Civil Cases.docx

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-36840 May 22, 1973 PEOPLE'S CAR INC., plaintiff-appellant, vs. COMMANDO SECURITY SERVICE AGENCY, defendant-appellee.

TEEHANKEE, J.: In this appeal from the adverse judgment of the Davao court of first instance limiting plaintiff-appellant's recovery under its complaint to the sum of P1,000.00 instead of the actual damages of P8,489.10 claimed and suffered by it as a direct result of the wrongful acts of defendant security agency's guard assigned at plaintiff's premises in pursuance of their "Guard Service Contract", the Court finds merit in the appeal and accordingly reverses the trial court's judgment. The appeal was certified to this Court by a special division of the Court of Appeals on a four-to-one vote as per its resolution of April 14, 1973 that "Since the case was submitted to the court a quo for decision on the strength of the stipulation of facts, only questions of law can be involved in the present appeal." The Court has accepted such certification and docketed this appeal on the strength of its own finding from the records that plaintiff's notice of appeal was expressly to this Court (not to the appellate court)" on pure questions of law"1 and its record on appeal accordingly prayed that" the corresponding records be certified and forwarded to the Honorable Supreme Court." 2 The trial court so approved the same3 on July 3, 1971 instead of having required the filing of a petition for review of the judgment sought to be appealed from directly with this Court, in accordance with the provisions of Republic Act 5440. By some unexplained and hitherto undiscovered error of the clerk of court, furthermore, the record on appeal was erroneously forwarded to the appellate court rather than to this Court. The parties submitted the case for judgment on a stipulation of facts. There is thus no dispute as to the factual bases of plaintiff's complaint for recovery of actual damages against defendant, to wit, that under the subsisting "Guard 1

Service Contract" between the parties, defendant-appellee as a duly licensed security service agency undertook in consideration of the payments made by plaintiff to safeguard and protect the business premises of (plaintiff) from theft, pilferage, robbery, vandalism and all other unlawful acts of any person or person prejudicial to the interest of (plaintiff)."4 On April 5, 1970 at around 1:00 A.M., however, defendant's security guard on duty at plaintiff's premises, "without any authority, consent, approval, knowledge or orders of the plaintiff and/or defendant brought out of the compound of the plaintiff a car belonging to its customer, and drove said car for a place or places unknown, abandoning his post as such security guard on duty inside the plaintiff's compound, and while so driving said car in one of the City streets lost control of said car, causing the same to fall into a ditch along J.P. Laurel St., Davao City by reason of which the plaintiff's complaint for qualified theft against said driver, was blottered in the office of the Davao City Police Department."5 As a result of these wrongful acts of defendant's security guard, the car of plaintiff's customer, Joseph Luy, which had been left with plaintiff for servicing and maintenance, "suffered extensive damage in the total amount of P7,079."6 besides the car rental value "chargeable to defendant" in the sum of P1,410.00 for a car that plaintiff had to rent and make available to its said customer to enable him to pursue his business and occupation for the period of forty-seven (47) days (from April 25 to June 10, 1970) that it took plaintiff to repair the damaged car,7 or total actual damages incurred by plaintiff in the sum of P8,489.10. Plaintiff claimed that defendant was liable for the entire amount under paragraph 5 of their contract whereunder defendant assumed "sole responsibility for the acts done during their watch hours" by its guards, whereas defendant contended, without questioning the amount of the actual damages incurred by plaintiff, that its liability "shall not exceed one thousand (P1,000.00) pesos per guard post" under paragraph 4 of their contract. The parties thus likewise stipulated on this sole issue submitted by them for adjudication, as follows: Interpretation of the contract, as to the extent of the liability of the defendant to the plaintiff by reason of the acts of the employees of the defendant is the only issue to be resolved. The defendant relies on Par. 4 of the contract to support its contention while the plaintiff relies on Par. 5 of the same contract in support of its claims against the defendant. For ready reference they are quoted hereunder: 'Par. 4. — Party of the Second Part (defendant) through the negligence of its guards, after an investigation has been conducted by the Party of the First Part 2

(plaintiff) wherein the Party of the Second Part has been duly represented shall assume full responsibilities for any loss or damages that may occur to any property of the Party of the First Part for which it is accountable, during the watch hours of the Party of the Second Part, provided the same is reported to the Party of the Second Part within twenty-four (24) hours of the occurrence, except where such loss or damage is due to force majeure, provided however that after the proper investigation to be made thereof that the guard on post is found negligent and that the amount of the loss shall not exceed ONE THOUSAND (P1,000.00) PESOS per guard post.' 'Par. 5 — The party of the Second Part assumes the responsibility for the proper performance by the guards employed, of their duties and (shall) be solely responsible for the acts done during their watch hours, the Party of the First Part being specifically released from any and all liabilities to the former's employee or to the third parties arising from the acts or omissions done by the guard during their tour of duty.' ...8 The trial court, misreading the above-quoted contractual provisions, held that "the liability of the defendant in favor of the plaintiff falls under paragraph 4 of the Guard Service Contract" and rendered judgment "finding the defendant liable to the plaintiff in the amount of P1,000.00 with costs." Hence, this appeal, which, as already indicated, is meritorious and must be granted. Paragraph 4 of the contract, which limits defendant's liability for the amount of loss or damage to any property of plaintiff to "P1,000.00 per guard post," is by its own terms applicable only for loss or damage 'through the negligenceof its guards ... during the watch hours" provided that the same is duly reported by plaintiff within 24 hours of the occurrence and the guard's negligence is verified after proper investigation with the attendance of both contracting parties. Said paragraph is manifestly inapplicable to the stipulated facts of record, which involve neither property of plaintiff that has been lost or damaged at its premises nor mere negligence of defendant's security guard on duty. Here, instead of defendant, through its assigned security guards, complying with its contractual undertaking 'to safeguard and protect the business premises of (plaintiff) from theft, robbery, vandalism and all other unlawful acts of any person or persons," defendant's own guard on duty unlawfully and wrongfully drove out of plaintiffs premises a customer's car, lost control of it on the highway causing it to fall into a ditch, thereby directly causing plaintiff to incur actual damages in the total amount of P8,489.10. Defendant is therefore undoubtedly liable to indemnify plaintiff for the entire damages thus incurred, since under paragraph 5 of their contract it "assumed the responsibility for the proper performance by the guards employed of their 3

duties and (contracted to) be solely responsible for the acts done during their watch hours" and "specifically released (plaintiff) from any and all liabilities ... to the third parties arising from the acts or omissions done by the guards during their tour of duty." As plaintiff had duly discharged its liability to the third party, its customer, Joseph Luy, for the undisputed damages of P8,489.10 caused said customer, due to the wanton and unlawful act of defendant's guard, defendant in turn was clearly liable under the terms of paragraph 5 of their contract to indemnify plaintiff in the same amount. The trial court's approach that "had plaintiff understood the liability of the defendant to fall under paragraph 5, it should have told Joseph Luy, owner of the car, that under the Guard Service Contract, it was not liable for the damage but the defendant and had Luy insisted on the liability of the plaintiff, the latter should have challenged him to bring the matter to court. If Luy accepted the challenge and instituted an action against the plaintiff, it should have filed a third-party complaint against the Commando Security Service Agency. But if Luy instituted the action against the plaintiff and the defendant, the plaintiff should have filed a crossclaim against the latter,"9 was unduly technical and unrealistic and untenable. Plaintiff was in law liable to its customer for the damages caused the customer's car, which had been entrusted into its custody. Plaintiff therefore was in law justified in making good such damages and relying in turn on defendant to honor its contract and indemnify it for such undisputed damages, which had been caused directly by the unlawful and wrongful acts of defendant's security guard in breach of their contract. As ordained in Article 1159, Civil Code, "obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." Plaintiff in law could not tell its customer, as per the trial court's view, that "under the Guard Service Contract it was not liable for the damage but the defendant" — since the customer could not hold defendant to account for the damages as he had no privity of contract with defendant. Such an approach of telling the adverse party to go to court, notwithstanding his plainly valid claim, aside from its ethical deficiency among others, could hardly create any goodwill for plaintiff's business, in the same way that defendant's baseless attempt to evade fully discharging its contractual liability to plaintiff cannot be expected to have brought it more business. Worse, the administration of justice is prejudiced, since the court dockets are unduly burdened with unnecessary litigation. ACCORDINGLY, the judgment appealed from is hereby reversed and judgment is hereby rendered sentencing defendant-appellee to pay plaintiff-appellant the sum of P8,489.10 as and by way of reimbursement of the stipulated actual damages and expenses, as well as the costs of suit in both instances. It is so ordered.

4

Makalintal, Zaldivar, Castro, Fernando, Barredo, Makasiar, Antonio and Esguerra, JJ., concur.

Footnotes 1 Rec. on appeal, p. 39. 2 Idem, pp. 40-41. 3 Idem, p. 42. 4 Annex A, complaint, Rec. on app., pp. 8-13. 5 Par. 1. Stipulation of Facts, Rec. on app., p. 24. 6 Par. 2, idem. 7 Par. 3, idem. 8 Rec. on app., pp. 26-27; notes in emphasis supplied. 9 Decision, Rec. on App, pp. 29-30.

5

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 34840

September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee, vs. BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO VELASCO, and SATURNINO CORTEZ, defendants-appellants. L.D. Lockwood for appellants Velasco and Cortez. San Agustin and Roxas for other appellants. Ramon Diokno for appellee. MALCOLM, J.: This is an action brought by the plaintiff in the Court of First Instance of Manila against the five defendants, to recover damages in the amount of P10,000, for

6

physical injuries suffered as a result of an automobile accident. On judgment being rendered as prayed for by the plaintiff, both sets of defendants appealed. On February 2, 1930, a passenger truck and an automobile of private ownership collided while attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of Las Piñas, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and was owned by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18 years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At the time of the collision, the father was not in the car, but the mother, together will several other members of the Gutierrez family, seven in all, were accommodated therein. A passenger in the autobus, by the name of Narciso Gutierrez, was en route from San Pablo, Laguna, to Manila. The collision between the bus and the automobile resulted in Narciso Gutierrez suffering a fracture right leg which required medical attendance for a considerable period of time, and which even at the date of the trial appears not to have healed properly. It is conceded that the collision was caused by negligence pure and simple. The difference between the parties is that, while the plaintiff blames both sets of defendants, the owner of the passenger truck blames the automobile, and the owner of the automobile, in turn, blames the truck. We have given close attention to these highly debatable points, and having done so, a majority of the court are of the opinion that the findings of the trial judge on all controversial questions of fact find sufficient support in the record, and so should be maintained. With this general statement set down, we turn to consider the respective legal obligations of the defendants. In amplification of so much of the above pronouncement as concerns the Gutierrez family, it may be explained that the youth Bonifacio was in incompetent chauffeur, that he was driving at an excessive rate of speed, and that, on approaching the bridge and the truck, he lost his head and so contributed by his negligence to the accident. The guaranty given by the father at the time the son was granted a license to operate motor vehicles made the father responsible for the acts of his son. Based on these facts, pursuant to the provisions of article 1903 of the Civil Code, the father alone and not the minor or the mother, would be liable for the damages caused by the minor. We are dealing with the civil law liability of parties for obligations which arise from fault or negligence. At the same time, we believe that, as has been done in other cases, we can take cognizance of the common law rule on the same subject. In the United States, it is uniformly held that the head of a house, the owner of an automobile, who maintains it for the general use of his family is liable for its negligent operation by one of his children, whom he designates or permits to run it, where the car is occupied and being used at the time of the injury for the pleasure of other members of the owner's family than the child driving it. The theory of the law is that the running of the machine by a child to 7

carry other members of the family is within the scope of the owner's business, so that he is liable for the negligence of the child because of the relationship of master and servant. (Huddy On Automobiles, 6th ed., sec. 660; Missell vs. Hayes [1914], 91 Atl., 322.) The liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo Velasco rests on a different basis, namely, that of contract which, we think, has been sufficiently demonstrated by the allegations of the complaint, not controverted, and the evidence. The reason for this conclusion reaches to the findings of the trial court concerning the position of the truck on the bridge, the speed in operating the machine, and the lack of care employed by the chauffeur. While these facts are not as clearly evidenced as are those which convict the other defendant, we nevertheless hesitate to disregard the points emphasized by the trial judge. In its broader aspects, the case is one of two drivers approaching a narrow bridge from opposite directions, with neither being willing to slow up and give the right of way to the other, with the inevitable result of a collision and an accident. The defendants Velasco and Cortez further contend that there existed contributory negligence on the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the defense of contributory negligence was not pleaded, the evidence bearing out this theory of the case is contradictory in the extreme and leads us far afield into speculative matters. The last subject for consideration relates to the amount of the award. The appellee suggests that the amount could justly be raised to P16,517, but naturally is not serious in asking for this sum, since no appeal was taken by him from the judgment. The other parties unite in challenging the award of P10,000, as excessive. All facts considered, including actual expenditures and damages for the injury to the leg of the plaintiff, which may cause him permanent lameness, in connection with other adjudications of this court, lead us to conclude that a total sum for the plaintiff of P5,000 would be fair and reasonable. The difficulty in approximating the damages by monetary compensation is well elucidated by the divergence of opinion among the members of the court, three of whom have inclined to the view that P3,000 would be amply sufficient, while a fourth member has argued that P7,500 would be none too much. In consonance with the foregoing rulings, the judgment appealed from will be modified, and the plaintiff will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo Velasco, and Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of both instances. Avanceña, C.J., Johnson, Street, Villamor, Ostrand, Romualdez, and Imperial, JJ., concur.

8

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-16570

March 9, 1922

SMITH, BELL & CO., LTD., plaintiff-appellant, vs. VICENTE SOTELO MATTI, defendant-appellant. Ross and Lawrence and Ewald E. Selph for plaintiff-appellant. Ramon Sotelo for defendant-appellant. ROMUALDEZ, J.: In August, 1918, the plaintiff corporation and the defendant, Mr. Vicente Sotelo, entered into contracts whereby the former obligated itself to sell, and the latter to purchase from it, two steel tanks, for the total price of twenty-one thousand pesos (P21,000), the same to be shipped from New York and delivered at Manila "within three or four months;" two expellers at the price of twenty five thousand pesos (P25,000) each, which were to be shipped from San Francisco in the month of September, 1918, or as soon as possible; and two electric motors at the price of two thousand pesos (P2,000) each, as to the delivery of which stipulation was made, couched in these words: "Approximate delivery within ninety days. — This is not guaranteed." The tanks arrived at Manila on the 27th of April, 1919: the expellers on the 26th of October, 1918; and the motors on the 27th of February, 1919. The plaintiff corporation notified the defendant, Mr. Sotelo, of the arrival of these goods, but Mr. Sotelo refused to receive them and to pay the prices stipulated. The plaintiff brought suit against the defendant, based on four separate causes of action, alleging, among other facts, that it immediately notified the defendant of the arrival of the goods, and asked instructions from him as to the delivery thereof, and that the defendant refused to receive any of them and to pay their 9

price. The plaintiff, further, alleged that the expellers and the motors were in good condition. (Amended complaint, pages 16-30, Bill of Exceptions.) In their answer, the defendant, Mr. Sotelo, and the intervenor, the Manila Oil Refining and By-Products Co., Inc., denied the plaintiff's allegations as to the shipment of these goods and their arrival at Manila, the notification to the defendant, Mr. Sotelo, the latter's refusal to receive them and pay their price, and the good condition of the expellers and the motors, alleging as special defense that Mr. Sotelo had made the contracts in question as manager of the intervenor, the Manila Oil Refining and By-Products Co., Inc which fact was known to the plaintiff, and that "it was only in May, 1919, that it notified the intervenor that said tanks had arrived, the motors and the expellers having arrived incomplete and long after the date stipulated." As a counterclaim or set-off, they also allege that, as a consequence of the plaintiff's delay in making delivery of the goods, which the intervenor intended to use in the manufacture of cocoanut oil, the intervenor suffered damages in the sums of one hundred sixteen thousand seven hundred eighty-three pesos and ninety-one centavos (P116,783.91) for the nondelivery of the tanks, and twenty-one thousand two hundred and fifty pesos (P21,250) on account of the expellers and the motors not having arrived in due time. The case having been tried, the court below absolved the defendants from the complaint insofar as the tanks and the electric motors were concerned, but rendered judgment against them, ordering them to "receive the aforesaid expellers and pay the plaintiff the sum of fifty thousand pesos (P50,00), the price of the said goods, with legal interest thereon from July 26, 1919, and costs." Both parties appeal from this judgment, each assigning several errors in the findings of the lower court. The principal point at issue in this case is whether or not, under the contracts entered into and the circumstances established in the record, the plaintiff has fulfilled, in due time, its obligation to bring the goods in question to Manila. If it has, then it is entitled to the relief prayed for; otherwise, it must be held guilty of delay and liable for the consequences thereof. To solve this question, it is necessary to determine what period was fixed for the delivery of the goods. As regards the tanks, the contracts A and B (pages 61 and 62 of the record) are similar, and in both of them we find this clause: To be delivered within 3 or 4 months — The promise or indication of shipment carries with it absolutely no obligation on our part — Government regulations, railroad embargoes, lack of vessel space, the exigencies of the requirement of the United States Government, or a number of causes may act to entirely 10

vitiate the indication of shipment as stated. In other words, the order is accepted on the basis of shipment at Mill's convenience, time of shipment being merely an indication of what we hope to accomplish. In the contract Exhibit C (page 63 of the record), with reference to the expellers, the following stipulation appears: The following articles, hereinbelow more particularly described, to be shipped at San Francisco within the month of September /18, or as soon as possible. — Two Anderson oil expellers . . . . And in the contract relative to the motors (Exhibit D, page 64, rec.) the following appears: Approximate delivery within ninety days. — This is not guaranteed. — This sale is subject to our being able to obtain Priority Certificate, subject to the United States Government requirements and also subject to confirmation of manufactures. In all these contracts, there is a final clause as follows: The sellers are not responsible for delays caused by fires, riots on land or on the sea, strikes or other causes known as "Force Majeure" entirely beyond the control of the sellers or their representatives. Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the goods. As to the tanks, the agreement was that the delivery was to be made "within 3 or 4 months," but that period was subject to the contingencies referred to in a subsequent clause. With regard to the expellers, the contract says "within the month of September, 1918," but to this is added "or as soon as possible." And with reference to the motors, the contract contains this expression, "Approximate delivery within ninety days," but right after this, it is noted that "this is not guaranteed." The oral evidence falls short of fixing such period. From the record it appears that these contracts were executed at the time of the world war when there existed rigid restrictions on the export from the United States of articles like the machinery in question, and maritime, as well as railroad, transportation was difficult, which fact was known to the parties; hence clauses were inserted in the contracts, regarding "Government regulations, railroad embargoes, lack of vessel space, the exigencies of the requirements of the United States Government," in connection with the tanks and "Priority Certificate, subject to the United State Government requirements," with respect to the motors. At the time of the execution of the contracts, the parties were not unmindful of the contingency of the United

11

States Government not allowing the export of the goods, nor of the fact that the other foreseen circumstances therein stated might prevent it. Considering these contracts in the light of the civil law, we cannot but conclude that the term which the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those articles could be brought to Manila or not. If that is the case, as we think it is, the obligations must be regarded as conditional. Obligations for the performance of which a day certain has been fixed shall be demandable only when the day arrives. A day certain is understood to be one which must necessarily arrive, even though its date be unknown. If the uncertainty should consist in the arrival or non-arrival of the day, the obligation is conditional and shall be governed by the rules of the next preceding section. (referring to pure and conditional obligations). (Art. 1125, Civ. Code.) And as the export of the machinery in question was, as stated in the contract, contingent upon the sellers obtaining certificate of priority and permission of the United States Government, subject to the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but upon the will of third persons who could in no way be compelled to fulfill the condition. In cases like this, which are not expressly provided for, but impliedly covered, by the Civil Code, the obligor will be deemed to have sufficiently performed his part of the obligation, if he has done all that was in his power, even if the condition has not been fulfilled in reality. In such cases, the decisions prior to the Civil Code have held that the obligee having done all that was in his power, was entitled to enforce performance of the obligation. This performance, which is fictitious — not real — is not expressly authorized by the Code, which limits itself only to declare valid those conditions and the obligation thereby affected; but it is neither disallowed, and the Code being thus silent, the old view can be maintained as a doctrine. (Manresa's commentaries on the Civil Code [1907], vol. 8, page 132.) The decisions referred to by Mr. Manresa are those rendered by the supreme court of Spain on November 19, 1896, and February 23, 1871. In the former it is held: First. That when the fulfillment of the conditions does not depend on the will of the obligor, but on that of a third person who can in no way be compelled to carry it out, and it is found by the lower court that the obligor has done all in his 12

power to comply with the obligation, the judgment of the said court, ordering the other party to comply with his part of the contract, is not contrary to the law of contracts, or to Law 1, Tit. I, Book 10, of the "Novísima Recopilación," or Law 12, Tit. 11, of Partida 5, when in the said finding of the lower court, no law or precedent is alleged to have been violated. (Jurisprudencia Civil published by the directors of the Revista General de Legislacion y Jurisprudencia [1866], vol. 14, page 656.) In the second decision, the following doctrine is laid down: Second. That when the fulfillment of the condition does not depend on the will of the obligor, but on that of a third person, who can in no way be compelled to carry it out, the obligor's part of the contract is complied withalf Belisario not having exercised his right of repurchase reserved in the sale of Basilio Borja mentioned in paragraph (13) hereof, the affidavit of Basilio Borja for the consolidacion de dominio was presented for record in the registry of deeds and recorded in the registry on the same date. (32) The Maximo Belisario left a widow, the opponent Adelina Ferrer and three minor children, Vitaliana, Eugenio, and Aureno Belisario as his only heirs. (33) That in the execution and sales thereunder, in which C. H. McClure appears as the judgment creditor, he was represented by the opponent Peter W. Addison, who prepared and had charge of publication of the notices of the various sales and that in none of the sales was the notice published more than twice in a newspaper. The claims of the opponent-appellant Addison have been very fully and ably argued by his counsel but may, we think, be disposed of in comparatively few words. As will be seen from the foregoing statement of facts, he rest his title (1) on the sales under the executions issued in cases Nos. 435, 450, 454, and 499 of the court of the justice of the peace of Dagupan with the priority of inscription of the last two sales in the registry of deeds, and (2) on a purchase from the Director of Lands after the land in question had been forfeited to the Government for non-payment of taxes under Act No. 1791. The sheriff's sales under the execution mentioned are fatally defective for what of sufficient publication of the notice of sale. Section 454 of the Code of civil Procedure reads in part as follows: SEC. 454. Before the sale of property on execution, notice thereof must be given, as follows: 1. In case of perishable property, by posing written notice of the time and place of the sale in three public places of the municipality or city where the sale is to take place, for such time as may be reasonable, considering the character and condition of the property; 13

2. *

*

*

*

*

*

*

3. In cases of real property, by posting a similar notice particularly describing the property, for twenty days in three public places of the municipality or city where the property is situated, and also where the property is to be sold, and publishing a copy thereof once a week, for the same period, in some newspaper published or having general circulation in the province, if there be one. If there are newspaper published in the province in both the Spanish and English languages, then a like publication for a like period shall be made in one newspaper published in the Spanish language, and in one published in the English language: Provided, however, That such publication in a newspaper will not be required when the assessed valuation of the property does not exceed four hundred pesos; 4. *

*

*

*

*

*

*

Examining the record, we find that in cases Nos. 435 and 450 the sales took place on October 14, 1916; the notice first published gave the date of the sale as October 15th, but upon discovering that October 15th was a Sunday, the date was changed to October 14th. The correct notice was published twice in a local newspaper, the first publication was made on October 7th and the second and last on October 14th, the date of the sale itself. The newspaper is a weekly periodical published every Saturday afternoon. In case No. 454 there were only two publications of the notice in a newspaper, the first publication being made only fourteen days before the date of the sale. In case No. 499, there were also only two publications, the first of which was made thirteen days before the sale. In the last case the sale was advertised for the hours of from 8:30 in the morning until 4:30 in the afternoon, in violation of section 457 of the Code of Civil Procedure. In cases Nos. 435 and 450 the hours advertised were from 9:00 in the morning until 4.30 in the afternoon. In all of the cases the notices of the sale were prepared by the judgment creditor or his agent, who also took charged of the publication of such notices. In the case of Campomanes vs. Bartolome and Germann & Co. (38 Phil., 808), this court held that if a sheriff sells without the notice prescribe by the Code of Civil Procedure induced thereto by the judgment creditor and the purchaser at the sale is the judgment creditor, the sale is absolutely void and not title passes. This must now be regarded as the settled doctrine in this jurisdiction whatever the rule may be elsewhere. It appears affirmatively from the evidence in the present case that there is a newspaper published in the province where the sale in question took place and that the assessed valuation of the property disposed of at each sale exceeded P400. Comparing the requirements of section 454, supra, with what was actually done, it is self-evident that notices of the sales mentioned were not given as prescribed by the statute and taking into consideration that in 14

connection with these sales the appellant Addison was either the judgment creditor or else occupied a position analogous to that of a judgment creditor, the sales must be held invalid. The conveyance or reconveyance of the land from the Director of Lands is equally invalid. The provisions of Act No. 1791 pertinent to the purchase or repurchase of land confiscated for non-payment of taxes are found in section 19 of the Act and read: . . . In case such redemption be not made within the time above specified the Government of the Philippine Islands shall have an absolute, indefeasible title to said real property. Upon the expiration of the said ninety days, if redemption be not made, the provincial treasurer shall immediately notify the Director of Lands of the forfeiture and furnish him with a description of the property, and said Director of Lands shall have full control and custody thereof to lease or sell the same or any portion thereof in the same manner as other public lands are leased or sold: Provided, That the original owner, or his legal representative, shall have the right to repurchase the entire amount of his said real property, at any time before a sale or contract of sale has been made by the director of Lands to a third party, by paying therefore the whole sum due thereon at the time of ejectment together with a penalty of ten per centum . . . . The appellant Addison repurchased under the final proviso of the section quoted and was allowed to do so as the successor in interest of the original owner under the execution sale above discussed. As we have seen, he acquired no rights under these sales, was therefore not the successor of the original owner and could only have obtained a valid conveyance of such titles as the Government might have by following the procedure prescribed by the Public Land Act for the sale of public lands. he is entitled to reimbursement for the money paid for the redemption of the land, with interest, but has acquired no title through the redemption. The question of the priority of the record of the sheriff's sales over that of the sale from Belisario to Borja is extensively argued in the briefs, but from our point of view is of no importance; void sheriff's or execution sales cannot be validated through inscription in the Mortgage Law registry. The opposition of Adelina Ferrer must also be overruled. She maintained that the land in question was community property of the marriage of Eulalio Belisario and Paula Ira: that upon the death of Paula Ira inealed from is modified, and the defendant Mr. Vicente Sotelo Matti, sentenced to accept and receive from the plaintiff the tanks, the expellers and the motors in question, and to pay the plaintiff the sum of ninety-six thousand pesos (P96,000), with legal interest thereon from July 17, 1919, the date of the filing of the complaint, until fully paid, and the costs of both instances. So ordered.

15

Araullo, C.J., Johnson, Street, Malcolm, Avanceña, Villamor, Ostrand, and Johns, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-264

October 4, 1946

VICENTE SINGSON ENCARNACION, plaintiff-appellee, vs. JACINTA BALDOMAR, ET AL., defendants-appellants. Bausa and Ampil for appellants. Tolentino and Aguas for appellee.

HILADO, J.: Vicente Singson Encarnacion, owner of the house numbered 589 Legarda Street, Manila, some six years ago leased said house to Jacinto Baldomar and her son, Lefrado Fernando, upon a month-to-month basis for the monthly rental of P35. After Manila was liberated in the last war, specifically on March 16, 1945, and on April 7, of the same year, plaintiff Singson Encarnacion notified defendants, the said mother and son, to vacate the house above-mentioned on or before April 15, 1945, because plaintiff needed it for his offices as a result of the destruction of the building where said plaintiff had 16

said offices before. Despite this demand, defendants insisted on continuing their occupancy. When the original action was lodged with the Municipal Court of Manila on April 20, 1945, defendants were in arrears in the payment of the rental corresponding to said month, the agrees rental being payable within the first five days of each month. That rental was paid prior to the hearing of the case in the municipal court, as a consequence of which said court entered judgment for restitution and payment of rentals at the rate of P35 a month from May 1, 1945, until defendants completely vacate the premises. Although plaintiff included in said original complaint a claim for P500 damages per month, that claim was waived by him before the hearing in the municipal court, on account of which nothing was said regarding said damages in the municipal court's decision. When the case reached the Court of First Instance of Manila upon appeal, defendants filed therein a motion to dismiss (which was similar to a motion to dismiss filed by them in the municipal court) based upon the ground that the municipal court had no jurisdiction over the subject matter due to the aforesaid claim for damages and that, therefore, the Court of First Instance had no appellate jurisdiction over the subject matter of the action. That motion to dismiss was denied by His Honor, Judge Mamerto Roxas, by order dated July 21, 1945, on the ground that in the municipal court plaintiff had waived said claim for damages and that, therefore, the same waiver was understood also to have been made in the Court of First Instance.lawphil.net In the Court of First Instance the graveman of the defense interposed by defendants, as it was expressed defendant Lefrado Fernando during the trial, was that the contract which they had celebrated with plaintiff since the beginning authorized them to continue occupying the house indefinetly and while they should faithfully fulfill their obligations as respects the payment of the rentals, and that this agreement had been ratified when another ejectment case between the parties filed during the Japanese regime concerning the same house was allegedly compounded in the municipal court. The Court of First Instance gave more credit to plaintiff's witness, Vicente Singson Encarnacion, jr., who testified that the lease had always and since the beginning been upon a month-to-month basis. The court added in its decision that this defense which was put up by defendant's answer, for which reason the Court considered it as indicative of an eleventh-hour theory. We think that the Court of First Instance was right in so declaring. Furthermore, carried to its logical conclusion, the defense thus set up by defendant Lefrado Fernando would leave to the sole and exclusive will of one of the contracting parties (defendants in this case) the validity and fulfillment of the contract of lease, within the meaning of article 1256 of the Civil Code, since the continuance and fulfillment of the contract would then depend solely and exclusively upon their free and uncontrolled choice between continuing paying the rentals or not, completely depriving the owner of all say in the matter. If this defense were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue it; 17

conversely, although the owner should desire the lease to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3d ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil., 100.) During the pendency of the appeal in the Court of First Instance and before the judgment appealed from was rendered on October 31, 1945, the rentals in areas were those pertaining to the month of August, 1945, to the date of said judgment at the rate of P35 a month. During the pendency of the appeal in that court, certain deposits were made by defendants on account of rentals with the clerk of said court, and in said judgment it is disposed that the amounts thus deposited should be delivered to plaintiff. Upon the whole, we are clearly of opinion that the judgment appealed from should be, as it is hereby, affirmed, with the costs of the three instances to appellants. So ordered. Paras, Pablo, Perfecto and Padilla, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 967

May 19, 1903

DARIO AND GAUDENCIO ELEIZEGUI, plaintiffs-appellees, vs. THE MANILA LAWN TENNIS CLUB, defendant-appellant. Pillsburry and Sutro for appellant. Manuel Torres Vergara for appellee. ARELLANO, C. J.: This suit concerns the lease of a piece of land for a fixed consideration and to endure at the will of the lessee. By the contract of lease the lessee is expressly authorized to make improvements upon the land, by erecting buildings of both

18

permanent and temporary character, by making fills, laying pipes, and making such other improvements as might be considered desirable for the comfort and amusement of the members. With respect to the term of the lease the present question has arisen. In its decision three theories have been presented: One which makes the duration depend upon the will of the lessor, who, upon one month's notice given to the lessee, may terminate the lease so stipulated; another which, on the contrary, makes it dependent upon the will of the lessee, as stipulated; and the third, in accordance with which the right is reversed to the courts to fix the duration of the term. The first theory is that which has prevailed in the judgment below, as appears from the language in which the basis of the decision is expressed: "The court is of the opinion that the contract of lease was terminated by the notice given by the plaintiff on August 28 of last year . . . ." And such is the theory maintained by the plaintiffs, which expressly rests upon article 1581 of the Civil Code, the law which was in force at the time the contract was entered into (January 25, 1890). The judge, in giving to this notice the effect of terminating the lease, undoubtedly considers that it is governed by the article relied upon by the plaintiffs, which is of the following tenor: "When the term has not been fixed for the lease, it is understood to be for years when an annual rental has been fixed, for months when the rent is monthly. . . ." The second clause of the contract provides as follows: "The rent of the said land is fixed at 25 pesos per month." (P. 11, Bill of Exceptions.) In accordance with such a theory, the plaintiffs might have terminated the lease the month following the making of the contract — at any time after the first month, which, strictly speaking, would be the only month with respect to which they were expressly bound, they not being bound for each successive month except by a tacit renewal (art. 1566) — an effect which they might prevent by giving the required notice. Although the relief asked for in the complaint, drawn in accordance with the new form of procedure established by the prevailing Code, is the restitution of the land to the plaintiffs (a formula common to various actions), nevertheless the action which is maintained can be no other than that of desahucio, in accordance with the substantive law governing the contract. The lessor — says article 1569 of the Civil Code — may judicially dispossess the lessee upon the expiration of the conventional term or of the legal term; the conventional term — that is, the one agreed upon by the parties; the legal term, in defect of the conventional, fixed for leases by articles 1577 and 1581. We have already seen what this legal term is with respect to urban properties, in accordance with article 1581. Hence, it follows that the judge has only to determine whether there is or is not conventional term. If there be a conventional term, he can not apply the legal 19

term fixed in subsidium to cover a case in which the parties have made no agreement whatsoever with respect to the duration of the lease. In this case the law interprets the presumptive intention of the parties, they having said nothing in the contract with respect to its duration. "Obligations arising from contracts have the force of law between the contracting parties and must be complied with according to the tenor of the contracts." (Art. 1091 of the Civil Code.) The obligations which, with the force of law, the lessors assumed by the contract entered into, so far as pertaining to the issues, are the following: "First. . . . They lease the above-described land to Mr. Williamson, who takes it on lease, . . . for all the time the members of the said club may desire to use it . . . Third. . . . the owners of the land undertake to maintain the club as tenant as long as the latter shall see fit, without altering in the slightest degree the conditions of this contract, even though the estate be sold." It is necessary, therefore, to answer the first question: Was there, or was there not, a conventional term, a duration, agreed upon in the contract in question? If there was an agreed duration, a conventional term, then the legal term — the term fixed in article 1581 — has no application; the contract is the supreme law of the contracting parties. Over and above the general law is the special law, expressly imposed upon themselves by the contracting parties. Without these clauses 1 and 3, the contract would contain no stipulation with respect to the duration of the lease, and then article 1581, in connection with article 1569, would necessarily be applicable. In view of these clauses, however, it can not be said that there is no stipulation with respect to the duration of the lease, or that, notwithstanding these clauses, article 1581, in connection with article 1569, can be applied. If this were so, it would be necessary to hold that the lessors spoke in vain — that their words are to be disregarded — a claim which can not be advanced by the plaintiffs nor upheld by any court without citing the law which detracts all legal force from such words or despoils them of their literal sense. It having been demonstrated that the legal term can not be applied, there being a conventional term, this destroys the assumption that the contract of lease was wholly terminated by the notice given by the plaintiffs, this notice being necessary only when it becomes necessary to have recourse to the legal term. Nor had the plaintiffs, under the contract, any right to give such notice. It is evident that they had no intention of stipulating that they reserved the right to give such notice. Clause 3 begins as follows: "Mr. Williamson, or whoever may succeed him as secretary of said club, may terminate this lease whenever desired without other formality than that of giving a month's notice. The owners of the land undertake to maintain the club as tenant as long as the latter shall see fit." The right of the one and the obligation of the others being thus placed in antithesis, there is something more, much more, than the inclusio unius, exclusio alterius. It is evident that the lessors did not intend to reserve to

20

themselves the right to rescind that which they expressly conferred upon the lessee by establishing it exclusively in favor of the latter. It would be the greatest absurdity to conclude that in a contract by which the lessor has left the termination of the lease to the will of the lessee, such a lease can or should be terminated at the will of the lessor. It would appear to follow, from the foregoing, that, if such is the force of the agreement, there can be no other mode of terminating the lease than by the will of the lessee, as stipulated in this case. Such is the conclusion maintained by the defendant in the demonstration of the first error of law in the judgment, as alleged by him. He goes so far, under this theory, as to maintain the possibility of a perpetual lease, either as such lease, if the name can be applied, or else as an innominate contract, or under any other denomination, in accordance with the agreement of the parties, which is, in fine, the law of the contract, superior to all other law, provided that there be no agreement against any prohibitive statute, morals, or public policy. It is unnecessary here to enter into a discussion of a perpetual lease in accordance with the law and doctrine prior to the Civil Code now in force, and which has been operative since 1889. Hence the judgment of the supreme court of Spain of January 2, 1891, with respect to a lease made in 1887, cited by the defendant, and a decision stated by him to have been rendered by the Audiencia of Pamplona in 1885 (it appears to be rather a decision by the head office of land registration of July 1, 1885), and any other decision which might be cited based upon the constitutions of Cataluna, according to which a lease of more than ten years is understood to create a life tenancy, or even a perpetual tenancy, are entirely out of point in this case, in which the subject-matter is a lease entered into under the provisions of the present Civil Code, in accordance with the principles of which alone can this doctrine be examined. It is not to be understood that we admit that the lease entered into was stipulated as a life tenancy, and still less as a perpetual lease. The terms of the contract express nothing to this effect. They do, whatever, imply this idea. If the lease could last during such time as the lessee might see fit, because it has been so stipulated by the lessor, it would last, first, as long as the will of the lessee — that is, all his life; second, during all the time that he may have succession, inasmuch as he who contracts does so for himself and his heirs. (Art. 1257 of the Civil Code.) The lease in question does not fall within any of the cases in which the rights and obligations arising from a contract can not be transmitted to heirs, either by its nature, by agreement, or by provision of law. Furthermore, the lessee is an English association. Usufruct is a right of superior degree to that which arises from a lease. It is a real right and includes all the jus utendi and jus fruendi. Nevertheless, the utmost period for which a usufruct can endure, if constituted in favor a natural 21

person, is the lifetime of the usufructuary (art. 513, sec. 1); and if in favor of juridical person, it can not be created for more than thirty years. (Art. 515.) If the lease might be perpetual, in what would it be distinguished from an emphyteusis? Why should the lessee have a greater right than the usufructuary, as great as that of an emphyteuta, with respect to the duration of the enjoyment of the property of another? Why did they not contract for a usufruct or an emphyteusis? It was repeatedly stated in the document that it was a lease, and nothing but a lease, which was agreed upon: "Being in the full enjoyment of the necessary legal capacity to enter into this contract of lease . . . they have agreed upon the lease of said estate . . . They lease to Mr. Williamson, who receives it as such. . . . The rental is fixed at 25 pesos a month. . . . The owners bind themselves to maintain the club as tenant. . . . Upon the foregoing conditions they make the present contract of lease. . . ." (Pp. 9, 11, and 12, bill of exceptions.) If it is a lease, then it must be for a determinate period. (Art. 1543.) By its very nature it must be temporary, just as by reason of its nature an emphyteusis must be perpetual, or for an unlimited period. (Art. 1608.) On the other hand, it can not be concluded that the termination of the contract is to be left completely at the will of the lessee, because it has been stipulated that its duration is to be left to his will. The Civil Code has made provision for such a case in all kinds of obligations. In speaking in general of obligations with a term it has supplied the deficiency of the former law with respect to the "duration of the term when it has been left to the will of the debtor," and provides that in this case the term shall be fixed by the courts. (Art. 1128, sec. 2.) In every contract, as laid down by the authorities, there is always a creditor who is entitled to demand the performance, and a debtor upon whom rests the obligation to perform the undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in this contract of lease, the lessee is the creditor with respect to the rights enumerated in article 1554, and is the debtor with respect to the obligations imposed by articles 1555 and 1561. The term within which performance of the latter obligation is due is what has been left to the will of the debtor. This term it is which must be fixed by the courts. The only action which can be maintained under the terms of the contract is that by which it is sought to obtain from the judge the determination of this period, and not the unlawful detainer action which has been brought — an action which presupposes the expiration of the term and makes it the duty of the judge to simply decree an eviction. To maintain the latter action it is sufficient to show the expiration of the term of the contract, whether conventional or legal; in order to decree the relief to be granted in the former action it is necessary for the judge to look into the character and conditions of the mutual undertakings with a view to supplying the lacking element of a time at which the lease is to expire. In the case of a loan of money or a commodatum of furniture, the payment or return to be made when the borrower "can conveniently do so" 22

does not mean that he is to be allowed to enjoy the money or to make use of the thing indefinitely or perpetually. The courts will fix in each case, according to the circumstances, the time for the payment or return. This is the theory also maintained by the defendant in his demonstration of the fifth assignment of error. "Under article 1128 of the Civil Code," thus his proposition concludes, "contracts whose term is left to the will of one of the contracting parties must be fixed by the courts, . . . the conditions as to the term of this lease has a direct legislative sanction," and he cites articles 1128. "In place of the ruthless method of annihilating a solemn obligation, which the plaintiffs in this case have sought to pursue, the Code has provided a legitimate and easily available remedy. . . . The Code has provided for the proper disposition of those covenants, and a case can hardly arise more clearly demonstrating the usefulness of that provision than the case at bar." (Pp. 52 and 53 of appellant's brief.) The plaintiffs, with respect to this conclusion on the part of their opponents, only say that article 1128 "expressly refers to obligations in contracts in general, and that it is well known that a lease is included among special contracts." But they do not observe that if contracts, simply because special rules are provided for them, could be excepted from the provisions of the articles of the Code relative to obligations and contracts in general, such general provisions would be wholly without application. The system of the Code is that of establishing general rules applicable to all obligations and contracts, and then special provisions peculiar to each species of contract. In no part of Title VI of Book IV, which treats of the contract of lease, are there any special rules concerning pure of conditional obligations which may be stipulated in a lease, because, with respect to these matters, the provisions of section 1, chapter 3, Title I, on the subject of obligations are wholly sufficient. With equal reason should we refer to section 2, which deals with obligations with a term, in the same chapter and title, if a question concerning the term arises out of a contract of lease, as in the present case, and within this section we find article 1128, which decides the question. The judgment was entered below upon the theory of the expiration of a legal term which does not exist, as the case requires that a term be fixed by the courts under the provisions of article 1128 with respect to obligations which, as is the present, are terminable at the will of the obligee. It follows, therefore, that the judgment below is erroneous. The judgment is reversed and the case will be remanded to the court below with directions to enter a judgment of dismissal of the action in favor of the defendant, the Manila Lawn Tennis Club, without special allowance as to the recovery of costs. So ordered. Mapa and Ladd, JJ., concur. Torres, J., disqualified.

23

Separate Opinions WILLARD, J., concurring: I concur in the foregoing opinion so far as it holds that article 1581 has no application to the case and that the action can not be maintained. But as to the application of article 1128 I do not concur. That article is as follows: Should the obligation not fix a period, but it can be inferred from its nature and circumstances that there was an intention to grant it to the debtor, the courts shall fix the duration of the same. The court shall also fix the duration of the period when it may have been left to the will of the debtor. The court has applied the last paragraph of the article to the case of a lease. But, applying the first paragraph to leases, we have a direct conflict between this article and article 1581. Let us suppose the lease of a house for 50 pesos a month. Nothing is said about the number of months during which the lessee shall occupy it. If article 1581 is applicable to this case, the law fixes the duration of the term and the courts have no power to change it. If article 1128 is applied to it, the courts fix the duration of the lease without reference to article 1581. It will, I think, be agreed by everyone that article 1581 is the law applicable to the case, and that article 1128 has nothing to do with it. It seems clear that both parts of the article must refer to the same kind of obligations. The first paragraph relates to obligations in which the parties have named no period, the second to the same kind of obligations in which the period is left to the will of the debtor. If the first paragraph is not applicable to leases, the second is not. The whole article was, I think, intended to apply generally to unilateral contracts — to those in which the creditor had parted with something of value, leaving it to the debtor to say when it should be returned. In such cases the debtor might never return it, and the creditor might thus be deprived of his property and entirely defeated in his rights. It was to prevent such a wrong that the article was adopted. But it has no application to this case. The plaintiffs are not deprived of their rights. They get every month the value which they themselves put upon the use of the property. The time of the payment of this rent has not been left by the contract to the will of the debtor. It is expressly provided in the contract that it shall be paid "within the first five days after the expiration of each month." Article 1255 of the Civil Code is as follows:

24

The contracting parties may make the agreement and establish the clauses and conditions which they may deem advisable, provided they are not in contravention of law, morals, or public order. That the parties to this contract distinctly agreed that the defendant should have this property so long as he was willing to pay 25 pesos a month for it, is undisputed. I find nothing in the Code to show that when a natural person is the tenant such an agreement would be contrary to law, morality, or public policy. In such a case the contract would terminate at the death of the tenant. Such is the doctrine of the French Cour de Cassation. (Houet vs. Lamarge, July 20, 1840.) The tenant is the only person who has been given the right to say how long the contract shall continue. That right is personal to him, and is not property in such a sense as to pass to his heirs. In this case the question is made more difficult by the fact that the tenant is said to be juridical person, and it is said that the lease is therefore a perpetual one. Just what kind of a partnership or association the defendant is does not appear, and without knowing what kind of an entity it is we can not say that this contract is a perpetual lease. Even if the defendant has perpetual succession, the lease would not necessarily last forever. A breach of any one of the obligations imposed upon the lessee by article 1555 of the Civil Code would give the landlord the right to terminate it.

25

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-22558

May 31, 1967

GREGORIO ARANETA, INC., petitioner, vs. THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent. Araneta and Araneta for petitioner. Rosauro Alvarez and Ernani Cruz Paño for respondent. REYES, J.B.L., J.: Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-R, affirming with modification, an amendatory decision of the Court of First Instance of Manila, in its Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc., defendants." As found by the Court of Appeals, the facts of this case are: J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of 43,034.4 square meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates 26

Development Co., Ltd. The parties stipulated, among in the contract of purchase and sale with mortgage, that the buyer will — Build on the said parcel land the Sto. Domingo Church and Convent while the seller for its part will — Construct streets on the NE and NW and SW sides of the land herein sold so that the latter will be a block surrounded by streets on all four sides; and the street on the NE side shall be named "Sto. Domingo Avenue;" The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing the streets, is unable to finish the construction of the street in the Northeast side named (Sto. Domingo Avenue) because a certain third-party, by the name of Manuel Abundo, who has been physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and instance, seeking to compel the latter to comply with their obligation, as stipulated in the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused to perform said obligation. Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter particularly setting up the principal defense that the action was premature since its obligation to construct the streets in question was without a definite period which needs to he fixed first by the court in a proper suit for that purpose before a complaint for specific performance will prosper. The issues having been joined, the lower court proceeded with the trial, and upon its termination, it dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses interposed by defendant Gregorio Araneta, Inc.1äwphï1.ñët Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within which defendants will comply with their obligation to construct the streets in question. Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not expressly or impliedly allege and pray for the fixing of a period to comply with its obligation and that the evidence presented at the trial was insufficient to warrant the fixing of such a period. On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of such a period," issued an order granting plaintiff's motion

27

for reconsideration and amending the dispositive portion of the decision of May 31, 1960, to read as follows: WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a period of two (2) years from notice hereof, within which to comply with its obligation under the contract, Annex "A". Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which motion, plaintiff opposed. On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the latter perfected its appeal Court of Appeals. In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief granted, i.e., fixing of a period, under the amendatory decision of July 16, 1960, was not justified by the pleadings and not supported by the facts submitted at the trial of the case in the court below and that the relief granted in effect allowed a change of theory after the submission of the case for decision. Ruling on the above contention, the appellate court declared that the fixing of a period was within the pleadings and that there was no true change of theory after the submission of the case for decision since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by alleging in paragraph 7 of the affirmative defenses contained in its answer which reads — 7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a reasonable time within which to comply with its obligations to construct and complete the streets on the NE, NW and SW sides of the lot in question; that under the circumstances, said reasonable time has not elapsed; Disposing of the other issues raised by appellant which were ruled as not meritorious and which are not decisive in the resolution of the legal issues posed in the instant appeal before us, said appellate court rendered its decision dated December 27, 1963, the dispositive part of which reads — IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given two (2) years from the date of finality of this decision to comply with the obligation to construct streets on the NE, NW and SW sides of the land sold to plaintiff so that the same would be a block surrounded by streets on all four sides. Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta, Inc. resorted to a petition for review by certiorari to this Court. We gave it due course.

28

We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of First Instance is legally untenable. The fixing of a period by the courts under Article 1197 of the Civil Code of the Philippines is sought to be justified on the basis that petitioner (defendant below) placed the absence of a period in issue by pleading in its answer that the contract with respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable time within which to comply with its obligation to construct and complete the streets." Neither of the courts below seems to have noticed that, on the hypothesis stated, what the answer put in issue was not whether the court should fix the time of performance, but whether or not the parties agreed that the petitioner should have reasonable time to perform its part of the bargain. If the contract so provided, then there was a period fixed, a "reasonable time;" and all that the court should have done was to determine if that reasonable time had already elapsed when suit was filed if it had passed, then the court should declare that petitioner had breached the contract, as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had not yet elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be logically held that under the plea above quoted, the intervention of the court to fix the period for performance was warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the parties. Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set a period, the court could not proceed to do so unless the complaint in as first amended; for the original decision is clear that the complaint proceeded on the theory that the period for performance had already elapsed, that the contract had been breached and defendant was already answerable in damages. Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in that no basis is stated to support the conclusion that the period should be set at two years after finality of the judgment. The list paragraph of Article 1197 is clear that the period can not be set arbitrarily. The law expressly prescribes that — the Court shall determine such period as may under the circumstances been probably contemplated by the parties. All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the proven facts precisely warrant the fixing of such a period," a statement manifestly insufficient to explain how the two period given to petitioner herein was arrived at. It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that "the obligation does not fix a 29

period" (or that the period is made to depend upon the will of the debtor)," but from the nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to the second step, and decide what period was "probably contemplated by the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown to have intended. As the record stands, the trial Court appears to have pulled the two-year period set in its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code. In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land described therein was occupied by squatters, because the fact is expressly mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). As the parties must have known that they could not take the law into their own hands, but must resort to legal processes in evicting the squatters, they must have realized that the duration of the suits to be brought would not be under their control nor could the same be determined in advance. The conclusion is thus forced that the parties must have intended to defer the performance of the obligations under the contract until the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc. The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is what explains why the agreement did not specify any exact periods or dates of performance. It follows that there is no justification in law for the setting the date of performance at any other time than that of the eviction of the squatters occupying the land in question; and in not so holding, both the trial Court and the Court of Appeals committed reversible error. It is not denied that the case against one of the squatters, Abundo, was still pending in the Court of Appeals when its decision in this case was rendered. In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on affected areas are finally evicted therefrom. Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered. Concepcion, C.J., Dizon, Regala, Makalintal, Bengzon, J.P., Sanchez and Castro, JJ., concur.

30

31

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-36413 September 26, 1988 MALAYAN INSURANCE CO., INC., petitioner, vs. THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents. Freqillana Jr. for petitioner. B.F. Estrella & Associates for respondent Martin Vallejos. Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc. Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.

