – already arose and consequently may be demanded.
Article 1475 of the Civil Code makes this clear:

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law
governing the form of contracts.

At this juncture, the Court must dispel the notion that the stipulation anent MTCL’s reservation of
ownership of the subject products as reflected in the Invoice Receipt, i.e., the title reservation stipulation,
changed the complexion of the transaction from a contract of sale into a contract to sell. Records are
bereft of any showing that the said stipulation novated the contract of sale between the parties which, to
repeat, already existed at the precise moment ACE Foods accepted MTCL’s proposal. To be sure, novation,
in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory
when the old obligation subsists to the extent it remains compatible with the amendatory agreement. In
either case, however, novation is never presumed, and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be
mistaken.

In the present case, it has not been shown that the title reservation stipulation appearing in the Invoice
Receipt had been included or had subsequently modified or superseded the original agreement of the
parties. The fact that the Invoice Receipt was signed by a representative of ACE Foods does not, by and of
itself, prove animus novandi since: (a) it was not shown that the signatory was authorized by ACE Foods
(the actual party to the transaction) to novate the original agreement; (b) the signature only proves that
the Invoice Receipt was received by a representative of ACE Foods to show the fact of delivery; and (c) as
matter of judicial notice, invoices are generally issued at the consummation stage of the contract and not
its perfection, and have been even treated as documents which are not actionable per se, although they

Page 99 of 189
may prove sufficient delivery. 39 Thus, absent any clear indication that the title reservation stipulation
was actually agreed upon, the Court must deem the same to be a mere unilateral imposition on the part of
MTCL which has no effect on the nature of the parties’ original agreement as a contract of sale. Perforce,
the obligations arising thereto, among others, ACE Foods’s obligation to pay the purchase price as well as
to accept the delivery of the goods,40 remain enforceable and subsisting.1âwphi1

As a final point, it may not be amiss to state that the return of the subject products pursuant to a
rescissory action is neither warranted by ACE Foods’s claims of breach – either with respect to MTCL’s
breach of its purported "after delivery services" obligations or the defective condition of the products -
since such claims were not adequately proven in this case. The rule is clear: each party must prove his
own affirmative allegation; one who asserts the affirmative of the issue has the burden of presenting at
the trial such amount of evidence required by law to obtain a favorable judgment, which in civil cases, is
by preponderance of evidence. 42 This, however, ACE Foods failed to observe as regards its allegations of
breach. Hence, the same cannot be sustained.

WHEREFORE, the petition is DENIED. Accordingly, the Decision dated October 21, 2011 and Resolution
dated February 8, 2012 of the Court of Appeals in CA-G.R. CV No. 89426 are hereby AFFIRMED.

SO ORDERED.
x-------------------------------------------------------------------------------------------------------------------x
G.R. No. 177232 October 11, 2012
RCJ BUS LINES, INCORPORATED, Petitioner, vs.
MASTER TOURS AND TRAVEL CORPORATION, Respondent.
DECISION
ABAD, J.:

This case is about a prior agreement for the lease of four buses, claimed to have been novated by a
subsequent agreement I~H- their storage in the former lessee's garage for a fee.

The Facts and the Case

On February 9, 1993 respondent Master Tours and Travel Corporation (Master Tours) entered into a five-
year lease agreement from February 15, 1993 to February 15, 1998 with petitioner RCJ Bus Lines,
Incorporated (RCJ) covering four Daewoo air-conditioned buses, described as "presently junked and not
operational" for the lease amount of ₱ 600,000.00, with ₱ 400,000.00 payable upon the signing of the
agreement and ₱ 200,000.00 "payable upon completion of rehabilitation of the four buses by the lessee."1
The agreement was signed by Marciano T. Tan as Master Tours’ Executive Vice-President and Rolando
Abadilla as RCJ’s President and Chairman.

More than four years into the lease or on June 16, 1997 Master Tours wrote RCJ a letter, demanding the
return of the four buses "brought to your garage at E. Rodriguez Avenue for safekeeping"2 so Master
Tours could settle its obligation with creditors who wanted to foreclose on the buses. RCJ did not,
however, heed the demand.

On January 16, 1998 Master Tours wrote RCJ a letter, demanding the return of the buses to it and the
payment of the lease fee of ₱ 600,000.00 that had remained unpaid since 1993. On February 2, 1998 RCJ
wrote back through counsel that it had no obligation to pay the lease fee and that it would return the
buses only after Master Tours shall have paid RCJ the storage fees due on them. This prompted Master
Tours to file a collection suit against RCJ before the Regional Trial Court (RTC) of Manila, Branch 49.

For its defense, RCJ alleged that it had no use for the buses, they being non-operational, and that the
lease agreement had been modified into a contract of deposit of the buses for which Master Tours agreed
to pay RCJ storage fees of ₱ 4,000.00 a month. To prove the new agreement, RCJ cited Master Tours’
letter of June 16, 1997 which acknowledged that the buses were brought to RCJ’s garage for
"safekeeping."

On November 5, 2001 the RTC rendered judgment, ordering RCJ to pay Master Tours ₱ 600,000.00 as
lease fee with 6% interest per annum from the date of the filing of the suit and attorney’s fees of ₱
50,000.00 plus costs.

Page 100 of 189

The lower court rejected RCJ’s defense of novation from a contract of lease to a contract of deposit, given
the absence of proof that Master Tours gave its consent to such a novation.

On appeal, the Court of Appeals (CA) rendered judgment dated October 26, 2006,3 entirely affirming the
RTC Decision. The CA also denied petitioner’s motion for reconsideration in a Resolution dated March 27,
2007, hence, the present petition for review.

The Issues Presented

The case presents the following issues:

1. Whether or not the CA erred in holding that there had been no novation in the agreement of the parties
from one of lease of the buses to one of deposit of the same;

2. Assuming absence of novation, whether or not the CA erred in ruling that RCJ can be held liable for
rental fee notwithstanding that the buses never became operational; and

3. Whether or not the CA erred in affirming the RTC’s award of ₱ 50,000.00 in attorney’s fees plus cost of
suit against RCJ.

The Court’s Rulings

One. Article 1292 of the Civil Code provides that in novation, "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." And the obligations are incompatible if they cannot stand together. In such a case, the subsequent
obligation supersedes or novates the first.4

To begin with, the cause in a contract of lease is the enjoyment of the thing;5 in a contract of deposit, it is
the safekeeping of the thing.6 They thus create essentially distinct obligations that would result in a
novation only if the parties entered into one after the other concerning the same subject matter. The
turning point in this case, therefore, is whether or not the parties subsequently entered into an agreement
for the storage of the buses that superseded their prior lease agreement involving the same buses.

Although the buses were described in the lease agreement as "junked and not operational," it is clear from
the prescribed manner of payment of the rental fee (₱ 400,000.00 down and ₱ 200,000.00 upon
completion of their rehabilitation) that RCJ would rehabilitate such buses and use them for its transport
business. Now, RCJ’s theory is that the parties subsequently changed their minds and terminated the
lease but, rather than have Master Tours get back its junked buses, RCJ agreed to store them in its
garage as a service to Master Tours subject to payment of storage fees.

Two things militate against RCJ’s theory.

First, RCJ failed to present any clear proof that it agreed with Master Tours to abandon the lease of the
buses and in its place constitute RCJ as depositary of the same, providing storage service to Master Tours
for a fee. The only evidence RCJ relied on is Master Tours’ letter of June 16, 1997 in which it demanded
the return of the four buses which were placed in RCJ’s garage for "safekeeping." The pertinent portion of
the letter reads:

This is to follow up our previous discussion with you with regards to the Five (5) units of Daewoo
Airconditioned Motorcoaches, which we brought to your garage at E. Rodriguez Avenue for safekeeping.
Since we have outstanding loan with BancAsia Finance & Investment Corporation and BancAsia Capital
Corporation that we are unable to service payment, they have made final demand to us and are in the
process of foreclosing these units. We urgently request from you a meeting to thresh out matters
concerning the pulling of these units by the financing firms.7

For one thing, the letter does not on its face constitute an agreement. It contains no contractual
stipulations respecting some warehousing arrangement between the parties concerning the buses. At best,
the letter acknowledges that five Master Tours’ buses were "brought to your RCJ’s garage…for

Page 101 of 189

safekeeping." But the idea of RCJ safekeeping the buses for Master Tours is consistent with their lease
agreement. The lessee of a movable property has an obligation to "return the thing leased, upon the
termination of the lease, just as he received it."8 This means that RCJ must, as an incident of the lease,
keep the buses safe from injury or harm while these were in its possession.

For another, it is evident from the tenor of Master Tours’ letter that RCJ’s "safekeeping" was to begin from
the time the buses were delivered at its garage. There is no allegation or evidence that Master Tours
pulled out the buses at some point, signifying the pre-termination of the lease agreement, then brought
them back to RCJ’s garage, this time for safekeeping. This circumstance rules out any notion that an
agreement for RCJ to hold the buses for safekeeping had overtaken the lease agreement.

Second, it did not make sense for Master Tours to pre-terminate its lease of the junked buses to RCJ,
which would earn Master Tours ₱ 600,000.00, in exchange for having to pay RCJ storage fees for keeping
those buses just the same. As pointed out above, the lease already implied an obligation on RCJ’s part to
safekeep the buses while they were being rented.

Two. RCJ claims that it cannot be held liable to Master Tours for rental fee on the buses considering that
these never became operational. The pertinent portions of the lease agreement provide:

Section 1. Lease of AIRCON BUSES – The LESSOR hereby agrees and shall deliver unto the LESSEE the
AIRCON BUSES by way of a long term lease of said buses.

Section 2. Term of Lease – The lease of the AIRCON BUSES shall be for a period of FIVE (5) years to
commence on 15 February 1993 and to end automatically on 15 February 1998. x x x

Section 3. Lease Fee – For and in consideration of the lease of the AIRCON BUSES subject hereof, the
lease fee for five years for the Four (4) units shall be in the amount of PESOS: SIX HUNDRED THOUSAND
(₱ 600,000.00). The LESSEE agrees to advance the amount of PESOS: FOUR HUNDRED THOUSAND (₱
400,000.00) payable upon the signing of the Agreement. The remaining balance of PESOS: TWO
HUNDRED THOUSAND (₱ 200,000.00) will be payable upon completion of rehabilitation of the 4 buses by
the lessee.9

The Court finds no basis in the above for holding that RCJ’s obligation to pay the rents of ₱ 600,000.00 on
the buses depended on the buses being rehabilitated. Apart from delivering the buses to RCJ, the
agreement did not require any further act from Master Tours as a condition to the exercise of its right to
collect the lease fee.

Of course, the lease agreement provided for two payments: ₱ 400,000.00 upon the signing of the
agreement and ₱ 200,000.00 upon completion of rehabilitation of the buses. But this provision is more
about the mode of payment rather than about the extinguishment of the obligation to pay the amounts
due. The phrase "upon completion of rehabilitation" implies an obligation to complete the rehabilitation
which, in this case, wholly depended on work to be done "by the lessee."

That the buses may have turned out to be unsuitable for use despite repair cannot prejudice Master Tours.
The latter did not hide the condition of the buses from RCJ. Indeed, the lease agreement described them
as "presently junked and not operational." RCJ knew what it was getting into and calculated some profit
after it shall have rehabilitated the buses and placed them on the road. That it may have made a
miscalculation cannot exempt it from its obligation to pay the rents.

But since Master Tours demanded the return of the buses before the expiration of the contract, RCJ was
not yet in default for the payment of ₱ 200,000.00. There was time left to complete or undertake the
rehabilitation of the buses since the lease was still operative at that time Master Tours opted to pre-
terminate the contract.10 It is only equitable to release RCJ from the liability to pay ₱ 200,000.00 since it
was not afforded the balance of the period to perform its obligation to repair.11 No one should be unduly
enriched at the expense of another.12

Three. RCJ claims that the award of attorney’s fees plus cost against it was unjustified.

Page 102 of 189

Notably, RCJ did not question such award in the appellant’s brief that it filed with the CA.1âwphi1 RCJ
brought it up only through a supplemental appellant’s brief that it filed without leave of court three years
after the case was submitted for decision and a month before the CA rendered its judgment in the case.13

Nonetheless, the Court notes that the RTC Decision awarded attorney’s fees without stating its basis for
making such award. The discretion of the court to award attorney's fees under Article 2208 of the Civil
Code demands factual, legal, and equitable justification. The court must state the reason for the award of
attorney's fees and its failure to do so makes the award utterly baseless.

As regards the cost of suit, costs ordinarily follow the results of the suit and shall be allowed to the
prevailing party as a matter of course.14

WHEREFORE, the Court MODIFIES the Court of Appeals Decision dated October 26, 2006. RCJ Bus Lines,
Incorporated is ORDERED to pay ₱ 400, 000.00 to Master Tours and Travel Corporation with interest of
6% per annum from the filing of the complaint. The Regional Trial Court’s award of attorney’s fees is
DELETED for lack of legal basis.

Costs against the petitioner.

SO ORDERED.
x-----------------------------------------------------------------------------------------------------------------x
G.R. No. 164051 October 3, 2012
PHILIPPINE NATIONAL BANK, Petitioner, vs.
LILIAN S. SORIANO, Respondent.
DECISION
PEREZ, J.:

We arc urged in this petition for review on certiorari to reverse and set aside the Decision of the Court of
Appeals in C A-G.R. SP No. 762431 finding no grave abuse of discretion in the ruling of the Secretary of
the Department of Justice ( DOJ) which, in turn, dismissed the criminal complaint for Estafa, i.e., violation
of Section 13 of Presidential Decree No. 1 15 (Trust Receipts Law), in relation to Article 315, paragraph
(b) of the Revised Penal Code, filed by petitioner Philippine National Bank (PNB) against respondent Lilian
S. Soriano (Soriano).2

First, the ostensibly simple facts as found by the Court of Appeals and adopted by PNB in its petition and
memorandum:

On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock Line (FSL) in the
increased amount of Thirty Million Pesos (₱30 Million) to Lisam Enterprises, Inc. [LISAM], a family-owned
and controlled corporation that maintains Current Account No. 445830099-8 with petitioner PNB.

x x x. Soriano is the chairman and president of LISAM, she is also the authorized signatory in all LISAM’s
Transactions with [PNB].

On various dates, LISAM made several availments of the FSL in the total amount of Twenty Nine Million
Six Hundred Forty Five Thousand Nine Hundred Forty Four Pesos and Fifty Five Centavos (₱
29,645,944.55), the proceeds of which were credited to its current account with [PNB]. For each
availment, LISAM through [Soriano], executed 52 Trust Receipts (TRs). In addition to the promissory
notes, showing its receipt of the items in trust with the duty to turn-over the proceeds of the sale thereof
to [PNB].

Sometime on January 21-22, 1998, [PNB’s] authorized personnel conducted an actual physical inventory
of LISAM’s motor vehicles and motorcycles and found that only four (4) units covered by the TRs
amounting to One Hundred Forty Thousand Eight Hundred Pesos (₱158,100.00) (sic) remained unsold.

Out of the Twenty Nine Million Six Hundred Forty Four Thousand Nine Hundred Forty Four Pesos and Fifty
Five Centavos (₱29,644,944.55) as the outstanding principal balance [of] the total availments on the line
covered by TRs, [LISAM] should have remitted to [PNB], Twenty Nine Million Four Hundred Eighty Seven
Thousand Eight Hundred Forty Four Pesos and Fifty Five Centavos (₱29,487,844.55). Despite several

Page 103 of 189

formal demands, respondent Soriano failed and refused to turn over the said [amount to] the prejudice of
[PNB].3

Given the terms of the TRs which read, in pertinent part:

RECEIVED in Trust from the [PNB], Naga Branch, Naga City, Philippines, the motor vehicles ("Motor
Vehicles") specified and described in the Invoice/s issued by HONDA PHILIPPINES, INC. (HPI) to Lisam
Enterprises, Inc., (the "Trustee") hereto attached as Annex "A" hereof, and in consideration thereof, the
trustee hereby agrees to hold the Motor Vehicles in storage as the property of PNB, with the liberty to sell
the same for cash for the Trustee’s account and to deliver the proceeds thereof to PNB to be applied
against its acceptance on the Trustee’s account. Under the terms of the Invoices and (sic) the Trustee
further agrees to hold the said vehicles and proceeds of the sale thereof in Trust for the payment of said
acceptance and of any [of] its other indebtedness to PNB.

For the purpose of effectively carrying out all the terms and conditions of the Trust herein created and to
insure that the Trustee will comply strictly and faithfully with all undertakings hereunder, the Trustee
hereby agrees and consents to allow and permit PNB or its representatives to inspect all of the Trustee’s
books, especially those pertaining to its disposition of the Motor Vehicles and/or the proceeds of the sale
hereof, at any time and whenever PNB, at its discretion, may find it necessary to do so.

The Trustee’s failure to account to PNB for the Motor Vehicles received in Trust and/or for the proceeds of
the sale thereof within thirty (30) days from demand made by PNB shall constitute prima facie evidence
that the Trustee has converted or misappropriated said vehicles and/or proceeds thereof for its benefit to
the detriment and prejudice of PNB.4

and Soriano’s failure to account for the proceeds of the sale of the motor vehicles, PNB, as previously
adverted to, filed a complaint-affidavit before the Office of the City Prosecutor of Naga City charging
Soriano with fifty two (52) counts of violation of the Trust Receipts Law, in relation to Article 315,
paragraph 1(b) of the Revised Penal Code.

In refutation, Soriano filed a counter-affidavit asserting that:

1. The obligation of [LISAM] which I represent, and consequently[,] my obligation, if any, is purely civil in
nature. All of the alleged trust receipt agreements were availments made by the corporation [LISAM] on
the PNB credit facility known as "Floor Stock Line" (FSL), which is just one of the several credit facilities
granted to [LISAM] by PNB. When my husband Leandro A. Soriano, Jr. was still alive, [LISAM] submitted
proposals to PNB for the restructuring of all of [LISAM’s] credit facilities. After exchanges of several letters
and telephone calls, Mr. Josefino Gamboa, Senior Vice President of PNB on 12 May 1998 wrote [LISAM]
informing PNB’s lack of objection to [LISAM’s] proposal of restructuring all its obligations. x x x.

2. On September 22, 1998 Mr. Avengoza sent a letter to [LISAM], complete with attached copy of PNB
Board’s minutes of meeting, with the happy information that the Board of Directors of PNB has approved
the conversion of [LISAM’s] existing credit facilities at PNB, which includes the FSL on which the Trust
receipts are availments, to [an] Omnibus Line (OL) available by way of Revolving Credit Line (RCL),
Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills Purchased Line (DBPL) and with
a "Full waiver of penalty charges on RCL, FSL (which is the Floor Stock Line on which the trust receipts are
availments) and Time Loan. x x x.

3. The [FSL] and the availments thereon allegedly secured by Trust Receipts, therefore, was (sic) already
converted into[,] and included in[,] an Omnibus Line (OL) of ₱106 million on September 22, 1998, which
was actually a Revolving Credit Line (RCL)[.]5

PNB filed a reply-affidavit maintaining Soriano’s criminal liability under the TRs:

2. x x x. While it is true that said restructuring was approved, the same was never implemented because
[LISAM] failed to comply with the conditions of approval stated in B/R No. 6, such as the payment of the
interest and other charges and the submission of the title of the 283 sq. m. of vacant residential lot, x x x
Tandang Sora, Quezon City, as among the common conditions stated in paragraph V, of B/R 6. The
nonimplementation of the approved restructuring of the account of [LISAM] has the effect of reverting the

Page 104 of 189

account to its original status prior to the said approval. Consequently, her claim that her liability for
violation of the Trust Receipt Agreement is purely civil does not hold water.

In a Resolution, the City Prosecutor of Naga City found, thus:

WHEREFORE, the undersigned finds prima facie evidence that respondent LILIAN SORIANO is probably
guilty of violation of [the] Trust Receipt Law, in relation to Article 315 par. 1 (b) of the Revised Penal
Code, let therefore 52 counts of ESTAFA be filed against the respondent.8

Consequently, on 1 August 2001, the same office filed Informations against Soriano for fifty two (52)
counts of Estafa (violation of the Trust Receipts Law), docketed as Criminal Case Nos. 2001-0641 to 2001-
0693, which were raffled to the Regional Trial Court (RTC), Branch 21, Naga City.

Meanwhile, PNB filed a petition for review of the Naga City Prosecutor’s Resolution before the Secretary of
the DOJ.

In January 2002, the RTC ordered the dismissal of one of the criminal cases against Soriano, docketed as
Criminal Case No. 2001-0671. In March of the same year, Soriano was arraigned in, and pled not guilty
to, the rest of the criminal cases. Thereafter, on 16 October 2002, the RTC issued an Order resetting the
continuation of the pre-trial on 27 November 2002.

On the other litigation front, the DOJ, in a Resolution9 dated 25 June 2002, reversed and set aside the
earlier resolution of the Naga City Prosecutor:

WHEREFORE, the questioned resolution is REVERSED and SET ASIDE and the City Prosecutor of Naga City
is hereby directed to move, with leave of court, for the withdrawal of the informations for estafa against
Lilian S. Soriano in Criminal Case Nos. 2001-0641 to 0693 and to report the action taken thereon within
ten (10) days from receipt thereof.10

On various dates the RTC, through Pairing Judge Novelita Villegas Llaguno, issued the following Orders:

1. 27 November 2002

When this case was called for continuation of pre-trial, [Soriano’s] counsel appeared. However, Prosecutor
Edgar Imperial failed to appear.

Records show that a copy of the Resolution from the Department of Justice promulgated on October 28,
2002 was received by this Court, (sic) denying the Motion for Reconsideration of the Resolution No. 320,
series of 2002 reversing that of the City Prosecutor of Naga City and at the same time directing the latter
to move with leave of court for the withdrawal of the informations for Estafa against Lilian Soriano.

Accordingly, the prosecution is hereby given fifteen (15) days from receipt hereof within which to comply
with the directive of the Department of Justice.

2. 21 February 2003

Finding the Motion to Withdraw Informations filed by Pros. Edgar Imperial duly approved by the City
Prosecutor of Naga City to be meritorious the same is hereby granted. As prayed for, the Informations in
Crim. Cases Nos. RTC 2001-0641 to 2001-0693 entitled, People of the Philippines vs. Lilian S. Soriano,
consisting of fifty-two (52) cases except for Crim. Case No. RTC 2001-0671 which had been previously
dismissed, are hereby ordered WITHDRAWN.

3. 15 July 2003

The prosecution of the criminal cases herein filed being under the control of the City Prosecutor, the
withdrawal of the said cases by the Prosecution leaves this Court without authority to re-instate, revive or
refile the same.

Wherefore, the Motion for Reconsideration filed by the private complainant is hereby DENIED.

Page 105 of 189

With the denial of its Motion for Reconsideration of the 25 June 2002 Resolution of the Secretary of the
DOJ, PNB filed a petition for certiorari before the Court of Appeals alleging that:

A. THE SECRETARY OF THE DOJ COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO WANT OR
EXCESS OF JURISDICTION IN REVERSING AND SETTING ASIDE THE RESOLUTON OF THE CITY
PROSECUTOR OF NAGA CITY FINDING A PRIMA FACIE CASE AGAINST PRIVATE RESPONDENT [SORIANO],
FOR THE SAME HAS NO LEGAL BASES AND IS NOT IN ACCORD WITH THE JURISPRUDENTIAL RULINGS
ON THE MATTER.

As stated at the outset, the appellate court did not find grave abuse of discretion in the questioned
resolution of the DOJ, and dismissed PNB’s petition for certiorari.

Hence, this appeal by certiorari.

Before anything else, we note that respondent Soriano, despite several opportunities to do so, failed to file
a Memorandum as required in our Resolution dated 16 January 2008. Thus, on 8 July 2009, we resolved
to dispense with the filing of Soriano’s Memorandum.

In its Memorandum, PNB posits the following issues:

I. Whether or not the Court of Appeals gravely erred in concurring with the finding of the DOJ that the
approval by PNB of [LISAM’s] restructuring proposal of its account with PNB had changed the status of
[LISAM’s] obligations secured by Trust Receipts to one of an ordinary loan, non-payment of which does
not give rise to a criminal liability.

II. Whether or not the Court of Appeals gravely erred in concluding and concurring with the June 25, 2002
Resolution of the DOJ directing the withdrawal of the Information for Estafa against the accused in
Criminal Case Nos. 2001-0641 up to 0693 considering the well-established rule that once jurisdiction is
vested in court, it is retained up to the end of the litigation.

III. Whether or not the reinstatement of the 51 counts (Criminal Case No. 2001-0671 was already
dismissed) of criminal cases for estafa against Soriano would violate her constitutional right against double
jeopardy.

Winnowed from the foregoing, we find that the basic question is whether the Court of Appeals gravely
erred in affirming the DOJ’s ruling that the restructuring of LISAM’s loan secured by trust receipts
extinguished Soriano’s criminal liability therefor.

It has not escaped us that PNB’s second and third issues delve into the three (3) Orders of the RTC which
are not the subject of the petition before us. To clarify, the instant petition assails the Decision of the
appellate court in CA-G.R. SP No. 76243 which, essentially, affirmed the ruling of the DOJ in I.S. Nos.
2000-1123, 2000-1133 and 2000-1184. As previously narrated, the DOJ Resolution became the basis of
the RTC’s Orders granting the withdrawal of the Informations against Soriano. From these RTC Orders, the
remedy of PNB was to file a petition for certiorari before the Court of Appeals alleging grave abuse of
discretion in the issuance thereof.

However, for clarity and to obviate confusion, we shall first dispose of the peripheral issues raised by PNB:

1. Whether the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 against Soriano as directed by
the DOJ violates the well-established rule that once the trial court acquires jurisdiction over a case, it is
retained until termination of litigation.

2. Whether the reinstatement of Criminal Cases Nos. 2001-0641 to 2001-0693 violate the constitutional
provision against double jeopardy.

We rule in the negative.

Precisely, the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 was ordered by the RTC. In
particular, the Secretary of the DOJ directed City Prosecutor of Naga City to move, with leave of court, for

Page 106 of 189

the withdrawal of the Informations for estafa against Soriano. Significantly, the trial court gave the
prosecution fifteen (15) days within which to comply with the DOJ’s directive, and thereupon, readily
granted the motion. Indeed, the withdrawal of the criminal cases did not occur, nay, could not have
occurred, without the trial court’s imprimatur. As such, the DOJ’s directive for the withdrawal of the
criminal cases against Soriano did not divest nor oust the trial court of its jurisdiction.

Regrettably, a perusal of the RTC’s Orders reveals that the trial court relied solely on the Resolution of the
DOJ Secretary and his determination that the Informations for estafa against Soriano ought to be
withdrawn. The trial court abdicated its judicial power and refused to perform a positive duty enjoined by
law. On one occasion, we have declared that while the recommendation of the prosecutor or the ruling of
the Secretary of Justice is persuasive, it is not binding on courts.16 We shall return to this point shortly.

In the same vein, the reinstatement of the criminal cases against Soriano will not violate her constitutional
right against double jeopardy.

Section 7,17 Rule 117 of the Rules of Court provides for the requisites for double jeopardy to set in: (1) a
first jeopardy attached prior to the second; (2) the first jeopardy has been validly terminated; and (3) a
second jeopardy is for the same offense as in the first. A first jeopardy attaches only (a) after a valid
indictment; (b) before a competent court; (c) after arraignment; (d) when a valid plea has been entered;
and (e) when the accused has been acquitted or convicted, or the case dismissed or otherwise terminated
without his express consent.18

In the present case, the withdrawal of the criminal cases did not include a categorical dismissal thereof by
the RTC. Double jeopardy had not set in because Soriano was not acquitted nor was there a valid and
legal dismissal or termination of the fifty one (51) cases against her. It stands to reason therefore that the
fifth requisite which requires conviction or acquittal of the accused, or the dismissal of the case without
the approval of the accused, was not met.

On both issues, the recent case of Cerezo v. People,19 is enlightening. In Cerezo, the trial court simply
followed the prosecution’s lead on how to proceed with the libel case against the three accused. The
prosecution twice changed their mind on whether there was probable cause to indict the accused for libel.
On both occasions, the trial court granted the prosecutor’s motions. Ultimately, the DOJ Secretary directed
the prosecutor to re-file the Information against the accused which the trial court forthwith reinstated.
Ruling on the same issues raised by PNB in this case, we emphasized, thus:

x x x. In thus resolving a motion to dismiss a case or to withdraw an Information, the trial court should
not rely solely and merely on the findings of the public prosecutor or the Secretary of Justice. It is the
court’s bounden duty to assess independently the merits of the motion, and this assessment must be
embodied in a written order disposing of the motion. x x x.

In this case, it is obvious from the March 17, 2004 Order of the RTC, dismissing the criminal case, that the
RTC judge failed to make his own determination of whether or not there was a prima facie case to hold
respondents for trial. He failed to make an independent evaluation or assessment of the merits of the
case. The RTC judge blindly relied on the manifestation and recommendation of the prosecutor when he
should have been more circumspect and judicious in resolving the Motion to Dismiss and Withdraw
Information especially so when the prosecution appeared to be uncertain, undecided, and irresolute on
whether to indict respondents.

The same holds true with respect to the October 24, 2006 Order, which reinstated the case. The RTC
judge failed to make a separate evaluation and merely awaited the resolution of the DOJ Secretary. This is
evident from the general tenor of the Order and highlighted in the following portion thereof:

As discussed during the hearing of the Motion for Reconsideration, the Court will resolve it depending on
the outcome of the Petition for Review. Considering the findings of the Department of Justice reversing the
resolution of the City Prosecutor, the Court gives favorable action to the Motion for Reconsideration.

By relying solely on the manifestation of the public prosecutor and the resolution of the DOJ Secretary, the
trial court abdicated its judicial power and refused to perform a positive duty enjoined by law. The said

Page 107 of 189

Orders were thus stained with grave abuse of discretion and violated the complainant’s right to due
process. They were void, had no legal standing, and produced no effect whatsoever.

It is beyond cavil that double jeopardy did not set in. Double jeopardy exists when the following requisites
are present: (1) a first jeopardy attached prior to the second; (2) the first jeopardy has been validly
terminated; and (3) a second jeopardy is for the same offense as in the first. A first jeopardy attaches
only (a) after a valid indictment; (b) before a competent court; (c) after arraignment; (d) when a valid
plea has been entered; and (e) when the accused has been acquitted or convicted, or the case dismissed
or otherwise terminated without his express consent.

Since we have held that the March 17, 2004 Order granting the motion to dismiss was committed with
grave abuse of discretion, then respondents were not acquitted nor was there a valid and legal dismissal
or termination of the case. Ergo, the fifth requisite which requires the conviction and acquittal of the
accused, or the dismissal of the case without the approval of the accused, was not met. Thus, double
jeopardy has not set in.20 (Emphasis supplied)

We now come to the crux of the matter: whether the restructuring of LISAM’s loan account extinguished
Soriano’s criminal liability.

PNB admits that although it had approved LISAM’s restructuring proposal, the actual restructuring of
LISAM’s account consisting of several credit lines was never reduced into writing. PNB argues that the
stipulations therein such as the provisions on the schedule of payment of the principal obligation,
interests, and penalties, must be in writing to be valid and binding between the parties. PNB further
postulates that assuming the restructuring was reduced into writing, LISAM failed to comply with the
conditions precedent for its effectivity, specifically, the payment of interest and other charges, and the
submission of the titles to the real properties in Tandang Sora, Quezon City. On the whole, PNB is
adamant that the events concerning the restructuring of LISAM’s loan did not affect the TR security, thus,
Soriano’s criminal liability thereunder subsists.

On the other hand, the appellate court agreed with the ruling of the DOJ Secretary that the approval of
LISAM’s restructuring proposal, even if not reduced into writing, changed the status of LISAM’s loan from
being secured with Trust Receipts (TR’s) to one of an ordinary loan, non-payment of which does not give
rise to criminal liability. The Court of Appeals declared that there was no breach of trust constitutive of
estafa through misappropriation or conversion where the relationship between the parties is simply that of
creditor and debtor, not as entruster and entrustee.

We cannot subscribe to the appellate court’s reasoning. The DOJ Secretary’s and the Court of Appeals
holding that, the supposed restructuring novated the loan agreement between the parties is myopic.

To begin with, the purported restructuring of the loan agreement did not constitute novation.

Novation is one of the modes of extinguishment of obligations;21 it is a single juridical act with a diptych
function. The substitution or change of the obligation by a subsequent one extinguishes the first, resulting
in the creation of a new obligation in lieu of the old.22 It is not a complete obliteration of the obligor-
obligee relationship, but operates as a relative extinction of the original obligation.

Article 1292 of the Civil Code which provides:

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.

contemplates two kinds of novation: express or implied. The extinguishment of the old obligation by the
new one is a necessary element of novation, which may be effected either expressly or impliedly.

In order for novation to take place, the concurrence of the following requisites is indispensable:

(1) There must be a previous valid obligation;

Page 108 of 189

(2) There must be an agreement of the parties concerned to a new contract;

(3) There must be the extinguishment of the old contract; and

(4) There must be the validity of the new contract.

Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express
agreement of the parties, or by their acts that are too clear and unmistakable. The contracting parties
must incontrovertibly disclose that their object in executing the new contract is to extinguish the old one.
Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts.24 Nonetheless, both kinds of novation must still
be clearly proven.25

In this case, without a written contract stating in unequivocal terms that the parties were novating the
original loan agreement, thus undoubtedly eliminating an express novation, we look to whether there is an
incompatibility between the Floor Stock Line secured by TR’s and the subsequent restructured Omnibus
Line which was supposedly approved by PNB.

Soriano is confident with her assertion that PNB’s approval of her proposal to restructure LISAM’s loan
novated the loan agreement secured by TR’s. Soriano relies on the following:

1. x x x. All the alleged trust receipt agreements were availments made by [LISAM] on the PNB credit
facility known as "Floor Stock Line," (FSL) which is just one of the several credit facilities granted to
[LISAM] by PNB. When my husband Leandro A. Soriano, Jr. was still alive, [LISAM] submitted proposals to
PNB for the restructuring of all of [LISAM’s] credit facilities. After exchanges of several letters and
telephone calls, Mr. Josefino Gamboa, Senior Vice President of PNB on 12 May 1998 wrote [LISAM]
informing PNB’s lack of objection to [LISAM’s] proposal of restructuring all its obligations. x x x.

2. On September 22, 1998, Mr. Avengoza sent a letter to [LISAM], complete with attached copy of PNB’s
Board’s minutes of meeting, with the happy information that the Board of Directors of PNB has approved
the conversion of [LISAM’s] existing credit facilities at PNB, which includes the FSL on which the trust
receipts are availments, to [an] Omnibus Line (OL) available by way of Revolving Credit Line (RCL),
Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills Purchased Line (DBPL) and with
a "Full waiver of penalty charges on RCL, FSL (which is the Floor Stock Line on which the trust receipts are
availments) and Time Loan. x x x.26

Soriano’s reliance thereon is misplaced. The approval of LISAM’s restructuring proposal is not the bone of
contention in this case. The pith of the issue lies in whether, assuming a restructuring was effected, it
extinguished the criminal liability on the loan obligation secured by trust receipts, by extinguishing the
entruster-entrustee relationship and substituting it with that of an ordinary creditor-debtor relationship.
Stated differently, we examine whether the Floor Stock Line is incompatible with the purported
restructured Omnibus Line.

The test of incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such as its object, cause
or principal conditions thereof; otherwise, the change would be merely modificatory in nature and
insufficient to extinguish the original obligation.

We have scoured the records and found no incompatibility between the Floor Stock Line and the purported
restructured Omnibus Line. While the restructuring was approved in principle, the effectivity thereof was
subject to conditions precedent such as the payment of interest and other charges, and the submission of
the titles to the real properties in Tandang Sora, Quezon City. These conditions precedent imposed on the
restructured Omnibus Line were never refuted by Soriano who, oddly enough, failed to file a
Memorandum. To our mind, Soriano’s bare assertion that the restructuring was approved by PNB cannot
equate to a finding of an implied novation which extinguished Soriano’s obligation as entrustee under the
TR’s.

Page 109 of 189

Moreover, as asserted by Soriano in her counter-affidavit, the waiver pertains to penalty charges on the
Floor Stock Line. There is no showing that the waiver extinguished Soriano’s obligation to "sell the
[merchandise] for cash for [LISAM’s] account and to deliver the proceeds thereof to PNB to be applied
against its acceptance on [LISAM’s] account." Soriano further agreed to hold the "vehicles and proceeds of
the sale thereof in Trust for the payment of said acceptance and of any of its other indebtedness to PNB."
Well-settled is the rule 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.28 Besides, novation does not extinguish criminal liability.29 It stands to reason therefore, that
Soriano’s criminal liability under the TR’s subsists considering that the civil obligations under the Floor
Stock Line secured by TR’s were not extinguished by the purported restructured Omnibus Line.

In Transpacific Battery Corporation v. Security Bank and Trust Company,30 we held that the restructuring
of a loan agreement secured by a TR does not per se novate or extinguish the criminal liability incurred
thereunder:

x x x Neither is there an implied novation since the restructuring agreement is not incompatible with the
trust receipt transactions.

Indeed, the restructuring agreement recognizes the obligation due under the trust receipts when it
required "payment of all interest and other charges prior to restructuring." With respect to Michael, there
was even a proviso under the agreement that the amount due is subject to "the joint and solidary liability
of Spouses Miguel and Mary Say and Michael Go Say." While the names of Melchor and Josephine do not
appear on the restructuring agreement, it cannot be presumed that they have been relieved from the
obligation. The old obligation continues to subsist subject to the modifications agreed upon by the parties.

The circumstance that motivated the parties to enter into a restructuring agreement was the failure of
petitioners to account for the goods received in trust and/or deliver the proceeds thereof. To remedy the
situation, the parties executed an agreement to restructure Transpacific's obligations.

The Bank only extended the repayment term of the trust receipts from 90 days to one year with monthly
installment at 5% per annum over prime rate or 30% per annum whichever is higher. Furthermore, the
interest rates were flexible in that they are subject to review every amortization due. Whether the terms
appeared to be more onerous or not is immaterial.1âwphi1 Courts are not authorized to extricate parties
from the necessary consequences of their acts. The parties will not be relieved from their obligations as
there was absolutely no intention by the parties to supersede or abrogate the trust receipt transactions.
The intention of the new agreement was precisely to revive the old obligation after the original period
expired and the loan remained unpaid. Well-settled is the rule 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.

Based on all the foregoing, we find grave error in the Court of Appeals dismissal of PNB’s petition for
certiorari. Certainly, while the determination of probable cause to indict a respondent for a crime lies with
the prosecutor, the discretion must not be exercised in a whimsical or despotic manner tantamount to
grave abuse of discretion.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 76243
finding no grave abuse of discretion on the part of the Secretary of Justice is REVERSED and SET ASIDE.

The Resolution of the Secretary of Justice dated 25 June 2002, directing the City Prosecutor of Naga City
to move for the withdrawal of the Informations for estafa in relation to the Trust Receipts Law against
respondent Lilian S. Soriano, and his 29 October 2002 Resolution, denying petitioner's Motion for
Reconsideration, are ANNULLED and SET ASIDE for having been issued with grave abuse of discretion;
and the Resolution or the Naga City Prosecutor's Office dated 19 March 2001, finding probable cause
against herein respondent, is REINSTATED. Consequently, the Orders of the Regional Trial Court, Branch
21 of Naga City in Criminal Cases Nos. 2001-0641 to 2001-0693, except Criminal Case No. 2001-0671,
dated 27 November 2002, 21 February 2003 and 15 July 2003 are SET ASIDE and its Order of 16 October

Page 110 of 189

2002 resetting the continuation or the pre-trial is REINSTATED. The RTC is further ordered to conduct the
pretrial with dispatch.

SO ORDERED.
x------------------------------------------------------------------------------------------------------------------x
G.R. No. 174665 September 18, 2013
PHILIPPINE RECLAMATION AUTHORITY (Formerly known as the PUBLIC ESTATES
AUTHORITY), Petitioner, vs.
ROMAGO, INCORPORATED, Respondent.
x-----------------x
G.R. No. 175221
ROMAGO, INCORPORATED, Petitioner, vs.
PHILIPPINE RECLAMATION AUTHORITY (Formerly known as the PUBLIC ESTATES
AUTHORITY), Respondent.
DECISION
ABAD, J.:

These cases pertain to the defense of novation by virtue of the debtor’s assignment to a third party of its
contractual liability to the creditor.

The Facts and the Case

In order to convert former military reservations and installations to productive use and raise funds out of
the sale of portions of the country’s military camps,1 in 1992 Congress enacted Republic Act 7227,2
creating the Bases Conversion and Development Authority (BCDA). Pursuant to this law, the President
issued Executive Order 40,3 Series of 1992, setting aside portions of Fort Bonifacio in Taguig, Metro
Manila, for the Heritage Park Project, aimed at converting a 105-hectare land into a world class memorial
park for the purpose of generating funds for the BCDA.4

On August 9, 1993 the BCDA entered into a Memorandum of Agreement5 (MOA) with the Philippine
Reclamation Authority (PRA),formerly the Public Estates Authority, designating it as the Project Manager.
On September 9, 1994 the BCDA, PRA, and the Philippine National Bank (PNB) executed a Pool Formation
Trust Agreement (PFTA)6 under which BCDA, as project owner, was to issue Heritage Park Investment
Certificates that would evidence the holders’ right to the perpetual use and care of specific interment
plots. The PFTA designated PRA as Project Manager, tasked with the physical development of the park.
The PNB was to act as trustee for the Heritage Park securitization.7

After public bidding, the PRA awarded the outdoor electrical and lighting works for the park to respondent
Romago, Inc. (Romago) with which it entered into a Construction Agreement on March 18, 1996 for the
contract price of ₱176,326,794.10.8 On receipt of the PRA’s notice to proceed,9 Romago immediately
began construction works.10 Meanwhile, the parties to the PFTA organized the Heritage Park Management
Corporation (HPMC) to take over the management of the project.11 On February 24, 2000 the Chairman
of HPMC Board of Trustees, Mr. Rogelio L. Singson, sent a notice of termination of management to then
PRA General Manager Carlos P. Doble with a demand for the turnover of the park to HPMC.12 The letter
reads:

Pursuant to Article 11 of the Pool Formation Trust Agreement(PFTA), the certificate holders of the Heritage
Park Management Corporation (HPMC) duly elected its Board of Trustees at the 03 January2000 meeting
held at the BCDA Corporate Center. Attached is a copy of the Secretary’s Certificate attesting to said
election of the HPMC Board of Trustees.

Section 11.07 of the PFTA provides that upon the election of the Board of Trustees, the PNB shall turnover
to the Board all its functions and responsibilities, and all documents in its custody, including all Heritage
Park Accounts, except the General Fund, which will go to BCDA. Upon such turnover and upon the
complete and faithful performance by PNB and [PRA] of their respective obligations under this Agreement,
the respective obligations of [PRA] and PNB under this Agreement shall be deemed terminated.

Page 111 of 189

[PRA] shall turnover to the Board of Trustees all the documents and equipment it has in its possession
relating to the Project and the Park, including the computer hardware and software pertaining to the
geographical information system of the Park."

Pursuant to the foregoing provision, we hereby formally advise you of the termination of [PRA’s]
obligations, duties and responsibilities as Project Manager under the PFTA, effective upon receipt of this
letter. We also formally request for [PRA] to turn over, within fifteen (15) days from receipt of this letter,
the documents and equipment relating to the Heritage Park Project, including the computer hardware and
software in [PRA’s] possession pertaining to the geographical information system of the Park.13

The PRA lost no time in informing Romago of the consequent termination of its services. Thus, it wrote
Romago a letter14 on March 13,2000:

As a consequence of the assumption of functions, duties and responsibilities by the Heritage Park
Management Corporation, as provided for under the provisions of the Pool Formation Trust Agreement, we
are constrained to assign the Electrical Works contract entered with you on March 18, 1996 including all
supplemental agreements relative thereto, effective March 18, 2000 in favor of the Heritage Park
Management Corporation. The formal turnover on March 17, 2000 by[PRA] to the Heritage Park
Management Corporation of all its obligations, duties and responsibilities, and all documents relating to
the Heritage Park Project, was made pursuant to the attached letter of the Chairman of HPMC Board of
Trustees, Mr. Rogelio L. Singson to the [PRA], received by us on March 02, 2000.

By virtue of this assignment, all the contractual functions, responsibilities and liabilities, if any, as well as
any cause of action for or against [PRA] shall hereafter accrue to and devolve upon the assignee hereof.

Please be guided accordingly.

Because the HPMC refused to recognize the PRA’s contract with it, on March 17, 2004 Romago filed with
the Construction Industry Arbitration Commission (CIAC) a complaint,16 docketed as CIAC Case 18-
2004,seeking to collect its claims totaling ₱24,467,621.64, plus interest from the PRA, HPMC, and
Rosehills Memorial Management (Phils.), Inc. (RMMI). Romago claimed that it won the bidding for the
construction of the electrical and lighting facilities at the Heritage Park for ₱181,779,800.0017 but PRA
deducted 3% from the bid amount, reducing the contract price to₱176,326,794.10.18

Because of problems encountered with illegal settlers, only around 60of the 105-hectare park was
delivered to Romago for lighting work, reducing the contract price to ₱101,083,636.16.19 But this amount
was adjusted to ₱109,330,032.81 due to PRA variation orders.20 Although Romago completed 96.15% of
the works, it claimed that the PRA paid it only₱82,929,577.22 instead of the ₱105,120,826.50 due it.21
Romago also claimed that it should be reimbursed the ₱9,336,054.15 retention money that it posted since
its services had already been terminated and since it had substantially completed the Heritage Park
Project.22

Romago also sought payment of the additional costs and expenses that it incurred by reason of PRA’s
delays in turning over the project area, in delivering the owner-supplied equipment, and in solving the
security problems at the work site. These included price escalation of materials and supplies, at
₱857,799.10; and extended overhead costs, at ₱10,051,870.61.23 And, for mobilizations costs that it
spent preparing for works on the entire105-hectare project area, Romago sought additional payment of
₱7,524,315.79 plus interest of ₱517,923.74 from April 12, 1999 to May 31,1999 or a total of
₱8,042,239.53. It also claimed proportionate refund of ₱2,327,107.97 out of the 3% discount applied to
its original bid 24 and ₱420,944.02 in damages for the unceremonious termination of its services.25

Romago admitted, however, owing the PRA ₱15,475,835.42 in unrecouped prepaid materials and
₱12,286,795.12 in unrecouped down payment.26

In its answer, the PRA denied liability, claiming that it entered into the construction agreement with
Romago after its approval by the Heritage Park Executive Committee, the policy-making and governing
body of the Heritage Park Project. The PRA merely processed and recommended payment of all the works
done. The money came from the project’s Construction and Development Fund that PRA did not control.

Page 112 of 189

PNB acted as trustee of the fund under the PFTA. Since these funds had all been turned over to the HPMC
when the latter came into being, Romago should not address its claims to PRA.27

Rather than answer the complaint, the HPMC and RMMI moved to dismiss it, claiming that CIAC had no
jurisdiction over them since they never agreed to arbitration.28 Additionally, the HPMC said that the PRA’s
turnover of the Heritage Park project to it did not amount to assignment of the PRA’s liabilities under the
construction agreement. Further, its termination of the PRA’s authority over the project carried with it the
termination of any Construction Agreement that the PRA entered into.

For its part, RMMI averred that it was merely the undertaker at the Heritage Park, tasked with providing
services for embalming, burial, cremation, and other activities for the care of the dead.29

On July 22, 2004 the CIAC issued an order dropping RMMI as respondent but denying the HPMC’s motion
to dismiss the case against it.30 The HPMC elevated the CIAC order to the Court of Appeals (CA) by
special civil action of certiorari and prohibition in CA-G.R. SP 86342.

Meantime, after due proceedings, on October 22, 2004 the CIAC rendered a decision,31 holding the PRA
and the HPMC jointly and severally liable to Romago for the following amounts:
The unpaid balance of the 96.15% ₱22,191,249.3
accomplishment --------------------------------------------------------------- 8

Interest from 15 May 2002 to 31

January 2004 at 6% per annum -------------------------------------------- 2,276,372.31

Plus:

1.1.1 – Retention Charges ---------------- ₱9,336,054.15

1.1.2 – Price Escalation ------------------- 775,793.55

1.1.3 – Damages for Closure of Area -- 8,042,239.53

1.1.4 – Reimbursement for Pro-rata

discount ---------------------------- (not entitled)

1.1.5 – Damages for Stoppage of Works 420,944.02

Sub-Total ------- ₱18,575,031.25

Less:

Unrecouped prepaid materials and

unrecouped downpayment -------------------------------------------------- 27,762,642.54

₱15,280,012.3
Actual Damages Due -------------------------- 5

Plus:

Additional 6% interest from February 1, 2004

to August 31, 2004 on the ₱15,280,012.35 ----------------------------- 534,800.43

Costs of Arbitration:

Filing Fee ------------------- ₱26,834.39

Administrative Fee ------- 28,164.39

Arbitrator’s Fees ---------- 316,296.95

ADF ------------------------- 25,323.99

Total Cost of Arbitration ----------------------- ₱396,608.73

Page 113 of 189

 Total Award -------------------------------------- ₱16,211,421.51 32

Not satisfied with the CIAC decision, the PRA filed a petition for review of the same with the CA in CA-G.R.
SP 88059.

Meantime on February 18, 2005 the CA rendered a Decision in CA-G.R. SP 86342, dismissing Romago’s
complaint before the CIAC against the HPMC on the ground that the latter did not have an arbitration
agreement with Romago.33

On December 20, 2005 the CA rendered a Decision34 in CA-G.R. S₱88059, the main case, finding that the
unpaid accomplishment of Romago should be reduced from ₱22,191,249.33 to ₱18,641,208.89, and that
interests on the damages awarded to Romago arising from the reduction in project area and on its unpaid
accomplishment from May 15, 2002 to January 31, 2004 should be deleted, therefore entitling it to actual
damages in the amount of ₱8,935,673.8635 plus interest from February 1, 2004 to August 31, 2004 and
the costs of arbitration.

The CA rejected the PRA’s argument that it can no longer be held liable to Romago after turning over and
assigning the project, including all its duties and obligations relating to it, to the HPMC. Romago was not a
party to the PFTA and it did not give consent to the PRA’s supposed assignment of its obligations to the
HPMC.

The PRA and Romago separately moved for reconsideration of the decision but the CA denied both
motions in its August 24, 2006Resolution.36 Undeterred, both parties filed separate petitions for review
before this Court in G.R. 174665 for the PRA and in G.R. 175221 for Romago.

The Issues Presented

These consolidated cases present the following issues:

1. Whether or not the CA erred in holding the PRA still liable to Romago under the Construction Agreement
despite the subsequent turnover of the Heritage Park Project to the HPMC; and

2. Whether or not the CA erred in reducing the CIAC award for actual damages to Romago to just
₱8,935,673.86.

The Rulings of the Court

The PRA claims that its liability under its contract with Romago had been extinguished by novation when it
assigned all its obligations to the HPMC pursuant to the provisions of the PFTA. The PRA insists that the CA
erroneously applied to the case the 2001 ruling of the Court in Public Estates Authority v. Uy37 that also
involved the Heritage Park Project. Uy dealt only with the PRA and the HPMC came into the picture only
after the case has been filed. Here, while Romago first dealt with the PRA, it eventually dealt with the
HPMC before the construction company can finish the contracted works, evidencing novation of parties.

In novation, a subsequent obligation extinguishes a previous one through substitution either by changing
the object or principal conditions, by substituting another in place of the debtor, or by subrogating a third
person into the rights of the creditor.38 Novation requires (a) the existence of a previous valid obligation;
(b) the agreement of all parties to the new contract; (c) the extinguishment of the old contract; and (d)
the validity of the new one.39

There cannot be novation in this case since the proposed substituted parties did not agree to the PRA’s
supposed assignment of its obligations under the contract for the electrical and light works at Heritage
Park to the HPMC. The latter definitely and clearly rejected the PRA’s assignment of its liability under that
contract to the HPMC. Romago tried to follow up its claims with the HPMC, not because of any new
contract it entered into with the latter, but simply because the PRA told it that the HPMC would henceforth
assume the PRA’s liability under its contract with Romago.1âwphi1

Besides, Section 11.07 of the PFTA makes it clear that the termination of the PRA’s obligations is
conditioned upon the turnover of documents, equipment, computer hardware and software on the

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geographical information system of the Park; and the completion and faithful performance of its respective
duties and responsibilities under the PFTA. More importantly, Section 11.07 did not say that the HPMC
shall, thereafter, assume the PRA’s obligations. On the contrary, Section 7.01 of the PFTA recognizes that
contracts that the PRA entered into in its own name and makes it liable for the same. Thus:

Section 7.01. Liability of BCDA and [PRA]. BCDA and [PRA]shall be liable in accordance herewith only to
the extent of the obligations specifically undertaken by BCDA and [PRA] herein and any other documents
or agreements relating to the Project, and in which they are parties.40

Romago claims that the CA award should be increased to₱13,598,139.24 based on the detailed account of
expenses and cash payments as of December 31, 2005 that it submitted. But the Court cannot agree.
Engineer J. R. Milan testified that Romago received ₱86,479,617.61 out of ₱105,120,826.50 worth of work
that it accomplished, thereby leaving a deficiency of only ₱18,641,208.89. Thus:

ATTY. S.B. GARCIA:

Mr. Witness, from the time you became the Project Manager of Heritage Park Project up to the time it
turned over its responsibilities to HPMC, can you recall how much [PRA] already paid to Romago? You can
refer to any documents we have now with you for recollection.

ENGR. J.R. MILLAN:

Based on progress Report No. 50, which was submitted by the Managing Consultant of Robert Espiritu, the
accomplishment as of February 29, 2000, the amount disbursed as of Billing no. 14A is₱86,479,617.61.

ATTY. S.B. GARCIA:

What document again are you referring to, Mr. Witness?

ENGR. J.R. MILLAN:This is a Progress Report dated March 8, 2000 addressed to the [Philippine
Reclamation Authority], Progress Report No. 50 submitted by Mr. Roberto Espiritu.

ATTY. S.B. GARCIA: And the one where the ₱86,479,617.61, the document which reflects that amount,
that is what the document?

ENGR. J.R. MILLAN:

This is the attachment to the accomplishment of Romago kasi the Managing Consultant who made the
report, they were the ones computing the accomplishments of the contractors. All the contractors in the
project, bale ito yong report nila . For Romago, ito yong report niya as of February29, 2000.

ATTY. S.B. GARCIA:

Your Honor, please, may I request that this accomplishment report as February 29, 2000 for outdoor
electrical and lighting works be marked as our exhibit "R-2-10."41

Had the above testimony been untrue, Romago should have refuted the same considering that it had
every opportunity to do so. On the contrary, it even adopted the same document as its own exhibit.42 In
effect, Romago conceded the correctness of the PRA’s valuation of the balance due it.

In keeping with this Court’s ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,43 the Court deems
it proper to impose legal interest of 6% per annum on the amount finally adjudged, reckoned from
October 22,2004, the date the CIAC rendered judgment until the same is wholly satisfied.44

WHEREFORE , the Court AFFIRMS the Decision dated December 20, 2005 and Resolution dated August 24,
2006 of the Court of Appeals in CA-G.R. SP 88059 with MODIFICATION , directing the Philippine
Reclamation Authority to pay Romago in addition to the ₱8,935,673.86award of actual damages, legal
interest of 6% per annum from October 22,2004 until the judgment against it is wholly paid; and the
costs of arbitration in the amount of ₱396,608.73.

SO ORDERED.
x-------------------------------------------------------------------------------------------------------------------x

Page 115 of 189

G.R. No. 159213 July 3, 2013
VECTOR SHIPPING CORPORATION and FRANCISCO SORIANO, Petitioners, vs.
AMERICAN HOME ASSURANCE COMPANY and SULPICIO LINES, INC., Respondents.
DECISION
BERSAMIN, J.:

Subrogation under Article 2207 of the Civil Code gives rise to a cause of action created by law. For
purposes of the law on the prescription of actions, the period of limitation is ten years.

The Case

Vector Shipping Corporation (Vector) and Francisco Soriano appeal the decision promulgated on July 22,
2003,1 whereby the Court of Appeals (CA) held them jointly and severally liable to pay ₱7 ,455,421.08 to
American Home Assurance Company (respondent) as and by way of actual damages on the basis of
respondent being the subrogee of its insured Caltex Philippines, Inc. (Caltex).

Antecedents

Vector was the operator of the motor tanker M/T Vector, while Soriano was the registered owner of the
M/T Vector. Respondent is a domestic insurance corporation.2

On September 30, 1987, Caltex entered into a contract of Affreightment3 with Vector for the transport of
Caltex’s petroleum cargo through the M/T Vector. Caltex insured the petroleum cargo with respondent for
₱7,455,421.08 under Marine Open Policy No. 34-5093-6.4 In the evening of December 20, 1987, the M/T
Vector and the M/V Doña Paz, the latter a vessel owned and operated by Sulpicio Lines, Inc., collided in
the open sea near Dumali Point in Tablas Strait, located between the Provinces of Marinduque and Oriental
Mindoro. The collision led to the sinking of both vessels. The entire petroleum cargo of Caltex on board the
M/T Vector perished.5 On July 12, 1988, respondent indemnified Caltex for the loss of the petroleum
cargo in the full amount of ₱7,455,421.08.6

On March 5, 1992, respondent filed a complaint against Vector, Soriano, and Sulpicio Lines, Inc. to
recover the full amount of ₱7,455,421.08 it paid to Caltex (Civil Case No. 92-620).7 The case was raffled
to Branch 145 of the Regional Trial Court (RTC) in Makati City.

On December 10, 1997, the RTC issued a resolution dismissing Civil Case No. 92-620 on the following
grounds:

This action is upon a quasi-delict and as such must be commenced within four 4 years from the day they
may be brought. [Art. 1145 in relation to Art. 1150, Civil Code] "From the day [the action] may be
brought" means from the day the quasi-delict occurred. [Capuno v. Pepsi Cola, 13 SCRA 663]

The tort complained of in this case occurred on 20 December 1987. The action arising therefrom would
under the law prescribe, unless interrupted, on 20 December 1991.

When the case was filed against defendants Vector Shipping and Francisco Soriano on 5 March 1992, the
action not having been interrupted, had already prescribed.

Under the same situation, the cross-claim of Sulpicio Lines against Vector Shipping and Francisco Soriano
filed on 25 June 1992 had likewise prescribed.

The letter of demand upon defendant Sulpicio Lines allegedly on 6 November 1991 did not interrupt the
tolling of the prescriptive period since there is no evidence that it was actually received by the addressee.
Under such circumstances, the action against Sulpicio Lines had likewise prescribed.

Even assuming that such written extra-judicial demand was received and the prescriptive period
interrupted in accordance with Art. 1155, Civil Code, it was only for the 10-day period within which
Sulpicio Lines was required to settle its obligation. After that period lapsed, the prescriptive period started
again. A new 4-year period to file action was not created by the extra-judicial demand; it merely

Page 116 of 189

suspended and extended the period for 10 days, which in this case meant that the action should be
commenced by 30 December 1991, rather than 20 December 1991.

Thus, when the complaint against Sulpicio Lines was filed on 5 March 1992, the action had prescribed.

PREMISES CONSIDERED, the complaint of American Home Assurance Company and the cross-claim of
Sulpicio Lines against Vector Shipping Corporation and Francisco Soriano are DISMISSED.

Without costs.

SO ORDERED.

Respondent appealed to the CA, which promulgated its assailed decision on July 22, 2003 reversing the
RTC.9 Although thereby absolving Sulpicio Lines, Inc. of any liability to respondent, the CA held Vector
and Soriano jointly and severally liable to respondent for the reimbursement of the amount of
₱7,455,421.08 paid to Caltex, explaining:

The resolution of this case is primarily anchored on the determination of what kind of relationship existed
between Caltex and M/V Dona Paz and between Caltex and M/T Vector for purposes of applying the laws
on prescription. The Civil Code expressly provides for the number of years before the extinctive
prescription sets in depending on the relationship that governs the parties.

After a careful perusal of the factual milieu and the evidence adduced by the parties, We are constrained
to rule that the relationship that existed between Caltex and M/V Dona Paz is that of a quasi-delict while
that between Caltex and M/T Vector is culpa contractual based on a Contract of Affreightment or a charter
party.

On the other hand, the claim of appellant against M/T Vector is anchored on a breach of contract of
affreightment. The appellant averred that M/T Vector committed such act for having misrepresented to the
appellant that said vessel is seaworthy when in fact it is not. The contract was executed between Caltex
and M/T Vector on September 30, 1987 for the latter to transport thousands of barrels of different
petroleum products. Under Article 1144 of the New Civil Code, actions based on written contract must be
brought within 10 years from the time the right of action accrued. A passenger of a ship, or his heirs, can
bring an action based on culpa contractual within a period of 10 years because the ticket issued for the
transportation is by itself a complete written contract (Peralta de Guerrero vs. Madrigal Shipping Co., L
12951, November 17, 1959).

Viewed with reference to the statute of limitations, an action against a carrier, whether of goods or of
passengers, for injury resulting from a breach of contract for safe carriage is one on contract, and not in
tort, and is therefore, in the absence of a specific statute relating to such actions governed by the statute
fixing the period within which actions for breach of contract must be brought (53 C.J.S. 1002 citing
Southern Pac. R. Co. of Mexico vs. Gonzales 61 P. 2d 377, 48 Ariz. 260, 106 A.L.R. 1012).

Considering that We have already concluded that the prescriptive periods for filing action against M/V
Doña Paz based on quasi delict and M/T Vector based on breach of contract have not yet expired, are We
in a position to decide the appeal on its merit.

We say yes.

Article 2207 of the Civil Code on subrogation is explicit that if the plaintiff’s property has been insured,
and he has received indemnity from the insurance company for the injury or loss arising out of the wrong
or breach of contract complained of, the insurance company should be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract. Undoubtedly, the herein
appellant has the rights of a subrogee to recover from M/T Vector what it has paid by way of indemnity to
Caltex.

WHEREFORE, foregoing premises considered, the decision dated December 10, 1997 of the RTC of Makati
City, Branch 145 is hereby REVERSED. Accordingly, the defendant-appellees Vector Shipping Corporation

Page 117 of 189

and Francisco Soriano are held jointly and severally liable to the plaintiff-appellant American Home
Assurance Company for the payment of ₱7,455,421.08 as and by way of actual damages.

SO ORDERED.

Respondent sought the partial reconsideration of the decision of the CA, contending that Sulpicio Lines,
Inc. should also be held jointly liable with Vector and Soriano for the actual damages awarded.11 On their
part, however, Vector and Soriano immediately appealed to the Court on September 12, 2003.12 Thus, on
October 1, 2003, the CA held in abeyance its action on respondent’s partial motion for reconsideration
pursuant to its internal rules until the Court has resolved this appeal.13

Issues

The main issue is whether this action of respondent was already barred by prescription for bringing it only
on March 5, 1992. A related issue concerns the proper determination of the nature of the cause of action
as arising either from a quasi-delict or a breach of contract.

The Court will not pass upon whether or not Sulpicio Lines, Inc. should also be held jointly liable with
Vector and Soriano for the actual damages claimed.

Ruling

The petition lacks merit.

Vector and Soriano posit that the RTC correctly dismissed respondent’s complaint on the ground of
prescription. They insist that this action was premised on a quasi-delict or upon an injury to the rights of
the plaintiff, which, pursuant to Article 1146 of the Civil Code, must be instituted within four years from
the time the cause of action accrued; that because respondent’s cause of action accrued on December 20,
1987, the date of the collision, respondent had only four years, or until December 20, 1991, within which
to bring its action, but its complaint was filed only on March 5, 1992, thereby rendering its action already
barred for being commenced beyond the four-year prescriptive period;14 and that there was no showing
that respondent had made extrajudicial written demands upon them for the reimbursement of the
insurance proceeds as to interrupt the running of the prescriptive period.15

We concur with the CA’s ruling that respondent’s action did not yet prescribe. The legal provision
governing this case was not Article 1146 of the Civil Code,16 but Article 1144 of the Civil Code, which
states:

Article 1144. The following actions must be brought within ten years from the time the cause of action
accrues:

(1)Upon a written contract;

(2)Upon an obligation created by law;
(3)Upon a judgment.