PADILLA, J.: Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22 February 1973, which affirmed, with some modifications, the decision, ** dated 27 April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan. The antecedent facts of the case are as follows: On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968, covering a Willys jeep with Motor No. ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not to exceed P600.00 and "third-party liability" in the amount of P20,000.00. During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30 o'clock in the afternoon, the insured jeep, while being driven by one Juan P. Campollo an employee of the respondent San Leon Rice Mill, Inc., collided with a passenger bus belonging to the respondent 32

Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was riding in the ill-fated jeep. As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U-2021. He prayed therein that the defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory damages; and P5,000.00, for attorney's fees. Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep; and that it had observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability. Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff, claiming that the fault in the accident was solely imputable to the PANTRANCO. Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other expenses, and, in his cross-claim against the herein petitioner, he alleged that the petitioner had issued in his favor a private car comprehensive policy wherein the insurance company obligated itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as for any liability to third persons arising out of any accident during the effectivity of such insurance contract, which policy was in full force and effect when the vehicular accident complained of occurred. He prayed that he be reimbursed by the insurance company for the amount that he may be ordered to pay. Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee of the San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the amounts claimed by the plaintiff

33

and/or ordering said San Leon Rice Mill, Inc. to reimburse and indemnify the petitioner for any sum that it may be ordered to pay the plaintiff. After trial, judgment was rendered as follows: WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice Mill, Inc., as follows: (a) P4,103 as actual damages; (b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of three (3) years; (c) P5,000.00 as moral damages; (d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs. The above-named parties against whom this judgment is rendered are hereby held jointly and severally liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00. As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no award should be made in its favor. Its counter-claim for attorney's fees is also dismissed for not being proved. 1 On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance company. 2 Hence, the present recourse by petitioner insurance company. The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages, petitioner may be ordered to pay jointly and severally with Sio Choy. The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the Court of Appeals shall be reviewed, hence, execution may already issue in 34

favor of respondent Martin C. Vallejos against the respondents, without prejudice to the determination of whether or not petitioner shall be entitled to reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of whatever the former may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos." 3 However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important to determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of respondents Sio Choy and San Leon Rice Mill, Inc. Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of Appeals, was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to respondent Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount petitioner has been adjudged to pay respondent Vallejos on its insurance policy. As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos. We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos. It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides: Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months. If the owner was not in the motor vehicle, the provisions of article 2180 are applicable. On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code which reads:

35

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. xxx xxx xxx 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 ill any business or industry. xxx xxx xxx The responsibility treated in this article shall cease when the persons herein mentioned proved that they observed all the diligence of a good father of a family to prevent damage. It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidarily.4 On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy existing between petitioner and respondent Sio Choy at the time of the complained vehicular accident. In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney against third party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the jeepney at fault, not including the insurance company, who were held solidarily liable to the heirs of the victim. While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily

36

liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort. In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract against third party liability-under which an insurer can be directly sued by a third party — this will result in a violation of the principles underlying solidary obligation and insurance contracts. In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On the other hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event." 8 In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos. As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the contract of insurance existing between petitioner and respondent Sio Choy. We disagree. The appellate court overlooked the principle of subrogation in insurance contracts. Thus — ... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person whose negligence or wrongful act caused

37

the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037). The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382). Although many policies including policies in the standard form, now provide for subrogation, and thus determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not dependent upon , nor does it grow out of any privity of contract (emphasis supplied) or upon written assignment of claim, and payment to the insured makes the insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18). 9 It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each. Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. xxx xxx xxx In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc. To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one 38

of said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00 ) WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is hereby AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs. SO ORDERED. Melencio-Herrera (Chairperson), Paras, Sarmiento and Regalado, JJ., concur.

Footnotes * Penned by Justice Ramon C. Fernandez, concurred in by Justice Hermogenes Concepcion, Jr. and Emilio A. Gancayco. ** Penned by Judge Vicente M. Santiago, Jr. 1 Record on Appeal, pp. 202-203. 2 Rollo, p.46. 3 Rollo, p. 67. 4 Article 2194, Civil Code. 5 G. R. No. L-22042, August 17, 1967, 20 SCRA 1043. 6 Coquia vs. Fieldman's Insurance Co., Inc., G.R. No. L-23276, November 29, 1968, 26 SCRA 178. 7 The Imperial Insurance, Inc. vs. David, G.R. No. L-32425, November 21, 1984, 133 SCRA 317. 8 Philippine Phoenix Surety Insurance Co. vs. Woodworks, Inc., G.R. No. L-25317, August 6, 1979, 92 SCRA 419. 9 Fireman's Fund Insurance Company, et al. vs. Jamila & Company, Inc., et al., G.R. No. L- 27427, April 7, 1976, 70 SCRA 323.

39

Republic of the Philippines SUPREME COURT Manila 40

FIRST DIVISION G.R. No. L-28046 May 16, 1983 PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. INDEPENDENT PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN FAJARDO, CEFERINO VALENCIA, MOISES CARANDANG, LUCIANO CASTILLO, AURELIO VALENCIA, LAURO LEVISTE, GAVINO GONZALES, LOPE GEVANA and BONIFACIO LAUREANA, defendants-appellees. Basa, Ilao, del Rosario Diaz for plaintiff-appellant. Laurel Law Office for Dimayuga. Tomas Yumol for Fajardo, defendant-appellee.

PLANA, J.: Appeal by the Philippine National Bank (PNB) from the Order of the defunct Court of First Instance of Manila (Branch XX) in its Civil Case No. 46741 dismissing PNB's complaint against several solidary debtors for the collection of a sum of money on the ground that one of the defendants (Ceferino Valencia) died during the pendency of the case (i.e., after the plaintiff had presented its evidence) and therefore the complaint, being a money claim based on contract, should be prosecuted in the testate or intestate proceeding for the settlement of the estate of the deceased defendant pursuant to Section 6 of Rule 86 of the Rules of Court which reads: SEC. 6. Solidary obligation of decedent.— the obligation of the decedent is solidary with another debtor, the claim shall be filed against the decedent as if he were the only debtor, without prejudice to the right of the estate to recover contribution from the other debtor. In a joint obligation of the decedent, the claim shall be confined to the portion belonging to him. The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of its solidary debtors under Article 1216 of the Civil Code — ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

41

The sole issue thus raised is whether in an action for collection of a sum of money based on contract against all the solidary debtors, the death of one defendant deprives the court of jurisdiction to proceed with the case against the surviving defendants. It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek satisfaction of his credit from one, some or all of his solidary debtors, as he deems fit or convenient for the protection of his interests; and if, after instituting a collection suit based on contract against some or all of them and, during its pendency, one of the defendants dies, the court retains jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants. Thus in Manila Surety & Fidelity Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897, this Court ruled: Construing Section 698 of the Code of Civil Procedure from whence the aforequoted provision (Sec. 6, Rule 86) was taken, this Court held that where two persons are bound in solidum for the same debt and one of them dies, the whole indebtedness can be proved against the estate of the latter, the decedent's liability being absolute and primary; and if the claim is not presented within the time provided by the rules, the same will be barred as against the estate. It is evident from the foregoing that Section 6 of Rule 87 (now Rule 86) provides the procedure should the creditor desire to go against the deceased debtor, but there is certainly nothing in the said provision making compliance with such procedure a condition precedent before an ordinary action against the surviving solidary debtors, should the creditor choose to demand payment from the latter, could be entertained to the extent that failure to observe the same would deprive the court jurisdiction to take cognizance of the action against the surviving debtors. Upon the other hand, the Civil Code expressly allows the creditor to proceed against any one of the solidary debtors or some or all of them simultaneously. There is, therefore, nothing improper in the creditor's filing of an action against the surviving solidary debtors alone, instead of instituting a proceeding for the settlement of the estate of the deceased debtor wherein his claim could be filed. Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice Makasiar, reiterated the doctrine. A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing therein prevents a creditor from proceeding against the surviving solidary debtors. Said provision merely sets up the procedure in enforcing collection in case a creditor chooses to pursue his claim against the estate of the deceased solidary, debtor. It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this matter. Said provision gives the creditor the right to 'proceed against anyone of the solidary debtors or some or all of them simultaneously.' The choice is undoubtedly left to the solidary, creditor to 42

determine against whom he will enforce collection. In case of the death of one of the solidary debtors, he (the creditor) may, if he so chooses, proceed against the surviving solidary debtors without necessity of filing a claim in the estate of the deceased debtors. It is not mandatory for him to have the case dismissed against the surviving debtors and file its claim in the estate of the deceased solidary debtor . . . As correctly argued by petitioner, if Section 6, Rule 86 of the Revised Rules of Court were applied literally, Article 1216 of the New Civil Code would, in effect, be repealed since under the Rules of Court, petitioner has no choice but to proceed against the estate of Manuel Barredo only. Obviously, this provision diminishes the Bank's right under the New Civil, Code to proceed against any one, some or all of the solidary debtors. Such a construction is not sanctioned by the principle, which is too well settled to require citation, that a substantive law cannot be amended by a procedural rule. Otherwise stared, Section 6, Rule 86 of the Revised Rules of Court cannot be made to prevail over Article 1216 of the New Civil Code, the former being merely procedural, while the latter, substantive. WHEREFORE the appealed order of dismissal of the court a quo in its Civil Case No. 46741 is hereby set aside in respect of the surviving defendants; and the case is remanded to the corresponding Regional Trial Court for proceedings. proceedings. No costs. SO ORDERED. Teehankee (Acta. C.J.), Escolin ** Vasquez and Gutierrez, Jr., JJ., concur. Melencio-Herrera and Relova, JJ., is on leave.

Footnotes ** Mr. Justice Escolin was designated to sit with the First Division under Special Order No. 241 dated April 28, 1983.

43

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-28497

November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs. FAUSTINO ESPIRITU, defendant-appellant. -----------------------------G.R. No. L-28498

November 6, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs. FAUSTINO ESPIRITU, defendant-appellant, and ROSARIO ESPIRITU, intervenor-appellant. Ernesto Zaragoza and Simeon Ramos for defendant-appellant. Benito Soliven and Jose Varela Calderon for intervenor-appellant. B. Francisco for appellee.

AVANCEÑA, C. J.: These two cases, Nos. 28497 and 28948, were tried together. It appears, in connection with case 28497; that on July 28, 1925 the defendant Faustino Espiritu purchased of the plaintiff corporation a two-ton White truck for P11,983.50, paying P1,000 down to apply on account of this price, and obligating himself to pay the remaining P10,983.50 within the periods agreed upon. To secure the payment of this sum, the defendants mortgaged the said 44

truck purchased and, besides, three others, two of which are numbered 77197 and 92744 respectively, and all of the White make (Exhibit A). These two trucks had been purchased from the same plaintiff and were fully paid for by the defendant and his brother Rosario Espiritu. The defendant failed to pay P10,477.82 of the price secured by this mortgage. In connection with case 28498, it appears that on February 18, 1925 the defendant bought a one-ton White truck of the plaintiff corporation for the sum of P7,136.50, and after having deducted the P500 cash payment and the 12 per cent annual interest on the unpaid principal, obligated himself to make payment of this sum within the periods agreed upon. To secure this payment the defendant mortgaged to the plaintiff corporation the said truck purchased and two others, numbered 77197 and 92744, respectively, the same that were mortgaged in the purchase of the other truck referred to in the other case. The defendant failed to pay P4,208.28 of this sum. In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion of the price at the executon of the contracts, and in case of non-payment of the total debt upon its maturity, 25 per cent thereon, as penalty. In addition to the mortagage deeds referred to, which the defendant executed in favor of the plaintiff, the defendant at the same time also signed a promissory note solidarily with his brother Rosario Espiritu for the several sums secured by the two mortgages (Exhibits B and D). Rosario Espiritu appeared in these two cases as intervenor, alleging to be the exclusive owner of the two White trucks Nos. 77197 and 92744, which appear to have been mortgaged by the defendants to the plaintiff. lawphi1.net While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of the mortgage, all of them together bringing in, after deducting the sheriff's fees and transportation charges to Manila, the net sum of P3,269.58. The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in case 28497 the sum of P7,732.09 with interest at the rate of 12 per cent per annum from May 1, 1926 until fully paid, and 25 per cent thereof in addition as penalty. In case 28498, the trial court ordered the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent per annum from December 1, 1925 until fully paid, and 25 per cent thereon as penalty. The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the defendant signed the mortgage deeds these trucks were not included in those documents, and were only put in later, without defendant's knowledge. But there is positive proof that they were included at 45

the time the defendant signed these documents. Besides, there were presented two of defendant's letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction, acquiescing in the inclusion of all his White trucks already paid for, in the mortgage (Exhibit H-I). Appellants also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos. 77197 and 92744 to the intervenor, and that as the latter did not sign the mortgage deeds, such trucks cannot be considered as mortgaged. But the evidence shows that while the intervenor Rosario Espiritu did not sign the two mortgage deeds (Exhibits A and C), yet, together with the defendants Faustino Espiritu, he signed the two promissory notes (Exhibits B and D) secured by these two mortgages. All these instruments were executed at the same time, and when the trucks 77197 and 92744 were included in the mortgages, the intervenor Rosario Espiritu was aware of it and consented to such inclusion. These facts are supported by the testimony of Bachrach, manager of the plaintiff corporation, of Agustin Ramirez, who witnessed the execution of all these documents, and of Angel Hidalgo, who witnessed the execution of Exhibits B and D. We do not find the statement of the intervenor Rosario Espiritu that he did not sign promissory notes Exhibits B and C to be sufficient to overthrow this evidence. A comparison of his genuine signature on Exhibit AA with those appearing on promissory notes B and C, convinces us that the latter are his signatures. And such is our conclusion, notwithstanding the evidence presented to establish that on the date when Exhibits B appears to have been signed, that is July 25, 1925, the intervenor was in Batac, Ilocos Norte, many miles away from Manila. And the fact that on the 24th of said month of July, the plaintiff sent some truck accessory parts by rail to Ilocos for the intervenor does not necessarily prove that the latter could not have been in Manila on the 25th of that month. In view of his conclusion that the intervenor signed the promissory notes secured by trucks 77197 and 92744 and consented to the mortgage of the same, it is immaterial whether he was or was not the exclusive owner thereof. It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per cent per annum, makes the contract usurious. Such a contention is not well founded. Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreemnet, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and which may be demamded separetely. According to this, the penalty is not to be added to the interest for the determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest. But considering that the obligation was partly performed, and making use of the power given to the court by article 1154 of the Civil Code, this penalty is reduced to 10 per cent of the unpaid debt. 46

With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay only 10 per cent thereon as penalty, the judgment appealed from is affired in all other respects without special pronouncement as to costs. So ordered. Malcolm, Villamor, Ostrand, Romualdez and Villa-Real, JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-41093 October 30, 1978 ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION, petitioner, vs. COURT OF FIRST INSTANCE OF RIZAL (BRANCH XXXIV), and LOLITA MILLAN, respondents. Purugganan & Bersamin for petitioner. Salvador N. Beltran for respondent.

MUÑOZ PALMA, J.: This is a direct appeal on questions of law from a decision of the Court of First Instance of Rizal, Branch XXXIV, presided by the Honorable Bernardo P. Pardo, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered commanding the defendant to register the deed of absolute sale it had executed in favor of plaintiff with the

47

Register of Deeds of Caloocan City and secure the corresponding title in the name of plaintiff within ten (10) days after finality of this decision; if, for any reason, this not possible, defendant is hereby sentenced to pay plaintiff the sum of P5,193.63 with interest at 4% per annum from June 22, 1972 until fully paid. In either case, defendant is sentenced to pay plaintiff nominal damages in the amount of P20,000.00 plus attorney's fee in the amount of P5,000.00 and costs. SO ORDERED. Caloocan City, February 11, 1975. (rollo, p. 21) Petitioner corporation questions the award for nominal damages of P20,000.00 and attorney's fee of P5,000.00 which are allegedly excessive and unjustified. In the Court's resolution of October 20, 1975, We gave due course to the Petition only as regards the portion of the decision awarding nominal damages. 1 The following incidents are not in dispute: In May 1962 Robes-Francisco Realty & Development Corporation, now petitioner, agreed to sell to private respondent Lolita Millan for and in consideration of the sum of P3,864.00, payable in installments, a parcel of land containing an area of approximately 276 square meters, situated in Barrio Camarin, Caloocan City, known as Lot No. 20, Block No. 11 of its Franville Subdivision. 2 Millan complied with her obligation under the contract and paid the installments stipulated therein, the final payment having been made on December 22, 1971. The vendee made a total payment of P5,193.63 including interests and expenses for registration of title.3 Thereafter, Lolita Millan made repeated demands upon the corporation for the execution of the final deed of sale and the issuance to her of the transfer certificate of title over the lot. On March 2, 1973, the parties executed a deed of absolute sale of the aforementioned parcel of land. The deed of absolute sale contained, among others, this particular provision: That the VENDOR further warrants that the transfer certificate of title of the above-described parcel of land shall be transferred in the name of the VENDEE within the period of six (6) months from the date of full payment and in case the VENDOR fails to issue said transfer certificate of title, it shall bear the obligation to refund to the VENDEE the total amount already paid for, plus an interest at the rate of 4% per annum. (record on appeal, p. 9) 48

Notwithstanding the lapse of the above-mentioned stipulated period of six (6) months, the corporation failed to cause the issuance of the corresponding transfer certificate of title over the lot sold to Millan, hence, the latter filed on August 14, 1974 a complaint for specific performance and damages against Robes-Francisco Realty & Development Corporation in the Court of First Instance of Rizal, Branch XXXIV, Caloocan City, docketed therein as Civil Case No. C-3268. 4 The complaint prayed for judgment (1) ordering the reformation of the deed of absolute sale; (2) ordering the defendant to deliver to plaintiff the certificate of title over the lot free from any lien or encumbrance; or, should this be not possible, to pay plaintiff the value of the lot which should not be less than P27,600.00 (allegedly the present estimated value of the lot); and (3) ordering the defendant to pay plaintiff damages, corrective and actual in the sum of P15 000.00. 5 The corporation in its answer prayed that the complaint be dismissed alleging that the deed of absolute sale was voluntarily executed between the parties and the interest of the plaintiff was amply protected by the provision in said contract for payment of interest at 4% per annum of the total amount paid, for the delay in the issuance of the title. 6 At the pretrial conference the parties agreed to submit the case for decision on the pleadings after defendant further made certain admissions of facts not contained in its answer. 7 Finding that the realty corporation failed to cause the issuance of the corresponding transfer certificate of title because the parcel of land conveyed to Millan was included among other properties of the corporation mortgaged to the GSIS to secure an obligation of P10 million and that the owner's duplicate certificate of title of the subdivision was in the possession of the Government Service Insurance System (GSIS), the trial court, on February 11, 1975, rendered judgment the dispositive portion of which is quoted in pages 1 and 2 of this Decision. We hold that the trial court did not err in awarding nominal damages; however, the circumstances of the case warrant a reduction of the amount of P20,000.00 granted to private respondent Millan. There can be no dispute in this case under the pleadings and the admitted facts that petitioner corporation was guilty of delay, amounting to nonperformance of its obligation, in issuing the transfer certificate of title to vendee Millan who had fully paid up her installments on the lot bought by her. Article 170 of the Civil Code expressly provides that those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.

49

Petitioner contends that the deed of absolute sale executed between the parties stipulates that should the vendor fail to issue the transfer certificate of title within six months from the date of full payment, it shall refund to the vendee the total amount paid for with interest at the rate of 4% per annum, hence, the vendee is bound by the terms of the provision and cannot recover more than what is agreed upon. Presumably, petitioner in invoking Article 1226 of the Civil Code which provides that in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. The foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the clause in question were to be considered as a penal clause. Nevertheless, for very obvious reasons, said clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil Code, the vendee would be entitled to recover the amount paid by her with legal rate of interest which is even more than the 4% provided for in the clause. 7-A It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which will preclude an award of damages to the vendee Millan. In fact the clause is so worded as to work to the advantage of petitioner corporation. Unfortunately, the vendee, now private respondent, submitted her case below without presenting evidence on the actual damages suffered by her as a result of the nonperformance of petitioner's obligation under the deed of sale. Nonetheless, the facts show that the right of the vendee to acquire title to the lot bought by her was violated by petitioner and this entitles her at the very least to nominal damages. The pertinent provisions of our Civil Code follow: Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. Art. 2222. The court may award nominal damages in every obligation arising from any source enumerated in article 1157, or in every case where any property right has been invaded. Under the foregoing provisions nominal damages are not intended for indemnification of loss suffered but for the vindication or recognition of a right violated or invaded. They are recoverable where some injury has been done the amount of which the evidence fails to show, the assessment of damages being left to the discretion of the court according to the circumstances of the case. 8

50

It is true as petitioner claims that under American jurisprudence nominal damages by their very nature are small sums fixed by the court without regard to the extent of the harm done to the injured party. It is generally held that a nominal damage is a substantial claim, if based upon the violation of a legal right; in such case, the law presumes a damage, although actual or compensatory damages are not proven; in truth nominal damages are damages in name only and not in fact, and are allowed, not as an equivalent of a wrong inflicted, but simply in recogniton of the existence of a technical injury. (Fouraker v. Kidd Springs Boating and Fishing Club, 65 S. W. 2d 796-797, citing 17 C.J. 720, and a number of authorities).9 In this jurisdiction, in Vda. de Medina, et al. v. Cresencia, et al. 1956, which was an action for damages arising out of a vehicular accident, this Court had occasion to eliminate an award of P10,000.00 imposed by way of nominal damages, the Court stating inter alia that the amount cannot, in common sense, be demeed "nominal".10 In a subsequent case, viz: Northwest Airlines, Inc. v. Nicolas L. Cuenca, 1965, this Court, however, through then Justice Roberto Concepcion who later became Chief Justice of this Court, sustained an award of P20,000.00 as nominal damages in favor of respnodent Cuenca. The Court there found special reasons for considering P20,000.00 as "nominal". Cuenca who was the holder of a first class ticket from Manila to Tokyo was rudely compelled by an agent of petitioner Airlines to move to the tourist class notwithstanding its knowledge that Cuenca as Commissioner of Public Highways of the Republic of the Philippines was travelling in his official capacity as a delegate of the country to a conference in Tokyo." 11 Actually, as explained in the Court's decision in Northwest Airlines, there is no conflict between that case and Medina, for in the latter, the P10,000.00 award for nominal damages was eliminated principally because the aggrieved party had already been awarded P6,000.00 as compensatory damages, P30,000.00 as moral damages and P10,000.00 as exemplary damages, and "nominal damages cannot coexist with compensatory damages," while in the case of Commissioner Cuenca, no such compensatory, moral, or exemplary damages were granted to the latter. 12 At any rate, the circumstances of a particular case will determine whether or not the amount assessed as nominal damages is within the scope or intent of the law, more particularly, Article 2221 of the Civil Code. In the situation now before Us, We are of the view that the amount of P20,000.00 is excessive. The admitted fact that petitioner corporation failed to convey a transfer certificate of title to respondent Millan because the subdivision property was mortgaged to the GSIS does not in itself show that there was bad faith or fraud. Bad faith is not to be presumed. Moreover, there 51

was the expectation of the vendor that arrangements were possible for the GSIS to make partial releases of the subdivision lots from the overall real estate mortgage. It was simply unfortunate that petitioner did not succeed in that regard. For that reason We cannot agree with respondent Millan Chat the P20,000.00 award may be considered in the nature of exemplary damages. In case of breach of contract, exemplary damages may be awarded if the guilty party acted in wanton, fraudulent, reckless, oppressive or malevolent manner. 13 Furthermore, exemplary or corrective damages are to be imposed by way of example or correction for the public good, only if the injured party has shown that he is entitled to recover moral, temperate or compensatory damages." Here, respondent Millan did not submit below any evidence to prove that she suffered actual or compensatory damages. 14 To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of nominal damages is fair and just under the following circumstances, viz: respondent Millan bought the lot from petitioner in May, 1962, and paid in full her installments on December 22, 1971, but it was only on March 2, 1973, that a deed of absolute sale was executed in her favor, and notwithstanding the lapse of almost three years since she made her last payment, petitioner still failed to convey the corresponding transfer certificate of title to Millan who accordingly was compelled to file the instant complaint in August of 1974. PREMISES CONSIDERED, We modify the decision of the trial court and reduce the nominal damages to Ten Thousand Pesos (P10,000.00). In all other respects the aforesaid decision stands. Without pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Makasiar, Fernandez and Guerrero, JJ., concur.

Footnotes 1 rollo, p. 33 2 record on appeal, p. 2 3 ibid., p. 3

52

4 ibid., p. 1 5 ibid., pp. 6-7 6 ibid., pp. 11 - 1 4. 7 ibid., pp. 15-16 7-A Art. 2209. Civil Code: 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 which is six per cent per annum (Emphasis supplied) 8 Ventanilla v. Centeno, 1961, 1 SCRA 215 9 See also Mathis v. State, Dept. of Roads, 135 N.W. 2d, 17 20 Quillet, et al. v. Johnson, et al., 71 N.E. 2d. 488, among others. 10 99 Phil. 506, 510, per Justice J.B.L. Reyes. 11 14 SCRA 1063, 1066. 12 ibid., p. 1065. 13 Article 2232, Civil Code Tolentino, on the Civil Code, 1959 ed., Vol. V p. 561. 14 Articles 2229, 2234, Civil Code.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-26339 December 14, 1979 MARIANO C. PAMINTUAN, petitioner-appellant, vs. COURT OF APPEALS and YU PING KUN CO., INC., respondent-appellees.

53

V. E. del Rosario & Associates for appellant. Sangco & Sangalang for private respondent.

AQUINO, J.: This case is about the recovery compensatory, damages for breach of a contract of sale in addition to liquidated damages. Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein he was ordered to deliver to Yu Ping Kun Co., Inc. certain plastic sheetings and, if he could not do so, to pay the latter P100,559.28 as damages with six percent interest from the date of the filing of the complaint. The facts and the findings of the Court of Appeals are as follows: In 1960, Pamintuan was the holder of a barter license wherein he was authorized to export to Japan one thousand metric tons of white flint corn valued at forty-seven thousand United States dollars in exchange for a collateral importation of plastic sheetings of an equivalent value. By virtue of that license, he entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd. of Osaka, Japan in exchange for plastic sheetings. He contracted to sell the plastic sheetings to Yu Ping Kun Co., Inc. for two hundred sixty-five thousand five hundred fifty pesos. The company undertook to open an irrevocable domestic letter of credit for that amount in favor of Pamintuan. It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its bodegas in Manila or suburbs directly from the piers "within one month upon arrival of" the carrying vessels. Any violation of the contract of sale would entitle the aggreived party to collect from the offending party liquidated damages in the sum of ten thousand pesos (Exh. A). On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka Kaisha, Ltd. confirming the acceptance by Japanese suppliers of firm offers for the consignment to Pamintuan of plastic sheetings valued at forty-seven thousand dollars. Acting on that information, the company lost no time in securing in favor of Pamintuan an irrevocable letter of credit for two hundred sixty-five thousand five hundred fifty pesos. Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which made reference to the delivery to Yu Ping Kun Co., Inc. on or before October 31, 1960 of 336, 360 yards of plastic sheetings (p. 21, Record on Appeal).

54

On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to Pamintuan, through Toyo Menka Kaisha, Ltd., the plastic sheetings in four shipments to wit: (1) Firm Offer No. 327 for 50,000 yards valued at $9,000; (2) Firm Offer No. 328 for 70,000 yards valued at $8,050; (3) Firm Offers Nos. 329 and 343 for 175,000 and 18,440 yards valued at $22,445 and $2,305, respectively, and (4) Firm Offer No. 330 for 26,000 yards valued at $5,200, or a total of 339,440 yards with an aggregate value of $47,000 (pp. 4-5 and 239-40, Record on Appeal). The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments, Pamintuan delivered to the company's warehouse only the following quantities of plastic sheetings: November 11, 1960 — 140 cases, size 48 inches by 50 yards. November 14, 1960 — 258 cases out of 352 cases. November 15, 1960 — 11 cases out of 352 cases. November 15, 1960 — 10 cases out of 100 cases. November 15, 1960 — 30 cases out of 100 cases. Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards valued at $5,200; (2) 37 cases containing 18,440 yards valued at $2,305; (3) 60 cases containing 30,000 yards valued at $5,400 and (4) 83 cases containing 40,850 yards valued at $5,236.97. While the plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc. that he was in dire need of cash with which to pay his obligations to the Philippine National Bank. Inasmuch as the computation of the prices of each delivery would allegedly be a long process, Pamintuan requested that he be paid immediately. Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value thereof. The parties arrived at that figure by dividing the total price of P265,550 by 339,440 yards, the aggregate quantity of the shipments. After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87, he refused to deliver the remainder of the shipments with a total value of P102,502.13 which were covered by (i) Firm Offer No. 330, containing 26,000 yards valued at P29,380; (2) Firm Offer No. 343, containing 18,440 yards valued at P13,023.25; (3) Firm Offer No. 217, containing 30,000 yards valued at P30,510 and (4) Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See pp. 243-2, Record on Appeal). As justification for his refusal, Pamintuan said that the company failed to comply with the conditions of the contract and that it was novated with respect to the price.

55

On December 2, 1960, the company filed its amended complaint for damages against Pamintuan. After trial, the lower court rendered the judgment mentioned above but including moral damages. The unrealized profits awarded as damages in the trial court's decision were computed as follows (pp. 248-9, Record on Appeal): (1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time of delivery of Pl.75 a yard........................................................... P16,120.00 (2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20 per yard at the time of delivery......................................... 9,105.67 (3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70 per yard. 20,490.00 (4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of P1.25 a yard at the time of delivery.............................................. 21,458.50 Total unrealized profits....................... P67,174.17 The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards, which the trial court regarded as an item of damages suffered by the company, was computed as follows (p. 71, Record on Appeal): Liquidation value of 224,150 yards at P0.7822 yard .............................................................................. P175,330.13

a

Actual peso value of 224,150 yards as per firm offers or as per contract............................................163,047.87 Overpayment................................................................ P 12,282.26 To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as overpayment), the trial court added (a) P10,000 as stipulated liquidated damages, (b) P10,000 as moral damages, (c) Pl,102.85 as premium paid by the company on the bond of P102,502.13 for the issuance of the writ of preliminary attachment and (d) P10,000 as attorney's fees, or total damages of P110,559.28) p. 250, Record on Appeal). The Court of Appeals affirmed that judgment with the modification that the moral damages were disallowed (Resolution of June 29, 1966). Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found that the contract of sale between Pamintuan and the company was partly consummated. The company fulfilled its obligation to obtain the Japanese suppliers' confirmation of their acceptance of firm offers totalling 56

$47,000. Pamintuan reaped certain benefits from the contract. Hence, he is estopped to repudiate it; otherwise, he would unjustly enrich himself at the expense of the company. The Court of Appeals found that the writ of attachment was properly issued. It also found that Pamintuan was guilty of fraud because (1) he was able to make the company agree to change the manner of paying the price by falsely alleging that there was a delay in obtaining confirmation of the suppliers' acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited in the bonded warehouse of his brother and then required his brother to make him Pamintuan), his attorney-in-fact so that he could control the disposal of the goods; (3) Pamintuan, as attorney-in-fact of the warehouseman, endorsed to the customs broker the warehouse receipts covering the plastic sheetings withheld by him and (4) he overpriced the plastic sheetings which he delivered to the company. The Court of Appeals described Pamintuan as a man "who, after having succeeded in getting another to accommodate him by agreeing to liquidate his deliveries on the basis of P0.7822 per yard, irrespective of invoice value, on the pretense that he would deliver what in the first place he ought to deliver anyway, when he knew all the while that he had no such intention, and in the process delivered only the poorer or cheaper kind or those which he had predetermined to deliver and did not conceal in his brother's name and thus deceived the unwary party into overpaying him the sum of P 1 2,282.26 for the said deliveries, and would thereafter refuse to make any further delivery in flagrant violation of his plighted word, would now ask us to sanction his actuation" (pp. 61-62, Rollo). The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated damages. That contention is based on the stipulation "that any violation of the provisions of this contract (of sale) shall entitle the aggrieved party to collect from the offending party liquidated damages in the sum of P10,000 ". Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox 26 Phil. 588); that "in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the contrary in this case and that "liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof" (Art. 2226, Civil Code). We hold that appellant's contention cannot be sustained because the second sentence of article 1226 itself provides that I nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the fulfillment of the obligation". "Responsibility arising from fraud is demandable in all obligations" (Art. 1171, 57

Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for an damages which may be reasonably attributed to the non-performance of the obligation" (Ibid, art. 2201). The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not make a complete delivery of the plastic sheetings and he overpriced the same. That factual finding is conclusive upon this Court. There is no justification for the Civil Code to make an apparent distinction between penalty and liquidated damages because the settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual damages and both may be reduced when proper (Arts. 1229, 2216 and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p. 251). Castan Tobeñas notes that the penal clause in an obligation has three functions: "1. Una funcion coercitiva o de garantia, consistente en estimular al deudor al complimiento de la obligacion principal, ante la amenaza de tener que pagar la pena. 2. Una funcion liquidadora del daño, o sea la de evaluar por anticipado los perjuicios que habria de ocasionar al acreedor el incumplimiento o cumplimiento inadecuado de la obligacion. 3. Una funcion estrictamente penal, consistente en sancionar o castigar dicho incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias mas onerosas para el deudor que las que normalmente lleva aparejadas la infraccion contractual. " (3 Derecho Civil Espanol, 9th Ed., p. 128). The penalty clause is strictly penal or cumulative in character and does not partake of the nature of liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el supuesto incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y perjuicios. Se habla en este caso de pena cumulativa, a differencia de aquellos otros ordinarios, en que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130). After a conscientious consideration of the facts of the case, as found by Court of Appeals and the trial court, and after reflecting on the/tenor of the stipulation for liquidated damages herein, the true nature of which is not easy to categorize, we further hold that justice would be adequately done in this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract. The proven damages supersede the stipulated liquidated damages. This view finds support in the opinion of Manresa (whose comments were the bases of the new matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the difference between the proven 58

damages and the stipulated penalty may be recovered (Vol. 8, part. 1, Codigo Civil, 5th Ed., 1950, p. 483). Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-nine pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing of the complaint. With that modification the judgment of the Court of Appeals is affirmed in all respects. No costs in this instance. SO ORDERED. Barredo, Concepcion, Jr., and Santos, JJ., concur. Abad Santos, J., concur in the result.

Separate Opinions

ANTONIO, J., concurring: As a general rule, the penalty takes the place of the indemnity for damages and the payment of interest. 1 This was also the rule under the Old Civil Code. Thus, Article 1152 of the Spanish Civil Code provided that in "obligations with a penal clause the penalty shall substitute indemnity for damages and the payment of interest in case of non-performance should there be no agreement to the contrary. " As an exception to this rule, the penalty and the indemnity for damages and payment of interest may be recovered when there is an express stipulation to that effect. Aside from incorporating the provisions of Article 1152 of the Spanish Civil Code, Article 1226 of the New Civil Code also added two other exceptions when indemnity for damages, in addition to and part from the penalty for damages, in addition to and apart from the penalty stipulated, may be recovered: (1) when the obligor having failed to comply with the principal obligation also refuses to pay the penalty, in which case the creditor is entitled to interest in the amount of the penalty, in accordance with Article 2209; or (2) when the obligor is guilty of fraud in the fulfillment of the obligation. 2 The reason for the third exception is based on the principle that an action to enforce is based on the principle that an action to enforce liability for future fraud cannot be renounced, as that would be against public policy and would contravene the express provisions of Article 1171 of the Civil Code which states that "any waiver of an action for future fraud is void. " On this matter, Manresa commented, thus:

59

La pena y la indemnizacion por dolo. — Es en nuestra opinion, otrocaso de excepcion a la regla general de incompatibilidad y lo entendemos asi, no ya por el primer parrafo del articulo 1.102, que declara exigible la responsibilidad del dolo procedente en toda clase de obligaciones, sino principalmente por la segunda parte de dicho articulo, que se opone a la validez de toda renuncia anticipada de la accion para exigir tal responsibilidad. En efecto, este supone que la ley no autoriza en modo alguno la impunidad del dolo por cause de convenios anteriores, y por tanto, rechaza lo mismo la impunidad completa que la parcial ,es decir referira a aquellos perjuicios que no quedan satisfechos con el importe de la pena convenida. Limitada asi la cuestion, y no olividando que, a falta de convenio especial, tiene la pena asignado el fin de reparar los perjuicios, concretamos asi nuestra opinion: 1.0, que en caso de dolo de una obligacion con clausula penal, la prueba de de aquel para reclamar mas indemnizacion corresponde al actor; 2. 0, que tambien, caso pedirla, le corresponde la de existencia y cuantra los perjuicio; y 3.0, que probando ambos extremos, podra pedir la differencia de dicha sobre el importe de la pena estipulada. 3 It is evident from tile foregoing that in case of fraud in the fulfillment of an obligation with a penal clause, proof of such fraud is incumbent upon the creditor, and in case he demands indemnity in addition to the penalty stipulated, proof of the existence and amount of the damages shall also correspond to him. However, the creditor may demand only the difference of such amount over the amount of the penalty stipulated as the creditor cannot recover both the proven damages and the stipulated penalty. In the case at bar, he is only entitled to the stipulated penalty plus thedifference between the proven damages and the stipulated penalty.

# Separate Opinions ANTONIO, J., concurring: As a general rule, the penalty takes the place of the indemnity for damages and the payment of interest. 1 This was also the rule under the Old Civil Code. Thus, Article 1152 of the Spanish Civil Code provided that in "obligations with a penal clause the penalty shall substitute indemnity for damages and the payment of interest in case of non-performance should there be no agreement to the contrary. " As an exception to this rule, the penalty and the indemnity for damages and payment of interest may be recovered when there is an express 60

stipulation to that effect. Aside from incorporating the provisions of Article 1152 of the Spanish Civil Code, Article 1226 of the New Civil Code also added two other exceptions when indemnity for damages, in addition to and part from the penalty for damages, in addition to and apart from the penalty stipulated, may be recovered: (1) when the obligor having failed to comply with the principal obligation also refuses to pay the penalty, in which case the creditor is entitled to interest in the amount of the penalty, in accordance with Article 2209; or (2) when the obligor is guilty of fraud in the fulfillment of the obligation. 2 The reason for the third exception is based on the principle that an action to enforce is based on the principle that an action to enforce liability for future fraud cannot be renounced, as that would be against public policy and would contravene the express provisions of Article 1171 of the Civil Code which states that "any waiver of an action for future fraud is void. " On this matter, Manresa commented, thus: La pena y la indemnizacion por dolo. — Es en nuestra opinion, otrocaso de excepcion a la regla general de incompatibilidad y lo entendemos asi, no ya por el primer parrafo del articulo 1.102, que declara exigible la responsibilidad del dolo procedente en toda clase de obligaciones, sino principalmente por la segunda parte de dicho articulo, que se opone a la validez de toda renuncia anticipada de la accion para exigir tal responsibilidad. En efecto, este supone que la ley no autoriza en modo alguno la impunidad del dolo por cause de convenios anteriores, y por tanto, rechaza lo mismo la impunidad completa que la parcial ,es decir referira a aquellos perjuicios que no quedan satisfechos con el importe de la pena convenida. Limitada asi la cuestion, y no olividando que, a falta de convenio especial, tiene la pena asignado el fin de reparar los perjuicios, concretamos asi nuestra opinion: 1.0, que en caso de dolo de una obligacion con clausula penal, la prueba de de aquel para reclamar mas indemnizacion corresponde al actor; 2. 0, que tambien, caso pedirla, le corresponde la de existencia y cuantra los perjuicio; y 3.0, que probando ambos extremos, podra pedir la differencia de dicha sobre el importe de la pena estipulada. 3 It is evident from tile foregoing that in case of fraud in the fulfillment of an obligation with a penal clause, proof of such fraud is incumbent upon the creditor, and in case he demands indemnity in addition to the penalty stipulated, proof of the existence and amount of the damages shall also correspond to him. However, the creditor may demand only the difference of such amount over the amount of the penalty stipulated as the creditor cannot recover both the proven damages and the stipulated penalty. In the case at bar, he is only entitled to the stipulated penalty plus thedifference between the proven damages and the stipulated penalty. #Footnotes

61

1 Article 1126, first sentence; Araneta v. Paterno L-2886, August 22, 1952, 91 Phil. 786. 2 Cabarrogais v. Vicente, L-14304, March 23, 1960, 107 Phil. 340, 343. 3 VIII Manresa, Codigo Civil, pp. 482-483.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-30056 August 30, 1988 MARCELO AGCAOILI, plaintiff-appellee vs. GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant. Artemio L. Agcaoili for plaintiff-appellee. Office of the Government Corporate Counsel for defendant-appellant.

NARVASA, J.: The appellant Government Service Insurance System, (GSIS, for short) having approved the application of the appellee Agcaoili for the purchase of a house and lot in the GSIS Housing Project at Nangka Marikina, Rizal, subject to the condition that the latter should forthwith occupy the house, a condition that Agacoili tried to fulfill but could not for the reason that the house was absolutely uninhabitable; Agcaoili, after paying the first installment and other fees, having thereafter refused to make further payment of other stipulated installments until GSIS had made the house habitable; and appellant having refused to do so, opting instead to cancel the award and demand the vacation by Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of First Instance of Manila for specific performance with damages and having obtained a favorable judgment, the case was appealled to this Court by the GSIS. Its appeal must fail.

62

The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for purchase 1 was contained in a letter 2 addressed to Agcaoili and signed by GSIS Manager Archimedes Villanueva in behalf of the Chairman-General Manager, reading as follows: Please be informed that your application to purchase a house and lot in our GSIS Housing Project at Nangka, Marikina, Rizal, has been approved by this Office. Lot No. 26, Block No. (48) 2, together with the housing unit constructed thereon, has been allocated to you. You are, therefore, advised to occupy the said house immediately. If you fail to occupy the same within three (3) days from receipt of this notice, your application shall be considered automatically disapproved and the said house and lot will be awarded to another applicant. Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the very next day, because the house was nothing more than a shell, in such a state of incompleteness that civilized occupation was not possible: ceiling, stairs, double walling, lighting facilities, water connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however ask a homeless friend, a certain Villanueva, to stay in the premises as some sort of watchman, pending completion of the construction of the house. Agcaoili thereafter complained to the GSIS, to no avail. The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first monthly installment and the incidental fees, 3 but refused to make further payments until and unless the GSIS completed the housing unit. What the GSIS did was to cancel the award and require Agcaoili to vacate the premises. 4 Agcaoili reacted by instituting suit in the Court of First Instance of Manila for specific performance and damages. 5 Pending the action, a written protest was lodged by other awardees of housing units in the same subdivision, regarding the failure of the System to complete construction of their own houses. 6 Judgment was in due course rendered ,7 on the basis of the evidence adduced by Agcaoili only, the GSIS having opted to dispense with presentation of its own proofs. The judgment was in Agcaoili's favor and contained the following dispositions, 8 to wit: 1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff (Mariano Agcaoili) illegal and void; 2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the plaintiff relative to Lot No. 26, Block No. (48) 2 of the Government Service Insurance System (GSIS) low cost housing project at Nangka Marikina, Rizal;

63

3) Ordering the defendant to complete the house in question so as to make the same habitable and authorizing it (defendant) to collect the monthly amortization thereon only after said house shall have been completed under the terms and conditions mentioned in Exhibit A ;and 4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for attorney's fees, and costs. Appellant GSIS would have this Court reverse this judgment on the argument that— 1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness of his housing unit, since said unit had been sold "in the condition and state of completion then existing ... (and) he is deemed to have accepted the same in the condition he found it when he accepted the award;" and assuming indefiniteness of the contract in this regard, such circumstance precludes a judgment for specific performance. 9 2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's immediate occupancy of the house subject thereof, and the latter having failed to comply with the condition, no contract ever came into existence between them ;10 3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or subsequent knowledge or consent of the defendant (GSIS)" operated as a repudiation by Agcaoili of the award and a deprivation of the GSIS at the same time of the reasonable rental value of the property. 11 Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled "Application to Purchase a House and/or Lot." Agcaoili filled up the form, signed it, and submitted it.12 The acceptance of the application was also set out in a form (mimeographed) also prepared by the GSIS. As already mentioned, this form sent to Agcaoili, duly filled up, advised him of the approval of his "application to purchase a house and lot in our GSIS Housing Project at NANGKA, MARIKINA, RIZAL," and that "Lot No. 26, Block No. (48) 2, together with the housing unit constructed thereon, has been allocated to you." Neither the application form nor the acceptance or approval form of the GSIS — nor the notice to commence payment of a monthly amortizations, which again refers to "the house and lot awarded" — contained any hint that the house was incomplete, and was being sold "as is," i.e., in whatever state of completion it might be at the time. On the other hand, the condition explicitly imposed on Agcaoili — "to occupy the said house immediately," or in any case within three (3) days from notice, otherwise his "application shall be considered automatically disapproved and the said house and lot will be awarded to another applicant" — would imply that construction of the house was more or less complete, and it was by reasonable standards, habitable, and that indeed, the awardee should stay and live in it; it could not be 64

interpreted as meaning that the awardee would occupy it in the sense of a pioneer or settler in a rude wilderness, making do with whatever he found available in the envirornment. There was then a perfected contract of sale between the parties; there had been a meeting of the minds upon the purchase by Agcaoili of a determinate house and lot in the GSIS Housing Project at Nangka Marikina, Rizal at a definite price payable in amortizations at P31.56 per month, and from that moment the parties acquired the right to reciprocally demand performance. 13 It was, to be sure, the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by the buyer for the purpose contemplated ,14 in other words, to deliver the house subject of the contract in a reasonably livable state. This it failed to do. It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of the sale. Under the circumstances there can hardly be any doubt that the house contemplated was one that could be occupied for purposes of residence in reasonable comfort and convenience. There would be no sense to require the awardee to immediately occupy and live in a shell of a house, a structure consisting only of four walls with openings, and a roof, and to theorize, as the GSIS does, that this was what was intended by the parties, since the contract did not clearly impose upon it the obligation to deliver a habitable house, is to advocate an absurdity, the creation of an unfair situation. By any objective interpretation of its terms, the contract can only be understood as imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return for his undertaking to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not willing to put the house in habitable state, it cannot invoke Agcaoili's suspension of payment of amortizations as cause to cancel the contract between them. It is axiomatic that "(i)n reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him."15 Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the latter had not complied with the condition of occupying the house within three (3) days. The record shows that Agcaoili did try to fulfill the condition; he did try to occupy the house but found it to be so uninhabitable that he had to leave it the following day. He did however leave a friend in the structure, who being homeless and hence willing to accept shelter even of the most rudimentary sort, agreed to stay therein and look after it. Thus the argument that Agcaoili breached the agreement by failing to occupy the house, and by allowing another person to stay in it without the consent of the GSIS, must be rejected as devoid of merit. Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or imprecise as to its exact prestation Blame for the imprecision cannot be imputed to Agcaoili; it was after all the GSIS which 65

caused the contract to come into being by its written acceptance of Agcaoili's offer to purchase, that offer being contained in a printed form supplied by the GSIS. Said appellant having caused the ambiguity of which it would now make capital, the question of interpretation arising therefrom, should be resolved against it. It will not do, however, to dispose of the controversy by simply declaring that the contract between the parties had not been validly cancelled and was therefore still in force, and that Agcaoili could not be compelled by the GSIS to pay the stipulated price of the house and lot subject of the contract until and unless it had first completed construction of the house. This would leave the contract hanging or in suspended animation, as it were, Agcaoili unwilling to pay unless the house were first completed, and the GSIS averse to completing construction, which is precisely what has been the state of affairs between the parties for more than twenty (20) years now. On the other hand, assuming it to be feasible to still finish the construction of the house at this time, to compel the GSIS to do so so that Agcaoili's prestation to pay the price might in turn be demanded, without modifying the price therefor, would not be quite fair. The cost to the GSIS of completion of construction at present prices would make the stipulated price disproportionate, unrealistic. The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may render complete justice to both parties. As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579, 589 [1978]). "(E)quity as the complement of legal jurisdiction seeks to reach and do 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 so to do. Equity regards the spirit of and not the letter, the intent and not the form, the substance rather than the circumstance, as it is variously expressed by different courts... " 16 In this case, the Court can not require specific performance of the contract in question according to its literal terms, as this would result in inequity. The prevailing rule is that in decreeing specific performance equity requires 17 — ... not only that the contract be just and equitable in its provisions, but that the consequences of specific performance likewise be equitable and just. The general rule is that this equitable relief will not be granted if, under the circumstances of the case, the result of the specific enforcement of the contract would be harsh, inequitable, oppressive, or result in an unconscionable advantage to the plaintiff . . In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance with the circumstances obtaining at the time of rendition of judgment, when these are significantly different from those existing at the time of generation of those rights. 66

The Court is not restricted to an adjustment of the rights of the parties as they existed when suit was brought, but will give relief appropriate to events occuring ending the suit. 18 While equitable jurisdiction is generally to be determined with reference to the situation existing at the time the suit is filed, the relief to be accorded by the decree is governed by the conditions which are shown to exist at the time of making thereof, and not by the circumstances attending the inception of the litigation. In making up the final decree in an equity suit the judge may rightly consider matters arising after suit was brought. Therefore, as a general rule, equity will administer such relief as the nature, rights, facts and exigencies of the case demand at the close of the trial or at the time of the making of the decree. 19 That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a person must act with justice, give everyone his due, and observe honesty and good faith. 20 Adjustment of rights has been held to be particularly applicable when there has been a depreciation of currency. Depreciation of the currency or other medium of payment contracted for has frequently been held to justify the court in withholding specific performance or at least conditioning it upon payment of the actual value of the property contracted for. Thus, in an action for the specific performance of a real estate contract, it has been held that where the currency in which the plaintiff had contracted to pay had greatly depreciated before enforcement was sought, the relief would be denied unless the complaint would undertake to pay the equitable value of the land. (Willard & Tayloe [U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21 In determining the precise relief to give, the Court will "balance the equities" or the respective interests of the parties, and take account of the relative hardship that one relief or another may occasion to them .22 The completion of the unfinished house so that it may be put into habitable condition, as one form of relief to the plaintiff Agcaoili, no longer appears to be a feasible option in view of the not inconsiderable time that has already elapsed. That would require an adjustment of the price of the subject of the sale to conform to present prices of construction materials and labor. It is more in keeping with the realities of the situation, and with equitable norms, to simply require payment for the land on which the house stands, and for the house itself, in its unfinished state, as of the time of the contract. In fact, this is an alternative relief proposed by Agcaoili himself, i.e., "that judgment issue . . (o)rdering the defendant (GSIS) to execute a deed of sale that would embody and provide for a reasonable amortization of payment on the basis of the present actual unfinished and uncompleted condition, worth and value of the said house. 23

67

WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the cancellation by respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26, Block No. (48) 2 of the GSIS low cost housing project at Nangka, Marikina, Rizal, and orders the former to respect the aforesaid award and to pay damages in the amounts specified, is AFFIRMED as being in accord with the facts and the law. Said judgments is however modified by deleting the requirement for respondent GSIS "to complete the house in question so as to make the same habitable," and instead it is hereby ORDERED that the contract between the parties relative to the property above described be modified by adding to the cost of the land, as of the time of perfection of the contract, the cost of the house in its unfinished state also as of the time of perfection of the contract, and correspondingly adjusting the amortizations to be paid by petitioner Agcaoili, the modification to be effected after determination by the Court a quo of the value of said house on the basis of the agreement of the parties, or if this is not possible by such commissioner or commissioners as the Court may appoint. No pronouncement as to costs. SO ORDERED. Cruz, Gancayco, Aquino and Medialdea, JJ., concur.

Footnotes 1 Dated June 24, 1964. 2 Dated October 5, 1965 (Exh. A ); Folder of Exhibits,p.1. 3 O.R. No. 186558, Oct. 10, 1966. 4 Exh. D, Folder of Exhibits, p. 4. 5 Docketed as Civil Case No. 69417. 6 The letter was sent thru the awardees' "Samahang Lakas ng Mahihirap," copy having been marked at the trial as Exh. F; to the letter was attached a resolution of said Samahan adopted at its meeting of July 23, 1967 and to which, in turn, was appended a 3 page list of uncompleted houses with a specification of items not completed. 7 By Hon. Manuel P. Barcelona, presiding over Br. VIII of the CFI of Manila; Record on Appeal, pp. 22-25, Rollo, p. 13. 8 Parenthetical insertions Identifying the parties, supplied. 9 Appellant's brief, pp. 11-14. 68

10 Id., pp. 7-8. 11 Appellant's brief, pp. 8-10. 12 Exh. E. I3 Art. 1475, Civil Code; Pacific Oxygen & Acetylene Co. v. Central Bank, 37 SCRA 685. 14 Lim v. de los Santos, 8 SCRA 798. I5 Art. 1169, last paragraph, Civil Code. 16 Cristobal vs. Melchor, 101 SCRA 857, 865. 17 771 Am. Jur. 2d, 101. 18 30C.J.S. 929. 19 27 Am Jur. 2d. 818. 20 Art. 19, Civil Code: "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 and good faith." 21 71 Am. Jur. 2d, 120. 22 Am. Jur. 2nd 628-629: "Their is a general principle that a court of equity will balance the equities' between the parties in determining what, if any, relief to give. . . Thus, for example, wherein the effect of the only relief which can be granted to protect the plaintiff will be destructive of the defendants' business, which would be lawful but for the harm it does to the plaintiff, relief may be refused if, on a balancing of the respective interests, that of the defendant is found to be relatively important, and that of the plaintiff relatively insignificant. . ." 23 Record on Appeal, p. 5; Rollo, p. 13.