We need to clarify, however, that we cannot adopt the CA’s characterization of the cause of action as
based on the contract of affreightment between Caltex and Vector, with the breach of contract being the
failure of Vector to make the M/T Vector seaworthy, as to make this action come under Article 1144 (1),
supra. Instead, we find and hold that that the present action was not upon a written contract, but upon an
obligation created by law. Hence, it came under Article 1144 (2) of the Civil Code. This is because the
subrogation of respondent to the rights of Caltex as the insured was by virtue of the express provision of
law embodied in Article 2207 of the Civil Code, to wit:

Article 2207. If the plaintiff’s property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the
loss or injury. (Emphasis supplied)

Page 118 of 189

The juridical situation arising under Article 2207 of the Civil Code is well explained in Pan Malayan
Insurance Corporation v. Court of Appeals,17 as follows:

Article 2207 of the Civil Code is founded on the well-settled principle of subrogation.1âwphi1 If the insured
property is destroyed or damaged through the fault or negligence of a party other than the assured, then
the insurer, upon payment to the assured, will be subrogated to the rights of the assured to recover from
the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the insurer to the
assured operates as an equitable assignment to the former of all remedies which the latter may have
against the third party whose negligence or wrongful act caused the loss.1âwphi1 The right of subrogation
is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of
claim. It accrues simply upon payment of the insurance claim by the insurer [Compania Maritima v.
Insurance Company of North America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213; Fireman’s Fund
Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323].18

Verily, the contract of affreightment that Caltex and Vector entered into did not give rise to the legal
obligation of Vector and Soriano to pay the demand for reimbursement by respondent because it
concerned only the agreement for the transport of Caltex’s petroleum cargo. As the Court has aptly put it
in Pan Malayan Insurance Corporation v. Court of Appeals, supra, respondent’s right of subrogation
pursuant to Article 2207, supra, was "not dependent upon, nor did it grow out of, any privity of contract or
upon written assignment of claim but accrued simply upon payment of the insurance claim by the insurer."

Considering that the cause of action accrued as of the time respondent actually indemnified Caltex in the
amount of ₱7,455,421.08 on July 12, 1988,19 the action was not yet barred by the time of the filing of its
complaint on March 5, 1992,20 which was well within the 10-year period prescribed by Article 1144 of the
Civil Code.

The insistence by Vector and Soriano that the running of the prescriptive period was not interrupted
because of the failure of respondent to serve any extrajudicial demand was rendered inconsequential by
our foregoing finding that respondent’s cause of action was not based on a quasi-delict that prescribed in
four years from the date of the collision on December 20, 1987, as the RTC misappreciated, but on an
obligation created by law, for which the law fixed a longer prescriptive period of ten years from the accrual
of the action.

Still, Vector and Soriano assert that respondent had no right of subrogation to begin with, because the
complaint did not allege that respondent had actually paid Caltex for the loss of the cargo. They further
assert that the subrogation receipt submitted by respondent was inadmissible for not being properly
identified by Ricardo C. Ongpauco, respondent’s witness, who, although supposed to identify the
subrogation receipt based on his affidavit, was not called to testify in court; and that respondent
presented only one witness in the person of Teresita Espiritu, who identified Marine Open Policy No. 34-
5093-6 issued by respondent to Caltex.21

We disagree with petitioners’ assertions. It is undeniable that respondent preponderantly established its
right of subrogation. Its Exhibit C was Marine Open Policy No. 34-5093-6 that it had issued to Caltex to
insure the petroleum cargo against marine peril.22 Its Exhibit D was the formal written claim of Caltex for
the payment of the insurance coverage of ₱7,455,421.08 coursed through respondent’s adjuster.23 Its
Exhibits E to H were marine documents relating to the perished cargo on board the M/V Vector that were
processed for the purpose of verifying the insurance claim of Caltex.24 Its Exhibit I was the subrogation
receipt dated July 12, 1988 showing that respondent paid Caltex ₱7,455,421.00 as the full settlement of
Caltex’s claim under Marine Open Policy No. 34-5093-6.25 All these exhibits were unquestionably duly
presented, marked, and admitted during the trial.26 Specifically, Exhibit C was admitted as an authentic
copy of Marine Open Policy No. 34-5093-6, while Exhibits D, E, F, G, H and I, inclusive, were admitted as
parts of the testimony of respondent’s witness Efren Villanueva, the manager for the adjustment service
of the Manila Adjusters and Surveyors Company.27

Consistent with the pertinent law and jurisprudence, therefore, Exhibit I was already enough by itself to
prove the payment of ₱7,455,421.00 as the full settlement of Caltex’s claim.28 The payment made to
Caltex as the insured being thereby duly documented, respondent became subrogated as a matter of
course pursuant to Article 2207 of the Civil Code. In legal contemplation, subrogation is the "substitution

Page 119 of 189

of another person in the place of the creditor, to whose rights he succeeds in relation to the debt;" and is
"independent of any mere contractual relations between the parties to be affected by it, and is broad
enough to cover every instance in which one party is required to pay a debt for which another is primarily
answerable, and which in equity and conscience ought to be discharged by the latter."29

Lastly, Vector and Soriano argue that Caltex waived and abandoned its claim by not setting up a cross-
claim against them in Civil Case No. 18735, the suit that Sulpicio Lines, Inc. had brought to claim
damages for the loss of the M/V Doña Paz from them, Oriental Assurance Company (as insurer of the M/T
Vector), and Caltex; that such failure to set up its cross- claim on the part of Caltex, the real party in
interest who had suffered the loss, left respondent without any better right than Caltex, its insured, to
recover anything from them, and forever barred Caltex from asserting any claim against them for the loss
of the cargo; and that respondent was similarly barred from asserting its present claim due to its being
merely the successor-in-interest of Caltex.

The argument of Vector and Soriano would have substance and merit had Civil Case No. 18735 and this
case involved the same parties and litigated the same rights and obligations. But the two actions were
separate from and independent of each other. Civil Case No. 18735 was instituted by Sulpicio Lines, Inc.
to recover damages for the loss of its M/V Doña Paz. In contrast, this action was brought by respondent to
recover from Vector and Soriano whatever it had paid to Caltex under its marine insurance policy on the
basis of its right of subrogation. With the clear variance between the two actions, the failure to set up the
cross-claim against them in Civil Case No. 18735 is no reason to bar this action.

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision promulgated
on July 22, 2003; and ORDERS petitioners to pay the costs of suit.

SO ORDERED.
x--------------------------------------------------------------------------------------------------------------------x
G.R. No. 181163 July 24, 2013
ASIAN TERMINALS, INC., Petitioner, vs.
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance, Inc.), Respondent.
x-------------------x
G.R. No. 181262
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance, Inc.), Petitioner, vs.
WESTWIND SHIPPING CORPORATION and ASIAN TERMINALS, INC., Respondents.
x------------------x
G.R. No. 181319
WESTWIND SHIPPING CORPORATION, Petitioner, vs.
PHILAM INSURANCE CO., INC. (now Chartis Philippines Insurance, Inc.) and ASIAN
TERMINALS, INC., Respondents.
DECISION
VILLARAMA, JR., J.:

Before us are three consolidated petitions for review on certiorari assailing the Decision1 dated October
15, 2007 and the Resolution dated January 11, 2008 of the Court of Appeals (CA) which affirmed with
modification the Decision3 of the Regional Trial Court (RTC) of Makati City, Branch 148, in Civil Case No.
96-062. The RTC had ordered Westwind Shipping Corporation (Westwind) and Asian Terminals, Inc. (ATI)
to pay, jointly and severally, Philam Insurance Co., Inc. (Philam) the sum of ₱633,957.15, with interest at
12% per annum from the date of judicial demand and ₱158,989.28 as attorney’s fees.

The facts of the case follow:

On April 15, 1995, Nichimen Corporation shipped to Universal Motors Corporation (Universal Motors) 219
packages containing 120 units of brand new Nissan Pickup Truck Double Cab 4x2 model, without engine,
tires and batteries, on board the vessel S/S "Calayan Iris" from Japan to Manila. The shipment, which had
a declared value of US$81,368 or ₱29,400,000, was insured with Philam against all risks under Marine
Policy No. 708-8006717-4.

The carrying vessel arrived at the port of Manila on April 20, 1995, and when the shipment was unloaded
by the staff of ATI, it was found that the package marked as 03-245-42K/1 was in bad order.5 The Turn

Page 120 of 189

Over Survey of Bad Order Cargoes6 dated April 21, 1995 identified two packages, labeled 03-245-42K/1
and 03/237/7CK/2, as being dented and broken. Thereafter, the cargoes were stored for temporary
safekeeping inside CFS Warehouse in Pier No. 5.

On May 11, 1995, the shipment was withdrawn by R.F. Revilla Customs Brokerage, Inc., the authorized
broker of Universal Motors, and delivered to the latter’s warehouse in Mandaluyong City. Upon the
request7 of Universal Motors, a bad order survey was conducted on the cargoes and it was found that one
Frame Axle Sub without LWR was deeply dented on the buffle plate while six Frame Assembly with Bush
were deformed and misaligned.8 Owing to the extent of the damage to said cargoes, Universal Motors
declared them a total loss.

On August 4, 1995, Universal Motors filed a formal claim for damages in the amount of ₱643,963.84
against Westwind,9 ATI10 and R.F. Revilla Customs Brokerage, Inc.11 When Universal Motors’ demands
remained unheeded, it sought reparation from and was compensated in the sum of ₱633,957.15 by
Philam. Accordingly, Universal Motors issued a Subrogation Receipt12 dated November 15, 1995 in favor
of Philam.

On January 18, 1996, Philam, as subrogee of Universal Motors, filed a Complaint13 for damages against
Westwind, ATI and R.F. Revilla Customs Brokerage, Inc. before the RTC of Makati City, Branch 148.

On September 24, 1999, the RTC rendered judgment in favor of Philam and ordered Westwind and ATI to
pay Philam, jointly and severally, the sum of ₱633,957.15 with interest at the rate of 12% per annum,
₱158,989.28 by way of attorney’s fees and expenses of litigation.

The court a quo ruled that there was sufficient evidence to establish the respective participation of
Westwind and ATI in the discharge of and consequent damage to the shipment. It found that the subject
cargoes were compressed while being hoisted using a cable that was too short and taut.

The trial court observed that while the staff of ATI undertook the physical unloading of the cargoes from
the carrying vessel, Westwind’s duty officer exercised full supervision and control throughout the process.
It held Westwind vicariously liable for failing to prove that it exercised extraordinary diligence in the
supervision of the ATI stevedores who unloaded the cargoes from the vessel. However, the court absolved
R.F. Revilla Customs Brokerage, Inc. from liability in light of its finding that the cargoes had been
damaged before delivery to the consignee.

The trial court acknowledged the subrogation between Philam and Universal Motors on the strength of the
Subrogation Receipt dated November 15, 1995. It likewise upheld Philam’s claim for the value of the
alleged damaged vehicle parts contained in Case Nos. 03-245-42K/1 and 03-245-51K or specifically for "7
pieces of Frame Axle Sub Without Lower and Frame Assembly with Bush."14

Westwind filed a Motion for Reconsideration15 which was, however, denied in an Order16 dated October
26, 2000.

On appeal, the CA affirmed with modification the ruling of the RTC. In a Decision dated October 15, 2007,
the appellate court directed Westwind and ATI to pay Philam, jointly and severally, the amount of
₱190,684.48 with interest at the rate of 12% per annum until fully paid, attorney’s fees of ₱47,671 and
litigation expenses.

The CA stressed that Philam may not modify its allegations by claiming in its Appellee’s Brief17 that the
six pieces of Frame Assembly with Bush, which were purportedly damaged, were also inside Case No. 03-
245-42K/1. The CA noted that in its Complaint, Philam alleged that "one (1) pc. FRAME AXLE SUB W/O
LWR from Case No. 03-245-42K/1 was completely deformed and misaligned, and six (6) other pcs. of
FRAME ASSEMBLY WITH BUSH from Case No. 03-245-51K were likewise completely deformed and
misaligned."18

The appellate court accordingly affirmed Westwind and ATI’s joint and solidary liability for the damage to
only one (1) unit of Frame Axle Sub without Lower inside Case No. 03-245-42K/1. It also noted that when
said cargo sustained damage, it was not yet in the custody of the consignee or the person who had the
right to receive it. The CA pointed out that Westwind’s duty to observe extraordinary diligence in the care

Page 121 of 189

of the cargoes subsisted during unloading thereof by ATI’s personnel since the former exercised full
control and supervision over the discharging operation.

Similarly, the appellate court held ATI liable for the negligence of its employees who carried out the
offloading of cargoes from the ship to the pier. As regards the extent of ATI’s liability, the CA ruled that
ATI cannot limit its liability to ₱5,000 per damaged package. It explained that Section 7.0119 of the
Contract for Cargo Handling Services20 does not apply in this case since ATI was not yet in custody and
control of the cargoes when the Frame Axle Sub without Lower suffered damage.

Citing Belgian Overseas Chartering and Shipping N.V. v. Philippine First Insurance Co., Inc.,21 the
appellate court also held that Philam’s action for damages had not prescribed notwithstanding the absence
of a notice of claim.

All the parties moved for reconsideration, but their motions were denied in a Resolution dated January 11,
2008. Thus, they each filed a petition for review on certiorari which were consolidated together by this
Court considering that all three petitions assail the same CA decision and resolution and involve the same
parties.

Essentially, the issues posed by petitioner ATI in G.R. No. 181163, petitioner Philam in G.R. No. 181262
and petitioner Westwind in G.R. No. 181319 can be summed up into and resolved by addressing three
questions: (1) Has Philam’s action for damages prescribed? (2) Who between Westwind and ATI should be
held liable for the damaged cargoes? and (3) What is the extent of their liability?

Petitioners’ Arguments

G.R. No. 181163

Petitioner ATI disowns liability for the damage to the Frame Axle Sub without Lower inside Case No. 03-
245-42K/1. It shifts the blame to Westwind, whom it charges with negligence in the supervision of the
stevedores who unloaded the cargoes. ATI admits that the damage could have been averted had
Westwind observed extraordinary diligence in handling the goods. Even so, ATI suspects that Case No. 03-
245-42K/1 is "weak and defective"22 considering that it alone sustained damage out of the 219 packages.

Notwithstanding, petitioner ATI submits that, at most, it can be held liable to pay only ₱5,000 per package
pursuant to its Contract for Cargo Handling Services. ATI maintains that it was not properly notified of the
actual value of the cargoes prior to their discharge from the vessel.

G.R. No. 181262

Petitioner Philam supports the CA in holding both Westwind and ATI liable for the deformed and
misaligned Frame Axle Sub without Lower inside Case No. 03-245-42K/1. It, however, faults the appellate
court for disallowing its claim for the value of six Chassis Frame Assembly which were likewise supposedly
inside Case Nos. 03-245-51K and 03-245-42K/1. As to the latter container, Philam anchors its claim on
the results of the Inspection/Survey Report23 of Chartered Adjusters, Inc., which the court received
without objection from Westwind and ATI. Petitioner believes that with the offer and consequent
admission of evidence to the effect that Case No. 03-245-42K/1 contains six pieces of dented Chassis
Frame Assembly, Philam’s claim thereon should be treated, in all respects, as if it has been raised in the
pleadings. Thus, Philam insists on the reinstatement of the trial court’s award in its favor for the payment
of ₱633,957.15 plus legal interest, ₱158,989.28 as attorney’s fees and costs.

G.R. No. 181319

Petitioner Westwind denies joint liability with ATI for the value of the deformed Frame Axle Sub without
Lower in Case No. 03-245-42K/1. Westwind argues that the evidence shows that ATI was already in actual
custody of said case when the Frame Axle Sub without Lower inside it was misaligned from being
compressed by the tight cable used to unload it. Accordingly, Westwind ceased to have responsibility over
the cargoes as provided in paragraph 4 of the Bill of Lading which provides that the responsibility of the
carrier shall cease when the goods are taken into the custody of the arrastre.

Page 122 of 189

Westwind contends that sole liability for the damage rests on ATI since it was the latter’s stevedores who
operated the ship’s gear to unload the cargoes. Westwind reasons that ATI is an independent company,
over whose employees and operations it does not exercise control. Moreover, it was ATI’s employees who
selected and used the wrong cable to lift the box containing the cargo which was damaged.

Westwind likewise believes that ATI is bound by its acceptance of the goods in good order despite a
finding that Case No. 03-245-42K/1 was partly torn and crumpled on one side. Westwind also notes that
the discovery that a piece of Frame Axle Sub without Lower was completely deformed and misaligned
came only on May 12, 1995 or 22 days after the cargoes were turned over to ATI and after the same had
been hauled by R.F. Revilla Customs Brokerage, Inc.

Westwind further argues that the CA erred in holding it liable considering that Philam’s cause of action has
prescribed since the latter filed a formal claim with it only on August 17, 1995 or four months after the
cargoes arrived on April 20, 1995. Westwind stresses that according to the provisions of clause 20,
paragraph 224 of the Bill of Lading as well as Article 36625 of the Code of Commerce, the consignee had
until April 20, 1995 within which to make a claim considering the readily apparent nature of the damage,
or until April 27, 1995 at the latest, if it is assumed that the damage is not readily apparent.

Lastly, petitioner Westwind contests the imposition of 12% interest on the award of damages to Philam
reckoned from the time of extrajudicial demand. Westwind asserts that, at most, it can only be charged
with 6% interest since the damages claimed by Philam does not constitute a loan or forbearance of
money.

The Court’s Ruling

The three consolidated petitions before us call for a determination of who between ATI and Westwind is
liable for the damage suffered by the subject cargo and to what extent. However, the resolution of the
issues raised by the present petitions is predicated on the appreciation of factual issues which is beyond
the scope of a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended. It is settled that in petitions for review on certiorari, only questions of law may be put in issue.
Questions of fact cannot be entertained.26

There is a question of law if the issue raised is capable of being resolved without need of reviewing the
probative value of the evidence. The resolution of the issue must rest solely on what the law provides on
the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented,
the question posed is one of fact. If the query requires a re-evaluation of the credibility of witnesses, or
the existence or relevance of surrounding circumstances and their relation to each other, the issue in that
query is factual.27

In the present petitions, the resolution of the question as to who between Westwind and ATI should be
liable for the damages to the cargo and to what extent would have this Court pass upon the evidence on
record. But while it is not our duty to review, examine and evaluate or weigh all over again the probative
value of the evidence presented,28 the Court may nonetheless resolve questions of fact when the case
falls under any of the following exceptions:

(1) when the findings are grounded entirely on speculation, surmises, or conjectures; (2) when the
inference made is manifestly mistaken, absurd, or impossible; (3) when there is grave abuse of discretion;
(4) when the judgment is based on a misapprehension of facts; (5) when the findings of fact are
conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are
contrary to those of the trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner’s
main and reply briefs are not disputed by the respondent; and (10) when the findings of fact are premised
on the supposed absence of evidence and contradicted by the evidence on record.29

In the cases at bar, the fifth and seventh exceptions apply. While the CA affirmed the joint liability of ATI
and Westwind, it held them liable only for the value of one unit of Frame Axle Sub without Lower inside
Case No. 03-245-42K/1. The appellate court disallowed the award of damages for the six pieces of Frame

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Assembly with Bush, which petitioner Philam alleged, for the first time in its Appellee’s Brief, to be likewise
inside Case No. 03-245-42K/1. Lastly, the CA reduced the award of attorney’s fees to ₱47,671.

Foremost, the Court holds that petitioner Philam has adequately established the basis of its claim against
petitioners ATI and Westwind. Philam, as insurer, was subrogated to the rights of the consignee, Universal
Motors Corporation, pursuant to the Subrogation Receipt executed by the latter in favor of the former. The
right of subrogation accrues simply upon payment by the insurance company of the insurance claim.30
Petitioner Philam’s action finds support in Article 2207 of the Civil Code, which provides as follows:

Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract. x x x.

In their respective comments31 to Philam’s Formal Offer of Evidence,32 petitioners ATI and Westwind
objected to the admission of Marine Certificate No. 708-8006717-4 and the Subrogation Receipt as
documentary exhibits "B" and "P," respectively. Petitioner Westwind objects to the admission of both
documents for being hearsay as they were not authenticated by the persons who executed them. For the
same reason, petitioner ATI assails the admissibility of the Subrogation Receipt. As regards Marine
Certificate No. 708-8006717-4, ATI makes issue of the fact that the same was issued only on April 27,
1995 or 12 days after the shipment was loaded on and transported via S/S "Calayan Iris."

The nature of documents as either public or private determines how the documents may be presented as
evidence in court. Public documents, as enumerated under Section 19,33 Rule 132 of the Rules of Court,
are self-authenticating and require no further authentication in order to be presented as evidence in
court.34

In contrast, a private document is any other writing, deed or instrument executed by a private person
without the intervention of a notary or other person legally authorized by which some disposition or
agreement is proved or set forth. Lacking the official or sovereign character of a public document, or the
solemnities prescribed by law, a private document requires authentication35 in the manner prescribed
under Section 20, Rule 132 of the Rules:

SEC. 20. Proof of private document. – Before any private document offered as authentic is received in
evidence, its due execution and authenticity must be proved either:

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to be.

The requirement of authentication of a private document is excused only in four instances, specifically: (a)
when the document is an ancient one within the context of Section 21,36 Rule 132 of the Rules; (b) when
the genuineness and authenticity of the actionable document have not been specifically denied under oath
by the adverse party; (c) when the genuineness and authenticity of the document have been admitted; or
(d) when the document is not being offered as genuine.37

Indubitably, Marine Certificate No. 708-8006717-4 and the Subrogation Receipt are private documents
which Philam and the consignee, respectively, issue in the pursuit of their business. Since none of the
exceptions to the requirement of authentication of a private document obtains in these cases, said
documents may not be admitted in evidence for Philam without being properly authenticated.

Contrary to the contention of petitioners ATI and Westwind, however, Philam presented its claims officer,
Ricardo Ongchangco, Jr. to testify on the execution of the Subrogation Receipt, as follows:

ATTY. PALACIOS
Q How were you able to get hold of this subrogation receipt?
A Because I personally delivered the claim check to consignee and have them receive the said check.

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Q I see. Therefore, what you are saying is that you personally delivered the claim check of Universal
Motors Corporation to that company and you have the subrogation receipt signed by them personally?
A Yes, sir.
Q And it was signed in your presence?
A Yes, sir.38

Indeed, all that the Rules require to establish the authenticity of a document is the testimony of a person
who saw the document executed or written. Thus, the trial court did not err in admitting the Subrogation
Receipt in evidence despite petitioners ATI and Westwind’s objections that it was not authenticated by the
person who signed it.

However, the same cannot be said about Marine Certificate No. 708-8006717-4 which Ongchangcho, Jr.
merely identified in court. There is nothing in Ongchangco, Jr.’s testimony which indicates that he saw
Philam’s authorized representative sign said document, thus:

ATTY. PALACIOS
Q Now, I am presenting to you a copy of this marine certificate 708-8006717-4 issued by Philam
Insurance Company, Inc. to Universal Motors Corporation on April 15, 1995. Will you tell us what relation
does it have to that policy risk claim mentioned in that letter?
A This is a photocopy of the said policy issued by the consignee Universal Motors Corporation.

ATTY. PALACIOS
I see. May I request, if Your Honor please, that this marine risk policy of the plaintiff as submitted by
claimant Universal Motors Corporation be marked as Exhibit B.

COURT
Mark it.39

As regards the issuance of Marine Certificate No. 708-8006717-4 after the fact of loss occurred, suffice it
to say that said document simply certifies the existence of an open insurance policy in favor of the
consignee. Hence, the reference to an "Open Policy Number 9595093" in said certificate. The Court finds it
completely absurd to suppose that any insurance company, of sound business practice, would assume a
loss that has already been realized, when the profitability of its business rests precisely on the non-
happening of the risk insured against.

Yet, even with the exclusion of Marine Certificate No. 708-8006717-4, the Subrogation Receipt, on its
own, is adequate proof that petitioner Philam paid the consignee’s claim on the damaged goods.
Petitioners ATI and Westwind failed to offer any evidence to controvert the same. In Malayan Insurance
Co., Inc. v. Alberto,40 the Court explained the effect of payment by the insurer of the insurance claim in
this wise:

We have held that payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose negligence or wrongful
act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine
of subrogation has its roots in equity. It is designed to promote and accomplish justice; and is the mode
that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good
conscience, ought to pay.41

Neither do we find support in petitioner Westwind’s contention that Philam’s right of action has prescribed.

The Carriage of Goods by Sea Act (COGSA) or Public Act No. 521 of the 74th US Congress, was accepted
to be made applicable to all contracts for the carriage of goods by sea to and from Philippine ports in
foreign trade by virtue of Commonwealth Act (C.A.) No. 65.42 Section 1 of C.A. No. 65 states:

Section 1. That the provisions of Public Act Numbered Five hundred and twenty-one of the Seventy-fourth
Congress of the United States, approved on April sixteenth, nineteen hundred and thirty-six, be accepted,
as it is hereby accepted to be made applicable to all contracts for the carriage of goods by sea to and from

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Philippine ports in foreign trade: Provided, That nothing in the Act shall be construed as repealing any
existing provision of the Code of Commerce which is now in force, or as limiting its application.

The prescriptive period for filing an action for the loss or damage of the goods under the COGSA is found
in paragraph (6), Section 3, thus:

(6) Unless notice of loss or damage and the general nature of such loss or damage be given in writing to
the carrier or his agent at the port of discharge before or at the time of the removal of the goods into the
custody of the person entitled to delivery thereof under the contract of carriage, such removal shall be
prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading. If the loss
or damage is not apparent, the notice must be given within three days of the delivery.

Said notice of loss or damage maybe endorsed upon the receipt for the goods given by the person taking
delivery thereof.

The notice in writing need not be given if the state of the goods has at the time of their receipt been the
subject of joint survey or inspection.

In any event the carrier and the ship shall be discharged from all liability in respect of loss or damage
unless suit is brought within one year after delivery of the goods or the date when the goods should have
been delivered: Provided, That if a notice of loss or damage, either apparent or concealed, is not given as
provided for in this section, that fact shall not affect or prejudice the right of the shipper to bring suit
within one year after the delivery of the goods or the date when the goods should have been delivered.

In the Bill of Lading43 dated April 15, 1995, Rizal Commercial Banking Corporation (RCBC) is indicated as
the consignee while Universal Motors is listed as the notify party. These designations are in line with the
subject shipment being covered by Letter of Credit No. I501054, which RCBC issued upon the request of
Universal Motors.

A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants to have control of his goods before paying.44
However, letters of credit are employed by the parties desiring to enter into commercial transactions, not
for the benefit of the issuing bank but mainly for the benefit of the parties to the original transaction,45 in
these cases, Nichimen Corporation as the seller and Universal Motors as the buyer. Hence, the latter, as
the buyer of the Nissan CKD parts, should be regarded as the person entitled to delivery of the goods.
Accordingly, for purposes of reckoning when notice of loss or damage should be given to the carrier or its
agent, the date of delivery to Universal Motors is controlling.

S/S "Calayan Iris" arrived at the port of Manila on April 20, 1995, and the subject cargoes were
discharged to the custody of ATI the next day. The goods were then withdrawn from the CFS Warehouse
on May 11, 1995 and the last of the packages delivered to Universal Motors on May 17, 1995. Prior to
this, the latter filed a Request for Bad Order Survey46 on May 12,1995 following a joint inspection where
it was discovered that six pieces of Chassis Frame Assembly from two bundles were deformed and one
Front Axle Sub without Lower from a steel case was dented. Yet, it was not until August 4, 1995 that
Universal Motors filed a formal claim for damages against petitioner Westwind.

Even so, we have held in Insurance Company of North America v. Asian Terminals, Inc. that a request for,
and the result of a bad order examination, done within the reglementary period for furnishing notice of
loss or damage to the carrier or its agent, serves the purpose of a claim. A claim is required to be filed
within the reglementary period to afford the carrier or depositary reasonable opportunity and facilities to
check the validity of the claims while facts are still fresh in the minds of the persons who took part in the
transaction and documents are still available.47 Here, Universal Motors filed a request for bad order
survey on May 12, 1995, even before all the packages could be unloaded to its warehouse.

Moreover, paragraph (6), Section 3 of the COGSA clearly states that failure to comply with the notice
requirement shall not affect or prejudice the right of the shipper to bring suit within one year after delivery
of the goods. Petitioner Philam, as subrogee of Universal Motors, filed the Complaint for damages on

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January 18, 1996, just eight months after all the packages were delivered to its possession on May 17,
1995. Evidently, petitioner Philam’s action against petitioners Westwind and ATI was seasonably filed.

This brings us to the question that must be resolved in these consolidated petitions. Who between
Westwind and ATI should be liable for the damage to the cargo?

It is undisputed that Steel Case No. 03-245-42K/1 was partly torn and crumpled on one side while it was
being unloaded from the carrying vessel. The damage to said container was noted in the Bad Order Cargo
Receipt48 dated April 20, 1995 and Turn Over Survey of Bad Order Cargoes dated April 21, 1995. The
Turn Over Survey of Bad Order Cargoes indicates that said steel case was not opened at the time of
survey and was accepted by the arrastre in good order. Meanwhile, the Bad Order Cargo Receipt bore a
notation "B.O. not yet t/over to ATI." On the basis of these documents, petitioner ATI claims that the
contents of Steel Case No. 03-245-42K/1 were damaged while in the custody of petitioner Westwind.

We agree.

Common carriers, from the nature of their business and for reasons of public policy, are bound to observe
extraordinary diligence in the vigilance over the goods transported by them. Subject to certain exceptions
enumerated under Article 173449 of the Civil Code, common carriers are responsible for the loss,
destruction, or deterioration of the goods. The extraordinary responsibility of the common carrier lasts
from the time the goods are unconditionally placed in the possession of, and received by the carrier for
transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or
to the person who has a right to receive them.50

The court a quo, however, found both petitioners Westwind and ATI, jointly and severally, liable for the
damage to the cargo. It observed that while the staff of ATI undertook the physical unloading of the
cargoes from the carrying vessel, Westwind’s duty officer exercised full supervision and control over the
entire process. The appellate court affirmed the solidary liability of Westwind and ATI, but only for the
damage to one Frame Axle Sub without Lower.

Upon a careful review of the records, the Court finds no reason to deviate from the finding that petitioners
Westwind and ATI are concurrently accountable for the damage to the content of Steel Case No. 03-245-
42K/1.

Section 251 of the COGSA provides that under every contract of carriage of goods by the sea, the carrier
in relation to the loading, handling, stowage, carriage, custody, care and discharge of such goods, shall be
subject to the responsibilities and liabilities and entitled to the rights and immunities set forth in the Act.
Section 3 (2)52 thereof then states that among the carrier’s responsibilities are to properly load, handle,
stow, carry, keep, care for and discharge the goods carried.53

At the trial, Westwind’s Operation Assistant, Menandro G. Ramirez, testified on the presence of a ship
officer to supervise the unloading of the subject cargoes.

ATTY. LLAMAS
Q Having been present during the entire discharging operation, do you remember who else were present
at that time?
A Our surveyor and our checker the foreman of ATI.
Q Were there officials of the ship present also?
A Yes, sir there was an officer of the vessel on duty at that time.54
Q Who selected the cable slink to be used?
A ATI Operation.
Q Are you aware of how they made that selection?
A Before the vessel arrived we issued a manifesto of the storage plan informing the ATI of what type of
cargo and equipment will be utilitized in discharging the cargo.55
Q You testified that it was the ATI foremen who select the cable slink to be used in discharging, is that
correct?
A Yes sir, because they are the one who select the slink and they know the kind of cargoes because they
inspected it before the discharge of said cargo.

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Q Are you aware that the ship captain is consulted in the selection of the cable sling?
A Because the ship captain knows for a fact the equipment being utilized in the discharge of the cargoes
because before the ship leave the port of Japan the crew already utilized the proper equipment fitted to
the cargo.56 (Emphasis supplied.)