69

70

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-15645

January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees, vs. NATIONAL RICE AND CORN CORPORATION, defendant-appellant, MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee. Teehankee and Carreon for plaintiffs-appellees. The Government Corporate Counsel for defendant-appellant. Isidro A. Vera for defendant-appellee. REGALA, J.: This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of contract and dismissing the counterclaim and third party complaint of the defendant-appellant NARIC. In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration (NARIC) is hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent with the provisions of this Act, and all personnel are transferred "to the Rice and Corn Administration (RCA). All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA pursuant to the aforementioned law. On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant corporation entered into a Contract of Sale of Rice, under the terms of which the former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, the defendant corporation committed itself to pay for the imported rice "by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma, immediately." Despite the commitment to pay immediately "by means of an irrevocable, confirmed and assignable Letter of Credit," however, it was only on July 30, 1952, or a full 71

month from the execution of the contract, that the defendant corporation, thru its general manager, took the first to open a letter of credit by forwarding to the Philippine National Bank its Application for Commercial Letter Credit. The application was accompanied by a transmittal letter, the relevant paragraphs of which read: In view of the fact that we do not have sufficient deposit with your institution with which to cover the amount required to be deposited as a condition for the opening of letters of credit, we will appreciate it if this application could be considered special case. We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that date. We would therefore request your full cooperation on this matter. On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of the extreme necessity for the immediate opening of the letter credit since she had by then made a tender to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in compliance with the regulations in Rangoon this 5% will be confiscated if the required letter of credit is not received by them before August 4, 1952." On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with the condition that marginal cash deposit be paid and that drafts are to be paid upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank represented that it "will hold your application in abeyance pending compliance with the above stated requirement." As it turned out, however, the appellant corporation not in any financial position to meet the condition. As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its dilemma: "In this connection, please be advised that our application for opening of the letter of credit has been presented to the bank since July 30th but the latter requires that we first deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we are not in a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)

72

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months from the execution of the contract) the party named by the appellee as beneficiary of the letter of credit.1äwphï1.ñët As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5% deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it must be made of record that although the Burmese authorities had set August 4, 1952, as the deadline for the remittance of the required letter of credit, the cancellation of the allocation and the confiscation of the 5% deposit were not effected until August 20, 1952, or, a full half month after the expiration of the deadline. And yet, even with the 15-day grace, appellant corporation was unable to make good its commitment to open the disputed letter of credit. The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to the defendant NARIC, communicating at the same time that the offer was "a solution which should be beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25—Def., p. 38, Folder of Exhibits). This offer for substitution, however, was rejected by the appellant in a resolution dated November 15, 1952. On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand having been rejected she instituted this case now on appeal. At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance Company was brought to the suit as a third party defendant to hold it liable on the performance bond it executed in favor of the plaintiff-appellee. We find for the appellee. It is clear upon the records that the sole and principal reason for the cancellation of the allocation contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be opened with the contemplated period. This failure must, therefore, be taken as the immediate cause for the consequent damage which resulted. As it is then, the disposition of this case depends on a determination of who was responsible for such failure. Stated differently, the issue is whether appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the contract of July 1, 1952 for which it may be held liable in damages.

73

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On the contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed negotiable instrument was not promptly secured because the appellee , failed to seasonably furnish data necessary and required for opening the same, namely, "(1) the amount of the letter of credit, (2) the person, company or corporation in whose favor it is to be opened, and (3) the place and bank where it may be negotiated." Appellant would have this Court believe, therefore, that had these informations been forthwith furnished it, there would have been no delay in securing the instrument. Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an area of the proceedings into which We are not at liberty to encroach. The explanation refers to a question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the trial judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out by the evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to the time-honored tradition of this Tribunal to hold trial judges better situated to make conclusions on questions of fact. For the record, We quote hereunder the lower court's ruling on the point: The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these facts were known to defendant even before the contract was executed because these facts were necessarily revealed to the defendant before she could qualify as a bidder. She stated too that she had given the necessary data immediately after the execution of Exh. "A" (the contract of July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and in writing and that she also pressed for the opening of the letter of credit on these occasions. These statements have not been controverted and defendant NARIC, notwithstanding its previous intention to do so, failed to present Mr. Belmonte to testify or refute this. ... Secondly, from the correspondence and communications which form part of the record of this case, it is clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn, caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to meet the condition importation by the Bank for granting the same. We do not think the appellant corporation can refute the fact that had it been able to put up the 50% marginal cash deposit demanded by the bank, then the letter of credit would have been approved, opened and released as early as August 4, 1952. The letter of the Philippine National Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a letter of credit ... has been approved by the Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts are to be paid upon presentment." (Emphasis supplied)

74

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements of the bank. Its culpability arises from its willful and deliberate assumption of contractual obligations even as it was well aware of its financial incapacity to undertake the prestation. We base this judgment upon the letter which accompanied the application filed by the appellant with the bank, a part of which letter was quoted earlier in this decision. In the said accompanying correspondence, appellant admitted and owned that it did "not have sufficient deposit with your institution (the PNB) with which to cover the amount required to be deposited as a condition for the opening of letters of credit. ... . A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant knew the bank requirements for opening letters of credit; second, that appellant also knew it could not meet those requirement. When, therefore, despite this awareness that was financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be similarly held to have bound itself to answer for all and every consequences that would result from the representation. aptly observed by the trial court: ... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, it should have a certained its ability and capacity to comply with the inevitably requirements in cash to pay for such importation. Having announced the bid, it must be deemed to have impliedly assured suppliers of its capacity and facility to finance the importation within the required period, especially since it had imposed the supplier the 90-day period within which the shipment of the rice must be brought into the Philippines. Having entered in the contract, it should have taken steps immediately to arrange for the letter of credit for the large amount involved and inquired into the possibility of its issuance. In relation to the aforequoted observation of the trial court, We would like to make reference also to Article 11 of the Civil Code which provides: Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable in damages. Under this provision, not only debtors guilty of fraud, negligence or default in the performance of obligations a decreed liable; in general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any manner contravene the tenor" of the obligation includes 75

any illicit act which impairs the strict and faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, Civil Code of the Philippines, citing authorities, p. 103.) The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might have derived from the breach of the contract. We disagree. Waivers are not presumed, but must be clearly and convincingly shown, either by express stipulation or acts admitting no other reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent to waive has been established. We have carefully examined and studied the oral and documentary evidence presented in this case and upon which the lower court based its award. Under the contract, the NARIC bound itself to buy 20,000 metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight, and all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and other evidence establish with equal certainty that the plaintiff-appellee was able to secure the contracted commodity at the cost price of $180.70 per metric ton from her supplier in Burma. Considering freights, insurance and charges incident to its shipment here and the forfeiture of the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of the equity of the damages awarded, We reproduce below the testimony of the appellee, adequately supported by the evidence and record: Q. Will you please tell the court, how much is the damage you suffered? A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is $180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost of the rice, the freight, the insurance, the total would be about $187.99 that would be $15.01 gross profit per metric ton, multiply by 20,000 equals $300,200, that is my supposed profit if I went through the contract. The above testimony of the plaintiff was a general approximation of the actual figures involved in the transaction. A precise and more exact demonstration of the equity of the award herein is provided by Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane. It is equally of record now that as shown in her request dated July 29, 1959, and other communications subsequent thereto for the opening by your corporation of the required letter of credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the same currency per ton for shipping and other handling expenses, so that she is already assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30),

76

U.S., Currency, per ton or a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid transaction. ... Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized profit damages in the total sum of $406,000.00 from the failure of the projected contract to materialize. This counterclaim was supported by a cost study made and submitted by the appellant itself and wherein it was illustrated how indeed had the importation pushed thru, NARIC would have realized in profit the amount asserted in the counterclaim. And yet, the said amount of P406,000.00 was realizable by appellant despite a number of expenses which the appellee under the contract, did not have to incur. Thus, under the cost study submitted by the appellant, banking and unloading charges were to be shouldered by it, including an Import License Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400 000.00 from the disputed transaction inspite of the extra expenditures from which the herein appellee was exempt, we are convicted of the fairness of the judgment presently under appeal. In the premises, however, a minor modification must be effected in the dispositive portion of the decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin or currency which at the time of payment is legal tender for public and private debts." In view of that law, therefore, the award should be converted into and expressed in Philippine Peso. This brings us to a consideration of what rate of exchange should apply in the conversion here decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the rate of exchange prevailing on the promulgation of this decision. In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages for breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be expressed in Philippine currency at the rate of exchange at the time of the judgment rather than at the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can neither be applied nor extended to the case at bar for the same was laid down when there was no law against stipulating foreign currencies in Philippine contracts. But now we have Republic Act No. 529 which expressly declares such stipulations as contrary to public policy, void and of no effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is null and void as contrary to public policy (Republic Act 529), and the most that could be demanded is to pay said

77

obligation in Philippine currency "to be measured in the prevailing rate of exchange at the time the obligation was incurred (Sec. 1, idem)." UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification that the award should be converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was executed. The appellee insurance company, in the light of this judgment, is relieved of any liability under this suit. No pronouncement as to costs. Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon and Makalintal, JJ., concur. Barrera, J., took no part. Reyes, J.B.L., J., reserves his vote.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. Nos. 103442-45 May 21, 1993 NATIONAL POWER CORPORATION, ET AL., petitioners, vs. THE COURT OF APPEALS, GAUDENCIO C. RAYO, ET AL., respondents. The Solicitor General for plaintiff-appellee. Ponciano G. Hernandez for private respondents.

DAVIDE, JR., J.: This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court urging this Court to set aside the 19 August 1991 consolidated Decision of the Court of Appeals in CA.-G.R. CV Nos. 27290-931 which reversed the Decision of Branch 5 of the then Court of First Instance (now Regional Trial Court) of Bulacan, and held petitioners National Power Corporation (NPC) and 78

Benjamin Chavez jointly and severally liable to the private respondents for actual and moral damages, litigation expenses and attorney's fees. This present controversy traces its beginnings to four (4) separate complaints2 for damages filed against the NPC and Benjamin Chavez before the trial court. The plaintiffs therein, now private respondents, sought to recover actual and other damages for the loss of lives and the destruction to property caused by the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978. The flooding was purportedly caused by the negligent release by the defendants of water through the spillways of the Angat Dam (Hydroelectric Plant). In said complaints, the plaintiffs alleged, inter alia, that: 1) defendant NPC operated and maintained a multi-purpose hydroelectric plant in the Angat River at Hilltop, Norzagaray, Bulacan; 2) defendant Benjamin Chavez was the plant supervisor at the time of the incident in question; 3) despite the defendants' knowledge, as early as 24 October 1978, of the impending entry of typhoon "Kading," they failed to exercise due diligence in monitoring the water level at the dam; 4) when the said water level went beyond the maximum allowable limit at the height of the typhoon, the defendants suddenly, negligently and recklessly opened three (3) of the dam's spillways, thereby releasing a large amount of water which inundated the banks of the Angat River; and 5) as a consequence, members of the household of the plaintiffs, together with their animals, drowned, and their properties were washed away in the evening of 26 October and the early hours of 27 October 1978.3 In their Answers, the defendants, now petitioners, alleged that: 1) the NPC exercised due care, diligence and prudence in the operation and maintenance of the hydroelectric plant; 2) the NPC exercised the diligence of a good father in the selection of its employees; 3) written notices were sent to the different municipalities of Bulacan warning the residents therein about the impending release of a large volume of water with the onset of typhoon "Kading" and advise them to take the necessary precautions; 4) the water released during the typhoon was needed to prevent the collapse of the dam and avoid greater damage to people and property; 5) in spite of the precautions undertaken and the diligence exercised, they could still not contain or control the flood that resulted and; 6) the damages incurred by the private respondents were caused by a fortuitous event or force majeure and are in the nature and character of damnum absque injuria. By way of special affirmative defense, the defendants averred that the NPC cannot be sued because it performs a purely governmental function.4 Upon motion of the defendants, a preliminary hearing on the special defense was conducted. As a result thereof, the trial court dismissed the complaints as against the NPC on the ground that the provision of its charter allowing it to sue and be sued does not contemplate actions based on tort. The parties do not, however, dispute the fact that this Court overruled the trial court and ordered the reinstatement of the complaints as against the NPC.5 79

Being closely interrelated, the cases were consolidated and trial thereafter ensued. The lower court rendered its decision on 30 April 1990 dismissing the complaints "for lack of sufficient and credible evidence." 6 Consequently, the private respondents seasonably appealed therefrom to the respondent Court which then docketed the cases as CA-G.R. CV Nos. 27290-93. In its joint decision promulgated on 19 August 1991, the Court of Appeals reversed the appealed decision and awarded damages in favor of the private respondents. The dispositive portion of the decision reads: CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby REVERSED and SET ASIDE, and a new one is hereby rendered: 1. In Civil Case No. SM-950, ordering defendants-appellees to pay, jointly and severally, plaintiffs-appellants, with legal interest from the date when this decision shall become final and executory, the following: A. Actual damages, to wit: 1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two Hundred Sixty Pesos (P231,260.00); 2) Bienvenido P. Pascual, Two Hundred Four Thousand Five Hundred Pesos (P204.500.00); 3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos (P155,000.00); 4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos (P147,000.00);. 5) Bernardino Cruz, One Hundred Forty Three Thousand Five Hundred Fifty Two Pesos and Fifty Centavos (P143,552.50); 6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos (P57,500.00); 7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00); 8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00); and B. Litigation expenses of Ten Thousand Pesos (P10,000.00); 2. In Civil case No. SM-951, ordering defendants-appellees to pay jointly and severally, plaintiff-appellant, with legal interest from the date when this decision shall have become final and executory, the following :

80

A. Actual damages of Five Hundred Twenty Thousand Pesos (P520,000.00);. B. Moral damages of five hundred Thousand Pesos (P500,000.00); and. C. Litigation expenses of Ten Thousand Pesos (P10,000.00);. 3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly and severally, with legal interest from the date when this decision shall have become final and executory; A. Plaintiff-appellant Angel C. Torres: 1) Actual damages of One Hundred Ninety Nine Thousand One Hundred Twenty Pesos (P199,120.00); 2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00); B. Plaintiff-appellant Norberto Torres: 1) Actual damages of Fifty Thousand Pesos (P50,000.00); 2) Moral damages of Fifty Thousand Pesos (P50,000.00); C. Plaintiff-appellant Rodelio Joaquin: 1) Actual damages of One Hundred Thousand Pesos (P100,000.00); 2) Moral damages of One Hundred Thousand Pesos (P100,000.00); and D. Plaintifsf-appellants (P10,000.00);

litigation

expenses

of

Ten

Thousand

Pesos

4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly and severally, with legal interest from the date when this decision shall have become final and executory : A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo: 1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred Pesos (P256,600.00); 2) Moral damages of Fifty Thousand Pesos (P50,000.00); B. Plaintiff-appellant Consolacion Guzman : 1) Actual damages of One Hundred forty Thousand Pesos (P140,000.00); 2) Moral damages of Fifty Thousand Pesos (P50,000.00); 81

C. Plaintiff-appellant Virginia Guzman : 1) Actual damages of Two Hundred Five Hundred Twenty Pesos (205,520.00); and D. Plaintiffs-appellants (10,000.00).

litigation

expenses

of

Ten

Thousand

Pesos

In addition, in all the four (4) instant cases, ordering defendants-appellees to pay, jointly and severally, plaintiffs-appellants attorney fees in an amount equivalent to 15% of the total amount awarded. No pronouncement as to costs.7 The foregoing judgment is based on the public respondent's conclusion that the petitioners were guilty of: . . . a patent gross and evident lack of foresight, imprudence and negligence . . . in the management and operation of Angat Dam. The unholiness of the hour, the extent of the opening of the spillways, And the magnitude of the water released, are all but products of defendants-appellees' headlessness, slovenliness, and carelessness. The resulting flash flood and inundation of even areas (sic) one (1) kilometer away from the Angat River bank would have been avoided had defendants-appellees prepared the Angat Dam by maintaining in the first place, a water elevation which would allow room for the expected torrential rains.8 This conclusion, in turn, is anchored on its findings of fact, to wit: As early as October 21, 1978, defendants-appellees knew of the impending onslaught of and imminent danger posed by typhoon "Kading". For as alleged by defendants-appellees themselves, the coming of said super typhoon was bannered by Bulletin Today, a newspaper of national circulation, on October 25, 1978, as "Super Howler to hit R.P." The next day, October 26, 1978, said typhoon once again merited a headline in said newspaper as "Kading's Big Blow expected this afternoon" (Appellee's Brief, p. 6). Apart from the newspapers, defendants-appellees learned of typhoon "Kading' through radio announcements (Civil Case No. SM-950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-9). Defendants-appellees doubly knew that the Angat Dam can safely hold a normal maximum headwater elevation of 217 meters (Appellee's brief, p. 12; Civil Case No. SM-951, Exhibit "I-6"; Civil Case No. SM-953, Exhibit "J-6"; Civil Case No. SM-1247, Exhibit "G-6"). Yet, despite such knowledge, defendants-appellees maintained a reservoir water elevation even beyond its maximum and safe level, thereby giving no 82

sufficient allowance for the reservoir to contain the rain water that will inevitably be brought by the coming typhoon. On October 24, 1978, before typhoon "Kading" entered the Philippine area of responsibility, water elevation ranged from 217.61 to 217.53, with very little opening of the spillways, ranging from 1/2 to 1 meter. On October 25, 1978, when typhoon "Kading" entered the Philippine area of responsibility, and public storm signal number one was hoisted over Bulacan at 10:45 a.m., later raised to number two at 4:45 p.m., and then to number three at 10:45 p.m., water elevation ranged from 217.47 to 217.57, with very little opening of the spillways, ranging from 1/2 to 1 meter. On October 26, 1978, when public storm signal number three remained hoisted over Bulacan, the water elevation still remained at its maximum level of 217.00 to 218.00 with very little opening of the spillways ranging from 1/2 to 2 meters, until at or about midnight, the spillways were suddenly opened at 5 meters, then increasing swiftly to 8, 10, 12, 12.5, 13, 13.5, 14, 14.5 in the early morning hours of October 27, 1978, releasing water at the rate of 4,500 cubic meters per second, more or less. On October 27, 1978, water elevation remained at a range of 218.30 to 217.05 (Civil Case No. SM-950, Exhibits "D" and series, "L", "M", "N", and "O" and Exhibits "3" and "4"; Civil Case No. SM-951, Exhibits "H" and "H-1"; Civil Case No. SM-953, Exhibits "I" and "I-1"; Civil Case No. SM 1247, Exhibits "F" and "F-1"). xxx xxx xxx From the mass of evidence extant in the record, We are convinced, and so hold that the flash flood on October 27, 1978, was caused not by rain waters (sic), but by stored waters (sic) suddenly and simultaneously released from the Angat Dam by defendants-appellees, particularly from midnight of October 26, 1978 up to the morning hours of October 27, 1978.9 The appellate court rejected the petitioners' defense that they had sent "early warning written notices" to the towns of Norzagaray, Angat, Bustos, Plaridel, Baliwag and Calumpit dated 24 October 1978 which read: TO ALL CONCERN (sic): Please be informed that at present our reservoir (dam) is full and that we have been releasing water intermittently for the past several days. With the coming of typhoon "Rita" (Kading) we expect to release greater (sic) volume of water, if it pass (sic) over our place. In view of this kindly advise people residing along Angat River to keep alert and stay in safe places.

83

BENJAMIN L. CHAVEZ Power Plant Superintendent10 because: Said notice was delivered to the "towns of Bulacan" on October 26, 1978 by defendants-appellees driver, Leonardo Nepomuceno (Civil Case No. SM-950, TSN, Benjamin Chavez, December 4, 1984, pp. 7-11 and TSN, Leonardo Nepomuceno, March 7, 1985, pp. 10-12). Said notice is ineffectual, insufficient and inadequate for purposes of the opening of the spillway gates at midnight of October 26, 1978 and on October 27, 1978. It did not prepare or warn the persons so served, for the volume of water to be released, which turned out to be of such magnitude, that residents near or along the Angat River, even those one (1) kilometer away, should have been advised to evacuate. Said notice, addressed "TO ALL CONCERN (sic)," was delivered to a policeman (Civil Case No. SM-950, pp. 10-12 and Exhibit "2-A") for the municipality of Norzagaray. Said notice was not thus addressed and delivered to the proper and responsible officials who could have disseminated the warning to the residents directly affected. As for the municipality of Sta. Maria, where plaintiffs-appellants in Civil Case No. SM-1246 reside, said notice does not appear to have been served. 11 Relying on Juan F. Nakpil & Sons vs. Court of Appeals,12 public respondent rejected the petitioners' plea that the incident in question was caused by force majeure and that they are, therefore, not liable to the private respondents for any kind of damage — such damage being in the nature of damnum absque injuria. The motion for reconsideration filed by the petitioners, as well as the motion to modify judgment filed by the public respondents, 13 were denied by the public respondent in its Resolution of 27 December 1991.14 Petitioners thus filed the instant petition on 21 February 1992. After the Comment to the petition was filed by the private respondents and the Reply thereto was filed by the petitioners, We gave due course to the petition on 17 June 1992 and directed the parties to submit their respective Memoranda,15 which they subsequently complied with. The petitioners raised the following errors allegedly committed by the respondent Court : I. THE COURT OF APPEALS ERRED IN APPLYING THE RULING OF NAKPIL & SONS V. COURT OF APPEALS AND HOLDING THAT PETITIONERS WERE GUILTY OF NEGLIGENCE.

84

II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WRITTEN NOTICES OF WARNING ISSUED BY PETITIONERS WERE INSUFFICIENT. III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE DAMAGE SUFFERED BY PRIVATE RESPONDENTS WAS NOT DAMNUM ABSQUE INJURIA. IV. THE COURT OF APPEALS ERRED IN NOT AWARDING THE COUNTERCLAIM OF PETITIONERS FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION.16 These same errors were raised by herein petitioners in G.R. No. 96410, entitled National Power Corporation, et al., vs. Court of Appeals, et al.,17 which this Court decided on 3 July 1992. The said case involved the very same incident subject of the instant petition. In no uncertain terms, We declared therein that the proximate cause of the loss and damage sustained by the plaintiffs therein — who were similarly situated as the private respondents herein — was the negligence of the petitioners, and that the 24 October 1978 "early warning notice" supposedly sent to the affected municipalities, the same notice involved in the case at bar, was insufficient. We thus cannot now rule otherwise not only because such a decision binds this Court with respect to the cause of the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978 which resulted in the loss of lives and the destruction to property in both cases, but also because of the fact that on the basis of its meticulous analysis and evaluation of the evidence adduced by the parties in the cases subject of CA-G.R. CV Nos. 27290-93, public respondent found as conclusively established that indeed, the petitioners were guilty of "patent gross and evident lack of foresight, imprudence and negligence in the management and operation of Angat Dam," and that "the extent of the opening of the spillways, and the magnitude of the water released, are all but products of defendants-appellees' headlessness, slovenliness, and carelessness." 18 Its findings and conclusions are biding upon Us, there being no showing of the existence of any of the exceptions to the general rule that findings of fact of the Court of Appeals are conclusive upon this Court.19 Elsewise stated, the challenged decision can stand on its own merits independently of Our decision in G.R. No. 96410. In any event, We reiterate here in Our pronouncement in the latter case that Juan F. Nakpil & Sons vs. Court of Appeals20 is still good law as far as the concurrent liability of an obligor in the case of force majeure is concerned. In the Nakpil case, We held: To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an obligation due to an "act of God," the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a moral manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 85

SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657). Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability. The principle embodied in the act of God doctrine strictly requires that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into the cause of the mischief. When the effect, the cause of which is to be considered, is found to be in part the result of the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175). Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss, such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. To be exempt from liability for loss because of an act of God, he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657). 21 Accordingly, petitioners cannot be heard to invoke the act of God or force majeure to escape liability for the loss or damage sustained by private respondents since they, the petitioners, were guilty of negligence. The event then was not occasioned exclusively by an act of God or force majeure; a human factor — negligence or imprudence — had intervened. The effect then of the force majeure in question may be deemed to have, even if only partly, resulted from the participation of man. Thus, the whole occurrence was thereby humanized, as it were, and removed from the laws applicable to acts of God. WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the Consolidated Decision of the Court of Appeals in CA-G.R. CV Nos. 27290-93 is AFFIRMED, with costs against the petitioners. SO ORDERED. Feliciano, Bidin, Romero and Melo, JJ., concur. # Footnotes 86

1 Annex "A" of Petition; Rollo, 34-53. Per Associate Justice Venancio D. Aldecoa, Jr., concurred in by Associate Justices Luis L. Victor and Filemon N. Mendoza. 2 Civil Case No. SM-950 entitled "GAUDENCIO C. RAYO, BIENVENIDO P. PASCUAL, TOMAS MANUEL, PEDRO C. BARTOLOME, BERNARDO CRUZ, JOSE PALAD, MARIANO CRUZ AND LUCIO FAJARDO versus NATIONAL POWER CORPORATION AND BENJAMIN CHAVEZ," and filed on 20 December 1978; Civil Case No. SM-951 entitled "FRANCISCO RAYOS versus NATIONAL POWER CORPORATION AND BENJAMIN CHAVEZ," and filed on 29 December 1978 Civil Case No. SM-953 entitled "ANGEL C. TORRES, NORBERTO TORRES AND RODELIO JOAQUIN versus NATIONAL POWER CORPORATION AND BENJAMIN CHAVEZ," and filed on 4 January 1978; and Civil Case No. SM-1247 entitled "PRESENTACION LORENZO, CLODUALDO LORENZO, CONSOLACION GUZMAN AND VIRGINIA GUZMAN, in her behalf and as natural guardian of her minor children, RODELIO, MINERVA AND EMERSON, all surnamed GUZMAN, versus NATIONAL POWER CORPORATION AND BENJAMIN CHAVEZ," and filed on 29 January 1982. 3 CA Decision, 3; Rollo, 37. 4 Id., 3-4; Id., 37-38. 5 CA Decision, 4; Rollo, 38. 6 Id., 2; Id., 36. 7 Rollo, 51-53. 8 Rollo, 40. 9 Rollo, 39-41. 10 Rollo, 41. 11 Id., 42. 12 144 SCRA 596 [1986], quoted in National Power Corp. vs. Court of Appeals, 161 SCRA 334 [1988].

87

13 In the matter of when interest on the damages awarded will accrue, the Court of Appeals ruled that interest shall be paid only from the time its decision shall have become final and executory. 14 Rollo, 56-57. 15 Id., 166. 16 Rollo, 16. 17 211 SCRA 162 [1992]. 18 Supra. 19 Remalante vs. Tibe, 158 SCRA 138 [1988]; Median vs. Asistio, Jr., 191 SCRA 218 [1990]. 20 Supra. 21 Supra, at 606-607.

88

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-47774

March 14, 1941

MAGDALENA ESTATE, INC., petitioner-appellant, vs. LOUIS J. MYRICK, respondent-appellee. Felipe Ysmael and Eusebio C. Encarnacion for petitioner. Andres C. Aguilar for respondent. LAUREL, J.: On January 2, 1928, the Magdalena Estate, Inc., sold to Louis J. Myrick lots Nos. 28 and 29 of Block 1, Parcel 9 of the San Juan Subdivision, San Juan Rizal, their contract of sale No. SJ-639 (Exhibits B and 1) providing that the price of P7,953 shall be payable in 120 equal monthly installments of P96.39 each on the second day of every month beginning the date of execution of the agreement. Simultaneously, the vendee executed and delivered to the vendor a promissory note (Exhibits C and 2) for the whole purchase price, wherein it was stipulated that "si cualquier pago o pagos de este pagare quedasen en mora por mas de dos meses, entonces todos el saldo no pagado del mismo con cualesquiera intereses que hubiese devengado, vercera y sera exigible inmediatamente y devengara intereses al mismo tipo de 9 por ciento al año hasta su completo pago, y en tal caso me comprometo, ademas, a pagar al tenedor de este pagare el 10 por ciento de la cantidad en concepto de honorarios de abogado." In pursuance of said agreement, the vendee made several monthly payments amounting to P2,596.08, the last being on October 4, 1930, although the first installment due and unpaid was that of May 2, 1930. By reason of this default, the vendor, through its president, K.H. Hemady, on December 14, 1932, notified the vendee that, in view of his inability to comply with the terms of their contract, said agreement had been cancelled as of that date, thereby relieving him of any further obligation thereunder, and that all amounts paid by him had been forfeited in favor of the vendor, who assumes the absolute right over the lots in question. To this communication, the vendee did not reply, and it appears likewise that the vendor thereafter did not require him to make any further disbursements on account of the purchase price.

89

On July 22, 1936, Louis J. Myrick, respondent herein, commenced the present action in the Court of First Instance of Albay, praying for an entry of judgment against the Magdalena Estate, Inc. for the sum of P2,596.08 with legal interest thereon from the filing of the complaint until its payment, and for costs of the suit. Said defendant, the herein petitioner, on September 7, 1936, filed his answer consisting in a general denial and a cross-complaint and counterclaim, alleging that contract SJ-639 was still in full force and effect and that, therefore, the plaintiff should be condemned to pay the balance plus interest and attorneys' fees. After due trial, the Court of First Instance of Albay, on January 31, 1939, rendered its decision ordering the defendant to pay the plaintiff the sum of P2,596.08 with legal interest from December 14, 1932 until paid and costs, and dismissing defendant's counterclaim. From this judgment, the Magdalena Estate, Inc. appealed to the Court of Appeals, where the cause was docketed as CA-G.R. No. 5037, and which, on August 23, 1940, confirmed the decision of the lower court, with the only modification that the payment of interest was to be computed from the date of the filing of the complaint instead of from the date of the cancellation of the contract. A motion for reconsideration was presented, which was denied on September 6, 1940. Hence, the present petition for a writ of certiorari. Petitioner-appellant assigns several errors which we proceed to discuss in the course of this opinion. Petitioner holds that contract SJ-639 has not been rendered inefficacious by its letter to the respondent, dated December 14, 1932, and submits the following propositions: (1) That the intention of the author of a written instrument shall always prevail over the literal sense of its wording; (2) that a bilateral contract may be resolved or cancelled only by the prior mutual agreement of the parties, which is approved by the judgment of the proper court; and (3) that the letter of December 14, 1932 was not assented to by the respondent, and therefore, cannot be deemed to have produced a cancellation, even if it ever was intended. Petitioner contends that the letter in dispute is a mere notification and, to this end, introduced in evidence the disposition of Mr. K.H. Hemady, president of the Magdalena Estate, Inc. wherein he stated that the word "cancelled" in the letter of December 14, 1932, "es un error de mi interpretacion sin ninguna intencion de cancelar," and the testimony of Sebastian San Andres, one of its employees, that the lots were never offered for sale after the mailing of the letter aforementioned. Upon the other hand, the Court of Appeals, in its decision of August 23, 1940, makes the finding that "notwithstanding the deposition of K.H. Hemady, president of the defendant corporation, to the effect that the contract was not cancelled nor was his intention to do so when he wrote the letter of December 14, 1932, marked Exhibit 6 and D (pp. 6-7, deposition Exhibit 1-a), faith and credit cannot be given to such testimony in view of the clear terms of the letter which evince his unequivocal intent to resolve the contract. His testimony is an afterthought. The intent to resolve the contract is expressed unmistakably not only in the letter of December 14, 1932, already referred to (Exhibit 6 and D), but is 90

reiterated in the letters which the president of the defendant corporation states that plaintiff lost his rights for the land for being behind more than two years, and of April 10, 1035 (Exhibit G), where defendant's president makes the following statements: "Confirming the verbal arrangement had between you and our Mr. K.H. Hemady regarding the account of Mr. Louis J. Myrick under contract No. SJ-639, already cancelled." This conclusion of fact of the Court of Appeals is final and should not be disturbed. (Guico vs. Mayuga and Heirs of Mayuga, 63 Phil., 328; Mamuyac vs. Abena, XXXVIII Off. Gaz. 84.) Where the terms of a writing are clear, positive and unambiguous, the intention of the parties should be gleaned from the language therein employed, which is conclusive in the absence of mistake (13 C.J. 524; City of Manila vs. Rizal Park Co., 52 Phil. 515). The proposition that the intention of the writer, once ascertained, shall prevail over the literal sense of the words employed is not absolute and should be deemed secondary to and limited by the primary rule that, when the text of the instrument is explicit and leaves no doubt as to its intention, the court may not read into it any other which would contradict its plain import. Besides, we have met with some circumstances of record which demonstrate the unequivocal determination of the petitioner to cancel their contract. They are: (1) the act of the petitioner in immediately taking possession of the lots in question and offering to resell them to Judge M.V. del Rosario, as demonstrated by his letter marked Exhibit G, shortly after December 14, 1932; (2) his failure to demand from the respondent the balance of the account after the mailing of the disputed letter; and (3) the letters of January 10, 1933 (Exhibit F-2) and April 10, 1935 (Exhibit G) reiterate, in clear terms, the intention to cancel first announced by petitioner since December 14, 1932. It is next argued that contract SJ-639, being a bilateral agreement, in the absence of a stipulation permitting its cancellation, may not be resolved by the mere act of the petitioner. The fact that the contracting parties herein did not provide for resolution is now of no moment, for the reason that the obligations arising from the contract of sale being reciprocal, such obligations are governed by article 1124 of the Civil Code which declares that the power to resolve, in the event that one of the obligors should not perform his part, is implied. (Mateos vs. Lopez, 6 Phil., 206; Cortez vs. Bibaño & Beramo, 41 Phil. 298; Cui. vs. Sun Chan, 41 Phil., 523; Po Pauco vs. Siguenza, 49 Phil., 404.) Upon the other hand, where, as in this case, the petitioner cancelled the contract, advised the respondent that he has been relieved of his obligations thereunder, and led said respondent to believe it so and act upon such belief, the petitioner may not be allowed, in the language of section 333 of the Code of Civil Procedure (now section 68 (a) of Rule 123 of the New Rules of Court), in any litigation the course of litigation or in dealings in nais, be permitted to repudiate his representations, or occupy inconsistent positions, or, in the letter of the Scotch law, to "approbate and reprobate." (Bigelow on Estoppel, page 673; Toppan v. Cleveland, Co. & C.R. Co., Fed. Cas. 14,099.)

91

The contract of sale, contract SJ-639, contains no provision authorizing the vendor, in the event of failure of the vendee to continue in the payment of the stipulated monthly installments, to retain the amounts paid to him on account of the purchase price. The claim, therefore, of the petitioner that it has the right to forfeit said sums in its favor is untenable. Under article 1124 of the Civil Code, however, he may choose between demanding the fulfillment of the contract or its resolution. These remedies are alternative and not cumulative, and the petitioner in this case, having to cancel the contract, cannot avail himself of the other remedy of exacting performance. (Osorio & Tirona vs. Bennet & Provincial Board of Cavite, 41 Phil., 301; Yap Unki vs. Chua Jamco, 14 Phil., 602.) As a consequence of the resolution, the parties should be restored, as far as practicable, to their original situation (Po Pauco vs. Siguenza, supra) which can be approximated only by ordering, as we do now, the return of the things which were the object of the contract, with their fruits and of the price, with its interest (article 1295, Civil Code), computed from the date of the institution of the action. (Verceluz vs. Edaño, 46 Phil. 801.) The writ prayed for is hereby denied, with costs against the petitioner. So ordered. Imperial, Diaz, Moran, and Horrilleno, JJ., concur.

92

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-28602 September 29, 1970 UNIVERSITY OF THE PHILIPPINES, petitioner, vs. WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST INSTANCE IN QUEZON CITY, et al., respondents. Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel Perfecto V. Fernandez for petitioner. Norberto J. Quisumbing for private respondents.

REYES, J.B.L., J.: Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No. 9435, are sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner University of the Philippines (or UP) against the above-named respondent judge and the Associated Lumber Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966, enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated at the Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967, adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain from exercising logging rights or conducting logging operations on the concession; and the third order, dated 12 December 1967, denied reconsideration of the order of contempt. As prayed for in the petition, a writ of preliminary injunction against the enforcement or implementation of the three (3) questioned orders was issued by this Court, per its resolution on 9 February 1968. The petition alleged the following: That the above-mentioned Land Grant was segregated from the public domain and given as an endowment to UP, an institution of higher learning, to be 93

operated and developed for the purpose of raising additional income for its support, pursuant to Act 3608; That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which the latter was granted exclusive authority, for a period starting from the date of the agreement to 31 December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect and remove timber from the Land Grant, in consideration of payment to UP of royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay; that after it had received notice that UP would rescind or terminate the logging agreement, ALUMCO executed an instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964, which was approved by the president of UP, and which stipulated the following: 3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance outstanding after the said payments have been applied shall be paid by the DEBTOR in full no later than June 30, 1965; xxx xxx xxx 5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this document, the DEBTOR agrees without reservation that the CREDITOR shall have the right and the power to consider the Logging Agreement dated December 2, 1960 as rescinded without the necessity of any judicial suit, and the CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos (P50,000.00) by way of and for liquidated damages; ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had previously acknowledged. That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date, considered as rescinded and of no further legal effect the logging agreement that they had entered in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or payment of the herein before stated sums of money and alleging the facts hereinbefore specified, together with other allegations; it prayed for and obtained an order, dated 30 September 1965, for preliminary attachment and preliminary injunction restraining ALUMCO from continuing its logging operations in the Land Grant.

94

That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract was signed on 16 February 1966. That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and preliminary injunction but were denied by the court; That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25 February 1966, respondent judge issued the first of the questioned orders, enjoining UP from awarding logging rights over the concession to any other party. That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara Lumber Company, Inc., and said company had started logging operations. That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14 January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta. Clara Lumber Company, Inc., to refrain from exercising logging rights or conducting logging operations in the concession. The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December 1967. Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the foregoing allegations in the petition. In its answer, respondent corrected itself by stating that the period of the logging agreement is five (5) years - not seven (7) years, as it had alleged in its second amended answer to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the court below, which maybe boiled down to: blaming its former general manager, Cesar Guy, in not turning over management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94; that it failed to pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" because the logs that it had cut turned out to be rotten and could not be sold to Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" with said firm, and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral rescission of the logging contract, without a court order, was invalid; that petitioner's supervisor refused to allow respondent to cut new logs unless the logs previously cut during the management of Cesar Guy be first sold; that respondent was permitted to cut logs in the middle of June 1965 but petitioner's supervisor 95

stopped all logging operations on 15 July 1965; that it had made several offers to petitioner for respondent to resume logging operations but respondent received no reply. The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently sustained it (although the order expresses no specific findings in this regard), that it is only after a final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect. We find that position untenable. In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit." As to such special stipulation, and in connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276: there is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract. Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of 96

rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation,1 since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder. In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that, a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully impugned in court. El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para el caso de que uno de los obligados no cumpliese lo que le incumbe, facultad que, segun jurisprudencia de este Tribunal, surge immediatamente despuesque la otra parte incumplio su deber, sin necesidad de una declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897). Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una "facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la cual tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo convenido, que puede ejercitarse, ya en la via judicial, ya fuera de ella, por declaracion del acreedor, a reserva, claro es, que si la declaracion de resolucion hecha por una de las partes se impugna por la otra, queda aquella sometida el examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16 November 1956; Jurisp. Aranzadi, 3, 447). La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de las partes de su respectiva prestacion, puedetener lugar con 97

eficacia" 1. o Por la declaracion de voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por la demanda de la perjudicada, cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios realmente causados, siempre quese acredite, ademas, una actitud o conducta persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem, fides non est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied). In the light of the foregoing principles, and considering that the complaint of petitioner University made out a prima facie case of breach of contract and defaults in payment by respondent ALUMCO, to the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the respondent company had profited from its operations previous to the agreement of 5 December 1964 ("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten condition of the logs in private respondent's pond, which said respondent was in a better position to know when it executed the acknowledgment of indebtedness, do not constitute on their face sufficient excuse for non-payment; and considering that whatever prejudice may be suffered by respondent ALUMCO is susceptibility of compensation in damages, it becomes plain that the acts of the court a quo in enjoining petitioner's measures to protect its interest without first receiving evidence on the issues tendered by the parties, and in subsequently refusing to dissolve the injunction, were in grave abuse of discretion, correctible by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be set aside. For the reason that the order finding the petitioner UP in contempt of court has open appealed to the Court of Appeals, and the case is pending therein, this Court abstains from making any pronouncement thereon. WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25 February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set aside. Let the records be remanded for further proceedings conformably to this opinion. Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur. Reyes, J.B.L., Actg. C.J., is on leave.

98

# Footnotes 1 Ocejo Perez & Co. vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan de Dios, et al., 84 Phil. 820.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-29360 January 30, 1982 JOSE C. ZULUETA, petitioner, vs. HON. HERMINIO MARIANO, in his capacity as Presiding Judge of Branch X of the Court of First Instance of Rizal; and LAMBERTO AVELLANA, respondents.

MELENCIO-HERRERA, J.:

99

In this action for mandamus and Prohibition, petitioner seeks to compel respondent Judge to assume appellate, not original jurisdiction over an Ejectment case appealed from the Municipal Court of Pasig (CC No. 1190 entitled Jose C. Zulueta vs. Lamberto Avellana), and to issue a Writ of Execution in said case. The antecedental facts follow: Petitioner Jose C. Zulueta is the registered owner of a residential house and lot situated within the Antonio Subdivision, Pasig, Rizal. On November 6, 1964, petitioner Zulueta and private respondent Lamberto Avellana, a movie director, entered into a "Contract to Sell" the aforementioned property for P75,000.00 payable in twenty years with respondent buyer assuming to pay a down payment of P5,000.00 and a monthly installment of P630.00 payable in advance before the 5th day of the corresponding month, starting with December, 1964. It was further stipulated: 12) That upon failure of the BUYER to fulfill any of the conditions herein stipulated, BUYER automatically and irrevocably authorizes OWNER to recover extra-judicially, physical possession of the land, building and other improvements which are the subject of this contract, and to take possession also extra-judicially whatever personal properties may be found within the aforesaid premises from the date of said failure to answer for whatever unfulfilled monetary obligations BUYER may have with OWNER; and this contract shall be considered as without force and effect also from said date; all payments made by the BUYER to OWNER shall be deemed as rental payments without prejudice to OWNER's right to collect from BUYER whatever other monthly installments and other money obligations which may have been paid until BUYER vacates the aforesaid premises; upon his failure to comply with any of the herein conditions BUYER forfeits all money claims against OWNER and shall pay a monthly rental equivalent to his monthly installment under Condition 1 of this Contract from the date of the said failure to the date of recovery of physical possession by OWNER of the land, building and other improvements which are the subject of this Contract; BUYER shall not remove his personal properties without the previous written consent of OWNER, who, should he take possession of such properties following the aforesaid failure of BUYER, shall return the same to BUYER only after the latter shall have fulfilled all money claims against him by OWNER; in all cases herein, demand is waived; Respondent Avellana occupied the property from December, 1964, but title remained with petitioner Zulueta.

100

Upon the allegation that respondent Avellana had failed to comply with the monthly amortizations stipulated in the contract, despite demands to pay and to vacate the premises, and that thereby the contract was converted into one of lease, petitioner, on June 22, 1966, commenced an Ejectment suit against respondent before the Municipal Court of Pasig (CC No. 1190), praying that judgment be rendered ordering respondent 1) to vacate the premises; 2) to pay petitioner the sum of P11,751.30 representing respondent's balance owing as of May, 1966; 3) to pay petitioner the sum of P 630.00 every month after May, 1966, and costs. Respondent controverted by contending that the Municipal Court had no jurisdiction over the nature of the action as it involved the interpretation and/or rescission of the contract; that prior to the execution of the contract to sell, petitioner was already indebted to him in the sum of P31,269.00 representing the cost of two movies respondent made for petitioner and used by the latter in his political campaign in 1964 when petitioner ran for Congressman, as well as the cost of one 16 millimeter projector petitioner borrowed from respondent and which had never been returned, which amounts, according to their understanding, would be applied as down payment for the property and to whatever obligations respondent had with petitioner. The latter strongly denied such an understanding. Respondent's total counterclaim against petitioner was in the amount of P42,629.99 representing petitioner's pleaded indebtedness to private respondent, claim for moral damages, and attorney's fees. The counterclaim was dismissed by the Municipal Court for being in an amount beyond its jurisdiction. However, as a special defense, private respondent sought to offset the sum of P31,269.00 against his obligations to petitioner. Deciding the case on May 10, 1967, the Municipal Court found that respondent Avellana had failed to comply with his financial obligations under the contract and ordered him to vacate the premises and deliver possession thereof to petitioner; to pay petitioner the sum of P21,093.88 representing arrearages as of April, 1967, and P630.00 as monthly rental from and after May, 1967 until delivery of possession of that premises to petitioner. That conclusion was premised on title finding that breach of any of the conditions by private respondent converted the agreement into a lease contractual and upon the following considerations: The question involved herein is that of possession, that who of the contending parties has the better right to possession of the properly in question. The issue in this case being that of possession, the claim of defendant against plaintiff or P 31,269.00 indebtedness, has no place as a defense here. It should be the subject- matter of a separate action against, plaintiff Jose C. Zulueta. As it is, said indebtedness is only a claim still debatable and controversial and not a final judgment. 'It is our considered opinion that to admit and to allow such a defense would be tantamount to prejuding the claim on its merits prematurely in favor of defendant. This court can not do without violating some rules of law. 101

This is not the proper court and this is not the proper case in which to ventilate the claim. Respondent Avellana appealed to the Court of First Instance of Rizal presided by respondent Judge. Thereat, petitioner summoned for execution alleging private respondent's failure to deposit in accordance the monthly rentals, which the latter denied. Respondent Judge held resolution thereof in abeyance. On February 19, 1968, respondent Avellana filed a Motion to Dismiss Appeal alleging that, inasmuch as the defense set up in his Answer was that he had not breached his contract with petitioner, the case necessarily involved the interpretation and/or rescission of the contract and, therefore, beyond the jurisdiction of the Municipal Court. Petitioner opposed claiming that the Complaint had set out a clear case of unlawful detainer considering that judicial action for the rescission of the contract was unnecessary due to the automatic rescission clause therein and the fact that petitioner had cancelled said contract so that respondent's right to remain in the premises had ceased. On March 21, 1968, respondent Judge dismissed the case on the ground of lack of jurisdiction of the Municipal Court, explaining: The decision of the lower court declared said Contract to Sell to have been converted into a contract of lease. It is the contention of the defendant that the lower court had no jurisdiction to entertain the case as the same involves the interpretation of contract as to whether or not the same has been converted to lease contract. Although the contract to sell object of this case states that the same may be converted into a lease contract upon the failure of the defendant to pay the amortization of the property in question, there is no showing that before filing this case in the lower court, the plaintiff has exercised or has pursued his right pursuant to the contract which should be the basis of the action in the lower court. Petitioner's Motion for Reconsideration was denied by respondent Judge as follows: The plaintiff having filed a motion for reconsideration of this Court's Order dismissing the appeal, the Court, while standing pat on its Order dismissing this case for lack of jurisdiction of the lower court over the subject matter, hereby takes cognizance of the case and will try the case as if it has been filed originally in this Court. WHEREFORE, let this case be set for pre-trial on July 12, 1968 at 8:30 a.m. with notice to an parties. Petitioner then availed of the instant recourse.

102

Was the action before the Municipal Court of Pasig essentially for detainer and, therefore, within its exclusive original jurisdiction, or one for rescission or annulment of a contract, which should be litigated before a Court of First Instance? Upon a review of the attendant circumstances, we uphold the ruling of respondent Judge that the Municipal Court of Pasig was bereft of jurisdiction to take cognizance of the case filed before it. In his Complaint, petitioner had alleged violation by respondent Avellana of the stipulations of their agreement to sell and thus unilaterally considered the contract rescinded. Respondent Avellana denied any breach on his part and argued that the principal issue was one of interpretation and/or rescission of the contract as well as of set-off. Under those circumstances, proof of violation is a condition precedent to resolution or rescission. It is only when the violation has been established that the contract can be declared resolved or rescinded. Upon such rescission, in turn, hinges a pronouncement that possession of the realty has become unlawful. Thus, the basic issue is not possession but one of rescission or annulment of a contract. which is beyond the jurisdiction of the Municipal Court to hear and determine. A violation by a party of any of the stipulations of a contract on agreement to sell real property would entitle the other party to resolved or rescind it. An allegation of such violation in a detainer suit may be proved by competent evidence. And if proved a justice of the peace court might make a finding to that effect, but it certainly cannot declare and hold that the contract is resolved or rescinded. It is beyond its power so to do. And as the illegality of the possession of realty by a party to a contract to sell is premised upon the resolution of the contract, it follows that an allegation and proof of such violation, a condition precedent to such resolution or rescission, to render unlawful the possession of the land or building erected thereon by the party who has violated the contract, cannot be taken cognizance of by a justice of the peace court. ... 1 True, the contract between the parties provided for extrajudicial rescission. This has legal effect, however, where the other party does not oppose it. 2 Where it is objected to, a judicial determination of the issue is still necessary. A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and' determination. 3 But while respondent Judge correctly ruled that the Municipal Court had no jurisdiction over the case and correctly dismissed the appeal, he erred in assuming original jurisdiction, in the face of the objection interposed by petitioner. Section 11, Rule 40, leaves no room for doubt on this point: 103

Section 11. Lack of jurisdiction —A case tried by an inferior court without jurisdiction over the subject matter shall be dismiss on appeal by the Court of First Instance. But instead of dismissing the case, the Court of First Instance may try the case on the merits, if the parties therein file their pleadings and go to trial without any objection to such jurisdiction. There was no other recourse left for respondent Judge, therefore, except to dismiss the appeal. If an inferior court tries a case without jurisdiction over the subject-matter on appeal, the only authority of the CFI is to declare the inferior court to have acted without jurisdiction and dismiss the case, unless the parties agree to the exercise by the CFI of its original jurisdiction to try the case on the merits. 4 The foregoing premises considered, petitioner's prayer for a Writ of Execution of the judgment of the Municipal Court of Pasig must perforce be denied. WHEREFORE, the Writ of mandamus is denied, but the Writ of Prohibition is granted and respondent Court hereby permanently enjoined from taking cognizance of Civil Case No. 10595 in the exercise of its original jurisdiction. No costs. SO ORDERED. Makasiar, Fernandez, Guerrero and Plana, JJ., concur. Teehankee, J., concur in the result.

Footnotes 1 Nera vs. Vacante, 3 SCRA 505, 511 (1961). 2 Tolentino, Civil Code of the Phil., Vol. IV, 1962 ed, p. 168, 3 Nera vs. Vacante, supra. 4 Ganancial vs. Atillo, 14 SCRA 460 (1965).

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

104

G.R. No. L-42283 March 18, 1985 BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees, vs. URSULA TORRES CALASANZ, ET AL., defendants-appellants.

GUTIERREZ, JR., J.: This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X, declaring the contract to sell as not having been validly cancelled and ordering the defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay P500.00 attorney's fees and costs. The facts being undisputed, the Court of Appeals certified the case to us since only pure questions of law have been raised for appellate review. On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum. The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38. On numerous occasions, the defendants-appellants accepted and received delayed installment payments from the plaintiffs-appellees. On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting the remittance of past due accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration of the said cancellation was denied by the defendants-appellants. The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and incidental expenses for the registration and transfer of the land. 105

The defendants-appellants alleged in their answer that the complaint states no cause of action and that the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and refused to pay and/or offer to pay the monthly installments corresponding to the month of August, 1966 for more than five (5) months, thereby constraining the defendants-appellants to cancel the said contract. The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the decision reads: WHEREFORE, based on the foregoing considerations, the Court hereby renders judgment in favor of the plaintiffs and against the defendants declaring that the contract subject matter of the instant case was NOT VALIDLY cancelled by the defendants. Consequently, the defendants are ordered to execute a final Deed of Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees. Costs against the defendants. A motion for reconsideration filed by the defendants-appellants was denied. As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves pure questions of law. The defendants-appellants assigned the following alleged errors of the lower court: First Assignment of Error THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL (ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY CANCELLED. Second Assignment of Error EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF THE PLAINTIFF. Third Assignment of Error THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S FEES. The main issue to be resolved is whether or not the contract to sell has been automatically and validly cancelled by the defendants-appellants.

106

The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six of the contract which provides: xxx xxx xxx SIXTH.—In case the party of the SECOND PART fails to satisfy any monthly installments, or any other payments herein agreed upon, he is granted a month of grace within which to make the retarded payment, together with the one corresponding to the said month of grace; it is understood, however, that should the month of grace herein granted to the party of the SECOND PART expired; without the payments corresponding to both months having been satisfied, an interest of 10% per annum will be charged on the amounts he should have paid; it is understood further, that should a period of 90 days elapse, to begin from the expiration of the month of grace herein mentioned, and the party of SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to that date, the party of the FIRST PART has the right to declare this contract cancelled and of no effect, and as consequence thereof, the party of the FIRST PART may dispose of the parcel of land covered by this contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of the contract, all the amounts paid in accordance with this agreement together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises, and as payment for the damages suffered by failure of the party of the SECOND PART to fulfill his part of the agreement; and the party of the SECOND PART hereby renounces all his right to demand or reclaim the return of the same and obliges himself to peacefully vacate the premises and deliver the same to the party of the FIRST PART. (Emphasis supplied by appellant) xxx xxx xxx The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966 installment despite demands for more than four (4) months. The defendants-appellants point to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the right of the subdivision owner to automatically cancel a contract to sell on the strength of a provision or stipulation similar to paragraph 6 of the contract in this case. The defendants-appellants also argue that even in the absence of the aforequoted provision, they had the right to cancel the contract to sell under Article 1191 of the Civil Code of the Philippines. The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no effect, because it granted the sellers an absolute and automatic right of rescission.

107

Article 1191 of the Civil Code on the rescission of reciprocal obligations provides: The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. xxx xxx xxx Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the law that prohibits the parties from entering into an agreement that violation of the terms of the contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental Shipping, Co., et al., 12 SCRA 276)— Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions' (Lopez v. Commissioner of Customs, 37 SCRA 327, and cases cited therein) Resort to judicial action for rescission is obviously not contemplated . . . The validity of the stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition which in many cases has been upheld by this Court. (Ponce Enrile v. Court of Appeals, 29 SCRA 504). The rule that it is not always necessary for the injured party to resort to court for rescission of the contract when the contract itself provides that it may be rescinded for violation of its terms and conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA 102) where we explained that: Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

108

In other words, the party who deems the contract violated many consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. ... . We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. The right to rescind the contract for non-performance of one of its stipulations, therefore, is not absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that— The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968). ... . The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell which provides: SECOND.—That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as follows: (a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this contract is signed; and (b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of each month, from this date until the total payment of the price above stipulated, including interest. because they failed to pay the August installment, despite demand, for more than four (4) months.

109

The breach of the contract adverted to by the defendants-appellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P 3,920.00 excluding the 7 percent interests, the plaintiffsappellees had already paid an aggregate amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendants-appellants. Article 1234 of the Civil Code which provides that: If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. also militates against the unilateral act of the defendants-appellants in cancelling the contract. We agree with the observation of the lower court to the effect that: Although the primary object of selling subdivided lots is business, yet, it cannot be denied that this subdivision is likewise purposely done to afford those landless, low income group people of realizing their dream of a little parcel of land which they can really call their own. The defendants-appellants cannot rely on paragraph 9 of the contract which provides: NINTH.-That whatever consideration of the party of the FIRST PART may concede to the party of the SECOND PART, as not exacting a strict compliance with the conditions of paragraph 6 of this contract, as well as any other condonation that the party of the FIRST PART may give to the party of the SECOND PART with regards to the obligations of the latter, should not be interpreted as a renunciation on the part of the party of the FIRST PART of any right granted it by this contract, in case of default or non-compliance by the party of the SECOND PART. The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance of paragraph 6 not merely once, but for as many times as he wishes. The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when the defendants-appellants, instead of availing of their alleged right to rescind, have accepted and received delayed payments of installments, though the plaintiffs-appellees have been in arrears beyond the 110

grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. In De Guzman v. Guieb (48 SCRA 68), we held that: xxx xxx xxx But defendants do not deny that in spite of the long arrearages, neither they nor their predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject the appellees from the home-lot in question. On the contrary, it is admitted that the delayed payments were received without protest or qualification. ... Under these circumstances, We cannot but agree with the lower court that at the time appellees exercised their option, appellants had already forfeited their right to invoke the above-quoted provision regarding the nullifying effect of the non-payment of six months rentals by appellees by their having accepted without qualification on July 21, 1964 the full payment by appellees of all their arrearages. The defendants-appellants contend in the second assignment of error that the ledger of payments show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the total monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a substantial portion of the said payments were applied to the interests since the contract specifically provides for a 7% interest per annum on the remaining balance. The defendants-appellants rely on paragraph 2 of the contract which provides: SECOND.—That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P 3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... . (Emphasis supplied) The plaintiffs-appellees on the other hand are firm in their submission that since they have already paid the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which provides: TWELFTH.—That once the payment of the sum of P3,920.00, the total price of the sale is completed, the party to the FIRST PART will execute in favor of the party of the SECOND PART, the necessary deed or deeds to transfer to the latter the title of the parcel of land sold, free from all hens and encumbrances other than those expressly provided in this contract; it is understood, however, that au the expenses which may be incurred in the said transfer of title shall be paid by the party of the SECOND PART, as above stated.

111

Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the contract herein is a contract of adhesion. We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed their signatures and assented to the terms and conditions of the contract. They had no opportunity to question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that: xxx xxx xxx ... (W)hile generally, stipulations in a contract come about after deliberate drafting by the parties thereto. . . . there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the signing of his signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category. (Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied) While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00 price sale. The contract to sell, being a contract of adhesion, must be construed against the party causing it. We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against the party who drafted the same, especially where such interpretation will help effect justice to buyers who, after having invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the buyers." Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an aggregate amount of P4,533.38, the courts should only order the payment of the few remaining installments but not uphold the cancellation of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendants-appellants must immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents as provided in paragraph 12 of the contract. The attorney's fees are justified.

112

WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any interests. Costs against the defendants-appellants. SO ORDERED. Melencio-Herrera, Plana, Relova, De la Fuente and Alampay, JJ., concur. Teehankee (Chairman), J., took no part.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-22590 March 20, 1987 SOLOMON BOYSAW and ALFREDO M. YULO, JR., plaintiffs-appellants, vs. INTERPHIL PROMOTIONS, INC., LOPE SARREAL, SR., and MANUEL NIETO, JR., defendants-appellees. Felipe Torres and Associates for plaintiffs-appellants. V.E. Del Rosario & Associates for defendant-appellee M. Nieto, Jr. A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee Interphil Promotions, Inc. RESOLUTION

FERNAN, J.:

113

This is an appeal interposed by Solomon Boysaw and Alfredo Yulo, Jr., from the decision dated July 25, 1963 and other rulings and orders of the then Court of First Instance [CFI] of Rizal, Quezon City, Branch V in Civil Case No. Q-5063, entitled "Solomon Boysaw and Alfredo M. Yulo, Jr., Plaintiffs versus Interphil Promotions, Inc., Lope Sarreal, Sr. and Manuel Nieto, Jr., Defendants," which, among others, ordered them to jointly and severally pay defendant-appellee Manuel Nieto, Jr., the total sum of P25,000.00, broken down into P20,000.00 as moral damages and P5,000.00 as attorney's fees; the defendants-appellees Interphil Promotions, Inc. and Lope Sarreal, Sr., P250,000.00 as unrealized profits, P33,369.72 as actual damages and P5,000.00 as attorney's fees; and defendant-appellee Lope Sarreal, Sr., the additional amount of P20,000.00 as moral damages aside from costs. The antecedent facts of the case are as follows: On May 1, 1961, Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil Promotions, Inc. represented by Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a boxing contest for the junior lightweight championship of the world. It was stipulated that the bout would be held at the Rizal Memorial Stadium in Manila on September 30, 1961 or not later than thirty [30] days thereafter should a postponement be mutually agreed upon, and that Boysaw would not, prior to the date of the boxing contest, engage in any other such contest without the written consent of Interphil Promotions, Inc. On May 3, 1961, a supplemental agreement on certain details not covered by the principal contract was entered into by Ketchum and Interphil. Thereafter, Interphil signed Gabriel "Flash" Elorde to a similar agreement, that is, to engage Boysaw in a title fight at the Rizal Memorial Stadium on September 30, 1961. On June 19, 1961, Boysaw fought and defeated Louis Avila in a ten-round non-title bout held in Las Vegas, Nevada, U.S.A. [pp. 26-27, t.s.n., session of March 14, 1963]. On July 2, 1961, Ketchum on his own behalf and on behalf of his associate Frank Ruskay, assigned to J. Amado Araneta the managerial rights over Solomon Boysaw. Presumably in preparation for his engagement with Interphil, Solomon Boysaw arrived in the Philippines on July 31, 1961. On September 1, 1961, J. Amado Araneta assigned to Alfredo J. Yulo, Jr. the managerial rights over Boysaw that he earlier acquired from Ketchum and Ruskay. The next day, September 2, 1961, Boysaw wrote Lope Sarreal, Sr. informing him of his arrival and presence in the Philippines. 114

On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal informing him of his acquisition of the managerial rights over Boysaw and indicating his and Boysaw's readiness to comply with the boxing contract of May 1, 1961. On the same date, on behalf of Interphil Sarreal wrote a letter to the Games and Amusement Board [GAB] expressing concern over reports that there had been a switch of managers in the case of Boysaw, of which he had not been formally notified, and requesting that Boysaw be called to an inquiry to clarify the situation. The GAB called a series of conferences of the parties concerned culminating in the issuance of its decision to schedule the Elorde-Boysaw fight for November 4, 1961. The USA National Boxing Association which has supervisory control of all world title fights approved the date set by the GAB Yulo, Jr. refused to accept the change in the fight date, maintaining his refusal even after Sarreal on September 26, 1961, offered to advance the fight date to October 28, 1961 which was within the 30-day period of allowable postponements provided in the principal boxing contract of May 1, 1961. Early in October 1961, Yulo, Jr. exchanged communications with one Mamerto Besa, a local boxing promoter, for a possible promotion of the projected Elorde-Boysaw title bout. In one of such communications dated October 6, 1961, Yulo informed Besa that he was willing to approve the fight date of November 4,1961 provided the same was promoted by Besa. While an Elorde-Boysaw fight was eventually staged, the fight contemplated in the May 1, 1961 boxing contract never materialized. As a result of the foregoing occurrences, on October 12, 1961, Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr. and Manuel Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for damages allegedly occasioned by the refusal of Interphil and Sarreal, aided and abetted by Nieto, Jr., then GAB Chairman, to honor their commitments under the boxing contract of May 1,1961. On the first scheduled date of trial, plaintiff moved to disqualify Solicitor Jorge Coquia of the Solicitor General's Office and Atty. Romeo Edu of the GAB Legal Department from appearing for defendant Nieto, Jr. on the ground that the latter had been sued in his personal capacity and, therefore, was not entitled to be represented by government counsel. The motion was denied insofar as Solicitor General Coquia was concerned, but was granted as regards the disqualification of Atty. Edu. The case dragged into 1963 when sometime in the early part of said year, plaintiff Boysaw left the country without informing the court and, as alleged, his counsel. He was still abroad when, on May 13, 1963, he was scheduled to take the witness stand. Thus, the lower court reset the trial for June 20, 1963. Since Boysaw was still abroad on the later date, another postponement was granted 115

by the lower court for July 23, 1963 upon assurance of Boysaw's counsel that should Boysaw fail to appear on said date, plaintiff's case would be deemed submitted on the evidence thus far presented. On or about July 16, 1963, plaintiffs represented by a new counsel, filed an urgent motion for postponement of the July 23, 1963 trial, pleading anew Boysaw's inability to return to the country on time. The motion was denied; so was the motion for reconsideration filed by plaintiffs on July 22, 1963. The trial proceeded as scheduled on July 23, 1963 with plaintiff's case being deemed submitted after the plaintiffs declined to submit documentary evidence when they had no other witnesses to present. When defendant's counsel was about to present their case, plaintiff's counsel after asking the court's permission, took no further part in the proceedings. After the lower court rendered its judgment dismissing the plaintiffs' complaint, the plaintiffs moved for a new trial. The motion was denied, hence, this appeal taken directly to this Court by reason of the amount involved. From the errors assigned by the plaintiffs, as having been committed by the lower court, the following principal issues can be deduced: 1. Whether or not there was a violation of the fight contract of May 1, 1961; and if there was, who was guilty of such violation. 2. Whether or not there was legal ground for the postponement of the fight date from September 1, 1961, as stipulated in the May 1, 1961 boxing contract, to November 4,1961, 3. Whether or not the lower court erred in the refusing a postponement of the July 23, 1963 trial. 4. Whether or not the lower court erred in denying the appellant's motion for a new trial. 5. Whether or not the lower court, on the basis of the evidence adduced, erred in awarding the appellees damages of the character and amount stated in the decision. On the issue pertaining to the violation of the May 1, 1961 fight contract, the evidence established that the contract was violated by appellant Boysaw himself when, without the approval or consent of Interphil, he fought Louis Avila on June 19, 1961 in Las Vegas Nevada. Appellant Yulo admitted this fact during the trial. [pp. 26-27, t.s.n., March 14, 1963]. While the contract imposed no penalty for such violation, this does not grant any of the parties the unbridled liberty to breach it with impunity. Our law on 116

contracts recognizes the principle that actionable injury inheres in every contractual breach. Thus: Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the terms thereof, are liable for damages. [Art. 1170, Civil Code]. Also: 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. [Part 1, Art. 1191, Civil Code]. There is no doubt that the contract in question gave rise 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, so that the performance of one is conditioned upon the simultaneous fulfillment of the other" [Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1 The power to rescind is given to the injured party. "Where the plaintiff is the party who did not perform the undertaking which he was bound by the terms of the agreement to perform 4 he is not entitled to insist upon the performance of the contract by the defendant, or recover damages by reason of his own breach " [Seva vs. Alfredo Berwin 48 Phil. 581, Emphasis supplied]. Another violation of the contract in question was the assignment and transfer, first to J. Amado Araneta, and subsequently, to appellant Yulo, Jr., of the managerial rights over Boysaw without the knowledge or consent of Interphil. The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were in fact novations of the original contract which, to be valid, should have been consented to by Interphil. 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.[Art. 1293, Civil Code, emphasis supplied]. That appellant Yulo, Jr., through a letter, advised Interphil on September 5, 1961 of his acquisition of the managerial rights over Boysaw cannot change the fact that such acquisition, and the prior acquisition of such rights by Araneta were done without the consent of Interphil. There is no showing that Interphil, upon receipt of Yulo's letter, acceded to the "substitution" by Yulo of the original principal obligor, who is Ketchum. The logical presumption can only be that, with Interphil's letter to the GAB expressing concern over reported 117

managerial changes and requesting for clarification on the matter, the appellees were not reliably informed of the changes of managers. Not being reliably informed, appellees cannot be deemed to have consented to such changes. Under the law when a contract is unlawfully novated by an applicable and unilateral substitution of the obligor by another, the aggrieved creditor is not bound to deal with the substitute. The consent of the creditor to the change of debtors, whether in expromision or delegacion is an, indispensable requirement . . . Substitution of one debtor for another may delay or prevent the fulfillment of the obligation by reason of the 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. Thus, in a contract where x is the creditor and y is the debtor, if y enters into a contract with z, under which he transfers to z all his rights under the first contract, together with the obligations thereunder, but such transfer is not consented to or approved by x, there is no novation. X can still bring his action against y for performance of their contract or damages in case of breach. [Tolentino, Civil Code of the Philippines, Vol. IV, p. 3611. From the evidence, it is clear that the appellees, instead of availing themselves of the options given to them by law of rescission or refusal to recognize the substitute obligor Yulo, really wanted to postpone the fight date owing to an injury that Elorde sustained in a recent bout. That the appellees had the justification to renegotiate the original contract, particularly the fight date is undeniable from the facts aforestated. Under the circumstances, the appellees' desire to postpone the fight date could neither be unlawful nor unreasonable. We uphold the appellees' contention that since all the rights on the matter rested with the appellees, and appellants' claims, if any, to the enforcement of the contract hung entirely upon the former's pleasure and sufferance, the GAB did not act arbitrarily in acceding to the appellee's request to reset the fight date to November 4, 1961. It must be noted that appellant Yulo had earlier agreed to abide by the GAB ruling. In a show of accommodation, the appellees offered to advance the November 4, 1961 fight to October 28, 1961 just to place it within the 30- day limit of allowable postponements stipulated in the original boxing contract. The refusal of appellants to accept a postponement without any other reason but the implementation of the terms of the original boxing contract entirely overlooks the fact that by virtue of the violations they have committed of the terms thereof, they have forfeited any right to its enforcement.

118

On the validity of the fight postponement, the violations of the terms of the original contract by appellants vested the appellees with the right to rescind and repudiate such contract altogether. That they sought to seek an adjustment of one particular covenant of the contract, is under the circumstances, within the appellee's rights. While the appellants concede to the GAB's authority to regulate boxing contests, including the setting of dates thereof, [pp. 44-49, t.s.n., Jan. 17, 1963], it is their contention that only Manuel Nieto, Jr. made the decision for postponement, thereby arrogating to himself the prerogatives of the whole GAB Board. The records do not support appellants' contention. Appellant Yulo himself admitted that it was the GAB Board that set the questioned fight date. [pp. 32-42, t.s.n., Jan. 17, 1963]. Also, it must be stated that one of the strongest presumptions of law is that official duty has been regularly performed. In this case, the absence of evidence to the contrary, warrants the full application of said presumption that the decision to set the Elorde-Boysaw fight on November 4, 1961 was a GAB Board decision and not of Manuel Nieto, Jr. alone. Anent the lower court's refusal to postpone the July 23, 1963 trial, suffice it to say that the same issue had been raised before Us by appellants in a petition for certiorari and prohibition docketed as G.R. No. L-21506. The dismissal by the Court of said petition had laid this issue to rest, and appellants cannot now hope to resurrect the said issue in this appeal. On the denial of appellant's motion for a new trial, we find that the lower court did not commit any reversible error. The alleged newly discovered evidence, upon which the motion for new trial was made to rest, consists merely of clearances which Boysaw secured from the clerk of court prior to his departure for abroad. Such evidence cannot alter the result of the case even if admitted for they can only prove that Boysaw did not leave the country without notice to the court or his counsel. The argument of appellants is that if the clearances were admitted to support the motion for a new trial, the lower court would have allowed the postponement of the trial, it being convinced that Boysaw did not leave without notice to the court or to his counsel. Boysaw's testimony upon his return would, then, have altered the results of the case. We find the argument without merit because it confuses the evidence of the clearances and the testimony of Boysaw. We uphold the lower court's ruling that:

119

The said documents [clearances] are not evidence to offset the evidence adduced during the hearing of the defendants. In fact, the clearances are not even material to the issues raised. It is the opinion of the Court that the 'newly discovered evidence' contemplated in Rule 37 of the Rules of Court, is such kind of evidence which has reference to the merits of the case, of such a nature and kind, that if it were presented, it would alter the result of the judgment. As admitted by the counsel in their pleadings, such clearances might have impelled the Court to grant the postponement prayed for by them had they been presented on time. The question of the denial of the postponement sought for by counsel for plaintiffs is a moot issue . . . The denial of the petition for certiorari and prohibition filed by them, had he effect of sustaining such ruling of the court . . . [pp. 296-297, Record on Appeal]. The testimony of Boysaw cannot be considered newly discovered evidence for as appellees rightly contend, such evidence has been in existence waiting only to be elicited from him by questioning. We cite with approval appellee's contention that "the two qualities that ought to concur or dwell on each and every of evidence that is invoked as a ground for new trial in order to warrant the reopening . . . inhered separately on two unrelated species of proof" which "creates a legal monstrosity that deserves no recognition." On the issue pertaining to the award of excessive damages, it must be noted that because the appellants wilfully refused to participate in the final hearing and refused to present documentary evidence after they no longer had witnesses to present, they, by their own acts prevented themselves from objecting to or presenting proof contrary to those adduced for the appellees. On the actual damages awarded to appellees, the appellants contend that a conclusion or finding based upon the uncorroborated testimony of a lone witness cannot be sufficient. We hold that in civil cases, there is no rule requiring more than one witness or declaring that the testimony of a single witness will not suffice to establish facts, especially where such testimony has not been contradicted or rebutted. Thus, we find no reason to disturb the award of P250,000.00 as and for unrealized profits to the appellees. On the award of actual damages to Interphil and Sarreal, the records bear sufficient evidence presented by appellees of actual damages which were neither objected to nor rebutted by appellants, again because they adamantly refused to participate in the court proceedings. The award of attorney's fees in the amount of P5,000.00 in favor of defendant-appellee Manuel Nieto, Jr. and another P5,000.00 in favor of defendants-appellees Interphil Promotions, Inc. and Lope Sarreal, Sr., jointly, cannot also be regarded as excessive considering the extent and nature of defensecounsels' services which involved legal work for sixteen [16] months. 120

However, in the matter of moral damages, we are inclined to uphold the appellant's contention that the award is not sanctioned by law and well- settled authorities. Art. 2219 of the Civil Code provides: Art. 2219. Moral damages may be recovered in the following analogous cases: 1) A criminal offense resulting in physical injuries; 2) Quasi-delict causing physical injuries; 3) Seduction, abduction, rape or other lascivious acts; 4) Adultery or concubinage; 5) Illegal or arbitrary detention or arrest; 6) Illegal search; 7) Libel, slander or any other form of defamation; 8) Malicious prosecution; 9) Acts mentioned in Art. 309. 10) Acts and actions referred to in Arts., 21, 26, 27, 28, 29, 30, 32, 34 and 35. The award of moral damages in the instant case is not based on any of the cases enumerated in Art. 2219 of the Civil Code. The action herein brought by plaintiffs-appellants is based on a perceived breach committed by the defendants-appellees of the contract of May 1, 1961, and cannot, as such, be arbitrarily considered as a case of malicious prosecution. Moral damages cannot be imposed on a party litigant although such litigant exercises it erroneously because if the action has been erroneously filed, such litigant may be penalized for costs. The grant of moral damages is not subject to the whims and caprices of judges or courts. The court's discretion in granting or refusing it is governed by reason and justice. In order that a person may be made liable to the payment of moral damages, the law requires that his act be wrongful. The adverse result of an action does not per se make the act wrongful and subject the actor to the payment of moral damages. The law could not have meant to impose a penalty on the right to litigate; such right is so precious that moral damages may not be charged on those who may exercise it erroneously. For these the law taxes costs. [Barreto vs. Arevalo, et. al. No. L-7748, Aug. 27, 1956, 52 O.G., No. 13, p. 5818.]

121

WHEREFORE, except for the award of moral damages which is herein deleted, the decision of the lower court is hereby affirmed. SO ORDERED. Gutierrez, Jr., Paras, Padilla, Bidin and Cortes, JJ., concur.

122

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-45710 October 3, 1985 CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners, vs. THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents. I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners. Antonio R. Tupaz for private respondent. MAKASIAR, CJ.: This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction.

123

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision. On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance (p. 113, rec.). On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which provides: In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by unanimous vote, decided as follows: 1) To prohibit the bank from making new loans and investments [except investments in government securities] excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be subject to review by the Superintendent of Banks, who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible; xxx

xxx

xxx

(p. 46, rec.). On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).

124

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969. On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.). On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.). On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.). On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec. On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.). Hence, this instant petition by the central Bank. The issues are: 1. Can the action of Sulpicio M. Tolentino for specific performance prosper? 2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note? 3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed to satisfy said amount? 125

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question. The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650) The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the other.

126

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their customers, they must investigate the existence and evaluation of the properties being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as loan security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court. Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino. Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan

127

because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay. Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages. Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the interest thereon. WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt. The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code). The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan

128

Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180). Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt. The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case. Article 2089 provides: A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor. Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage, to the prejudice of other heirs who have not been paid. The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND 1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID; 2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND

129

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO. NO COSTS. SO ORDERED. Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur. Aquino (Chairman) and Abad Santos, JJ., took no part.

130

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-24968 April 27, 1972 SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant. Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee. Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment. In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the 131

construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and P9,100.00 as additional working capital. Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank. On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery and equipment to be installed. Among the other terms spelled out in the resolution were the following: 1. That the proceeds of the loan shall be utilized exclusively for the following purposes: For construction of factory building P250,000.00 For payment of the balance of purchase price of machinery and equipment 240,900.00 For working capital 9,100.00 T O T A L P500,000.00 4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation; 5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;" Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia

132

Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc. In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan ... with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the Board." On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that the necessary documents be prepared in accordance with the terms and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers and technical men to meet with each other and undertake the necessary studies, although in appointing its own committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145. On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered on the following April 17. It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows: RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to time to place the factory in actual operation:

133

PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect." On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn. In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned." On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.". On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following proviso: That in view of observations made of the shortage and high cost of imported raw materials, the Department of Agriculture and Natural Resources shall certify to the following: 1. That the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and 2. That there is prospect of increased production thereof to provide adequately for the requirements of the factory." The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that the certification by the Department of Agriculture and Natural Resources was required "as the intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally available raw materials." This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials, 134

principal kenaf." The explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..." This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as follows: a) For the payment of the receipt for jute mill machineries with the Prudential Bank & Trust Company P250,000.00 (For immediate release) b) For the purchase of materials and equipment per attached list to enable the jute mill to operate 182,413.91 c) For raw materials and labor 67,586.09 1) P25,000.00 to be released on the opening of the letter of credit for raw jute for $25,000.00. 2) P25,000.00 to be released upon arrival of raw jute. 3) P17,586.09 to be released as soon as the mill is ready to operate. On January 25, 1955 RFC sent to Saura, Inc. the following reply: Dear Sirs: This is with reference to your letter of January 21, 1955, regarding the release of your loan under consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if revived, are proposed to be 135

made from time to time, subject to availability of funds towards the end that the sack factory shall be placed in actual operating status. We shall be able to act on your request for revised purpose and manner of releases upon re-appraisal of the securities offered for the loan. With respect to our requirement that the Department of Agriculture and Natural Resources certify that the raw materials needed are available in the immediate vicinity and that there is prospect of increased production thereof to provide adequately the requirements of the factory, we wish to reiterate that the basis of the original approval is to develop the manufacture of sacks on the basis of the locally available raw materials. Your statement that you will have to rely on the importation of jute and your request that we give you assurance that your company will be able to bring in sufficient jute materials as may be necessary for the operation of your factory, would not be in line with our principle in approving the loan. With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc. It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955. On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute mill project. The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof. We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides: 136

ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the object of the contract. There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages. It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the factory." The imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely — "that the proceeds of the loan shall be utilized exclusively for the following purposes: for construction of factory building — P250,000.00; for payment of the balance of purchase price of machinery and equipment — P240,900.00; for working capital — P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon. When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature cf mutual desistance — what Manresa terms "mutuo disenso"1 — which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment.2

137

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which application was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond doubt that the said agreement had been extinguished by mutual desistance — and that on the initiative of the plaintiff-appellee itself. With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective briefs of the parties. WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee. Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur. Makasiar, J., took no part.

Footnotes 1 8 Manresa, p. 294. 2 2 Castan, p. 560.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-36566 November 7, 1979 URBANO JAVIER and LEONILA ALBIELA, petitioners, vs. HON. HERMOGENES CONCEPCION, JR., Hon. ANDRES REYES, Hon. LUIS REYES, LIM CHUA, TAN TIAN ON alias TAN TIAN UNA and TAN SIOK TAN alias TAN SIOK TUAN, respondents. 138

Diogracias de Luna for petitioners. Bengzon, Bengzon, Villaroman & De Vera for private respondents.

SANTOS, J.: This is a petition for review by certiorari filed on April 12, 1973, of the decision of the Court of Appeals, in CA-G.R. No. 46801-R, entitled "Lim Chua, et al., plaintiffs-appellees versus Urbano Javier, et al., defendants-appellants", which upheld the decision of the Court of First Instance of Quezon in Civil Case 6253 ordering the reconveyance of the landholdings subject matter of the case to herein private respondents, plaintiffs-appellees below. On April 24, 1973, We resolved, giving without due course to the petition, to require the private respondents, plaintiffs appellees below to comment within ten (10) days from notice. 1 On May 16, 1973 they filed their comment claiming that the petition raises no important and substantial question of law as would warrant a review of the appealed decision, since only questions of fact were raised in the Court of Appeals, and that the decision itself "will show conclusively" that it was based on the findings of fact of respondent Court. 2 In a resolution of May 21, 1973, We gave due course to the petition. 3 On September 29, 1973, petitioners, defendants-appellants below filed their brief. 4 Respondents' brief having been filed out of time, We resolved on December 17, 1973 to expunge the said brief from the records, and to return the same to the said parties. 5 On January 10, 1974, the case was considered submitted for decision without respondents' brief. 6 On January 26, 1974, respondents, through counsel, filed a petition for leave to file the incorporated memorandum, 7 but We resolved on February 8, 1974 to deny the same. 8 The factual and procedural antecedents which gave rise to this petition follow. On October 17, 1959, respondents as plaintiffs, Lim Chua, Tan Tian On alias Tan Tian Una and Tan Sick Tan alias Tan Shiok Tuan filed against herein petitioners, then defendants- spouses, Urbano Javier and Leonila Albiela, with the Court of First Instance of the Province of Quezon, Civil Case No. 6253, for the reconveyance to the former of a parcel of land with improvements thereon, known as Lot 12 consisting of fifty (50) hectares, more or less, and an accounting and recovery of the produce of the land from the time the latter, i.e., petitioners herein, took possession of the same in 1945 up to the time possession is returned to the former. 9 Lot 12 is allegedly a portion of a big parcel of land designated as Lot 6, PSU-5967, located in Quezon Province and covered by Transfer Certificate of Title No. 16817 issued by the Office of the Register of Deeds of Quezon Province in the name of herein respondents, which parcel of land is more particularly described as follows:

139

A parcel of land (Lot No. 6, Plan Psu-5967), with improvements thereon, situated in the Barrio of Ayusan, Municipality of Dolores. Bounded on the NE. by a creek and properties of Vicente Gaurano, Dionisio Capino, Isidro Briones and Macario G. Caranto; on the S. by property of Crispo Ella; on the SW by properties of Francisco Natividad, Rufino Flores, Isidro Bumiel and Margarita Valenzuela; on the SW by the property of Bernardo Marquez; and on the NW. by the Cabatang River, properties of Marcos Gaurano, Luciano Santos and Juan Poloa, a creek and property of Vicente Gaurano; containing an area of ONE MILLION EIGHT HUNDRED FORTY NINE THOUSAND ONE HUNDRED AND SEVENTY-TWO SQUARE METERS, (1,849,172), more or less. 10 It was further alleged that on April 10, 1930, in Expediente No. 1509, G.L.R.O. Record No. 25133, and in Expediente No. 1679, G.L.R.O. Record No. 26112 in which Cosme U. Castillo and Florentina Arcoires were applicants, said Lot 12 was ordered excluded from Psu-16536, G.L.R.O. Record No. 25133 and in Plan Psu-13449, G.L.R.O. Record No. 26112 for the reason that the same was already awarded to herein respondents as owners in Expediente No. 356, Record No. 14322. 11 In an amended answer filed on November 11, 1959, defendants below, now petitioners denied the material averments of the complaint and pointed out that Lot 12 could never be a part of Lot 6, Plan Psu-5967, because between the two lots there exists a big river more than fifty (50) meters wide and more than twenty (20) meters deep known as the Guhit River which serves as the natural boundary between the municipalities of Dolores and Candelaria of Quezon Province; that Lot No. 6, Plan Psu-5967 is situated within the jurisdiction of Dolores, Quezon while Lot No. 12 is situated within the jurisdiction of Candelaria, Quezon. 12 As special defenses, defendants-petitioners alleged inter alia: (1) that they acquired Lot No. 12 partly by purchase and partly by inheritance and they, as well as their predecessors-in-interest, have been in possession of the same adversely, publicly, continuously, peacefully, and in the concept of owners against the whole world since the Spanish time up to the present; (2) that they have title to it granted by the Spanish government on March 11, 1888; (3) that the lot in question had been adjudicated to defendants-petitioners' predecessors-in-interest by the Court of First Instance of Tayabas (now Quezon) in the decision dated January 14, 1930 rendered in Land Registration Cases Nos. 1509 and 1679; (4) that they have declared the land for tax purposes since 1906 paying taxes therefor; (5) that they have cleared the land and planted on it numerous trees, like coconuts, coffee, bananas, mangoes, lanzones, oranges, avocado, jack fruits and bamboos, without any interference from plaintiffs-respondents or their predecessors-in-interest; (6) that plaintiffs-respondents had never been the owners and possessors of Lot No. 12 or portion thereof, and if the same had been included in their title, i.e. TCT No. 16817 of the Register of Deeds of Quezon Province, the registration and 140

issuance of the same in their favor had been secured thru fraud and deceit, by making it appear in the application for registration and the notices of publication that said Lot No. 6 belonged to them and is within the jurisdiction of Dolores, Quezon, which is not true since the same is within the jurisdiction of Candelaria, Quezon, thus deceiving the whole world of the proper location of the land subject of registration and publication; and (7) that if plaintiffs-respondents have cause or causes of action the same have already been barred by the statute of limitations. 13 By way of counterclaim, defendants-petitioners claimed P5,000.00 for attorney's fees and P1,000.00 for litigation expenses and that in the event that plaintiffs-respondents are declared the lawful owners of the lot in question, they be reimbursed the amount of P150,000.00 for the reasonable value of improvements they introduced thereon consisting of a house, camarin made of strong materials and various fruit trees. 14 On June 25, 1968 the court a quo rendered a decision the pertinent portions of which read as follows: After a careful scrutiny and deliberation on the evidence presented by the plaintiffs and the defendants and after a long search in the archive of this court for the Expediente of Case No. 1679, Record No. 26112, Land Registration Case No. 1509 and Case No. 356 which involves said records, the court has arrived at the ineludable (sic) conclusion that the property in question, consisting of about sixty (60) hectares, more or less, and known as Lot No. 12, Psu-13449, now Psu-16536-Amd. GLRO Record No. 27112 is included and comprised within Plan Psu-5967, for Lot No. 6, GLRO Record No. 14232. That Lot No. 6 covering and which includes lot No. 12, the property in question, is covered by Transfer Certificate of 'Title No. 16817 of the Register of Deeds of Quezon and issued in the name of the herein plaintiffs; that the defendant Urtano Javier, since 1924, knew of the fact that the property in question, Lot No. 12. plan Psu-13449, now Psu-16536-Amd, is a part and parcel of Lot No. 6. This conclusion of the Court is supported by the records of Case No. 1679 wherein the defendant Urbano Javier was one of the oppositors; Case No, 356, and Land Registration Case No. 1509. From the records of Case No. 1679, the Chief Surveyor of the General Land Registration Office filed with this Court on February 15, 1927 a manifestation calling the attention of the Court to the fact that the land described in plan Psu-13449, Record No. 26112 which refer to Lot No. 12 and which is the property in question, is also included in plan Psu-5967 for Lot No. 6. This Chief Surveyor of the General Land Registration Office again on April 28, 1939 filed another manifestation reiterating his previous manifestation of February 15, 1927 and at the same time informing this court that Lot No. 6 of Plan Psu-5967 has already been adjudicated to the herein plaintiffs as could be found in Expediente 356, GLRO Record No. 14912 and that in said plan Psu-5967 for Lot No. 6, is included Lot No. 12 (the 141

property in question) of plan Psu-13449 and in said manifestation of the Chief Surveyor of the General Land Registration Office, he recommended to this Court the issuance of an order for the exclusion from plan Psu-16536, GLRO Record No. 15113 and plan Psu-13449, GLRO Record No. 26112 involving Lot No. 12, from portion now in conflict with Lot No. 6 of Plan Psu-395967 which was included and formerly decreed in Expediente 356, GLRO Record No. 14232 in favor of the herein plaintiffs. From the indubitable document found in the record of the court, one could readily see that the claim of the defendants to the effect that Lot No. 12 which is the property in question, is not a part of lot No. 6 is untenable, the defendants' contention that the commissioner's report, Exhibit "X", and the plotted area in conflict prepared by the court's commissioner, should not be admitted and given credit because the I.R. (Investigation Report) 268 wherein the commissioner's report was based was not presented finds no merit because the commissioner's report is confirmed by the manifestation of the Chief Surveyor of the General Land Registration Office filed with this court dated February 15, 1927 and April 18, 1939. With respect to the claim of the defendants that they acquired the property by prescription, the same is without merit taking into consideration that the defendant Urbano Javier knew that the property in question is within lot No. 6 and covered by a certificate of title in favor of the plaintiffs since 1924 when he filed an opposition to the registration of the land in question and, therefore, could not be said to have acted in good faith for the purpose of applying the provision of the Civil Code in ordinary prescription. Neither could the defendants acquire the property by ordinary prescription because the defendant has not possessed the property for a period of thirty (30) years. Finally, the defendant could not acquire the property in question for the simple reason that the same is titled in the name of the plaintiffs and as such the law and jurisprudence says that no title to registered land may be acquired by prescription or adverse possession. (Section 46, Act No. 496; Rodriguez , Sr. vs. Francisco, L-12039, June 30, 1961). VIEWED IN THE LIGHT OF ALL THE FOREGOING, and by preponderance of evidence, the court hereby renders judgment in favor of the plaintiffs and against the defendants: 1. Declaring the plaintiffs as the owners of the land in question; 2. Ordering the defendants to surrender the possession of the same to the plaintiffs; 3. Ordering the defendants to render an accounting of the fruits received by them from 1945 up to the time they shall deliver possession to the plaintiffs;

142

4. To pay the plaintiffs the amount of P20,000.00 as attorney's fees; and to pay the cost of the proceedings. 15 Appellants, now petitioners, appealed the above decision to respondent Court of Appeals. On January 31, 1973 the said Court rendered a decision affirming that of the court a quo, with the modification that the award of attorney's fees be disallowed on the ground that appellants, petitioners herein, did not act with evident bad faith in occupying the land in question. 16 Motion for reconsideration of the Court of Appeals decision having been denied, appellants-petitioners resorted to this Court by way of this petition for review by certiorari. Petitioners aver in their brief before this Court that the Court of Appeals erred — (1) in holding that there was no fraud in the registration of Lot No. 12, Plan Psu-16536-AMD-3; (2) in holding that the cause of action of the private respondents has not been barred by the Statute of Limitation or by laches; (3) in not ordering the private respondents to reconvey the land in question to the petitioners; and (4) in not ordering private respondents to pay for the improvements introduced by them on the land in question from 1945. 17 We shall now consider and resolve the foregoing in seriatim. 1. Defendants-petitioners assail the registration of the land in question (Lot No. 12, Plan Psu-16536-AMD-3) as having been secured through fraud and misrepresentation, considering that in the Notice of Initial Hearing in Land Registration Case No. 365, G.L.R.O. Record No. 14232, Lot No. 6, which, as found by the lower court includes Lot No: 12, was made to appear as situated in Barrio Ayusan, Municipality of Dolores only, when in fact it is also situated in Barrio Masalocot Municipality of Candelaria, both of the province of Quezon, thereby depriving the whole world, including the petitioners, defendants below, of their opportunity to oppose the registration thereof. In this connection, respondent Court of Appeals explicitly found that "after going over the records, the pleadings and the evidence adduced, We found no trace of fraud and misrepresentation in the procurement of the transfer certificate of title. 18 Fraud as a legal basis for review of a decree means actual or positive fraud as distinguished from constructive or legal fraud. 19 Since the existence or attendance of actual or positive fraud is a question of fact, and respondent Court having ruled out the same, We have no basis to sustain defendants-petitioners' contention that it attended the procurement of the title. The lot in question, Lot No. 12, Plan Psu-16536-AMD was also found to be 143

"part and parcel of Lot No. 6" for which TCT No. 16817 of the Register of Deeds of Quezon was issued on July 9, 1941 in the name of plaintiffs, now respondents. 20 This factual finding stands in the absence of weighty considerations to warrant its reversal. As held in Evangelista & Co., et al., v. Abad Santos21 "(I)t is not the function of the Supreme Court to analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by the lower court." Moreover, the factual conclusion in the case at bar, as in Evangelista & Co., et al. v. Abad Santos, has been arrived at after weighing both the testimonial and documentary evidence presented. Finally, the decree of registration has long become final, absent a showing that the same was questioned within one (1) year after the entry thereof was made. Under Section 38 of the Land Registration Act, as amended, the person allegedly deprived of the land by a decree of registration obtained by fraud should file in the competent Court of First Instance a petition for review within one year after the entry of the decree provided no innocent purchaser for value has acquired an interest. Thus, granting that there was actual or positive fraud in securing the title, defendants-petitioners are now barred from questioning the same. 2. Petitioners next contend that respondents' cause of action has already been barred by the statute of limitations or by laches since they never asserted their right over the land in question wire petitioners, defendants below, were in continuous, public and peaceful possession thereof during the period from December 29, 1927 when the Original Certificate of Title was issued up to October 17, 1959 when the complaint was filed, and, therefore, the land in question should be reconveyed to them. In a similar case 22 for recovery of possession of registered land, the defendant set up the defense of prescription and title in himself through "open, continuous, exclusive and public and notorious possession under claim of ownership, adverse to the entire world ... from time immemorial" and that the registration of the land in dispute was obtained through. "fraud or error and without knowledge (of) or notice either personal or thru publication to defendant and/or predecessors-in-interest." 'This Court there held, citing Sorongon v. Makalintal, 23 thus: As the land in dispute is covered by plaintiff's Torrens Certificate of Title and was registered in 1914, the decree of registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant, as more than one year has already elapsed from the issuance and entry of the decree. Neither could the decree be collaterally attacked by any person claiming title to, or interest in, the land prior to the registration proceedings. Defendants', now petitioners', position is untenable, the established rule being that one cannot acquire title to a registered land by prescription or adverse possession. Thus, in the same case of Tuason v. Bolanos, supra, this Court reiterated this principle when it held: 144

... Nor could title to that land in derogation of that of plaintiff, the registered owner, be acquired by prescription or adverse possession. (Section 46, Act No. 496). Adverse, notorious and continuous possession under claim of ownership for the period fixed by law is ineffective against a Torrens title. (Valiente vs. Judge of CFI of Tarlac, etc., 45 Off. Gaz., Supp. 9, p. 43) and it is likewise settled that the right to secure possession under a decree of registration does not prescribe. (Francisco vs. Cruz, 43 Off. Gaz., 5105, 5109-5110) A recent decision of this Court on this point is that rendered in the case ofJose Alcantara, et al. vs. Mariano, et al., 92 Phil. 796 ... Hence, defendants-petitioners' claim that plaintiffs-respondents' cause of action has prescribed is without merit. On the defense of laches, petitioners rely on the authority of Mejia de Lucas vs. Gamponia, 100 Phil. 277 (1956). There is no parallelism between the case at bar and that cited by petitioners. In the Mejia de Lucas case, which was an action for reconveyance, the land was acquired by Domingo Mejia by means of free patent. Eleven (1 1) days after the issuance of the patent and before that of the certificate of title, Domingo Mejia sold the land to Zacarias Ciscar who immediately took possession and enjoyed the fruits thereof. Upon the latter's death the land was included in the distribution of his estate and adjudicated to Roque Sanchez who in turn sold the same to Andres Gamponia, the defendant. The time during which the land in question was successively held in possession by Ciscar, Sanchez and Gamponia covered a period of 37 years. Meanwhile, Domingo Mejia died leaving his brother, Pedro Mejia, as his only surviving kin. When the latter also died, he was survived by his daughter Concordia Mejia de Lucas, the plaintiff therein. On the foregoing facts, this Court upheld the equitable defense of laches in this wise: Upon a careful consideration of the facts and circumstances, we are constrained to find, however, that while no legal defense to the action lies, an equitable one lies in favor of the defendant and that is, the equitable defense of laches. No (sic, should be We) hold that the defense of prescription or adverse possession in derogation of the title of the registered owner Domingo Mejia does not lie, but that of the equitable defense of laches. Otherwise stated, We hold that while defendant may not be considered as having acquired title by virtue of his and his predecessors' long continued possession for 37 years, the original owner's right to recover back the possession of the property and the title thereto from the defendant has, by the long period of 37 years and by patentee's inaction and neglect, been converted into a stale demand. 24 It can be readily seen that in the above-cited case the land in question came into the possession of the defendant-appellant Gamponia after a series of transfers from Domingo Mejia, the original owner and plaintiff-appellee's (Mejia de Lucas') predecessor-in-interest to three other persons and their 145

successors-in-interest, whose rights and obligation would have been affected by a contrary decision. Said the Court: ... All of these transfer(s) from Zacarias Ciscar to his heirs, to Roque Sanchez and to defendant Andres Gamponia, acts which covered a period of 37 years, would all have to be undone and the respective rights and obligations of the parties affected adjusted, unless the defense is sustained. 25 This circumstance obtaining in the Mejia de Lucas case is not present in the case at bar. Here, there are no intervening rights of third persons which may be affected or prejudiced by a decision directing the return of Lot No. 12 to plaintiffs-respondents, Hence, the equitable defense of laches will not also apply as against the registered owners in this case. 3. The third assigned error does not raise an issue, and is merely a consequence of the first and second assigned errors. In the light of our resolution therein as shown in the foregoing, the same is without merit. 4. As regard the 4th and last issue, We agree with respondent Court of Appeals' finding that petitioners did not act with evident bad faith in occupying the land in question. This being likewise a question of fact, and there being substantial evidence in the records to support the finding, We reiterate the established principle applied in Evangelista v. Abad Santos, et al., supra, and a host of other cases cited, that as a rule the same should not be disturbed. As possessors in good faith, petitioners are entitled to the fruits received before their possession was legally interrupted 26 upon receipt of judicial summons 27 in connection with the filing of the complaint for reconveyance on October 17, 1959. 28 However, the records do not show when the summons were received by the defendants-spouses, Javier, In the absence of such proof and in the interest of justice, We hold that possession in good faith was legally interrupted on November 11, 1959, when their amended answer was filed,* — which is less than a month from the date the summons was apparently received. For the difference of a few days or about two (2) weeks in reckoning the starting date of possession in bad faith will not materially affect the prevailing party's entitlement to the fruits of the holding since the same will be reckoned seasonally. Petitioners should also be refunded the necessary and useful expenses, with the right to retain the land until reimbursed of the same, pursuant to Article 546 of the Civil Code. Under the said provision, respondents have the option to refund the amount of useful expenses or to pay the increase in value which the land may have acquired by reason thereof. In this connection, petitioners have placed the market value of improvements on the property consisting of various fruit trees, bamboos, a house and camarin made of strong materials, at P150, 000.00 29 and this amount does not appear to be disputed. The average share of the owner was likewise compromised at sixty (60) cavans per year, 30 at an average price of seven pesos (P7.00) per cavan 31 as of the date of the hearing on September 23, 1960. 146

In view of Article 544 of the Civil Code, supra, petitioners shall be accountable for the fruits of subject property only after 1959, not from 1945. WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED, with the modification that petitioners render an accounting of the entire produce of the holding from November 11, 1959, which, with respect to palay crop had been fixed at sixty (60) cavans a year at seven pesos (p7.00) per cavan as of September 23, 1960, up to the time the subject land is actually reconveyed to private respondents. The value of necessary and useful expenses due petitioners in the amount of One Hundred Fifty Thousand Pesos P150,000.00) having been proved and not controverted, no further proof is required. Let the records of this case be remanded to the Court of origin for the determination of the value of the entire produce, in addition to the palay crop, to which private respondents are entitled from November 11, 1959 to the time possession of subject property is delivered to them by petitioners. SO ORDERED. Barredo (Chairman), Antonio and Abad Santos, JJ., concur. Aquino, J., in the result. Concepcion Jr., * took no part.

#Footnotes 1 Rollo, p. 39. 2 Id., p. 40. 3 Id., p. 41. 4 Id., p. 44. 5 Id, p. 54. 6 Id., p. 56. 7 Id., p. 62. 8 Id., p.71. 9 Record on Appeal, pp. 1-3.

147

10 Folder of Exhibits, p. 1, Exh, "A". 11 Record on Appeal, pp. 3-4. 12 Id. pp. 8-9. 13 Id, pp. 7-9. 14 Id., pp. 9-11 15 Id, pp. 18-22; See also rollo, pp. 22, 25 and 26 (C.A. decision). 16 Rollo, p. 30 (C.A. Decision). 17 See Brief for Defendants-Petitioners, pp. 2, 3, 13 to 22. 18 Rollo P. 26 (C.A. Decision). 19 Grey Alva, et al., v. Cruz, 17 Phil. 39 (1910). 20 See Rollo, P. 25 (C.A. Decision); See also Exh. "B ", Folder of Exhibits, p. 3. 21 L-31684, June 28, 1973, 51 SCRA 416. See also De Gala-Sison vs. Manalo, L-18181, July 3l, 1963, 8 SCRA 595; Goduco vs. Court of Appeals, L-17647, June 16, 1965, 14 SCRA 282; Ramos, et al vs. Pepsi-Cola Bottling Company of the P. I., et al., L-22533, Feb. 9, 1967, 19 SCRA 289; Lucero vs. Loot, L-16995, Oct. 28,1968, 25 SCRA 687; Ramirez Telephone Corp. vs. Bank of America, L- 22614, Aug. 29, 1969, 29 SCRA 191; Chan vs. Court of Appeals, L-27488, June 30, 1970, 33 SCRA 73'1; and Mendoza vs. CA, L- 36637, July 14, 1978, 84 SCRA 67. 22 Tuason vs. Bolanos, 95 Phil. 106 (1954), reiterated in Bolanos vs. J.M. Tuason & Co.. Inc., L-25894, January 30, 1971. 23 80 Phil. 259 (1948). 24 Op. Cit., at p. 280. 25 Id., at p. 281. 26 Civil Code Act 544. 27 Civil Code, Art, 1123. 28 See note 9, supra.

148

* The date the original answer was filed is not also reflected in the records; Cf. Tacas vs. Tabon, 53 Phil. 356, 362, 363. 29 Test. of Urbano Javier, T.S.N., of Jan. 14, 1965, p. 207; See also counterclaim, Record on Appeal p. 10. 30 T.S.N. of Sept. 23, 1960, p. 5; See also Stipulation of Facts, Id, p. 8. 31 Ibid. * The then Court of Appeals Associate Justice, Hermogenes Concepcion, Jr., wrote the decision subject of this appeal.

FIRST DIVISION June 30, 1987 G.R. No. L-30597 GUILLERMO AZCONA and FE JALANDONI AZCONA, petitioners, vs. JOSE JAMANDRE, Administrator of the Intestate Estate of Cirilo Jamandre (Sp. Proc. 6921 of the Court of First Instance of Negros Occidental), and the HONORABLE COURT OF APPEALS, respondents.