It is settled in maritime law jurisprudence that cargoes while being unloaded generally remain under the
custody of the carrier.57 The Damage Survey Report58 of the survey conducted by Phil. Navtech Services,
Inc. from April 20-21, 1995 reveals that Case No. 03-245-42K/1 was damaged by ATI stevedores due to
overtightening of a cable sling hold during discharge from the vessel’s hatch to the pier. Since the damage
to the cargo was incurred during the discharge of the shipment and while under the supervision of the
carrier, the latter is liable for the damage caused to the cargo.

This is not to say, however, that petitioner ATI is without liability for the damaged cargo.

The functions of an arrastre operator involve the handling of cargo deposited on the wharf or between the
establishment of the consignee or shipper and the ship’s tackle. Being the custodian of the goods
discharged from a vessel, an arrastre operator’s duty is to take good care of the goods and to turn them
over to the party entitled to their possession.59

Handling cargo is mainly the arrastre operator’s principal work so its drivers/operators or employees
should observe the standards and measures necessary to prevent losses and damage to shipments under
its custody.

While it is true that an arrastre operator and a carrier may not be held solidarily liable at all times,61 the
facts of these cases show that apart from ATI’s stevedores being directly in charge of the physical
unloading of the cargo, its foreman picked the cable sling that was used to hoist the packages for transfer
to the dock. Moreover, the fact that 218 of the 219 packages were unloaded with the same sling
unharmed is telling of the inadequate care with which ATI’s stevedore handled and discharged Case No.
03-245-42K/1.

With respect to petitioners ATI and Westwind’s liability, we agree with the CA that the same should be
confined to the value of the one piece Frame Axle Sub without Lower.

In the Bad Order Inspection Report62 prepared by Universal Motors, the latter referred to Case No. 03-
245-42K/1 as the source of said Frame Axle Sub without Lower which suffered a deep dent on its buffle
plate. Yet, it identified Case No. 03-245-51K as the container which bore the six pieces Frame Assembly
with Bush. Thus, in Philam’s Complaint, it alleged that "the entire shipment showed one (1) pc. FRAME
AXLE SUB W/O LWR from Case No. 03-245-42K/1 was completely deformed and misaligned, and six (6)
other pcs. of FRAME ASSEMBLY WITH BUSH from Case No. 03-245-51K were likewise completely
deformed and misaligned."63 Philam later claimed in its Appellee’s Brief that the six pieces of Frame
Assembly with Bush were also inside the damaged Case No. 03-245-42K/1.

However, there is nothing in the records to show conclusively that the six Frame Assembly with Bush were
likewise contained in and damaged inside Case No. 03-245-42K/1. In the Inspection Survey Report of
Chartered Adjusters, Inc., it mentioned six pieces of chassis frame assembly with deformed body
mounting bracket. However, it merely noted the same as coming from two bundles with no identifying
marks.

Lastly, we agree with petitioner Westwind that the CA erred in imposing an interest rate of 12% on the
award of damages. Under Article 2209 of the Civil Code, when an obligation not constituting a loan or
forbearance of money is breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum.64 In the similar case of Belgian Overseas Chartering
and Shipping NV v. Philippine First Insurance Co., lnc.,65 the Court reduced the rate of interest on the
damages awarded to the carrier therein to 6% from the time of the filing of the complaint until the finality
of the decision.

WHEREFORE, the Court AFFIRMS with MODIFICATION the Decision dated October 15,2007 and the
Resolution dated January 11, 2008 of the Court of Appeals in CA-G.R. CV No. 69284 in that the interest

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rate on the award of ₱190,684.48 is reduced to 6% per annum from the date of extrajudicial demand,
until fully paid.

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

SO ORDERED.
x-------------------------------------------------------------------------------------------------------------------x
G.R. No. 180144 September 24, 2014
LEONARDO BOGNOT, Petitioner, vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J. BERNARDEZ,
Respondent.
DECISION
BRION, J.:

Before the Court is the petition for review on certiorari1 filed by Leonardo Bognot (petitioner) assailing the
March 28, 2007 decision2 and the October 15, 2007 resolution3 of the Court of Appeals (CA) in CA-G.R.
CV No. 66915.

Background Facts

RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its
borrowers within Metro Manila. It is duly represented by its General Manager, Mr. Dario J. Bernardez
(Bernardez).

Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot (collectively
referred to as the "Bognot siblings"), applied for and obtained a loan of Five Hundred Thousand Pesos
(₱500,000.00) from the respondent, payable on November 30, 1996.4 The loan was evidenced by a
promissory note and was secured by a post dated check5 dated November 30, 1996.

Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He paid
a renewal fee of ₱54,600.00 for each renewal, issued a new post-dated check as security, and executed
and/or renewed the promissory note previously issued. The respondent on the other hand, cancelled and
returned to the petitioner the post-dated checks issued prior to their renewal.

Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as principal
and signed Promissory Note No. 97-0356 payable on April 1, 1997; his co-maker was again Rolando. As
security for the loan, the petitioner also issued BPI Check No. 0595236,7 post dated to April 1, 1997.8

Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by the
Official Receipt No. 7979 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly
signed by Bernardez. The petitioner purportedly paid the renewal fees and issued a post-dated check
dated June 30, 1997 as security. As had been done in the past, the respondent superimposed the date
"June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it appear that it would
mature on the said date.

Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the
respondent’s office and applied for another renewal of the loan. She issued in favor of the respondent
Promissory Note No. 97-051, and International Bank Exchange (IBE) Check No. 00012522, dated July 30,
1997, in the amount of ₱54,600.00 as renewal fee.

On the excuse that she needs to bring home the loan documents for the Bognot siblings’ signatures and
replacement, Mrs. Bognot asked the respondent’s clerk to release to her the promissory note, the
disclosure statement, and the check dated July 30, 1997. Mrs. Bognot, however, never returned these
documents nor issued a new post-dated check. Consequently, the respondent sent the petitioner follow-up
letters demanding payment of the loan, plus interest and penalty charges. These demands went
unheeded.

On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money before
the Regional Trial Court (RTC) against the Bognot siblings. The respondent mainly alleged that the loan

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renewal payable on June 30, 1997 which the Bognot siblings applied for remained unpaid; that before
June30, 1997, Mrs. Bognot applied for another loan extension and issued IBE Check No. 00012522 as
payment for the renewal fee; that Mrs. Bognot convinced the respondent’s clerk to release to her the
promissory note and the other loan documents; that since Mrs. Bognot never issued any replacement
check, no loan extension took place and the loan, originally payable on June 30, 1997, became due on this
date; and despite repeated demands, the Bognot siblings failed to pay their joint and solidary obligation.

Summons were served on the Bognot siblings. However, only the petitioner filed his answer.

In his Answer,10 the petitioner claimed that the complaint states no cause of action because the
respondent’s claim had been paid, waived, abandoned or otherwise extinguished. He denied being a party
to any loan application and/or renewal in May 1997. He also denied having issued the BPI check post-
dated to June 30, 1997, as well as the promissory note dated June 30, 1997, claiming that this note had
been tampered. He claimed that the one (1) month loan contracted by Rolando and his wife in November
1996 which was lastly renewed in March 1997 had already been fully paid and extinguished in April 1997.

Trial on the merits thereafter ensued.

The Regional Trial Court Ruling

In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s favor and ordered the Bognot
siblings to pay the amount of the loan, plus interest and penalty charges. It considered the wordings of
the promissory note and found that the loan they contracted was joint and solidary. It also noted that the
petitioner signed the promissory note as a principal (and not merely as a guarantor), while Rolando was
the co-maker. It brushed the petitioner’s defense of full payment aside, ruling that the respondent had
successfully proven, by preponderance of evidence, the nonpayment of the loan. The trial court said:

Records likewise reveal that while he claims that the obligation had been fully paid in his Answer, he did
not, in order to protect his right filed (sic) a cross-claim against his co-defendant Rolando Bognot despite
the fact that the latter did not file any responsive pleading.

In fine, defendants are liable solidarily to plaintiff and must pay the loan of ₱500,000.00 plus 5% interest
monthly as well as 10% monthly penalty charges from the filing of the complaint on December 3, 1997
until fully paid. As plaintiff was constrained to engage the services of counsel in order to protect his right,
defendants are directed to pay the former jointly and severally the amount of ₱50,000.00 as and by way
of attorney’s fee.

The petitioner appealed the decision to the Court of Appeals.

The Court of Appeals Ruling

In its decision dated March 28, 2007, the CA affirmed the RTC’s findings. It found the petitioner’s defense
of payment untenable and unsupported by clear and convincing evidence. It observed that the petitioner
did not present any evidence showing that the check dated June 30, 1997 had, in fact, been encashed by
the respondent and the proceeds applied to the loan, or any official receipt evidencing the payment of the
loan. It further stated that the only document relied upon by the petitioner to substantiate his defense was
the April 1, 1997 check he issued which was cancelled and returned to him by the respondent.

The CA, however, noted the respondent’s established policy of cancelling and returning the post-dated
checks previously issued, as well as the subsequent loan renewals applied for by the petitioner, as
manifested by the official receipts under his name. The CA thus ruled that the petitioner failed to
discharge the burden of proving payment.

The petitioner moved for the reconsideration of the decision, but the CA denied his motion in its resolution
of October 15, 2007, hence, the present recourse to us pursuant to Rule 45 of the Rules of Court.

The Petition

The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his wife. He
claimed that based on the legal presumption provided by Article 1271 of the Civil Code,13 his obligation

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had been discharged by virtue of his possession of the post-dated check (stamped "CANCELLED") that
evidenced his indebtedness. He argued that it was Mrs. Bognot who subsequently assumed the obligation
by renewing the loan, paying the fees and charges, and issuing a check. Thus, there is an entirely new
obligation whose payment is her sole responsibility.

The petitioner also argued that as a result of the alteration of the promissory note without his consent
(e.g., the superimposition of the date "June 30, 1997" on the upper right portion of Promissory Note No.
97-035 to make it appear that it would mature on this date), the respondent can no longer collect on the
tampered note, let alone, hold him solidarily liable with Rolando for the payment of the loan. He
maintained that even without the proof of payment, the material alteration of the promissory note is
sufficient to extinguish his liability.

Lastly, he claimed that he had been released from his indebtedness by novation when Mrs. Bognot
renewed the loan and assumed the indebtedness.

The Case for the Respondents

The respondent submits that the issues the petitioner raised hinge on the appreciation of the adduced
evidence and of the factual lower courts’ findings that, as a rule, are not reviewable by this Court.

The Issues

The case presents to us the following issues:

1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with Rolando;
2. Whether the petitioner is relieved from liability by reason of the material alteration in the promissory
note; and
3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii) novation by substitution of
debtors.

Our Ruling

We find the petition partly meritorious.

As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of law.14
Appreciation of evidence and inquiry on the correctness of the appellate court's factual findings are not the
functions of this Court; we are not a trier of facts.15

A question of law exists when the doubt or dispute relates to the application of the law on given facts. On
the other hand, a question of fact exists when the doubt or dispute relates to the truth or falsity of the
parties’ factual allegations.16

As the respondent correctly pointed out, the petitioner’s allegations are factual issues that are not proper
for the petition he filed. In the absence of compelling reasons, the Court cannot re-examine, review or re-
evaluate the evidence and the lower courts’ factual conclusions. This is especially true when the CA
affirmed the lower court’s findings, as in this case. Since the CA’s findings of facts affirmed those of the
trial court, they are binding on this Court, rendering any further factual review unnecessary.

If only to lay the issues raised - both factual and legal – to rest, we shall proceed to discuss their merits
and demerits.

No Evidence Was Presented to Establish the Fact of Payment

Jurisprudence tells us that one who pleads payment has the burden of proving it;17 the burden rests on
the defendant to prove payment, rather than on the plaintiff to prove non-payment.18 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.19

In the present case, the petitioner failed to satisfactorily prove that his obligation had already been
extinguished by payment. As the CA correctly noted, the petitioner failed to present any evidence that the

Page 131 of 189

respondent had in fact encashed his check and applied the proceeds to the payment of the loan. Neither
did he present official receipts evidencing payment, nor any proof that the check had been dishonored.

We note that the petitioner merely relied on the respondent’s cancellation and return to him of the check
dated April 1, 1997. The evidence shows that this check was issued to secure the indebtedness. The acts
imputed on the respondent, standing alone, do not constitute sufficient evidence of payment.

Article 1249, paragraph 2 of the Civil Code provides:

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. (Emphasis supplied)

Also, we held in Bank of the Philippine Islands v. Spouses Royeca:

Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore,
cannot constitute a valid tender of payment. Since a negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does not, by itself, operate as payment. 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.(Emphasis supplied)

Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in cases
where a private document evidencing a credit was voluntarily returned by the creditor to the debtor), this
presumption is merely prima facie and is not conclusive; the presumption loses efficacy when faced with
evidence to the contrary.

Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation of the
credit where more convincing evidence would be required than what normally would be called for to prove
payment.21 Thus, reliance by the petitioner on the legal presumption to prove payment is misplaced.

To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check
dated April 1, 1997, simply established his renewal of the loan – not the fact of payment. Furthermore, it
has been established during trial, through repeated acts, that the respondent cancelled and surrendered
the post-dated check previously issued whenever the loan is renewed. We trace whatwould amount to a
practice under the facts of this case, to the following testimonial exchanges:

Civil Case No. 97-0572

TSN December 14, 1998, Page 13.

Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the debtor which
he or she must pay before a renewal is allowed. I show you Exhibit "3" official receipt of plaintiff dated
July 3, 1997, would this be your official receipt which you issued to your client which they make renewal
of the loan?
A: Yes, sir.

Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal has already
been cancelled, is that correct?
A: Yes, sir.

Q: It is also true to say that all promissory notes and all postdated checks covered by the old loan which
have been the subject of the renewal are deemed cancelled and replaced is that correct?
A: Yes, sir. xxx22

Civil Case No. 97-0572

TSN November 27, 1998, Page 27.

Q: What happened to the check that Mr. Bognot issued?

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Court: There are two Bognots. Who in particular?

Q: Leonardo Bognot, Your Honor.

A: Every month, they were renewed, he issued a new check, sir.

Q: Do you have a copy of the checks?

A: We returned the check upon renewing the loan.23

In light of these exchanges, we find that the petitioner failed to discharge his burden ofproving payment.

The Alteration of the Promissory Note Did Not Relieve the Petitioner From Liability

We now come to the issue of material alteration. The petitioner raised as defense the alleged material
alteration of Promissory Note No. 97-035 as basis to claim release from his loan. He alleged that the
respondent’s superimposition of the due date "June 30, 1997" on the promissory note without his consent
effectively relieved him of liability.

We find this defense untenable.

Although the respondent did not dispute the fact of alteration, he nevertheless denied that the alteration
was done without the petitioner’s consent. The parties’ Pre-Trial Order dated November 3, 199824 states
that:

xxx There being no possibility of a possible compromise agreement, stipulations, admissions, and denials
were made, to wit:

FOR DEFENDANT LEONARDO BOGNOT

13. That the promissory note subject of this case marked as Annex "A" of the complaint was originally
dated April 1, 1997 with a superimposed rubber stamp mark "June 30, 1997" to which the plaintiff
admitted the superimposition.

14. The superimposition was done without the knowledge, consent or prior consultation with Leonardo
Bognot which was denied by plaintiff."25 (Emphasis supplied)

Significantly, the respondent also admitted in the Pre-Trial Order that part of its company practice is to
rubber stamp, or make a superimposition through a rubber stamp, the old promissory note which has
been renewed to make it appear that there is a new loan obligation. The petitioner did not rebut this
statement. To our mind, the failure to rebut is tantamount to an admission of the respondent’s
allegations:

"22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a rubber
stamp on old promissory note which has been renewed to make it appear that there is a new loan
obligation to which the plaintiff admitted." (Emphasis Supplied).26

Even assuming that the note had indeed been tampered without the petitioner’s consent, the latter cannot
totally avoid payment of his obligation to the respondent based on the contract of loan.

Based on the records, the Bognot Siblings had applied for and were granted a loan of ₱500,000.00 by the
respondent. The loan was evidenced by a promissory note and secured by a post-dated check27 dated
November 30, 1996. In fact, the petitioner himself admitted his loan application was evidenced by the
Promissory Note dated April 1, 1997.28 This loan was renewed several times by the petitioner, after
paying the renewal fees, as shown by the Official Receipt Nos. 79729 and 58730 dated May 5 and July 3,
1997, respectively. These official receipts were issued in the name of the petitioner. Although the
petitioner had insisted that the loan had been extinguished, no other evidence was presented to prove
payment other than the cancelled and returned post-dated check.

Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability to the
respondent solely on the ground that the Promissory Note in question was tampered. Notably, the

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existence of the obligation, as well as its subsequent renewals, have been duly established by: first, the
petitioner’s application for the loan; second, his admission that the loan had been obtained from the
respondent; third, the post-dated checks issued by the petitioner to secure the loan; fourth, the testimony
of Mr. Bernardez on the grant, renewal and non-payment of the loan; fifth, proof of non-payment of the
loan; sixth, the loan renewals; and seventh, the approval and receipt of the loan renewals.

In Guinsatao v. Court of Appeals,31 this Court pointed out that while a promissory note is evidence of an
indebtedness, it is not the only evidence, for the existence of the obligation can be proven by other
documentary evidence such as a written memorandum signed by the parties. In Pacheco v. Court of
Appeals,32 this Court likewise expressly recognized that a check constitutes an evidence of indebtedness
and is a veritable proof of an obligation. It canbe used in lieu of and for the same purpose as a promissory
note and can therefore be presented to establish the existence of indebtedness.33

In the present petition, we find that the totality of the evidence on record sufficiently established the
existence of the petitioner’s indebtedness (and liability) based on the contract of loan. Even with the
tampered promissory note, we hold that the petitioner can still be held liable for the unpaid loan.

The Petitioner’s Belated Claim of Novation by Substitution May no Longer be Entertained

It has not escaped the Court’s attention that the petitioner raised the argument that the obligation had
been extinguished by novation. The petitioner never raised this issue before the lower courts.

It is a settled principle of law that no issue may be raised on appeal unless it has been brought before the
lower tribunal for its consideration.34 Matters neither alleged in the pleadings nor raised during the
proceedings below cannot be ventilated for the first time on appeal before the Supreme Court.35

In any event, we find no merit in the defense of novation as we discuss at length below. Novation cannot
be presumed and must be clearly and unequivocably proven.

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.36

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."

To give novation legal effect, the original debtor must be expressly released from the obligation, and the
new debtor must assume the original debtor’s place in the contractual relationship. Depending on who
took the initiative, novation by substitution of debtor has two forms – substitution by expromision and
substitution by delegacion. The difference between these two was explained in Garcia v. Llamas:37

"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."

In both cases, the original debtor must be released from the obligation; otherwise, there can be no valid
novation.38 Furthermore, novation by substitution of debtor must always be made with the consent of the
creditor.

The petitioner contends that novation took place through a substitution of debtors when Mrs. Bognot
renewed the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by paying
the renewal fees and charges, and by executing a new promissory note. He further claimed that she
issued her own check40 to cover the renewal fees, which fact, according to the petitioner, was done with
the respondent’s consent.

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Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She merely
attempted to renew the original loan by executing a new promissory note41 and check. The purported one
month renewal of the loan, however, did not push through, as Mrs. Bognot did not return the documents
or issue a new post dated check. Since the loan was not renewed for another month, the original due
date, June 30,1997, continued to stand.

More importantly, the respondent never agreed to release the petitioner from his obligation. That the
respondent initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement and the
petitioner’s previous check dated June 30, 1997, does not ipso facto result in novation. Neither will this
acquiescence constitute an implied acceptance of the substitution of the debtor.

In order to give novation legal effect, the creditor should consent to the substitution of a new debtor.
Novation must be clearly and unequivocally shown, and cannot be presumed.

Since the petitioner failed to show that the respondent assented to the substitution, no valid novation took
place with the effect of releasing the petitioner from his obligation to the respondent.

Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the
petitioner, the respondent can still enforce the payment of the obligation against the original debtor. Mere
acquiescence to the renewal of the loan, when there is clearly no agreement to release the petitioner from
his responsibility, does not constitute novation.

The Nature of the Petitioner’s Liability

On the nature of the petitioner’s liability, we rule however, that the CA erred in holding the petitioner
solidarily liable with Rolando.

A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the
creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors.42
There is solidary liability when the obligation expressly so states, when the law so provides, or when the
nature of the obligation so requires.43 Thus, when the obligor undertakes to be "jointly and severally"
liable, the obligation is solidary,

In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on
Promissory Note No. 97-035 dated June 30, 1997. Under the promissory note, the Bognot Siblings defined
the parameters of their obligation as follows:

"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY RESOURCES INVESTORS
RRI LENDING CORPO. or Order, its office at Paranaque, M.M. the principal sum of Five Hundred Thousand
PESOS (₱500,000.00), Philippine Currency, with interest thereon at the rate of Five percent (5%) per
month/annum, payable in One Installment (01) equal daily/weekly/semi-monthly/monthly of PESOS Five
Hundred Thousand Pesos (₱500,000.00), first installment to become due on June 30, 1997. xxx"44
(Emphasis Ours).

Although the phrase "jointly and severally" in the promissory note clearly and unmistakably provided for
the solidary liability of the parties, we note and stress that the promissory note is merely a photocopy of
the original, which was never produced.

Under the best evidence rule, when the subject of inquiry is the contents of a document, no evidence is
admissible other than the original document itself except in the instances mentioned in Section 3, Rule
130 of the Revised Rules of Court.45

The records show that the respondent had the custody of the original promissory note dated April 1, 1997,
with a superimposed rubber stamp mark "June 30, 1997", and that it had been given every opportunity to
present it. The respondent even admitted during pre-trial that it could not present the original promissory
note because it is in the custody of its cashier who is stranded in Bicol.46 Since the respondent never
produced the original of the promissory note, much less offered to produce it, the photocopy of the
promissory note cannot be admitted as evidence. Other than the promissory note in question, the

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respondent has not presented any other evidence to support a finding of solidary liability. As we earlier
noted, both lower courts completely relied on the note when they found the Bognot siblings solidarily
liable.

The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be positively and
clearly expressed and cannot be presumed.

In view of the inadmissibility of the promissory note, and in the absence of evidence showing that the
petitioner had bound himself solidarily with Rolando for the payment of the loan, we cannot but conclude
that the obligation to pay is only joint.48

The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be Equitably
Reduced

Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the respondent
for the unpaid loan, we find the imposition of the 5% monthly interest to be excessive, iniquitous,
unconscionable and exorbitant, and hence, contrary to morals and jurisprudence. Although parties to a
loan agreement have wide latitude to stipulate on the applicable interest rate under Central Bank Circular
No. 905 s. 1982 (which suspended the Usury Law ceiling on interest effective January 1, 1983), we stress
that unconscionable interest rates may still be declared illegal.49

In several cases, we have ruled that stipulations authorizing iniquitous or unconscionable interests are
contrary to morals and are illegal. In Medel v. Court of Appeals, we annulled a stipulated 5.5% per month
or 66% per annum interest on a ₱500,000.00 loan, and a 6% per month or 72% per annum interest on a
₱60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant.

We reiterated this ruling in Chua v. Timan, where we held that the stipulated interest rates of 3% per
month and higher are excessive, iniquitous, unconscionable and exorbitant, and must therefore be
reduced to 12% per annum.

Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5% per month,
(or 60% per annum) in the promissory note is excessive, unconscionable, contrary to morals and is thus
illegal. It is void ab initio for violating Article 130652 of the Civil Code. We accordingly find it equitable to
reduce the interest rate from 5% per month to 1% per month or 12% per annum in line with the
prevailing jurisprudence.

WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of Appeals in CA-G.R.
CV No. 66915 is hereby AFFIRMED with MODIFICATION, as follows:

1. The petitioner Leonardo A. Bognot and his brother, Rolando A. Bognot are JOINTLY LIABLE to pay the
sum of ₱500,000.00 plus 12% interest per annum from December 3, 1997 until fully paid.

2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.

Costs against petitioner Leonardo A. Bognot.

SO ORDERED.
x-------------------------------------------------------------------------------------------------------------------x
G.R. No. 162826 October 14, 2013
NARCISO DEGAÑOS, Petitioner, vs.
PEOPLE OF THE PHILIPPINES, Respondent.
DECISION
BERSAMIN, J.:

Novation is not a mode of extinguishing criminal liability under the penal laws of the country. Only the.
State may validly waive the criminal action against an accused. Novation is relevant only to determine if
the parties have meanwhile altered the nature of the obligation prior to the commencement of the criminal
prosecution in order to prevent the incipient criminal liability of the accused.

Page 136 of 189

Antecedents

In an amended information dated March 23, 1994, the Office of the Provincial Prosecutor of Bulacan
charged Brigida D. Luz, alias Aida Luz, and Narciso Degaños in the Regional Trial Court in Malolos, Bulacan
with estafa under Article 315 paragraph 1 b) of the Revised Penal Code, allegedly committed as follows:

That on or about the 27th day of April, 1987 until July 20, 1987, in the municipality of Meycauayan,
province of Bulacan, Philippines, and within the jurisdiction of this Honorable Court, the above-named
accused conspiring, confederating and helping one another, received from Spouses Atty. Jose Bordador
and Lydia Bordador gold and pieces of jewelry worth ₱438,702.00, under express obligation to sell the
same on commission and remit the proceeds thereof or return the unsold gold and pieces of jewelry, but
the said accused, once in possession of the said merchandise and far from complying with their aforesaid
obligation, inspite of repeated demands for compliance therewith, did then and there willfully, unlawfully
and feloniously, with intent of gain and grave abuse of confidence misapply, misappropriate and convert
to their own use and benefit the said merchandise and/or the proceeds thereof, to the damage and
prejudice of said Sps. Atty. Jose Bordador and Lydia Bordador in the said amount of ₱438,702.00.

Contrary to law.2

The decision of the Court of Appeals (CA) summarized the evidence of the parties as follows:

Prior to the institution of the instant case, a separate civil action for the recovery of sum of money was
filed on June 25, 1990 by the private complainants spouses Jose and Lydia Bordador against accused
Brigida D. Luz alias Aida D. Luz and Narciso Degaños. In an amended complaint dated November 29,
1993, Ernesto Luz, husband of Brigida Luz, was impleaded as party defendant. The case docketed as Civil
Case No. 412-M-90 was raffled to Branch 15, RTC of Malolos, Bulacan. On June 23, 1995, the said court
found Narciso Degaños liable and ordered him to pay the sum of ₱725,463,98 as actual and consequential
damages plus interest and attorney’s fees in the amount of ₱10,000.00. On the other hand, Brigida Luz
alias Aida Luz was ordered to pay the amount of ₱21,483.00, representing interest on her personal loan.
The case against Ernesto Luz was dismissed for insufficiency of evidence. Both parties appealed to the
Court of Appeals. On July 9, 1997, this Court affirmed the aforesaid decision. On further appeal, the
Supreme Court on December 15, 1997 sustained the Court of Appeals. Sometime in 1994, while the said
civil case was pending, the private complainants instituted the present case against the accused.

EVIDENCE FOR THE PROSECUTION

The prosecution evidence consists of the testimonies of the private complainants-spouses, Jose and Lydia
Bordador.

Private complainant Lydia Bordador, a jeweler, testified that accused Narciso Degaños and Brigida/Aida
Luz are brother and sister. She knew them because they are the relatives of her husband and their
Kumpadre/kumadre. Brigida/Aida Luz was the one who gave instructions to Narciso Degaños to get gold
and jewelry from Lydia for them to sell. Lydia came to know Narciso Degaños because the latter
frequently visited their house selling religious articles and books. While in their house, Narciso Degaños
saw her counting pieces of jewelry and he asked her if he could show the said pieces of jewelry to his
sister, Brigida/Aida Luz, to which she agreed. Thereafter, Narciso Degaños returned the jewelry and
Aida/Brigida Luz called her to ask if she could trust Narciso Degaños to get the pieces of jewelry from her
for Aida/Brigida Luz to sell. Lydia agreed on the condition that if they could not pay it in cash, they should
pay it after one month or return the unsold jewelry within the said period. She delivered the said jewelry
starting sometime in 1986 as evidenced by several documents entitled "Katibayan at Kasunduan", the
earliest of which is dated March 16, 1986. Everytime Narciso Degaños got jewelry from her, he signed the
receipts in her presence. They were able to pay only up to a certain point. However, receipt nos. 614 to
745 dated from April 27, 1987 up to July 20, 1987 (Exhs. "A"-"O") were no longer paid and the accused
failed to return the jewelry covered by such receipts. Despite oral and written demands, the accused failed
and refused to pay and return the subject jewelry. As of October 1998, the total obligation of the accused
amounted to ₱725,000.00.

Private complainant Atty. Jose Bordador corroborated the testimony of his wife, Lydia. He confirmed that
their usual business practice with the accused was for Narciso Degaños to receive the jewelry and gold

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items for and in behalf of Brigida/Aida Luz and for Narciso Degaños to sign the "Kasunduan at Katibayan"
receipts while Brigida/Aida Luz will pay for the price later on. The subject items were usually given to
Narciso Degaños only upon instruction from Brigida/Aida Luz through telephone calls or letters. For the
last one year, the "Kasunduan at Katibayan" receipts were signed in his presence. Said business
arrangement went on for quite sometime since Narciso Degaños and Brigida/Aida Luz had been paying
religiously. When the accused defaulted in their payment, they sent demand letters. It was the accused’s
sister, Julie dela Rosa, who responded, seeking an extension of time for the accused to settle their
obligation.

EVIDENCE FOR THE DEFENSE

The defense presented accused Brigida/Aida Luz, who testified that she started transacting business of
selling gold bars and jewelry with the private complainants sometime in 1986 through her brother, Narciso
Degaños. It was the usual business practice for Narciso Degaños to get the gold bars and pieces of jewelry
from the private complainants after she placed orders through telephone calls to the private complainants,
although sometimes she personally went to the private complainants’ house to get the said items. The
gold bars and pieces of jewelry delivered to her by Narciso Degaños were usually accompanied by a pink
receipt which she would sign and after which she would make the payments to the private complainants
through Narciso Degaños, which payments are in the form of postdated checks usually with a thirty-day
period. In return, the private complainants would give the original white receipts to Narciso Degaños for
him to sign. Thereafter, as soon as the postdated checks were honored by the drawee bank, the said
white receipts were stamped "paid" by Lydia Bordador, after which the same would be delivered to her by
Narciso Degaños.

On September 2, 1987, she sent a letter to private complainant Lydia Bordador requesting for an
accounting of her indebtedness. Lydia Bordador made an accounting which contained the amount of
₱122,673.00 as principal and ₱21,483.00 as interest. Thereafter, she paid the principal amount through
checks. She did not pay the interest because the same was allegedly excessive. In 1998, private
complainant Atty. Jose Bordador brought a ledger to her and asked her to sign the same. The said ledger
contains a list of her supposed indebtedness to the private complainants. She refused to sign the same
because the contents thereof are not her indebtedness but that of his brother, Narciso Degaños. She even
asked the private complainants why they gave so many pieces of jewelry and gold bars to Narciso
Degaños without her permission, and told them that she has no participation in the transactions covered
by the subject "Kasunduan at Katibayan" receipts.

Co-accused Narciso Degaños testified that he came to know the private complainants when he went to the
latter’s house in 1986 to sell some Bible books. Two days later he returned to their house and was initially
given a gold bracelet and necklace to sell. He was able to sell the same and paid the private complainants
with the proceeds thereof. Since then he started conducting similar business transactions with the private
complainants. Said transactions are usually covered by receipts denominated as "Kasunduan at
Katibayan". All the "Kasunduan at Katibayan" receipts were issued by the private complainants and was
signed by him. The phrase "for Brigida Luz" and for "Evely Aquino" were written on the receipts so that in
case he fails to pay for the items covered therein, the private complainants would have someone to collect
from. He categorically admitted that he is the only one who was indebted to the private complainants and
out of his indebtedness, he already made partial payments in the amount of ₱53,307.00. Included in the
said partial payments is the amount of ₱20,000.00 which was contributed by his brothers and sisters who
helped him and which amount was delivered by Brigida Luz to the private complainants.3

Ruling of the RTC

On June 23, 1999, the RTC found Degaños guilty as charged but acquitted Luz for insufficiency of
evidence, imposing on Degaños twenty years of reclusion temporal, viz:

WHEREFORE, judgment is hereby rendered as follows:

1. finding accused Narciso Degaños GUILTY beyond reasonable doubt of the crime of estafa penalized
under Article 315, Subsection 1, paragraph (b) of the Revised Penal code and hereby sentences him to
suffer the penalty of TWENTY YEARS (20) of reclusion temporal;

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2. finding accused Brigida Luz NOT GUILTY and is hereby ACQUITTED on the ground of insufficiency of
evidence.