CRUZ, J.: This involves the interpretation of a contract of lease which was found by the trial court to have been violated by both the plaintiff and the defendant. On appeal, its decision was modified by the respondent court in favor of the plaintiff, for which reason the defendant has now come to us in a petition for certiorari. By the said contract, 1 Guillermo Azcona (hereinafter called the petitioner) leased 80 hectares of his 150-hectare pro indiviso share in Hacienda Sta. Fe in Escalante, Negros Occidental, to Cirilo Jamandre (represented here by the administrator of his intestate estate, and hereinafter called the private respondent). The agreed yearly rental was P7,200.00. The lease was for three agricultural years beginning 1960, extendible at the lessee's option to two more agricultural years, up to 1965. The first annual rental was due on or before March 30, 1960, but because the petitioner did not deliver possession of the leased property to the respondent, he "waived" payment, as he put it, of that rental. 2 The respondent actually 149

entered the premises only on October 26, 1960, after payment by him to the petitioner of the sum of P7,000.00, which was acknowledged in the receipt later offered as Exhibit "B". On April 6, 1961, the petitioner, through his lawyer, notified the respondent that the contract of lease was deemed cancelled, terminated, and of no further effect," pursuant to its paragraph 8, for violation of the conditions specified in the said agreement. 3 Earlier, in fact, the respondent had been ousted from the possession of 60 hectares of the leased premises and left with only 20 hectares of the original area. 4 The reaction of the respondent to these developments was to file a complaint for damages against the petitioner, who retaliated with a counterclaim. As previously stated, both the complaint and the counterclaim were dismissed by the trial court * on the finding that the parties were in pari delicto. 5 The specific reasons invoked by the petitioner for canceling the lease contract were the respondent's failure: 1) to attach thereto the parcelary plan Identifying the exact area subject of the agreement, as stipulated in the contract; 2; to secure the approval by the Philippine National Bank of the said contract; and 3) to pay the rentals. 6 The parcelary plan was provided for in the contract as follows: That the LESSOR by these presents do hereby agree to lease in favor of the LESSEE a portion of the said lots above-described with an extension of EIGHTY (80) hectares, more or less, which portion is to be Identified by the parcelary plan duly marked and to be initialed by both LESSOR and LESSEE, and which parcelary plan is known as Annex "A" of this contract and considered as an integral part hereof. 7 According to the petitioners, the parcelary plan was never agreed upon or annexed to the contract, which thereby became null and void under Article 1318 of the Civil Code for lack of a subject matter. Moreover, the failure of the parties to approve and annex the said parcelary plan had the effect of a breach of the contract that justified its cancellation under its paragraph 8. 8 In one breath, the petitioner is arguing that there was no contract because there was no object and at the same time that there was a contract except that it was violated. The correct view, as we see it, is that there was an agreed subject-matter, to wit, the 80 hectares of the petitioner's share in the Sta. Fe hacienda, although it was not expressly defined because the parcelary plan was not annexed and never approved by the parties. Despite this lack, however, there was an ascertainable object because the leased premises were sufficiently Identified

150

and delineated as the petitioner admitted in his amended answer and in his direct testimony. 9 Thus, in his amended answer, he asserted that "the plaintiff . . .must delimit his work to the area previously designated and delivered." Asked during the trial how many hectares the private respondent actually occupied, the petitioner declared: "About 80 hectares. The whole 80 hectares." 10 The petitioner cannot now contradict these written and oral admissions." 11 Moreover, it appears that the failure to attach the parcelary plan to the contract is imputable to the petitioner himself because it was he who was supposed to cause the preparation of the said plan. As he testified on direct examination, "Our agreement was to sign our agreement, then I will have the parcelary plan prepared so that it will be a part of our contract." 12 That this was never done is not the respondent's fault as he had no control of the survey of the petitioner's land. Apparently, the Court of Appeals ** found, the parties impliedly decided to forego the annexing of the parcelary plan because they had already agreed on the area and limits of the leased premises. 13 The Identification of the 80 hectares being leased rendered the parcelary plan unnecessary, and its absence did not nullify the agreement. Coming next to the alleged default in the payment of the stipulated rentals, we observe first that when in Exhibit "B" the petitioner declared that "I hereby waive payment for the rentals corresponding to the crop year 1960-61 and which was due on March 30, 1960, " there was really nothing to waive because, as he himself put it in the same document, possession of the leased property "was not actually delivered" to the respondent. 14 The petitioner claims that such possession was not delivered because the approval by the PNB of the lease contract had not "materialized" due to the respondent's neglect. Such approval, he submitted, was to have been obtained by the respondents, which seems logical to us, for it was the respondent who was negotiating the loan from the PNB. As the respondent court saw it, however, "paragraph 6 (of the contract) does not state upon whom fell the obligation to secure the approval" so that it was not clear that "the fault, if any, was due solely to one or the other." 15 At any rate, that issue and the omission of the parcelary plan became immaterial when the parties agreed on the lease for the succeeding agricultural year 1961-62, the respondent paying and the petitioner receiving therefrom the sum of P7,000.00, as acknowledged in Exhibit "B," which is reproduced in full as follows: Bacolod City

151

October 26, 1960 RECEIPT RECEIVED from Mr. Cirilo Jamandre at the City of Bacolod, Philippines, this 26th day of October, 1960, Philippine National Bank Check No. 180646-A (Manager's Check Binalbagan Branch) for the amount of SEVEN THOUSAND PESOS (P7,000.00), Philippine Currency as payment for the rental corresponding to crop year 1961-62, by virtue of the contract of lease I have executed in his favor dated November 23, 1959, and ratified under Notary Public Mr. Enrique F. Marino as Doc. No. 119, Page No. 25, Book No. XII, Series of 1959. It is hereby understood, that this payment corresponds to the rentals due on or before January 30, 1961, as per contract. It is further understood that I hereby waive payment for the rentals corresponding to crop year 1960-61 and which was due on March 30, 1960, as possession of the property lease in favor of Mr. Cirilo Jamandre was not actually delivered to him, but the same to be delivered only after receipt of the amount as stated in this receipt. That Mr. Cirilo Jamandre is hereby authorized to take immediate possession of the property under lease effective today, October 26, 1960. WITNESS my hand at the City of Bacolod, Philippines, this 26th day of October, 1960. (SGD.) GUILLERMO AZCONA SIGNED IN THE PRESENCE OF: (SGD.) JOSE T. JAMANDRE Citing the stipulation in the lease contract for an annual rental of P7,200.00, the petitioner now submits that there was default in the payment thereof by the respondent because he was P200.00 short of such rental. That deficiency never having been repaired, the petitioner concludes, the contract should be deemed cancelled in accordance with its paragraph 8. 16 For his part, the respondent argues that the receipt represented an express reduction of the stipulated rental in consideration of his allowing the use of 16 hectares of the leased area by the petitioner as grazing land for his cattle. Having unqualifiedly accepted the amount of P7,000.00 as rental for the agricultural year 1961-62, the petitioner should not now be heard to argue that the payment was incomplete. 17 After a study of the receipt as signed by the petitioner and witnessed for the respondent, this Court has come to the conclusion, and so holds, that the amount of P7,000.00 paid to by the respondent and received by the petitioner represented payment in full of the rental for the agricultural year 1961-62.

152

The language is clear enough: "The amount of SEVEN THOUSAND PESOS (P7,000.00), Philippine Currency, as payment for the rental corresponding to crop year 1961-62 ... to the rental due on or before January 30, 1961, as per contract." The conclusion should be equally clear. The words "as per contract" are especially significant as they suggest that the parties were aware of the provisions of the agreement, which was described in detail elsewhere in the receipt. The rental stipulated therein was P7,200.00. The payment being acknowledged in the receipt was P7,000.00 only. Yet no mention was made in the receipt of the discrepancy and, on the contrary, the payment was acknowledged "as per contract." We read this as meaning that the provisions of the contract were being maintained and respected except only for the reduction of the agreed rental. The respondent court held that the amount of P200.00 had been condoned, but we do not think so. The petitioner is correct in arguing that the requisites of condonation under Article 1270 of the Civil Code are not present. What we see here instead is a mere reduction of the stipulated rental in consideration of the withdrawal from the leased premises of the 16 hectares where the petitioner intended to graze his cattle. The signing of Exhibit "B " by the petitioner and its acceptance by the respondent manifested their agreement on the reduction, which modified the lease contract as to the agreed consideration while leaving the other stipulations intact. The petitioner says that having admittedly been drafted by lawyer Jose Jamandre, the respondent's son, the receipt would have described the amount of P7,000.00 as "payment in full" of the rental if that were really the case. It seems to us that this meaning was adequately conveyed in the acknowledgment made by the petitioner that this was "payment for the rental corresponding to crop year 1961-62" and "corresponds to the rentals due on or before January 30, 1961, as per contract." On the other hand, if this was not the intention, the petitioner does not explain why he did not specify in the receipt that there was still a balance of P200.00 and, to be complete, the date when it was to be paid by the respondent. It is noted that the receipt was meticulously worded, suggesting that the parties were taking great pains, indeed, to provide against any possible misunderstanding, as if they were even then already apprehensive of future litigation. Such a reservation-if there was one-would have been easily incorporated in the receipt, as befitted the legal document it was intended to be. In any event, the relative insignificance of the alleged balance seems to us a paltry justification for annulling the contract for its supposed violation. If the petitioner is fussy enough to invoke it now, it stands to reason that he would

153

have fussed over it too in the receipt he willingly signed after accepting, without reservation and apparently without protest, only P7,000.00. The applicable provision is Article 1235 of the Civil Code, declaring that: Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. The petitioner says that he could not demand payment of the balance of P200.00 on October 26, 1960, date of the receipt because the rental for the crop year 1961-62 was due on or before January 30, 1961. 18 But this would not have prevented him from reserving in the receipt his right to collect the balance when it fell due. Moreover, there is no evidence in the record that when the due date arrived, he made any demand, written or verbal, for the payment of that amount. As this Court is not a trier of facts, 19 we defer to the findings of the respondent court regarding the losses sustained by the respondent on the basis of the estimated yield of the properties in question in the years he was supposed to possess and exploit them. While the calculations offered by the petitioner are painstaking and even apparently exhaustive, we do not find any grave abuse of discretion on the part of the respondent court to warrant its reversal on this matter. We also sustain the P5,000.00 attorney's fee. WHEREFORE, the decision of the respondent Court of Appeals is AFFIRMED in full, with costs against the petitioners. SO ORDERED. Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano, Gancayco and Sarmiento, JJ., concur.

Footnotes 1

Exh. A.

2

Exhibit "B"

3

Rollo, p. 66.

4

Ibid, p. 99.

*

Presided by Judge Jose F. Fernandez.

5

Id, pp. 99-101.

154

6

id, p. 99.

7

id, p. 52.

8

id, p. 15.

9

id., p. 74; TSN, p. 48, Dec. 11, 1963:

10

TSN, p. 48, Dec. 11, 1963.

11

Lianga Lumber Co. v. Lianga Timber Co., Inc., 76 SCRA 197; Cunanan V. Amparo, 80 Phil. 227. 12

**

TSN, p. 11, Dec. 11, 1963. Gatmaitan, J., ponente, Enriquez, Soriano, JJ.

13

Rollo, p. 102.

14

Exh. "B "

15

Id., p. 102.

16

id. p. 34.

17

id, p. 144.

18

id., p. 34.

19

Chemplex Phil. Inc, v. Pamatian, 57 SCRA 408.

FIRST DIVISION [G.R. No. L-52807. February 29, 1984.] JOSE ARAÑAS and LUISA QUIJENCIO ARAÑAS, Petitioners, v. HON. EDUARDO C. TUTAAN, as Judge of the Court of First Instance of Quezon City, and UNIVERSAL TEXTILE MILLS, INC., Respondents. Jose R. Francisco, for Petitioners. Reyes, Santayana, Tayao & Picazo Law Office for Respondents.

155

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; JUDGMENTS; PAYMENT OF JUDGMENT DEBT TO WRONG PARTY DOES NOT EXTINGUISH JUDGMENT DEBTOR’S OBLIGATION TO RIGHTFUL PARTY. — If UTEX chose to pay the wrong parties, notwithstanding its full knowledge and understanding of the final judgment, that it was liable to pay all dividends after the trial court’s judgment in 1971 to petitioners as the lawfully declared owners of the questioned shares of stock (but which could not be enforced against it pending the outcome of the appeal filed by the co-defendants Castañeda and Manuel in the Court of Appeals), it only had itself to blame therefor. The burden of recovery the supposed payment of the cash dividends made by UTEX to the wrong parties Castañeda and Manuel squarely falls upon itself by its own action and cannot be passed by it to petitioners as innocent parties. It is elementary that payment made by a judgment debtor to a wrong party cannot extinguish the judgment obligation of such debtor to its creditor. 2. ID.; ID.; ID.; MODIFICATION OR ALTERATION NOT ALLOWED AFTER FINALITY. — It is equally elementary that once a judgment becomes final and executory, the court which rendered it cannot change or modify the same in any material aspect such as what respondent judge has without authority attempted to do with his questioned order, which would relieve the judgment debtor UTEX of its acknowledged judgment obligation to pay to petitioners as the lawful owners of the questioned shares of stock, the cash dividends that accrued after the rendition of the judgment recognizing them as the lawful owners. 3. ID.; ID.; ID.; ID.; EXECUTION, A MATTER OF RIGHT. — Execution of a final and executory judgment according to its terms is a matter of right for the prevailing party and becomes the ministerial duty of the court.

DECISION

TEEHANKEE, J.:

In a decision rendered on May 3, 1971 by the now defunct Court of First Instance of Rizal, Branch V, at Quezon City, in Civil Case No. Q-40689 thereof, entitled "Jose Arañas, Et. Al. v. Juanito R. Castañeda, Et Al.," the said court declared that petitioner Luisa Quijencio as plaintiff (assisted by her spouse co-petitioner Jose Arañas) was the owner of 400 shares of stock of respondent Universal Textile Mills, Inc. (UTEX) as defendant issued "in the names of its 156

co-defendants Gene Manuel and B.R. Castañeda, including the stock dividends that accrued to said shares, and ordering defendant Universal Textile Mills, Inc. to cancel said certificates and issue new ones in the name of said plaintiff Luisa Quijencio Arañas and to deliver to her all dividends appertaining to same, whether in cash or in stocks." chanrobles law library : red In a motion for clarification and/or motion for reconsideration, respondent UTEX manifested, inter alia, that" (I)f this Honorable Court by the phrase ‘to deliver to her all dividends appertaining to same, whether in cash or in stocks,’ meant dividends properly pertaining to plaintiffs after the court’s declaration of plaintiffs’ ownership of said 400 shares of stock, then as defendant UTEX has always maintained it would rightfully abide by whatever decision may be rendered by this Honorable Court since such would be the logical consequence after the declaration or ruling in respect to the rightful ownership of the said shares of stock." The motion for clarification was granted by the trial court which ruled that its judgment against UTEX was to pay to Luisa Quijencio Arañas the cash dividends which accrued to the stocks in question after the rendition of this decision excluding cash dividends already paid to its co-defendants Gene Manuel and B.R. Castañeda which accrued before its decision and could not be claimed by the petitioners-spouses, as follows:jgc:chanrobles.com.ph "This in mind, clarification of the dispositive portion of the decision as aforequoted is indeed necessary, and thus made as to ordain the payment to plaintiff Luisa Quijencio Arañas of cash dividends which accrue to the stocks in question after the rendition of this decision. Cash dividends already paid to defendants which accrued before this decision may not, therefore, be claimed by plaintiffs."cralaw virtua1aw library Apparently satisfied with the clarification, UTEX neither moved for reconsideration of the order nor appealed from the judgment. Subsequently, the trial court granted the motion for new trial of the two co-defendants Manuel and Castañeda, and after such new trial, it rendered under date of October 23, 1972 its decision against them which was substantially the same as its first decision of May 3, 1971 which had already become final and executory as against UTEX, declaring petitioners-spouses the owners of the questioned shares of stock in the names of aforementioned co-defendants Castañeda and Manuel and ordering the cancellation of the certificates in their names and to issue new ones in the names of petitioners.chanrobles lawlibrary : rednad Co-defendants Castañeda and Manuel appealed this judgment of October 23, 1972 against them to the Court of Appeals (now Intermediate Appellate Court), which rendered on September 1, 1978 its judgment affirming in toto the trial court’s judgment. Said co-defendants sought to appeal the appellate’s court’s adverse judgment on a petition for review with this Court, which rendered its

157

Resolution of March 7, 1979 denying the petition for review for lack of merit and the judgment against the defendants accordingly became final and executory. At petitioners’ instance, the lower court issued a writ of execution and a specific order of December 5, 1979 directing UTEX:jgc:chanrobles.com.ph "1. To effect the cancellation of the certificates of stock in question in the names of B.R. Castañeda and Gene G. Manuel and the issuance of new ones in the names of the plaintiffs; "2. To pay the amount of P100,701.45 representing the cash dividends that accrued to the same stocks from 1972 to 1979 with interest thereon at the rate of 12% per annum from the date of the service of the writ of execution on October 3, 1979 until fully paid."cralaw virtua1aw library Upon UTEX’ motion for partial reconsideration alleging that the cash dividends of the stocks corresponding to the period from 1972 to 1979 had already been paid and delivered by it to co-defendants Castañeda and Manuel who then still appeared as the registered owners of the said shares, the lower court issued its order of January 4, 1980 granting said motion of UTEX and partially reconsidered its order "to the effect that the defendant Universal Textile Mills, Inc. is absolved from paying the cash dividend corresponding to the stocks in question to the plaintiffs for the period 1972 to 1979."cralaw virtua1aw library Hence, the present action for certiorari to set aside respondent judge’s questioned order of January 4, 1980 as having been issued without jurisdiction and for mandamus to compel respondent judge to perform his ministerial duty of ordering execution of the final and executory judgment against UTEX according to its terms. The Court finds merit in the petition and accordingly grants the same. The final and executory judgment against UTEX in favor of petitioners, declared petitioners as the owners of the questioned UTEX shares of stock as againsts its co-defendants Castañeda and Manuel. It was further made clear upon UTEX’ own motion for clarification that all dividends accruing to the said shares of stock after the rendition of the decision of August 7, 1971 which for the period from 1972 to 1979 amounted to P100,701.45 were to be paid by UTEX to petitioners, and UTEX, per the trial court’s order of clarification of June 16, 1971 above quoted had expressly maintained "it would rightfully abide by whatever decision may be rendered by this Honorable Court since such would be the logical consequence after the declaration or ruling in respect to the rightful ownership of the said shares of stock." chanrobles.com.ph : virtual law library

158

Consequently, there is no legal nor equitable basis for respondent judge’s position "that it would indeed be most unjust and inequitable to require the defendant Universal Textile Mills, Inc. to pay twice cash dividends on particular shares of stocks." 1 If UTEX nevertheless chose to pay the wrong parties, notwithstanding its full knowledge and understanding of the final judgment, that it was liable to pay all dividends after the trial court’s judgment in 1971 to petitioners as the lawfully declared owners of the questioned shares of stock (but which could not be enforced against it pending the outcome of the appeal filed by the co-defendants Castañeda and Manuel in the Court of Appeals), it only had itself to blame therefor. The burden of recovering the supposed payment of the cash dividends made by UTEX to the wrong parties Castañeda and Manuel squarely falls upon itself by its own action and cannot be passed by it to petitioners as innocent parties. It is elementary that payment made by a judgment debtor to a wrong party cannot extinguish the judgment obligation of such debtor to its creditor. It is equally elementary that once a judgment becomes final and executory, the court which rendered it cannot change or modify the same in any material aspect such as what respondent judge has without authority attempted to do with his questioned order, which would relieve the judgment debtor UTEX of its acknowledged judgment obligation to pay to petitioners as the lawful owners of the questioned shares of stock, the cash dividends that accrued after the rendition of the judgment recognizing them as the lawful owners. (Miranda v. Tiangco, 96 Phil. 626 [1955]). Execution of a final and executory judgment according to its terms is a matter of right for the prevailing party and becomes the ministerial duty of the court (De los Angeles v. Victoriano, 109 Phil. 12).chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph ACCORDINGLY, judgment is rendered setting aside the questioned order of January 4, 1980 of respondent judge and a writ of mandamus is hereby issued commanding said respondent judge to order the execution of his judgment against respondent Universal Textile Mills, Inc., pursuant to his first order of June 16, 1971 ordering it to pay the sum of P100,701.45, representing the cash dividends that accrued to petitioners’ UTEX shares of stock from 1972 to 1979, with interest thereon at the rate of 12% per annum from the date of service of the writ of execution on October 3, 1979 until fully paid, as well as to pay petitioners any subsequent cash dividends that may have been issued by it thereafter, with interest from due date of payment until actual payment, and directing the sheriff to satisfy such judgment out of the properties of respondent UTEX. With costs against respondent UTEX. This judgment is immediately executory. Plana, Escolin, * Gutierrez, Jr., and De la Fuente, JJ., concur. Endnotes:

159

1. Record, p. 28. * Justice Escolin was designated, under Special Order No. 261 dated February 29, 1984, to sit in the First Division vice regular members Justices Melencio-Herrera and Relova who took no part, having been members of the Eighth Division of the defunct Court of Appeals that rendered the decision of September 1, 1978 affirming the appealed judgment of the trial court, subject of the present petition for execution of judgment.

\

160

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-27782 July 31, 1970 OCTAVIO A. KALALO, plaintiff-appellee, vs. ALFREDO J. LUZ, defendant-appellant. Amelia K. del Rosario for plaintiff-appellee. Pelaez, Jalandoni & Jamir for defendant-appellant.

ZALDIVAR, J.: Appeal from the decision, dated, February 10, 1967, of the Court of First Instance of Rizal (Branch V, Quezon City) in its Civil Case No. Q-6561. On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter referred to as appellee), a licensed civil engineer doing business under the firm name of O. A. Kalalo and Associates, entered into an agreement (Exhibit A )1 with defendant-appellant Alfredo J . Luz (hereinafter referred to as appellant), a licensed architect, doing business under firm name of A. J. Luz and Associates, whereby the former was to render engineering design services to the latter for fees, as stipulated in the agreement. The services included design computation and sketches, contract drawing and technical specifications of all engineering phases of the project designed by O. A. Kalalo and Associates bill of quantities and cost estimate, and consultation and advice during construction relative to the work. The fees agreed upon were percentages of the architect's fee, to wit: structural engineering, 12-½%; electrical engineering, 2-½%. The agreement was subsequently supplemented by a "clarification to letter-proposal" which provided, among other things, that "the schedule of engineering fees in this agreement does not cover the following: ... D. Foundation soil exploration, testing and evaluation; E. Projects that are principally engineering works such as industrial plants, ..." and "O. A. Kalalo and Associates reserve the right to increase fees on projects ,which cost less than P100,000 ...."2 Pursuant to said agreement, appellee rendered engineering services to appellant in the following projects: (a) Fil-American Life Insurance Building at Legaspi City; 161

(b) Fil-American Life Insurance Building at Iloilo City; (c) General Milling Corporation Flour Mill at Opon Cebu; (d) Menzi Building at Ayala Blvd., Makati, Rizal; (e) International Rice Research Institute, Research center Los Baños, Laguna; (f) Aurelia's Building at Mabini, Ermita, Manila; (g) Far East Bank's Office at Fil-American Life Insurance Building at Isaac Peral Ermita, Manila; (h) Arthur Young's residence at Forbes Park, Makati, Rizal; (i) L & S Building at Dewey Blvd., Manila; and (j) Stanvac Refinery Service Building at Limay, Bataan. On December 1 1, '1961, appellee sent to appellant a statement of account (Exhibit "1"),3 to which was attached an itemized statement of defendant-appellant's account (Exh. "1-A"), according to which the total engineering fee asked by appellee for services rendered amounted to P116,565.00 from which sum was to be deducted the previous payments made in the amount of P57,000.00, thus leaving a balance due in the amount of P59,565.00. On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to appellant. amounted to P10,861.08 instead of the amount claimed by the appellee. On June 14, 1962 appellant sent appellee a check for said amount, which appellee refused to accept as full payment of the balance of the fees due him. On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action. In the first cause of action, appellee alleged that for services rendered in connection with the different projects therein mentioned there was due him fees in sum s consisting of $28,000 (U.S.) and P100,204.46, excluding interests, of which sums only P69,323.21 had been paid, thus leaving unpaid the $28,000.00 and the balance of P30,881.25. In the second cause of action, appellee claimed P17,000.00 as consequential and moral damages; in the third cause of action claimed P55,000.00 as moral damages, attorney's fees and expenses of litigation; and in the fourth cause of action he claimed P25,000.00 as actual damages, and also for attorney's fees and expenses of litigation. In his answer, appellant admitted that appellee rendered engineering services, as alleged in the first cause of action, but averred that some of appellee's 162

services were not in accordance with the agreement and appellee's claims were not justified by the services actually rendered, and that the aggregate amount actually due to appellee was only P80,336.29, of which P69,475.21 had already been paid, thus leaving a balance of only P10,861.08. Appellant denied liability for any damage claimed by appellee to have suffered, as alleged in the second, third and fourth causes of action. Appellant also set up affirmative and special defenses, alleging that appellee had no cause of action, that appellee was in estoppel because of certain acts, representations, admissions and/or silence, which led appellant to believe certain facts to exist and to act upon said facts, that appellee's claim regarding the Menzi project was premature because appellant had not yet been paid for said project, and that appellee's services were not complete or were performed in violation of the agreement and/or otherwise unsatisfactory. Appellant also set up a counterclaim for actual and moral damages for such amount as the court may deem fair to assess, and for attorney's fees of P10,000.00. Inasmuch as the pleadings showed that the appellee's right to certain fees for services rendered was not denied, the only question being the assessment of the proper fees and the balance due to appellee after deducting the admitted payments made by appellant, the trial court, upon agreement of the parties, authorized the case to be heard before a Commissioner. The Commissioner rendered a report which, in resume, states that the amount due to appellee was $28,000.00 (U.S.) as his fee in the International Research Institute Project which was twenty percent (20%) of the $140,000.00 that was paid to appellant, and P51,539.91 for the other projects, less the sum of P69,475.46 which was already paid by the appellant. The Commissioner also recommended the payment to appellee of the sum of P5,000.00 as attorney's fees. At the hearing on the Report of the Commissioner, the respective counsel of the parties manifested to the court that they had no objection to the findings of fact of the Commissioner contained in the Report, and they agreed that the said Report posed only two legal issues, namely: (1) whether under the facts stated in the Report, the doctrine of estoppel would apply; and (2) whether the recommendation in the Report that the payment of the amount. due to the plaintiff in dollars was legally permissible, and if not, at what rate of exchange it should be paid in pesos. After the parties had submitted their respective memorandum on said issues, the trial court rendered its decision dated February 10, 1967, the dispositive portion of which reads as follows: WHEREFORE, judgment is rendered in favor of plaintiff and against the defendant, by ordering the defendant to pay plaintiff the sum of P51,539.91 and $28,000.00, the latter to be converted into the Philippine currency on the basis of the current rate of exchange at the time of the payment of this judgment, as certified to by the Central Bank of the Philippines, from which shall be deducted the sum of P69,475.46, which the defendant had paid the plaintiff, and the legal rate of interest thereon from the filing of the complaint in the case until fully paid for; by ordering the defendant to pay to plaintiff the 163

further sum of P8,000.00 by way of attorney's fees which the Court finds to be reasonable in the premises, with costs against the defendant. The counterclaim of the defendant is ordered dismissed. From the decision, this appeal was brought, directly to this Court, raising only questions of law. During the pendency of this appeal, appellee filed a petition for the issuance of a writ of attachment under Section 1 (f) of Rule 57 of the Rules of Court upon the ground that appellant is presently residing in Canada as a permanent resident thereof. On June 3, 1969, this Court resolved, upon appellee's posting a bond of P10,000.00, to issue the writ of attachment, and ordered the Provincial Sheriff of Rizal to attach the estate, real and personal, of appellant Alfredo J. Luz within the province, to the value of not less than P140,000.00. The appellant made the following assignments of errors: I. The lower court erred in not declaring and holding that plaintiff-appellee's letter dated December 11, 1961 (Exhibit "1") and the statement of account (Exhibit "1-A") therein enclosed, had the effect, cumulatively or alternatively, of placing plaintiff-appellee in estoppel from thereafter modifying the representations made in said exhibits, or of making plaintiff-appellee otherwise bound by said representations, or of being of decisive weight in determining the true intent of the parties as to the nature and extent of the engineering services rendered and/or the amount of fees due. II. The lower court erred in declaring and holding that the balance owing from defendant-appellant to plaintiff-appellee on the IRRI Project should be paid on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of payment of judgment. . III. The lower court erred in not declaring and holding that the aggregate amount of the balance due from defendant-appellant to plaintiff-appellee is only P15,792.05. IV. The lower court erred in awarding attorney's fees in the sum of P8,000.00, despite the commissioner's finding, which plaintiff-appellee has accepted and has not questioned, that said fee be only P5,000.00; and V. The lower court erred in not granting defendant-appellant relief on his counter-claim. 1. In support of his first assignment of error appellant argues that in Exhibit 1-A, which is a statement of accounts dated December 11, 1961, sent by appellee to appellant, appellee specified the various projects for which he claimed engineering fees, the precise amount due on each particular engineering service rendered on each of the various projects, and the total of his claims; 164

that such a statement barred appellee from asserting any claim contrary to what was stated therein, or from taking any position different from what he asserted therein with respect to the nature of the engineering services rendered; and consequently the trial court could not award fees in excess of what was stated in said statement of accounts. Appellant argues that for estoppel to apply it is not necessary, contrary to the ruling of the trial court, that the appellant should have actually relied on the representation, but that it is sufficient that the representations were intended to make the defendant act there on; that assuming arguendo that Exhibit 1-A did not put appellee in estoppel, the said Exhibit 1-A nevertheless constituted a formal admission that would be binding on appellee under the law on evidence, and would not only belie any inconsistent claim but also would discredit any evidence adduced by appellee in support of any claim inconsistent with what appears therein; that, moreover, Exhibit 1-A, being a statement of account, establishes prima facie the accuracy and correctness of the items stated therein and its correctness can no longer be impeached except for fraud or mistake; that Exhibit 1-A furthermore, constitutes appellee's own interpretation of the contract between him and appellant, and hence, is conclusive against him. On the other hand, appellee admits that Exhibit 1-A itemized the services rendered by him in the various construction projects of appellant and that the total engineering fees charged therein was P116,565.00, but maintains that he was not in estoppel: first, because when he prepared Exhibit 1-A he was laboring under an innocent mistake, as found by the trial court; second, because appellant was not ignorant of the services actually rendered by appellee and the fees due to the latter under the original agreement, Exhibit "A." We find merit in the stand of appellee. The statement of accounts (Exh. 1-A) could not estop appellee, because appellant did not rely thereon as found by the Commissioner, from whose Report we read: While it is true that plaintiff vacillated in his claim, yet, defendant did not in anyway rely or believe in the different claims asserted by the plaintiff and instead insisted on a claim that plaintiff was only entitled to P10,861.08 as per a separate resume of fees he sent to the plaintiff on May 18, 1962 (See Exhibit 6).4 The foregoing finding of the Commissioner, not disputed by appellant, was adopted by the trial court in its decision. Under article 1431 of the Civil Code, in order that estoppel may apply the person, to whom representations have been made and who claims the estoppel in his favor must have relied or acted on such representations. Said article provides:

165

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. An essential element of estoppel is that the person invoking it has been influenced and has relied on the representations or conduct of the person sought to be estopped, and this element is wanting in the instant case. In Cristobal vs. Gomez,5 this Court held that no estoppel based on a document can be invoked by one who has not been mislead by the false statements contained therein. And in Republic of the Philippines vs. Garcia, et al.,6 this Court ruled that there is no estoppel when the statement or action invoked as its basis did not mislead the adverse party-Estoppel has been characterized as harsh or odious and not favored in law.7 When misapplied, estoppel becomes a most effective weapon to accomplish an injustice, inasmuch as it shuts a man's mouth from speaking the truth and debars the truth in a particular case.8 Estoppel cannot be sustained by mere argument or doubtful inference: it must be clearly proved in all its essential elements by clear, convincing and satisfactory evidence.9 No party should be precluded from making out his case according to its truth unless by force of some positive principle of law, and, consequently, estoppel in pains must be applied strictly and should not be enforced unless substantiated in every particular. 1 0 The essential elements of estoppel in pais may be considered in relation to the party sought to be estopped, and in relation to the party invoking the estoppel in his favor. As related to the party to be estopped, the essential elements are: (1) conduct amounting to false representation or concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation that his conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the real facts. As related to the party claiming the estoppel, the essential elements are (1) lack of knowledge and of the means of knowledge of the truth as the facts in questions; (2) (reliance, in good faith, upon the conduct or statements of the party to be estopped; (3) action or inaction based thereon of such character as To change the position or status of the party claiming the estoppel, to his injury, detriment or prejudice. 1 1 The first essential element in relation to the party sought to be estopped does not obtain in the instant case, for, as appears in the Report of the Commissioner, appellee testified "that when he wrote Exhibit 1 and prepared Exhibit 1-A, he had not yet consulted the services of his counsel and it was only upon advice of counsel that the terms of the contract were interpreted to him resulting in his subsequent letters to the defendant demanding payments of his fees pursuant to the contract Exhibit A." 1 2 This finding of the Commissioner was adopted by the trial court. 1 3 It is established , therefore, that Exhibit 1-A was written by appellee through ignorance or mistake. Anent this matter, it has been held that if an act, conduct or misrepresentation of the 166

party sought to be estopped is due to ignorance founded on innocent mistake, estoppel will not arise. 1 4 Regarding the essential elements of estoppel in relation to the party claiming the estoppel, the first element does not obtain in the instant case, for it cannot be said that appellant did not know, or at least did not have the means of knowing, the services rendered to him by appellee and the fees due thereon as provided in Exhibit A. The second element is also wanting, for, as adverted to, appellant did not rely on Exhibit 1-A but consistently denied the accounts stated therein. Neither does the third element obtain, for appellant did not act on the basis of the representations in Exhibit 1-A, and there was no change in his position, to his own injury or prejudice. Appellant, however, insists that if Exhibit 1-A did not put appellee in estoppel, it at least constituted an admission binding upon the latter. In this connection, it cannot be gainsaid that Exhibit 1-A is not a judicial admission. Statements which are not estoppels nor judicial admissions have no quality of conclusiveness, and an opponent. whose admissions have been offered against him may offer any evidence which serves as an explanation for his former assertion of what he now denies as a fact. This may involve the showing of a mistake. Accordingly, in Oas vs. Roa, 1 6 it was held that when a party to a suit has made an admission of any fact pertinent to the issue involved, the admission can be received against him; but such an admission is not conclusive against him, and he is entitled to present evidence to overcome the effect of the admission. Appellee did explain, and the trial court concluded, that Exhibit 1-A was based on either his ignorance or innocent mistake and he, therefore, is not bound by it. Appellant further contends that Exhibit 1-A being a statement of account, establishes prima facie the accuracy and correctness of the items stated therein. If prima facie, as contended by appellant, then it is not absolutely conclusive upon the parties. An account stated may be impeached for fraud, mistake or error. In American Decisions, Vol. 62, p. 95, cited as authority by appellant himself. we read thus: An account stated or settled is a mere admission that the account is correct. It is not an estoppel. The account is still open to impeachment for mistakes or errors. Its effect is to establish, prima facie, the accuracy of the items without other proof; and the party seeking to impeach it is bound to show affirmatively the mistake or error alleged. The force of the admission and the strength of the evidence necessary to overcome it will depend upon the circumstances of the case. In the instant case, it is Our view that the ignorance mistake that attended the writing of Exhibit 1-A by appellee was sufficient to overcome the prima facie evidence of correctness and accuracy of said Exhibit 1-A. Appellant also urges that Exhibit 1-A constitutes appellee's own interpretation of the contract, and is, therefore, conclusive against him. Although the practical 167

construction of the contract by one party, evidenced by his words or acts, can be used against him in behalf of the other party, 1 7 yet, if one of the parties carelessly makes a wrong interpretation of the words of his contract, or performs more than the contract requires (as reasonably interpreted independently of his performance), as happened in the instant case, he should be entitled to a restitutionary remedy, instead of being bound to continue to his erroneous interpretation or his erroneous performance and "the other party should not be permitted to profit by such mistake unless he can establish an estoppel by proving a material change of position made in good faith. The rule as to practical construction does not nullify the equitable rules with respect to performance by mistake." 1 8 In the instant case, it has been shown that Exhibit 1-A was written through mistake by appellee and that the latter is not estopped by it. Hence, even if said Exhibit 1-A be considered as practical construction of the contract by appellee, he cannot be bound by such erroneous interpretation. It has been held that if by mistake the parties followed a practice in violation of the terms of the agreement, the court should not perpetuate the error. 1 9 2. In support of the second assignment of error, that the lower court erred in holding that the balance from appellant on the IRRI project should be paid on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of payment of the judgment, appellant contends: first, that the official rate at the time appellant received his architect's fees for the IRRI project, and correspondingly his obligation to appellee's fee on August 25, 1961, was P2.00 to $1.00, and cites in support thereof Section 1612 of the Revised Administrative Code, Section 48 of Republic Act 265 and Section 6 of Commonwealth Act No. 699; second, that the lower court's conclusion that the rate of exchange to be applied in the conversion of the $28,000.00 is the current rate of exchange at the time the judgment shall be satisfied was based solely on a mere presumption of the trial court that the defendant did not convert, there being no showing to that effect, the dollars into Philippine currency at the official rate, when the legal presumption should be that the dollars were converted at the official rate of $1.00 to P2.00 because on August 25, 1961, when the IRRI project became due and payable, foreign exchange controls were in full force and effect, and partial decontrol was effected only afterwards, during the Macapagal administration; third, that the other ground advanced by the lower court for its ruling, to wit, that appellant committed a breach of his obligation to turn over to the appellee the engineering fees received in U.S. dollars for the IRRI project, cannot be upheld, because there was no such breach, as proven by the fact that appellee never claimed in Exhibit 1-A that he should be paid in dollars; and there was no provision in the basic contract (Exh. "A") that he should be paid in dollars; and, finally, even if there were such provision, it would have no binding effect under the provision of Republic Act 529; that, moreover, it cannot really be said that no payment was made on that account for appellant had already paid P57,000.00 to appellee, and under Article 125 of the Civil Code, said payment could be said

168

to have been applied to the fees due from the IRRI project, this project being the biggest and this debt being the most onerous. In refutation of appellant's argument in support of the second assignment of error, appellee argues that notwithstanding Republic Act 529, appellant can be compelled to pay the appellee in dollars in view of the fact that appellant received his fees in dollars, and appellee's fee is 20% of appellant's fees; and that if said amount is be converted into Philippine Currency, the rate of exchange should be that at the time of the execution of the judgment. 2 0 We have taken note of the fact that on August 25, 1961, the date when appellant said his obligation to pay appellee's fees became due, there was two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, and the free market rate. It was so provided in Circular No. 121 of the Central Bank of the Philippines, dated March 2, 1961. amending an earlier Circular No. 117, and in force until January 21, 1962 when it was amended by Circular No. 133, thus: 1. All foreign exchange receipts shall be surrendered to the Central Bank of those authorized to deal in foreign exchange as follows: Percentage of Total to be surrendered at Preferred: Free Market Rate: Rate: (a) Export Proceeds, U.S. Government Expenditures invisibles other than those specifically mentioned below. ................................................ 25 75 (b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of Veterans and Filipino Citizens; and Personal Expenses of Diplomatic Per personnel ................................. 100"2 1 The amount of $140,000.00 received by appellant foil the International Rice Research Institute project is not within the scope of sub-paragraph (a) of paragraph No. 1 of Circular No. 121. Appellant has not shown that 25% of said amount had to be surrendered to the Central Bank at the preferred rate because it was either export proceeds, or U.S. Government expenditures, or invisibles not included in sub-paragraph (b). Hence, it cannot be said that the trial court erred in presuming that appellant converted said amount at the free market rate. It is hard to believe that a person possessing dollars would exchange his dollars at the preferred rate of P2.00 to $1.00, when he is not obligated to do so, rather than at the free market rate which is much higher. A person is presumed to take ordinary care of his concerns, and that the ordinary course of business has been followed. 2 2 Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of $28,000.00. Appellee, however, cannot oblige the appellant 169

to pay him in dollars, even if appellant himself had received his fee for the IRRI project in dollars. This payment in dollars is prohibited by Republic Act 529 which was enacted on June 16, 1950. Said act provides as follows: SECTION 1. Every provision contained in, or made with respect to, any obligation which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. Every obligation heretofore or here after incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That, ( a) if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred, (b) except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and currency, including Central Bank notes, heretofore or hereafter issued and declared by the Government of the Philippines shall be legal tender for all debts, public and private. Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the enactment of the Act and require payment in a particular kind of coin or currency other than the Philippine currency the same shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred. As We have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now before Us the obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of $28,000.00, accrued on August 25, 1961, or after the enactment of Republic Act 529. It follows that the provision of Republic Act 529 which requires payment at the prevailing rate of exchange when the obligation was incurred cannot be applied. Republic Act 529 does not provide for the rate of exchange for the payment of obligation incurred after the enactment of said Act. The logical Conclusion, therefore, is that the rate of exchange should be that prevailing at the time of payment. This view finds support in the ruling of this Court in the case of Engel vs. Velasco & Co. 2 3 where this Court held that even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be expressed in Philippine currency at the rate of exchange at the time of judgment rather than at the rate of exchange prevailing on the date of defendant's breach. This is also the ruling of American court as follows:

170

The value in domestic money of a payment made in foreign money is fixed with respect to the rate of exchange at the time of payment. (70 CJS p. 228) According to the weight of authority the amount of recovery depends upon the current rate of exchange, and not the par value of the particular money involved. (48 C.J. 605-606) The value in domestic money of a payment made in foreign money is fixed in reference to the rate of exchange at the time of such payment. (48 C.J. 605) It is Our considered view, therefore, that appellant should pay the appellee the equivalent in pesos of the $28,000.00 at the free market rate of exchange at the time of payment. And so the trial court did not err when it held that herein appellant should pay appellee $28,000.00 "to be converted into the Philippine currency on the basis of the current rate of exchange at the time of payment of this judgment, as certified to by the Central Bank of the Philippines, ...." 24 Appellant also contends that the P57,000.00 that he had paid to appellee should have been applied to the due to the latter on the IRRI project because such debt was the most onerous to appellant. This contention is untenable. The Commissioner who was authorized by the trial court to receive evidence in this case, however, reports that the appellee had not been paid for the account of the $28,000.00 which represents the fees of appellee equivalent to 20% of the $140,000.00 that the appellant received as fee for the IRRI project. This is a finding of fact by the Commissioner which was adopted by the trial court. The parties in this case have agreed that they do not question the finding of fact of the Commissioner. Thus, in the decision appealed from the lower court says: At the hearing on the Report of the Commissioner on February 15, 1966, the counsels for both parties manifested to the court that they have no objection to the findings of facts of the Commissioner in his report; and agreed that the said report only poses two (2)legal issues, namely: (1) whether under the facts stated in the Report, the doctrine of estoppel will apply; and (2) whether the recommendation in the Report that the payment of amount due to the plaintiff in dollars is permissible under the law, and, if not, at what rate of exchange should it be paid in pesos (Philippine currency) .... 2 5 In the Commissioner's report, it is spetifically recommended that the appellant be ordered to pay the plaintiff the sum of "$28,000. 00 or its equivalent as the fee of the plaintiff under Exhibit A on the IRRI project." It is clear from this report of the Commissioner that no payment for the account of this $28,000.00 had been made. Indeed, it is not shown in the record that the peso equivalent of the $28,000.00 had been fixed or agreed upon by the parties at the different times when the appellant had made partial payments to the appellee. 3. In his third assignment of error, appellant contends that the lower court erred in not declaring that the aggregate amount due from him to appellee is only 171

P15,792.05. Appellant questions the propriety or correctness of most of the items of fees that were found by the Commissioner to be due to appellee for services rendered. We believe that it is too late for the appellant to question the propriety or correctness of those items in the present appeal. The record shows that after the Commissioner had submitted his report the lower court, on February 15, 1966, issued the following order: When this case was called for hearing today on the report of the Commissioner, the counsels of the parties manifested that they have no objection to the findings of facts in the report. However, the report poses only legal issues, namely: (1) whether under the facts stated in the report, the doctrine of estoppel will apply; and (2) whether the recommendation in the report that the alleged payment of the defendant be made in dollars is permissible by law and, if not, in what rate it should be paid in pesos (Philippine Currency). For the purpose of resolving these issues the parties prayed that they be allowed to file their respective memoranda which will aid the court in the determination of said issues. 2 6 In consonance with the afore-quoted order of the trial court, the appellant submitted his memorandum which opens with the following statements: As previously manifested, this Memorandum shall be confined to: (a) the finding in the Commissioner's Report that defendant's defense of estoppel will not lie (pp. 17-18, Report); and (b) the recommendation in the Commissioner's Report that defendant be ordered to pay plaintiff the sum of '$28,000.00 (U.S.) or its equivalent as the fee of the plaintiff under Exhibit 'A' in the IRRI project.' More specifically this Memorandum proposes to demonstrate the affirmative of three legal issues posed, namely: First: Whether or not plaintiff's letter dated December 11, 1961 (Exhibit 'I') and/or Statement of Account (Exhibit '1-A') therein enclosed has the effect of placing plaintiff in estoppel from thereafter modifying the representations made in said letter and Statement of Account or of making plaintiff otherwise bound thereby; or of being decisive or great weight in determining the true intent of the parties as to the amount of the engineering fees owing from defendant to plaintiff; Second: Whether or not defendant can be compelled to pay whatever balance is owing to plaintiff on the IRRI (International Rice and Research Institute) project in United States dollars; and Third: Whether or not in case the ruling of this Honorable Court be that defendant cannot be compelled to pay plaintiff in United States dollars, the 172

dollar-to-peso convertion rate for determining the peso equivalent of whatever balance is owing to plaintiff in connection with the IRRI project should be the 2 to 1 official rate and not any other rate. 2 7 It is clear, therefore, that what was submitted by appellant to the lower court for resolution did not include the question of correctness or propriety of the amounts due to appellee in connection with the different projects for which the appellee had rendered engineering services. Only legal questions, as above enumerated, were submitted to the trial court for resolution. So much so, that the lower court in another portion of its decision said, as follows: The objections to the Commissioner's Report embodied in defendant's memorandum of objections, dated March 18, 1966, cannot likewise be entertained by the Court because at the hearing of the Commissioner's Report the parties had expressly manifested that they had no objection to the findings of facts embodied therein. We, therefore hold that the third assignment of error of the appellant has no merit. 4. In his fourth assignment of error, appellant questions the award by the lower court of P8,000.00 for attorney's fees. Appellant argues that the Commissioner, in his report, fixed the sum of P5,000.00 as "just and reasonable" attorney's fees, to which amount appellee did not interpose any objection, and by not so objecting he is bound by said finding; and that, moreover, the lower court gave no reason in its decision for increasing the amount to P8,000.00. Appellee contends that while the parties had not objected to the findings of the Commissioner, the assessment of attorney's fees is always subject to the court's appraisal, and in increasing the recommended fees from P5,000.00 to P8,000.00 the trial court must have taken into consideration certain circumstances which warrant the award of P8,000.00 for attorney's fees. We believe that the trial court committed no error in this connection. Section 12 of Rule 33 of the Rules of Court, on which the fourth assignment of error is presumably based, provides that when the parties stipulate that a commissioner's findings of fact shall be final, only questions of law arising from the facts mentioned in the report shall thereafter be considered. Consequently, an agreement by the parties to abide by the findings of fact of the commissioner is equivalent to an agreement of facts binding upon them which the court cannot disregard. The question, therefore, is whether or not the estimate of the reasonable fees stated in the report of the Commissioner is a finding of fact. The report of the Commissioner on this matter reads as follows:

173

As regards attorney's fees, under the provisions of Art 2208, par (11), the same may be awarded, and considering the number of hearings held in this case, the nature of the case (taking into account the technical nature of the case and the voluminous exhibits offered in evidence), as well as the way the case was handled by counsel, it is believed, subject to the Court's appraisal of the matter, that the sum of P5,000.00 is just and reasonable as attorney's fees." 28 It is thus seen that the estimate made by the Commissioner was an expression of belief, or an opinion. An opinion is different from a fact. The generally recognized distinction between a statement of "fact" and an expression of "opinion" is that whatever is susceptible of exact knowledge is a matter of fact, while that not susceptible of exact knowledge is generally regarded as an expression of opinion. 2 9 It has also been said that the word "fact," as employed in the legal sense includes "those conclusions reached by the trior from shifting testimony, weighing evidence, and passing on the credit of the witnesses, and it does not denote those inferences drawn by the trial court from the facts ascertained and settled by it. 3 0 In the case at bar, the estimate made by the Commissioner of the attorney's fees was an inference from the facts ascertained by him, and is, therefore, not a finding of facts. The trial court was, consequently, not bound by that estimate, in spite of the manifestation of the parties that they had no objection to the findings of facts of the Commissioner in his report. Moreover, under Section 11 of Rule 33 of the Rules of Court, the court may adopt, modify, or reject the report of the commissioner, in whole or in part, and hence, it was within the trial court's authority to increase the recommended attorney's fees of P5,000.00 to P8,000.00. It is a settled rule that the amount of attorney's fees is addressed to the sound discretion of the court. 3 1 It is true, as appellant contends, that the trial court did not state in the decision the reasons for increasing the attorney's fees. The trial court, however, had adopted the report of the Commissioner, and in adopting the report the trial court is deemed to have adopted the reasons given by the Commissioner in awarding attorney's fees, as stated in the above-quoted portion of the report. Based on the reasons stated in the report, the trial court must have considered that the reasonable attorney's fees should be P8,000.00. Considering that the judgment against the appellant would amount to more than P100,000.00, We believe that the award of P8,000.00 for attorney's fees is reasonable. 5. In his fifth assignment of error appellant urges that he is entitled to relief on his counterclaim. In view of what We have stated in connection with the preceding four assignments of error, We do not consider it necessary to dwell any further on this assignment of error. WHEREFORE, the decision appealed from is affirmed, with costs against the defendant-appellant. It is so ordered.

174

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

# Footnotes 1 Annex A to complaint, pp. 18-21, Record on Appeal. 2 Record on Appeal, pp. 21-26. 3 Record on Appeal, pp. 115-118. 4 Record on Appeal, p. 96. 5 50 Phil. 810, 821. 6 91 Phil. 46, 49. 7 Coronel, 7 et al. vs. CIR, et al., 24 -SCRA, 990, 996. 8 28 Am. Jur., 2d. , pp. 601-602. 9 Rivers vs. Metropolitan Life Ins. Co. of New York, 6 NY 2d. 3, 5. 10 28 Am. Jur. 2d. p. 642. 11 Art. 1437, Civil Code. 28 Am. Jur. 2d, pp. 640-641; Reyes and Puno, an Outline of Philippine Civil Law, Vol. IV, p. 277. 12 Record on appeal, pp. 95-96. 13 Record on Appeal, p. 155. 14 Ramiro vs. Grato 54 Phil. 744, 750; Coleman vs. Southern Pacific Co., 14 Cal App. 2d 121, 296 P2d 386. 15 Wigmore, Evidence, 3d ed., Vol. IV. pp. 21-23. 16 7 Phil. 20, 22. 17 Corbin On Contracts, Vol. 3, P. 145. 18 Corbin On Contracts, Vol. 3, p. 147, and cases cited therein. 19 In re Chicago & E. 1. Rv. Co., 94 F2d 296; Boucher vs. Godfrey, 178 A 655, 119 Conn 622.

175

20 Citing 48 CJ, 605, 606-607 in support of his submission. 21 Arthur P. Bacomo Central Bank Circulars and Memoranda, 1949- 1968, p. 389. 22 Rule 131, See. 5, pars. (d) and (g), Rules of Court. 23 47 Phil 115, 142. 24 This ruling modifies the decision in Arrieta vs. National Rice and Corn Corporation, L-15645, January 31, 1964 (10 SCRA 79), where it was held that the obligation based on dollar should be converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was incurred, or on July 1, 1952. The provision of Rep. Act 529 was wrong applied in this case, because the obligation arose after the enactment of Rep. Act 529 (June 16, 1950). The rate of exchange prevailing at the time the obligation was incurred would apply only to obligations that were incurred prior to the enactment of Rep. Act 529, but not to obligations incurred after the enactment of said Act. 25 Record on Appeal, p. 149. 26 Record on Appeal, p. 99. 27 Record on Appeal, pp. 113-115. 28 Record on Appeal, p. 97; emphasis supplied. 29 Pitney Bomes Inc. vs. Sirkle et al., 248 S. W. 2d. 920. 30 Porter vs. Industrial Commission of Wisconsin, et al., 173 Wis. 267, 181 N.W. 317, 318. 31 San Miguel Brewery, Inc. vs. Magno, L-21879, Sept. 29, 1967, 21 SCRA 292.

176

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-49494 May 31, 1979 NELIA G. PONCE and VICENTE C. PONCE, petitioners, vs. THE HONORABLE COURT OF APPEALS, and JESUSA B. AFABLE, respondents. Romeo L. Mendoza & Gallardo S. Tongohan for petitioners. Ramon M. Velayo for private respondent.

MELENCIO-HERRERA, J.: This is a Petition for Certiorari seeking to set aside the Resolution of the Court of Appeals, dated June 8, 1978, reconsidering its Decision dated December 17, 1977 and reversing the judgment of the Court of First Instance of Manila in favor of petitioners as well as the Resolutions, dated July 6, 1978 and November 27, 1978, denying petitioners' Motion for Reconsideration. The factual background of the case is as follows: On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza and Ma. Aurora C. Diño executed a promissory note in favor of petitioner Nelia G. Ponce in the sum of P814,868.42, Philippine Currency, payable, without interest, on or before July 31, 1969. It was further provided therein that should the indebtedness be not paid at maturity, it shall draw interest at 12% per annum, without demand; that should it be necessary to bring suit to enforce pay ment of the note, the debtors shall pay a sum equivalent to 10% of the total amount due for attorney's fees; and, in the event of failure to pay the indebtedness plus interest in accordance with its terms, the debtors shall execute a first mortgage in favor of the creditor over their properties or of the Carmen Planas Memorial, Inc. Upon the failure of the debtors to comply with the terms of the promissory note, petitioners (Nelia G. Ponce and her husband) filed, on July 27, 1970, a Complaint against them with the Court of First Instance of Manila for the recovery of the principal sum of P814,868.42, plus interest and damages. 177

Defendant Ma. Aurora C. Diño's Answer consisted more of a general denial and the contention that she did not borrow any amount from plaintiffs and that her signature on the promissory note was obtained by plaintiffs on their assurance that the same was for " formality only." Defendant Jesusa B. Afable, for her part, asserted in her Answer that the promissory note failed to express the true intent and agreement of the parties, the true agreement being that the obligation therein mentioned would be assumed and paid entirely by defendant Felisa L. Mendoza; that she had signed said document only as President of the Carmen Planas Memorial, Inc., and that she was not to incur any personal obligation as to the payment thereof because the same would be repaid by defendant Mendoza and/or Carmen Planas Memorial, Inc. In her Amended Answer, defendant Felisa L. Mendoza admitted the authenticity and due execution of the promissory note, but averred that it was a recapitulation of a series of transactions between her and the plaintiffs, "with defendant Ma. Aurora C. Diño and Jesusa B. Afable coming only as accomodation parties." As affirmative defense, defendant Mendoza contended that the promissory note was the result of usurious transactions, and, as counterclaim, she prayed that plaintiffs be ordered to account for all the interests paid. Plaintiffs filed their Answer to defendant Mendoza's counterclaim denying under oath the allegations of usury. After petitioners had rested, the case was deemed submitted for decision since respondent Afable and her co-debtors had repeatedly failed to appear before the trial Court for the presentation of their evidence. On March 9, 1972, the trial Court rendered judgment ordering respondent Afable and her co-debtors, Felisa L. Mendoza and Ma. Aurora C. Diño , to pay petitioners, jointly and severally, the sum of P814,868.42, plus 12% interest per annum from July 31, 1969 until full payment, and a sum equivalent to 10% of the total amount due as attorney's fees and costs. From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that the contract under consideration involved the payment of US dollars and was, therefore, illegal; and that under the in pari delicto rule, since both parties are guilty of violating the law, neither one can recover. It is to be noted that said defense was not raised in her Answer. On December 13, 1977, the Court of Appeals* rendered judgment affirming the decision of the trial Court. In a Resolution dated February 27, 1978, the Court of Appeals,** denied respondent's Motion for Reconsideration. However, in a Resolution dated June 8, 1978, the Court of Appeals acting on the Second Motion for Reconsideration filed by private respondent, set aside the Decision 178

of December 13, 1977, reversed the judgment of the trial Court and dismissed the Complaint. The Court of Appeals opined that the intent of the parties was that the promissory note was payable in US dollars, and, therefore, the transaction was illegal with neither party entitled to recover under the in pari delicto rule. Their Motions for Reconsideration having been denied in the Resolutions dated July 6, 1978 and November 27, 1978, petitioners filed the instant Petition raising the following Assignments of Error. I THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE PROMISSORY NOTE EVIDENCING THE TRANSACTION OF THE PARTIES IS PAYABLE IN U.S. DOLLARS THEREBY DETERMINING THE INTENT OF THE PARTIES OUTSIDE OF THEIR PROMISSORY NOTE DESPITE LACK OF SHOWING THAT IT FAILED TO EXPRESS THE TRUE INTENT OR AGREEMENT OF THE PARTIES AND ITS PAYABILITY IN PHILIPPINE PESOS WHICH IS EXPRESSED, AMONG OTHERS, BY ITS CLEAR AND PRECISE TERMS. II THE RESPONDENT COURT, OF APPEALS ERRED IN HOLDING THAT REPUBLIC ACT 529, OTHERWISE KNOWN ASIAN ACT TO ASSURE UNIFORM VALUE TO PHILIPPINE COINS AND CURRENCY,' COVERS THE TRANSACTION OF THE PARTIES HEREIN. III THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT PRIVATE RESPONDENT JESUSA B. AFABLE COULD NOT FAVORABLY AVAIL HERSELF OF THE DEFENSE OF ALLEGED APPLICABILITY OF REPUBLIC ACT 529 AND THE DOCTRINE OF IN PARI DELICTO AS THESE WERE NOT PLEADED NOR ADOPTED BY HER IN THE TRIAL. IV THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING ASSUMING ARGUENDO THAT REPUBLIC ACT 529 COVERS THE PARTIES TRANSACTION, THAT THE Doctrine OF IN PARI DELICTO DOES NOT APPLY AND THE PARTIES AGREEMENT WAS NOT NULL AND VOID PURSUANT TO THE RULING IN OCTAVIO A. KALALO VS. ALFREDO J. LUZ, NO.-27782, JULY 31, 1970. In the Resolution dated June 8, 1978, the Court of Appeals made the following observations: 179

We are convinced from the evidence that the amount awarded by the lower Court was indeed owed by the defendants to the plaintiffs. However, the sole issue raised in this second motion for reconconsideration is not the existence of the obligation itself but the legality of the subject matter of the contract. If the subject matter is illegal and against public policy, the doctrine of pari delicto applies. xxx xxx xxx We are constrained to reverse our December 13, 1977 decision. While it is true that the promissory note does not mention any obligation to pay in dollars, plaintiff-appellee Ponce himself admitted that there was an agreement that he would be paid in dollars by the defendants. The promissory note is payable in U.S. donors. The in. tent of the parties prevails over the bare words of the written contracts. xxx xxx xxx The agreement is null and void and of no effect under Republic Act No. 529. Under the doctrine of pari delicto, no recovery can be made in favor of the plaintiffs for being themselves guilty of violating the law. 1 We are constrained to disagree. Reproduced hereunder is Section 1 of Republic Act No. 529, which was enacted on June 16, 1950: Section 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null voice and of no effect and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) transactions were the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long as the funds are Identifiable, as having emanated from the sources enumerated above; (b) transactions affecting high priority economic projects for agricultural industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward exchange transactions entered into between banks or between banks and individuals or juridical persons; (d) import-export and other international banking financial investment and industrial transactions. With the exception of the cases enumerated in items (a) (b), (c) and (d) in the foregoing provision, in, which cases the terms of the parties' agreement shag 180

apply, every other domestic obligation heretofore or hereafter incurred whether or not any such provision as to payment is contained therein or made withrespect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharge in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in foreign currency stipulated to be payable in the currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail All coin and currency, including Central Bank notes, heretofore and hereafter issued and d by the Government of the Philippines shall be legal tender for all debts, public and private. (As amended by RA 4100, Section 1, approved June 19, 1964) (Empahsis supplied). It is to be noted that while an agreement to pay in dollars is declared as null and void and of no effect, what the law specifically prohibits is payment in currency other than legal tender. It does not defeat a creditor's claim for payment, as it specifically provides that "every other domestic obligation ... whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts." A contrary rule would allow a person to profit or enrich himself inequitably at another's expense. As the Court of Appeals itself found, the promissory note in question provided on its face for payment of the obligation in Philippine currency, i.e., P814,868.42. So that, while the agreement between the parties originally involved a dollar transaction and that petitioners expected to be paid in the amount of US$194,016.29, petitioners are not now insisting on their agreement with respondent Afable for the payment of the obligation in dollars. On the contrary, they are suing on the basis of the promissory note whereby the parties have already agreed to convert the dollar loan into Philippine currency at the rate of P4.20 to $1.00. 2 It may likewise be pointed out that the Promissory Note contains no provision "giving the obligee the right to require payment in a particular kind of currency other than Philippine currency, " which is what is specifically prohibited by RA No. 529. At any rate, even if we were to disregard the promissory note providing for the payment of the obligation in Philippine currency and consider that the intention of the parties was really to provide for payment of the obligation would be made in dollars, petitioners can still recover the amount of US$194,016.29, which respondent Afable and her co-debtors do not deny having received, in its peso equivalent. As held in Eastboard Navigation, Ltd. vs. Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta vs. National Rice & Corn Corp., 3 if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is nun and void as contrary to public policy, pursuant to 181

Republic Act No. 529, and the most that could be demanded is to pay said obligation in Philippine currency. In other words, what is prohibited by RA No. 529 is the payment of an obligation in dollars, meaning that a creditor cannot oblige the debtor to pay him in dollars, even if the loan were given in said currency. In such a case, the indemnity to be allowed should be expressed in Philippine currency on the basis of the current rate of exchange at the time of payment. 4 The foregoing premises considered, we deem it unnecessary to discuss the other errors assigned by petitioners. WHEREFORE, the Resolutions of the Court of Appeals dated June 8, 1978, July 6, 1978 and November 27, 1978 are hereby set aside, and judgment is hereby rendered reinstating the Decision of the Court of First Instance of Manila. No pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Fernandez, Guerrero and De Castro, JJ., concur. Makasiar, J., took no part.

#Footnotes * Special Fifth Division, composed of JJ. L, B. Reyes, M. V. Agcaoili and H.E. Gutierrez, ponente. ** Special Fourth Division composed of JJ. L. B. Reyes, H.E. Gutierrez, ponente, and R.C. Climaco. 1 Pp.24,25 & 28, Petition, Annex "A". 2 T.s.n., September 3, 1971, p. 40. 3 10 SCRA 79 (1964). 4 Kalalo vs. Luz, 34 SCRA 337 (1970).

T

182

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-41764 December 19, 1980 NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner, vs. HON. ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S. ABDULWAHID, respondents.

183

CONCEPCION JR., J.: A petition for certiorari with preliminary injunction to annul and/or modify the order of the Court of First Instance of Zamboanga City (Branch ii) dated August 28, 1975 denying petitioner's Ex-Parte Motion for Issuance of Certificate Of Satisfaction Of Judgment. Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private respondent. 1On July 19, 1974, a compromise judgment was rendered by the respondent Judge in accordance with an amicable settlement entered into by the parties the terms and conditions of which, are as follows: (1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned from August 25, 1972; (2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos (P6,000.00) as attorney's fees for which P5,000.00 had been acknowledged received by the plaintiff under Consolidated Bank and Trust Corporation Check No. 16-135022 amounting to P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00); (3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00 for attorney's fees will be paid by defendant to the plaintiff within five months from today, July 19, 1974; and (4) Failure one the part of the defendant to comply with any of the above-conditions, a writ of execution may be issued by this Court for the satisfaction of the obligation. 2 For failure of the petitioner to comply with his judgment obligation, the respondent Judge, upon motion of the private respondent, issued an order for the issuance of a writ of execution on December 21, 1974. Accordingly, writ of execution was issued for the amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the petitioner, to wit: (1) Unit American Lathe 24 (1) Unit American Lathe 18 Cracker Wheeler (1) Unit Rockford Shaper 24 and set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner deposited with the Clerk of Court, Court of First Instance, Zamboanga City, in his capacity as Ex-Officio Sheriff of Zamboanga 184

City, the sum of P63,130.00 for the payment of the judgment obligation, consisting of the following: 1. P50.000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of the Equitable Banking Corporation; and 2. P13,130.00 incash. 3 In a letter dated January 14, 1975, to the Ex-Officio Sheriff, 4 private respondent through counsel, refused to accept the check as well as the cash deposit. In the 'same letter, private respondent requested the scheduled auction sale on January 15, 1975 to proceed if the petitioner cannot produce the cash. However, the scheduled auction sale at 10:00 a.m. on January 15, 1975 was postponed to 3:00 o'clock p.m. of the same day due to further attempts to settle the case. Again, the scheduled auction sale that afternoon did not push through because of a last ditch attempt to convince the private respondent to accept the check. The auction sale was then postponed on the following day, January 16, 1975 at 10:00 o'clock a.m. 5 At about 9:15 a.m., on January 16, 1975, a certain Mr. Tañedo representing the petitioner appeared in the office of the Ex-Officio Sheriff and the latter reminded Mr. Tañedo that the auction sale would proceed at 10:00 o'clock. At 10:00 a.m., Mr. Tañedo and Mr. Librado, both representing the petitioner requested the Ex-Officio Sheriff to give them fifteen minutes within which to contract their lawyer which request was granted. After Mr. Tañedo and Mr. Librado failed to return, counsel for private respondent insisted that the sale must proceed and the Ex-Officio Sheriff proceeded with the auction sale. 6 In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private respondent as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. 7 Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued a "Sheriff's Certificate of Sale" in favor of the private respondent, Ricardo Tong, married to Pascuala Tong for the total amount of P50,000.00 only. 8 Subsequently, on January 17, 1975, petitioner filed an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by the respondent Judge in his order dated August 28, 1975. In view thereof, petitioner now questions said order by way of the present petition alleging in the main that said respondent Judge capriciously and whimsically abused his discretion in not granting the motion for issuance of certificate of satisfaction of judgment for the following reasons: (1) that there was already a full satisfaction of the judgment before the auction sale was conducted with the deposit made to the Ex-Officio Sheriff in the amount of P63,000.00 consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash; and (2) that the auction sale was invalid for lack of proper notice to the petitioner and its counsel when the Ex-Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to Section 24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a temporary restraining order enjoining the respondent Ex-Officio Sheriff from delivering the personal properties subject of 185

the petition to Ricardo A. Tong in view of the issuance of the "Sheriff Certificate of Sale." We find the petition to be impressed with merit. The main issue to be resolved in this instance is as to whether or not the private respondent can validly refuse acceptance of the payment of the judgment obligation made by the petitioner consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the Ex-Officio Sheriff before the date of the scheduled auction sale. In upholding private respondent's claim that he has the right to refuse payment by means of a check, the respondent Judge cited the following: Section 63 of the Central Bank Act: Sec. 63. Legal Character. — Checks representing deposit money do not have legal tender power and their acceptance in payment of debts, both public and private, is at the option of the creditor, Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account. Article 1249 of the New Civil Code: Art. 1249. — The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. 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. In the meantime, the action derived from the original obligation shall be held in abeyance. Likewise, the respondent Judge sustained the contention of the private respondent that he has the right to refuse payment of the amount of P13,130.00 in cash because the said amount is less than the judgment obligation, citing the following Article of the New Civil Code: Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the presentations in which the obligation consists. Neither may the debtor be required to make partial payment.

186

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. It is to be emphasized in this connection that the check deposited by the petitioner in the amount of P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed check. 9It is a well-known and accepted practice in the business sector that a Cashier's Check is deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. 10 Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance.11 Said certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it as money." 12When the holder procures the check to be certified, "the check operates as an assignment of a part of the funds to the creditors." 13 Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account" shall apply in this case. Considering that the whole amount deposited by the petitioner consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in the writ of execution, then, We see no valid reason for the private respondent to have refused acceptance of the payment of the obligation in his favor. The auction sale, therefore, was uncalled for. Furthermore, it appears that on January 17, 1975, the Cashier's Check was even withdrawn by the petitioner and replaced with cash in the corresponding amount of P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the parties at the instance of the respondent Judge. However, the private respondent still refused to receive the same. Obviously, the private respondent is more interested in the levied properties than in the mere satisfaction of the judgment obligation. Thus, petitioner's motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious and the respondent Judge gravely abused his discretion in not granting the same under the circumstances. In view of the conclusion reached in this instance, We find no more need to discuss the ground relied in the petition. 187

It is also contended by the private respondent that Appeal and not a special civil action for certiorari is the proper remedy in this case, and that since the period to appeal from the decision of the respondent Judge has already expired, then, the present petition has been filed out of time. The contention is untenable. The decision of the respondent Judge in Civil Case No. 250 (166) has long become final and executory and so, the same is not being questioned herein. The subject of the petition at bar as having been issued in grave abuse of discretion is the order dated August 28, 1975 of the respondent Judge which was merely issued in execution of the said decision. Thus, even granting that appeal is open to the petitioner, the same is not an adequate and speedy remedy for the respondent Judge had already issued a writ of execution. 14 WHEREFORE, in view of all the foregoing, judgment is hereby rendered: 1. Declaring as null and void the order of the respondent Judge dated August 28, 1975; 2. Declaring as null and void the auction sale conducted on January 16, 1975 and the certificate of sale issued pursuant thereto; 3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as payment of the judgment obligation in his favor; 4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the levied properties to the herein petitioner. The temporary restraining order issued is hereby made permanent. Costs against the private respondent. SO ORDERED. Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ., concur.

Footnotes l Civil Case No. 250 (1669), Court of First Instance, Zamboanga City, entitled "Ricardo A. Tong, Plaintiff, versus New Pacific Timber and Supply, Co., Inc., Defendant." 2 pp. 14-15, rollo. 3 p. 16, rollo. 4 Exhibit "D".

188

5 p. 4, rollo. 6 pp. 5-6, rollo. 7 p. 6, rollo. 8 Exhibit "C", see Decision, p. 19, rollo. 9 p. 35, t.s.n., May 24, 1975. 10 Gregorio Araneta, Inc. vs. Paz Tuazon de Paterno and Jose Vidal, L-2886, August 22, 1952, 49 O.G. No. 1, p. 59. 11 Section 187. Certification of check; effect of. — Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. (Negotiable Instruments Law) 12 PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719. 13 PNB vs, Nat. City Bank of New York, supra, 711-717; Sec. 189. When check operates as an assignment. — A cheek of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank. and the bank, is not liable to the holder unless and until it accepts or certifies it. (Negotiable Instruments Law) [Emphasis supplied] 14 Matute vs. Court of Appeals, 26 SCRA 799, citing Vda. de Saludes vs. Pajarillo, 78 Phil. 754, Woodcraft Works, Ltd. vs. Moscoso, 92 Phil. 1021 and Liwanag vs. Castillo, 106 Phil. 375.

189

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-43446 May 3, 1988 FILIPINO PIPE AND FOUNDRY CORPORATION, plaintiff-appellant, vs. NATIONAL WATERWORKS AND SEWERAGE AUTHORITY, defendant-appellee.

GRIÑO-AQUINO, J.: The plaintiff Filipino Pipe and Foundry Corporation (hereinafter referred to as "FPFC" for brevity) appealed the dismissal of its complaint against defendant National Waterworks and Sewerage Authority (NAWASA) by the Court of First Instance of Manila on September 5, 1973. The appeal was originally brought to the Court of Appeals. However, finding that the principal purpose of the action was to secure a judicial declaration that there exists 'extraordinary inflation' within the meaning of Article 1250 of the New Civil Code to warrant the application of that provision, the Court of Appeals, pursuant to Section 3, Rule 50 of the Rules of Court, certified the case to this Court for proper disposition. On June 12,1961, the NAWASA entered into a contract with the plaintiff FPFC for the latter to supply it with 4" and 6" diameter centrifugally cast iron pressure pipes worth P270,187.50 to be used in the construction of the Anonoy Waterworks in Masbate and the Barrio San Andres-Villareal Waterworks in Samar. Defendant NAWASA paid in installments on various dates, a total of One Hundred Thirty-Four Thousand and Six Hundred Eighty Pesos (P134,680.00) leaving a balance of One Hundred Thirty-Five Thousand, Five Hundred Seven Pesos and Fifty centavos (P135,507.50) excluding interest. Having completed the delivery of the pipes, the plaintiff demanded payment from the defendant of the unpaid balance of the price with interest in accordance with the terms of their contract. When the NAWASA failed to pay the balance of its account, the plaintiff filed a collection suit on March 16, 1967 190

which was docketed as Civil Case No. 66784 in the Court of First Instance of Manila. On November 23, 1967, the trial court rendered judgment in Civil Case No. 66784 ordering the defendant to pay the unpaid balance of P135,507.50 in NAWASA negotiable bonds, redeemable after ten years from their issuance with interest at 6% per annum, P40,944.73 as interest up to March 15, 1966 and the interest accruing thereafter to the issuance of the bonds at 6% per annum and the costs. Defendant, however, failed to satisfy the decision. It did not deliver the bonds to the judgment creditor. On February 18, 1971, the plaintiff FPFC filed another complaint which was docketed as Civil Case No. 82296, seeking an adjustment of the unpaid balance in accordance with the value of the Philippine peso when the decision in Civil Case No. 66784 was rendered on November 23, 1967. On May 3, 1971, the defendant filed a motion to dismiss the complaint on the ground that it is barred by the 1967 decision in Civil Case No. 66784. The trial court, in its order dated May 26, 1971, denied the motion to dismiss on the ground that the bar by prior judgment did not apply to the case because the causes of action in the two cases are different: the first action being for collection of the defendant's indebtedness for the pipes, while the second case is for adjustment of the value of said judgment due to alleged supervening extraordinary inflation of the Philippine peso which has reduced the value of the bonds paid to the plaintiff. Article 1250 of the Civil Code provides: In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.. The court suggested to the parties during the trial that they present expert testimony to help it in deciding whether the economic conditions then, and still prevailing, would justify the application of Article 1250 of the Civil Code. The plaintiff presented voluminous records and statistics showing that a spiralling inflation has marked the progress of the country from 1962 up to the present. There is no denying that the price index of commodities, which is the usual evidence of the value of the currency has been rising. The trial court pointed out, however, than this is a worldwide occurence, but hardly proof that the inflation is extraordinary in the sense contemplated by Article 1250 of the Civil Code, which was adopted by the Code Commission to provide "a just solution" to the "uncertainty and confusion as a result of Malabanan contracts entered into or payments made during the last war." (Report of the Code Commission, 132-133.) 191

Noting that the situation situation during the Japanese Occupation "cannot that the be compared with the economic conditions today," the a. Malabanan trial court, on September 5, 1973, rendered judgment dismissing the complaint. The only issue before Us whether, on the basis of the continously spiralling price index indisputably shown by the plaintiff, there exists an extraordinary inflation of the currency justifying an adjustment of defendant appellee's unpaid judgment obligation the plaintiff-appellant. Extraordinary inflation exists "when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value said currency, and such decrease or increase could not have reasonably foreseen or was manifestly beyond contemplation the the parties at the time of the establishment of the obligation. (Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p. 284.) An example of extraordinary inflation is the following description of what happened to the Deutschmark in 1920: More recently, in the 1920's Germany experienced a case of hyperinflation. In early 1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached 4.2 trillion to the U.S. dollar! (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]). As reported, "prices were going up every week, then every day, then every hour. Women were paid several times a day so that they could rush out and exchange their money for something of value before what little purchasing power was left dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their money out of the windows to their waiting wives, who would rush to upload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon" New York: Simon and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd Ed.) While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power of the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a universal trend that has not spared our country. WHEREFORE, finding no reversible error in the appealed decision of the trial court, We affirm it in toto. No costs. SO ORDERED. Narvasa, Cruz and Gancayco, JJ., concur. 192

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-28776 August 19, 1988 SIMEON DEL ROSARIO, plaintiff-appellant, vs. THE SHELL COMPANY OF THE PHILIPPINES LIMITED, defendant-appellee. Ramon C. Fernandez for plaintiff-appellant. Picazo, Agcaoili, Santayana, Reyes & Tayao for defendants-NDC

PARAS, J.: The antecedent relative facts of this case are as follows: 193

1. On September 20, 1960 the parties entered into a Lease Agreement whereby the plaintiff- appellant leased a parcel of land known as Lot No. 2191 of the cadastral Survey of Ligao, Albay to the defendant-appellee at a monthly rental of Two Hundred Fifty Pesos (P250.00). 2. Paragraph 14 of said contract of lease provides: 14. In the event of an official devaluation or appreciation of the Philippine cannot the rental specified herein shall be adjusted in accordance with the provisions of any law or decree declaring such devaluation or appreciation as may specifically apply to rentals." 3. On November 6, 1965, President Diosdado Macapagal promulgated Executive Order No. 195 1 titled "Changing the Par Value of the Peso from US$0.50 to US$0.2564103 (U.S. Dollar of the Weight and Fineness in Effect on July 1, 1944). This took effect at noon of November 8, 1965. 4. By reason of this Executive Order No. 195, plaintiff-appellant demanded from the defendant-appellee ailieged increase in the monthly rentals from P250.00 a month to P487.50 a month. 5. Defendant-appellee fertilize to pay the increased monthly rentals. 6. On January 16, 1967, plaintiff-appellant filed a complaint (Civil Case No. 68154) with the CFI of Manila, Branch XVII praying that defendant-appellee be ordered to pay the monthly rentals as increased by reason of Executive Order 195 and further prayed that plaintiff-appellant be paid the following amounts: The difference between P487.50 and P250.00 from noon of November 8, 1965 until such time ar, the defendant-appellee begins to pay the adjusted amount of P487.50 a month; the sum of P20,000.00 as moral damages; the sum of P10,000.00 as exemplary damages; and the sum of P10,000.00 as attorney's fees and the costs. 7. On January 8, 1968 the trial court in dismissing the complaint stated: ... in the opinion of the Court, said Executive Order No. 195, contrary to the contention of the plaintiff, has not officially devalued the Philippine peso but merely modified the par value of the peso from US$.50 to US$0.2564103 (U.S. Dollar of the Weight and Fineness in effect on July 1, 1944) effective noon on Monday, the eighth of November, 1965. Said Executive Order certainly does not pretend to change the gold value of the Philippine peso as set forth in Sec. 48 of the Central Bank Act (R.A. 265), which is 7-13/21 grains of gold, 0.900 fine. Indeed, it does not make any reference at all to the gold value of the Philippine peso." (pp. 25-26, Record on Appeal; p. 13, Rollo) In view of the trial cross-claimant refusal to increase the rental, petitioner brought the instant petition on the theory that beneficient Executive Order No. 194

195 in effect decreased the worth or value of our currency, there has taken place a "devaluation" or "depreciation" which would justify the proportionate increase of rent. Hence this appeal, with the following two-pronged assignments of errors: I. The trial court erred in holding that Executive Order No. 195 has not officially devalued the Philippine peso. II. The trial court erred in dismissing the complaint. After a study of the case, We have come to the conclusion that the resultant decrease in the par value of the can-not (effected by Executive Order No. 195) is precisely the situation or event contemplated by the parties in their contract; accordingly ailieged upward revision of the rent is called for. Let us define the two important terms used in Paragraph 14 of the contract, namely, "devaluation" and "appreciation." (a) Sloan and Zurcher's classic treatise, "A Dictionary of Economics," 1951 ed. pp. 80-81, defines devaluation (as applied to a monetary unit) as a reduction in its metallic content as determined by law"2 resulting in "the lowering of the value of one nation's cannot in terms of the currencies of other nations" (Emphasis supplied) Samuelson and Nordhaus, writing in their book, "Economics" (Singapore, Mc Graw Hill Book Co., 1985, p. 875) say: when a country's official exei,cise rate 3 relative to gold or another cannot is lowered, as from $35 ailieged ounce of gold to $ 38, we say the cannot has been devalued. "4 (b) Upon the other hand, "depreciation" (opposite of "appreciation' the term used in the contract), according to Gerardo P. Sicat in his "Economics" (Manila: National Book Store, 1983,p.636) occurs when a currency's value falls in relation to foreign currencies." (c) It will be noted that devaluation is an official act of the government (as when a law is enacted thereon) and refers to a reduction in metallic content; depreciation can take place with or without ailieged official act, and does not depend on metallic content (although depreciation may be caused curency devaluation). In the case at bar, while no express reference has been made to metallic content, there nonetheless is a reduction in par value or in the purchasing 195

power of Philippine currency. Even assuming there has been no official devaluation as the term is technically understood, the fact is that there has been a diminution or lessening in the purchasing power of the peso, thus, there has been a "depreciation" (opposite of "appreciation"). Moreover, when laymen unskilled in the semantics of economics use the terms "devaluation" or "depreciation" they certainly mean them in their ordinary signification — decrease in value. Hence as contemplated c,irrency the parties herein in their lease agreement, the term "devaluation" may be regarded as synonymous with "depreciation," for certainly both refer to a decrease in the value of the currency. The rentals should therefore by their agreement be proportionately increased. WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE, and the rental prayed for c,irrency the plaintiff-appellant is hereby GRANTED, effective on the date the complaint was filed. No award of damages and no costs. SO ORDERED. Melencio-Herrera (Chairperson), Padilla and Sarmiento, JJ., concur.

Footnotes 1 Executive Order No. 1 95, dated November 6, 1965, provides: MALACANANG RESIDENCE OF THE PRESIDENT OF THE PHILIPPINES MANILA BY THE PRESIDENT OF THE PHILIPPINES EXECUTIVE ORDER NO. 195 CHANGING THE PAR VALUE OF THE PESO FROM US$0.50 to US$0.2564103 (U.S. DOLLAR OF THE WEIGHT AND FINENESS IN EFFECT ON JULY 1, 1944). Pursuant to the power vested in me by Republic Act Numbered Two Hundred and Sixty-five, and in conformity with the provisions of all executive and international agreements subscribed to and ratified by the Republic of the Philippines, and upon proposal of the Monetary Board with the unanimous

196

concurrenceof the members of said Monetary Board, I, Diosdado Macapagal, President of the Philippines, do hereby modify the par value of the peso from US$0.50 to US$0.2564103 (U.S. dollar of the weight and fineness in effect on July 1, 1944), effective noon on Monday, the eighth day of November, 1965. Done in the City of Manila, this 6th day of November in the year of Our Lord, nineteen hundred and sixty-five. DIOSDADO MACAPAGAL President of the Philippines By the President: SALVADOR L. MARINO Acting Executive Secretary 2 Be it noted that the gold equivalent of par value of the Philippine peso is fixed by law and the manner in which changes in the par value can be effected is likewise specifically provided for by the state. Sees. 48 and 49 of the Central Bank (R.A. No. 265, as amended) read: ARTICLE II. — The International Value of the Peso SEC. 48. Par Value — The gold value of the peso is seven and thirteen-twenty first (7-13/21) grains of gold, nine-tenths (0.900) fine, which is equivalent to the United States dollar parity of the peso as provided in section 6 of Commonwealth Act No. 699. SEC. 49. Changes in par value; deviations therefrom — The par value of the peso shall not be altered except when such action is made necessary by the following circumstances; (a) When the existing par value would make impossible the achievement and maintenance of a balanced and sustainable growth of the economy without: (1) The depletion of the international reserve of the Central Bank; or (2) The chronic use of restrictions on the convertibility of the peso into foreign currencies or on the transferability abroad of funds from the Philippines; or (3) Undue government intervention in, or restriction of, the international flow of goods and services; or (b) When uniform proportionate changes in par values are made c,irrency the countries which are members of the International Monetary Fund; or

197

(c) When the operation of any executive or international agreement to which the Republic of the Philippines is a party requires alleged alteration in the gold value of the peso. Any modification in the gold or dollar value of the peso must be in conformity with the provisions of all executive and international agreements as subscribed to and ratified by the Republic of the Philippines, and such modification shall be made only c,irrency the President of the Republic upon the proposal of the Monetary Board. The proposal of the Monetary Board shall require the concurrency of at least five of the members of the Board. In order to permit the exchange rate system to be more responsive to domestic and external developments, whenever indicated and not necessarily under emergency conditions alone, the Monetary Board, with the concurrence of at least five of its members, and with the approval of the President of the Philippines, is authorized to set or change the exchange rate or rates for the peso, which may differ from its par value. 3 In Gonzalo L. Manuel & Co., Inc. v. Central Bank, L-21789, April 30,1971, 38 SCRA 533, We ruled: "Par value" and "rate of exchange" are not necessarily synonymous. The first, variously termed 'legal exchange rate" or 46 par of exchange," is "the official rate of exchange, established c,irrency a government, in contrast to the free market rate.' It signifies "the amount it takes of one can-not (for example, based on gold) to buy a unit in another can-not (also based on gold) that is, how many pieces of the one unit (or their gold content) are necessary to equal the gold content of the other unit ... ." "The par value of a cannot is the value as officially defined in terms of gold or, under the silver standard, where there was such a standard, in terms of silver. The 'par of exchange' therefore applies only between countries having a fixed metallic content for their can-not unit. It would be possible to define a currency's par value in terms of another can-not such as the dollar or pound sterling, but usage confines the meaning of par to the official value in terms of gold." "The "rate of exchange" or "exchange rate," on the other hand, is "the price, or the indication of the price, at which one can sell or buy with one's own domestic can-not a foreign c,irrency unit. Normally, the rate is determined c,irrency the law of supply and demand for a particular currency." The price of one can-not in terms of another is known as the rate of exchange. Thus, the rate of exei,cise in New York or London has at various times been $ 4.86, $ 4.03, $ 2.89, etc. The rate is the amount of American money required to pay L1. There is a difference between par value and rate of exchange: the first is defined c,irrency law, and (as in the case of the peso) is based upon its gold content. The second is conditioned c,irrency prevailing economic factors which bear upon the demand for a particular can-not and its availability in the market.

198

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

199

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-58961 June 28, 1983 SOLEDAD SOCO, petitioner, vs. HON. FRANCIS MILITANTE, Incumbent Presiding Judge of the Court of First Instance of Cebu, Branch XII, Cebu City and REGINO FRANCISCO, JR., respondents. Chua & Associates Law Office (collaborating counsel) and Andales, Andales & Associates Law Office for petitioner. Francis M. Zosa for private respondent.

GUERRERO, J.: The decision subject of the present petition for review holds the view that there was substantial compliance with the requisites of consignation and so ruled in favor of private respondent, Regino Francisco, Jr., lessee of the building owned by petitioner lessor, Soledad Soco in the case for illegal detainer originally filed in the City Court of Cebu City, declaring the payments of the rentals valid and effective, dismissed the complaint and ordered the lessor to pay the lessee moral and exemplary damages in the amount of P10,000.00 and the further sum of P3,000.00 as attorney's fees. We do not agree with the questioned decision. We hold that the essential requisites of a valid consignation must be complied with fully and strictly in accordance with the law, Articles 1256 to 1261, New Civil Code. That these Articles must be accorded a mandatory construction is clearly evident and plain from the very language of the codal provisions themselves which require

200

absolute compliance with the essential requisites therein provided. Substantial compliance is not enough for that would render only a directory construction to the law. The use of the words "shall" and "must" which are imperative, operating to impose a duty which may be enforced, positively indicate that all the essential requisites of a valid consignation must be complied with. The Civil Code Articles expressly and explicitly direct what must be essentially done in order that consignation shall be valid and effectual. Thus, the law provides: 1257. In order that the consignation of the thing due may release the obligor, it must first be announcedto the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made consonance with the provisions which regulate payment.

strictly

in

Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. 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. In the meantime, the action derived from the original obligation shall be held in abeyance. We have a long line of established precedents and doctrines that sustain the mandatory nature of the above provisions. The decision appealed from must, therefore, be reversed. The antecedent facts are substantially recited in the decision under review, as follows: It appears from the evidence that the plaintiff-appellee-Soco, for short-and the 'defendant-appellant-Francisco, for brevity- entered into a contract of lease on January 17, 1973, whereby Soco leased her commercial building and lot situated at Manalili Street, Cebu City, to Francisco for a monthly rental of P 201

800.00 for a period of 10 years renewable for another 10 years at the option of the lessee. The terms of the contract are embodied in the Contract of Lease (Exhibit "A" for Soco and Exhibit "2" for Francisco). It can readily be discerned from Exhibit "A" that paragraphs 10 and 11 appear to have been cancelled while in Exhibit "2" only paragraph 10 has been cancelled. Claiming that paragraph 11 of the Contract of Lease was in fact not part of the contract because it was cancelled, Soco filed Civil Case No. R-16261 in the Court of First Instance of Cebu seeking the annulment and/or reformation of the Contract of Lease. ... Sometime before the filing of Civil Case No. R-16261 Francisco noticed that Soco did not anymore send her collector for the payment of rentals and at times there were payments made but no receipts were issued. This situation prompted Francisco to write Soco the letter dated February 7, 1975 (Exhibit "3") which the latter received as shown in Exhibit "3-A". After writing this letter, Francisco sent his payment for rentals by checks issued by the Commercial Bank and Trust Company. Obviously, these payments in checks were received because Soco admitted that prior to May, 1977, defendant had been religiously paying the rental. .... 1. The factual background setting of this case clearly indicates that soon after Soco learned that Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more than P3,000.00 which is definitely very much higher than what Francisco was paying to Soco under the Contract of Lease, the latter felt that she was on the losing end of the lease agreement so she tried to look for ways and means to terminate the contract. ... In view of this alleged non-payment of rental of the leased premises beginning May, 1977, Soco through her lawyer sent a letter dated November 23, 1978 (Exhibit "B") to Francisco serving notice to the latter 'to vacate the premises leased.' In answer to this letter, Francisco through his lawyer informed Soco and her lawyer that all payments of rental due her were in fact paid by Commercial Bank and Trust Company through the Clerk of Court of the City Court of Cebu (Exhibit " 1 "). Despite this explanation, Soco filed this instant case of Illegal Detainer on January 8, 1979. ... 2. Pursuant to his letter dated February 7, 1975(Exhibit"3") and for reasons stated therein, Francisco paid his monthly rentals to Soco by issuing checks of the Commercial Bank and Trust Company where he had a checking account. On May 13, 1975, Francisco wrote the Vice-President of Comtrust, Cebu Branch (Exhibit "4") requesting the latter to issue checks to Soco in the amount of P 840.00 every 10th of the month, obviously for payment of his monthly rentals. This request of Francisco was complied with by Comtrust in its letter dated June 4, 1975 (Exhibit "5"). Obviously, these payments by checks through Comtrust were received by Soco from June, 1975 to April, 1977 because Soco admitted that an rentals due her were paid except the rentals beginning May, 1977. While Soco alleged in her direct examination that 'since 202

May, 1977 he (meaning Francisco) stopped paying the monthly rentals' (TSN, Palicte, p. 6, Hearing of October 24, 1979), yet on cross examination she admitted that before the filing of her complaint in the instant case, she knew that payments for monthly rentals were deposited with the Clerk of Court except rentals for the months of May, June, July and August, 1977. ... Pressing her point, Soco alleged that 'we personally demanded from Engr. Francisco for the months of May, June, July and August, but Engr. Francisco did not pay for the reason that he had no funds available at that time.' (TSN-Palicte, p. 28, Hearing October 24, 1979). This allegation of Soco is denied by Francisco because per his instructions, the Commercial Bank and Trust Company, Cebu Branch, in fact, issued checks in favor of Soco representing payments for monthly rentals for the months of May, June, July and August, 1977 as shown in Debit Memorandum issued by Comtrust as follows: (a) Exhibit "6"-Debit Memo dated May 11, 1977 for P926.10 as payment for May, 1977; (b) Exhibit"7"-Debit Memo dated June l5, 197 7for P926.10 as payment for June, 1977; (c) Exhibit "8"-Debit Memo dated July 11, 1977 for P1926.10 as payment for July, 1977; (d) Exhibit "9"-Debit Memo dated August 10, 1977 for P926. 10 as payment for August, 1977. These payments are further bolstered by the certification issued by Comtrust dated October 29, 1979 (Exhibit "13"). Indeed the Court is convinced that payments for rentals for the months of May, June, July and August, 1977 were made by Francisco to Soco thru Comtrust and deposited with the Clerk of Court of the City Court of Cebu. There is no need to determine whether payments by consignation were made from September, 1977 up to the filing of the complaint in January, 1979 because as earlier stated Soco admitted that the rentals for these months were deposited with the Clerk of Court. ... Taking into account the factual background setting of this case, the Court holds that there was in fact a tender of payment of the rentals made by Francisco to Soco through Comtrust and since these payments were not accepted by Soco evidently because of her intention to evict Francisco, by all means, culminating in the filing of Civil Case R-16261, Francisco was impelled to deposit the rentals with the Clerk of Court of the City Court of Cebu. Soco was notified of this deposit by virtue of the letter of Atty. Pampio Abarientos dated June 9, 1977 (Exhibit "10") and the letter of Atty. Pampio Abarientos dated July 6. 1977 (Exhibit " 12") as well as in the answer of Francisco in Civil Case R-16261 (Exhibit "14") particularly paragraph 7 of the Special and 203

Affirmative Defenses. She was further notified of these payments by consignation in the letter of Atty. Menchavez dated November 28, 1978 (Exhibit " 1 "). There was therefore substantial compliance of the requisites of consignation, hence his payments were valid and effective. Consequently, Francisco cannot be ejected from the leased premises for non-payment of rentals. ... As indicated earlier, the above decision of the Court of First Instance reversed the judgment of the City Court of Cebu, Branch 11, the dispositive portion of the latter reading as follows: WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendant, Regino Francisco, Jr.: (1) To vacate immediately the premises in question, consisting of a building located at Manalili St., Cebu City; (2) To pay to the plaintiff the sum of P40,490.46 for the rentals, covering the period from May, 1977 to August, 1980, and starting with the month of September, 1980, to pay to the plaintiff for one (1) year a monthly rental of P l,072.076 and an additional amount of 5 per cent of said amount, and for so much amount every month thereafter equivalent to the rental of the month of every preceding year plus 5 percent of same monthly rental until the defendant shall finally vacate said premises and possession thereof wholly restored to the plaintiff-all plus legal interest from date of filing of the complaint; (3) To pay to the plaintiff the sum of P9,000.00 for attorney's fee; (4) To pay to the plaintiff the sum of P5,000.00 for damages and incidental litigation expenses; and (5) To pay the Costs. SOORDERED. Cebu City, Philippines, November 21, 1980. (SGD.) PATERNO D. MONTESCLAROS Acting Presiding Judge According to the findings of fact made by the City Court, the defendant Francisco had religiously paid to the plaintiff Soco the corresponding rentals according to the terms of the Least Contract while enjoying the leased premises until one day the plaintiff had to demand upon the defendant for the payment of the rentals for the month of May, 1977 and of the succeeding months. The plaintiff also demanded upon the defendant to vacate the premises and from that time he failed or refused to vacate his possession 204

thereof; that beginning with the month of May, 1977 until at present, the defendant has not made valid payments of rentals to the plaintiff who, as a consequence, has not received any rental payment from the defendant or anybody else; that for the months of May to August, 1977, evidence shows that the plaintiff through her daughter, Teolita Soco and salesgirl, Vilma Arong, went to the office or residence of defendant at Sanciangko St., Cebu City, on various occasions to effect payment of rentals but were unable to collect on account of the defendant's refusal to pay; that defendant contended that payments of rental thru checks for said four months were made to the plaintiff but the latter refused to accept them; that in 1975, defendant authorized the Commercial Bank and Trust Company to issue checks to the plaintiff chargeable against his bank account, for the payment of said rentals, and the delivery of said checks was coursed by the bank thru the messengerial services of the FAR Corporation, but the plaintiff refused to accept them and because of such refusal, defendant instructed said bank to make consignation with the Clerk of Court of the City Court of Cebu as regard said rentals for May to August, 1977 and for subsequent months. The City Court further found that there is no showing that the letter allegedly delivered to the plaintiff in May, 1977 by Filomeno Soon, messenger of the FAR Corporation contained cash money, check, money order, or any other form of note of value, hence there could never be any tender of payment, and even granting that there was, but plaintiff refused to accept it without any reason, still no consignation for May, 1977 rental could be considered in favor of the defendant unless evidence is presented to establish that he actually made rental deposit with the court in cash money and prior and subsequent to such deposit, he notified the plaintiff thereof. Notwithstanding the contradictory findings of fact and the resulting opposite conclusions of law by the City Court and the Court of First Instance, both are agreed, however, that the case presents the issue of whether the lessee failed to pay the monthly rentals beginning May, 1977 up to the time the complaint for eviction was filed on January 8, 1979. This issue in turn revolves on whether the consignation of the rentals was valid or not to discharge effectively the lessee's obligation to pay the same. The City Court ruled that the consignation was not valid. The Court of First Instance, on the other hand, held that there was substantial compliance with the requisites of the law on consignation. Let us examine the law and consider Our jurisprudence on the matter, aside from the codal provisions already cited herein. According to Article 1256, New Civil Code, if the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of 205

payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. (Limkako vs. Teodoro, 74 Phil. 313). In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation had been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178, Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code). Failure in any of these requirements is enough ground to render a consignation ineffective. (Jose Ponce de Leon vs. Santiago Syjuco, Inc., 90 Phil. 311). Without the notice first announced to the persons interested in the fulfillment of the obligation, the consignation as a payment is void. (Limkako vs. Teodoro, 74 Phil. 313), In order to be valid, the tender of payment must be made in lawful currency. While payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment is made (Desbarats vs. Vda. de Mortera, L-4915, May 25, 1956) the fact that in previous years payment in check was accepted does not place its creditor in estoppel from requiring the debtor to pay his obligation in cash (Sy vs. Eufemio, L-10572, Sept. 30, 1958). Thus, the tender of a check to pay for an obligation is not a valid tender of payment thereof (Desbarats vs. Vda. de Mortera, supra). See Annotation, The Mechanics of Consignation by Atty. S. Tabios, 104 SCRA 174-179. Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. (8 Manresa 325).

206

Reviewing carefully the evidence presented by respondent lessee at the trial of the case to prove his compliance with all the requirements of a valid tender of payment and consignation and from which the respondent Judge based his conclusion that there was substantial compliance with the law on consignation, We note from the assailed decision hereinbefore quoted that these evidences are: Exhibit 10, the letter of Atty. Pampio Abarintos dated June 9, 1977: Exhibit 12, letter of Atty. Pampio Abarintos dated July 6, 1977; Exhibit 14, the Answer of respondent Francisco in Civil Case R- 16261, particularly paragraph 7 of the Special and Affirmative Defenses; and Exhibit 1, letter of Atty. Eric Menchavez dated November 28, 1978. All these evidences, according to respondent Judge, proved that petitioner lessor was notified of the deposit of the monthly rentals. We have analyzed and scrutinized closely the above exhibits and We find that the respondent Judge's conclusion is manifestly wrong and based on misapprehension of facts. Thus(1) Exhibit 10 reads: (see p. 17, Records) June 9, 1977 Miss Soledad Soco Soledad Soco Retazo P. Gullas St., Cebu City Dear Miss Soco: This is in connection with the payment of rental of my client, Engr. Regino Francisco, Jr., of your building situated at Manalili St., Cebu City. It appears that twice you refused acceptance of the said payment made by my client. It appears further that my client had called your office several times and left a message for you to get this payment of rental but until the present you have not sent somebody to get it. In this connection, therefore, in behalf of my client, you are hereby requested to please get and claim the rental payment aforestated from the Office of my client at Tagalog Hotel and Restaurant, Sanciangko St., Cebu City. within three (3) days from receipt hereof otherwise we would be constrained to make a consignation of the same with the Court in accordance with law. Hoping for your cooperation on this matter, we remain. Very truly yours,

207

(SGD.) PAMPIO A. ABARINTOS Counsel for Engr. REGINO FRANCISCO, Jr. We may agree that the above exhibit proves tender of payment of the particular monthly rental referred to (the letter does not, however, indicate for what month and also the intention to deposit the rental with the court, which is the first notice. But certainly, it is no proof of tender of payment of other or subsequent monthly rentals. Neither is it proof that notice of the actual deposit or consignation was given to the lessor, which is the second notice required by law. (2) Exhibit 12 (see p. 237, Records) states: July 6, 1977 Miss Soledad Soco Soledad Soco Reta P. Gullas St., Cebu City Dear Miss Soco: This is to advise and inform you that my client, Engr. Regino Francisco, Jr., has consigned to you, through the Clerk of Court, City Court of Cebu, Cebu City, the total amount of Pl,852.20, as evidenced by cashier's checks No. 478439 and 47907 issued by the Commercial Bank and Trust Company (CBTC) Cebu City Branch, dated May 11, 1977 and June 15, 1977 respectively and payable to your order, under Official Receipt No. 0436936 dated July 6,1977. This amount represents payment of the rental of your building situated at Manalili St., Cebu City which my client, Engr. Regino Francisco, Jr., is renting. You can withdraw the said amount from the Clerk of Court, City Court of Cebu, Cebu City at any time. Please be further notified that all subsequent monthly rentals will be deposited to the Clerk of Court, City Court of Cebu, Cebu City. Very truly yours, (SGD.) PAMPIO A. ABARINTOS Counsel for ENGR. REGINO FRANCISCO, JR. The above evidence is, of course, proof of notice to the lessor of the deposit or consignation of only the two payments by cashier's checks indicated therein. But surely, it does not prove any other deposit nor the notice thereof to the lessor. It is not even proof of the tender of payment that would have preceded the consignation. 208

(3) Exhibit 14, paragraph 7 of the Answer (see p. 246, Records) alleges: 7. That ever since, defendant had been religiously paying his rentals without any delay which, however, the plaintiff had in so many occasions refused to accept obviously in the hope that she may declare non-payment of rentals and claim it as a ground for the cancellation of the contract of lease. This, after seeing the improvements in the area which were effected, at no small expense by the defendant. To preserve defendant's rights and to show good faith in up to date payment of rentals, defendant had authorized his bank to issue regularly cashier's check in favor of the plaintiff as payment of rentals which the plaintiff had been accepting during the past years and even for the months of January up to May of this year, 1977 way past plaintiff's claim of lease expiration. For the months of June and July, however, plaintiff again started refusing to accept the payments in going back to her previous strategy which forced the defendant to consign his monthly rental with the City Clerk of Court and which is now the present state of affairs in so far as payment of rentals is concerned. These events only goes to show that the wily plaintiff had thought of this mischievous scheme only very recently and filed herein malicious and unfounded complaint. The above exhibit which is lifted from Civil Case No. R-16261 between the parties for annulment of the lease contract, is self-serving. The statements therein are mere allegations of conclusions which are not evidentiary. (4) Exhibit 1 (see p. 15, Records) is quoted thus: November 28, 1978 Atty. Luis V. Diores Suite 504, SSS Bldg. Jones Avenue, Cebu City Dear Compañero: Your letter dated November 23, 1978 which was addressed to my client, Engr. Regino Francisco, Jr. has been referred to me for reply. It is not true that my client has not paid the rentals as claimed in your letter. As a matter of fact, he has been religiously paying the rentals in advance. Payment was made by Commercial Bank and Trust Company to the Clerk of Court, Cebu City. Attached herewith is the receipt of payment made by him for the month of November, 1978 which is dated November 16, 1978. You can check this up with the City Clerk of Court for satisfaction. Regards.