SO ORDERED.

Decision of the CA

On appeal, Degaños assailed his conviction upon the following grounds, to wit:

I
THE HONORABLE COURT A QUO ERRED IN NOT FINDING THAT THE AGREEMENT BETWEEN THE PRIVATE
COMPLAINANT LYDIA BORDADOR AND THE ACCUSED WAS ONE OF SALE ON CREDIT.

II
THE HONORABLE COURT A QUO ERRED IN NOT FINDING THAT NOVATION HAD CONVERTED THE
LIABILITY OF THE ACCUSED INTO A CIVIL ONE.

III
THE HONORABLE COURT ERRED IN NOT APPLYING THE INDETERMINATE SENTENCE LAW.

On September 23, 2003, however, the CA affirmed the conviction of Degaños but modified the prescribed
penalty, thusly:

WHEREFORE, the appealed Decision finding the accused-appellant Narciso Degaños guilty beyond
reasonable doubt of the crime of Estafa under Article 315 (1) par. b of the Revised Penal code is hereby
AFFIRMED with the modification that the accused-appellant is sentenced to suffer an indeterminate
penalty of imprisonment of four (4) years and two (2) months of prision correccional in its medium period,
as the minimum, to twenty (20) years of reclusion temporal as maximum.

SO ORDERED.

Issues

Hence, Degaños has appealed, again submitting that:

I. THE HONORABLE COURT A QUO ERRED IN NOT FINDING THAT THE AGREEMENT BETWEEN THE
PRIVATE COMPLAINANT LYDIA BORDADOR AND THE ACCUSED WAS ONE OF SALE ON CREDIT;

II. THE HONORABLE COURT A QUO ERRED IN NOT FINDING THAT NOVATION HAD CONVERTED THE
LIABILITY OF THE ACCUSED INTO A CIVIL ONE.8

Ruling

The appeal lacks merit.

I. Transaction was an agency, not a sale on credit

Degaños contends that his agreement with the complainants relative to the items of jewelry and gold
subject of the amended information as embodied in the relevant Kasunduan at Katibayan was a sale on
credit, not a consignment to sell on commission basis.

The contention of Degaños is devoid of factual and legal bases.

The text and tenor of the relevant Kasunduan at Katibayan follow:

KASUNDUAN AT KATIBAYAN

Akong nakalagda sa ibaba nito ay nagpapatunay na tinanggap ko kay Ginang LYDIA BORDADOR ng
Calvario, Meycauayan, Bulacan ang mga hiyas (jewelries) [sic] na natatala sa ibaba nito upang ipagbili ko

Page 139 of 189

sa kapakanan ng nasabing Ginang. Ang pagbibilhan ko sa nasabing mga hiyas ay aking ibibigay sa
nasabing Ginang, sa loob ng __________ araw at ang hindi mabili ay aking isasauli sa kanya sa loob din
ng nasabing taning na panahon sa mabuting kalagayan katulad ng aking tanggapin. Ang bilang kabayaran
o pabuya sa akin ay ano mang halaga na aking mapalabis na mga halagang nakatala sa ibaba nito. Ako ay
walang karapatang magpautang o kaya ay magpalako sa ibang tao ng nasabing mga hiyas.9

Based on the express terms and tenor of the Kasunduan at Katibayan , Degaños received and accepted
the items under the obligation to sell them in behalf of the complainants ("ang mga hiyas (jewelries) na
natatala sa ibaba nito upang ipagbili ko sa kapakanan ng nasabing Ginang"), and he would be
compensated with the overprice as his commission ("Ang bilang kabayaran o pabuya sa akin ay ano mang
halaga na aking mapalabis na mga halagang nakatala sa ibaba nito."). Plainly, the transaction was a
consignment under the obligation to account for the proceeds of sale, or to return the unsold items. As
such, he was the agent of the complainants in the sale to others of the items listed in the Kasunduan at
Katibayan.

In contrast, according the first paragraph of Article 1458 of the Civil Code, one of the contracting parties
in a contract of sale obligates himself to transfer the ownership of and to deliver a determinate thing,
while the other party obligates himself to pay therefor a price certain in money or its equivalent. Contrary
to the contention of Degaños, there was no sale on credit to him because the ownership of the items did
not pass to him.

II. Novation did not transpire as to prevent the incipient criminal liability from arising

Degaños claims that his partial payments to the complainants novated his contract with them from agency
to loan, thereby converting his liability from criminal to civil. He insists that his failure to complete his
payments prior to the filing of the complaint-affidavit by the complainants notwithstanding, the fact that
the complainants later required him to make a formal proposal before the barangay authorities on the
payment of the balance of his outstanding obligations confirmed that novation had occurred.

The CA rejected the claim of Degaños, opining as follows:

Likewise untenable is the accused-appellant’s argument that novation took place when the private
complainants accepted his partial payments before the criminal information was filed in court and
therefore, his criminal liability was extinguished.

Novation is not one of the grounds prescribed by the Revised Penal Code for the extinguishment of
criminal liability.1âwphi1 It is well settled that criminal liability for estafa is not affected by compromise or
novation of contract, for it is a public offense which must be prosecuted and punished by the Government
on its own motion even though complete reparation should have been made of the damage suffered by
the offended party. A criminal offense is committed against the People and the offended party may not
waive or extinguish the criminal liability that the law imposes for the commission of the offense. The
criminal liability for estafa already committed is not affected by the subsequent novation of the contract.

We sustain the CA.

Degaños’ claim was again factually unwarranted and legally devoid of basis, because the partial payments
he made and his purported agreement to pay the remaining obligations did not equate to a novation of
the original contractual relationship of agency to one of sale. As we see it, he misunderstands the nature
and the role of novation in a criminal prosecution.

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a

subsequent one that terminates the first, either by (a) changing the object or principal conditions; or (b)
substituting the person of the debtor; or (c) subrogating a third person in the rights of the creditor. In
order that an obligation may be extinguished by another that substitutes the former, it is imperative that
the extinguishment be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other.11 Obviously, in case of only slight modifications, the old
obligation still prevails.12

The Court has further pointed out in Quinto v. People:

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Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express
agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.

The extinguishment of the old obligation by the new one is necessary element of novation which may be
effected either expressly or impliedly. The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon
the other hand, no specific form is required for an implied novation, and all that is prescribed by law would
be an incompatibility between the two contracts. While there is really no hard and fast rule to determine
what might constitute to be a sufficient change that can bring about novation, the touchstone for
contrarity, however would be an irreconcilable incompatibility between the old and the new obligations.

There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect
of extinguishing an obligation by another which substitutes the same. The firs t is when novation has been
explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first. Corollarily, changes that breed incompatibility must be essential in nature and
not merely accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be
merely modificatory in nature and insufficient to extinguish the original obligation.

The changes alluded to by petitioner consists only in the manner of payment. There was really no
substitution of debtors since private complainant merely acquiesced to the payment but did not give her
consent to enter into a new contract.
The legal effects of novation on criminal liability were explained by the Court, through Justice J.B.L. Reyes,
in People v. Nery,15 viz:

The novation theory may perhaps apply prior to the filing of the criminal information in court by the state
prosecutors because up to that time the original trust relation may be converted by the parties into an
ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the original
trust. But after the justice authorities have taken cognizance of the crime and instituted action in court,
the offended party may no longer divest the prosecution of its power to exact the criminal liability, as
distinguished from the civil. The crime being an offense against the state, only the latter can renounce it
(People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montañes, 8 Phil. 620).

It may be observed in this regard that novation is not one of the means recognized by the Penal Code
whereby criminal liability can be extinguished; hence, the role of novation may only be to either prevent
the rise of criminal liability or to cast doubt on the true nature of the original basic transaction, whether or
not it was such that its breach would not give rise to penal responsibility, as when money loaned is made
to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs.
Villareal, 27 Phil. 481).

Even in Civil Law the acceptance of partial payments, without further change in the original relation
between the complainant and the accused, can not produce novation. For the latter to exist, there must
be proof of intent to extinguish the original relationship, and such intent can not be inferred from the mere
acceptance of payments on account of what is totally due. Much less can it be said that the acceptance of
partial satisfaction can effect the nullification of a criminal liability that is fully matured, and already in the
process of enforcement. Thus, this Court has ruled that the offended party’s acceptance of a promissory
note for all or part of the amount misapplied does not obliterate the criminal offense (Camus vs. Court of
Appeals, 48 Off. Gaz. 3898).

Novation is not a ground under the law to extinguish criminal liability. Article 89 (on total extinguishment)
and Article 94 (on partial extinguishrnent)17 of the Revised Penal Code list down the various grounds for
the extinguishment of criminal liability. Not being included in the list, novation is limited in its effect only
to the civil aspect of the liability, and, for that reason, is not an efficient defense in estafa. This is because
only the State may validly waive the criminal action against an accused.18 The role of novation may only
be either to prevent the rise of criminal liability, or to cast doubt on the true nature of the original basic
transaction, whether or not it was such that the breach of the obligation would not give rise to penal

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responsibility, as when money loaned is made to appear as a deposit, or other similar disguise is resorted
to.

Although the novation of a contract of agency to make it one of sale may relieve an offender from an
incipient criminal liability, that did not happen here, for the partial payments and the proposal to pay the
balance the accused made during the barangay proceedings were not at all incompatible with Degafios
liability under the agency that had already attached. Rather than converting the agency to sale, therefore,
he even thereby confirmed his liability as the sales agent of the complainants.

VHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on September 23,
2003; and ORDERS petitioner to pay the costs of suit.

SO ORDERED.
x------------------------------------------------------------------------------------------------------------------x
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 certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R. CV No.
95709, which stemmed from a complaint3 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 7,220,968.31 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, 20077 in the amount of 1,487,766.68 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 agreement10
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:

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 ₱18.50 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 ₱6.50 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.

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On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of
7,220,968.31, but no payment was made to him.

Dan T. Lim filed a complaint14 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
answer15 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.

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 appealed18 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 Appeals20 rendered a decision21 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 ₱7,220,968.31 with interest at 12% per annum from the time of demand; ₱50,000.00
moral damages; ₱50,000.00 exemplary damages; and ₱50,000.00 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 reconsideration25 having been denied,26 Arco Pulp and Paper and its President 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.

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.

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

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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.

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 ₱7,220,968.31 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.

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)

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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."

Novation was extensively discussed by this court in Garcia v. Llamas:

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 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 tobe 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)

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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 states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos
and Mr. Eric Sy. . . .

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 ₱7,220,968.31.

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.

Further, the following requisites must be proven for the recovery of moral damages:

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 ₱7,220,968.31 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;

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(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 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.

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 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:

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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 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. Ranteciting 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

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(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent
manner.

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.

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)

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:

Page 149 of 189

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 1,487,766.68
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.1âwphi1 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.

The rate of interest due on the obligation must be reduced in view of Nacar v. Gallery Frames

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 Linesare
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.

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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 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 ₱7,220,968.31 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 ₱7,220,968.31 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
₱50,000.00, exemplary damages in the amount of ₱50,000.00, and attorney's fees in the amount of
₱50,000.00.

SO ORDERED.
x--------------------------------------------------------------------------------------------------------------------x
G.R. No. 167519 January 14, 2015
THE WELLEX GROUP, INC., Petitioner, vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:

This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court. The Wellex Group, Inc.
(Wellex) prays that the Decision2 dated July 30, 2004 of the Court of Appeals in CA-GR. CV No. 74850 be
reversed and set aside.3

The Court of Appeals affirmed the Decision4 of the Regional Trial Court, Branch 62 of Makati City in Civil
Case No. 99-1407. The Regional Trial Court rendered judgment in favor of U-Land Airlines, Co., Ltd.
(ULand) and ordered the rescission of the Memorandum of Agreement5 between Wellex and U-Land.6

Wellex is a corporation established under Philippine law and it maintains airline operations in the
Philippines.7 It owns shares of stock in several corporations including Air Philippines International
Corporation (APIC), Philippine Estates Corporation (PEC), and Express Savings Bank (ESB).8 Wellex
alleges that it owns all shares of stock of Air Philippines Corporation (APC).9

U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and existing under the laws of Taiwan,
registered to do business . . . in the Philippines."10 It is engaged in the business of air transportation in
Taiwan and in other Asian countries.11

On May 16, 1998, Wellex and U-Land entered into a Memorandum of Agreement12 (First Memorandum of
Agreement) to expand their respective airline operations in Asia.13

Terms of the First Memorandum of Agreement

The preambular clauses of the First Memorandum of Agreement state:

WHEREAS, U-LAND is engaged in the business of airline transportation in Taiwan, Philippines and/or in
other countries in the Asian region, and desires to expand its operation and increase its market share by,
among others, pursuing a long-term involvement in the growing Philippine airline industry;

WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation and the latter’s subsidiary, Air

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Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets, a Memorandum of Agreement on ______, a certified copy of which is attached hereto as Annex
"A" and is hereby made an integral part hereof, which sets forth, among others, the basis for WELLEX’s
present ownership of shares in Air Philippines International Corporation. WHEREAS, the parties recognize
the opportunity to develop a long-term profitable relationship by combining such of their respective
resources in an expanded airline operation as well as in property development and in other allied business
activities in the Philippines, and desire to set forth herein the basic premises and their understanding with
respect to their joint cooperation and undertakings.14

In the First Memorandum of Agreement, Wellex and U-Land agreed to develop a long-term business
relationship through the creation of joint interest in airline operations and property development projects
in the Philippines.15 This long-term business relationship would be implemented through the following
transactions, stated in Section 1 of the First Memorandum of Agreement:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION ("APIC") equivalent to at least 35% of the outstanding capital stock of APIC, but in any
case, not less than 1,050,000,000 shares . . . [;]

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES CORPORATION ("PEC")
equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares . . . [;]

(c) U-LAND shall enter into a joint development agreement with PEC . . . [; and]

(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS SAVINGS BANK
("ESB") up to 40% of the outstanding capital stock of ESB . . . under terms to be mutually agreed.16

I. Acquisition of APIC and PEC shares

The First Memorandum of Agreement stated that within 40 days from its execution date, Wellex and U-
Land would execute a share purchase agreement covering U-Land’s acquisition of the shares of stock of
both APIC (APIC shares) and PEC (PEC shares).17 In this share purchase agreement, U-Land would
purchase from Wellex its APIC shares and PEC shares.18

Wellex and U-Land agreed to an initial purchase price of P0.30 per share of APIC and 0.65 per share of
PEC. However, they likewise agreed that the final price of the shares of stock would be reflected in the
actual share purchase agreement.19

Both parties agreed that the purchase price of APIC shares and PEC shares would be paid upon the
execution of the share purchase agreement and Wellex’s delivery of the stock certificates covering the
shares of stock. The transfer of APIC shares and PEC shares to U-Land was conditioned on the full
remittance of the final purchase price as reflected in the share purchase agreement. Further, the transfer
was conditioned on the approval of the Securities and Exchange Commission of the issuance of the shares
of stock and the approval by the Taiwanese government of U-Land’s acquisition of these shares of
stock.20

Thus, Section 2 of the First Memorandum of Agreement reads:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by
mutual agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement ("SHPA") covering
the acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject Shares"). Without
prejudice to any subsequent agreement between the parties, the purchase price for the APIC Shares to be
reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY
FIVE CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution of
the SHPA against delivery of the Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be provided in a separate instrument.

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The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price
reflected in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC) shall
have approved the issuance of the Subject Shares; and (iii) any required approval by the Taiwanese
government of the acquisition by U-LAND of the Subject Shares shall likewise have been obtained.21

II. Operation and management of APIC/PEC/APC

U-Land was "entitled to a proportionate representation in the Board of Directors of APIC and PEC in
accordance with Philippine law."22 Operational control of APIC and APC would be exercised jointly by
Wellex and U-Land "on the basis of mutual agreement and consultations."23 The parties intended that U-
Land would gain primary control and responsibility for the international operations of APC.24 Wellex
manifested that APC is a subsidiary of APIC in the second preambular clause of the First Memorandum of
Agreement.25

Section 3 of the First Memorandum of Agreement reads:

3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a proportionate representation in the

Board of Directors of APIC and PEC in accordance with Philippine law. For this purpose, WELLEX shall
cause the resignation of its nominated Directors in APIC and PEC to accommodate U-LAND’s pro rata
number of Directors. Subject to applicable Philippine law and regulations, operational control of APIC and
Air Philippines Corporation ("APC") shall be lodged jointly to WELLEX and U-LAND on the basis of mutual
agreement and consultations. Further, U-LAND may second technical and other consultants into APIC
and/or APC with the view to increasing service, productivity and efficiency, identifying and implementing
profit-service opportunities, developing technical capability and resources, and installing adequate safety
systems and procedures. In addition, U-LAND shall arrange for the lease by APC of at least three (3)
aircrafts owned by ULAND under such terms as the parties shall mutually agree upon. It is the intent of
the parties that U-LAND shall have primary control and responsibility for APC’s international operations.26

III. Entering into and funding a joint development agreement

Wellex and U-Land also agreed to enter into a joint development agreement simultaneous with the
execution of the share purchase agreement. The joint development agreement shall cover housing and
other real estate development projects.27

U-Land agreed to remit the sum ofUS$3 million not later than May 22, 1998. This sum was to serve as
initial funding for the development projects that Wellex and U-Land were to undertake pursuant to the
joint development agreement. In exchange for the US$3 million, Wellex would deliver stock certificates
covering 57,000,000 PEC shares to U-Land.28

The execution of a joint development agreement was also conditioned on the execution of a share
purchase agreement.

Section 4 of the First Memorandum of Agreement reads:

4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA, U-LAND and
PEC shall execute a joint development agreement ("JDA") to pursue property development projects in the
Philippines. The JDA shall cover specific housing and other real estate development projects as the parties
shall agree. All profits derived from the projects covered by the JDA shall be shared equally between
ULAND and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0 million as initial
funding for the aforesaid development projects against delivery by WELLEX of 57,000,000 shares of PEC
as security for said amount in accordance with Section 9 below.30

In case of conflict between the provisions of the First Memorandum of Agreement and the provisions of
the share purchase agreement or its implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated otherwise or the context of any agreement
between the parties would reveal a different intent.31 Thus, in Section 6 of the First Memorandum of
Agreement:

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6. Primacy of Agreement. – It is agreed that in case of conflict between the provisions of this Agreement
and those of the SHPA and the implementing agreements of the SHPA, the provisions of this Agreement
shall prevail, unless the parties specifically state otherwise, or the context clearly reveal a contrary
intent.32

Finally, Wellex and U-Land agreed that if they were unable to agree on the terms of the share purchase
agreement and the joint development agreement within 40 days from signing, then the First Memorandum
of Agreement would cease to be effective.33

In case no agreements were executed, the parties would be released from their respective undertakings,
except that Wellex would be required to refund within three (3) days the US$3 million given as initial
funding by U-Land for the development projects. If Wellex was unable to refund the US$3 million to U-
Land, U-Land would have the right to recover on the 57,000,000 PEC shares that would be delivered to
it.34 Section 9 of the First Memorandum of Agreement reads:

9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within
forty (40) days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings herein,
except that WELLEX shall refund the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.35

The First Memorandum of Agreement was signed by Wellex Chairman and President William T. Gatchalian
(Mr. Gatchalian) and U-Land Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998.36

Annex "A" or the Second Memorandum of Agreement

Attached and made an integral part of the First Memorandum of Agreement was Annex "A," as stated in
the second preambular clause. It is a document denoted as a "Memorandum of Agreement" entered into
by Wellex, APIC, and APC.37

The Second Memorandum of Agreement states:

This Memorandum of Agreement, made and executed this ___th day of ______ at Makati City, by and
between:

THE WELLEX GROUP, INC., a corporation duly organized and existing under the laws of the Philippines,
with offices at 22F Citibank Tower, 8741 Paseo de Roxas, Makati City (hereinafter referred to as "TWGI"),

AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM PACIFIC, INC.), likewise a corporation
duly organized and existing under the laws of the Philippines, with offices at 8F Rufino Towers, Ayala
Avenue, Makati City (hereinafter referred to as "APIC"),

- and –

AIR PHILIPPINES CORPORATION, corporation duly organized and existing under the laws of the
Philippines, with offices at Multinational Building, Ayala Avenue, Makati City (hereinafter referred to as
"APC").

W I T N E S S E T H: That -

WHEREAS, TWGI is the registered and beneficial owner, or has otherwise acquired _____ (illegible in rollo)
rights to the entire issued and outstanding capital stock (the "APC SHARES") of AIR PHILIPPINES
CORPORATION ("APC") and has made stockholder advances to APC for the _____ (illegible in rollo) of
aircraft, equipment and for working capital used in the latter’s operations (the "_____ (illegible in rollo)
ADVANCES").

WHEREAS, APIC desires to obtain full ownership and control of APC, including all of _____ (illegible in
rollo) assets, franchise, goodwill and operations, and for this purpose has offered to acquire the _____

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(illegible in rollo) 302SHARES of TWGI in APC, including the APC ADVANCES due to TWGI from APC, with
_____ (illegible in rollo) of acquiring all the assets, franchise, goodwill and operations of APC; and TWGI
has _____ (illegible in rollo) to the same in consideration of the conveyance by APIC to TWGI of certain
investments, _____ (illegible in rollo) issuance of TWGI of shares of stock of APIC in exchange for said
APC SHARES and the _____ (illegible in rollo) ADVANCES, as more particularly described hereunder.

NOW, THEREFORE, the parties agree as follows:

1. TWGI agrees to transfer the APC ADVANCES in APIC in exchange for the _____ (illegible in rollo) by
APIC to TWGI of investment shares of APIC in Express Bank, Petro Chemical _____ (illegible in rollo) of
Asia Pacific, Republic Resources & Development Corporation and Philippine _____ (illegible in rollo)
Corporation (the "APIC INVESTMENTS").

2. TWGI likewise agrees to transfer the APC SHARES to APIC in exchange solely _____ (illegible in rollo)
the issuance by APIC of One Billion Seven Hundred Ninety-Seven Million Eight Hundred Fifty Seven
Thousand Three Hundred Sixty Four (1,797,857,364) shares of its capital stock of a _____ (illegible in
rollo) value of ₱1.00 per share (the "APIC SHARES"), taken from the currently authorized but _____
(illegible in rollo) shares of the capital stock of APIC, as well as from the increase in the authorized capital
_____ (illegible in rollo) of APIC from ₱2.0 billion to ₱3.5 billion.

3. It is the basic understanding of the parties hereto that the transfer of the APC _____ (illegible in rollo)
as well as the APC ADVANCES to APIC shall be intended to enable APIC to obtain _____ (illegible in rollo)
and control of APC, including all of APC’s assets, franchise, goodwill and _____ (illegible in rollo).

4. Unless the parties agree otherwise, the effectivity of this Agreement and transfers _____ (illegible in
rollo) APC ADVANCES in exchange for the APIC INVESTMENTS, and the transfer of the _____ (illegible in
rollo) SHARES in exchange for the issuance of new APIC SHARES, shall be subject to _____ (illegible in
rollo) due diligence as the parties shall see fit, and the condition subsequent that the _____ (illegible in
rollo) for increase in the authorized capital stock of the APIC from ₱2.0 billion to ₱3.5 _____ (illegible in
rollo) shall have been approved by the Securities and Exchange Commission.

IN WITNESS WHEREOF, the parties have caused these presents to be signed on the date _____ (illegible
in rollo) first above written.38 (Emphasis supplied)

This Second Memorandum of Agreement was allegedly incorporated into the First Memorandum of
Agreement as a "disclosure to [U-Land] [that] . . . [Wellex] was still in the process of acquiring and
consolidating its title to shares of stock of APIC."39 It "included the terms of a share swap whereby
[Wellex] agreed to transfer to APIC its shareholdings and advances to APC in exchange for the issuance by
APIC of shares of stock to [Wellex]."40

The Second Memorandum of Agreement was signed by Mr. Gatchalian, APIC President Salud,41 and APC
President Augustus C. Paiso.42 It was not dated, and no place was indicated as the place of signing.43 It
was not notarized either, and no other witnesses signed the document.44

The 40-day period lapsed on June 25, 1998.45 Wellex and U-Land were not able to enter into any share
purchase agreement although drafts were exchanged between the two.

Despite the absence of a share purchase agreement, U-Land remitted to Wellex a total of
US$7,499,945.00.46 These were made in varying amounts and through the issuance of post-dated
checks.47 The dates of remittances were the following:
Date Amount (in US$)
June 30, 1998 990,000.00
July 2, 1998 990,000.00
20,000.00
July 30, 1998 990,000.00

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 490,000.00
490,000.00
August 1, 1998 990,000.00
490,000.00
490,000.00
August 3, 1998 990,000.00
70,000.00
September 25, 1998 399,972.50
99, 972.50
Total US$7,499,945.0048
Wellex acknowledged the receipt of these remittances in a confirmation letter addressed to U-Land dated
September 30, 1998.

According to Wellex, the parties agreed to enter into a security arrangement. If the sale of the shares of
stock failed to push through, the partial payments or remittances U-Land made were to be secured by
these shares of stock and parcels of land.50 This meant that U-Land could recover the amount it paid to
Wellex by selling these shares of stock and land titles or using them to generate income.

Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land stock certificates representing
60,770,000 PEC shares and 72,601,000 APIC shares.51 These were delivered to U-Land on July 1, 1998,
September 1, 1998, and October 1, 1998.52

In addition, Wellex delivered to U-Land Transfer Certificates of Title (TCT) Nos. T-216769, T-216771, T-
228231, T-228227, T-211250, and T-216775 covering properties owned by Westland Pacific Properties
Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910, T-120250, T-1114398, and T-
120772 covering properties owned by Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land
received a letter from Wellex, indicating a list of stock certificates that the latter was giving to the former
by way of "security."55

Despite these transactions, Wellex and U-Land still failed to enter into the share purchase agreement and
the joint development agreement.

In the letter56 dated July 22, 1999, 10 months57 after the last formal communication between the two
parties, U-Land, through counsel, demanded the return of the US$7,499,945.00.58 This letter was sent 14
months after the signing of the First Memorandum of Agreement.

Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to enter into the. . . Share Purchase
Agreement."59 As far as U-Land was concerned, the First Memorandum of Agreement was no longer in
effect, pursuant to Section 9.60 As such, U-Land offered to return all the stock certificates covering APIC
shares and PEC shares as well as the titles to real property given by Wellex as security for the amount
remitted by U-Land.61

Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-Land’s claims. Counsel for Wellex
stated that the two parties carried out several negotiations that included finalizing the terms of the share
purchase agreement and the terms of the joint development agreement. Wellex asserted that under the
joint development agreement, U-Land agreed to remit the sum of US$3 million by May 22,1998 as initial
funding for the development projects.

Wellex further asserted that it conducted extended discussions with U-Land in the hope of arriving at the
final terms of the agreement despite the failure of the remittance of the US$3 million on May 22, 1998.64
That remittance pursuant to the joint development agreement "would have demonstrated [U-Land’s] good
faith in finalizing the agreements."

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Wellex averred that, "[s]ave for a few items, [Wellex and U-Land] virtually agreed on the terms of both
[the share purchase agreement and the joint development agreement.]"66 Wellex believed that the
parties had already "gone beyond the ‘intent’ stage of the [First Memorandum of Agreement] and [had
already] effected partial implementation of an over-all agreement."67 U-Land even delivered a total of 12
post-dated checks to Wellex as payment for the APIC shares and PEC shares.68 "[Wellex] on the other
hand, had [already] delivered to[U-Land] certificates of stock of APEC [sic] and PEC as well as various
land titles to cover actual remittances."69 Wellex alleged that the agreements were not finalized because
U-Land was "forced to suspend operations because of financial problems spawned by the regional
economic turmoil."

Thus, Wellex maintained that "the inability of the parties to execute the [share purchase agreement] and
the [joint development agreement] principally arose from problems at [U-Land’s] side, and not due to
[Wellex’s] ‘unjustified refusal to enter into [the] [share purchase agreement][.]’"71

On July 30, 1999, U-Land filed a Complaint72 praying for rescission of the First Memorandum of
Agreement and damages against Wellex and for the issuance of a Writ of Preliminary Attachment.73 From
U-Land’s point of view, its primary reason for purchasing APIC shares from Wellex was APIC’s majority
ownership of shares of stock in APC (APC shares).74 After verification with the Securities and Exchange
Commission, U-Land discovered that "APIC did not own a single share of stock in APC."75 U-Land alleged
that it repeatedly requested that the parties enter into the share purchase agreement.76 U-Land attached
the demand letter dated July 22, 1999 to the Complaint.77 However, the 40-day period lapsed, and no
share purchase agreement was finalized.78

U-Land alleged that, as of the date of filing of the Complaint, Wellex still refused to return the amount of
US$7,499,945.00 while refusing to enter into the share purchase agreement.79 U-Land stated that it was
induced by Wellex to enter into and execute the First Memorandum of Agreement, as well as release the
amount of US$7,499,945.00.80

In its Answer with Compulsory Counterclaim,81 Wellex countered that U-Land had no cause of action.82
Wellex maintained that under the First Memorandum of Agreement, the parties agreed to enter into a
share purchase agreement and a joint development agreement.83 Wellex alleged that to bring the share
purchase agreement to fruition, it would have to acquire the corresponding shares in APIC.84 It claimed
that U-Land was fully aware that the former "still ha[d] to consolidate its title over these shares."85 This
was the reason for Wellex’s attachment of the Second Memorandum of Agreement to the First
Memorandum of Agreement. Wellex attached the Second Memorandum of Agreement as evidence to
refute U-Land’s claim of misrepresentation.86

Wellex further alleged that U-Land breached the First Memorandum of Agreement since the payment for
the shares was to begin during the 40-day period, which began on May 16, 1998.87 In addition, U-Land
failed to remit the US$3 million by May 22, 1998 that would serve as initial funding for the development
projects.88 Wellex claimed that the remittance of the US$3 million on May 22, 1998 was a mandatory
obligation on the part of U-Land.89 Wellex averred that it presented draft versions of the share purchase
agreement, which were never finalized.90 Thus, it believed that there was an implied extension of the 40-
day period within which to enter into the share purchase agreement and the joint development agreement
since U-Land began remitting sums of money in partial payment for the purchase of the shares of stock.91

In its counterclaim against U-Land, Wellex alleged that it had already set in motion building and
development of real estate projects on four (4) major sites in Cavite, Iloilo, and Davao. It started initial
construction on the basis of its agreement with U-Land to pursue real estate development projects.92

Wellex claims that, had the development projects pushed through, the parties would have shared equally
in the profits of these projects.93 These projects would have yielded an income of ₱2,404,948,000.00, as
per the study Wellex conducted, which was duly recognized by U-Land.94 Half of that amount,
₱1,202,474,000.00, would have redounded to Wellex.95 Wellex, thus, prayed for the rescission of the
First Memorandum of Agreement and the payment of ₱1,202,474,000 in damages for loss of profit.96 It
prayed for the payment of moral damages, exemplary damages, attorney’s fees, and costs of suit.97

In its Reply,98 U-Land denied that there was an extension of the 40-day period within which to enter into
the share purchase agreement and the joint development agreement. It also denied requesting for an

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extension of the 40-day period. It further raised that there was no provision in the First Memorandum of
Agreement that required it to remit payments for Wellex’s shares of stock in APIC and PEC within the 40-
day period. Rather, the remittances were supposed to begin upon the execution of the share purchase
agreement.99

As for the remittance of the US$3 million, U-Land stated that the issuance of this amount on May 22, 1998
was supposed to be simultaneously made with Wellex’s delivery of the stock certificates for 57,000,000
PEC shares. These stock certificates were not delivered on that date.100

With regard to the drafting of the share purchase agreement, U-Land denied that it was Wellex that
presented versions of the agreement. U-Land averred that it was its own counsel who drafted versions of
the share purchase agreement and the joint development agreement, which Wellex refused to sign.101

U-Land specifically denied that it had any knowledge prior to or during the execution of the First
Memorandum of Agreement that Wellex still had to "consolidate its title over" its shares in APIC. U-Land
averred that it relied on Wellex’s representation that it was a majority owner of APIC shares and that APIC
owned a majority of APC shares.102

Moreover, U-Land denied any knowledge of the initial steps that Wellex undertook to pursue the
development projects and denied any awareness of a study conducted by Wellex regarding the potential
profit of these projects.103

The case proceeded to trial.