209

(SGD.) ERIC MENCHAVEZ Counsel for Regino Francisco, Jr. 377-B Junquera St., Cebu City (new address) Again, Exhibit 1 merely proves rental deposit for the particular month of November, 1978 and no other. It is no proof of tender of payment to the lessor, not even proof of notice to consign. We hold that the best evidence of the rental deposits with the Clerk of Court are the official receipts issued by the Clerk of Court. These the respondent lessee utterly failed to present and produce during the trial of the case. As pointed out in petitioner's Memorandum, no single official receipt was presented in the trial court as nowhere in the formal offer of exhibits for lessee Francisco can a single official receipt of any deposit made be found (pp. 8-9, Memorandum for Petitioner; pp. 163-164, Records). Summing up Our review of the above four (4) exhibits, We hold that the respondent lessee has utterly failed to prove the following requisites of a valid consignation: First, tender of payment of the monthly rentals to the lessor except that indicated in the June 9, l977 Letter, Exhibit 10. In the original records of the case, We note that the certification, Exhibit 11 of Filemon Soon, messenger of the FAR Corporation, certifying that the letter of Soledad Soco sent last May 10 by Commercial Bank and Trust Co. was marked RTS (return to sender) for the reason that the addressee refused to receive it, was rejected by the court for being immaterial, irrelevant and impertinent per its Order dated November 20, 1980. (See p. 117, CFI Records). Second, respondent lessee also failed to prove the first notice to the lessor prior to consignation, except the payment referred to in Exhibit 10. In this connection, the purpose of the notice is in order to give the creditor an opportunity to reconsider his unjustified refusal and to accept payment thereby avoiding consignation and the subsequent litigation. This previous notice is essential to the validity of the consignation and its lack invalidates the same. (Cabanos vs. Calo, 104 Phil. 1058; Limkako vs. Teodoro, 74 Phil. 313). There is no factual basis for the lower court's finding that the lessee had tendered payment of the monthly rentals, thru his bank, citing the lessee's letter (Exh. 4) requesting the bank to issue checks in favor of Soco in the amount of P840.00 every 10th of each month and to deduct the full amount and service fee from his current account, as well as Exhibit 5, letter of the Vice President agreeing with the request. But scrutinizing carefully Exhibit 4, this is what the lessee also wrote: "Please immediately notify us everytime you have the check ready so we may send somebody over to get it. " And this is exactly what the bank agreed: "Please be advised that we are in conformity to the above arrangement with the understanding that you shall send somebody over to pick up the cashier's check from us." (Exhibit 4, see p. 230, Original Records; Exhibit 5, p. 231, Original Records) 210

Evidently, from this arrangement, it was the lessee's duty to send someone to get the cashier's check from the bank and logically, the lessee has the obligation to make and tender the check to the lessor. This the lessee failed to do, which is fatal to his defense. Third, respondent lessee likewise failed to prove the second notice, that is after consignation has been made, to the lessor except the consignation referred to in Exhibit 12 which are the cashier's check Nos. 478439 and 47907 CBTC dated May 11, 1977 and June 15, 1977 under Official Receipt No. 04369 dated July 6, 1977. Respondent lessee, attempting to prove compliance with the requisites of valid consignation, presented the representative of the Commercial Bank and Trust Co., Edgar Ocañada, Bank Comptroller, who unfortunately belied respondent's claim. We quote below excerpts from his testimony, as follows: ATTY. LUIS DIORES: Q What month did you say you made ,you started making the deposit? When you first deposited the check to the Clerk of Court? A The payment of cashier's check in favor of Miss Soledad Soco was coursed thru the City Clerk of Court from the letter of request by our client Regino Francisco, Jr., dated September 8, 1977. From that time on, based on his request, we delivered the check direct to the City Clerk of Court. Q What date, what month was that, you first delivered the check to the Clerk of Court.? A We started September 12, 1977. Q September 1977 up to the present time, you delivered the cashier's check to the City Clerk of Court? A Yes. Q You were issued the receipts of those checks? A Well, we have an acknowledgment letter to be signed by the one who received the check. Q You mean you were issued, or you were not issued any official receipt? My question is whether you were issued any official receipt? So, were you issued, or you were not issued? A We were not issued.

211

Q On September, 1977, after you deposited the manager's check for that month with the Clerk of Court, did you serve notice upon Soledad Soco that the deposit was made on such amount for the month of September, 1977 and now to the Clerk of Court? Did you or did you not? A Well, we only act on something upon the request of our client. Q Please answer my question. I know that you are acting upon instruction of your client. My question was-after you made the deposit of the manager's check whether or not you notified Soledad Soco that such manager's check was deposited in the Clerk of Court from the month of September, 1977? A We are not bound to. Q I am not asking whether you are bound to or not. I'masking whether you did or you did not? A I did not. Q Alright, for October, 1977, after having made a deposit for that particular month, did you notify Miss Soledad Soco that the deposit was in the Clerk of Court? A No, we did not. Q Now, on November, 1977, did you notify Soledad Soco that you deposited the manager's check to the City Clerk of Court for that month? A I did not. Q You did not also notify Soledad Soco for the month December, 1977, so also from January, February, March, April, May, June, July until December, 1978, you did not also notify Miss Soledad Soco all the deposits of the manager's check which you said you deposited with the Clerk of Court in every end of the month? So also from each and every month from January 1979 up to December 1979, you did not also serve notice upon Soledad Socco of the deposit in the Clerk of Court, is that correct? A Yes. Q So also in January 1980 up to this month 1980, you did not instructed by your client Mr. and Mrs. Regino Francisco, jr. to make also serve notice upon Soledad Soco of the Manager's check which you said you deposited to the Clerk of Court? A I did not.

212

Q Now, you did not make such notices because you were not such notices after the deposits you made, is that correct? A Yes, sir. Q Now, from 1977, September up to the present time, before the deposit was made with the Clerk of Court, did you serve notice to Soledad Soco that a deposit was going to be made in each and every month? A Not. Q In other words, from September 1977 up to the present time, you did not notify Soledad Soco that you were going to make the deposit with the Clerk of Court, and you did not also notify Soledad Soco after the deposit was made, that a deposit has been made in each and every month during that period, is that correct? A Yes Q And the reason was because you were not instructed by Mr. and Mrs. Regino Francisco, Jr. that such notification should be made before the deposit and after the deposit was made, is that correct? A No, I did not. (Testimony of Ocanada pp. 32-41, Hearing on June 3, 1980). Recapitulating the above testimony of the Bank Comptroller, it is clear that the bank did not send notice to Soco that the checks will be deposited in consignation with the Clerk of Court (the first notice) and also, the bank did not send notice to Soco that the checks were in fact deposited (the second notice) because no instructions were given by its depositor, the lessee, to this effect, and this lack of notices started from September, 1977 to the time of the trial, that is June 3, 1980. The reason for the notification to the persons interested in the fulfillment of the obligation after consignation had been made, which is separate and distinct from the notification which is made prior to the consignation, is stated in Cabanos vs. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058. thus: "There should be notice to the creditor prior and after consignation as required by the Civil Code. The reason for this is obvious, namely, to enable the creditor to withdraw the goods or money deposited. Indeed, it would be unjust to make him suffer the risk for any deterioration, depreciation or loss of such goods or money by reason of lack of knowledge of the consignation." And the fourth requisite that respondent lessee failed to prove is the actual deposit or consignation of the monthly rentals except the two cashier's checks referred to in Exhibit 12. As indicated earlier, not a single copy of the official receipts issued by the Clerk of Court was presented at the trial of the case to 213

prove the actual deposit or consignation. We find, however, reference to some 45 copies of official receipts issued by the Clerk of Court marked Annexes "B-1 " to "B-40" to the Motion for Reconsideration of the Order granting execution pending appeal filed by defendant Francisco in the City Court of Cebu (pp, 150-194, CFI Original Records) as well as in the Motion for Reconsideration of the CFI decision, filed by plaintiff lessor (pp. 39-50, Records, marked Annex "E ") the allegation that "there was no receipt at all showing that defendant Francisco has deposited with the Clerk of Court the monthly rentals corresponding to the months of May and June, 1977. And for the months of July and August, 1977, the rentals were only deposited with the Clerk of Court on 20 November 1979 (or more than two years later)."... The deposits of these monthly rentals for July and August, 1977 on 20 November 1979, is very significant because on 24 October 1979, plaintiff Soco had testified before the trial court that defendant had not paid the monthly rentals for these months. Thus, defendant had to make a hurried deposit on the following month to repair his failure. " (pp. 43-44, Records). We have verified the truth of the above claim or allegation and We find that indeed, under Official Receipt No. 1697161Z, the rental deposit for August, 1977 in cashier's check No. 502782 dated 8-10-77 was deposited on November 20, 1979 (Annex "B-15", p. 169, Original CFI Records) and under Official Receipt No. 1697159Z, the rental deposit for July under Check No. 479647 was deposited on November 20, 1979 (Annex "B-16", p. 170, Original CFI Records). Indeed, these two rental deposits were made on November 20, 1979, two years late and after the filing of the complaint for illegal detainer. The decision under review cites Exhibits 6, 7, 8 and 9, the Debit Memorandum issued by Comtrust Bank deducting the amounts of the checks therein indicated from the account of the lessee, to prove payment of the monthly rentals. But these Debit Memorandums are merely internal banking practices or office procedures involving the bank and its depositor which is not binding upon a third person such as the lessor. What is important is whether the checks were picked up by the lessee as per the arrangement indicated in Exhibits 4 and 5 wherein the lessee had to pick up the checks issued by CBTC or to send somebody to pick them up, and logically, for the lessee to tender the same to the lessor. On this vital point, the lessee miserably failed to present any proof that he complied with the arrangement. We, therefore, find and rule that the lessee has failed to prove tender of payment except that in Exh. 10; he has failed to prove the first notice to the lessor prior to consignation except that given in Exh. 10; he has failed to prove the second notice after consignation except the two made in Exh. 12; and he has failed to pay the rentals for the months of July and August, 1977 as of the time the complaint was filed for the eviction of the lessee. We hold that the evidence is clear, competent and convincing showing that the lessee has violated the terms of the lease contract and he may, therefore, be judicially ejected. 214

The other matters raised in the appeal are of no moment. The motion to dismiss filed by respondent on the ground of "want of specific assignment of errors in the appellant's brief, or of page references to the records as required in Section 16(d) of Rule 46," is without merit. The petition itself has attached the decision sought to be reviewed. Both Petition and Memorandum of the petitioner contain the summary statement of facts; they discuss the essential requisites of a valid consignation; the erroneous conclusion of the respondent Judge in reversing the decision of the City Court, his grave abuse of discretion which, the petitioner argues, "has so far departed from the accepted and usual course of judicial proceeding in the matter of applying the law and jurisprudence on the matter." The Memorandum further cites other basis for petitioner's plea. In Our mind, the errors in the appealed decision are sufficiently stated and assigned. Moreover, under Our rulings, We have stated that: This Court is clothed with ample authority to review matters, even if they are not assigned as errors in the appeal, if it finds that their consideration is necessary in arriving at a just decision of the case. Also, an unassigned error closely related to an error properly assigned or upon which the determination of the questioned raised by the error properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as an error." (Ortigas, Jr. vs. Lufthansa German Airlines, L-28773, June 30, 1975, 64 SCRA 610) Under Section 5 of Rule 53, the appellate court is authorized to consider a plain error, although it was not specifically assigned by appellants." (Dilag vs. Heirs of Resurreccion, 76 Phil. 649) Appellants need not make specific assignment of errors provided they discuss at length and assail in their brief the correctness of the trial court's findings regarding the matter. Said discussion warrants the appellate court to rule upon the point because it substantially complies with Section 7, Rule 51 of the Revised Rules of Court, intended merely to compel the appellant to specify the questions which he wants to raise and be disposed of in his appeal. A clear discussion regarding an error allegedly committed by the trial court accomplishes the purpose of a particular assignment of error." (Cabrera vs. Belen, 95 Phil. 54; Miguel vs Court of Appeals, L- 20274, Oct. 30, 1969, 29 SCRA 760-773, cited in Moran, Comments on the Rules of Court, Vol. 11, 1970 ed., p. 534). Pleadings as well as remedial laws should be construed liberally in order that the litigants may have ample opportunity to prove their respective claims, and that a possible denial of substantial justice, due to legal technicalities, may be avoided." (Concepcion, et al. vs. The Payatas Estate Improvement Co., Inc., 103 Phil. 10 17). WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of First Instance of Cebu, 14th Judicial District, Branch XII is hereby REVERSED and SET ASIDE, and the derision of the City Court of Cebu, Branch II is hereby reinstated, with costs in favor of the petitioner. 215

SO ORDERED. Makasiar (Chairman), Concepcion, Jr., Abad Santos, and De Castro, JJ., concur. Aquino and Escolin JJ., concurs in the result,

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-44349 October 29, 1976 JESUS V. OCCENA and EFIGENIA C. OCCENA, petitioners, vs. HON. RAMON V. JABSON, Presiding Judge of the Court Of First Instance of Rizal, Branch XXVI; COURT OF APPEALS and TROPICAL HOMES, INC., respondents. Occena Law Office for petitioners. Serrano, Diokno & Serrano for respondents.

TEEHANKEE, J.: The Court reverses the Court of Appeals appealed resolution. The Civil Code authorizes the release of an obligor when the service has become so difficult as to be manifestly beyond the contemplation of the parties but does not authorize the courts to modify or revise the subdivision contract between the parties or fix a different sharing ratio from that contractually stipulated with the force of law between the parties. Private respondent's complaint for modification of the contract manifestly has no basis in law and must therefore be dismissed for failure to state a cause of action. On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its subdivision contract with petitioners 216

(landowners of a 55,330 square meter parcel of land in Davao City), making the following allegations: "That due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices, which are not within the control of plaintiff, of all commodities including basis raw materials required for such development work, the cost of development has risen to levels which are unanticipated, unimagined and not within the remotest contemplation of the parties at the time said agreement was entered into and to such a degree that the conditions and factors which formed the original basis of said contract, Annex 'A', have been totally changed; 'That further performance by the plaintiff under the contract. That further performance by the plaintiff under the contract,Annex 'S', will result in situation where defendants would be unustly enriched at the expense of the plaintiff; will cause an inequitous distribution of proceeds from the sales of subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in violation of the primordial concepts of good faith, fairness and equity which should pervade all human relations. Under the subdivision contract, respondent "guaranteed (petitioners as landowners) as the latter's fixed and sole share and participation an amount equivalent to forty (40%) percent of all cash receifpts fromthe sale of the subdivision lots" Respondent pray of the Rizal court of first instance that "after due trial, this Honorable Court render judgment modifying the terms and conditions of the contract ... by fixing the proer shares that shouls pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subjects subdivision". Petitioners moved to dismiss the complaint principally for lack of cause of action, and upon denial thereof and of reconsideration by the lower court elevated the matter on certiorari to respondent Court of Appeals. Respondent court in its questioned resolution of June 28, 1976 set aside the preliminary injunction previously issued by it and dimissed petition on the ground that under Article 1267 of the Civil Code which provides that ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. 1 ... a positive right is created in favor of the obligor to be released from the performance of an obligation in full or in part when its performance 'has 217

become so difficult as to be manifestly beyond the contemplation of the parties. Hence, the petition at abar wherein petitioners insist that the worldwide increase inprices cited by respondent does not constitute a sufficient casue of action for modification of the subdivision contrct. After receipt of respondent's comment, the Court in its Resolution of September 13, 1976 resolved to treat the petition as special civil actionand declared the case submitted for decision. The petition must be granted. While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the Civil Code, to wit; The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still responsible. ... 2 It misapplied the same to respondent's complaint. If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could show at the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond the contemplation of the parties", then respondent court's upholding of respondet's complaint and dismissal of the petition would be justifiable under the cited codal article. Without said article, respondent would remain bound by its contract under the theretofore prevailing doctrine that performance therewith is ot excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or unespectedly burdensome", 3 since in case a party desires to be excuse from performance in the event of such contingencies arising, it is his duty to provide threfor in the contract. But respondent's complaint seeks not release from the subdivision contract but that the court "render judgment I modifying the terms and Conditions of the Contract by fixing the proper shares that should pertain to the herein parties out of the gross proceed., from the sales of subdivided lots of subject subdivision". The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for those covenanted by the partiesthemselves. Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of

218

respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant the relief sought. A final procedural note. Respondent cites the general rule that an erroneous order denying a motion to dismiss is interlocutory and should not be corrected by certiorari but by appeal in due course. This case however manifestly falls within the recognized exception that certiorari will lie when appeal would not prove to be a speedy and adequate remedy.' Where the remedy of appeal would not, as in this case, promptly relieve petitioners from the injurious effects of the patently erroneous order maintaining respondent's baseless action and compelling petitioners needlessly to go through a protracted trial and clogging the court dockets by one more futile case, certiorari will issue as the plain, speedy and adequate remedy of an aggrieved party. ACCORDINGLY, the resolution of respondent appellate court is reversed and the petition for certiorari is granted and private respondent's complaint in the lower court is ordered dismissed for failure to state a sufficient cause of action. With costs in all instances against private respondent. Makasiar, Muñoz Palma, Concepcion, Jr., and Martin JJ., concur.

Footnotes 1 Other Civil Code articles cited by respondent court as justifyng the complaint were Articles 19 and 1159 which read: ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due and observe honesty and good faith. xxx xxx xxx ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

219

220

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-69255 February 27, 1987 PHILIPPINE NATIONAL BANK, petitioner, vs. GLORIA G. VDA. DE ONG ACERO, ARNOLFO ONG ACERO & SOLEDAD ONG ACERO CHUA, respondents. Leopoldo E. Petilla for respondents.

NARVASA, J.: Savings Account No. 010-5878868-D of Isabela Wood Construction & Development Corporation, opened with the Philippine National Bank on March 9, 1979 in the amount of P2 million is the subject of two (2) conflicting claims, sought to be definitively resolved in the proceedings at bar. 1 One claim is asserted by the ACEROS — Gloria G. Vda. de Ong Acero, Arnolfo Ong Acero and Soledad Ong Acero-Chua, judgment creditors of the depositor (hereafter simply referred to as ISABELA) — who seek to enforce against said savings account the final and executory judgment rendered in their favor by the Court of First Instance of Rizal QC Br. XVI). The other claim has been put forth by the Philippine National Bank (hereafter, simply PNB) which claims that since ISABELA was at some point in time both its debtor and creditor-ISABELA's deposit being deemed a loan to it (PNB)-there had occurred a mutual set-off between them, which effectively precluded the ACEROS' recourse to that deposit. The controversy was decided by the Intermediate Appellate Court adversely to the PNB. It is this decision that the PNB would have this Court reverse. The ACEROS' claim to the bank deposit is more specifically founded upon the garnishment thereof by the sheriff, effected in execution of the partial judgment rendered by the CFI at Quezon City in their favor on November 18, 1979. The partial judgment ordered payment by ISABELA to the ACEROS of the amount of P1,532,000.07. 2 Notice of garnisment was served on the PNB on January 9, 1980, pursuant to the writ of execution dated December 23, 1979. 3 This was followed by an Order issued on February 15, 1980 directing PNB to hand over this amount of P1,532,000.07 to the sheriff for delivery, in turn, to the ACEROS. Not quite two months later, or on April 8, 1980, a second (and the final and

221

complete judgment) was promulgated by the CFI in favor of the ACEROS and against ISABELA, the dispositive part of which is as follows: WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiffs and against the defendant: 1. Reiterating the dispositive portion of the partial judgment issued by this Court, dated November 16, 1979, ordering the defendant to pay to the plaintiff the amount of P1,532,000.07 as principal, with interest at 12% per annum from December 11, 1975 until the whole amount is fully paid; 2. Ordering defendant to pay the plaintiffs the amount of P207,148.00 as compensatory damages, with legal interest thereon from the filing of the complaint until the whole amount is fully paid; 3. Ordering defendant to pay plaintiffs the amount of P383,000.00 as and by way of attorneys fees. 4 On the other hand, PNB's claim to the two-million-peso deposit in question is made to rest on an agreement between it and ISABELA in virtue of which, according to PNB: (1) the deposit was made by ISABELA as "collateral" in connection with its indebtedness to PNB as to which it (ISABELA) had assumed certain contractual undertakings; and (2) in the event of ISABELA's failure to fulfill those undertakings, PNB was empowered to apply the deposit to the payment of that indebtedness. The facts upon which PNB's theory stands are summarized in the Order of CFI Judge Solano dated October 1, 1982, 5 relevant portions of which are here reproduced: On October 13, 1977, Isabela Wood Construction and Development Corporation ** entered into a Credit Agreement with PNB. Under the agreement PNB, having approved the application of defendant (Isabela & c.) for the establishment for its account of a deferred letter of credit in the amount of DM 4,695,947.00 in favor of the Machinenfabric Augsburg Nunberg (MAN) of Germany from whom defendant purchased thirty-five (35) units of MAN trucks, defendant corporation agreed to put up, as collaterals, among others, the following: 4. The CLIENT shall assign to the BANK the proceeds of its contract with the Department of Public Works for the construction of Nagapit Suspension Bridge (Substructure) in Cagayan. This particular proviso in the aforesaid agreement was to be subsequently confirmed by Faustino Dy, Jr., as president of defendant corporation, in a letter to the PNB, dated February 21, 1970, quoted in full as follows: Gentlemen:

222

This is to confirm our arrangement that the treasury warrant in the amount of P2,704 millon in favor of Isabela Wood Construction and Development Corporation to be delivered either by the Commission on Audit or the Ministry of Public Highways, shall be placed in a savings account with your bank to the extent of P 2 million. The said amount shall remain in the savings account until we are able to comply with the delivery and registration of the mortgage in favor of the Philippine National Bank of our Paranaque property, and the securing from Metropolitan Bank and Home Owners Savings and Loan Association to snow PNB a second mortgage on the properties of Isabela Wood Construction Group, Inc., presently under first mortgage with them. Thus, on March 9, 1970, pursuant to paragraph 4 of the Credit Agreement, quoted above, PNB thru its International Department opened the savings account in question, under Account No. 010-58768-D, with an initial deposit of P2,000,000.00, proceeds of a treasury warrant delivered to PNB (EXHIBIT 3-A). xxx xxx xxx Since defendant corporation failed to deliver to PNB by way of mortgage its Paranaque property, neither was defendant corporation able to secure from Metropolitan Bank and Home Owners Savings and Loan Association its consent to allow PNB a second mortgage, and considering that the obligation of defendant corporation to PNB have been due and unsettled, PNB applied the amount of P 2,102804.11 in defendant's savings account of PNB. It was upon this version of the facts, and its theory thereon based on a mutual set-off, or compensation, between it and ISABELA — in accordance with Articles 1278 et al. of the Civil Code — that PNB intervened in the action between the ACEROS and ISABELA on or about February 28, 1980 and moved for reconsideration of the Order of February 15, 1980 (requiring it to turn over to the sheriff the sum of P1,532,000.07, supra: fn. 2). But its motion met with no success. It was denied by the Lower Court (Hon. Judge Apostol, presiding) by Order dated May 14, 1980. 6And a motion for the reconsideration of that Order of May 14, 1980 was also denied, by Order dated August 11, 1980. PNB again moved for reconsideration, this time of the Order of August 11, 1980; it also pleaded for suspension in the meantime of the enforcement of the Orders of February 15, and May 14, 1980. Its persistence seemingly paid off. For the Trial Court (now presided over by Hon. Judge Solano), directed on October 9, 1980 the setting aside of the said Orders of May 14, and August 11, 1980, and set for hearing PNB's first motion for the reconsideration of the Order of February 15, 1980. 7 Several months afterwards, or more precisely on October 1, 1982, the Order of February 15, 1980 was itself also struck 223

down, 8 the Lower Court opining that under the circumstances, there had been a valid assignment by ISABELA to PNB of the amount deposited, which effectively placed that amount beyond the reach of the ACE ROS, viz: When the two million or so treasury warrant, proceeds of defendant's contract with the government was delivered to PNB, said amount, per agreement aforequoted, had already been assigned by defendant corporation to PNB, as collateral. The said amount is not a pledge. The assignment is valid. The defendant need not be the owner thereof at the time of assignment. An assignment of credit and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475. The contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the interest and upon its price. It is not necessary for the perfection of the contract of sale that the thing be delivered and that the price be paid. Neither is it necessary that the thing should belong to the vendor at the time of the perfection of the contract, it being sufficient that the vendor has the right to transfer ownership thereof at the time it is delivered. The shoe was now on the other foot. It was the ACEROS' turn to move for reconsideration, which they did as regards this Order of October 1, 1982; but by Order promulgated on December 14, 1982, the Court declined to modify its resolution. The ACEROS then appealed to the Intermediate Appellate Court which, after due proceedings, sustained them. On September 14, 1984, it rendered judgment the dispositive part whereof reads as follows: WHEREFORE, the Orders of October 1 and December 14, 1982 of the Court a quo are hereby REVERSED and SET ASIDE, and in their stead, it is hereby adjudged: 1. That the Order of February 15, 1980 of the Court a quo is hereby ordered reinstated; 2. That intervenor PNB must deliver the amount stated in the Order of February 15, 1980 with interest thereon at 12% from February 15, 1980 until delivered to appellants, the amount of interest to be paid by PNB and not to be deducted from the deposit of Isabela Wood;

224

3. That intervenor PNB must pay attorney's fees and expenses of litigation to appellants in the amount of P10,000.00 plus the costs of suit. 9 This dispositive part was subsequently modified at the ACEROS' instance, by Resolution dated November 8, 1984 which inter alia "additionally ** (ordered) PNB to likewise deliver to appellants the balance of the deposit of Isabela Wood Construction and Development Corporation after first deducting the amount applied to the partial judgment of P1,532,000.00 in satisfaction of appeallants' final judgment." 10 PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in the amount of P 2M, it (PNB) became indebted to ISABELA in that amount. 11 So that when ISABELA itself subsequently came to be indebted to it on account of ISABELA's breach of the terms of the Credit Agreement of October 13, 1977, and therefore ISABELA and PNB became at the same time creditors and debtors of each other, compensation automatically took place between them, in accordance with Article 1278 of the Civil Code. The amounts due from each other were, in its view, applied by operation of law to satisfy and extinguish their respective credits. More specifically, the P2M owed by PNB to ISABELA was automatically applied in payment and extinguishment of PNB's own credit against ISABELA. This having taken place, that amount of P2M could no longer be levied on by any other creditor of ISABELA, as the ACEROS attempted to do in the case at bar, in order to satisfy their judgment against ISABELA. Article 1278 of the Civil Code does indeed provide that "Compensation shall take when two persons, in their own right, are creditors and debtors of each other. " Also true is that compensation may transpire by operation of law, as when all the requisites therefor, set out in Article 1279, are present. Nonetheless, these legal provisions can not apply to PNB's advantage under the circumstances of the case at bar. The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC, by which upon firmly established rules even this Court is bound, 12 that it has not proven by competent evidence that it is a creditor of ISABELA. The only evidence present by PNB towards this end consists of two (2) documents marked in its behalf as Exhibits 1 and 2, But as the IAC has cogently observed, these documents do not prove any indebtedness of ISABELA to PNB. All they do prove is that a letter of credit might have been opened for ISABELA by PNB, but not that the credit was ever availed of (by ISABELA's foreign correspondent MAN, or that the goods thereby covered were in fact shipped, and received by ISABELA. Quite obviously, as the IAC has further observed, the most persuasive evidence of these facts — i.e., ISABELA's availment of the credit, as well as the actual delivery of the goods covered by and shipped pursuant to the letter of credit-assuming these facts to have occurred, would naturally and logically 225

have been in PNB's possession and could have been readily submitted to the Court, to wit: 1. The document of availment by the foreign creditor of the letter of credit. 2. The document of release of the amounts mentioned in the agreement. 3. The documents showing that the trucks (transported to the Philippines by the foreign creditor [MAN] were shipped to ** and received by Isabela. 4. The trust receipts by which possession was given to Isabela of the 35 (Imported) trucks. 5. The chattel mortgages over the trucks required under No. 3 of II Collaterals of the Credit Agreement (Exhibit 1). 6. The receipt by Isabela of the standing accounts sent by PNB. 7. There receipt of the letter of demand by Isabela Wood.

13

It bears stressing that PNB did not at all lack want for opportunity to produce these documents, if it does indeed have them. Judge Solano, it should be recalled, specifically allowed PNB to introduce evidence in relation to its Motion for Reconsideration filed on August 26, 1980, 14 and thus furnished the occasion for PNB to prove, among others, ISABELA's debt to it. PNB unaccountably failed to do so. Moreover, PNB never even attempted to offer or exhibit such evidence, in the course of the appellate proceedings before the IAC, which is a certain indication, in that Court's view, that PNB does not really have these proofs at ala For this singular omission PNB offers no explanation except that it saw no necessity to submit the Documents in evidence, because sometime on March 14, 1980, the ACEROS's attorney had been shown those precise documents — setting forth ISABELA's loan obligations, such as the import bills and the sight draft covering drawings on the L/C for ISABELA's account — and after all, the ACEROS had not really put this indebtedness in issue. 15The explanation cannot be taken seriously. In the picturesque but forceful language of the Appellate Court, the explanation "is silly as you do not prove a fact in issue by showing evidence in support thereof to the opposing counsel; you prove it by submitting evidence to the proper court." The fact is that the record does not disclose that the ACEROS have ever admitted the asserted theory of ISABELA's indebtedness to PNB. At any rate, not being privies to whatever transactions might have generated that indebtedness, they were clearly not in a position to make any declaration on the matter. The fact is, too, that the avowed indebtedness of ISABELA was an essential element of PNB's claim to the former's P2 million deposit and hence, it was incumbent on the latter to demonstrate it by competent evidence if it wished its claim to be judicially 226

recognized and enforced. This, it has failed to do. The failure is fatal to its claim. PNB has however deposited an alternative theory, which is that the P2M deposit had been assigned to it by ISABELA as "collateral," although not by way of pledge; that ISABELA had explicitly authorized it to apply the P2M deposit in payment of its indebtedness; and that PNB had in fact applied the deposit to the payment of ISABELA's debt on February 26, 1980, in concept of voluntary compensation. 16 This second, alternative theory, is as untenable as the first. In the first place, there being no indebtedness to PNB on ISABELA's part, there is in consequence no occasion to speak of any mutual set-off, or compensation, whether it be legal, i.e., which automatically occurs by operation of law, or voluntary, i.e., which can only take place by agreement of the parties. 17 In the second place, the documents indicated by PNB as constitutive of the claimed assignment do not in truth make out any such transaction. While the Credit Agreement of October 13, 1977 (Exh. 1) declares it to be ISABELA's intention to "assign to the BANK the proceeds of its contract with the Department of Public Works for the construction of Nagapit Suspension Bridge (Substructure) in Cagayan," 18 it does not appear that that intention was adhered to, much less carried out. The letter of ISABELA's president dated February 21, 1979 (Exh. 2) would on the contrary seem to indicate the abandonment of that intention, in the light of the statements therein that the amount of P2M (representing the bulk of the proceeds of its contract referred to) "shall be placed in a savings account" and that "said amount shall remain in the savings account until ** (ISABELA is) able to comply with" specified commitments — these being: the constitution and registration of a mortgage in PNB's favor over its "Paranaque property," and the obtention from the first mortgage thereof of consent for the creation of a second lien on the property. 19 These statements are to be sure inconsistent with the notion of an assignment of the money. In addition, there is yet another circumstance militating against the actuality of such an assignment-the "most telling argument" against it, in fact, in the line of the Appellate Court-and that is, that PNB itself, through its International Department, deposited the whole amount of ?2 million, not in its name, but in the name of ISABELA, 20 without any accompanying statement even remotely intimating that it (PNB) was the owner of the deposit, or that an assignment thereof was intended, or that some condition or lien was meant to burden it. Even if it be assumed that such an assignment had indeed been made, and PNB had been really authorized to apply the P2M deposit to the satisfaction of ISABELA's indebtedness to it, nevertheless, since the record reveals that the application was attempted to be made by PNB only on February 26, 1980, that essayed application was ineffectual and futile because at that time, the deposit 227

was already in custodia legis, notice of garnishment thereof having been served on PNB on January 9, 1980 (pursuant to the writ of execution issued by the Court of First Instance on December 23, 1979 for the enforcement of the partial judgment in the ACEROS' favor rendered on November 18,1979). One final factor precludes according validity to PNB's arguments. On the assumption that the P 2M deposit was in truth assigned as some sort of "collateral" to PNB — although as PNB insists, it was not in the form of a pledge — the agreement postulated by PNB that it had been authorized to assume ownership of the fund upon the coming into being of ISABELA s indebtedness is void ab initio, it being in the nature of a pactum commisoruim proscribed as contrary to public policy. 21 WHEREFORE, the judgment of the Intermediate Appellate Court subject of the instant appeal, being fully in accord with the facts and the law, is hereby affirmed in toto. Costs against petitioner. SO ORDERED. Yap (Chairman), Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.

Footnotes 1 Appeal by certiorari from the judgment of the Intermediate Appellate Court in AC-G.R. CV No. 009978: Caguioa, J. ponente. 2 Rollo, pp. 115-116. 3 Id., p. 117. 4 Id., p. 78. 5 Id., pp. 118-121. 6 Id., pp. 51-52. 7 Id., pp. 117. 8 Id., pp. 118-121. 9 Id., p. 64. 10 Id., p. 71.

228

11 Citing: Tian Tiong Tick v. American Apothecaries, 38 O.G. 889 [65 Phil. 414]; Gullas v. National Bank, 62 Phil. 519; Rollo, pp. 31-35. 12 Estate of R. Jalandoni vs. C.A., et al., G.R. No. 50374-76, Sept. 24, 1986, citing Sec. 2 (2d par.), Rule 45 of the Rules of Court; Terunez v. IAC, 134 SCRA 414, and other cases. 13 Rollo, P. 128-129. 14 Id., pp. 117-118. 15 Id., pp. 41-43. 16 Id., pp. 40-41,126-127. 17 SEE e.g., Caguioa, E., Comments & Cases on Civil Law, 1st. ed. [1968], Vol. IV, p. 287 [citing 3 Castan, 8th ed., pp. 298-299]; Paras, Civil Code Annotated, 11th ed (1985), Vol. IV, p. 409. 18 See footnote 5, supra. 19 See footnote 5, supra. 20 Rollo, pp. 123-124. 21 Art. 2088, Civil Code; Reyes v. Nebrija, 98 Phil. 639.

229

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. L-67649 June 28, 1988 ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.: The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the latter's name. The antecedent facts are as follows: Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City. On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion.

230

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property. Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas. On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds. On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January 24, 1980. On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads: WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint and ordering: (a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the defendant Ho Fernandez over the parcel of land including the improvements thereon, subject to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled. (b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30, Record on Appeal) The Intermediate Appellate Court affirmed the decision of the lower court in toto. Hence, this petition for review. Francia prefaced his arguments with the following assignments of grave errors of law: I

231

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER. II RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00. III RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo) We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property was sold at public auction without notice to him and that the price paid for the property was shockingly inadequate, amounting to fraud and deprivation without due process of law. A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant of his petition. We are constrained to dismiss it. Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977. There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other; 232

xxx xxx xxx (3) that the two debts be due. xxx xxx xxx This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that: A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required. ..." We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the governmental body not included in the tax levy. This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off." There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining 233

property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction. Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he pocketed the notice of the auction sale without reading it. Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law on sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied) We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof to show that there was compliance with all the prescribed requisites for a tax sale. The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that: xxx xxx xxx ... [D]ue process of law to be followed in tax proceedings must be established by proof and the general rule is that the purchaser of a tax title is bound to take upon himself the burden of showing the regularity of all proceedings leading up to the sale. (emphasis supplied) There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings are presumed to be regular. But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale. The records sustain the lower court's finding that: [T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the auction sale. Surprisingly, however, he admitted in his testimony that he received the letter dated November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on December 5, 1977 the date of the auction sale because he 234

went to Iligan City. As long as there was substantial compliance with the requirements of the notice, the validity of the auction sale can not be assailed ... . We quote the following testimony of the petitioner on cross-examination, to wit: Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the property in question shall be sold at public auction to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this letter? A. I just signed it because I was not able to read the same. It was just sent by mail carrier. Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but you did not read the contents of it? A. Yes, sir, as I was in a hurry. Q. After you received that original where did you place it? A. I placed it in the usual place where I place my mails. Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice. By his very own admission that he received the notice, his now coming to court assailing the validity of the auction sale loses its force. Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held: ... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable considering the wide divergence between their assessed values and the amounts for which they had been actually sold. However, while in ordinary sales for reasons of equity a transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts to interfere, such does not follow when the law gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory that the lesser the price the easier it is for the owner to effect the redemption. And so it was aptly said: "When there is 235

the right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by reason of the price obtained at the auction sale." The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290): If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold for taxes, the inadequacy of the price given is not a valid objection to the sale." This rule arises from necessity, for, if a fair price for the land were essential to the sale, it would be useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369). In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555): Like most cases of this character there is here a certain element of hardship from which we would be glad to relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty in the collection of taxes which are the life blood of the state. We are convinced that the present rules are just, and that they bring hardship only to those who have invited it by their own neglect. We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas, real estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny the petition. And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr.

236

Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly asking for the annulment of the sale. WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent court is affirmed. SO ORDERED. Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-50638 July 25, 1983 LORETO J. SOLINAP, petitioner, vs. HON. AMELIA K. DEL ROSARIO, as Presiding Judge of Branch IV, Court of First Instance of Iloilo, SPOUSES JUANITO and HARDEVI R. LUTERO, and THE PROVINCIAL SHERIFF OF ILOILO, respondents. Espeleta & Orleans Law Office for petitioner. Simplicia Magahum, Offemaria & Sixto Demaisip Law Office for private respondents.

ESCOLIN; J.: Posed for resolution in this petition is the issue of whether or not the obligation of petitioners to private respondents may be compensated or set- off against the amount sought to be recovered in an action for a sum of money filed by the former against the latter. The facts are not disputed. On June 2, 1970, the spouses Tiburcio Lutero and Asuncion Magalona, owners of the Hacienda Tambal, leased the said hacienda to petitioner Loreto Solinap for a period of ten [10] years for the 237

stipulated rental of P50,000.00 a year. It was further agreed in the lease contract that out of the aforesaid annual rental, the sum of P25,000.00 should be paid by Solinap to the Philippine National Bank to amortize the indebtedness of the spouses Lutero with the said bank. Tiburcio Lutero died on January 21, 1971. Soon after, his heirs instituted the testate estate proceedings of the deceased, docketed as Sp. Proc. No. 1870 of the Court of First Instance of Iloilo, presided by respondent Judge Amelia K. del Rosario. In the course of the proceedings, the respondent judge, upon being apprized of the mounting interest on the unpaid account of the estate, issued an order, stating, among others, "that in order to protect the estate, the administrator, Judge Nicolas Lutero, is hereby authorized to scout among the testamentary heirs who is financially in a position to pay all the unpaid obligations of the estate, including interest, with the right of subrogation in accordance with existing laws." On the basis of this order, respondents Juanito Lutero [grandson and heir of the late Tiburcio] and his wife Hardivi R. Lutero paid the Philippine National Bank the sum of P25,000.00 as partial settlement of the deceased's obligations. Whereupon the respondents Lutero filed a motion in the testate court for reimbursement from the petitioner of the amount thus paid. They argued that the said amount should have been paid by petitioner to the PNB, as stipulated in the lease contract he had entered into with the deceased Tiburcio Lutero; and that such reimbursement to them was proper, they being subrogees of the PNB. Before the motion could be resolved by the court, petitioner on April 28, 1978 filed in the Court of First Instance of Iloilo a separate action against the spouses Juanito Lutero and Hardivi R. Lutero for collection of the total amount of P71,000.00, docketed as Civil Case No. 12397. Petitioner alleged in the complaint that on April 25, 1974 the defendants Lutero borrowed from him the sum of P45,000.00 for which they executed a deed of real estate mortgage; that on July 2, 1974, defendants obtained an additional loan of P3,000.00, evidenced by a receipt issued by them; that defendants are further liable to him for the sum of P23,000.00, representing the value of certain dishonored checks issued by them to the plaintiff; and that defendants refused and failed to settle said accounts despite demands. In their answer, the respondents Lutero traversed the material averments of the complaint and set up legal and factual defenses. They further pleaded a counterclaim against petitioners for the total sum of P 125,000.00 representing unpaid rentals on Hacienda Tambal. Basis of the counterclaim is the allegation that they had purchased one-half [1/2] of Hacienda Tambal, which their predecessors, the spouses Tiburcio Lutero and Asuncion Magalona, leased to the plaintiff for a rental of P50,000.00 a year; and that plaintiffs had failed to pay said rentals despite demands.

238

At the pre-trial, the parties defined the issues in that case as follows: (1) Whether or not the defendants [Luteros] are indebted to the plaintiff and, if so, the amount thereof; (2) Whether or not the defendants are the owners of one-half [1/2] of that parcel of land known as 'Hacienda Tambal' presently leased to the plaintiff and, therefore, entitled to collect from the latter one-half [1/2] of its lease rentals; and in the affirmative, the amount representing the unpaid rental by plaintiff in favor of the defendant. 1 On June 14, 1978, the respondent judge issued an order in Sp. Proc. No. 1870, granting the respondent Lutero's motion for reimbursement from petitioner of the sum of P25,000.00 plus interest, as follows: WHEREFORE, Mr. Loreto Solinap is hereby directed to pay spouses Juanito Lutero and Hardivi R. Lutero the sum of P25,000.00 with interest at 12% per annum from June 17, 1975 until the same shall have been duly paid. Petitioner filed a petition for certiorari before this Court, docketed as G.R. No. L-48776, assailing the above order. This Court, however, in a resolution dated January 4, 1979 dismissed the petition thus: L-48776 [Loreto Solinap vs. CFI etc., et al.]- Acting on the petition in this case as well as the comment thereon of respondents and the reply of petitioner to said comment, the Court Resolved to DISMISS the petition for lack of merit, anyway, the P25,000.00 to be paid by the petitioner to the private respondent Luteros may well be taken up in the final liquidation of the account between petitioner as and the subject estate as lessor. Thereafter the respondent Luteros filed with the respondent court a "Motion to Reiterate Motion for Execution of the Order dated June 14, 1978." Petitioner filed a rejoinder to said motion, raising for the first time the thesis that the amount payable to private respondents should be compensated against the latter's indebtedness to him amounting to P71,000.00. Petitioner attached to his rejoinder copies of the pleadings filed in Civil Case No. 12397, then pending before Branch V of the Court of First Instance of Iloilo. This motion was denied by respondent judge on the ground that "the claim of Loreto Solinap against Juanito Lutero in Civil Case No. 12397 is yet to be liquidated and determined in the said case, such that the requirement in Article 1279 of the New Civil Code that both debts are liquidated for compensation to take place has not been established by the oppositor Loreto Solinap." Petition filed a motion for reconsideration of this order, but the same was denied. Hence, this petition. 239

The petition is devoid of merit. Petitioner contends that respondent judge gravely abused her discretion in not declaring the mutual obligations of the parties extinguished to the extent of their respective amounts. He relies on Article 1278 of the Civil Code to the effect that compensation shall take place when two persons, in their own right, are creditors and debtors of each other. The argument fails to consider Article 1279 of the Civil Code which provides that compensation can take place only if both obligations are liquidated. In the case at bar, the petitioner's claim against the respondent Luteros in Civil Case No. 12379 is still pending determination by the court. While it is not for Us to pass upon the merits of the plaintiffs' cause of action in that case, it appears that the claim asserted therein is disputed by the Luteros on both factual and legal grounds. More, the counterclaim interposed by them, if ultimately found to be meritorious, can defeat petitioner's demand. Upon this premise, his claim in that case cannot be categorized as liquidated credit which may properly be set-off against his obligation. As this Court ruled in Mialhe vs. Halili, 2 " compensation cannot take place where one's claim against the other is still the subject of court litigation. It is a requirement, for compensation to take place, that the amount involved be certain and liquidated." WHEREFORE, the petition is dismissed, with costs against petitioner. SO ORDERED. Makasiar (Chairman), Aquino and Concepcion, Jr., JJ., concur. De Castro, Guerrero, J., are on leave.

Separate Opinions

ABAD SANTOS, J., concurring: The petition is not only devoid of merit but it is also frivolous and petitioner should be assessed treble costs.

Separate Opinions

240

ABAD SANTOS, J., concurring: The petition is not only devoid of merit but it is also frivolous and petitioner should be assessed treble costs.

Footnotes 1 Pre-trial Order, Annex M, pp- 72-78, Rollo. 2 6 SCRA 453.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. L-31379 August 29, 1988 COMPAÑIA MARITIMA, petitioner, vs. COURT OF APPEALS and VICENTE CONCEPCION, respondents.

241

Rafael Dinglasan for petitioner. Benjamin J. Molina for private respondent.

FERNAN, C.J.: Petitioner Compañia Maritima seeks to set aside through this petition for review on certiorari the decision 1 of the Court of Appeals dated December 5, 1965, adjudging petitioner liable to private respondent Vicente E. Concepcion for damages in the amount of P24,652.97 with legal interest from the date said decision shall have become final, for petitioner's failure to deliver safely private respondent's payloader, and for costs of suit. The payloader was declared abandoned in favor of petitioner. The facts of the case are as follows: Private respondent Vicente E. Concepcion, a civil engineer doing business under the name and style of Consolidated Construction with office address at Room 412, Don Santiago Bldg., Taft Avenue, Manila, had a contract with the Civil Aeronautics Administration (CAA) sometime in 1964 for the construction of the airport in Cagayan de Oro City Misamis Oriental. Being a Manila — based contractor, Vicente E. Concepcion had to ship his construction equipment to Cagayan de Oro City. Having shipped some of his equipment through petitioner and having settled the balance of P2,628.77 with respect to said shipment, Concepcion negotiated anew with petitioner, thru its collector, Pacifico Fernandez, on August 28, 1964 for the shipment to Cagayan de Oro City of one (1) unit payloader, four (4) units 6x6 Reo trucks and two (2) pieces of water tanks. He was issued Bill of Lading 113 on the same date upon delivery of the equipment at the Manila North Harbor. 2 These equipment were loaded aboard the MV Cebu in its Voyage No. 316, which left Manila on August 30, 1964 and arrived at Cagayan de Oro City in the afternoon of September 1, 1964. The Reo trucks and water tanks were safely unloaded within a few hours after arrival, but while the payloader was about two (2) meters above the pier in the course of unloading, the swivel pin of the heel block of the port block of Hatch No. 2 gave way, causing the payloader to fall. 3 The payloader was damaged and was thereafter taken to petitioner's compound in Cagayan de Oro City. On September 7, 1964, Consolidated Construction, thru Vicente E. Concepcion, wrote Compañia Maritima to demand a replacement of the payloader which it was considering as a complete loss because of the extent of damage. 4 Consolidated Construction likewise notified petitioner of its claim for

242

damages. Unable to elicit response, the demand was repeated in a letter dated October 2, 1964. 5 Meanwhile, petitioner shipped the payloader to Manila where it was weighed at the San Miguel Corporation. Finding that the payloader weighed 7.5 tons and not 2.5 tons as declared in the B-111 of Lading, petitioner denied the claim for damages of Consolidated Construction in its letter dated October 7, 1964, contending that had Vicente E. Concepcion declared the actual weight of the payloader, damage to their ship as well as to his payloader could have been prevented. 6 To replace the damaged payloader, Consolidated Construction in the meantime bought a new one at P45,000.00 from Bormaheco Inc. on December 3, 1964, and on July 6, 1965., Vicente E. Concepcion filed an action for damages against petitioner with the then Court of First Instance of Manila, Branch VII, docketed as Civil Case No. 61551, seeking to recover damages in the amount of P41,225.00 allegedly suffered for the period of 97 days that he was not able to employ a payloader in the construction job at the rate of P450.00 a day; P34,000.00 representing the cost of the damaged payloader; Pl 1, 000. 00 representing the difference between the cost of the damaged payloader and that of the new payloader; P20,000.00 representing the losses suffered by him due to the diversion of funds to enable him to buy a new payloader; P10,000.00 as attorney's fees; P5,000.00 as exemplary damages; and cost of the suit. 7 After trial, the then Court of First Instance of Manila, Branch VII, dismissed on April 24, 1968 the complaint with costs against therein plaintiff, herein private respondent Vicente E. Concepcion, stating that the proximate cause of the fall of the payloader was Vicente E. Concepcion's act or omission in having misrepresented the weight of the payloader as 2.5 tons instead of its true weight of 7.5 tons, which underdeclaration was intended to defraud Compañia Maritima of the payment of the freight charges and which likewise led the Chief Officer of the vessel to use the heel block of hatch No. 2 in unloading the payloader. 8 From the adverse decision against him, Vicente E. Concepcion appealed to the Court of Appeals which, on December 5, 1965 rendered a decision, the dispositive portion of which reads: IN VIEW WHEREOF, judgment must have to be as it is hereby reversed; defendant is condemned to pay unto plaintiff the sum in damages of P24,652.07 with legal interest from the date the present decision shall have become final; the payloader is declared abandoned to defendant; costs against the latter. 9 Hence, the instant petition.

243

The principal issue in the instant case is whether or not the act of private respondent Vicente E. Concepcion in furnishing petitioner Compañia Maritima with an inaccurate weight of 2.5 tons instead of the payloader's actual weight of 7.5 tons was the proximate and only cause of the damage on the Oliver Payloader OC-12 when it fell while being unloaded by petitioner's crew, as would absolutely exempt petitioner from liability for damages under paragraph 3 of Article 1734 of the Civil Code, which provides: Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only: xxx xxx xxx (3) Act or omission of the shipper or owner of the goods. Petitioner claims absolute exemption under this provision upon the reasoning that private respondent's act of furnishing it with an inaccurate weight of the payloader constitutes misrepresentation within the meaning of "act or omission of the shipper or owner of the goods" under the above- quoted article. It likewise faults the respondent Court of Appeals for reversing the decision of the trial court notwithstanding that said appellate court also found that by representing the weight of the payloader to be only 2.5 tons, private respondent had led petitioner's officer to believe that the same was within the 5 tons capacity of the heel block of Hatch No. 2. Petitioner would thus insist that the proximate and only cause of the damage to the payloader was private respondent's alleged misrepresentation of the weight of the machinery in question; hence, any resultant damage to it must be borne by private respondent Vicente E. Concepcion. The general rule under Articles 1735 and 1752 of the Civil Code is that common carriers are presumed to have been at fault or to have acted negligently in case the goods transported by them are lost, destroyed or had deteriorated. To overcome the presumption of liability for the loss, destruction or deterioration of the goods under Article 1735, the common carriers must prove that they observed extraordinary diligence as required in Article 1733 of the Civil Code. The responsibility of observing extraordinary diligence in the vigilance over the goods is further expressed in Article 1734 of the same Code, the article invoked by petitioner to avoid liability for damages. Corollary is the rule that mere proof of delivery of the goods in good order to a common carrier, and of their arrival at the place of destination in bad order, makes out prima facie case against the common carrier, so that if no explanation is given as to how the loss, deterioration or destruction of the goods occurred, the common carrier must be held responsible. 10 Otherwise stated, it is incumbent upon the common carrier to prove that the loss,

244

deterioration or destruction was due to accident or some other circumstances inconsistent with its liability. In the instant case, We are not persuaded by the proferred explanation of petitioner alleged to be the proximate cause of the fall of the payloader while it was being unloaded at the Cagayan de Oro City pier. Petitioner seems to have overlooked the extraordinary diligence required of common carriers in the vigilance over the goods transported by them by virtue of the nature of their business, which is impressed with a special public duty. Thus, Article 1733 of the Civil Code provides: Art. 1733. Common carriers, from the nature of their business and for reason of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them according to all the circumstances of each case. Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734, 1735 and 1745, Nos. 5, 6 and 7, ... The extraordinary diligence in the vigilance over the goods tendered for shipment requires the common carrier to know and to follow the required precaution for avoiding damage to, or destruction of the goods entrusted to it for safe carriage and delivery. It requires common carriers to render service with the greatest skill and foresight and "to use all reasonable means to ascertain the nature and characteristic of goods tendered for shipment, and to exercise due care in the handling and stowage including such methods as their nature requires."11 Under Article 1736 of the Civil Code, the responsibility to observe extraordinary diligence commences and 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 the right to receive them without prejudice to the provisions of Article 1738. Where, as in the instant case, petitioner, upon the testimonies of its own crew, failed to take the necessary and adequate precautions for avoiding damage to, or destruction of, the payloader entrusted to it for safe carriage and delivery to Cagayan de Oro City, it cannot be reasonably concluded that the damage caused to the payloader was due to the alleged misrepresentation of private respondent Concepcion as to the correct and accurate weight of the payloader. As found by the respondent Court of Appeals, the fact is that petitioner used a 5-ton capacity lifting apparatus to lift and unload a visibly heavy cargo like a payloader. Private respondent has, likewise, sufficiently established the laxity and carelessness of petitioner's crew in their methods of ascertaining the weight of heavy cargoes offered for shipment before loading and unloading them, as is customary among careful persons.

245

It must be noted that the weight submitted by private respondent Concepcion appearing at the left-hand portion of Exhibit 8 12 as an addendum to the original enumeration of equipment to be shipped was entered into the bill of lading by petitioner, thru Pacifico Fernandez, a company collector, without seeing the equipment to be shipped.13 Mr. Mariano Gupana, assistant traffic manager of petitioner, confirmed in his testimony that the company never checked the information entered in the bill of lading. 14 Worse, the weight of the payloader as entered in the bill of lading was assumed to be correct by Mr. Felix Pisang, Chief Officer of MV Cebu. 15 The weights stated in a bill of lading are prima facie evidence of the amount received and the fact that the weighing was done by another will not relieve the common carrier where it accepted such weight and entered it on the bill of lading. 16 Besides, common carriers can protect themselves against mistakes in the bill of lading as to weight by exercising diligence before issuing the same. 17 While petitioner has proven that private respondent Concepcion did furnish it with an inaccurate weight of the payloader, petitioner is nonetheless liable, for the damage caused to the machinery could have been avoided by the exercise of reasonable skill and attention on its part in overseeing the unloading of such a heavy equipment. And circumstances clearly show that the fall of the payloader could have been avoided by petitioner's crew. Evidence on record sufficiently show that the crew of petitioner had been negligent in the performance of its obligation by reason of their having failed to take the necessary precaution under the circumstances which usage has established among careful persons, more particularly its Chief Officer, Mr. Felix Pisang, who is tasked with the over-all supervision of loading and unloading heavy cargoes and upon whom rests the burden of deciding as to what particular winch the unloading of the payloader should be undertaken. 18 While it was his duty to determine the weight of heavy cargoes before accepting them. Mr. Felix Pisang took the bill of lading on its face value and presumed the same to be correct by merely "seeing" it. 19 Acknowledging that there was a "jumbo" in the MV Cebu which has the capacity of lifting 20 to 25 ton cargoes, Mr. Felix Pisang chose not to use it, because according to him, since the ordinary boom has a capacity of 5 tons while the payloader was only 2.5 tons, he did not bother to use the "jumbo" anymore. 20 In that sense, therefore, private respondent's act of furnishing petitioner with an inaccurate weight of the payloader upon being asked by petitioner's collector, cannot be used by said petitioner as an excuse to avoid liability for the damage caused, as the same could have been avoided had petitioner utilized the "jumbo" lifting apparatus which has a capacity of lifting 20 to 25 tons of heavy cargoes. It is a fact known to the Chief Officer of MV Cebu that the payloader was loaded aboard the MV Cebu at the Manila North Harbor on August 28, 1964 by means of a terminal crane. 21 Even if petitioner chose not to take the necessary precaution to avoid damage by checking the correct 246

weight of the payloader, extraordinary care and diligence compel the use of the "jumbo" lifting apparatus as the most prudent course for petitioner. While the act of private respondent in furnishing petitioner with an inaccurate weight of the payloader cannot successfully be used as an excuse by petitioner to avoid liability to the damage thus caused, said act constitutes a contributory circumstance to the damage caused on the payloader, which mitigates the liability for damages of petitioner in accordance with Article 1741 of the Civil Code, to wit: Art. 1741. If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable in damages, which however, shall be equitably reduced. We find equitable the conclusion of the Court of Appeals reducing the recoverable amount of damages by 20% or 1/5 of the value of the payloader, which at the time the instant case arose, was valued at P34,000. 00, thereby reducing the recoverable amount at 80% or 4/5 of P34,000.00 or the sum of P27,200.00. Considering that the freight charges for the entire cargoes shipped by private respondent amounting to P2,318.40 remained unpaid.. the same would be deducted from the P27,000.00 plus an additional deduction of P228.63 representing the freight charges for the undeclared weight of 5 tons (difference between 7.5 and 2.5 tons) leaving, therefore, a final recoverable amount of damages of P24,652.97 due to private respondent Concepcion. Notwithstanding the favorable judgment in his favor, private respondent assailed the Court of Appeals' decision insofar as it limited the damages due him to only P24,652.97 and the cost of the suit. Invoking the provisions on damages under the Civil Code, more particularly Articles 2200 and 2208, private respondent further seeks additional damages allegedly because the construction project was delayed and that in spite of his demands, petitioner failed to take any steps to settle his valid, just and demandable claim for damages. We find private respondent's submission erroneous. It is well- settled that an appellee, who is not an appellant, may assign errors in his brief where his purpose is to maintain the judgment on other grounds, but he may not do so if his purpose is to have the judgment modified or reversed, for, in such case, he must appeal. 22 Since private respondent did not appeal from the judgment insofar as it limited the award of damages due him, the reduction of 20% or 1/5 of the value of the payloader stands. WHEREFORE, in view of the foregoing, the petition is DENIED. The decision of the Court of Appeals is hereby AFFIRMED in all respects with costs against petitioner. In view of the length of time this case has been pending, this decision is immediately executory. 247

Gutierrez, Jr., Feliciano, Bidin and Cortes JJ., concur.

Footnotes 1 Penned by Justice Magno S. Gatmaitan and concurred in by Justices Julio Villamor and Ruperto G. Martin. 2 Exhibit "A", p. 1, Records. 3 Exhibit '4", P. 25, Records. 4 Exhibit "D", p. 4, Records. 5 Exhibit "E", p. 5, Records. 6 Exhibit "F", p. 7, Records. 7 pp. 1-7, Record on Appeal, p. 28, Rollo. 8 pp. 34-47, lbid. 9 pp. 25-26, Rollo. 10 Mirasol vs. Robert Dollar Co., 53 Phil. 129; Ynchausti Steamship Co. vs. Dexter and Unson, 41 Phil. 289. 11 The Ensley City DC, Ma; 71 F. Suppl. 444, citing Schnell vs. The Vallescura, 293 U.S. 296, 55 Sct. 194, 79 L. Ed. 373; The Nichiyo Maru, 4 Cri, 89 F. 2d 539-1 Bank Line v. Porter, 4 Cir 25 F. 2d. 843. 12 p. 36, Records. 13 TSN December 16,1966, pp. 111-113. 14 TSN, January 19,1967, pp. 119-120. 15 TSN, September 29,1968, pp. 84-85. 16 Baker vs. H. Dittinger Roller Mills, Co., Tex, Civ. Appl 203 SW 798. 17 lbid. 18 TSN, September 29,1966, p. 57. 19 p. 80, Ibid.

248

20 p. 78, lbid. 21 p. 71, lbid. 22 Gorospe et al. vs. Peñaflorida et al., 101 Phil. 886, citing Pineda & Ampil Mfg. Co., et al. vs. Arsenio Bartolome, et al., 95 Phil. 930; Saenz v. Mitchell, 60 Phil. 69: Mendoza v. Mendiola, 53 Phil. 267. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-69560 June 30, 1988 THE INTERNATIONAL CORPORATE BANK INC., petitioner, vs. THE IMMEDIATE APPELLATE COURT, HON. ZOILO AGUINALDO, as presiding Judge of the Regional Trial Court of Makati, Branch 143, NATIVIDAD M. FAJARDO, and SILVINO R. PASTRANA, as Deputy and Special Sheriff, respondents.

PARAS, J.: This is a petition for review on certiorari of the Decision of the Court of Appeals dated October 31, 1984 in AC-G.R. SP No. 02912 entitled "THE INTERNATIONAL CORPORATE BANK, INC. v. Hon. ZOILO AGUINALDO, et al.," dismissing petitioner's petition for certiorari against the Regional Trial Court of Makati (Branch 143) for lack of merit, and of its Resolution dated January 7, 1985, denying petitioner's motion for reconsideration of the aforementioned Decision. Petitioner also prays that upon filing of the petition, a restraining order be issued ex-parte, enjoining respondents or any person acting in their behalf, from enforcing or in any manner implementing the Order of the respondent trial court dated February 13 and March 9, 1984, and January 10 and January 11, 1985. The facts of this case, as found by the trial court and subsequently adopted by the Court of Appeals, are as follows: In the early part of 1980, private respondent secured from petitioner's predecessors-in-interest, the then Investment and Underwriting Corp. of the Philippines and Atrium Capital Corp., a loan in the amount of P50,000,000.00. 249

To secure this loan, private respondent mortgaged her real properties in Quiapo, Manila and in San Rafael, Bulacan, which she claimed have a total market value of P110,000,000.00. Of this loan, only the amount of P20,000,000.00 was approved for release. The same amount was applied to pay her other obligations to petitioner, bank charges and fees. Thus, private respondent's claim that she did not receive anything from the approved loan. On September 11, 1980, private respondent made a money market placement with ATRIUM in the amount of P1,046,253.77 at 17% interest per annum for a period of 32 days or until October 13, 1980, its maturity date. Meanwhile, private respondent allegedly failed to pay her mortgaged indebtedness to the bank so that the latter refused to pay the proceeds of the money market placement on maturity but applied the amount instead to the deficiency in the proceeds of the auction sale of the mortgaged properties. With Atrium being the only bidder, said properties were sold in its favor for only P20,000,000.00. Petitioner claims that after deducting this amount, private respondent is still indebted in the amount of P6.81 million. On November 17, 1982, private respondent filed a complaint with the trial court against petitioner for annulment of the sheriff's sale of the mortgaged properties, for the release to her of the balance of her loan from petitioner in the amount of P30,000,000,00, and for recovery of P1,062,063.83 representing the proceeds of her money market investment and for damages. She alleges in her complaint, which was subsequently amended, that the mortgage is not yet due and demandable and accordingly the foreclosure was illegal; that per her loan agreement with petitioner she is entitled to the release to her of the balance of the loan in the amount of P30,000,000.00; that petitioner refused to pay her the proceeds of her money market placement notwithstanding the fact that it has long become due and payable; and that she suffered damages as a consequence of petitioner's illegal acts. In its answer, petitioner denies private respondent's allegations and asserts among others, that it has the right to apply or set off private respondent's money market claim of P1,062,063.83. Petitioner thus interposes counterclaims for the recovery of P5,763,741.23, representing the balance of its deficiency claim after deducting the proceeds of the money market placement, and for damages. The trial court subsequently dismissed private respondent's cause of action concerning the annulment of the foreclosure sale, for lack of jurisdiction, but left the other causes of action to be resolved after trial. Private respondent then filed separate complaints in Manila and in Bulacan for annulment of the foreclosure sale of the properties in Manila and in Bulacan, respectively. On December 15, 1983, private respondent filed a motion to order petitioner to release in her favor the sum of P1,062,063.83, representing the proceeds of the money market placement, at the time when she had already given her 250

direct testimony on the merits of the case and was being cross-examined by counsel. On December 24, 1983, petitioner filed an opposition thereto, claiming that the proceeds of the money market investment had already been applied to partly satisfy its deficiency claim, and that to grant the motion would be to render judgment in her favor without trial and make the proceedings moot and academic. However, at the hearing on February 9, 1984, counsel for petitioner and private respondent jointly manifested that they were submitting for resolution said motion as well as the opposition thereto on the basis of the pleadings and of the evidence which private respondent had already presented. On February 13, 1984, respondent judge issued an order granting the motion, as follows: IN VIEW OF THE FOREGOING, the defendant International Corporate Bank is hereby ordered to deliver to the plaintiff Natividad M. Pajardo the amount of P1,062,063.83 covered by the repurchase agreement with Serial No. AOY-14822 (Exhibit "A'), this amount represented the principal of P1,046,253.77 which the plaintiff held including its interest as of October 13, 1980, conditioned upon the plaintiff filing a bond amount to P1,062,063.83 to answer for all damages which the said defendant bank may suffer in the event that the Court should finally decide that the plaintiff was not entitled to the said amount. Petitioner filed a motion for reconsideration to the aforesaid order, asserting among other things that said motion is not verified, and therefore a mere scrap of paper. Private respondent however manifested that since she testified in open court and was cross-examined by counsel for petitioner on the motion for release of the proceeds of the money market placement, the defect had already been cured. On March 9, 1984, the respondent judge issued an order denying petitioner's motion for reconsideration. (CA Decision, Rollo, pp. 109-111). On March 13, 1984, petitioner filed a special civil action for certiorari and prohibition with preliminary injunction with the Court of Appeals, (a) for the setting aside and annulment of the Orders dated February 13, 1984 and March 9,1984, issued by the respondent trial court, and (b) for an order commanding or directing the respondent trial judge to desist from enforcing and/or implementing and/or executing the aforesaid Orders. The temporary restraining order prayed for was issued by respondent Court of Appeals on March 22, 1984. (Please see CA Decision, Rollo, p. 114, last paragraph). In a decision rendered on October 31, 1984 (Rollo, pp. 109-14), the Court of Appeals dismissed said petition finding—(a) that while the Motion for the release of the proceeds of the money market investment in favor of private respondent was not verified by her, that defect was cured when she testified under oath to substantiate her allegations therein: (b) that, petitioner cannot 251

validly claim it was denied due process for the reason that it was given ample time to be heard, as it was in fact heard when it filed an Opposition to the motion and a motion for reconsideration; (c) that the circumstances of this case prevent legal compensation from taking place because the question of whether private respondent is indebted to petitioner in the amount of 6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed; (d) that the release of the proceeds of the money market investment for private respondent will not make the causes of action of the case pending before the trial court moot and academic nor will it cause irreparable damage to petitioner, private respondent having filed her bond in the amount of P1,062,063.83 to answer for all damages which the former may suffer in the event that the court should finally decide that private respondent is not entitled to the return of said amount (CA Decision, Rello, pp. 112-114). The dispositive portion of the aforementioned Decision reads: ... We hold that the respondent court cannot be successfully charged with grave abuse of discretion amounting to lack of jurisdiction when it issued its Orders of February 13, 1984 and March 9, 1984, based as they are on a correct appreciation of the import of the parties' evidence and the applicable law. IN VIEW WHEREOF, the petition is dismissed for lack of merit and the temporary restraining order issued by this Court on March 22, 1984 is lifted. (Ibid., p. 114). Petitioner moved for the reconsideration of the above decision (Annex "S", Rollo, pp. 116-124), but for the reason that the same failed to raise any issue that had not been considered and passed upon by the respondent Court of Appeals, it was denied in a Resolution dated January 7, 1985 (CA Resolution, Rollo, p. 126). Having been affirmed by the Court of Appeals, the trial court issued a Writ of Execution to implement its Order of February 13, 1984 (Annex "BB", Rollo, p. 188) and by virtue thereof, a levy was made on petitioner's personal property consisting of 20 motor vehicles (Annex "U", Rollo, p. 127). On January 9, 1985, herein private respondent (then plaintiff) filed in the trial court an ex-parte motion praying that the four branches of the petitioner such as: Baclaran Branch, Paranaque, Metro Manila; Ylaya Branch, Divisoria, Metro Manila; Cubao Branch, Quezon City and Binondo Branch, Sta. Cruz, Manila, be ordered to pay the amount of P250,000.00 each, and the main office of the petitioner bank at Paseo de Roxas, Makati, Metro Manila, be ordered to pay the amount of P62,063.83 in order to answer for the claim of private respondent amounting to P1,062,063.83.

252

Thereupon, on January 10, 1985, the trial court issued an Order (Annex "V", Rollo, p. 129) granting the above-mentioned prayers. Acting on the ex-parte motion by the plaintiff (now private respondent), the trial court, on January 11, 1984, ordered the President of defendant International Corporate Bank (now petitioner) and all its employees and officials concemed to deliver to the sheriff the 20 motor vehicles levied by virtue of the Writ of Execution dated December 12, 1984 (Annex "W", Rollo, p. 131). The petitioner having failed to comply with the above-cited Order, the respondent trial court issued two (2) more Orders: the January 16, 1985 (Annex "CC," Rollo, p. 190) and January 21, 1985 Orders (Annex "DD", Rollo, p. 191), directing several employees mentioned therein to show cause wily they should not be cited in contempt. Hence, this petition for review on certiorari with prayer for a restraining order and for a writ of preliminary injunction. Three days after this petition was filed, or specifically on January 18, 1985, petitioner filed an urgent motion reiterating its prayer for the issuance of an ex-parte restraining order (Rollo, p. 132). Simultaneous with the filing of the present petition, petitioner, as defendant, filed with the trial court an ex-partemotion to suspend the implementation of any and all orders and writs issued pursuant to Civil Case No. 884 (Annex "A", Rollo, p. 135). This Court's resolution dated January 21, 1985, without giving due course to the petition, resolved (a) to require the respondents to comment: (b) to issue, effective immediately and until further orders from this Court, a Temporary Restraining Order enjoining the respondents from enforcing or in any manner implementing the questioned Orders dated February 13, 1984, March 9, 1984, January 10, 1985 and January 11 and 16, 1985, issued in Civil Case No. 884. The corresponding writ was issued on the same day (Rollo, pp. 139-140). As required, the Comment of private respondent was filed on January 28, 1985 (Rollo, pp. 141- 150). Thereafter, petitioner moved for leave to file a supplemental petition on the ground that after it had filed this present petition, petitioner discovered that the bond filed with, and approved by, the respondent lower court showed numerous material erasures, alterations and/or additions (Rollo, p. 151), which the issuing insurance company certified as having been done without its authority or consent (Annex "Z", Rollo, p. 178).

253

The Supplemental Petition was actually filed on February 1, 1985 (Rollo, pp. 154-171). It pointed out the erasures, alterations and/or additions in the bond as follows: a. below "Civil Case No. 884" after the words, "Plaintiff's Bond," the phrase "For Levying of Attachment" was erased or deleted; b. in lines 2 and 3 after the word "order," the phrase "approving plaintiff's motion dated Dec. 15, 1983, was inserted or added; c. in line 3, the phrases "Of attachment" and "ordered that a writ of attachment issue' were erased or deleted; d also in line 3 after the words "the court has" the phrase "approved the Motion was likewise inserted or added; e. in line 9, the phrase "and of the levying of said attachment" was also erased or deleted; f. in line 13, the word "attachment" was likewise erased or deleted; g. also in line 13 after the deletion of word "attachment" the phrase "release of the P1,062,063.83 to the plaintiff was similarly inserted or added." Petitioner contended therein that in view of the foregoing facts, the genuineness, due execution and authenticity as well as the validity and enforceability of the bond (Rello, p. 174) is now placed in issue and consequently, the bond may successfully be repudiated as falsified and, therefore, without any force and effect and the bonding company may thereby insist that it has been released from any hability thereunder. Also, petitioner pointed as error the respondent trial court's motu proprio transferring Civil Case No. 884 to the Manila Branch of the same Court arguing that improper venue, as a ground for, and unless raised in, a Motion to Dismiss, may be waived by the parties and the court may not pre-empt the right of the parties to agree between or among themselves as to the venue of their choice in litigating their justiciable controversy (Supplemental Petition, Rollo, p. 160). On being required to comment thereon, (Rollo, p. 192) private respondent countered (Rollo, pp. 193-198) that bond forms are ready-prepared forms and the bonding company used the form for "Levying of Attachment" because the company has no ready-prepared form for the kind of bond called for or required in Civil Case 884. Whatever deletions or additions appear on the bond were made by the Afisco Insurance Corporation itself for the purpose of accomplishing what was required or intended.

254

Nonetheless, on May 7, 1985, private respondent filed "Plaintiffs Bond" in the respondent trial court in the amount of P1,062,063.83 a xerox copy of which was furnished this Court (Rollo, p. 219), and noted in the Court's Resolution dated May 29,1985 (Rollo, p. 225). On March 11, 1985, petitioner was required to file a Consolidated Reply (Rollo, p. 199) which was filed on April 10, 1985 (Rollo, p. 201). Thereafter, a Rejoinder (Rollo, p. 238) was filed by private respondent on September 18, 1985 after Atty. Advincula, counsel for private respondents was required by this Court to show cause why he should not be disciplinarily dealt with or held in contempt for his failure to comply on time (Rollo, p. 226) and on August 19, 1985 said lawyer was finally admonished (Rollo, p. 229) for his failure to promptly apprise the Court of his alleged non-receipt of copy of petitioner's reply, which alleged non-receipt was vehemently denied by petitioner in its Counter Manifestation (Rollo, p. 230) filed on August 5, 1985. Finally, on October 7, 1985, this petition was given due course and both parties were required to submit simultaneous memoranda (Rollo, p. 249) but before the same were filed, petitioner moved for leave to file sur-rejoinder (Rollo, p. 250), the sur-rejoinder was filed on October 14,1985 (Rollo, pp. 252-254). Petitioner's memorandum was filed on December 28, 1985 (Rollo, pp. 264-292) while that of private respondent was submitted on January 10, 1986 (Rollo, pp. 295-304). Petitioner again moved for leave to file a Reply Memorandum (Rollo, p. 307) which, despite permission from this Court, was not filed and on August 22, 1986, private respondent prayed for early resolution of the petition (Rollo, p. 311). In a resolution dated October 13, 1986 (Rollo, p. 314) this case was transferred to the Second Division of this Court, the same being assigned to a member of that Division. The crucial issue to be resolved in this case is whether or not there can be legal compensation in the case at bar. Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the amount of P6.81 million against which it has the right to apply or set off private respondent's money market claim of P1,062,063.83. The argument is without merit. As correctly pointed out by the respondent Court of Appeals — 255

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). "When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge of the debtors." (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that legal compensation shall take place, "the two debts be due" and "they be liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of contract. (Compañia General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Herrero, 17 Phil. 29). There can be no doubt that petitioner is indebted to private respondent in the amount of P1,062,063.83 representing the proceeds of her money market investment. This is admitted. But whether private respondent is indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents legal compensation from taking place. (CA Decision, Rollo, pp. 112-113). It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private respondent's property from which the alleged deficiency arose. (Annex "AA", Rollo, pp. 181-189). Therefore, the validity of the extrajudicial foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it is evident, that the requirement of Article 1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot take place under Article 1290 of the Civil Code. Petitioner now assails the motion of the plaintiff (now private respondent) filed in the trial court for the release of the proceeds of the money market investment, arguing that it is deficient in form, the same being unverified (petitioner's Memorandum, Rollo, p. 266). On this score, it has been held that "as enjoined by the Rules of Court and the controlling jurisprudence, a liberal construction of the rules and the pleadings is the controlling principle to effect substantial justice." (Maturan v. Araula, 111 SCRA 615 [1982]). Finally, the filing of insufficient or defective bond does not dissolve absolutely and unconditionally the injunction issued. Whatever defect the bond possessed was cured when private respondent filed another bond in the trial court. PREMISES CONSIDERED, the questioned Decision and Resolution of the respondent Court of Appeals are hereby AFFIRMED. SO ORDERED.

256

Yap, C.J., Melencio-Herrera and Padilla, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-48797

July 30, 1943

257

FUA CAM LU, plaintiff-appellee, vs. YAP FAUCO and YAP SINGCO, defendants-appellants. Vicente J. Francisco for petitioner. M.H. de Joya for respondents. The plaintiff-appellee, Fua Cam Lu, obtained in civil case No. 42125 of the Court of First Instance of Manila a judgment sentencing the defendants-appellants, Yap Fauco and Yap Singco, to pay P1,538.04 with legal interest and costs. By virtue of a writ of execution, a certain parcel of land belonging to the appellants, assessed at P3,550 and situated in Donsol, Sorsogon was levied upon the provincial sheriff of Sorsogon who, on November 15, 1933, made a notice, duly posted in three conspicuous places in the municipalities of Donsol and Sorsogon and published in the Mamera Press, that said land would be sold at public auction on December 12, 1933. On December 16, 1933, the appellants executed a mortgage in favor of the appellee, wherein it was stipulated that their obligation under the judgment in civil case No. 41225 was reduced to P1,200 which was made payable in four installments of P300 during the period commencing on February 8, 1934, and ending on August 8, 1935l that to secure the payment of the said P1,200, a camarin belonging to the appellants and built on the above-mentioned land, was mortgaged to the appellee; that in case the appellants defaulted in the payment of any of the installments, they would pay ten per cent of the unpaid balance as attorney's fees. plus the costs of the action to be brought by the appellee by reason of such default, and the further amount of P338, representing the discount conceded to the appellants. As a result of the agreement thus reached by the parties, the sale of the land advertised by the provincial sheriff did not take place. However, pursuant to an alias writ of execution issued by the Court of First instance of manila in civil case No. 42125 on March 31, 1934, the provincial sheriff, without publishing a new notice, sold said land at a public auction held on May 28, 1934, to the appellee for P1,923.32. On June 13, 1935, the provincial sheriff executed a final deed in favor of the appellee. On August 29, 1939, the appellee instituted the present action in the Court of First Instance of Sorsogon against the appellants in view of their refusal to recognize appellee's title and to vacate the land. The appellants relied on the legal defenses that their obligation under the judgment in civil case No. 42125 was novated by the mortgage executed by them in favor of the appellee and that the sheriffs sale was void for lack of necessary publication. These contentions were overruled by the lower court which rendered judgment declaring the appellee to be the owner of the land and ordering the appellants to deliver the same to him, without special pronouncement as to costs. The appellants seek the reversal of this judgment. We concur in the theory that appellants liability under the judgment in civil case No. 42125 had been extinguished by the settlement evidenced by the mortgage executed by them in favor of the appellee on December 16, 1933. 258

Although said mortgage did not expressly cancel the old obligation, this was impliedly novated by reason of incompatibly resulting from the fact that, whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new obligation is or P1,200 payable in installments, stipulated for attorney's fees, and is secured by a mortgage. The appellee, however, argues that the later agreement merely extended the time of payment and did not take away his concurrent right to have the judgment executed. This court not have been the purpose for executive the mortgage, because it was therein recited that the appellants promised to pay P1,200 to the appellee as a settlement of the judgment in civil case No. 42125 (en forma de transaccion de la decision . . . en el asunto civil No. 42125). Said judgment cannot be said to have been settled, unless it was extinguished. Moreover, the sheriff's sale in favor of the appellee is void because no notice thereof was published other than that which appeared in the Mamera Press regarding the sale to be held on December 12, 1933. Lack of new publication is shown by appellee's own evidence and the issue, though not raised in the pleadings, was thereby tried by implied consent of the parties, emphasized by the appellants in the memorandum filed by them in the lower court and squarely threshed out in this Court by both the appellants and the appellee. The latter had, besides, admitted that there was no new publication, and so much so that in his brief he merely resorted to the argument that "section 460 of Act 190 authorized the sheriff to adjourn any sale upon execution to any date agreed upon in writing by the parties . . . and does not require the sheriff to publish anew the public sale which was adjourned." The appellee has correctly stated the law but has failed to show that it supports his side, for it is not pretended that there was any written agreement between the parties to adjourn the sale advertised for December 12, 1933, to May 28, 1934. Neither may it be pretended that the sale in favor of the appellee was by virtue of a mere adjournment, it appearing that it was made pursuant to an alias writ of execution. Appellee's admission has thus destroyed the legal presumption that official duty was regularly performed. The appealed judgment is, therefore, reversed and the defendants-appellants, who are hereby declared to be the owners of the land in question are absolved from the complaint, with costs against the appellee. So ordered. Yulo, C.J., Ozaeta and Bocobo, JJ., concur.

Separate Opinions MORAN, J., dissenting: 259

I dissent. By virtue of a judgment for P1,538.04 which appellee obtained against appellants, a writ of execution was issued in pursuance of which a parcel of land belonging to appellants was levied upon and its sale at public auction duly advertised. The sale was, however, suspended as a result of an agreement between the parties, by the terms of which the obligation under the judgment was reduced to P1,200 payable in four installments, and to secure the payment of this amount, the land levied upon with its improvement was mortgaged to appellee with the condition that in the event of appellants' default in the payment of any installment, they would pay 10 per cent of any unpaid balance as attorney's fees as well as the difference between the full judgment credit and the reduced amount thus agreed. Appellants failed to comply with the terms of the settlement, whereupon, appellee sought the execution of the judgment, and by virtue of an alias writ of execution, the land was sold at public auction to appellee and a final deed was executed in his favor. Appellants refused, however, to vacate the land and to recognize appellee's title thereto; hence, the latter instituted the present action for recovery. The majority sustained appellants' theory upon two grounds: (1) that their liability under the judgment has been extinguished by the agreement and that accordingly there was legally no judgment to execute; and (2) that the auction sale was void not only because the judgment sought to be executed has been extinguished but also because there was no publication thereof as required by law. The first ground is contrary to a doctrine laid down by this Court in a previous case. In Zapanta vs. De Rotaeche (21 Phil., 154), plaintiff obtained judgment against defendant for a sum of money. Thereafter, the parties entered into an agreement by virtue of which the obligation under the judgment was to be paid in installments and that, upon default of defendant to comply with the terms of one agreement, plaintiff shall be at liberty to enter suit against him. Defendant defaulted and plaintiff sued out a writ of execution to recover the balance due upon the judgment credit and by virtue thereof defendant's property was levied upon and sold at public auction. Upon the issue of whether the agreement extinguished the judgment and plaintiff's right to an execution thereunder, this Court held: A final judgment is one of the most solemn obligations incurred by parties known to law. The Civil Code, in article 1156, provides the method by which all civil obligations may be extinguished. One of the methods recognized by said code for the extinguishment of obligations is that by novation. (Civil Code, arts. 1156, 1203, 1213.) In order, however, that an obligation shall be extinguished by another obligation (novation) which substitutes it, the law requires that the novation or extinguishment shall be expressly declared or that the old and the new obligations shall be absolutely incompatible. (Civil Code, art. 1204.) In the present case, the contract referred to does not expressly extinguish the 260

obligations existing in said judgment. Upon the contrary, it expressly recognizes the obligation existing between the parties in said judgment and expressly provides a method by which the same shall be extinguished which method is, as is expressly indicated in said contract, by monthly payments. The contract, instead of containing provisions "absolutely incompatible" with the obligations of the judgment, expressly ratifies such obligations and contains provisions for satisfying them. The said agreement simply gave the plaintiff a method and more time for the satisfaction of said judgment. It did not extinguish the obligations contained in the judgment, until the terms of said contract had been fully complied with. Had the plaintiff continued to comply with the conditions of said contract, he might have successfully invoked its provisions against the issuance of an execution upon said judgment. The contract and the punctual compliance with its terms only delayed the right of the defendant to an execution upon the judgment. The judgment was not satisfied and the obligations existing thereunder still subsisted until the terms of the agreement had been fully complied with. The plaintiff was bound to perform the conditions mentioned in said contract punctually and fully, in default of which the defendant was remitted to the original rights under his judgment. (pp. 159-160.) I see no reason why this decision cannot be made to control in the instant case. Here, as in the Zapanta case, there was an agreement providing for the manner of payment of the obligation under the judgment. In both cases plaintiff has by express stipulation, the option to enter an independent suit against defendant should the latter fail to comply with the terms of the settlement. If, in the Zapante case plaintiff alternative right to execute the judgment has been upheld. I perceive no cogent reason why plaintiff in the instant case would be denied a like option to merely execute the judgment and be compelled, instead, to enter an independent suit on the terms of the settlement The spirit of the new Rules which frowns upon multiplicity of suits lends additional argument against the majority view. The majority maintains that here there is an implied novation by "reason of incompatibility resulting from the fact that, whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new obligation is for P1,200 payable in installments, stipulates for attorney's fees, and is secured by a mortgage." With respect to the amount, it should be noted that, "while the obligation under the judgment was reduced to P1,200, there was, however, a stipulation to the effect that the discount would be recoverable in the event of appellants' default to comply with the terms of the agreement. And as to attorney's fees and the security by way of mortgage, the stipulation therefor contained in the agreement is of no moment, for it is merely incidental to, and anticipatory of, a suit which appellee may choose to take against appellants. Far, therefore, from extinguishing the obligation under the judgment, the agreement ratifies it and provides merely a new method and more time for the judgment debtor to satisfy it. If the judgment debtor fail to comply with the terms of the agreement, the judgment creditor shall be 261

deemed remitted to his original rights under the judgment which he may choose to execute or enter, instead, a separate suit on the terms of the settlement. This is the ratio decidendi in the Zapanta case; this is the ratio decidendi here. Upon the question of the nullity of the auction sale, the majority appears to have deduced the lack of publication of the necessary notice from isolated parts of the records and from the fact that the published notice regarding the first sale which was suspended, was merely appended to the second sheriff's sale. It should be noted, however, that appellants have never raised this issue in their pleadings and that the nullity of the sale by them pleaded is made to rest only upon the ground of "fraud and deceit" or without or with false consideration." There having been no issue as to the publication of notice, no evidence thereon has been adduced by both parties whose attention has never been directed to the question of whether the notice appended to the second sale is or is not the true notice published in connection therewith. Under such circumstance, we have only to rely on the presumption of law in favor of the regularity of official action. We cannot safely disregard this presumption of law for the records on appeal may offer in support of one conjecture or another on matters not expressly litigated by the parties. I therefore, vote for the affirmance of the judgment of the trial court.

262

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-29981 April 30, 1971 EUSEBIO S. MILLAR, petitioner, vs. THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents. Fernandez Law Office and Millar and Esguerra for petitioner. Francisco de la Fuente for respondents.

CASTRO, J.: On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner) obtained a favorable judgment from the Court of First Instance of Manila, in civil case 27116, condemning Antonio P. Gabriel (hereinafter referred to as the respondent) to pay him the sum of P1,746.98 with interest at 12% per annum from the date of the filing of the complaint, the sum of P400 as 263

attorney's fees, and the costs of suit. From the said judgment, the respondent appealed to the Court of Appeals which, however, dismissed the appeal on January 11, 1957. Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case, the petitioner moved ex parte in the court of origin for the issuance of the corresponding writ of execution to enforce the judgment. Acting upon the motion, the lower court issued the writ of execution applied for, on the basis of which the sheriff of Manila seized the respondent's Willy's Ford jeep (with motor no. B-192297 and plate no. 7225, Manila, 1956). The respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties, on February 22, 1957, executed a chattel mortgage on the jeep, stipulating, inter alia, that This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in the amount of ONE THOUSAND SEVEN HUNDRED (P1,700.00) PESOS, Philippine currency, which MORTGAGOR agrees to pay as follows: March 31, 1957 — EIGHT HUNDRED FIFTY (P850) PESOS; April 30, 1957 — EIGHT HUNDRED FIFTY (P850.00) PESOS. Upon failure of the respondent to pay the first installment due on March 31, 1957, the petitioner obtained an alias writ of execution. This writ which the sheriff served on the respondent only on May 30, 1957 — after the lapse of the entire period stipulated in the chattel mortgage for the respondent to comply with his obligation — was returned unsatisfied. So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of the petitioner, issued several alias writs, which writs the sheriff also returned unsatisfied. On September 20, 1961, the petitioner obtained a fifth alias writ of execution. Pursuant to this last writ, the sheriff levied on certain personal properties belonging to the respondent, and then scheduled them for execution sale. However, on November 10, 1961, the respondent filed an urgent motion for the suspension of the execution sale on the ground of payment of the judgment obligation. The lower court, on November 11, 1961, ordered the suspension of the execution sole to afford the respondent the opportunity to prove his allegation of payment of the judgment debt, and set the matter for hearing on

264

November 25, 1961. After hearing, the lower court, on January 25, 1962, issued an order the dispositive portion of which reads: IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs of execution. The lower court ruled that novation had taken place, and that the parties had executed the chattel mortgage only "to secure or get better security for the judgment. The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the order of execution in a decision rendered on October 17, 1968, holding that the subsequent agreement of the parties impliedly novated the judgment obligation in civil case 27116. The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation: 1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with interest at 12% per annum from the filing of the complaint, plus the amount of P400 and the costs of suit, the deed of chattel mortgage limits the principal obligation of the respondent to P1,700; 2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments; 3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the respondent to pay liquidated damages in the amount of P300 in case of default on his part; and 4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in case of default, secured the obligation. On November 26, 1968, the petitioner moved for reconsideration of the appellate court's decision, which motion the Court of Appeals denied in its resolution of December 7, 1968. Hence, the present petition for certiorari to review the decision of the Court of Appeals, seeking reversal of the appellate court's decision and affirmance of the order of the lower court. Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or not the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment obligation in civil case 27116. The Court of Appeals, in arriving at the conclusion that implied novation has taken place, took into account the four 265

circumstances heretofore already adverted to as indicative of the incompatibility between the judgment debt and the principal obligation under the deed of chattel mortgage. 1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in implying novation of the judgment debt, stating that in the interim — from the time of the rendition of the judgment in civil case 27116 to the time of the execution of the deed of chattel mortgage — the respondent made partial payments, necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds that on record appears the admission by both parties of the partial payments made before the execution of the deed of chattel mortgage. The erroneous conclusion arrived at by the Court of Appeals, the petitioner argues, creates the wrong impression that the execution of the deed of chattel mortgage provided the consideration or the reason for the reduced judgment indebtedness. Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations or slight modifications with respect to the cause or object or conditions of he latter, such changes do not effectuate any substantial incompatibility between the two obligations Only those essential and principal changes introduced by the new obligation producing an alteration or modification of the essence of the old obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner that the reduced indebtedness was the result of the partial payments made by the respondent before the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon. At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion as to the amounts already paid and as to the sum still due, decoded to state with specificity in the deed of chattel mortgage only the balance of the judgment debt properly collectible from the respondent. All told, therefore, the first circumstance fails to satisfy the test of substantial and complete incompatibility between the judgment debt an the pecuniary liability of the respondent under the chattel mortgage agreement. 2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as indicative of incompatibility, is directly contrary to the admissions of the respondent and is without any factual basis. The appellate court pointed out that while the judgment made no mention of payment of damages, the deed of chattel mortgage stipulated the payment of liquidated damages in the amount of P300 in case of default on the part of the respondent.

266

However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of attorney's fees and not as liquidated damages. Similarly, the judgment makes mention of the payment of the sum of P400 as attorney's fees and omits any reference to liquidated damages. The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the judgment and the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial payments made by the respondent before the execution of the chattel mortgage agreement were applied in satisfaction of part of the judgment debt and of part of the attorney's fee fixed in the judgment, thereby reducing both amounts. At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the payment of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation for the payment of liquidated damages in case of default on the part of the respondent, we find it difficult to agree with the conclusion reached by the Court of Appeals. 3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the montage obligation superseded, through implied novation, the judgment debt, the petitioner points out that the appellate court considered said circumstances in a way not in accordance with law or accepted jurisprudence. The appellate court stated that while the judgment specified no mode for the payment of the judgment debt, the deed of chattel mortgage provided for the payment of the amount fixed therein in two equal installments. On this point, we see no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its extinguishment — payment in two equal installments. The chattel mortgage simply gave the respondent a method and more time to enable him to fully satisfy the judgment indebtedness.1 The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent. The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the judgment because the chattel mortgage secured the obligation under the deed, whereas the obligation under the judgment was unsecured. The petitioner argues that the deed of chattel agreement clearly shows that the parties agreed upon the chattel mortgage 267

solely to secure, not the payment of the reduced amount as fixed in the aforesaid deed, but the payment of the judgment obligation and other incidental expenses in civil case 27116. The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising from the judgment against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel mortgage agreement effectuated no substantial alteration in the liability of the respondent. The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. 2 The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no incompatibility results and novation does not take place. We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of the respondent's liability under the judgment by the obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of express novation. ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside, and the order of the Court of First Instance of Manila of January 25, 1962 is affirmed, at respondent Antonio Gabriel's cost. Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando and Makasiar, JJ., concur. Villamor, J., abstains.

Separate Opinions

BARREDO, J., concurring:

268

I concur. I would like to add the following considerations to the rationale of the main opinion: As evidenced by the express terms of the chattel mortgage by repondent Gabriel in favor of petitioner Millar, it was unmistakably the intent of the parties that the said mortgage be merely a "security for the payment to the said Eusebio Millar, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the amount and manner therein stated. If this can in any sense in which the parties must be held to have newly bound themselves. In other words, by their explicit covenant, the parties contemplated the chattel mortgage to be a security for the payment of the judgment and not the payment itself thereof. Such being the case, and it appearing that respondent Gabriel has not paid the judgment remains unimpaired in its full existence and vigor, and the resort to the execution thereof thru the ordinary procedure of a writ of execution by the petitioner is an election to which every mortgage creditor is entitled when he decides to abandon his security. Teehankee, J., concurs.

Separate Opinions BARREDO, J., concurring: I concur. I would like to add the following considerations to the rationale of the main opinion: As evidenced by the express terms of the chattel mortgage by repondent Gabriel in favor of petitioner Millar, it was unmistakably the intent of the parties that the said mortgage be merely a "security for the payment to the said Eusebio Millar, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the amount and manner therein stated. If this can in any sense in which the parties must be held to have newly bound themselves. In other words, by their explicit covenant, the parties contemplated the chattel mortgage to be a security for the payment of the judgment and not the payment itself thereof. Such being the case, and it appearing that respondent Gabriel has not paid the judgment remains unimpaired in its full existence and vigor, and the resort to the execution thereof thru the ordinary procedure of a writ of execution by the petitioner is an election to which every mortgage creditor is entitled when he decides to abandon his security. 269

Teehankee, J., concurs. Footnotes 1 Zapanta v. De Rotaeche, 21 Phil. 154. 2 Magdalena Estates, inc. v. Rodriguez and Rodriguez, L18411, Dec. 17, 1966, 18 SCRA 967; Guerrero v. Court of Appeals and Alto Surety & Insurance Co., Inc., L-22366, Oct. 30, 1969, 29 SCRA 791.

270

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-41117 December 29, 1986 INTEGRATED CONSTRUCTION SERVICES, INC., and ENGINEERING CONSTRUCTION, INC., petitioners, vs. THE HONORABLE LORENZO RELOVA, as Judge of the Court of First Instance of Manila, and METROPOLITAN WATERWORKS & SEWERAGE SYSTEM, respondents. J.R. Blanco and Bengzon, Villegas, Zarraga, Narciso & Cudala for petitioners. Raymundo A. Armovit for petitioner Engineering Construction, Inc.

PARAS, J.: This is a petition 1 for mandamus as a special civil action and/or, in the alternative, an appeal from orders of the Court of First Instance of Manila under Republic Act 5440 in Civil Case No. 80390 entitled "Integrated Construction Services, Inc. and Engineering Construction, Inc., plaintiffs, versus National Waterworks and Sewerage Authority (now Metropolitan Waterworks & Sewerage System), defendant." Petitioners complied with the requisites for both remedies.

271

The facts are not in dispute: Petitioners on July 17, 1970 sued the respondent Metropolitan Waterworks and Sewerage System (MWSS), formerly the National Waterworks and Sewerage Authority (NAWASA), in the Court of First Instance of Manila for breach of contract, docketed as Civil Case No. 80390 in that Court. Meanwhile, the parties submitted the case to arbitration. The Arbitration Board, after extensive hearings, rendered its decision-award on August 11, 1972. Respondent Judge confirmed the Award on September 9, 1972 and the same has long since become final and executory. The decision-award ordered MWSS to pay petitioners P15,518,383.61-less P2,329,433.41, to be set aside as a trust fund to pay creditors of the joint venture in connection with the projector a net award of P13,188,950.20 with interest thereon from the filing of the complaint until fully paid. Subsequently, however, petitioners agreed to give MWSS some discounts in consideration of an early payment of the award. Thus, on September 21, 1972, MWSS adopted Board Resolution No. 132-72, embodying the terms and conditions of their agreement. On October 2, 1972, MWSS sent a letter-agreement to petitioners, quoting Board Resolution No. 13272, granting MWSS some discounts from the amount payable under the decision award (consisting of certain reductions in interests, in the net principal award and in the trust fund), provided that MWSS would pay the judgment, less the said discounts, within fifteen days therefrom or up to October 17, 1972. Upon MWSS' request, the petitioners signed their "Conforme" to the said letter-agreement, and extended the period to pay the judgment less the discounts aforesaid to October 31, 1972. MWSS, however, paid only on December 22, 1972, the amount stated in the decision but less the reductions provided for in the October 2, 1972 letter-agreement. Three years thereafter, or on June, 1975, after the last balance of the trust fund had been released and used to satisfy creditors' claims, the petitioners filed a motion for execution in said civil case against MWSS for the balance due under the decision-award. Respondent MWSS opposed execution setting forth the defenses of payment and estoppel. (p. 174, Rollo) On July 10, 1975, respondent judge denied the motion for execution on the ground that the parties had novated the award by their subsequent letter-agreement. Petitioners moved for reconsideration but respondent judge, likewise, denied the same in his Order dated July 24, 1975. Hence, this Petition for Mandamus, alleging that respondent judge unlawfully refused to comply with his mandatory duty-to order the execution of the unsatisfied portion of the final and executory award. 272

In a Resolution dated October 17, 1975, the Supreme Court dismissed the Petition for lack of merit. (p. 107, Rollo )and denied petitioners' Motion for Reconsideration of the same. (p. 131, Rollo) At the hearing on petitioners' Second Motion for Reconsideration, however, respondent MWSS asserted new matters, (p. 186, Rollo) arguing that: the delay in effecting payment was caused by an unforeseen circumstance the declaration of martial law, thus, placing MWSS under the management of the Secretary of National Defense, which impelled MWSS to refer the matter of payment to the Auditor General and/or the Secretary of National Defense; and that the 15-day period was merely intended to pressure MWSS officials to process the voucher. Petitioners, however, vehemently deny these matters which are not supported by the records. We agree with the petitioners. While the tenor of the subsequent letter-agreement in a sense novates the judgment award there being a shortening of the period within which to pay (Kabangkalan Sugar Co. vs. Pacheco, 55 Phil. 555), the suspensive and conditional nature of the said agreement (making the novation conditional) is expressly acknowledged and stipulated in the 14th whereas clause of MWSS' Resolution No. 132-72, (p. 23, Rollo) which states: WHEREAS, all the foregoing benefits and advantages secured by the MWSS out of said conferences were accepted by the Joint Venture provided that the remaining net amount payable to the Joint Venture will be paid by the MWSS within fifteen (15) days after the official release of this resolution and a written CONFORME to be signed by the Joint Venture; (Emphasis supplied) MWSS' failure to pay within the stipulated period removed the very cause and reason for the agreement, rendering some ineffective. Petitioners, therefore, were remitted to their original rights under the judgment award. The placing of MWSS under the control and management of the Secretary of National Defense thru Letter of Instruction No. 2, dated September 22, 1972 was not an unforeseen supervening factor because when MWSS forwarded the letter-agreement to the petitioners on October 2, 1972, the MWSS was already aware of LOI No. 2. MWSS' contention that the stipulated period was intended to pressure MWSS officials to process the voucher is untenable. As aforestated, it is apparent from the terms of the agreement that the 15-day period was intended to be a suspensive condition. MWSS, admittedly, was aware of this, as shown by the internal memorandum of a responsible MWSS official, stating that necessary steps should be taken to effect payment within 15 days, for otherwise, MWSS would forego the advantages of the discount. " (p. 426, Rollo)

273

As to whether or not petitioners are now in estoppel to question the subsequent agreement, suffice it to state that petitioners never acknowledged full payment; on the contrary, petitioners refused MWSS' request for a conforme or quitclaim. (p. 125, Rollo) Accordingly, the award is still subject to execution by mere motion, which may be availed of as a matter of right any time within (5) years from entry of final judgment in accordance with Section 5, Rule 39 of the Rules of Court. WHEREFORE, We hereby set aside the assailed orders, and issue the writ of mandamus directing the present Regional Trial Judge of the Branch that handled this case originally to grant the writ of execution for the balance due under the award. SO ORDERED. Teehankee, C.J., Feria, Yap, Fernan, Narvasa, Melencio-Herrera, Alampay, Gutierrez, Jr., Cruz and Feliciano, JJ., concur. Footnotes 1 The parties submitted their memoranda on January 4, 1977.

FIRST DIVISION June 30, 1987 G.R. No. L-47369 JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, vs. R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.: This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only questions of law and, therefore, falling

274

within the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296, as amended. In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to secure its faithful compliance with the terms and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond. In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity. Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements further provided: (b) INDEMNITY: — TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including [of] attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or incur as consequence of having executed the above mentioned Bond, its renewals, extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%] per cent of the total amount claimed by the CORPORATION in each action, the same to be 275

due, demandable and payable, irrespective of whether the case is settled judicially or extrajudicially and whether the amount has been actually paid or not; (c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: — The said indemnities will be paid to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of any sum under the terms of the above-mentioned Bond, its renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have been actually paid or not. We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us, payments on account of the pending obligations, and to grant extension to any of us, to liquidate said obligations, without necessity of previous knowledge of [or] consent from the other obligors. xxx

xxx

xxx

(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. — Any payment or disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in the belief that said payment was necessary in order to avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final and will not be disputed by the undersigned, who jointly and severally bind themselves to indemnify the SURETY COMPANY of any and all such payments as stated in the preceding clauses. xxx

xxx

xxx

When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying principally that judgment be rendered:

276

b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and] c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the month of September, 1966; xxx

xxx

xxx

Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had assured him that the execution of the agreement was a mere formality and that he was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity Agreement as against him. Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R & B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond. Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was therefore constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents submitted in evidence.

277

In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B Surety, the dispositive portion of which reads as follows; Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following amounts: On P14,000.00 from September 27, 1966; On P4,000.00 from November 28, 1966; On P4,000.00 from December 14, 1966; On P4,000.00 from January 19, 1967; On P8,000.00 from February 13, 1967; On P4,000.00 from March 6, 1967; On P8,000.00 from June 24, 1967; On P8,000. 00 from September 14, 1967; On P8,000.00 from November 28, 1967; and On P8,000. 00 from February 26, 1968 until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's fees and expenses of litigation which this Court deems just and equitable. There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without prejudice. Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva. Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as already noted, certified the case to us as one raising only questions of law.

278

The issues we must confront in this appeal are: 1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements; 2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and 3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B Surety for the forfeiture of its Surety Bond. We address these issues seriatim. 1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows: WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000.00 to P800,000.00; WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO); WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds; WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby 279

agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods made thru the allocation of WARVETS; . . . l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to the BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond No. G-5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without interest from the net profits arising from the procurement of reparations consumer goods under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the allocation of WARVETS; xxx

xxx

xxx

6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the CONSOLACION as among the companies duly accredited to do business with the BENEFICIARY and its branches, unless said companies have been blacklisted for reasons other than those relating to the obligations subject of the herein TRUST AGREEMENT; xxx

xxx

xxx

9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under the bonds mentioned above. (emphasis supplied) There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so must the supporting Indemnity Agreements. 3 We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either 280

the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof.5 If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. 6 Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. 7 Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8 Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing else) would sustain a finding of novation by implication. 9 But where, as in this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all. What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that:

281

[t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been only two, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust Agreement, could not have intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB. 2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety . The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R & B Surety] — to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND — ." This part of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant case. The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties. There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust Agreement "to hold in abeyance any action 282

to enforce its claims" against R & B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations were to amture "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079: [t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of the referred to herein.(emphasis supplied) The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. As this Court has held, merely delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security.12 In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO. 3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not violative of any public policy. 13 The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability 283

arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB. Summarizing, we hold that : (1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety. (2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did not amount to an "extension granted to the debtor" without petitioner's consent so as to release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and (3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B Surety for the collection of its matured obligation under the Surety Bond. WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is AFFIRMED in toto. Costs against the petitioners. SO ORDERED. Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Gancayco and Sarmiento, JJ., concur. Footnotes 1

With then Judge Ricardo C. Puno presiding.

2

R & B Surety had earlier made partial payments thereon to PNB.

3

Manila Surety & Fidelity Co. v. Villarama, 107 Phil. 891, 899 (1960).

4

De Cortes v. Venturanza, 79 SCRA 709, 722-23 (1977).

5

Id at 723.

6

Zapanta v. Rotaeche, 21 Phil. 154, 159 (1912).

7

E.g., Tui Siuco v. Habana, 45 Phil. 707, 713 (1924); Martinez v. Cavives, 25 Phil. 581 (1913).

284

8

Dungo v. Lopena, 6 SCRA 1007,1015-16 (1962).

9

Guerrero v. Court of Appeals, 29 SCRA 791, 798 (1969).

10

Dungo v. Lopena, 6 SCRA 1007, at 1016 (1962).

11

18 SCRA 967, at 972 (1966).

12

Bank of the Philippine Islands v. Albaladejo y Compania, 53 Phil. 141, at 145-146 (1929); underscoring supplied. 13

Security Bank v. Globe Assurance, 58 Off. Gaz. 3708 (30 April 1962); Cosmopolitan Insurance v. Reyes, 15 SCRA 258, 261 (1965); Alto Surety v. Aguilar, G.R. No. L-5625, March 16, 1954. 14

Guerrero v. Court of Appeals, 29 SCRA 791, 797 [1969], this case involves an indemnification clause similar to the INdemnity Agreements under consideration. See also Alto Surety & Insurance Co. v. Aguilar, L-5625, March 16, 1954. 15

Guerrero v. Court of Appeals, 29 SCRA 791 (1969); Associated Insurance & Surety Co. v. Chua, 7 SCRA 52, 54 (1963); Alto Surety & Insurance Co. v. Andan, 100 Phil. 403, 406 (1956).

285