U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief Executive Officer, as its sole
witness.104 Mr. Tseng testified that "[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan
invited [U-Land] to join in the operation of his airline company[.]"105 U-Land did not accept the offer at
that time.106 During the first quarter of 1998, Mr. Gatchalian "went to Taiwan and invited [U-Land] to
invest in Air Philippines[.]"107 This time, U-Land alleged that subsequent meetings were held where Mr.
Gatchalian, representing Wellex, "claimed ownership of a majority of the shares of APIC and ownership by
APIC of a majority of the shares of [APC,] a domestic carrier in the Philippines."108 Wellex, through Mr.
Gatchalian, offered to sell to U-Land PEC shares as well.109

According to Mr. Tseng, the parties agreed to enter into the First Memorandum of Agreement after their
second meeting.110 Mr. Tseng testified that under this memorandum of agreement, the parties would
enter into a share purchase agreement "within forty (40) days from its execution which [would] put into
effect the sale of the shares [of stock] of APIC and PEC[.]"111 However, the "[s]hare [p]urchase
[a]greement was not executed within the forty-day period despite the draft . . . given [by U-Land to
Wellex]."112

Mr. Tseng further testified that it was only after the lapse of the 40-day period that U-Land discovered
that Wellex needed money for the transfer of APC shares to APIC. This allegedly shocked U-Land since
under the First Memorandum of Agreement, APIC was supposed to own a majority of APC shares. Thus, U-
Land remitted to Wellex a total of US$7,499,945.00 because of its intent to become involved in the
aviation business in the Philippines. These remittances were confirmed by Wellex through a confirmation
letter. Despite the remittance of this amount, no share purchase agreement was entered into by the
parties.113

Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice President of Wellex. She admitted her
knowledge of the First Memorandum of Agreement as she was involved in its drafting. She testified that
the First Memorandum of Agreement made reference, under its second preambular clause, to the Second
Memorandum of Agreement entered into by Wellex, APIC, and APC. She testified that under the First
Memorandum of Agreement, U-Land’s purchase of APIC shares and PEC shares from Wellex would take
place within 40 days, with the execution of a share purchase agreement.114

According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman Mr. Wang requested sometime in
June of 1998 for an extension for the execution of the share purchase agreement and the remittance of
the US$3 million. As proof that Mr. Wang made this request, Ms. Ting testified that Mr. Wang sent several
post-dated checks to cover the payment of the APIC shares and PEC shares and the initial funding of US$3

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million for the joint development agreement. She testified that Mr. Wang presented a draft of the share
purchase agreement, which Wellex rejected. Wellex drafted a new version of the share purchase
agreement.115 However, the share purchase agreement was not executed because during the period of
negotiation, Wellex learned from other sources that U-Land "encountered difficulties starting October of
1998."116 Ms. Ting admitted that U-Land made the remittances to Wellex in the amount of
US$7,499,945.00.117

Ms. Ting testified that U-Land was supposed to make an initial payment of US$19 million under the First
Memorandum of Agreement. However, U-Land only paid US$7,499,945.00. The total payments should
have amounted to US$41 million.118

Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a meeting to thresh out the problems
of the First Memorandum of Agreement, but U-Land did not reply. Instead, Wellex only received
communication from U-Land regarding their subsequent negotiations through the latter’s demand letter
dated July 22, 1999. In response, Wellex wrote to U-Land requesting another meeting to discuss the
demands. However, U-Land already filed the Complaint for rescission and caused the attachment against
the properties of Wellex, causing embarrassment to Wellex.119

In the Decision dated April 10, 2001, the Regional Trial Court of Makati City held that rescission of the
First Memorandum of Agreement was proper:

The first issue must be resolved in the negative. Preponderance of evidence leans in favor of plaintiff that
it is entitled to the issuance of the writ of preliminary attachment. Plaintiff’s evidence establishes the facts
that it is engaged in the airline business in Taiwan, was approached by defendant, through its Chairman
William Gatchalian, and was invited by the latter to invest in an airline business in the Philippines, Air
Philippines Corporation (APC); that plaintiff became interested in the invitation of defendant; that during
the negotiations between plaintiff and defendant, defendant induced plaintiff to buy shares in Air
Philippines International Corporation (APIC) since it owns majority of the shares of APC; that defendant
also induced plaintiff to buy shares of APIC in Philippine Estates Corporation (PEC); that the negotiations
between plaintiff and defendant culminated into the parties executing a MOA (Exhs. "C" to "C-3", also Exh.
"1"); that in the second "Whereas" clause of the MOA, defendant represented that it has a current airline
operation through its majority-owned subsidiary APIC, that under the MOA, the parties were supposed to
enter into a Share Purchase Agreement (SPA) within forty (40) days from May 16, 1998, the date the MOA
in order to effect the transfer of APIC and PEC shares of defendant to plaintiff; that plaintiff learned from
defendant that APIC does not actually own a single share in APC; that plaintiff verified with the Securities
and Exchange Commission (SEC), by obtaining a General Information Sheet therefrom (Exh. "C-
Attachment"); that APIC does not in fact own APC; that defendant induced plaintiff to still remit its
investment to defendant, which plaintiff did as admitted by defendant per its Confirmation Letter (Exh.
"D") in order that APC shares could be transferred to APIC; that plaintiff remitted a total of
US$7,499,945.00 to defendant; and that during the forty-day period stipulated in the MOA and even after
the lapse of the said period, defendant has not entered into the SPA, nor has defendant caused the
transfer of APC shares to APIC.

In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s misrepresentation that APIC owns APC
is made clear, as follows:

"WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation (Exh. "C") and the latter’s subsidiary,
Air Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets; x x x" (Second Whereas of Exh. "C")

On the other hand, defendant’s evidence failed to disprove plaintiff’s evidence. The testimony of
defendant’s sole witness Elvira Ting, that plaintiff knew at the time of the signing of the MOA that APIC
does not own a majority of the shares of APC because another Memorandum of Agreement was attached
to the MOA (Exh "1") pertaining to the purchase of APC shares by APIC is unavailing. The second
"Whereas" clause of the MOA leaves no room for interpretation. . . . The second MOA purportedly attached
as Annex "A" of this MOA merely enlightens the parties on the manner by which APIC acquired the shares
of APC. Besides, . . . the second MOA was not a certified copy and did not contain a marking that it is an
Annex "A" when it was supposed to be an Annex "A" and a certified copy per the MOA between plaintiff

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and defendant. As can be also gathered from her testimony, Ms. Ting does not have personal knowledge
that plaintiff was not informed that APIC did not own shares of APC during the negotiations as she was not
present during the negotiations between plaintiff and defendant’s William Gatchalian. Her participation in
the agreement between the parties [was] merely limited to the preparation of the documents to be
signed. Ms. Ting testified, as follows:

"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.

Q And you are just making your statement that U-Land knew about the intended transfer of shares from
APC to APIC because of this WHEREAS CLAUSE and the Annex to this Memorandum of Agreement?
A Yes, it was part of the contract."

(TSN, Elvira Ting, June 6, 2000, pp. 8-10)

Defendant’s fraud in the performance of its obligation under the MOA is further revealed when Ms. Ting
testified on cross-examination that notwithstanding the remittances made by plaintiff in the total amountn
[sic] of US$7,499, 945.00 to partially defray the cost of transferring APC shares to APIC even as of the
year 2000, as follows:

"Q Ms. Ting, can you please tell the Court if you know who owns shares of Air Philippines Corporation at
this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group and certain individual.

Q How much shares of Air Philippines Corporation is owned by Wellex Group?

A Around twenty...at this moment around twenty five percent (25%).

Q Can you tell us if you know who are the other owners of the shares of Air Philippines?
A There are several individual owners, I cannot recall the names.

Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the owners?
A As of this moment, no sir."

(lbid, p. 16)

That defendant represented to plaintiff that it needed the remittances of plaintiff, even if no SPA was
executed yet between the parties, to effect the transfer of APC shares to APIC is admitted by its same
witness also in this wise:

"Q You said that remittances were made to the Wellex Group, Incorporated by plaintiff for the period from
June 1998 to September 1998[,] is that correct?
A Yes, Sir.

Q During all these times, that remittances were made in the total amount of more than seven million
dollars, did you ever know if plaintiff asked for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of AIR PHILIPPINES CORPORATION?
A There were queries on the matter.

Q And what was your answer to those queries, Madam Witness?

A We informed them that the decision was still in the process.

Q Even up to the time that plaintiff U-Land stopped the remittances sometime in September 1998 you
have not effected the transfer of shares of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
INTERNATIONCAL [sic] CORPORATION[,] am I correct?
A APC to APIC, well at that time it’s still in the process.

Q In fact, Madam Witness, is it not correct for me to say that one of the reasons why U-Land Incorporated
was convinced to remit the amounts of money totalling seven million dollars plus, was that your company
said that it needed funds to effect these transfers, is that correct?

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A Yes, sir."

(lbid, pp. 25-29)

As the evidence adduced by the parties stand, plaintiff has established the fact that it had made
remittances in the total amount of US$7,499,945.00 to defendant in order that defendant will make good
its representation that APC is a subsidiary of APIC. The said remittances are admitted by defendant.

Notwithstanding the said remittances, APIC does not own a single share of APC. On the other hand,
defendant could not even satisfactorily substantiate its claim that at least it had the intention to cause the
transfer of APC shares to APIC. [D]efendant obviously did not enter into the stipulated SPA because it did
not have the shares of APC transferred to APIC despite its representations. Under the circumstances, it is
clear that defendant fraudulently violated the provisions of the MOA.120 (Emphasis supplied)

On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court.121 In its July 30, 2004
Decision, the Court of Appeals held that the Regional Trial Court did not err in granting the rescission:

Records show that in the answer filed by defendant-appellant, the latter itself asked for the rescission of
the MOA. Thus, in effect, it prays for the return of what has been given or paid under the MOA, as the law
creates said obligation to return the things which were the object of the contract, and the same could be
carried out only when he who demands rescission can return whatever he may be obliged to restore. The
law says:

"Rescission creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore."

Appellant, therefore, cannot ask for rescission of the MOA and yet refuse to return what has been paid to
it. Further, appellant’s claim that the lower court erred in ruling for the rescission of the MOA is absurd
and ridiculous because rescission thereof is prayed for by the former. . . . This Court agrees with the lower
court that appellee is the injured party in this case, and therefore is entitled to rescission, because the
rescission referred to here is predicated on the breach of faith by the appellant which breach is violative of
the reciprocity between the parties. It is noted that appellee has partly complied with its own obligation,
while the appellant has not. It is, therefore, the right of the injured party to ask for rescission because the
guilty party cannot ask for rescission.

The lower court . . . correctly ruled that:

". . . This Court agrees with plaintiff that defendant’s misrepresentations regarding APIC’s not owning
shares in APC vitiates its consent to the MOA. Defendant’s continued misrepresentation that it will cause
the transfer of APC shares in APIC inducing plaintiff to remit money despite the lapse of the stipulated
forty day period, further establishes plaintiff’s right to have the MOA rescinded.

Section 9 of the MOA itself provides that in the event of the non-execution of an SPA within the 40 day
period, or within the extensions thereof, the payments made by plaintiff shall be returned to it, to wit:

"9 Validity.- In the event that the parties are unable to agree on the terms of the SHPA and/or JDA within
forty (40) days from the date hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties released from their respective
undertakings herein, except that WELLEX shall refund the US$3.0 million under Section 4 within three (3)
days therefrom, otherwise U-LAND shall have the right to recover the 57,000,000 PEC shares delivered to
ULAND under Section 4."

Clearly, the parties were not able to agree on the terms of the SPA within and even after the lapse of the
stipulated 40 day period. There being no SPA entered into by and between the plaintiff and defendant,
defendant’s return of the remittances [of] plaintiff in the total amount of US$7,499,945 is only proper, in
the same vein, plaintiff should return to defendant the titles and certificates of stock given to it by
defendant.122 (Citations omitted)

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Hence, this Petition was filed.

Petitioner’s Arguments

Petitioner Wellex argues that contrary to the finding of the Court of Appeals, respondent U-Land was not
entitled to rescission because the latter itself violated the First Memorandum of Agreement. Petitioner
Wellex states that respondent U-Land was actually bound to pay US$17.5 million for all of APIC shares
and PEC shares under the First Memorandum of Agreement and the US$3 million to pursue the
development projects under the joint development agreement. In sum, respondent U-Land was liable to
petitioner Wellex for the total amount of US$20.5 million. Neither the Court of Appeals nor the Regional
Trial Court made any mention of the legal effect of respondent U-Land’s failure to pay the full purchase
price.123

On the share purchase agreement, petitioner Wellex asserts that its obligation to deliver the totality of the
shares of stock would become demandable only upon remittance of the full purchase price of US$17.5
million.124 The full remittance of the purchase price of the shares of stock was a suspensive condition for
the execution of the share purchase agreement and delivery of the shares of stock. Petitioner Wellex
argues that the use of the term "upon" in Section 2 of the First Memorandum of Agreement clearly
provides that the full payment of the purchase price must be given "simultaneously" or "concurrent" with
the execution of the share purchase agreement.125

Petitioner Wellex raises that the Court of Appeals erred in saying that the rescission of the First
Memorandum of Agreement was proper because petitioner Wellex itself asked for this in its Answer before
the trial court.126 It asserts that "there can be no rescission of a non-existent obligation, such as [one]
whose suspensive condition has not yet happened[,]"127 as held in Padilla v. Spouses Paredes.128 Citing
Villaflor v. Court of Appeals129 and Spouses Agustin v. Court of Appeals,130 it argues that "the vendor. .
. has no obligation to deliver the thing sold. . . if the buyer. . . fails to fully pay the price as required by
the contract."131 In this case, petitioner Wellex maintains that respondent U-Land’s remittance of
US$7,499,945.00 constituted mere partial performance of a reciprocal obligation.132 Thus, respondent U-
Land was not entitled to rescission. The nature of this reciprocal obligation requires both parties’
simultaneous fulfillment of the totality of their reciprocal obligations and not only partial performance on
the part of the allegedly injured party.

As to the finding of misrepresentations, petitioner Wellex raises that a seller may sell a thing not yet
belonging to him at the time of the transaction, provided that he will become the owner at the time of
delivery so that he can transfer ownership to the buyer. Contrary to the finding of the lower courts,
petitioner Wellex was obliged to be the owner of the shares only when the time came to deliver these to
respondent U-Land and not during the perfection of the contract itself.133

Finally, petitioner Wellex argues that respondent U-Land could have recovered through the securities
given to the latter.134 Petitioner Wellex invokes Suria v. Intermediate Appellate Court,135 which held that
an "action for rescission is not a principal action that is retaliatory in character [under Article 1191 of the
Civil Code, but] a subsidiary one which. . . is available only in the absence of any other legal remedy
[under Article 1384 of the Civil Code]."136 Respondent’s Arguments

Respondent U-Land argues that it was the execution of the share purchase agreement that would result in
its purchase of the APIC shares and PEC shares.137 It was not the full remittance of the purchase price of
the shares of stock as indicated in the First Memorandum of Agreement, as alleged by petitioner
Wellex.138 Respondent U-Land asserts that the First Memorandum of Agreement provides that the exact
number of APIC shares and PEC shares to be purchased under the share purchase agreement and the final
price of these shares were not yet determined by the parties.139

Respondent U-Land reiterates that it was petitioner Wellex that requested for the remittances amounting
to US$7,499,945.00 to facilitate APIC’s purchase of APC shares.140 Thus, it was petitioner Wellex’s
refusal to enter into the share purchase agreement that led to respondent U-Land demanding rescission of
the First Memorandum of Agreement and the return of the US$7,499,945.00.141 Respondent U-Land
further argues before this court that petitioner Wellex failed to present evidence as to how the money was
spent, stating that Ms. Ting admitted that the Second Memorandum of Agreement "was not consummated
at any time."142 Respondent U-Land raises that petitioner Wellex was guilty of fraud by making it appear

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that APC was a subsidiary of APIC.143 It reiterates that, as an airline company, its primary reason for
entering into the First Memorandum of Agreement was to acquire management of APC, another airline
company.144 Under Article 1191 of the Civil Code, respondent U-Land, as the injured party, was entitled
to rescission due to the fatal misrepresentations committed by petitioner Wellex.145

Respondent U-Land further asserts that the "shareholdings in APIC and APC were never in question."146
Rather, it was petitioner Wellex’s misrepresentation that APIC was a majority shareholder of APC that
compelled it to enter into the agreement.147

As for Suria, respondent U-land avers that this case was inapplicable because the pertinent provision in
Suria was not Article 1191 but rescission under Article 1383 of the Civil Code.148 The "rescission" referred
to in Article 1191 referred to "resolution" of a contract due to a breach of a mutual obligation, while Article
1384 spoke of "rescission" because of lesion and damage.149 Thus, the rescission that is relevant to the
present case is that of Article 1191, which involves breach in a reciprocal obligation. It is, in fact,
resolution, and not rescission as a result of fraud or lesion, as found in Articles 1381, 1383, and 1384 of
the Civil Code.150

The Issue

The question presented in this case is whether the Court of Appeals erred in affirming the Decision of the
Regional Trial Court that granted the rescission of the First Memorandum of Agreement prayed for by U-
Land.

The Petition must be denied.

I The requirement of a share purchase agreement

The Civil Code provisions on the interpretation of contracts are controlling to this case, particularly Article
1370, which reads:

ART. 1370. 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.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.

In Norton Resources and Development Corporation v. All Asia Bank Corporation:

The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of the
Civil Code: "[i]f 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." This provision is akin to the "plain meaning
rule" applied by Pennsylvania courts, which assumes that the intent of the parties to an instrument is
"embodied in the writing itself, and when the words are clear and unambiguous the intent is to be
discovered only from the express language of the agreement." It also resembles the "four corners" rule, a
principle which allows courts in some cases to search beneath the semantic surface for clues to meaning.
A court's purpose in examining a contract is to interpret the intent of the contracting parties, as
objectively manifested by them. The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous. A contract provision is ambiguous if
it is susceptible of two reasonable alternative interpretations. Where the written terms of the contract are
not ambiguous and can only be read one way, the court will interpret the contract as a matter of law. If
the contract is determined to be ambiguous, then the interpretation of the contract is left to the court, to
resolve the ambiguity in the light of the intrinsic evidence.152 (Emphasis supplied)

As held in Norton, this court must first determine whether a provision or stipulation contained in a contract
is ambiguous. Absent any ambiguity, the provision on its face will be read as it is written and treated as
the binding law of the parties to the contract.

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The parties have differing interpretations of the terms of the First Memorandum of Agreement. Petitioner
Wellex even admits that "the facts of the case are fairly undisputed [and that] [i]t is only the parties’
respective [understanding] of these facts that are not in harmony."153

The second preambular clause of the First Memorandum of Agreement reads:

WHEREAS, WELLEX, on the other hand, has current airline operation in the Philippines through its
majority-owned subsidiary Air Philippines International Corporation and the latter’s subsidiary, Air
Philippines Corporation, and in like manner also desires to expand its operation in the Asian regional
markets; a Memorandum of Agreement on ______, a certified copy of which is attached hereto as Annex
"A" and is hereby made an integral part hereof, which sets forth, among others, the basis for WELLEX’s
present ownership of shares in Air Philippines International Corporation.154 (Emphasis supplied)

Section 1 of the First Memorandum of Agreement reads:

I. Basic Agreement. - The parties agree to develop a long-term business relationship initially through the
creation of joint interest in airline operations as well as in property development projects in the Philippines
to be implemented as follows:

(a) U-LAND shall acquire from WELLEX, shares of stock of AIR PHILIPPINES INTERNATIONAL
CORPORATION ("APIC") equivalent to at least 35% of the outstanding capital stock of APIC, but in any
case, not less than 1,050,000,000 shares (the "APIC Shares").

(b) U-LAND shall acquire from WELLEX, shares of stock of PHILIPPINE ESTATES CORPORATION ("PEC")
equivalent to at least 35% of the outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares (the "PEC Shares").

(c) U-LAND shall enter into a joint development agreement with PEC to jointly pursue property
development projects in the Philippines.

(d) U-LAND shall be given the option to acquire from WELLEX shares of stock of EXPRESS SAVINGS BANK
("ESB") up to 40% of the outstanding capital stock of ESB (the "ESB Shares") under terms to be mutually
agreed.155

The First Memorandum of Agreement contained the following stipulations regarding the share purchase
agreement:

2. Acquisition of APIC and PEC Shares. - Within forty (40) days from date hereof (unless extended by
mutual agreement), U-LAND and WELLEX shall execute a Share Purchase Agreement ("SHPA") covering
the acquisition by U-LAND of the APIC Shares and PEC Shares (collectively, the "Subject Shares"). Without
prejudice to any subsequent agreement between the parties, the purchase price for the APIC Shares to be
reflected in the SHPA shall be THIRTY CENTAVOS (P0.30) per share and that for the PEC Shares at SIXTY
FIVE CENTAVOS (P0.65) per share.

The purchase price for the Subject Shares as reflected in the SHPA shall be paid in full upon execution of
the SHPA against delivery of the Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be provided in a separate instrument.

The transfer of the Subject Shares shall be effected to U-LAND provided that: (i) the purchase price
reflected in the SHPA has been fully paid; (ii) the Philippine Securities & Exchange Commission (SEC) shall
have approved the issuance of the Subject Shares; and (iii) any required approval by the Taiwanese
government of the acquisition by U-LAND of the Subject Shares shall likewise have been obtained.156
(Emphasis supplied)

As for the joint development agreement, the First Memorandum of Agreement contained the following
stipulation:

4. Joint Development Agreement with PEC. – Simultaneous with the execution of the SHPA, U-LAND and
PEC shall execute a joint development agreement ("JDA") to pursue property development projects in the

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Philippines. The JDA shall cover specific housing and other real estate development projects as the parties
shall agree. All profits derived from the projects covered by the JDA shall be shared equally between
ULAND and PEC. U-LAND shall, not later than May 22, 1998, remit the sum of US$3.0 million as initial
funding for the aforesaid development projects against delivery by WELLEX of 57,000,000 shares of PEC
as security for said amount in accordance with Section 9 below.157 (Emphasis provided)

Finally, the parties included the following stipulation in case of a failure to agree on the terms of the share
purchase agreement or the joint development agreement:

9. Validity. - In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within
forty (40) days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings herein,
except that WELLEX shall refund the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the 57,000,000 PEC shares delivered to U-
LAND under Section 4.158

Section 2 of the First Memorandum of Agreement clearly provides that the execution of a share purchase
agreement containing mutually agreeable terms and conditions must first be accomplished by the parties
before respondent U-Land purchases any of the shares owned by petitioner Wellex. A perusal of the
stipulation on its face allows for no other interpretation.

The need for a share purchase agreement to be entered into before payment of the full purchase price can
further be discerned from the other stipulations of the First Memorandum of Agreement.

In Section 1, the parties agreed to enter into a joint business venture, through entering into two (2)
agreements: a share purchase agreement and a joint development agreement. However, Section 1
provides that in the share purchase agreement, "U-LAND shall acquire from WELLEX, shares of stock of
AIR PHILIPPINES INTERNATIONAL CORPORATION (‘APIC’) equivalent to at least 35% of the outstanding
capital stock of APIC, but in any case, not less than 1,050,000,000 shares (the ‘APIC Shares’)."159

As for the PEC shares, Section 1 provides that respondent U-Land shall purchase from petitioner Wellex
"shares of stock of PHILIPPINE ESTATES CORPORATION (‘PEC’) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than 490,000,000 shares(the ‘PEC
Shares’)."160

The use of the terms "at least 35% of the outstanding capital stock of APIC, but in any case, not less than
1,050,000,000 shares" and "at least 35% of the outstanding capital stock of PEC, but in any case, not less
than 490,000,000 shares" means that the parties had yet to agree on the number of shares of stock to be
purchased.

The need to execute a share purchase agreement before payment of the purchase price of the shares is
further shown by the clause, "[w]ithout prejudice to any subsequent agreement between the parties, the
purchase price for the APIC Shares to be reflected in the [share purchase agreement] shall be... P0.30 per
share and that for the PEC Shares at... P0.65 per share."161 This phrase clearly shows that the final price
of the shares of stock was to be reflected in the share purchase agreement. There being no share
purchase agreement executed, respondent U-Land was under no obligation to begin payment or
remittance of the purchase price of the shares of stock.

Petitioner Wellex argues that the use of "upon" in Section 2162 of the First Memorandum of Agreement
means that respondent U-Land must pay the purchase price of the shares of stock in its entirety when
they are transferred. This argument has no merit.

Article 1373 of the Civil Code provides:

ART. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.

It is necessary for the parties to first agree on the final purchase price and the number of shares of stock
to be purchased before respondent U-Land is obligated to pay or remit the entirety of the purchase price.

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Thus, petitioner Wellex’s argument cannot be sustained since the parties to the First Memorandum of
Agreement were clearly unable to agree on all the terms concerning the share purchase agreement. It
would be absurd for petitioner Wellex to expect payment when respondent U-Land did not yet agree to the
final amount to be paid for the totality of an indeterminate number of shares of stock.

The third paragraph of Section 2163 provides that the "transfer of the Subject Shares" shall take place
upon the fulfillment of certain conditions, such as full payment of the purchase price "as reflected in the
[share purchase agreement]." The transfer of the shares of stock is different from the execution of the
share purchase agreement. The transfer of the shares of stock requires full payment of the final purchase
price. However, that final purchase price must be reflected in the share purchase agreement. The
execution of the share purchase agreement will require the existence of a final agreement.

In its Answer with counterclaim before the trial court, petitioner Wellex argued that the payment of the
shares of stock was to begin within the 40-day period. Petitioner Wellex’s claim is not in any of the
stipulations of the contract. Its subsequent claim that respondent U-Land was actually required to remit a
total of US$20.5 million is likewise bereft of basis since there was no final purchase price of the shares of
stock that was agreed upon, due to the failure of the parties to execute a share purchase agreement. In
addition, the parties had yet to agree on the final number of APIC shares and PEC shares that respondent
U-Land would acquire from petitioner Wellex.

Therefore, the understanding of the parties captured in the First Memorandum of Agreement was to
continue their negotiation to determine the price and number of the shares to be purchased. Had it been
otherwise, the specific number or percentage of shares and its price should already have been provided
clearly and unambiguously. Thus, they agreed to a 40-day period of negotiation.

Section 9 of the First Memorandum of Agreement explicitly provides that:

In the event the parties are unable to agree on the terms of the SHPA and/or the JDA within forty
(40)days from date hereof (or such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from their respective undertakings herein .
. .164

The First Memorandum of Agreement was, thus, an agreement to enter into a share purchase agreement.
The share purchase agreement should have been executed by the parties within 40 days from May 16,
1998, the date of the signing of the First Memorandum of Agreement.

When the 40-day period provided for in Section 9 lapsed, the efficacy of the First Memorandum of
Agreement ceased. The parties were "released from their respective undertakings." Thus, from June 25,
1998, the date when the 40-day period lapsed, the parties were no longer obliged to negotiate with each
other in order to enter into a share purchase agreement.

However, Section 9 provides for another period within which the parties could still be required to
negotiate. The clause "or such period as the parties shall mutually agree" means that the parties should
agree on a period within which to continue negotiations for the execution of an agreement. This means
that after the 40-day period, the parties were still allowed to negotiate, provided that they could mutually
agree on a new period of negotiation.

Based on the records and the findings of the lower courts, the parties were never able to arrive at a
specific period within which they would bind themselves to enter into an agreement. There being no other
period specified, the parties were no longer under any obligation to negotiate and enter into a share
purchase agreement. Section 9 clearly freed them from this undertaking.

II There was no express or implied novation of the First Memorandum of Agreement

The subsequent acts of the parties after the 40-day period were, therefore, independent of the First
Memorandum of Agreement.

In its Appellant’s Brief before the Court of Appeals, petitioner Wellex mentioned that there was an "implied
partial objective or real novation"165 of the First Memorandum of Agreement. Petititoner did not raise this

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argument of novation before this court. In Gayos v. Gayos,166 this court held that "it is a cherished rule
of procedure that a court should always strive to settle the entire controversy in a single proceeding
leaving no root or branch to bear the seeds of future litigation[.]"167

Articles 1291 and 1292 of the Civil Code provides how obligations may be modified:

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.

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.

In Arco Pulp and Paper Co. v. Lim,168 this court discussed the concept of novation:

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."

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. (Emphasis from the original omitted)

Because novation requires that it be clear and unequivocal, it is never presumed, thus:

In the civil law setting, novatiois 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. (Emphasis from the original omitted, citations omitted)

Applying Arco, it is clear that there was no novation of the original obligation.

After the 40-day period, the parties did not enter into any subsequent written agreement that was
couched in unequivocal terms. The transaction of the First Memorandum of Agreement involved large
amounts of money from both parties. The parties sought to participate in the air travel industry, which has
always been highly regulated and subject to the strictest commercial scrutiny. Both parties admitted that
their counsels participated in the crafting and execution of the First Memorandum of Agreement as well as
in the efforts to enter into the share purchase agreement. Any subsequent agreement would be expected
to be clearly agreed upon with their counsels’ assistance and in writing, as well.

Given these circumstances, there was no express novation.

There was also no implied novation of the original obligation. In Quinto v. People:

[N]o specific form is required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really no hard and fast rule to determine what

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might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new obligations.

. . . The test of incompatibility is whether or not the two obligations can stand together, each one having
its independent existence. If they cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such as its object, cause
or principal conditions thereof; otherwise, the change would be merely modificatory in nature and
insufficient to extinguish the original obligation. (Citations omitted)

There was no incompatibility between the original terms of the First Memorandum of Agreement and the
remittances made by respondent U-Land for the shares of stock. These remittances were actually made
with the view that both parties would subsequently enter into a share purchase agreement. It is clear that
there was no subsequent agreement inconsistent with the provisions of the First Memorandum of
Agreement.

Thus, no implied novation took place. In previous cases,172 this court has consistently ruled that
presumed novation or implied novation is not deemed favorable. In United Pulp and Paper Co., Inc. v.
Acropolis Central Guaranty Corporation:

Neither can novation be presumed in this case. As explained in Duñgo v. Lopena:

"Novation by presumption has never been favored. To be sustained, it need be established that the old
and new contracts are incompatible in all points, or that the will to novate appears by express agreement
of the parties or in acts of similar import."174 (Emphasis supplied)

There being no novation of the First Memorandum of Agreement, respondent U-Land is entitled to the
return of the amount it remitted to petitioner Wellex. Petitioner Wellex is likewise entitled to the return of
the certificates of shares of stock and titles of land it delivered to respondent U-Land. This is simply an
enforcement of Section 9 of the First Memorandum of Agreement. Pursuant to Section 9, only the
execution of a final share purchase agreement within either of the periods contemplated by this stipulation
will justify the parties’ retention of what they received or would receive from each other.

III Applying Article 1185 of the Civil Code, the parties are obligated to return to each other all they have
received

Article 1185 of the Civil Code provides that:

ART. 1185. The condition that some event will not happen at a determinate time shall render the
obligation effective from the moment the time indicated has elapsed, or if it has become evident that the
event cannot occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.

Article 1185 provides that if an obligation is conditioned on the nonoccurrence of a particular event at a
determinate time, that obligation arises (a) at the lapse of the indicated time, or(b) if it has become
evident that the event cannot occur.

Petitioner Wellex and respondent U-Land bound themselves to negotiate with each other within a 40-day
period to enter into a share purchase agreement. If no share purchase agreement was entered into, both
parties would be freed from their respective undertakings.

It is the non-occurrence or non-execution of the share purchase agreement that would give rise to the
obligation to both parties to free each other from their respective undertakings. This includes returning to
each other all that they received in pursuit of entering into the share purchase agreement.

At the lapse of the 40-day period, the parties failed to enter into a share purchase agreement. This lapse
is the first circumstance provided for in Article 1185 that gives rise to the obligation. Applying Article

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1185, the parties were then obligated to return to each other all that they had received in order to be
freed from their respective undertakings.

However, the parties continued their negotiations after the lapse of the 40-day period. They made
subsequent transactions with the intention to enter into the share purchase agreement. Despite that, they
still failed to enter into a share purchase agreement. Communication between the parties ceased, and no
further transactions took place.

It became evident that, once again, the parties would not enter into the share purchase agreement. This
is the second circumstance provided for in Article 1185. Thus, the obligation to free each other from their
respective undertakings remained.

As such, petitioner Wellex is obligated to return the remittances made by respondent U-Land, in the same
way that respondent U-Land is obligated to return the certificates of shares of stock and the land titles to
petitioner Wellex.

IV Respondent U-Land is praying for rescission or resolution under Article 1191, and not rescission under
Article 1381

The arguments of the parties generally rest on the propriety of the rescission of the First Memorandum of
Agreement. This requires a clarification of rescission under Article 1191, and rescission under Article 1381
of the Civil Code.

Article 1191 of the Civil Code provides:

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

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

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

Articles 1380 and 1381, on the other hand, provide an enumeration of rescissible contracts: ART. 1380.
Contracts validly agreed upon may be rescinded in the cases established by law. ART. 1381. The following
contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant without
the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.

Article 1383 expressly provides for the subsidiary nature of rescission:

ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same.

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Rescission itself, however, is defined by Article 1385:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take
place when the things which are the object of the contract are legally in the possession of third persons
who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss. Gotesco
Properties v. Fajardo175 categorically stated that Article 1385 is applicable to Article 1191:

At this juncture, it is noteworthy to point out that rescission does not merely terminate the contract and
release the parties from further obligations to each other, but abrogates the contract from its inception
and restores the parties to their original positions as if no contract has been made. Consequently, mutual
restitution, which entails the return of the benefits that each party may have received as a result of the
contract, is thus required. To be sure, it has been settled that the effects of rescission as provided for in
Article 1385 of the Code are equally applicable to cases under Article 1191, to wit:

Mutual restitution is required in cases involving rescission under Article 1191. This means bringing the
parties back to their original status prior to the inception of the contract. Article 1385 of the Civil Code
provides, thus:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obligated to restore. Neither shall rescission take
place when the things which are the object of the contract are legally in the possession of third persons
who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

This Court has consistently ruled that this provision applies to rescission under Article 1191: [S]ince
Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to return
the things which were the object of the contract, together with their fruits, and the price with its interest,"
the Court finds no justification to sustain petitioners’ position that said Article 1385 does not apply to
rescission under Article 1191. (Emphasis from the original, citations omitted)

Rescission, as defined by Article 1385, mandates that the parties must return to each other everything
that they may have received as a result of the contract. This pertains to rescission or resolution under
Article 1191, as well as the provisions governing all forms of rescissible contracts.

For Article 1191 to be applicable, however, there must be reciprocal prestations as distinguished from
mutual obligations between or among the parties. A prestation is the object of an obligation, and it is the
conduct required by the parties to do or not to do, or to give.177 Parties may be mutually obligated to
each other, but the prestations of these obligations are not necessarily reciprocal. The reciprocal
prestations must necessarily emanate from the same cause that gave rise to the existence of the contract.
This distinction is best illustrated by an established authority in civil law, the late Arturo Tolentino:

This article applies only to reciprocal obligations. It has no application to every case where two persons
are mutually debtor and creditor of each other. There must be reciprocity between them. Both relations
must arise from the same cause, such that one obligation is correlative to the other. Thus, a person may
be the debtor of another by reason of an agency, and his creditor by reason of a loan. They are mutually
obligated, but the obligations are not reciprocal. Reciprocity arises from identity of cause, and necessarily
the two obligations are created at the same time.178 (Citation omitted)

Ang Yu Asuncion v. Court of Appeals179 provides a clear necessity of the cause in perfecting the existence
of an obligation:

An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is
constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical

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tie which is the efficient cause established by the various sources of obligations (law, contracts, quasi-
contracts, delicts and quasi-delicts); (b) the object which is the prestation or conduct, required to be
observed (to give, to do or not to do); and (c) the subject-persons who, viewed from the demandability of
the obligation, are the active (obligee) and the passive (obligor) subjects.

The cause is the vinculum juris or juridical tie that essentially binds the parties to the obligation. This
linkage between the parties is a binding relation that is the result of their bilateral actions, which gave rise
to the existence of the contract.

The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to seek
the remedy of Article 1191. The wronged party is entitled to rescission or resolution under Article 1191,
and even the payment of damages. It is a principal action precisely because it is a violation of the original
reciprocal prestation.

Article 1381 and Article 1383, on the other hand, pertain to rescission where creditors or even third
persons not privy to the contract can file an action due to lesion or damage as a result of the contract. In
Ong v. Court of Appeals,181 this court defined rescission:

Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to
the contracting parties and even to third persons, to secure the reparation of damages caused to them by
a contract, even if this should be valid, by restoration of things to their condition at the moment prior to
the celebration of the contract. It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone. (Citations omitted)

Ong elaborated on the confusion between "rescission" or resolution under Article 1191 and rescission
under Article 1381:

On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New
Civil Code should be distinguished from rescission of contracts under Article 1383. Although both
presuppose contracts validly entered into and subsisting and both require mutual restitution when proper,
they are not entirely identical.

While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code, from
which the article was based, was "resolution." Resolution is a principal action which is based on breach of
a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescissionfor lesion
under Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts:

1. Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one fourth of the value of the things which are the object thereof;

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;

3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims due
them;

4. Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority; [and]

5. All other contracts specially declared by law to be subject to rescission. (Citations omitted)

When a party seeks the relief of rescission as provided in Article 1381, there is no need for reciprocal
prestations to exist between or among the parties. All that is required is that the contract should be
among those enumerated in Article 1381 for the contract to be considered rescissible. Unlike Article 1191,
rescission under Article 1381 must be a subsidiary action because of Article 1383.

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Contrary to petitioner Wellex’s argument, this is not rescission under Article 1381 of the Civil Code. This
case does not involve prejudicial transactions affecting guardians, absentees, or fraud of creditors. Article
1381(3) pertains in particular to a series of fraudulent actions on the part of the debtor who is in the
process of transferring or alienating property that can be used to satisfy the obligation of the debtor to the
creditor. There is no allegation of fraud for purposes of evading obligations to other creditors. The actions
of the parties involving the terms of the First Memorandum of Agreement do not fall under any of the
enumerated contracts that may be subject of rescission.

Further, respondent U-Land is pursuing rescission or resolution under Article 1191, which is a principal
action. Justice J.B.L. Reyes’ concurring opinion in the landmark case of Universal Food Corporation v.
Court of Appeals184 gave a definitive explanation on the principal character of resolution under Article
1191 and the subsidiary nature of actions under Article 1381:

The rescission on account of breach of stipulations is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between the
parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is a principal action retaliatory in character, it being unjust
that a party be held bound to fulfill his promises when the other violates his. As expressed in the old Latin
aphorism: "Non servanti fidem, non est fides servanda." Hence, the reparation of damages for the breach
is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure of
the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesión enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.185

Rescission or resolution under Article 1191, therefore, is a principal action that is immediately available to
the party at the time that the reciprocal prestation was breached. Article 1383 mandating that rescission
be deemed a subsidiary action cannot be applicable to rescission or resolution under Article 1191. Thus,
respondent U-Land correctly sought the principal relief of rescission or resolution under Article 1191.

The obligations of the parties gave rise to reciprocal prestations, which arose from the same cause: the
desire of both parties to enter into a share purchase agreement that would allow both parties to expand
their respective airline operations in the Philippines and other neighboring countries.

V The jurisprudence relied upon by petitioner Wellex is not applicable

The cases that petitioner Wellex cited to advance its arguments against respondent U-Land’s right to
rescission are not in point.

Suria v. Intermediate Appellate Court is not applicable. In that case, this court specifically stated that the
parties entered into a contract of sale, and their reciprocal obligations had already been fulfilled:186

There is no dispute that the parties entered into a contract of sale as distinguished from a contract to sell.

By the contract of sale, the vendor obligates himself to transfer the ownership of and to deliver a
determinate thing to the buyer, who in turn, is obligated to pay a price certain in money or its equivalent
(Art. 1458, Civil Code). From the respondents’ own arguments, we note that they have fully complied with
their part of the reciprocal obligation. As a matter of fact, they have already parted with the title as
evidenced by the transfer certificate of title in the petitioners’ name as of June 27, 1975.

The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage. The payments
on an installment basis secured by the execution of a mortgage took the place of a cash payment. In
other words, the relationship between the parties is no longer one of buyer and seller because the contract
of sale has been perfected and consummated. It is already one of a mortgagor and a mortgagee. In

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consideration of the petitioners’ promise to pay on installment basis the sum they owe the respondents,
the latter have accepted the mortgage as security for the obligation.

The situation in this case is, therefore, different from that envisioned in the cited opinion of Justice J.B.L.
Reyes. The petitioners’ breach of obligations is not with respect to the perfected contract of sale but in the
obligations created by the mortgage contract. The remedy of rescission is not a principal action retaliatory
in character but becomes a subsidiary one which by law is available only in the absence of any other legal
remedy. (Art. 1384, Civil Code). Foreclosure here is not only a remedy accorded by law but, as earlier
stated, is a specific provision found in the contract between the parties.187 (Emphasis supplied)

In Suria, this court clearly applied rescission under Article 1384 and not rescission or resolution under
Article 1191. In addition, the First Memorandum of Agreement is not a contract to sell shares of stock. It
is an agreement to negotiate with the view of entering into a share purchase agreement.

Villaflor v. Court of Appealsis not applicable either. In Villaflor, this court held that non-payment of
consideration of contracts only gave rise to the right to sue for collection, but this non-payment cannot
serve as proof of a simulated contract.188 The case did not rule that the vendor has no obligation to
deliver the thing sold if the buyer fails to fully pay the price required by the contract. In Villaflor:

Petitioner insists that nonpayment of the consideration in the contracts proves their simulation. We
disagree. Nonpayment, at most, gives him only the right to sue for collection. Generally, in a contract of
sale, payment of the price is a resolutory condition and the remedy of the seller is to exact fulfillment or,
in case of a substantial breach, to rescind the contract under Article 1191 of the Civil Code. However,
failure to pay is not even a breach, but merely an event which prevents the vendor’s obligation to convey
title from acquiring binding force.189 (Citations omitted) This court’s statement in Villaflor regarding
rescission under Article 1191 was a mere obiter dictum. In Land Bank of the Philippines v. Suntay,190 this
court discussed the nature of an obiter dictum:

An obiter dictum has been defined as an opinion expressed by a court upon some question of law that is
not necessary in the determination of the case before the court. It is a remark made, or opinion
expressed, by a judge, in his decision upon a cause by the way, that is, incidentally or collaterally, and not
directly upon the question before him, or upon a point not necessarily involved in the determination of the
cause, or introduced by way of illustration, or analogy or argument. It does not embody the resolution or
determination of the court, and is made without argument, or full consideration of the point. It lacks the
force of an adjudication, being a mere expression of an opinion with no binding force for purposes of res
judicata.191 (Citations omitted)

Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses Agustin v. Court of Appeals is also
misplaced. In these cases, this court held that there can be no rescission for an obligation that is
nonexistent, considering that the suspensive condition that will give rise to the obligation has not yet
happened. This is based on an allegation that the contract involved is a contract to sell. In a contract to
sell, the failure of the buyer to pay renders the contract without effect. A suspensive condition is one
whose non-fulfillment prevents the existence of the obligation.192 Payment of the purchase price,
therefore, constitutes a suspensive condition in a contract to sell. Thus, this court held that non-
remittance of the full price allowed the seller to withhold the transfer of the thing to be sold.

In this case, the First Memorandum of Agreement is not a contract to sell. Entering into the share
purchase agreement or the joint development agreement remained a stipulation that the parties
themselves agreed to pursue in the First Memorandum of Agreement.

Based on the First Memorandum of Agreement, the execution of the share purchase agreement was
necessary to put into effect respondent U-Land’s purchase of the shares of stock. This is the stipulation
indicated in this memorandum of agreement. There was no suspensive condition of full payment of the
purchase price needed to execute either the share purchase agreement or the joint development
agreement. Upon the execution of the share purchase, the obligation of petitioner Wellex to transfer the
shares of stock and of respondent U-Land to pay the price of these shares would have arisen.

Enforcement of Section 9 of the First Memorandum of Agreement has the same effect as rescission or
resolution under Article 1191 of the Civil Code. The parties are obligated to return to each other all that

Page 173 of 189

they may have received as a result of the breach by petitioner Wellex of the reciprocal obligation.
Therefore, the Court of Appeals did not err in affirming the rescission granted by the trial court.

VI Petitioner Wellex was not guilty of fraud but of violating Article 1159 of the Civil Code

In the issuance of the Writ of Preliminary Attachment, the lower court found that petitioner Wellex
committed fraud by inducing respondent U-Land to purchase APIC shares and PEC shares and by leading
the latter to believe that APC was a subsidiary of APIC.

Determining the existence of fraud is not necessary in an action for rescission or resolution under Article
1191. The existence of fraud must be established if the rescission prayed for is the rescission under Article
1381.

However, the existence of fraud is a question that the parties have raised before this court. To settle this
question with finality, this court will examine the established facts and determine whether petitioner
Wellex indeed defrauded respondent U-Land.

In Tankeh v. Development Bank of the Philippines,193 this court enumerated the relevant provisions of
the Civil Code on fraud:

Fraud is defined in Article 1338 of the Civil Code as:

x x x fraud when, through insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed to.

This is followed by the articles which provide legal examples and illustrations of fraud.

Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts,
are not in themselves fraudulent. (n)

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other
party has relied on the former’s special knowledge. (n)

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual. (n)

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. (n) The
distinction between fraud as a ground for rendering a contract voidable or as basis for an award of
damages is provided in Article 1344:

In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages. (1270)194

Tankeh further discussed the degree of evidence needed to prove the existence of fraud:

[T]he standard of proof required is clear and convincing evidence. This standard of proof is derived from
American common law. It is less than proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability is higher than that of an ordinary
civil case. Civil cases only require a preponderance of evidence to meet the required burden of proof.
However, when fraud is alleged in an ordinary civil case involving contractual relations, an entirely
different standard of proof needs to be satisfied. The imputation of fraud in a civil case requires the
presentation of clear and convincing evidence. Mere allegations will not suffice to sustain the existence of
fraud. The burden of evidence rests on the part of the plaintiff or the party alleging fraud. The quantum of
evidence is such that fraud must be clearly and convincingly shown.195

To support its allegation of fraud, Mr. Tseng, respondent U-Land’s witness before the trial court, testified
that Mr. Gatchalian approached respondent U-Land on two (2) separate meetings to propose entering into

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an agreement for joint airline operations in the Philippines. Thus, the parties entered into the First
Memorandum of Agreement. Respondent U-Land primarily anchors its allegation of fraud against
petitioner Wellex on the existence of the second preambular clause of the First Memorandum of
Agreement.

In its Appellant’s Brief before the Court of Appeals, petitioner Wellex admitted that "[t]he amount of
US$7,499,945.00 was remitted for the purchase of APIC and PEC shares."196 In that brief, it argued that
the parties were already in the process of partially executing the First Memorandum of Agreement.

As held in Tankeh, there must be clear and convincing evidence of fraud. Based on the established facts,
respondent U-Land was unable to clearly convince this court of the existence of fraud.

Respondent U-Land had every reasonable opportunity to ascertain whether APC was indeed a subsidiary of
APIC. This is a multimillion dollar transaction, and both parties admitted that the share purchase
agreement underwent several draft creations. Both parties admitted the participation of their respective
counsels in the drafting of the First Memorandum of Agreement. Respondent U-Land had every
opportunity to ascertain the ownership of the shares of stock. Respondent U-Land itself admitted that it
was not contesting petitioner Wellex’s ownership of the APIC shares or APC shares; hence, it was not
contesting the existence of the Second Memorandum of Agreement. Upon becoming aware of petitioner
Wellex’s representations concerning APIC’s ownership or control of APC as a subsidiary, respondent U-
Land continued to make remittances totalling the amount sought to be rescinded. It had the option to opt
out of negotiations after the lapse of the 40-day period. However, it proceeded to make the remittances to
petitioner Wellex and proceed with negotiations.

Respondent U-Land was not defrauded by petitioner Wellex to agree to the First Memorandum of
Agreement.1awp++i1 To constitute fraud under Article 1338, the words and machinations must have
been so insidious or deceptive that the party induced to enter into the contract would not have agreed to
be bound by its terms if that party had an opportunity to be aware of the truth.197 Respondent U-Land
was already aware that APC was not a subsidiary of APIC after the 40-day period. Still, it agreed to be
bound by the First Memorandum of Agreement by making the remittances from June 30 to September 25,
1998.198 Thus, petitioner Wellex’s failure to inform respondent U-Land that APC was not a subsidiary of
APIC when the First Memorandum of Agreement was being executed did not constitute fraud.

However, the absence of fraud does not mean that petitioner Wellex is free of culpability. By failing to
inform respondent U-Land that APC was not yet a subsidiary of APIC at the time of the execution of the
First Memorandum of Agreement, petitioner Wellex violated Article 1159 of the Civil Code. Article 1159
reads:

ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.

In Ochoa v. Apeta,199 this court defined good faith:

Good faith is an intangible and abstract quality with no technical meaning or statutory definition, and it
encompasses, among other things, an honest belief, the absence of malice and the absence of design to
defraud or to seek an unconscionable advantage. It implies honesty of intention, and freedom from
knowledge of circumstances which ought to put the holder upon inquiry. The essence of good faith lies in
an honest belief in the validity of one’s right, ignorance of a superior claim and absence of intention to
overreach another.200 (Citations omitted)

It was incumbent upon petitioner Wellex to negotiate the terms of the pending share purchase agreement
in good faith. This duty included providing a full disclosure of the nature of the ownership of APIC in APC.
Unilaterally compelling respondent U-Land to remit money to finalize the transactions indicated in the
Second Memorandum of Agreement cannot constitute good faith.

The absence of fraud in a transaction does not mean that rescission under Article 1191 is not proper. This
case is not an action to declare the First Memorandum of Agreement null and void due to fraud at the
inception of the contract or dolo causante. This case is not an action for fraud based on Article 1381 of the
Civil Code. Rescission or resolution under Article 1191 is predicated on the failure of one of the parties in a

Page 175 of 189

reciprocal obligation to fulfill the prestation as required by that obligation. It is not based on vitiation of
consent through fraudulent misrepresentations.

VII Respondent U-Land was not bound to pay the US$3 million under the joint development agreement

The alleged failure of respondent U-Land to pay the amount of US$3 million to petitioner Wellex does not
justify the actions of the latter in refusing to return the US$7,499,945.00.

Article 1374 of the Civil Code provides that:

ART. 1374. The 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.

The execution of the joint development agreement was contingent on the execution of the share purchase
agreement.1âwphi1 This is provided for in Section 4 of the First Memorandum of Agreement, which stated
that the execution of the two agreements is "[s]imultaneous."201 Thus, the failure of the share purchase
agreement’s execution would necessarily mean the failure of the joint development agreement’s
execution.

Section 9 of the First Memorandum of Agreement provides that should the parties fail to execute the
agreement, they would be released from their mutual obligations. Had respondent U-Land paid the US$3
million and petitioner Wellex delivered the 57,000,000 PEC shares for the purpose of the joint
development agreement, they would have been obligated to return these to each other.

Section 4 and Section 9 of the First Memorandum of Agreement must be interpreted together. Since the
parties were unable to agree on a final share purchase agreement and there was no exchange of money
or shares of stock due to the continuing negotiations, respondent U-Land was no longer obliged to provide
the money for the real estate development projects. The payment of the US$3 million was for pursuing
the real estate development projects under the joint development agreement. There being no joint
development agreement, the obligation to deliver the US$3 million and the delivery of the PEC shares for
that purpose were no longer incumbent upon the parties.

VIII Respondent U-Land was not obligated to exhaust the "securities" given by petitioner Wellex

Contrary to petitioner Wellex’s assertion, there is no obligation on the part of respondent U-Land to
exhaust the "securities" given by petitioner Wellex. No such meeting of the minds to create a guarantee or
surety or any other form of security exists. The principal obligation is not a loan or an obligation subject to
the conditions of sureties or guarantors under the Civil Code. Thus, there is no need to exhaust the
securities given to respondent U-Land, and there is no need for a legal condition where respondent U-Land
should pursue other remedies.

Neither petitioner Wellex nor respondent U-Land stated that there was already a transfer of ownership of
the shares of stock or the land titles. Respondent U-Land itself maintained that the delivery of the shares
of stock and the land titles were not in the nature of a pledge or mortgage.202 It received the certificates
of shares of stock and the land titles with an understanding that the parties would subsequently enter a
share purchase agreement. There being no share purchase agreement, respondent U-Land is obligated to
return the certificates of shares of stock and the land titles to petitioner Wellex.

The parties are bound by the 40-day period provided for in the First Memorandum of Agreement.
Adherence by the parties to Section 9 of the First Memorandum of Agreement has the same effect as the
rescission or resolution prayed for and granted by the trial court.

Informal acts are prone to ambiguous legal interpretation. This will be based on the say-so of each party
and is a fragile setting for good business transactions. It will contribute to the unpredictability of the
market as it would provide courts with extraordinary expectations to determine the business actor's
intentions. The parties appear to be responsible businessmen who know that their expectations and
obligations should be clearly articulated between them. They have the resources to engage legal
representation. Indeed, they have reduced their agreement in writing.

Page 176 of 189

Petitioner Wellex now wants this court to define obligations that do not appear in these instruments. We
cannot do so. This court cannot interfere in the bargains, good or bad, entered into by the parties. Our
duty is to affirm legal expectations, not to guarantee good business judgments.

WHEREFORE, the petition is DENIED. The Decision of the Regional Trial Court in Civil Case No. 99-1407
and the Decision of the Court of Appeals in CA-G.R. CV No. 74850 are AFFIRMED. Costs against petitioner
The Wellex Group, Inc.

SO ORDERED.
x--------------------------------------------------------------------------------------------------------------------x
G.R. No. 169407, March 25, 2015
BANK OF THE PHILIPPINE ISLANDS, PETITIONER, VS. AMADOR DOMINGO, RESPONDENT.
DECISION
LEONARDO-DE CASTRO, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, filed by
petitioner Bank of the Philippine Islands (BPI), seeking the reversal and setting aside of the Decision[1]
dated July 11, 2005 and Resolution[2] dated August 19, 2005 of the Court of Appeals in CA-G.R. SP No.
88836.

The Petition arose from the following facts:

On September 27, 1993, respondent Amador Domingo (Amador) and his wife, the late Mercy Maryden
Domingo (Mercy),[3] (collectively referred to as the spouses Domingo) executed a Promissory Note[4] in
favor of Makati Auto Center, Inc. in the sum of P629,856.00, payable in 48 successive monthly
installments in the amount of P13,122.00 each. They simultaneously executed a Deed of Chattel
Mortgage[5] over a 1993 Mazda 323 (subject vehicle) to secure the payment of their Promissory Note.
Makati Auto Center, Inc. then assigned, ceded, and transferred all its rights and interests over the said
Promissory Note and chattel mortgage to Far East Bank and Trust Company (FEBTC).

On April 7, 2000, the Securities and Exchange Commission (SEC) approved and issued the Certificate of
Filing of the Articles of Merger and Plan of Merger executed on January 20, 2000 by and between BPI, the
surviving corporation, and FEBTC, the absorbed corporation. By virtue of said merger, all the assets and
liabilities of FEBTC were transferred to and absorbed by BPI.[6]

The spouses Domingo defaulted when they failed to pay 21 monthly installments that had fallen due
consecutively from January 15, 1996 to September 15, 1997. BPI, being the surviving corporation after
the merger, demanded that the spouses Domingo pay the balance of the Promissory Note including
accrued late payment charges/interests or to return the possession of the subject vehicle for the purpose
of foreclosure in accordance with the undertaking stated in the chattel mortgage. When the spouses
Domingo still failed to comply with its demands, BPI filed on November 14, 2000 a Complaint[7] for
Replevin and Damages (or in the alternative, for the collection of sum of money, interest and other
charges, and attorney's fees) which was raffled to the Metropolitan Trial Court (MeTC) of Manila, Branch 9,
and docketed as Civil Case No. 168949-CV. BPI included a John Doe as defendant because at the time of
filing of the Complaint, BPI was already aware that the subject vehicle was in the possession of a third
person but did not yet know the identity of said person.

In their Answer,[8] the spouses Domingo raised the following affirmative defenses:
4. [BPI] has no cause of action against the [spouses Domingo].

5. The Honorable Court has no jurisdiction over this case,

6. As per the allegations in the complaint, JOHN DOE is an indispensable party to this case so with his
whereabouts unknown, service by publication should first be made before proceeding with the trial of this
case;

7. Defendant Maryden Domingo once obtained a car loan from Far East Bank and Trust Company but the
car was later sold to Carmelita S. Gonzales with the bank's conformity and the buyer subsequently
assumed payment of the balance of the mortgaged loan.

Page 177 of 189

During trial, the prosecution presented as witness Vicente Magpusao, a former employee of FEBTC and
now an Account Analyst of BPI. His testimony was summed up by the MeTC as follows:

Vicente Magpusao, [BPI's] Account Analyst and formerly connected with Far East Bank and Trust Company
testified that on September 27, 1993, [the spouses Domingo] for consideration executed and delivered to
Makati Auto Center, Inc. a Promissory Note in the sum of P629,856.00 payable in monthly installments in
accordance with the schedule of payment indicated in said Promissory Note. In order to secure the
payment of the obligation, the [spouses Domingo] executed in favor of said Makati Auto Center, Inc. on
the same date a Chattel Mortgage over one (1) unit of 1993 Mazda (323) with Motor No. B6-270146 and
with Serial No. BG1062M9100287. With notice to [the spouses Domingo], said Makati Auto Center, Inc.
assigned to Far East Bank and Trust Co. the Chattel Mortgage as shown by the Deed of Assignment
executed by [Makati Auto Center, Inc.]. Far East Bank and Trust Co. on the other hand, has been merged
with and/or absorbed by herein plaintiff [BPI]. The [spouses Domingo] defaulted in complying with the
terms and conditions of the Promissory Note with Chattel Mortgage by failing to pay twenty[-one] (21)
successive installments which fell due on January 15, 1996 up to September 15, 1997. [BPI] sent a
demand letter [to] defendant Mercy Domingo thru registered mail demanding payment of the whole
balance of the Promissory Note plus the stipulated interest and other charges or return to [BPI] the
possession of the above-described motor vehicle. There were some negotiations made by the [spouses
Domingo] to their In House Legal Assistant but the same did not materialize. Based on the Statement of
Account dated October 31, 2000, [the spouses Domingo have] an outstanding balance of P275,562.00
exclusive of interest and other charges.

On cross-examination, the witness explained that the first time he came to handle [the spouses
Domingo's] account was in 1997. Despite the fact that he was not yet employed with the bank in 1993, he
knew exactly what happened in this particular transaction because of his experience in auto financing. He
also has an access [to] the Promissory Note, Chattel Mortgage and other records of payment made by the
bank. Based on the records, the [spouses Domingo] issued several postdated checks but not for the entire
term. There were payments made from October 30, 199[3] up to September 14, 1994. He was not the
one who received payments for the auto finance. If there were receipts issued, they will only ride for the
account of Mrs. Domingo. He was not sure if these receipts are kept in the warehouse or probably
disposed of by the bank since the transaction was made in 1997. They already have a computer records of
all payments made by their client. Based on the subsidiary ledger, there were three (3) checks that
bounced and these are payments from the new buyer. They only have one (1) photocopy of these checks
in the amount of P325,431.60 while the other two (2) are missing. He was not aware who owns Cargo and
Hardware Corporation but the check was issued by a certain Miss Gonzales. The witness further testified
that anyone can pay the monthly amortization as long as the payment is for the account of Maryden
Domingo. They cannot include Carmelita Gonzales as one of the defendants in this case because they
don't have a document executed by the latter in behalf of Far East Bank and Trust Co. The bank did not
approve the Deed of Sale with Assumption of Mortgage.

Witness further testified that he found the photocopy of the Deed of Sale in the records of Maryden
Domingo. The Promissory Note and Chattel Mortgage were executed by the defendants Maryden and
Amador Domingo. There was no assumption of obligation of the [spouses Domingo]. Witness however
admitted that Far East Bank did not turn over to [BPI] all the records pertaining to the account of the
[spouses Domingo].[9] (Citations omitted.)

Amador himself testified for the defense. The MeTC provided the following summary of Amador's
testimony:

For his defense, defendant Amador Domingo testified that his wife and co-defendant Mercy Maryden
Domingo died on November 27, 2003. He admitted that his wife bought a car and was mortgaged to Far
East Bank and Trust Company. He identified the Chattel Mortgage and the Promissory Note he executed
together with his wife. In connection with the execution of this Promissory Note, he recalled that his wife
issued forty-eight (48) checks. The twelve (12) checks were cleared by the bank and his wife was able to
obtain a discount for prompt payments up to October 1994. While they were still paying for the car,
Carmelita Gonzales got interested to buy the car and is willing to assume the mortgage. After furnishing
the bank [with] the Deed of Sale duly notarized, Carmelita Gonzales subsequently issued a check payable
to Far East Bank and Trust Company and the remaining postdated checks were returned to them. Based
on the application of payment prepared by [BPI's] witness, Carmelita Gonzales made payments from

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November 14, 1995 to December 1995. Aside from these payments on May 19, 1997, Carmelita Gonzales
issued a check to Far East Bank in the amount of P385,431.60. In 1996, he received a phone call from a
certain Marvin Orence asking for their assistance to locate the car which Carmelita Gonzales bought from
them. His lawyer went to Land Transportation Office for assistance. From the time Ms. Gonzales started to
pay, they never received any demand letter from Far East Bank. Thereafter, on February 29, 1997, they
received a demand letter from Espino Law Office [on] behalf of [FEBTC]. His lawyer made a reply on
March 31, 1997 stating therein that the motor vehicle for which the loan was obtained had been sold to
Carmelita Gonzales as of July 5, 1994 with the knowledge and approval of their client. After three years,
they received another demand letter dated October 31, 2000 from Labaguis Law Office. His lawyer made
the same reply on March 7, 2000 and another letter on November 24, 2000.

Witness further testified that this malicious complaint probably triggered the early demise of his wife who
has a high blood pressure. His wife died of aneurism. As damages, he is asking for the amount of
P200,000.00 as moral damages, P75,000.00 as attorney's fees and P5,000.00 appearance fee.

On cross-examination, witness elaborates that when his wife presented to Far East Bank the Deed of Sale
with Assumption of Mortgage, the bank made no objection and returned all their postdated checks. His
wife was the one who deal[t] with Carmelita Gonzales but he always provide[d] assistance with respect to
paper works. Aside from the aforesaid Deed of Sale, there is no other document which shows the
conformity of the bank. They were only verbally assured by Mr. Orence that their papers are in order.[10]
On June 10, 2004, the MeTC rendered a Decision in favor of BPI as the bank was able to establish by
preponderance of evidence a valid cause of action against the spouses Domingo. According to the MeTC,
novation is never presumed and must be clearly shown by express agreement or by acts of equal import.
To effect a subjective novation by a change in the person of the debtor, it is necessary that the old debtor
be released expressly from the obligation and the third person or new debtor assumes his place. Without
such release, there is no novation and the third person who assumes the debtor's obligation merely
becomes a co-debtor or surety. The MeTC found Amador's bare testimony as insufficient evidence to prove
that he and his wife Mercy had been expressly released from their obligations and that Carmelita Gonzales
(Carmelita) assumed their place as the new debtor within the context of subjective novation; and if at all,
Carmelita only became the spouses Domingo's co-debtor or surety. While finding that BPI was entitled to
the reliefs prayed for, the MeTC made no adjudication as to the entitlement of the bank to the Writ of
Replevin, and instead awarded monetary reliefs as were just and equitable. The dispositive portion of the
MeTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of [BPI], ordering defendant
Amador Domingo:

To pay [BPI] the sum of P275,562.00 plus interest thereon at the rate of 36% per annum from November
15, 2000 until fully paid;

To pay [BPI] the sum equivalent to 25% of the total amount due as atorney's fees; and

To pay the costs of suit.[11]

Acting on Amador's Motion for Reconsideration, the MeTC issued an Order[12] dated September 6, 2004
affirming its earlier judgment but reducing the attorney's fees awarded, thus:

WHEREFORE, premises considered the Decision of this Court dated June 10, 2014 stands, subject to the
modification that the attorney's fees of twenty-five percent (25%) is ordered reduced to ten percent
(10%) of the total amount due.[13]

Dissatisfied, Amador appealed his case before the Regional Trial Court (RTC) of Manila, Branch 26,
wherein it was docketed as Civil Case No. 04-111100. In its Decision dated February 10, 2005, the RTC
held that in novation, consent of the creditor to the substitution of the debtor need not be by express
agreement, it can be merely implied. The consent is not required to be in any specific or particular form;
the only requirement being that it must be given by the creditor in one way or another. To the RTC, the
following circumstances demonstrated the implied consent of BPI to the novation: (1) BPI had knowledge
of the Deed of Sale and Assumption of Mortgage executed between Mercy and Carmelita, but did not
interpose any objection to the same; and (2) BPI (through FEBTC) returned the personal checks of the

Page 179 of 189

spouses Domingo and accepted the payments made by Carmelita. The RTC also noted that BPI made a
demand for payment upon the spouses Domingo only after 30 months from the time Carmelita assumed
payments for the installments due. The RTC reasoned that if the spouses Domingo truly remained as
debtors, BPI would not have wasted time in demanding payments from them. Ultimately, the RTC
decreed:

WHEREFORE, premises considered, the judgment appealed from is hereby reversed. The complaint filed
by [BPI] before [MeTC] Branch 9, Manila, is hereby DISMISSED and ordering [BPI] to pay
defendant/appellant Amador Domingo the following, to wit:

a) One Hundred Thousand (P100,000.00) Pesos as moral damages;

b) Fifty Thousand (P50,000.00) Pesos as exemplary damages;

c) Fifty Thousand (P50,000.00) Pesos as attorney's fees;

d) Twenty-Five Thousand (P25,000.00) [Pesos] as litigation expenses;

e) Costs of this suit.[14]

Aggrieved by the foregoing RTC judgment, BPI filed a Petition for Review with the Court of Appeals,
docketed as CA-G.R. SP No. 88836. The Court of Appeals promulgated its Decision on July 11, 2005,
affirming the finding of the RTC that novation took place. The Court of Appeals, relying on the declaration
in Babst v. Court of Appeals[15] that consent of the creditor to the substitution of debtors need not always
be express and may be inferred from the acts of the creditor, ruled that:
In this case, there is no doubt that FEBTC had the intention to release private respondent [Amador] and
his wife from the obligation when the latter sold the subject vehicle to [Carmelita]. This intention can be
inferred from the following acts of FEBTC: 1) it returned the postdated checks issued by private
respondent [Amador's] wife in favor of FEBTC; 2) it accepted the payments made by [Carmelita]; 3) it did
not interpose any objection despite knowledge of the existence of the Deed of Sale with Assumption of
Mortgage; and 4) it did not demand payment from private respondent [Amador] and his wife for thirty
(30) long months.

As correctly found by the RTC, the testimony of private respondent [Amador] as regards the return of the
said checks to them by FEBTC was not rebutted by petitioner BPI.

If indeed the said checks were not returned to private respondent [Amador's] wife, the least thing that
petitioner BPI or FEBTC could have done was to deposit them. Should the checks thereafter bounce, then
petitioner BPI or FEBTC could have filed a separate case against private respondent [Amador's] wife. This
was never done by petitioner BPI or FEBTC. Hence, it is safe to conclude that the said checks were indeed
returned to private respondent [Amador's] wife.[16]
The Court of Appeals rejected the other arguments of BPI:
Petitioner BPI further argues that as regards the payment made by the alleged new debtor, Carmelita
Gonzales, it appears that the only payment made by her was a PNB Check No. 00190322 dated May 19,
1997 which was dishonored due to Account Closed.

Careful scrutiny of the records of the case reveals otherwise. As found by the MeTC in its decision dated
June 10, 2004, Carmelita Gonzales made several payments on the said loan obligation, as testified to by
witness Vicente Magpusao, petitioner BPFs Account Analyst, thus:
xxx. Based on the subsidiary leger, (Exhibit "2"), there were three (3) checks that bounced and these are
payments from the new buyer. They only have one (1) photocopy of these checks in the amount of
P325,431.60 (Exhibit 4) while the other two are missing. He was not aware who owns Cargo and
Hardware Corporation but the check was issued by a certain Miss Gonzales. xxx.

Petitioner BPI further argues that it was not its obligation to interpose any objection to the Deed of Sale
with Assumption of Mortgage. Rather it should be the vendee, [Carmelita], who should secure the
approval and consent of petitioner BPI to the Deed of Sale.

This argument is untenable.

Page 180 of 189

The Deed of Sale with Assumption of Mortgage between private respondent [Amador's] wife and
[Carmelita] was executed way back on July 5, 1994. The check that was issued by [Carmelita] was dated
May 19, 1997. The position of petitioner BPI is not possible because when the Deed of Sale with
Assumption of Mortgage was executed and the said check was issued, private respondent [Amador's] wife
and [Carmelita] were still dealing with FEBTC, considering the fact that the merger of petitioner BPI and
FEBTC was formalized on April 10, 2000.

Nevertheless, FEBTC interposed no objection to the Deed of Sale with Assumption of Mortgage, hence, it
consented to it.

From the foregoing, it is clear that novation took place so that private respondent Domingo is no longer
the debtor of petitioner BPI.[17] (Citations omitted.)

The Court of Appeals, however, deleted the damages awarded to Amador for the following reasons:
As to the second issue, petitioner BPI argues that the RTC awarded moral and exemplary damages and
attorney's fees to respondent [Amador] only in the dispositive portion of the assailed decision without any
basis in fact and in law.

This Court finds the argument tenable.

In the case of Solid Homes, Inc. vs. Court of Appeals, it was held that:
"It is basic that the claim for actual, moral and punitive damages as well as exemplary damages and
attorney's fees must each be independently identified and justified."

Furthermore, Section 14, paragraph 1 of Article VIII, of the 1987 Constitution lays down the standard in
rendering decisions, to wit: it must be express therein clearly and distinctly the facts and law on which it
is based.

Perusal of the assailed decision reveals that the award of moral and exemplary damages as well as
attorney's fees and litigation expenses were only touched in the dispositive portion, which is in clear
disregard of the established rules laid down by the Constitution and existing jurisprudence. Therefore,
their deletion is in order.

As regards the award of litigation expenses and costs of the suit, the same should also be deleted
considering that "no premium should be placed on the right to litigate."[18] (Citations omitted.)
The Court of Appeals ultimately adjudged:

WHEREFORE, premises considered, the assailed decision dated February 10, 2005 of the Regional Trial
Court, Branch 26, Manila in Civil Case No. 04-111100 is hereby AFFIRMED with MODIFICATION in that the
award of moral and exemplary damages as well as attorney's fees, litigation expenses and costs of suit, is
hereby deleted.[19]

In its Resolution dated August 19, 2005, the Court of Appeals denied the Motion for Partial
Reconsideration of BPI.

BPI comes to this Court via the present Petition for Review/Appeal by Certiorari raising the sole issue of
whether or not there had been a novation of the loan obligation with chattel mortgage of the spouses
Domingo to BPI so that the spouses Domingo were released from said obligation and Carmelita was
substituted as debtor.

The Court answers in the negative and grants the Petition.

In De Cortes v. Venturanza,[20] the Court discussed some principles and jurisprudence underlying the
concept and nature of novation as a mode of extinguishing obligations:

According to Manresa, novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or by subrogating a third person to the
rights of the creditor (8 Manresa 428, cited in IV Civil Code of the Philippines by Tolentino 1962 ed., p.

Page 181 of 189

352). Unlike other modes of extinction of obligations, novation is a juridical act with a dual function - it
extinguishes an obligation and creates a new one in lieu of the old.

Article 1293 of the New Civil Code provides:

"Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor."
(emphasis supplied)

Under this provision, there are two forms of novation by substituting the person of the debtor, and they
are: (1) expromision and (2) delegacion. In the former, 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 logically requires the consent of the third person and the creditor. In the latter, the
debtor offers and the creditor accepts a third person who consents to the substitution and assumes the
obligation, so that the intervention and the consent of these three persons are necessary (8 Manresa 436-
437, cited in IV Civil Code of the Philippines by Tolentino, 1962 ed., p. 360). In these two modes of
substitution, the consent of the creditor is an indispensable requirement (Garcia vs. Khu Yek Chiong, 65
Phil. 466, 468). (Emphases supplied.)

The Court also emphasized in De Cortes the indispensability of the creditor's consent to the novation,
whether expromision or delegacion, given that the "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;
hence, the creditor should agree to accept the substitution in order that it may be binding on him."[21]

Both the RTC and the Court of Appeals found that there was novation by delegacion in the case at bar.
The Deed of Sale with Assumption of Mortgage was executed between Mercy (representing herself and her
husband Amador) and Carmelita, thus, their consent to the substitution as debtors and third person,
respectively, are deemed undisputed. It is the existence of the consent of BPI (or its absorbed corporation
FEBTC) as creditor that is being challenged herein.

As a general rule, since novation implies a waiver of the right the creditor had before the novation, such
waiver must be express.[22] The Court explained the rationale for the rule in Testate Estate of Lazaro
Mota v. Serra[23]:

It should be noted that in order to give novation its legal effect, the law requires that the creditor should
consent to the substitution of a new debtor. This consent must be given expressly for the reason that,
since novation extinguishes the personality of the first debtor who is to be substituted by a new one, it
implies on the part of the creditor a waiver of the right that he had before the novation, which waiver
must be express under the principle that renuntiatio non praesumitor, 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.

However, in Asia Banking Corporation v. Elser,[24] the Court qualified thus:

The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's consent to the
substitution of the new debtor for the old be express, or given at the time of the substitution, and the
Supreme Court of Spain, in its judgment of June 16, 1908, construing said article, laid down the doctrine
that "article 1205 of the Civil Code does not mean or require that the creditor's consent to the change of
debtors must be given simultaneously with the debtor's consent to the substitution; its evident purpose
being to preserve the creditor's full right, it is sufficient that the latter's consent be given at any time and
in any form whatever, while the agreement of the debtors subsists." The same rule is stated in the
Enciclopedia Juridica Española, volume 23, page 503, which reads: "The rule that this kind of novation,
like all others, must be express, is not absolute; for the existence of the consent may well be inferred
from the acts of the creditor, since volition may as well be expressed by deeds as by words." The
understanding between Henry W. Elser and the principal director of Yangco, Rosenstock & Co., Inc., with
respect to Luis R. Yangco's stock in said corporation, and the acts of the board of directors after Henry W.
Elser had acquired said shares, in substituting the latter for Luis R. Yangco, are a clear and unmistakable
expression of its consent. When this court said in the case of Estate of Mota vs. Serra (47 Phil., 464), that
the creditor's express consent is necessary in order that there may be a novation of a contract by the

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substitution of debtors, it did not wish to convey the impression that the word "express" was to be given
an unqualified meaning, as indicated in the authorities or cases, both Spanish and American, cited in said
decision.

Hence, based on the aforequoted ruling in Asia Banking, the existence of the creditor's consent may also
be inferred from the creditor's acts, but such acts still need to be "a clear and unmistakable expression of
[the creditor's] consent."

In Ajax Marketing and Development Corporation v. Court of Appeals,[26] the Court further clarified that:
The well settled rule is that novation is never presumed. Novation will not be allowed unless it is clearly
shown by express agreement, or by acts of equal import. Thus, to effect an objective novation it is
imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or
that the new obligation be on every point incompatible with the new one. In the same vein, to effect a
subjective novation by a change in the person of the debtor it is necessary that the old debtor be released
expressly from the obligation, and the third person or new debtor assumes his place in the relation. There
is no novation without such release as the third person who has assumed the debtor's obligation becomes
merely a co-debtor or surety. (Citations omitted.)

The determination of the existence of the consent of BPI to the substitution of debtors, in accordance with
the standards set in the preceding jurisprudence, is a question of fact because it requires the Court to
review the evidence on record. It is an established rule that the jurisdiction of the Court in cases brought
before it from the Court of Appeals via a petition for review on certiorari under Rule 45 of the Rules of
Court is generally limited to reviewing errors of law as the former is not a trier of facts. Thus, the findings
of fact of the Court of Appeals are conclusive and binding upon the Court in the latter's exercise of its
power to review for it is not the function of the Court to analyze or weigh evidence all over again.[27]
However, several of the recognized exceptions[28] to this rule are present in the instant case that justify a
factual review, i.e., the inference is manifestly mistaken, the judgment is based on misapprehension of
facts, and the findings of the Court of Appeals and the RTC are contrary to those of the MeTC.

The burden of establishing a novation is on the party who asserts its existence.[29] Contrary to the
findings of the Court of Appeals and the RTC, Amador failed to discharge such burden as he was unable to
present proof of the clear and unmistakable consent of BPI to the substitution of debtors.

Irrefragably, there is no express consent of BPI to the substitution of debtors. The Court of Appeals and
the RTC inferred the consent of BPI from the following facts: (1) BPI had a copy of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita in its file, indicating its knowledge of said
agreement, and still it did not interpose any objection to the same; (2) BPI (through FEBTC) returned the
spouses Domingo's checks and accepted Carmelita's payments; and (3) BPI did not demand any payment
from the spouses Domingo not until 30 months after Carmelita assumed the payment of balance on the
Promissory Note.

The Court disagrees with the inferences made by the Court of Appeals and the RTC.

First, that BPI (or FEBTC) had a copy of the Deed of Sale and Assumption of Mortgage executed between
Mercy and Carmelita in its file does not mean that it had consented to the same. The very Deed itself
states:

That the VENDEE [Carmelita] assumes as he/she had assumed to pay the aforecited mortgage in
accordance with the original terms and conditions of said mortgage, and the parties hereto [Mercy and
Carmelita] have agreed to seek the conformity of the MORTGAGEE [FEBTC].[30]

This brings the Court back to the original question of whether there is proof of the conformity of BPI.

The Court notes that the documents of BPI concerning the car loan and chattel mortgage are still in the
name of the spouses Domingo. No new promissory note or chattel mortgage had been executed between
BPI (or FEBTC) and Carmelita. Even the account itself is still in the names of the spouses Domingo.

The absence of objection on the part of BPI (or FEBTC) cannot be presumed as consent. Jurisprudence
requires presentation of proof of consent, not mere absence of objection. Amador cannot rely on Babst

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which involved a different factual milieu. Relevant portions of the Court's ruling in Babst are reproduced
below:

In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its
objection to the take-over by DBP of ELISCON's assets, at the creditors' meeting held in June 1981 and
thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor.

We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the assumption
by DBP of the obligations of ELISCON. In fact, BPI admits that—
"[T]he Development Blank of the Philippines (DBP), for a time, had proposed a formula for the settlement
of Eliscon's past obligations to its creditors, including the plaintiff [BPI], but the formula was expressly
rejected by the plaintiff as not acceptable (long before the filing of the complaint at bar)."
The Court of Appeals held that even if the account officer who attended the June 1981 creditors' meeting
had expressed consent to the assumption by DBP of ELISCON's debts, such consent would not bind BPI for
lack of a specific authority therefor. In its petition, ELISCON counters that the mere presence of the
account officer at the meeting necessarily meant that he was authorized to represent BPI in that creditors'
meeting. Moreover, BPI did not object to the substitution of debtors, although it objected to the payment
formula submitted by DBP.

Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting was an
authority to represent the bank, such that when he failed to object to the substitution of debtors, he did
so on behalf of and for the bank. Even granting arguendo that the said account officer was not so
empowered, BPI could have subsequently registered its objection to the substitution, especially after it
had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure
to do so can only mean an acquiescence in the assumption by DBP of ELISCON's obligations. As
repeatedly pointed out by ELISCON and MULTI, BPI's objection was to the proposed payment formula, not
to the substitution itself.[31]

In Babst, there was a clear opportunity for BPI, as creditor therein, to o ject to the substitution of debtors
given that its representative attended a creditor's meeting, during which, said representative already
objected to the proposed payment formula made by DBP, as the new debtor. Hence, the silence of BPI
during the same meeting as to the matter of substitution of debtors could already be interpreted as its
acquiescence to the same. In contrast, there was no clear opportunity for BPI (or FEBTC) to have
expressed its objection to the substitution of debtors in the case at bar.

Second, the consent of BPI to the substitution of debtors cannot be deduced from its acceptance of
payments from Carmelita, absent proof of its clear and unmistakable consent to release the spouses
Domingo from their obligation. Since the spouses Domingo remained as debtors of BPI, together with
Carmelita, the fact that BPI demanded payment from the spouses Dokningo 30 months after accepting
payment from Carmelita is insignificant.

The acceptance by a creditor of payments from a third person, who has assumed the obligation, will result
merely to the addition of debtors and not novation. The creditor may therefore enforce the obligation
against both debtors.[32] As the Court pronounced in Magdalena Estates, Inc. v. Rodriguez,[33] "[t]he
mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed
to assume the obligation, when there is no agreement that the first debtor shall be released from
responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the
original debtor." The Court reiterated in Quinto v. People[34] that "[n]ot too uncommon is when a
stranger to a contract agrees to assume an obligation; and while this may have the effect of adding to the
number of persons liable, it does not necessarily imply the extinguishment of the liability of the first
debtor. Neither would the fact alone that the creditor receives guaranty or accepts payments from a third
person who has agreed to assume the obligation, constitute an extinctive novation absent an agreement
that the first debtor shall be released from responsibility."

Absent proof that BPI gave its clear and unmistakable consent to release the spouses Domingo from the
obligation to pay the car loan, Carmelita is simply considered an additional debtor. Consequently, BPI can
still enforce the obligation against the spouses Domingo even 30 months after it had started accepting
payments from Carmelita.

Page 184 of 189

And third, there is no sufficient or competent evidence to establish the return of the checks to the spouses
Domingo and the assurance made by FEBTC that the spouses Domingo were already released from their
obligation.

During his direct examination, Amador testified as follows:

Atty. Rivera:
1.
Q. Do you remember who was this person who became interested to buy this car?
A. Carmelita S. Gonzales, Sir.

2.
Q. What did you tell Mrs. Gonzales when she expressed interest in buying this car, this Mazda vehicle?
A. We told her that the car was mortgaged and she told us that she is willing to assume the mortgage, Sir.

3.
Q. With that willingness, what happened next on the part of Mrs. Gonzales to assume the mortgage?
A. My wife and Mrs. Gonzales went to Far East Bank and Trust Company and she informed the bank that
somebody is interested in buying the car and assume the mortgage and the bank informed her that the
bank is agreeable and with no objection.

Atty. Ganitano:
Objection, your Honor. May we object to the answer of the witness, it would be hearsay. The witness
testified that it was his wife and the would-be buyer who went to the bank.

Atty. Rivera:
Then, we are just offering it as part of the narration not necessarily to prove the truth of the statement,
your Honor.

Court:
The witness may continue.

Atty. Rivera:
So, after that meeting with the bank occurred, what happened next in connection with this intention of
Mrs. Gonzales to purchase the car?
Witness:
After furnishing the bank with the Deed of Absolute Sale duly notarized, [Ms.] Carmelita Gonzales
subsequently issued a check payable to Far East Bank and Trust Company, Sir.

Atty. Rivera:
1.
Q. How about the postdated checks that your wife issued to Far East Bank and Trust Company?
A. The remaining postdated checks were returned to us, Sir.

2.
Q. Do you remember what were those postdated checks that were returned by the bank?
A. Those were the checks we issued in advance, Sir.

3.
Q. What were the dates of these checks?
A. October 30, 1994 to 1997, Sir.

Atty. Rivera:
1.
Q. Aside from this evidence that you have enumerated, were you able to talk to any representative from
Far East Bank relative to the approval of the change in the personality of the debtor from your wife to...
A. As I remember, sometime in 1996, I received a call from a certain Marvin Orence asking for our
assistance to locate the car that Mrs. Carmelita Gonzales bought from us and informed us that we have
nothing to worry except that we provide them assistance to locate the car and I informed our lawyer, Atty.
Rivera, about this and Atty. Rivera went to the Land Transportation Office for assistance.

Page 185 of 189

Amador continued to testify on cross-examination, thus:
CROSS EXAMINATION BY ATTY. GANITANO
1.
Q. You testified that out of the 48 checks you paid to Far East Bank & Trust Company, only 12 checks
were made good. What happened to the 36 checks?
A. When my wife brought the transaction to Far East Bank and presented the Deed of Absolute Sale, the
bank have no objection to the sale of the car and afterwards, the bank returned all the postdated checks
prepared by my wife that was in the possession of the bank, Sir.

1.
Q. Do you have with you those 36 checks that were allegedly returned by Far East Bank?
A. AThese checks have already been discarded, Sir.

2.
Q. So, you cannot present those 36 checks anymore?
A. No, Sir.

3.
Q. Who was the alleged buyer of the mortgaged car again?
Witness: Carmelita S. Gonzales, Sir.

Atty. Ganitano:
1.
Q. To whom did this Carmelita Gonzales transacted with respect to the sale of mortgaged vehicle?
A. To my wife, Mercy Maryden Domingo, Sir.

2.
Q. Not with you, Mr. Witness?
A. Well, I always provide assistance to my wife with regards to paper works, Sir.

3.
Q When was this Deed of Sale executed, was it before when your wife and the buyer went to the bank or
after they went to the bank?
A. I think it was simultaneous, Sir.

4.
Q. When you say "simultaneous", Mr. Witness, I'm showing to you this Deed of Sale with Assumption of
Mortgage and you said it was with the conformity of the bank. Will you please tell us in this Deed of Sale
with Assumption of Mortgage if you could find any entry which indicate that the bank agreed to the sale
with assumption of mortgage?
Witness: None, Sir.

Atty. Ganitano: Aside from this Deed of Sale with Assumption of Mortgage, do you have any document
which shows that the bank indeed conformed to the sale of the mortgaged vehicle with assumption of
mortgage?
Witness: We were verbally assured that our papers are in order, Sir.

Atty. Ganitano: So, there is no document, Mr. Witness, it was only made orally?
Witness: Yes, Sir, we were verbally assured that our papers are in order.

Atty. Ganitano:
1.
Q. Were you present when your wife and the would be buyer went to the bank?
A. No, Sir.

2.
Q. How did you know that there was an assurance from the bank?
A. I received a phone call from Mr. Oronce. I asked about the transaction and he told me that there is
nothing to worry because our documents or papers were in order, Sir.

Page 186 of 189

3.
Q. Do I get you right, Mr. Witness, that the confirmation was only through phone call?
A. It was Mr. Oronce who called me, Sir.

4.
Q. I'm just asking what was the means of communication, was it only thru phone call? A. Yes, Sir, thru
phone call. I think twice or three times.

Atty. Rivera: We would like to manifest, your Honor, as early as 1997, just to stress this point, as early as
March 1997, the name of Marvin Oronce...
Atty. Ganitano: The witness is under cross, your Honor.
Court: You just ask that in re-direct, counsel.
Atty. Rivera: Yes, you Honor.[36]

Amador admitted that it was his wife Mercy, together with Carmelita, who directly transacted with FEBTC
regarding the sale of the subject vehicle to and assumption of mortgage by Carmelita. Amador had no
personal knpwledge of what had happened when Mercy and Carmelita went to the bank so his testimony
on the matter was hearsay, which, if not excluded, deserves no credence.

The Court explained in Da Jose v. Angeles[37] that:

Evidence is hearsay when its probative force depends on the competency and credibility of some persons
other than the witness by whom it is sought to be produced. The exclusion of hearsay evidence is
anchored on three reasons: (1) absence of cross-examination; (2) absence of demeanor evidence; and
(3) absence of oath. Basic under the rules of evidence is that a witness can only testify on facts within his
or her personal knowledge. This personal knowledge is a substantive prerequisite in accepting testimonial
evidence establishing the truth of a disputed fact, x x x. (Citations omitted.)
The Court of Appeals and the RTC substantively based their finding that BPI (or FEBTC) consented to the
substitution of debtors on the return of the checks to the spouses Domingo, but the proof of the issuance
of the checks, their delivery to the bank, and the return of the checks flimsily consists of Amador's
unsubstantiated testimony. Amador recounted that the postdated checks which he and Mercy executed in
favor of FEBTC were returned to them, however, he failed to provide the details surrounding the return.
Amador only stated that when Mercy provided FEBTC with a copy of the Deed of Sale and Assumption of
Mortgage, the bank returned the checks to them "subsequently" or "afterwards." Amador did not say how
the checks were returned and to whom. The checks were not presented during the trial since according to
Amador, they were already "discarded," although once more, any other detail surrounding the discarding
of the checks is sorely lacking. Aside from Amador's bare testimony, no other supporting evidence of the
return of the checks to the spouses Domingo was submitted during trial. For the foregoing reasons, the
Court accords little weight and credence to Amador's testimony on the return of the checks.

It is worthy to stress that Amador, as the party asserting novation, bears the burden of proving its
existence. Amador cannot simply rely on the failure of BPI to produce the checks if these were not actually
returned to the spouses Domingo. There is simply not enough evidence to establish the prima facie
existence of novation to shift the burden of evidence to BPI to controvert the same.

The verbal assurances purportedly given by a Mr. Marvin Orence or Oronce (Orence/Oronce) of FEBTC to
Amador over the telephone that the spouses Domingo's documents were in order do not constitute the
clear and unmistakable consent of the bank to the substitution of debtors. Once again, except for
Amador's bare testimony, there is no other evidence of such telephone conversations taking place and the
subject of such telephone conversations. In addition, Mr. Orence/Oronce's identity, position at FEBTC, and
authority to represent and bind the bank, were not even clearly established.

The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera (Rivera), counsel for the spouses Domingo,
addressed to Atty. Cresenciano L. Espino, counsel for FEBTC, does not serve as supporting evidence for
Amador's testimony regarding the return of the checks and the verbal assurances given by Mr.
Orence/Oronce. The contents of such letter are rriere hearsay because the events stated therein did not
personally happen to Aity. Rivera or in his presence, and he merely relied on what his clients, the spouses
Domingo, told him.

Page 187 of 189

The Court is therefore convinced that there is no novation by delegacion in this case and Amador remains
a debtor of BPI. The Court reinstates the MeTC judgment ordering Amador to pay for the P275,562.00
lance on the Promissory Note, 10% attorney's fees, and costs of suit; but modifies the rate of interest
imposed and the date when such interest began to run.

In Ruiz v. Court of Appeals,[38] the Court equitably reduced the interest te of 3% per month or 36% per
annum stipulated in the promissory notes jrein to 1% per month or 12% per annum, based on the
following ratiocination:
We affirm the ruling of the appellate court, striking down as invalid the 10% compounded monthly
interest, the 10% surcharge per month stipulated in the promissory notes dated May 23, 1995 and
December 1, 1995, and the 1% compounded monthly interest stipulated in the promissory note dated
April 21, 1995. The legal rate of interest of 12% per annum shall apply after the maturity dates of the
notes until full payment of the entire amount due. Also, the only permissible rate of surcharge is 1% per
month, without compounding. We also uphold the award of the appellate court of attorney's fees, the
amount of which having been reasonably reduced from the stipulated 25% (in the March 22, 1995
promissory note) and 10% (in the other three promissory notes) of the entire amount due, to a fixed
amount of P50,000.00. However, we equitably reduce the 3% per month or 36% per annum interest
present in all four (4) promissory notes to 1% per month or 12% per annum interest.

The foregoing rates of interests and surcharges are in accord with Medel vs. Court of Appeals, Garcia vs.
Court of Appeals, Bautista vs. Pilar Development Corporation, and the recent case of Spouses Solangon
vs. Salazar. This Court invalidated a stipulated 5.5% per month or 66% per annum interest on a
P500,000.00 loan in Medel and a 6% per month or 72% per annum interest on a P60,000.00 loan in
Solangon for being excessive, iniquitous, unconscionable and exorbitant. In both cases, we reduced the
interest rate to 12% per annum. We held that while the Usury Law has been suspended by Central Bank
Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan agreement have been given
wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they are
unconscionable. Nothing in the said circular grants lenders carte blanche authority to raise interest rates
to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. On the other
hand, in Bautista vs. Pilar Development Corp., this Court upheld the validity of a 21% per annum interest
on a P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the agreement of the parties to a
24% per annum interest on an P8,649,250.00 loan. It is on the basis of these cases that we reduce the
36% per annum interest to 12%. An interest of 12% per annum is deemed fair and reasonable. While it is
true that this Court invalidated a much higher interest rate of 66% per annum in Medel and 72% in
Solangon it has sustained the validity of a much lower interest rate of 21% in Bautista and 24% in Garcia.
We still find the 36% per annum interest rate in the case at bar to be substantially greater than those
upheld by this Court in the two (2) aforecited cases. (Citations omitted.)
On the strength of the foregoing jurisprudence, the Court likewise finds the interest rate of 3% per month
or 36% per annum stipulated in the Promissory Note herein for the balance of P275,562.00 as excessive,
iniquitous, unconscionable, and exorbitant. Following the guidelines set forth in Eastern Shipping Lines,
Inc. v. Court of Appeals[39] and Nacar v. Gallery Frames,[40] the Court imposes instead legal interest in
the following rates: (1) legal interest of 12% per annum from date of extrajudicial demand on January 29,
1997 until June 30, 2013; and (2) legal interest of 6% per annum from July 1, 2013 until fully paid.

Incidentally, Amador passed away on June 5, 2010 during the pendency of the instant petition, and is
survived by his children, namely: Joann D. Moya, Annabelle G. Domingo, Cristina G. Domingo, Amador G.
Domingo, Jr., Gloria Maryden D. Macatangay, Dante Amador G. Domingo, Gregory Amador A. Domingo,
and Ina Joy A. Domingo.[41] To prevent future litigation in the enforcement of the award, the Court
clarifies that Amador's heirs are not personally responsible for the debts of their predecessor. The extent
of liability of Amador's heirs to BPI is limited to the value of the estate which they inherited from Amador.
In this jurisdiction, "it is the estate or mass of the property left by the decedent, instead of the heirs
directly, that becomes vested and charged with his rights and obligations which survive after his
death."[42] To rule otherwise would unduly deprive Amador's heirs of their properties.

WHEREFORE, in view of the foregoing, the Petition is GRANTED. The Decision dated July 11, 2005 and
Resolution dated August 19, 2005 of the Court of Appeals in CA-G.R. SP No. 88836, affirming with
modification the Decision dated February 10, 2005 of the RTC of Manila, Branch 26 in Civil Case No. 04-
111100, is REVERSED and SET ASIDE. The Decision dated June 10, 2004 and Order dated September 6,
2004 of the MeTC of Manila, Branch 9 in Civil Case No. 168949-CV, is REINSTATED with MODIFICATIONS.

Page 188 of 189

The heirs of respondent Amador Domingo are ORDERED to pay petitioner Bank of the Philippine Islands
the following:

(1) the P275,562.00 balance on the Promissory Note, plus legal interest of 12% from January 29, 1997 to
June 30, 2013 and 6% from July 1, 2013 until fully paid; (2) attorney's fees of 10%; and (3) costs of suit.
However, the liability of Amador Domingo's heirs is limited to the value of the inheritance they received
from the deceased.

SO ORDERED.

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